SCHOLAR Study Guide
CfE Higher Business Management
Unit 1
Authored by:
Julie Sanderson (West Calder High School)
Alan Hamilton (Stirling High School)
Reviewed by:
Frances McCrudden (The Mary Erskine School)
Previously authored by:
Alistair Wylie
Rhona Sivewright
John Murray
Peter Hagan
Heriot-Watt University
Edinburgh EH14 4AS, United Kingdom.
First published 2015 by Heriot-Watt University.
This edition published in 2016 by Heriot-Watt University SCHOLAR.
Copyright © 2016 SCHOLAR Forum.
Members of the SCHOLAR Forum may reproduce this publication in whole or in part for
educational purposes within their establishment providing that no profit accrues at any stage,
Any other use of the materials is governed by the general copyright statement that follows.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system
or transmitted in any form or by any means, without written permission from the publisher.
Heriot-Watt University accepts no responsibility or liability whatsoever with regard to the
information contained in this study guide.
Distributed by the SCHOLAR Forum.
SCHOLAR Study Guide Unit 1: CfE Higher Business Management
1. CfE Higher Business Management Course Code: C710 76
ISBN 978-1-909633-34-6
Print Production and Fulfilment in UK by Print Trail www.printtrail.com
Acknowledgements
Thanks are due to the members of Heriot-Watt University's SCHOLAR team who planned and
created these materials, and to the many colleagues who reviewed the content.
We would like to acknowledge the assistance of the education authorities, colleges, teachers
and students who contributed to the SCHOLAR programme and who evaluated these materials.
Grateful acknowledgement is made for permission to use the following material in the
SCHOLAR programme:
The Scottish Qualifications Authority for permission to use Past Papers assessments.
The Scottish Government for financial support.
The content of this Study Guide is aligned to the Scottish Qualifications Authority (SQA)
curriculum.
All brand names, product names, logos and related devices are used for identification purposes
only and are trademarks, registered trademarks or service marks of their respective holders.
i
Contents
1 The role of business in society
1.1 Businesses . . . . . . . .
1.2 Sectors of industry . . . .
1.3 Sectors of the economy . .
1.4 Summary questions . . . .
1.5 End of topic tests . . . . .
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1
2
5
6
7
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2 Types of organisations
2.1 Business organisations
2.2 Private sector . . . . .
2.3 Public sector . . . . . .
2.4 Third sector . . . . . .
2.5 Summary questions . .
2.6 End of topic tests . . .
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11
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24
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3 Objectives
3.1 An organisation's objectives
3.2 Business objectives . . . . .
3.3 Methods of growth . . . . . .
3.4 Case study . . . . . . . . . .
3.5 Summary questions . . . . .
3.6 End of topic tests . . . . . .
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27
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4 External and internal environments
4.1 PESTEC . . . . . . . . . . . . .
4.2 Internal factors . . . . . . . . . .
4.3 Summary questions . . . . . . .
4.4 End of topic tests . . . . . . . .
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39
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5 Business structures
5.1 Functional groupings . . . . . . . . . . . . . . . .
5.2 Other types of grouping . . . . . . . . . . . . . . .
5.3 Entrepreneurial structures . . . . . . . . . . . . .
5.4 Tall and flat management structures . . . . . . . .
5.5 Centralised, de-centralised and matrix structures
5.6 Summary questions . . . . . . . . . . . . . . . . .
5.7 End of topic tests . . . . . . . . . . . . . . . . . .
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51
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6 Stakeholders
6.1 Who are stakeholders? . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.2 Stakeholders' influence and aims . . . . . . . . . . . . . . . . . . . . .
65
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ii
CONTENTS
6.3
6.4
6.5
Stakeholder conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7 Decision making
7.1 Decisions types . . . . . . . . . .
7.2 Evaluation . . . . . . . . . . . . .
7.3 PEST analysis . . . . . . . . . . .
7.4 SWOT analysis . . . . . . . . . .
7.5 Conclusions from SWOT analysis
7.6 Role of the manager . . . . . . .
7.7 Aids to decision making . . . . . .
7.8 Summary questions . . . . . . . .
7.9 End of topic tests . . . . . . . . .
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68
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8 End of unit tests
93
Glossary
98
Answers to questions and activities
1
The role of business in society . .
2
Types of organisations . . . . . . .
3
Objectives . . . . . . . . . . . . . .
4
External and internal environments
5
Business structures . . . . . . . .
6
Stakeholders . . . . . . . . . . . .
7
Decision making . . . . . . . . . .
8
End of unit tests . . . . . . . . . .
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102
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111
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126
© H ERIOT-WATT U NIVERSITY
1
Topic 1
The role of business in society
Contents
1.1 Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
1.2 Sectors of industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.3 Sectors of the economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
6
1.4 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.5 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
8
Learning objectives
After studying this topic, you should be able to:
•
discuss the different types of business activity which takes place in each of the
sectors of industry;
•
describe business activity which can take place in each of the sectors of the
economy;
•
describe the reasons for a business to exist.
2
TOPIC 1. THE ROLE OF BUSINESS IN SOCIETY
1.1
Businesses
What is a business?
A business is any organisation which is set up in order to achieve a set of objectives.
This includes the obvious objectives such as businesses that sell their products for
profit. It also includes any other organisation that has been set up to achieve other
business objectives. We will consider business objectives in the next topic area. Other
organisations include charities, local and national government (including education).
It may seem odd to think of schools, colleges and universities as a business but they do
everything that the profit-making businesses do in organising themselves to provide a
good or service.
Businesses meet their objectives by fulfilling the wants and needs of consumers, through
the provision of goods and services. The needs and wants of consumers are complex
and ever changing, and every business needs to add value to a basic product to ensure
that it appeals to the target market. Adding value is the result of taking the raw materials
and creating a usable product which can be sold for a higher price than the cost of the
individual parts. It can also be as the result of providing a quality service.
Take a piece of paper and list three local businesses. (You will be using these as
examples to answer questions later.)
Why are businesses important?
Businesses provide us with goods and services. Goods and services allow us to live
our lives the way we do. Before we organised our society with businesses, we would all
have to make our own clothes, build our own shelter, and grow or catch our own food.
There would be little time for anything else, so as people we would have been stuck
with a basic existence.
Business has allowed us to live much better lives and continually works to improve
them.
Using the businesses that you identified earlier, list the goods and services that they
offer.
The production of goods and services
What are goods and services?
Goods are things we can see and touch such as clothes, mobile phones, mp3 players,
food. They are described as tangible products and are split into 2 categories: Durable
goods and Non-durable goods.
Durable goods are goods that can be used again and again like computers, mobile
phones. They have a reasonable life span. Some will be expensive like boats, while
others like pens will be cheap. They will not last forever, but we would expect them to
stand up to a lot of use.
Non-durable goods are things we can normally only use once like food, drinks, etc.
© H ERIOT-WATT U NIVERSITY
TOPIC 1. THE ROLE OF BUSINESS IN SOCIETY
3
Services are things that are done for us. They can be described as non-tangible
products. Some of our main traditional service industries are organisations involved in
banking, insurance, tourism, education and health.
The service industries make up the largest part of our modern economy in Scotland,
with the majority of employees working in services.
Category of goods or services
For each question categorise the goods or services as:
Go online
•
durable goods
•
non-durable goods
•
services
Q1: Can of Coca-Cola
..........................................
Q2: Desk
..........................................
Q3: Booking a holiday
..........................................
Q4: Doughnut
..........................................
Q5: Visiting the doctor
..........................................
Q6: Newspaper
..........................................
Q7: Going to the dentist
..........................................
Q8: Car
..........................................
Q9: Clothes
..........................................
Resources needed for production
In order to produce goods and services businesses need to use resources. These
resources are the inputs for business activity, with the goods and services that they
produce being the output of business activity.
© H ERIOT-WATT U NIVERSITY
4
TOPIC 1. THE ROLE OF BUSINESS IN SOCIETY
These resources used are what we call the factors of production. These are the
resources that business needs to produce goods and services.
The factors of production are:
Land: This is all the natural resources such as oil, water, and the land itself. It includes
everything that can be extracted from the land, the sea or the atmosphere or grown on
the land or in the sea. It can also include sunshine which is used with solar panels to
create electricity.
Labour: All businesses need people to work for them. Some will only need a few.
Others, like local government, will need thousands. Labour is the people required to
make the organisation work. It includes all their physical and mental effort.
Capital: These are the man made resources. Elsewhere, capital will be described as
the money invested in an organisation; however, here we use it as an economic term to
describe things like factories, machines, lorries and tools. They have all been created
or produced from natural resources, and are needed to produce goods and services.
Enterprise: This could be described as the most important factor of production,
because without it production would not take place. Enterprise is the human effort and
will to provide goods and services. The entrepreneur is the person who brings together
all the other resources and takes the risks to produce the goods or services.
Supplying the resources
For each question categorise the sentence as:
Go online
•
Land
•
Labour
•
Capital
•
Enterprise
Q10: Man made resource needed to make goods and services.
..........................................
Q11: The human effort and will to provide goods and services.
..........................................
Q12: Natural resources such as oil, water and land.
..........................................
Q13: The people required to make the goods and services.
..........................................
© H ERIOT-WATT U NIVERSITY
TOPIC 1. THE ROLE OF BUSINESS IN SOCIETY
1.2
5
Sectors of industry
All business organisations carry out activity which falls into one of four sectors of
industry.
These sectors of industry are:
Primary sector: This is where raw materials are extracted from the land or sea. The
main activity of a business in this sector will likely be some type of farming, fishing,
mining or oil extraction.
Secondary sector: This is where the raw materials extracted in the primary sector are
transformed into usable products through manufacturing and construction. Examples of
the type of activity in this sector include house builders, clothing manufacturers, food
processing factories and oil refineries.
Tertiary sector: Also known as the service industry, this is where the goods produced
by businesses in the primary and secondary sectors are provided to the consumer, and
where services and skills are sold. Examples of activity in this sector include retail,
travel agents, banking, hairdressing and government services such as education and
healthcare.
Quaternary sector: This can also be described as the support sector, and activity here
is based around organisations which provide information, especially (but not exclusively)
to businesses. IT consultancy, research and development, and consultancy services (for
example management consultants such as Accenture) operate in this sector of industry.
It's important to remember that these sectors all rely upon each other in order to fulfil the
needs and wants of the consumer. There's no point in catching fish in the sea if there's
no business willing to prepare the fish for selling, or no shop to sell the fish from.
Sectors of industry - descriptions
For each question categorise the sentence as:
Go online
•
Primary
•
Secondary
•
Tertiary
•
Quaternary
Q14: Businesses that are involved in providing services rather than goods.
..........................................
Q15: Businesses that are involved in exploiting or extracting natural resources.
..........................................
Q16: Businesses that are involved in manufacturing and construction.
..........................................
Q17: Businesses that are providing organisations with ICT support and services.
..........................................
© H ERIOT-WATT U NIVERSITY
6
TOPIC 1. THE ROLE OF BUSINESS IN SOCIETY
Over the last part of the 20th century there have been massive changes to the nature
of industry found in Scotland. Traditionally a country with strong primary industry
links (particularly farming, fishing and coal mining) and also a large number of men
employed in ship building and steel making in the west of the country, there is now a
much larger proportion of employment in the service industry - both in the tertiary and
quaternary sectors. Banking and entertainment industry call centres and e-commerce
have provided huge numbers of jobs, whilst the coal mines, steelworks and many of the
ship yards have been closed. Today primary sector jobs can mainly be found in farming,
fishing and oil extraction.
Sectors of industry - professions
For each question categorise the following professions into the correct sector of industry.
Go online
•
Primary
•
Secondary
•
Tertiary
•
Quaternary
Q18: sewing machinist, builder, baker
..........................................
Q19: management consultant, research director, IT consultant
..........................................
Q20: window cleaner, doctor, shop assistant
..........................................
Q21: farmer, miner, fisherman
..........................................
1.3
Sectors of the economy
The reasons for business organisations to exist are varied, and are determined by the
objectives of each organisation. These objectives and purposes can be categorised as
follows:
Private Sector: Business organisations which operate in order to make a profit for the
private individuals who own them. There are a variety of types of business which fall into
this category - sole traders, partnerships, private and public limited companies - which
will be discussed later in this course.
Public Sector: Business organisations which are operated by the government on behalf
of the tax payer. The public sector includes health services (the NHS), education and
local council services such as recycling facilities and local libraries.
© H ERIOT-WATT U NIVERSITY
TOPIC 1. THE ROLE OF BUSINESS IN SOCIETY
7
Third Sector: Organisations which are non-profit, and exist to benefit society. There
is a wide range of organisations in this sector, including charities, social enterprise and
clubs and societies.
Sectors of the economy - descriptions
Match the sectors of the economy with appropriate description:
Go online
•
Private Sector
•
Public Sector
•
Third Sector
Q22: Business organisations which are operated by the government on behalf of the
tax payer.
..........................................
Q23: Non-profit and social enterprises which exist to benefit society.
..........................................
Q24: Businesses which provide goods and services to consumers in order to create
profit for their owners.
..........................................
1.4
Summary questions
Summary questions
Q25: The quaternary sector of industry includes retail organisations.
Go online
a) True
b) False
..........................................
Q26: The public sector is made up of government run organisations.
a) True
b) False
..........................................
Q27: Durable goods are those which can be reused over and over again.
a) True
b) False
..........................................
© H ERIOT-WATT U NIVERSITY
8
TOPIC 1. THE ROLE OF BUSINESS IN SOCIETY
Q28: Extraction of raw materials from the earth or sea takes place in the secondary
sector of industry.
a) True
b) False
..........................................
Q29: Charities and non-profit organisations belong in the third sector of the economy.
a) True
b) False
..........................................
Q30: The four factors of production are land, labour, capital and enterprise.
a) True
b) False
..........................................
1.5
End of topic tests
End of topic 1 test
Q31: Complete the paragraph using following words.
Go online
enterprise
production
capital
economy
objectives
industry
third
tertiary
The term "business" can be used to refer to any organisation which is set up to achieve
. Therefore a "business" can exist in any of the three sectors of
a set of
sector. Business is
economy - the private sector, the public sector or the
of a country. Businesses use the four factors of
in
vital to the
order to provide these goods and services for consumers. The factors of production
and
. As well as operating in a sector of
are land, labour,
the economy, business organisations are classified as operating in different sectors of
. These are known as the primary, secondary,
and quaternary
sectors. From removing natural resources from the ground, to manufacturing them into
useable products, then selling them to customers, and offering advice to organisations
at all stages of this process, every business plays a role in this chain of production.
..........................................
© H ERIOT-WATT U NIVERSITY
TOPIC 1. THE ROLE OF BUSINESS IN SOCIETY
Decide which from the list of sectors below matches following descriptions.
•
Primary sector
•
Secondary sector
•
Tertiary sector
•
Quaternary sector
•
Private sector
•
Public sector
•
Third sector
Q32: Where raw materials are converted into useable products.
..........................................
Q33: Governmental organisations funded by the tax payer.
..........................................
Q34: Where the raw materials are extracted from the land/sea.
..........................................
Q35: Non-profit organisations such as charities or social enterprises
..........................................
Q36: Where a support service is offered to business.
..........................................
Q37: Also known as the service industries, where goods and services are provided to
the consumer.
..........................................
Q38: Business organisations which exist to make a profit.
..........................................
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TOPIC 1. THE ROLE OF BUSINESS IN SOCIETY
SQA style questions
Go online
Q39: Explain why it can be difficult for business organisations to meet or satisfy
consumers' wants. (2 Marks)
..........................................
Q40: Compare the difference between goods and services. (2 Marks)
..........................................
Q41: Describe the "factors of production". (4 Marks)
..........................................
Q42: Discuss the activity that takes place in the different sectors of industry. (2 Marks)
..........................................
Q43: Describe the sectors of the economy. (6 Marks)
..........................................
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Topic 2
Types of organisations
Contents
2.1 Business organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
2.2 Private sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.2.1 Limited Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13
13
2.2.2 Franchises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.2.3 Multinationals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16
18
2.3 Public sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.4 Third sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21
22
2.5 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.6 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Learning objectives
After studying this topic, you should be able to:
•
describe the private sector, public sector and third sector;
•
discuss the features of business organisations which operate in each of these
sectors.
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TOPIC 2. TYPES OF ORGANISATIONS
2.1
Business organisations
Business organisations exist to satisfy consumers' needs and wants by making and
providing goods and services.
These organisations are made up of people working together, using resources to
achieve various objectives. These objectives will include producing goods and services
by changing inputs (the raw materials) into outputs (finished products and services).
All organisations fall into one of three categories:
•
Private sector
•
Public sector
•
Third sector
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TOPIC 2. TYPES OF ORGANISATIONS
2.2
Private sector
Organisations in this sector are run by private individuals.
For most, the basic aim or objective is to make a profit. Profits are made when the
income from sales (revenue) exceeds the expenditure on costs. Any profits made are
then shared between the owners, in accordance with the rules governing the individual
business.
At National 5 level, small business organisations like sole traders, partnerships and
private limited companies were discussed. At Higher level, the focus is on the following
types of organisation:
•
Private Limited Companies (LTDs)
•
Public Limited Companies (PLCs)
•
Franchises
•
Multinationals
2.2.1
Limited Companies
As discussed at National 5 level, most new businesses now prefer to set up as limited
companies rather than a sole trader or a partnership. Particularly in the case of a private
limited company, the costs involved have decreased and the legal process has become
much simpler. For example, you can now set up a new limited company over the Internet.
The shareholders, (a minimum of two are required by law) are those people that own
a share of the business, in the form of share certificates, and so are the owners of the
business. They enjoy limited liability. This means shareholders can only lose the money
or capital they have invested in the business, not any of their personal possessions.
To become a limited company a company must be registered with the Companies
Registrar and complete two legal documents:
•
Memorandum of Association
•
Articles of Association
These set out the aims of the business and how it will be run and financed.
The profits are shared out in the form of dividends, each shareholder receiving a certain
amount for each of the share certificates they own in the business.
A public limited company (PLC) is a much larger organisation than a private limited
company. The main difference in terms of ownership and control of a PLC is that the
shares of a PLC can be sold to the public through the stock exchange, whereas private
limited companies can't trade their shares; they can only sell to individuals who are
invited to buy shares with the full agreement of the existing shareholders.
By selling shares to the public via the stock exchange, PLCs can raise vast amounts of
share capital, however ultimately control of the company can be lost to outsiders.
Both types of limited company share broadly the same advantages and disadvantages.
Where an advantage/disadvantage refers to one only this is highlighted.
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TOPIC 2. TYPES OF ORGANISATIONS
Advantages
•
Shareholders have limited liability. If the business fails they only lose the amount
of money they have invested;
•
in PLCs, because you can buy and sell the shares at any time, people are more
willing to invest, the business can raise money by selling more shares to the public
for big projects, and this means they find it easier to plan, develop and expand;
•
because a PLC is such a large organisation, it allows for economies of scale and
means that the business is less vulnerable to threat of failure;
•
in a private limited company shares can only be sold through invitation - usually to
friends and family. This means that for the original owners the advantage of limited
liability is enjoyed whilst retaining control of the company.
Disadvantages
•
All companies must be registered with the Registrar of Companies. This means
they have to disclose some financial information, which the public and their
competitors can see. There is a cost in setting up and administrating the legal
requirements placed on limited companies;
•
the original shareholders (owners) of a PLC can end up losing control to an outside
interest (possibly through a hostile takeover) due to the public trading of shares there is no control over who can buy these shares on the stock exchange;
•
big organisations can be very difficult to manage efficiently and may experience
economic problems on account of their size;
•
it is more difficult to keep workers happy and well-motivated in a big organisation.
The majority of large, well-known businesses in the UK are PLCs - for example, Tesco,
British Airways and Next. However, it should be noted that a number of well known and
large companies (for example Arnold Clark, Baxters and Tunnocks) have retained their
private limited status.
2.2.1.1 Case study
Limited companies
Read the information about limited companies, then answer the questions.
Before your business can begin operating as a limited company, it has to be registered
with the Registrar of Companies (Companies House). Incorporation is the process by
which a new or existing business is converted into a corporate body. This doesn't have
to be a complex and costly process, but you'll need to be clear about a few things
before you start.
There are requirements that different types of limited company must meet, and the
information here will help you understand the registration process. It focuses mainly on
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TOPIC 2. TYPES OF ORGANISATIONS
private companies limited by shares, but will also highlight some of the special
requirements for public limited companies (PLCs) and private companies limited by
guarantee.
You can handle the registration process yourself, but it is a good idea to seek
professional advice before you do so to ensure that incorporation is right for you. A
company formation agent, solicitor or accountant can carry out the process for you, for
a fee, as well as offer advice.
Registration documents and forms
To set up as a limited company in the UK, you - or the agent acting for you - will need to
send several documents and completed forms to Companies House.
•
A memorandum of Association, giving details of the company's name, location
and what it will do.
•
Articles of Association, describing how the company will be run, the rights of the
shareholders and the powers of the company's directors.
•
Form 10 (Statement of the First Directors, Secretary and Registered Office)
giving details of the company's registered office and the names and addresses of
its directors and company secretary.
•
Form 12 (Declaration of Compliance with the Requirements of the
Companies Act), stating that the company meets all the legal requirements of
incorporation.
You can order an Incorporation Starter Pack from Companies House.
Types of limited company: Private or public?
Most small businesses that opt for limited company status become private limited
companies rather than public limited companies (PLCs).
The main differences between them are that:
•
PLCs can raise money by selling shares on the stockmarket - private limited
companies cannot;
•
PLCs must have share capital of at least £50,000;
•
PLCs must have two shareholders, two directors and a qualified company
secretary.
Find out more about the special rules that apply to PLCs at the Companies House
website.
A private company limited by shares can convert into a PLC, but it will need to
re-register in order to do this. Find out more about re-registering as a PLC at the
Companies House website.
(http://www.companieshouse.gov.uk)
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Q1: Type the name of the process by which a new or existing business is converted
into a corporate body.
..........................................
Q2:
A memorandum of association gives:
a) the names of associated companies.
b) the company's name, location and what it will do.
c) a list of the company's products.
..........................................
Q3:
A public limited company must have at least:
a) one director and one company secretary.
b) two directors and one company secretary.
c) one director and two company secretaries.
..........................................
Q4: What is the difference between a public limited company and a private limited
company?
a) Public limited companies have to declare all their activities - private limited
companies can be secretive.
b) Public limited companies do not need a minimum share capital - private limited
companies must have a minimum £50,000.
c) Public limited companies can raise money by selling shares on the stockmarket private limited companies cannot.
..........................................
2.2.2
Franchises
A franchise is a method of setting up a business which involves two parties:
•
a franchiser
•
a franchisee
The franchiser is the "parent" company, and owns a brand, product or service. The rights
to use/sell this are then sold to the franchisee. This model of business is frequently
seen in the fast-food and leisure industries. Examples include McDonalds, RED Driving
School, Kip McGrath tutoring and Curves gyms.
When entering an agreement to become a franchisee, the individual or individuals can
usually choose their own form of business organisation - a sole trader, partnership or
most usually private limited company. Becoming a franchisee is a long term commitment
which requires a very large financial investment (often as much as £250,000 or even
more).
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The franchiser will provide:
•
the brand or product(s) being sold;
•
a store layout where appropriate;
•
advice and training as required to the franchisee;
•
marketing on a national scale.
The benefits for the franchiser in allowing branches of their franchise to be set up are:
•
it allows growth for their brand without making significant financial investment in
property and without the need to recruit and train a large workforce of their own;
•
it reduces competition: if a franchisee buys into their brand, that means they are
not launching their own product in competition;
•
it reduces risk: the risk of failure is shared with the franchisee;
•
they retain control over the image and product they have created;
•
there is guaranteed income from royalties paid by the franchisees.
Disadvantages for the franchiser are:
•
reputation depends on how good the franchisees are;
•
bad publicity for one branch affects all;
•
franchiser only receives a share of the profits or sales revenue profits depend on
the ability of the franchisees.
The advantages for the franchisee are:
•
training and support are available throughout the franchise agreement;
•
national marketing campaigns will be conducted by the franchiser on their behalf;
•
launching a new business is less of a risk due to using an established brand and
product;
•
all decisions regarding product range and store layout are made by the franchiser
on their behalf;
•
the franchiser will limit the number of franchises allowed to open in any
geographical area, reducing direct competition for each franchisee.
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TOPIC 2. TYPES OF ORGANISATIONS
The disadvantages for the franchisee are:
•
"being your own boss but with a boss" - although the franchisee is legally
responsible for a business, virtually all of the major decisions will be made by
the franchiser;
•
royalties need to be paid to the franchiser throughout the franchise agreement;
•
operating a franchise limits scope for showing initiative;
•
bad publicity or poor performance by a fellow franchisee can have negative impact
on whole brand;
•
most franchise agreements stipulate that the franchisee is not allowed to be
involved in any other business interest during the term of the franchise agreement;
•
a franchise is an extremely long term (up to 25 years in some cases) and financially
intensive agreement.
Franchise - terms
For each question categorise the terms into the correct description:
Go online
•
Franchiser
•
Franchisee
•
Royalty
•
Investment
Q5:
The parent company, providing a brand and product.
..........................................
Q6:
The business buying the right to operate under the established brand name.
..........................................
Q7:
Regular payment made by the franchisee to the franchiser.
..........................................
Q8:
Original sum of money required to set up as a franchisee.
..........................................
2.2.3
Multinationals
Markets for many goods and services are said to be global. Firms in Scotland will face
competition from organisations across the world. On the other hand this means that the
markets for their goods and services are worldwide.
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TOPIC 2. TYPES OF ORGANISATIONS
Multinationals are normally very large businesses which have outlets or production
facilities in a number of different countries, and many British businesses have opened
facilities in other countries. There are several good reasons for doing so:
•
governments in other countries may offer incentives such as tax concessions or
large grants to entice them to open there;
•
lower wage rates may make the cost of production much lower;
•
higher skilled workers may be available for the same or lower cost;
•
legislation in other countries may be more relaxed meaning production can
be much cheaper - (working hours, environmental restrictions, minimum wage,
building regulations, etc);
•
the rate of corporation tax may be lower which means they can keep more of their
profits;
•
the business can then operate competitively in the local market.
•
it allows the organisation to grow out with saturated or highly competitive markets;
•
the increasing sophistication of ICT means that it is much easier for organisations
to operate as a multinational business, due to the ease of communication;
•
the costs of operating across multiple countries is reducing due to using
technology to share information across secure networks, and for audio and video
conferencing.
However, there are several factors which may deter organisations from locating abroad:
•
legislation in the local country may be too restrictive to operate profitably;
•
the local currency may be too weak to allow profits to be converted back at a good
rate;
•
there may be a lack of technical expertise or equipment, including poor
infrastructure;
•
cultural differences may make the products unpopular for both production and sale;
•
The country may be politically unstable.
•
Taking advantage of local laws (eg minimum wage, working ages/conditions) can
have a negative impact with customers in the UK, due to a growing awareness of
ethical issues such as exploitation of child labour. This can lead to bad publicity
which can damage a brand.
Structure and operations of a multinational company
Identify a multinational company and research its structure and operations.
Write a short report on your findings (about 250 words) and submit this to your teacher.
..........................................
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TOPIC 2. TYPES OF ORGANISATIONS
2.2.3.1 Case study
Multinationals
Read the information about international trading, then answer the questions.
Who are the multinationals?
A multinational corporation is a company which operates in more than one country, as
opposed to a purely domestic business which has no operations abroad. There are
now approximately 63,000 multinational corporations in the world, and between them
they are responsible for two thirds of global trade and 80% of investment. They are the
economic force behind globalization.
Many of the world's multinationals have developed into giant enterprises spanning the
globe. The largest have annual sales greater than the entire economic output of many
medium sized countries. On this calculation General Motors is bigger than Norway,
Ford is bigger than South Africa and Shell is over twice as big as Nigeria. Of the largest
100 economic actors in the world today, 51 are corporations and 49 are countries.
Multinationals share many interests, and pool their considerable power to lobby
governments for policies which favour them. Bodies such as the International Chamber
of Commerce, the European Roundtable of Industrialists and the Transatlantic
Business Dialogue bring together the leaders of the world's most powerful
multinationals to influence global policies on trade and investment.
Western governments have responded by giving multinationals an ever greater role in
formulating international policy. It is now acknowledged that many of the liberalisation
policies introduced by the world's governments over the past decade have come as a
direct result of lobbying work by these groups.
Q9:
The 63,000 multinational corporations in the world are responsible for:
a) two thirds of global trade and 80% of investment.
b) one third of global trade and 50% of investment.
c) 80% of global trade and two thirds of investment.
..........................................
Q10: A company with no operations abroad is called? (Type one word in the text box)
..........................................
Q11: Which of the statements below is true?
a) Multinationals are generally unable to influence Government policies.
b) Multinationals act in isolation since they all have their own interests.
c) Multinationals have a large role in formulating international policy.
..........................................
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2.3
Public sector
Organisations which are owned and controlled by the government and funded through
the taxpayer.
Publicly-funded organisations
These are organisations set up and owned by the government to provide services to
the public. These are services which the private sector could not provide very well or
could not provide at all. Making a profit is not always that important, however, keeping
within the budget (money they are allocated from the government) is very important. In
recent years, this has led to many public organisations having to change to more
private sector-like practices in terms of target setting and cost cutting.
Public corporations
These organisations are businesses which are owned and run by the government for
us. The best known example of a public corporation is the BBC. The government
appoints a chairman and board of directors to run them on their behalf.
There used to be many more but these were 'Privatised', (sold on the stock market),
such as British Telecom, BP, and the gas and electricity companies.
Government-funded service providers
The government provides us with some services such as the National Health Service,
Social Security and Defence. These are services which the private sector would be
unlikely to offer to the public in ways that the government or the public would find
acceptable.
They are financed by the government in order to carry out their policies in these areas.
Each year they are given a set amount of money to spend. Each usually has its own
appointed government minister who has supervisory control and provides guidelines to
managers as to how the service should be run. The managers then make many of the
decisions as to how the money could be best spent to meet the government objectives.
Local authorities
These provide us with services such as education, housing, leisure and recreation, and
street lighting. They get their money from council tax, government grants, and from
fees for things like using facilities at sports centres.
Local authorities either set up their own departments to provide these services, or they
'contract out' to private companies who receive a fee for providing these services, such
as cleaning or meals for schools. The local authority has to do this, as national
government legislation insists that some services have to be put out to 'compulsory
tendering', where private companies are invited to bid for the work. Those who offer the
best value for money are given the contract for a number of years.
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TOPIC 2. TYPES OF ORGANISATIONS
2.4
Third sector
This sector refers to a wide range of non-governmental and non-profit-making
organisations or associations, including charities, voluntary and community groups,
cooperatives, and social enterprise.
Charities and voluntary organisations
These organisations, particularly cooperatives and social enterprises, have a
increasingly important place in our society.
These organisations' main aim is not to make profits, but to raise money for good
causes, or to provide services to the public which would otherwise not be provided, or
not be provided well. An example of this type of service would be the specialist support
offered by charities such as MacMillan.
Any profits that charities make are used to help people. They are formed by people
sharing similar beliefs or concerns who support the charity as volunteers or trustees.
Charities have to be registered with the Charity Commissioners (known as OSCR in
Scotland) who watch over their activities. To be recognised as a charity the
organisation has to have one or more of the following as their main objectives.
•
To relieve poverty
•
To advance education
•
To advance religion
•
To carry out activities beneficial to the community
Once they have been recognised as a charity they are given 'charitable status', which
means they do not have to pay some taxes such as VAT and allows "gift aid" to be
claimed on donations, which can increase income by up to 25%.
Another form of voluntary organisation is found in many local communities in the form
of local clubs and societies. Many football and cricket teams, playgroups and youth
groups are run as voluntary organisations which rely on member contributions and
subscriptions, and methods of fundraising, to survive. These organisations are set up
for the benefit of their members, and are run by elected members on behalf of the group.
Cooperatives and social enterprise
Examples of social enterprise exist within many local communities - and it's not a new
idea! Social enterprise has been a feature of villages and towns for a long time - in
fact, there is evidence of a type of social enterprise in Ayrshire as early as 1761! In
those early days, social enterprise was seen in the form of co-operative societies or
Gothenburg organisations.
A social enterprise is an organisation that applies commercial strategies to maximize
improvements in human and environmental well-being, rather than maximising profits
for external shareholders.
Today, whilst we still see co-operatives, we also buy fair-trade produce, and see lots of
smaller local organisations - like credit unions or small local childcare groups - which
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TOPIC 2. TYPES OF ORGANISATIONS
are set up to benefit the buyers and users of the service, not just to make profit for
the owners. These organisations may make a profit, however instead of these profits
being returned to the owners, the profits are either shared between the members of the
society, or reinvested into the business to provide future benefits for the community.
The co-operative society is a common form of social enterprise found throughout
Scotland. A co-operative society (like Scot-Mid or the Co-operative chain in Scotland,
which has food stores and funeral homes throughout the country) functions like any other
business, until it comes to the issue of profits. In the case of the Co-operative Society,
profits are shared amongst their members (customers) in the form of a dividend.
Social enterprises
Are there any social enterprises in your own local community?
You may use the Internet to carry out this research.
Write a short report (200-300 words) detailing what these organisations do, and how
they distribute/reinvest their profits, and submit to your teacher.
..........................................
The Dean Tavern
The Dean Tavern in Newtongrange is (and has always been) a busy local pub. Founded
in 1899, it has always operated as a "Gothenburg System" pub, where profits are used
for the good of the local community.
In the early days of the pub, the profits were shared between the residents of the village
- most of whom were employed as miners at the local pit, the Lady Victoria Colliery.
Today, although the mine is long gone and the village is much larger in size, there is still
a strong community spirit, and whilst the pub profits are not split between local families,
they are used for the good of the local people. This means that a number of local
voluntary organisations, for example the children's gala, the pipe and brass bands, and
Brownie and Scout groups, all receive an annual donation towards their running costs.
They can also apply for an extra grant if they require funding for a special project - for
example, a local football team tour to Germany.
Q12: Can you suggest a reason why the Dean Tavern would choose to operate as a
Gothenburg and redistribute any profits to the local residents?
..........................................
Q13: Taking into account the changes that have happened in society, can you suggest
a reason for the change in profit distribution, so that profits are given to local voluntary
organisations rather than individual residents?
..........................................
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TOPIC 2. TYPES OF ORGANISATIONS
2.5
Summary questions
Summary questions
Q14: Which type of business organisation can lose control to outsiders?
Go online
a) Charity
b) PLC
c) Franchise
..........................................
Q15: Shares for a PLC can be sold on the stock exchange.
a) True
b) False
..........................................
Q16: Which party in a franchise agreement makes royalty payments?
a) Franchisee
b) Franchise
..........................................
Q17: Which of the following organisations does not make dividend payments?
a) PLC
b) Cooperative society
c) Franchise
..........................................
Q18: What is the purpose of a social enterprise?
a) To make a profit
b) To use any money raised to further the venture
..........................................
Q19: There is no disadvantage to becoming a multinational organisation.
a) True
b) False
..........................................
Q20: A charity exists to:
a) raise awareness of and funds for a chosen cause.
b) to make a profit Provide a service to the public.
..........................................
Q21: The public sector is funded by the taxpayer.
a) True
b) False
..........................................
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TOPIC 2. TYPES OF ORGANISATIONS
2.6
25
End of topic tests
End of topic 2 test
Q22: Complete the sentences using following options.
Go online
a) meaning they can force smaller organisations out of business.
b) meaning PLCs will find it easier to attract shareholders.
c) which will be costly to produce.
d) meaning large amounts of finance can be raised.
e) as they have greater confidence it will be paid back.
f) or the company may be fined/have legal action taken against them.
g) resulting in poorer profit results for the first few years.
h) which might mean investors can plan a hostile takeover.
1. Shares can be sold on the stock
exchange
2. PLCs often dominate their
market/dictate market prices
3. Lenders are more likely to give money
4. Investors will have limited liability
5. Initial set-up costs will be high
6. There is a large amount of legislation
which must be complied with
7. PLCs have no control over who buys
shares
8. PLCs are required by law to publish
annual accounts
..........................................
Q23: Complete the sentences using following words.
private
government
taxes
trustees
donations
ministers
•
A public sector organisation is owned by the
organisation is owned by (but does not benefit)
•
A public sector organisation like the NHS is controlled by government
or their appointed managers whereas a charity operating in the third sector is
.
controlled by a board of
•
A public sector organisation is mainly funded through
whereas a third
or fundraising activities.
sector organisation is funded through
whereas a third sector
individuals.
..........................................
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TOPIC 2. TYPES OF ORGANISATIONS
SQA style questions
Go online
Q24: Describe the main characteristics of the following types of business organisation.
(3 Marks)
1. PLC
2. Multinational
3. Franchise
..........................................
Q25: Explain why a business organisation may decide to trade internationally. (3 Marks)
..........................................
Q26: Describe two advantages for the franchiser of this type of business structure. (2
Marks)
..........................................
Q27: Describe the main reason for the existence of a charity. (3 Marks)
..........................................
Q28: Explain why becoming a PLC may mean that the original shareholders could lose
control of their business. (2 Marks)
..........................................
Q29: Describe the purpose of a social enterprise. (3 Marks)
..........................................
Q30: Compare a private sector and public sector organisation in terms of ownership
and finance. (4 Marks)
..........................................
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Topic 3
Objectives
Contents
3.1 An organisation's objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28
3.2 Business objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.3 Methods of growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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33
3.4 Case study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.5 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35
36
3.6 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37
Learning objectives
After studying this topic, you should be able to:
•
identify business objectives;
•
differentiate between strategic and tactical objectives;
•
describe different objectives;
•
describe why objectives may change for an organisation.
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TOPIC 3. OBJECTIVES
3.1
An organisation's objectives
All organisations have objectives. These objectives will differ from organisation to
organisation and may be dependent on the type of organisation.
Objectives help to identify:
•
the specific goals of the organisation;
•
how they are to be achieved;
•
the eventual end result.
Objectives may be split in any organisation and identified as being either:
Strategic objectives:
Strategic objectives are those objectives which are identified and set by the top layer of
management in the organisation. They outline the main goals and aims of the
organisation.
Tactical objectives:
Tactical objectives are made in the light of strategic objectives and are more focussed
in their nature. They identify how the strategic objectives of the organisation can be
achieved through the performance of each department within the organisation.
An organisation's objectives
Choose an organisation that you know, visit its website and list its objectives.
For example: http://www.tesco.co.uk.
Visit another organisation's website - preferably one selling similar products - and list
and compare its objectives.
For example: http://www.sainsburys.co.uk.
..........................................
Business objectives of a publicly - funded organisation.
How do the business objectives of a public funded organisation differ from a commercial
company?
You may use the Internet to research this.
Your answer should be in the region of 100 words.
When you have finished show your work to your teacher.
..........................................
© H ERIOT-WATT U NIVERSITY
TOPIC 3. OBJECTIVES
3.2
Business objectives
As discussed at National 5 level, business objectives will differ according to the
organisation in question. Objectives studied at National 5 level included:
•
Profit maximisation
•
Survival
•
Sales maximisation
•
Provision of a service
At Higher level, in addition to these objectives, the following are introduced:
•
Corporate and social responsibility
•
Growth
•
Satisficing
•
Managerial objectives
Each of these objectives is fundamental to the continued existence of an organisation.
For many organisations, the objective of maximising profits will be their primary
objective, however this does not apply to all organisations. For example, a voluntary
organisation does not have profit as its main objective. It exists to provide a service to
those in need and the provision of the services required would be amongst its main
objectives.
As with people, the aims of an organisation will constantly change. Think about it: when
you were a young child, you perhaps aimed to learn to swim or ride a pony. As you
became more proficient at these skills, your aims perhaps changed, and you may have
wanted to win competitions in these sports. Also, it was likely that your personal aims
differed from those of your friends and family.
As a business moves from starting up to becoming a larger organisation, the objectives
of the organisation will change. Whilst initially survival will be the primary concern
for any organisation, as the business (or charity) becomes more established, this can
change to enable the business to grow or reach different customers. Objectives can
also be impacted by the external environment - for example in times of recession,
an organisation which had previously looked to maximise profits may find survival to
become a more pressing objective.
Objectives are also determined by the purpose of an organisation - as already
discussed, a private sector organisation aims to make a profit, which will never be the
aim of a charity.
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TOPIC 3. OBJECTIVES
Profit maximisation
Profit maximisation is where an organisation strives to make the highest level of profit
possible.
All commercial organisations are concerned with making profits. A profitable business
means making money for its owners and stakeholders.
Profit maximisation is not enough for the continued success of the business. The
growth and development of the business as a whole is also important.
Survival
Survival as an objective is literally the aim of continuing to trade as an organisation.
All organisations, given a choice, would like to survive into the future. Survival is one of
the main business objectives but it is dependent and related to the business objectives
of profit (maximisation) and growth.
Sales maximisation
Sales maximisation is literally where an organisation tries to achieve the highest volume
of sales possible.
Commercial organisations which offer goods or services for sale are concerned with
making money. Profit maximisation can be achieved through sales maximisation e.g.
increased sales mean increased revenue, which may increase profits.
Provision of a service
Most businesses provide some type of product or service, however there are some
types of organisations for which the provision of a service is their main concern. That is
to say, they may not be concerned with profits or growth but only in providing a service
to their customers.
The typical type of organisation that is concerned with providing a service is a charity.
Corporate and social responsibility
Many businesses nowadays are concerned with how the public perceives them and
how they treat the environment. This is called social responsibility and is an area of
concern for all businesses.
Growth
Whilst it is not a pre-requisite for survival that a business should grow, it is necessary
for all businesses to develop if they wish to survive.
The methods that an organisation can use to grow are discussed below.
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TOPIC 3. OBJECTIVES
31
Social responsibility can cover the following areas.
•
Working conditions
•
Treatment of the environment
•
Business associations
Businesses that are not socially responsible may find that they attract the interest of
pressure groups, have their products boycotted by consumers and are not an attractive
proposition for investors.
Satisficing
An organisation which aims for "satisficing" as an objective is literally looking to hold a
satisfactory position - in other words to be "good enough" (but no more than that).
An organisation which looks to achieve an objective of satisficing may have a future
"ideal position" in mind, but is acknowledging that it may not be possible to reach that
position at the present time - perhaps due to a recession, lack of staff or lack of finance.
Managerial objectives
Managerial objectives exist in an organisation where managers have their own
objectives which may operate alongside or contrary to the main business objectives
e.g. they may wish to increase their own salary or position within the company.
It is important for a company to ensure that managers do not allow their personal
objectives to impact on the decisions made on behalf of the organisation - for example
awarding themselves a pay rise to satisfy their personal managerial objective of
increased salary in a climate where the organisational objective is survival, requiring
reduced costs.
Other business objectives which may be identified include:
•
innovation;
•
management performance and development;
•
productivity;
•
physical and financial resources;
•
public responsibility;
•
employee performance and relations;
•
environmental concerns;
•
maximisation in the use of available resources;
•
public profile.
Identify the business objectives
For each question decide whether the business objective is:
Go online
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TOPIC 3. OBJECTIVES
A) Managerial
B) Social responsibility
C) Profit maximisation
D) Survival
E) Sales maximisation
F) Growth
G) Provision of a service
H) Satisficing
Q1:
Managing directors award themselves £1 million of share options
..........................................
Q2:
Let's hope the new advertising campaign is successful
..........................................
Q3:
Sales are holding steady with acceptable profit levels for shareholders.
..........................................
Q4:
Sainsbury's have introduce new reusable plastic bags.
..........................................
Q5:
We need to take on more staff to cope with increased demand.
..........................................
Q6: We need to make some employees redundant otherwise we may not exist this
time next year.
..........................................
Q7:
If we cut prices we will sell more.
..........................................
Q8: The local authority announces a new PFI initiative to build 10 new secondary
schools.
..........................................
Q9:
Morrisons take over Safeway.
..........................................
Q10: We need to cut costs as the shareholders are complaining of low dividends.
..........................................
© H ERIOT-WATT U NIVERSITY
TOPIC 3. OBJECTIVES
Business objectives
First, answer this question.
Q11: Identify eight business objectives.
..........................................
Then:
Choose FOUR of the business objectives that you have identified and explain why they
might be important to an organisation.
Submit this work to your teacher.
..........................................
3.3
Methods of growth
Organic growth
This is where a company grows naturally, without becoming involved in merging with
or taking over another company. This can be achieved through increasing sales and
opening new branches, or launching a new product range.
Takeovers and mergers
A takeover is the term used to describe when one company literally "takes over" another
company. This usually results in the company being taken over being rebranded - for
example, Safeway was taken over by Morrisons. A takeover can be voluntary (where a
company puts itself up for sale as Safeway did) or hostile (where a large company buys
enough shares in another company to force through a takeover - this happened when
Kraft took over Cadbury's).
A merger is where two companies integrate on equal terms - a "friendly" combining of
companies, where elements of both brands/names will be retained. For example Halifax
and Bank of Scotland became HBoS.
Horizontal and vertical integration
Companies may grow and develop in different ways. Integration of companies occurs
when organisations combine to become larger and more powerful.
Horizontal integration occurs when two companies which operate at the same stage of
production merge to become one entity.
The reasons for doing this include:
•
market domination;
•
avoidance of future takeovers;
•
increased efficiency.
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TOPIC 3. OBJECTIVES
Vertical integration occurs when two companies which operate at different stages of
production in the same industry decide to join.
Advantages here include:
•
increased efficiency;
•
less need to contract out work to other companies as more expertise at all stages
of production is now available.
Forward vertical integration occurs when an organisation takes over a customer. Control
can be exercised over the chain of distribution and supply.
Backward vertical integration occurs when an organisation takes over a supplier giving
a guaranteed source of stock.
Diversification
Diversification is the result of the take-over or merger of different firms operating in
different markets.
The reasons for this include:
•
growth and development;
•
spread of risk in case one area of the business fails;
•
acquisition of assets;
•
collection of new knowledge and experience.
Diversification is often a business's response to a change in its market or may be used
as an opportunity to enter new markets. For example, many tobacco companies based
in the UK have moved to diversify into leisure and food industries, to offset the falling
demand for their core products of cigarettes and tobacco.
Organisations can also choose to reverse the process of growth to focus on key areas.
Deintegration/demerger
This is where an organisation splits into two separate businesses. This allows
each business to focus on their core activity and therefore improve efficiency and
performance. Divestment: This is where a business chooses to sell off (usually less
profitable or loss making) elements of operations or some assets. This raises finance
which can be invested into improving remaining areas of the business.
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TOPIC 3. OBJECTIVES
3.4
Case study
Volkswagen cars - a social responsibility
Read the article about VW cars, then answer the questions.
If we look at the environmental impact during the life cycle of a vehicle, the usage
phase is decisive and has the biggest impact compared with the manufacturing or
recovery phase. Therefore Volkswagen believes it is particularly important from an
environmental viewpoint to minimise the environmental impact during the usage phase.
The lowest possible fuel consumption is the central aim of Volkswagen engineers in
their work to achieve ecological benefits for the environment and also economic
benefits for customers. In this area, successful examples include the modern FSI and
TDI engines as well as the automatic DSG©direct shift gearbox.
The long life span of the vehicle is also important. If the vehicle can be used longer, the
burden on the limited raw material resources of our planet and also on the costs to the
owner will be reduced.
At the same time, we have also been working on the area of servicing. The servicing
intervals for modern Volkswagen models are currently up to 50,000 km (with extended
servicing intervals depending on the model and the usage of the vehicle). The
occurrence of old oil and other used parts is therefore also lower.
(http://www.volkswagen.co.uk or http://www.vw.com)
Q12: What are the three phases in the life cycle of a vehicle?
a) Manufacturing, usage and recovery
b) Manufacturing, repair and recovery
c) Design, manufacturing and usage
..........................................
Q13: Which phase has the most impact on the environment?
..........................................
Q14: What is the MAIN aim of VW to reduce the impact on the environment?
a) Lowest price to buyers
b) Lowest damage on impacts
c) Lowest fuel consumption
..........................................
Q15: In what other ways does VW wish to reduce environmental impact?
..........................................
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TOPIC 3. OBJECTIVES
3.5
Summary questions
Summary questions
Social responsibility can cover following areas:
Go online
Q16: Working conditions
a) True
b) False
..........................................
Q17: Treatment of the environment
a) True
b) False
..........................................
Q18: Employee relations
a) True
b) False
..........................................
Q19: Attracting new investment
a) True
b) False
..........................................
Q20: Production of goods and services
a) True
b) False
..........................................
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TOPIC 3. OBJECTIVES
3.6
37
End of topic tests
End of topic 3 test
For each question categorise the objectives into the correct statements:
Go online
•
Objective
•
Sales maximisation
•
Profit maximisation
•
Growth
•
Social responsibility
•
Managerial
Q21: Increasing opening hours and making products available online.
..........................................
Q22: Acquiring competitors at every opportunity.
..........................................
Q23: Statement.
..........................................
Q24: Voting to award director bonuses.
..........................................
Q25: Minimising costs whilst increasing selling price.
..........................................
Q26: A high profile environmental strategy.
..........................................
SQA style questions
Q27: Describe the role of objectives in business. (6 Marks)
..........................................
Q28: Compare strategic and tactical objectives. (2 Marks)
..........................................
Q29: Describe four business objectives. (4 Marks)
..........................................
Q30: Define the term social responsibility and explain its importance to modern
business. (3 Marks)
..........................................
© H ERIOT-WATT U NIVERSITY
Go online
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TOPIC 3. OBJECTIVES
© H ERIOT-WATT U NIVERSITY
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Topic 4
External and internal environments
Contents
4.1 PESTEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
4.1.1 Case study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2 Internal factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42
44
4.3 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.4 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45
47
Learning objectives
After studying this topic, you should be able to:
•
explain the impact of external and internal factors on a large organisation;
•
discuss the importance of corporate culture.
40
TOPIC 4. EXTERNAL AND INTERNAL ENVIRONMENTS
4.1
PESTEC
Several factors exist which can affect the operation of any organisation. Factors that
come from the external environment are often outwith the control of the organisation.
Changes in the external environment are often referred to by the acronym PESTEC:
P - political
E - economic
S - sociological
T - technological
E - environmental
C - competitive
Political factors
Political factors that could affect the operation of a business include the implementation
of government policies. For example, the government controls taxation in the UK. New
legislation is published continually, and businesses must ensure that they are aware
of, and complying with, all legislation that affects them. For example, in March 2013,
the budget statement announced new packaging targets for 2013-2017. These targets
ensure the businesses cut their packaging and waste. This will allow the UK to meet EU
targets, but places an extra financial burden on business.
Economic factors
Economic factors affecting the operation of businesses may take several forms. One
economic factor, which is completely outside the control of any organisation, is the state
of the economy. The Bank of England sets the interest rates for the UK. An increase in
interest rate will directly affect any business with loans to repay, as the amount borrowed
will increase.
Large businesses may trade internationally. Fluctuating exchange rates between
countries will affect the price of raw materials or the profit margin on goods sold.
Socio-cultural factors
Socio-cultural factors acknowledge changes in the needs and wants of the population.
Tastes change quickly and consumers are rarely loyal to one particular brand or product.
They tend to be influenced to a much greater extent by special offers or new features.
Changes in demographics also have an impact and this must be taken into account by
organisations. The changing pattern of employment affects business. For example, the
increase in the number of households where both adults work has driven the increase in
online supermarket shopping, as families choose to spend more time together and less
time buying weekly shopping. The supermarket chain Sainsbury's was one of the last
to make the move to online sales, and blamed its poor financial performance on the late
decision to do so.
Another social-cultural factor that may impact on an organisation is pressure groups.
Pressure groups can exert a negative influence on organisations to the extent that the
organisation may have to alter its plans. An example of an environmental pressure group
is Greenpeace.
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TOPIC 4. EXTERNAL AND INTERNAL ENVIRONMENTS
41
Technological factors
Technological factors are relevant today as most organisations rely heavily on the use
of information technology in their everyday operation.
Information technology has evolved and the pace of change is very fast. The pace of
change is such that hardware and software that was up-to-date just last year is now
already out-of-date. This means that there is a great financial cost for businesses.
Money which did not require to be spent a decade ago is now dominating the buying
decisions of many businesses.
Maintaining a competitive advantage is essential to every organisation.
Environmental factors
Environmental factors are not usually controllable by organisations. The weather is an
example that may have an impact of business. Localised flooding or rail delays due to
snow can delay or halt the production process as businesses fail to receive stock.
Competitive factors
All businesses face competition and this, in turn, influences the way in which they
operate. Sometimes this may mean changes to the way in which their products and
services are marketed. In other cases it may mean completely redesigning their product
range or changing the way in which they market and sell. Apple and Samsung have been
embroiled in a number of lawsuits over the design of their smart phones and computers,
with both sides citing the other as copying their intellectual property. Disagreements
such as this are very costly and time consuming.
Businesses today must be more ethically aware, as consumers view this with increasing
importance when choosing where to purchase. With information available everywhere,
consumers have never been so knowledgeable. The Internet allows consumers a huge
choice of business to purchase from, therefore all businesses must ensure that they
are ethically competitive. This means they must think about where they source raw
materials, how much they pay workers and how much of a carbon footprint they leave
behind. Customers will go elsewhere if they think a competitor is more ethically aware.
External environment - events
For each question categorise the factor with the correct event:
Go online
•
Political
•
Economic
•
Social
•
Technological
•
Environmental
•
Competitive
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TOPIC 4. EXTERNAL AND INTERNAL ENVIRONMENTS
Q1: From March 2013, unpaid parental leave increased from 13 weeks to 18 weeks
for parents of children up to the age of 5.
..........................................
Q2: Mild weather during the month of October has been blamed on a 0.7% decrease
in sales.
..........................................
Q3:
There has been a prolonged rise in the number of 'local' supermarket stores.
..........................................
Q4:
Tesco launched its own tablet, beating the price point of all other brands.
..........................................
Q5:
The Bank of England interest rate has been held at a record low of 0.5%.
..........................................
Q6: Automated deliveries may be a possibility in the next 5 years, says retail giant
Amazon.
..........................................
4.1.1
Case study
Diageo offers to sell Whyte & Mackay Scotch whisky arm
Diageo, the world's biggest Scotch whisky distiller, has offered to sell most of its Whyte
and Mackay business to appease competition authorities.
It acquired the famous whisky brand when it secured a stake in India's United Spirits in
late 2012. As the deal increased Diageo's share of the blended whisky market to about
40%, the Office of Fair Trading (OFT) was concerned this could reduce competition and
raise prices for consumers. The OFT is considering Diageo's offer.
Before the merger, there had been "substantial competition" between Diageo's Bell's
whisky and Whyte and Mackay's own-label brand, the OFT said.
"Our investigation considered a wide range of evidence and we concluded that the
likely loss of competition could give rise to higher prices for retailers, and ultimately
consumers," said OFT chief economist Chris Walters.
"We are now considering Diageo's offer to sell the bulk of the Whyte & Mackay business
with the exception of two malt distilleries, to address our concerns."
Garry White, chief investment commentator at stockbroker Charles Stanley, said:
"Should the regulator accept the offer to sell the bulk of the Whyte and Mackay business,
the price doesn't seem too high to gain a significant position in India - the world's fastestgrowing whisky market."
The OFT had been mulling referring the deal to the Competition Commission.
In April 2014, a new body, the Competition and Markets Authority, will become the UK's
lead competition and consumer body.
Source: adapted from http://www.bbc.co.uk/news/business-25084764
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TOPIC 4. EXTERNAL AND INTERNAL ENVIRONMENTS
Q7: What is given as the main reason for Diageo's offer to sell Whyte and Mackay?
a) No longer profitable
b) Concerned that the competition commission may force them to
c) Want to promote their own label
..........................................
Q8: Name the Diageo whisky that was in strong competition with Whyte and Mackay
before the merger.
..........................................
Q9: The Scottish Government is trying to adopt a policy of minimum pricing for alcohol.
Name the external environment factor.
a) Political
b) Environmental
c) Economic
..........................................
Q10: Exports of Scottish Whisky continue to rise. Name the external environment
factor.
a) Political
b) Environmental
c) Economic
..........................................
Q11: In the 2013 Budget, the Chancellor reduced the levy on beer but not on spirits, in
a move that angered the whisky industry. Name the external factor.
a) Political
b) Environmental
c) Economic
..........................................
© H ERIOT-WATT U NIVERSITY
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TOPIC 4. EXTERNAL AND INTERNAL ENVIRONMENTS
4.2
Internal factors
Key point
Several factors exist that can affect the operation of any organisation. Factors that
come from the internal environment can be controlled and changed by decision
makers within the organisation.
Examples of internal pressures include:
•
a change of management;
•
the introduction of new technology;
•
a change in the company's financial position.
•
Corporate culture
All businesses need stability. A high turnover of managers does not provide this stability
as every new manager, or management team, joining the business will come with their
own ideas and initiatives. There may be a more serious underlying problem if a business
loses managers in quick succession. The business may be offering a level of pay lower
than that if their competitors, or may be controlled by a board who are unwilling to give
a manager the autonomy required to complete their role.
A businesses greatest asset is its employees, who must be nurtured and motivated. A
successful business will invest in its workforce to ensure that it gets the best out of them.
They realise that employees are the first contact for customers and the efficiency and
effectiveness of employees will determine the profitability of the business.
The ability to invest new sources of capital into a business will also impact on that
businesses success. A business may wish to expand into new countries, bring a new
product to market or run a new advertising campaign. All of these things cost money.
The management of an organisation has to decide where that money is going to come
from. It may look to increase the number of shareholders, for example. Before doing so,
the business must be comfortable with the knowledge that an increase in shareholders
reduces the ownership and control of the current owners.
Corporate culture
As previously discussed, the ability of a business to function lies with the managers and
employees who make decisions. The ability for employees to function successfully is
often determined by the culture of the business.
When managers set an ethos of mutual trust and respect, employees feel valued and
are empowered to always give their best. There is an increase in workers being given
the opportunity to work more flexibly, for example they may be allowed to set their own
hours or work from a place of their own choosing. This freedom often encourages loyalty
and can mean that staff work rates can increase.
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TOPIC 4. EXTERNAL AND INTERNAL ENVIRONMENTS
45
A businesses corporate culture can be determined by a number of factors:
•
Historic decision making processes.
•
The size and nature of the business.
•
The number of employees involved in the decision making process.
•
The management structure.
•
The flexible working practices employed by the business.
4.3
Summary questions
Summary questions
Q12: The availability of finance is an internal factor affecting business.
Go online
a) True
b) False
..........................................
Q13: The Bank of England increasing interest rates is an internal factor affecting
business.
a) True
b) False
..........................................
Q14: An employee facing a disciplinary hearing is an internal factor affecting business.
a) True
b) False
..........................................
Q15: The government deciding to stop an employee training scheme is an external
factor affecting business.
a) True
b) False
..........................................
Q16: A flood stopping a fleet of deliveries is an example of a social factor.
a) True
b) False
..........................................
© H ERIOT-WATT U NIVERSITY
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TOPIC 4. EXTERNAL AND INTERNAL ENVIRONMENTS
Q17: A change in the exchange rate between the UK and the Euro zone is an example
of a political factor.
a) True
b) False
..........................................
Q18: An increase in woman working is an example of an economic factor.
a) True
b) False
..........................................
Q19: An increase in the use of automation is an example of a technological factor.
a) True
b) False
..........................................
Q20: The introduction of the Equality Act 2010 is an example of a political factor.
a) True
b) False
..........................................
Q21: The national minimum wage increase is an example of an economic factor.
a) True
b) False
..........................................
© H ERIOT-WATT U NIVERSITY
TOPIC 4. EXTERNAL AND INTERNAL ENVIRONMENTS
4.4
47
End of topic tests
End of topic 4 test
For each of the following external factors, select the possible impact on an organisation.
Go online
Q22: Interest rates are rising.
a) Consumers are worried they will have less money to spend.
b) Business' expenses will fall.
c) Business must be willing to spend more on new equipment.
..........................................
Q23: The weather forecasts predicts a severe winter with many weeks of continual snow
fall.
a) Consumers are willing to spend more in a product if they feel it will positively benefit
others.
b) A new competitive pricing strategy is adopted.
c) Businesses put contingency plans in place to stockpile stock in case there are
problems with deliveries.
..........................................
Q24: The Government has announced it is to reduce corporation tax by 5%.
a) Business must be willing to spend more on new equipment.
b) Business' expenses will fall.
c) Consumers are worried they will have less money to spend.
..........................................
Q25: Two similar businesses have opened up in the same town.
a) A new competitive pricing strategy is adopted.
b) Consumers are worried they will have less money to spend.
c) Business must be willing to spend more on new equipment.
..........................................
Q26: 14% rise in the sale of Fair-trade products.
a) Businesses put contingency plans in place to stockpile stock incase there are
problems with deliveries.
b) Consumers are willing to spend more in a product if they feel it will positively benefit
others.
c) Business' expenses will fall.
..........................................
Q27: Research findings reveal automation can lower costs by 28%.
a) A new competitive pricing strategy is adopted.
b) Consumers are worried they will have less money to spend.
c) Business must be willing to spend more on new equipment.
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TOPIC 4. EXTERNAL AND INTERNAL ENVIRONMENTS
..........................................
Decide which area of PESTEC the external factor belongs to.
Q28: The weather forecast predicts a severe winter with many weeks of continual snow
fall.
a) Technological
b) Competitive
c) Environmental
..........................................
Q29: Two similar businesses have opened up in the same town.
a) Competitive
b) Technological
c) Environmental
..........................................
Q30: The Government has announced it is to reduce corporation tax by 5%.
a) Social
b) Economic
c) Political
..........................................
Q31: Research findings reveal automation can lower costs by 28%.
a) Technological
b) Social
c) Environmental
..........................................
Q32: Interest rates are rising.
a) Political
b) Economic
c) Competitive
..........................................
Q33: 14% rise in the sale of Fairtrade products.
a) Technological
b) Social
c) Economic
..........................................
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Q34: Which of the following factors does not affect the corporate culture of a business:
a) the size and nature of the business.
b) a competitor changing their prices.
c) the flexible working practices employed by the business.
..........................................
Q35: Corporate culture can best be described as:
a) the shared values and beliefs of employees and managers.
b) the way managers make decisions.
c) the level of turnover amongst staff.
..........................................
Q36: Which of the following is not an example of an internal factor:
a) a breakthrough in new technology.
b) an employee facing a disciplinary hearing.
c) an increase in the bonus structure.
..........................................
Q37: Staff feeling more motivated and enthused by work is often a direct result of:
a) a change in the weather.
b) a manager trying to change the corporate culture.
c) the increase in automation in the production run.
..........................................
Q38: Internal factors affecting business can be described as:
a) the size and nature of the business.
b) a competitor changing their prices.
c) the ability of a business to increase its finance.
..........................................
Q39: A businesses greatest asset can be described as:
a) the methods of production it uses.
b) the competency of its staff.
c) the availability of finance.
..........................................
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SQA style questions
Go online
Q40: Explain the effects that three political factors could have on an organisation. (3
Marks)
(A different effect should be explained each time.)
..........................................
Q41: Describe four external factors (other than political) that could have an impact on
an organisation. (4 Marks)
..........................................
Q42: Explain two internal problems that can exist when managers try to make effective
decisions. (2 Marks)
..........................................
Q43: Describe three factors an organisation should consider when trying to encourage
a positive corporate culture. (3 Marks)
..........................................
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Topic 5
Business structures
Contents
5.1 Functional groupings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52
5.2 Other types of grouping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.3 Entrepreneurial structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
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5.4 Tall and flat management structures . . . . . . . . . . . . . . . . . . . . . . . .
5.5 Centralised, de-centralised and matrix structures . . . . . . . . . . . . . . . . .
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5.6 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.7 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Learning objectives
After studying this topic, you should be able to:
•
•
describe the following internal structures;
◦
Groupings such as function, location, product and customer;
◦
entrepreneurial structure;
◦
tall and flat management structures;
◦
centralised and decentralised management structures;
◦
matrix management structure.
justify the use of each of the structures described.
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5.1
Functional groupings
It is common place for medium and large businesses to organise themselves by
functional area. Typical functional areas include Research and Development, Marketing,
Human Resources, Finance, Operations, Customer Services and Administration.
Research and development
The research and development department are always on the look out for new ideas.
Their remit is to bring new ideas to the management board, or look at ways to improve
existing products. An example of this is the squeeze bottle used by Heinz tomato
ketchup. In response to customer feedback Heinz introduced a new, more convenient
bottle in an effort to prolong the life cycle of the product and stay ahead of the
competition. This functional area will work closely with the marketing department.
Marketing
The marketing department aims to discover what customers want from the goods and
services they provide. They work closely with the research and development department
to conduct market research and use this information to develop strategies to ensure that
the business can meet the needs of customers. They are responsible for ensuring an
effective marketing mix (often referred to as the 7P's)
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TOPIC 5. BUSINESS STRUCTURES
Product
Which products are on offer and what is the level of sales? What new
products are planned? Are products in decline? What can be done to
reignite interest in products?
Price
How much should be charged? Should a high or low price be set? How
can we ensure that our product is competitively priced whilst ensuring a
profit is made?
Promotion
How can people be made aware about products? What special offers
should be ran? What advertising methods will ensure the correct
market segment will be aware of products?
Place
People
How can we distribute products? Should products be sold directly to
the customer or through retailers? How can the Internet help to sell
more?
How to make sure customers are always satisfied?What level of after
sales service should be given?
Process
What systems are in place to ensure customer satisfaction? How do
we know these systems are effective?
Physical
evidence
What evidence does the business have that they use to verify that it
keeps its promises to customers?
Human resources
The Human Resources department deals with the recruitment, selection, retention,
training and development of employees. They are also responsible for ensuring
employees are motivated through the financial and non-financial payment systems.
The human resources department will also take account of all government legislation
relevant to human resource management.
Finance
The Finance department is responsible for the payment of wages and salaries. They
are also responsible for producing financial accounts including Profit Statements and
Balance Sheets. They will set budgets for other functional areas and ensure that
departments do not overspend.
Operations
The Operations department is responsible for the purchasing or raw materials. They
work closely with the finance department to ensure that all raw materials are costed
and purchased within budget. They will also work alongside the marketing department
to ensure an appropriate selling price is decided upon. The Operations department,
often referred to as the production department, is responsible for the design and
manufacturing of goods. Quality is very important to an organisation and it is this
department that ensures processes are in place.
Customer services
With a growing quaternary sector and increased competition, the role of the customer
services department has increased in recent years. Customers have high expectations
and this department must ensure that a high level of service is maintained. This
department will put polices and procedures in place to ensure a consistent approach
to customer satisfaction. A policy for dealing with complaints must also be introduced
as successful businesses rely on returning customers to ensure continued success.
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Administration
The administrative department is responsible for the organisation and dissemination of
information around the business. This department deals with the storage and retrieval
of information. In today's business this information is likely to be stored online.
Grouping by function is a common grouping used by large businesses. It is used
to ensure that the business is run in the most efficient manner. Employees become
highly skilled in their chosen function, for example, an employee working in the
Finance department will be qualified to produce and audit financial accounts. However,
businesses organised by function may find that some tasks are duplicated, leading
to waste. Competition can arise between departments and this can cause friction.
Communication may be poor between functions, leading to mistakes and more waste.
Despite these disadvantages, grouping by function is a very good way to ensure large
businesses run smoothly as everyone is accountable.
Department activities
Q1:
Go online
Decide which from the list of activities below matches following descriptions.
•
Increasing the amount of automation will decrease the manufacturing errors and
reduce loss.
•
Effective promotion, such as paying a celebrity to endorse your product, may
increase sales.
•
An example is the improvement to the camera on a smart phone.
•
Technology such as video conferencing and email ensures business deals can be
conducted globally.
•
Finding the best borrowing rate will ensure a bank load can be repaid.
•
A consistent approach to customer satisfaction is important.
This department is always on the lookout
for new ideas.
This department is interested in setting
budgets to minimise overspends.
This department is interested in the
production process.
This department is interested in the
identification and fulfilment of customer
needs.
This department is interested in ensuring
a smooth flow of information across the
organisation.
This department is interested in dealing
with customer complaints to ensure
repeat customers are not put off.
..........................................
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TOPIC 5. BUSINESS STRUCTURES
5.2
Other types of grouping
Geographical grouping
Multinational businesses will often group by geography. This is because operating
across the world can create problems with time zones, payment rates, customer
expectations, delivery times and corporate culture. Grouping by place also allows for
a closer working relationship with local suppliers. This ensures that the optimum quality
and price can be achieved.
One advantage of this type of grouping is that customers benefit from speaking to an
employee with local knowledge. This can result in customer loyalty being achieved.
Inevitably, this will lead to duplication of services across the company.
Product grouping
Large businesses may choose to group by product or services. Under this model, a
business will be led with a management team. This team will split into the various
products or services that the business offers. Disney is an example of a business that
splits itself by product. The board ensures the overall brand continues to grow. The
business is split into divisions, and each division has a director overseeing that area of
the business. Disney is split into ESPN, consumer products, Walt Disney Studios, online
ventures, media (including TV and film) and parks and resorts.
Each division operates as a self contained unit, with the board ensuring that the work
of all divisions contributes to the overall business strategy and objectives. Each division
caters for different market segments and allows staff to increase knowledge and skills
to match that particular product. This allows the business to respond to social changes
more quickly.
Duplication can occur, as each division will have it's own functional areas, leading to an
increase in costs and a reduction in efficiency.
Customer grouping
A business may decide to group by the needs of their different customers. The financial
services business Prudential UK is an example of a business that does this. They offer
financial advice on a number of matters, such as investments, insurance and taxation.
Each team within the business has responsibility for dealing with customers. Customers
can be transferred from one team to another as their needs change.
A business grouping in this way can build up customer loyalty as they can give each
customer a personal service. This also means they can respond quickly to customer
needs or changes in taste.
This personal service can be expensive due to higher staff costs. It is also inevitable
that costs will increase due to a duplication of activity across the business. Another
disadvantage is that the personal relationship that exists between the business and staff
is lost when staff leave or move departments.
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Types of grouping
Q2:
Fill the gaps with following terms:
•
place
•
customer
•
product
. This is
It is common for a business to group its activities according to
useful for a company such as Mackie's who produce ice-cream and crisps as it allows
each staff member to have specific knowledge.
. This would be
Car manufacturers may group their activities according to
helpful as the European market is different to the market in the UK, or America.
grouping is important to a business like the Royal Bank of Scotland. They
deal with young savers and provide support for school learners. They also work closely
with businesses and people looking to invest in their retirement.
..........................................
Q3:
Distinguish between product/service and functional groupings.
..........................................
Q4:
Discuss the advantages and disadvantages of customer grouping.
..........................................
5.3
Entrepreneurial structures
Entrepreneurial structures rely on a small number of people making the key decisions
for the business. Although more common with small and medium businesses, there
are instances where owners of large businesses remain in control and do not delegate
to a large number of people. Michelle Mone is the founder and co-owner of MJM
International, a multi-million pound lingerie company. She remains in control of the
company with a very autocratic style of management.
Advantages
•
Decisions made quickly by the core team/individual.
•
Staff know who they are accountable to.
•
Decision-maker does not need to consult staff.
Disadvantages
•
Difficult to use in large businesses where many decisions have to be made.
•
It can create a heavy workload for decision-makers.
•
It can stifle other staff's initiatives and motivations.
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TOPIC 5. BUSINESS STRUCTURES
5.4
Tall and flat management structures
Hierarchical structures can be either tall or flat. Both can exist successfully in large
organisations. Tall structures contain many layers of managers whereas managers in
flat structures are responsible for more employees.
Managers on the same level will often be responsible for the same number of delegates.
This is often linked to the pay grade they receive. The higher up the pyramid a manager
is, the more responsibility and pay they will receive.
Image 1: Hierarchical structures in large organisations; tall structure and flat structure
..........................................
The number of employees in an organisation will often determine number of levels of
management.
Tall structures
A tall structure has many layers in the hierarchy. As there are many layers the chain
of command is longer and communication between the top of the chain and the bottom
may take longer. Managers have smaller spans of control and there is less delegation,
often resulting in less opportunity for subordinates to take on responsibility.
Decision making can often take longer in a tall hierarchical structure as more managers
have to be included in the decision making process. This can lead to a less flexible
organisation that finds it harder to react to competition.
Tall structure organisations will often be split into functional departments where
employees have clearly defined roles and responsibilities. Employees working in the
same department usually have expertise or experience in particular areas. This means
that each worker can become very good at what they do.
Flat structures
A flat structure has a wider span of control. This means every manager has more
responsibilities and is responsible for a larger number of employees. This can make the
decision making easier and more timely as there are less people to grant permission.
The workload of a manager in a flat structure can be large due to the number of
employees within their team. This wider span of control can lead to employees feeling
more empowered as subordinates take on some of the teams responsibilities. On the
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TOPIC 5. BUSINESS STRUCTURES
other hand it can lead to demotivated employees who feel that they are being asked to
do more than their job description.
Consultation will also be quick and efficient as the owner and manager can easily meet
all the staff face-to-face to discuss any problems that may arise. Another advantage is
that salaries tend to be cheaper as the business does not have to pay a large number
of expensive management salaries.
Summary of differences
Tall structures
Many layers in chain of command.
Flat structures
Managers responsible for high number of
employees.
Wide span of control.
Easy decision making as less people
involved.
Managers have more responsibilities and
large workload.
Smaller span of control.
Less flexible as more managers included
in decision making.
Employees have high level of expertise
and experience.
Less delegation and less opportunity for
Potential for empowered subordinates.
subordinates.
Employees have clearly defined roles and Potential for demotivated employees as
doing more than their job description.
responsibilities.
5.5
Centralised, de-centralised and matrix structures
In a centralised organisation a few senior managers will retain the major responsibilities
and powers whereas decentralised organisations will spread responsibility for specific
decisions across various departments and lower level managers, including branches
or units located away from head office. An example of a decentralised structure is
Poundland. Each store has a manager who can make certain decisions concerning their
store. The store manager is responsible to a regional manager. Promotions and stock
decisions are made centrally, but other decisions such as staff rotas and the placement
of special offers is left up to the individual stores.
Senior managers enjoy more control in a centralised structure. Decisions can be
made to benefit the whole organisation, which can result in cost savings as a standard
procedure is adopted. Where strong leadership exists, the whole organisation can
benefit.
On the other hand, staff in a centralised structure do not feel empowered, as they are
not part of the decision making process. This could lead to a lack of motivation and
reduced output. Centralised structures do not take account of the skills and knowledge
of staff lower down the organisation.
Successful businesses will often use a mixture centralised and decentralised structures
to ensure a consistent strategic approach is taken across the business, but the skills
and knowledge of staff are not ignored.
Matrix structure
A Matrix structure contains teams of people created from various departments from
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TOPIC 5. BUSINESS STRUCTURES
across the business. These teams will be created for the purposes of a specific project
and will be led by a project manager. Often the team will only exist for the duration
of the project and matrix structures are usually deployed to develop new products and
services. An example is when a business is preparing an event to launch a new product.
Employees from across the business will meet for a short period of time to plan the
launch. After the event, they will return to their original teams.
As a result, matrix structures do not replace traditional tall and short organisational
structures. They can help to break down traditional department barriers, improving
communication across the entire organisation. Employees with a variety of skills are
able to work together, which increases the skills set of all employees. This is likely to
result in greater motivation amongst the team members and encourages new ideas to
be developed. This way of sharing resources across departments can make a project
more cost-effective.
Matrix structures may not always work smoothly. Members of project teams may have
divided loyalties as they report to two line managers. Equally, this scenario can put
project team members under a heavy pressure of work, especially if their usual work
activity needs to be completed. Taking employees from a range of departments can
make coordinating meetings difficult. It can also take team members time to get used
to this new way of working. A further disadvantage is the employees normal working
routine may be disrupted, meaning a loss of output.
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Management structures - descriptions
Match the following structure types with appropriate description:
Go online
•
Entrepreneurial structure
•
Tall structure
•
Flat structure
•
Decentralised structure
•
Matrix structure
Q5: This structure contains few layers of management meaning managers have a
large span of control.
..........................................
Q6:
This structure encourages regional managers to make decisions.
..........................................
Q7: This structure relies on a small number of people making the key decisions for the
business.
..........................................
Q8: This structure contains many layers of management, making decision making
slow.
..........................................
Q9: This structure contains teams of people created from various departments from
across the business.
..........................................
Management structures - definition and justification
Match the structure definition with the following justifications:
Go online
•
It is clear to see who is in charge of who, who should make decisions and how
information should pass through the organisation.
•
This structure work well in smaller organisations and are more responsive to
change.
•
This allows new initiative to be developed using the best people from across the
businesses and gives staff new skills by working with others.
•
The business benefits from having a small number of people make decisions as it
means issues can be resolved quickly.
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TOPIC 5. BUSINESS STRUCTURES
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Q10: Matrix structures are short term and involve different people from across the
organisation working together on a particular project.
..........................................
Q11: Hierarchical structures involve a large number of layers of management, each
layer having responsibility over the layer below.
..........................................
Q12: Entrepreneurial structures are used in small businesses where only one or 2
people make decisions.
..........................................
Q13: A flat structure has fewer layers of management which means each manager has
a larger span of control.
..........................................
5.6
Summary questions
Summary questions
Q14: Grouping by customer allows a business to focus on different geographical areas.
Go online
a) True
b) False
..........................................
Q15: A business that groups by functional area is more likely to be unresponsive to
change.
a) True
b) False
..........................................
Q16: Customer loyalty can increase if a business offers personal service.
a) True
b) False
..........................................
Q17: A centralized structure is more likely to make use of local knowledge.
a) True
b) False
..........................................
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Q18: Span of control is the number of subordinates across the business.
a) True
b) False
..........................................
Q19: A tall structure can often have problems of communication.
a) True
b) False
..........................................
Q20: Matrix structures only happen in the movies.
a) True
b) False
..........................................
Q21: Employees in a decentralized organisation feel empowered.
a) True
b) False
..........................................
5.7
End of topic tests
End of topic 5 test
Complete the sentences by selecting one from the options below each question.
Go online
structures have a strong head office or several top managers who
Q22:
keep the major responsibilities and power in the company.
a) Decentralised
b) Centralised
c) Tall
..........................................
of is the number of employees or ranks of employees for
Q23: The span
which a manager is responsible. If there are a great number of employees, the span is
considered to be wide and if there are only a few, then the span is narrow.
a) control
b) power
c) authority
..........................................
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TOPIC 5. BUSINESS STRUCTURES
Q24:
organisations include both tall and flat structures but are always in
the shape of a pyramid or triangle, with only a few people at the top and the number of
people in each level increasing on the way down. The span of control goes from those
above to those below.
a) Entrepreneurial
b) Hierarchical
c) Matrix
..........................................
is someone who has a higher position than someone else in a
Q25:
company or organisation.
a) A subordinate
b) A superior
c) A coordinate
..........................................
of is the way that people with authority in an organisation
Q26: The chain
are ranked, from the person with the most authority to the next one below, and so on.
a) command
b) structure
c) network
..........................................
structure is also referred to as a line and staff structure. There are a
Q27:
number of levels of management and a long chain of command running from the top to
the bottom.
a) A tall
b) A flat
c) A matrix
..........................................
structure is similar to a tall structure in that it is also a line structure.
Q28:
However, there are relatively few levels of management making the chain of command
much smaller and widening the span of control.
a) A flat
b) A centralised
c) A matrix
..........................................
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Q29:
structure will have people from various sections of the business
working together in teams which are created for specific projects and time periods and
supervised by a project manager.
a) A matrix
b) A centralised
c) A decentralised
..........................................
Q30:
business.
structures spread the responsibility across various sections of the
a) Flat
b) Centralised
c) Decentralised
..........................................
is a company or other group of people that works together for a
Q31:
particular purpose.
a) An organisation
b) An institution
c) A constitution
..........................................
SQA style questions
Q32: Describe four main characteristics of an entrepreneurial structure. (4 Marks)
Go online
..........................................
Q33: Distinguish between a centralised structure and a decentralised structure. (2
Marks)
..........................................
Q34: Compare the use of functional grouping with product grouping. (3 Marks)
..........................................
Q35: Discuss the use of customer grouping for an organisation. (3 Marks)
..........................................
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Topic 6
Stakeholders
Contents
6.1 Who are stakeholders? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66
6.2 Stakeholders' influence and aims . . . . . . . . . . . . . . . . . . . . . . . . . .
6.3 Stakeholder conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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6.4 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.5 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Learning objectives
After studying this topic, you should be able to:
•
identify and describe internal and external stakeholders;
•
describe the conflict of interest and interdependence of stakeholders.
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TOPIC 6. STAKEHOLDERS
6.1
Who are stakeholders?
Stakeholders in business are those people who have a key interest in the business.
Their interest as a stakeholder will differ according to the type of business in which they
have an interest.
Stakeholders in business may include:
•
Shareholders
•
Suppliers
•
Customers
•
Banks
Employees
•
Other lenders
•
Donors
•
Taxpayers
•
Management
•
Community
Government
•
Local government
•
•
•
Investors
•
Members
•
Committees
•
Board members
•
Pressure groups
Internal stakeholders in an organisation include owners, shareholders, managers and
employees.
External stakeholders in an organisation include customers, the local community,
pressure groups, government, suppliers and bankers.
Internal and external stakeholders
Q1:
Go online
1.
2.
3.
4.
Categorise each type of stakeholder as either internal or external.
Donors
Board members
Pressure groups
Employees
5. Members
6. Investors
7. Management
8. Community
9. Local government
10. Shareholders
11. Suppliers
13. Government
14. Taxpayers
15. Other lenders
16. Customers
17. Banks
12. Committee
..........................................
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6.2
67
Stakeholders' influence and aims
Stakeholders have an effect on all businesses as they may be able to exert control
or influence decisions which have to be made. The degree to which they are able to
exercise their influence will be determined by their degree of involvement or relative
interest in the company. For example, within a public limited company, a shareholder in
possession of 35% of the shares in a company will be regarded as a greater stakeholder
when compared to an employee holding 1% of the shares.
The amount of influence that a stakeholder can exert on a company will also be
determined by the circumstances under which the influence is exerted. For example,
a company may normally regard its owners as the key stakeholders in the business.
However, imagine the scenario where a company is polluting the local environment. In
this case, the local community may be able to exert a great deal of pressure and hold
greater influence compared to the owners even although the local community is not a
major stakeholder.
Examples of the different aims that stakeholders have in an organisation include:
•
Customers interested in obtaining the best prices and the highest quality.
•
Employees concerned about job security and future prospects.
•
Suppliers wishing to receive payment for their goods as soon as possible.
Examples of the influence that stakeholders can exert on organisations include:
•
Lending institutions having the power to grant or refuse applications for loans.
•
Managers making decisions on a day-to-day basis.
•
The community as a whole persuading business to carry out its wishes.
•
Shareholders exerting their right to vote at the Annual General Meeting of a limited
company.
Interests of stakeholders
Q2: Match the type of stakeholder to each example of interest given. Choose from:
Type of stakeholder
A) Owner - private shareholders
B) Non managerial staff
C) Government
D) Senior management staff
E) Trade unions
F) Customers
G) Creditors
H) Local community
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TOPIC 6. STAKEHOLDERS
Examples of interest
1. VAT
2. environmental issues
3. financial return
4. minimum wage
8. job security
15. profit
9. customer care
10. jobs
16. involvement
17. credit score
18. targets
5. direction
6. quality
12. taxation
13. working conditions
7. liquidity
14. rates of pay
11. value
19. legislation
20. new contracts
21. performance
..........................................
6.3
Stakeholder conflict
Successful business must constantly change. It is inevitable that whilst some
stakeholders are pushing for a change, others will fight against it. One example is a
board of directors who, in a bid for cut costs and run a more efficient business, will
wish to increase the amount of machinery in the production process. Employees will
inevitably raise concerns about job losses and may fight against these changes.
Another example is the expansion of business and the effect that expansion plans may
have on the local community. Tesco have a strategic plan to increase the number of
stores they operate. They have faced fierce opposition of the years from local residents,
concerned about the changes to their local landscape, or the negative affect a new
supermarket may have on local businesses. In every case, Tesco must balance their
expansion plan with the wishes of the local communities in which they operate, for in
order to be successful they must persuade these local community groups to shop with
them.
To avoid conflict, stakeholders must work together for the benefit of the business. For
example, an employee arguing for a wage rise may be told that profits must first increase.
An increase in profits can only take place if customers spend more. This may happen
if customers views are taken on board by managers. This is known as Stakeholder
Interdependence - understanding that stakeholders can share aims and the actions of
one stakeholder can directly affect another.
Was Royal Mail sold too cheaply?
With £27bn of investors' money having chased shares priced at just £1.7bn, and with
Royal Mail's share price trading at more than 450p this morning, compared with the
330p a share the government is receiving, there is a certainly a case for saying the
government could have got more.
However if the shares had been priced at around this morning's market price, at say
450p, the Exchequer would have received £2.7bn. So should taxpayers be raging that
they've lost a potential windfall of £700m, which would not have paid off the trillion pound
national debt but would have paid for a couple of miles of High Speed 2?
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Also the price range for the privatisation shares was set by the government at a
time when prevailing opinion was that this was a risky declining business hobbled
by lamentable industrial relations; it was only in the course of the share sale that
investors noticed a parcels operation growing very nicely, an endowment of potentially
valuable properties in city centres and the fat income the company is promising to pay
shareholders.
What is particularly striking is that Royal Mail's own people are confident that they are in
a business that will prosper: I have learned that 15,000 Royal Mail employees, almost a
tenth of the workforce, have paid £52m to buy Royal Mail shares (in addition to the free
shares being handed to all Royal Mail employees).
However, what some may think is odd - including, presumably, ministers - is that
investors have completely ignored the risk that Royal Mail could imminently be brought
to a grinding halt by a strike. The frenzy to buy Royal Mail shares probably tells you
quite a lot about the extent to which better-off people think the economy is recovering which the government is not going to rage about.
That said, a 36% gap between market price and privatisation price is far wider than
would normally be thought necessary to whet punters' appetite for future privatisation
(remember that the Department for Business Innovation and Skills has another 30% of
Royal Mail to flog, probably next summer, so ministers would not want to burn investors
buying in this initial share offer).
So they know that if the share price stays at this level for weeks and months, they will
be vulnerable to criticism - and, probably, to a ticking off by the National Audit Office.
Labour's spokesman on all this, Chuka Umunna, in chastising Cable and Fallon for
allegedly selling Royal Mail too cheaply, has in effect been shouting - at the most
sensitive period of privatisation - "the government is selling five pound notes for 50p,
fill your boots."
Whereas the capitalist Tory Fallon and leftish Lib Dem Cable have been saying to retail
investors, "I'd take care if I were you, this stock-market game can be a bit dangerous."
So what is quite striking is that 700,000 people with a bit of money to spare voted
Umunna, by stampeding to apply for the shares - though whether they are natural Labour
supporters is another thing altogether.
Here is the intriguing political calculation.
If Royal Mail shares stay at these levels, the government may well in time be found guilty
of having privatised the company too cheaply.
But ministers have just delivered a tidy windfall of £187m to 690,000 people who've been
allocated £750 of shares each. That is a potential profit of almost £250 for each of them.
Adapted from www.bbc.co.uk/news
Q3: From the case study, identify stakeholders interested in the privatisation of Royal
Mail.
..........................................
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Q4:
Describe the conflict of 2 of these stakeholders.
..........................................
Q5: Do you think the Government issued the shares too cheaply? Use the Internet to
find the current share price of the Royal Mail.
..........................................
6.4
Summary questions
Summary questions
Q6:
Go online
A stakeholder is someone who has a claim in an organisation.
a) True
b) False
..........................................
Q7: A shareholder is not an internal stakeholder because they may not be employed
by the organisation.
a) True
b) False
..........................................
Q8:
Internal stakeholders include those employed by an organisation.
a) True
b) False
..........................................
Q9:
External stakeholders include those who have lent money to an organisation.
a) True
b) False
..........................................
Q10: Employees have a greater stake in an organisation than a shareholder who owns
60% of the shares in the organisation.
a) True
b) False
..........................................
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6.5
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End of topic tests
End of topic 6 test
Q11: Stakeholders have no interest in the success or failure of an organisation.
Go online
a) True
b) False
..........................................
Q12: A customer is an example of an internal stakeholder.
a) True
b) False
..........................................
Q13: A pressure group is an example of an external stakeholder.
a) True
b) False
..........................................
Q14: Conflict may arise between different groups of stakeholders when they do not hold
the same interest in the organisation.
a) True
b) False
..........................................
Q15: A shareholder who owns 40% of the shares in an organisation will be able to exert
a greater influence compared to a customer who is a member of the public.
a) True
b) False
..........................................
Q16: Stakeholders may often hold views that are in conflict with the main objectives of
the organisation.
a) True
b) False
..........................................
SQA style questions
Q17: Describe the interests stakeholders have in an organisation. (4 Marks)
..........................................
Q18: Describe how external stakeholders can support business. (4 Marks)
..........................................
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Topic 7
Decision making
Contents
7.1 Decisions types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74
7.2 Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.3 PEST analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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7.4 SWOT analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.5 Conclusions from SWOT analysis . . . . . . . . . . . . . . . . . . . . . . . . . .
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84
7.6 Role of the manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.7 Aids to decision making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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88
7.8 Summary questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.9 End of topic tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Learning objectives
After studying this topic, you should be able to:
•
describe types of decisions an organisation can make;
•
describe the use of SWOT analysis;
•
describe the use of PEST analysis;
•
identify the costs/drawbacks of using a SWOT analysis.
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7.1
Decisions types
Both managers and employees make decisions. The impact of these decisions will
directly affect the success of the organisation.
In order to make good decisions there are processes that managers should go through
to make sure that they are making the best decision to achieve the organisational goals.
Organisational goals are the targets that have been set by the senior management for
the organisation to achieve.
Some decisions are very easy to make and may have little or no impact on anything
else. For example, every day you have to make a decision about what to eat or what
music to listen to. These are routine decisions that we normally don't have to spend a
long time thinking about; they are sometimes second nature.
Some decisions take a little longer to make. For example, if one of your long term aims
was to buy a new car next year, you then have to decide how you are going to pay for
it. This will involve some budgeting decisions in order that you can save money. Many
decisions will now be influenced by your aim to purchase a new car.
Other decisions may be about what we want to do in the future e.g. the career path that
we wish to pursue. These decisions may take some time to make, and we don't make
them very often.
It is the same in business. Managers are paid to make decisions which influence the
running of the business. Some of these decisions, just like those in our daily lives, are
easy and routine but others are more challenging.
Here are some examples of business decisions that managers may have to make.
•
Whether or not to recruit more staff. More staff will cost the business money, but a
lack of staff could affect customer supplies, and so lose business.
•
New product development. Managers have to decide whether the cost of
development will be too high, or should the company risk losing customers in the
long run by not developing a new product.
Managers must make decisions from a number of different options. Effective decisions
are those decisions which will achieve the desired goals or aims of the organisation.
These decisions can be categorised as strategic, tactical or operational.
Strategic decisions
•
These are the 'medium-term' decisions about where the organisation wants to be
in the future.
•
They concern the overall purpose and direction of the organisation.
•
They are often (but not always) made by the most senior managers and the owners
of the organisation.
•
They don't go into great detail about how these decisions will be achieved.
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•
Major policy statements represent strategic decisions.
•
There are many variables to consider about the future of the organisation and, as
such, are non-routine decisions.
Examples:
•
To increase market share by 20% within 10 years.
•
To maximise sales in the next financial year.
•
To have 100% customer satisfaction.
Strategic decisions define the aims or objectives of the organisation. All businesses
have objectives. The managers of the organisation will be judged on their effectiveness
by how they set and how well they achieve these objectives.
Tactical decisions
•
These are the generally shorter-term decisions about how the strategic decisions
are going to be achieved, but are likely to have long term consequences for the
organisation.
•
They are often made by middle managers within the organisation, in finance,
operations, human resources and marketing.
•
They are based on achieving the goals or the aims of the organisation.
•
They go into detail about what resources will be needed and how they will be
used to achieve the aims. E.g. if the strategic decision is to grow then the tactical
decision is to open new shops.
•
They will be subject to change as Political, Economic, Socio-cultural, Competitive
and Technological factors change.
Examples:
•
To increase the number of staff employed.
•
To issue more shares on the stock market to fund a new factory.
•
To merge with a competitor.
•
To increase selling price.
•
To reduce costs.
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Operational decisions
•
These are generally short-term 'day-to-day' routine decisions.
•
They can be made by all levels of management, but mostly by lower level
managers and supervisors.
•
They are made in response to relatively minor but sometimes important problems
that arise each day or week, so they are routine and repetitive.
Examples:
•
Arranging work rotas.
•
Dealing with customer complaints To issue more shares on the stock market to
fund a new factory.
•
Ordering materials from suppliers.
•
Dealing with daily enquiries.
Decision types
Go online
At this stage there is an online activity. If however you do not have access to the internet
you may try the question which follows.
Q1:
Identify each of the following decisions as either:
•
strategic
•
tactical
•
operational
1. Expand operations into 3 new countries next year
2. Decrease our number of employees
3. Increase market share by 15% in the next 3 years
4. Increase sales
5. Answer customer queries
6. Order stationery supplies.
7. Decide on the product range for the next 3 years
8. Takeover our biggest competitor
..........................................
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7.2
Evaluation
An important part of decision making is finding out how well your decision making
worked. This is called evaluation.
•
Were the objectives of the decision met?
•
What happened that was not expected?
If things did not go to plan then some changes may be needed. All decisions may not be
successful for a number of reasons. They could be due to internal factors such as poor
employee relations, or external factors such as changes in the economy. It is important
that managers evaluate their decisions and make adjustments if necessary. Quality
decision making depends on checking at all stages, so any necessary changes can be
made and the organisation can best meet its objectives.
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7.3
PEST analysis
We discussed earlier how external influences can be grouped under the headings:
•
Political
•
Economic
•
Socio-cultural
•
Technological
•
Environmental
•
Competitive
Looking at these areas is also known as PEST analysis which organisations often carry
out in conjunction with the SWOT analysis, as it allows for a better view of the business
environment.
Using these headings the organisation can look more closely at the areas.
Political:
•
Government type and stability.
•
Freedom of press, rule of law, levels of bureaucracy and corruption.
•
Regulation and de-regulation trends.
•
Social and employment legislation.
•
Tax policy, and trade and tariff controls.
•
Environmental and consumer-protection legislation.
•
Likely changes in the political environment.
Economic:
•
Stage of business cycle.
•
Current and projected economic growth, inflation and interest rates.
•
Unemployment and labour supply.
•
Labour costs.
•
Levels of disposable income and income distribution.
•
Impact of globalisation.
•
Likely impact of technological or other change on the economy.
•
Likely changes in the economic environment.
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Socio-cultural:
•
Population growth rate and age profile
•
Population health, education, social mobility, and attitudes to these
•
Population employment patterns, job market freedom and attitudes to work
•
Press attitudes, public opinion, social attitudes and social taboos
•
Lifestyle choices and attitudes to these
•
Socio-Cultural changes
Technological environment:
•
Impact of emerging technologies
•
Impact of Internet, reduction in communications costs and increased remote
working
•
Research and development activity
•
Impact of technology transfer
Environmental:
•
Impact of weather on primary sector industries
•
Impact of weather on product distribution
•
Increasing consumer awareness of environmental issues
•
Protest groups
Competitive environment:
•
Impact of emerging and established competitors
•
Use of promotional advertising of competitors
•
Impact of destroyer pricing by competitors
•
Advancement of technology and production techniques by competitors
Political
The major source of potential threats or opportunities politically is when the
government decides to introduce new laws, or alter taxation rates. For example,
increases in the taxation on petrol are a threat to car sales, so manufacturers produce
cars with more fuel-efficient engines. The introduction of the minimum wage was seen
as a major threat to many small businesses. However, this did not result in the
large-scale unemployment that was predicted.
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Economic
How the economy is performing has a major influence on the level of success of a
business. Those organisations which are very dependant on borrowing will find their
costs rising and falling with the interest rate, and so therefore will their profits. This
makes businesses less likely to borrow money for major projects when rates are high.
Interest rate also affect consumer spending. When rates are low consumers are much
more likely to borrow and spend money. This in turn creates more sales for business.
However, it is also true that when rates are high they will borrow and spend less,
decreasing the level of sales.
The exchange rate affects the prices of imported and exported goods. When the pound
is valued highly against other currencies the price of our imports becomes cheaper.
However, our exports then become much dearer for other countries making them less
attractive and reducing sales levels.
Also, during a recession people have less money to spend on luxury goods, so
manufacturers will produce cheaper alternatives until the economy comes out of
recession.
Socio-cultural
Organisations have to take account of changes in the tastes, lifestyles and attitudes of
consumers. Tastes in fashions change from season to season and from year to year,
so clothing manufactures have to ensure that their latest products meet the consumer
tastes. More women are working than ever before, and this has had two effects.
Firstly, women themselves have a far greater influence on what is bought within the
household.
Secondly, the lifestyles of working women were changed meaning less time to spend
on shopping and preparing food, looking after children, and daily household chores.
This led to the growth in a wide variety of family convenience foods and fast food
outlets, a growth in childcare facilities and nurseries, and a growth in small house
cleaning companies and ironing services.
Consumers are far more aware of social issues such as third world poverty, health
issues, and environmental concerns. Organisations have adapted their products, their
image, and their processes to take account of consumers concerns. For example, most
supermarkets will carry a range of organic produce, a range of fair trade goods, label
the contents of their products and offer recycling facilities.
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Technological
The introduction of new technologies forces change on organisations. Mass production
techniques allow capital intensive automated processes which are more efficient than
labour intensive production. Producing 'Hi-tech' consumer goods such as computers
uses very sophisticated robotics. As new developments in computer components are
introduced, this requires new automated machinery. Firms have to keep up to date to
survive.
As these new computers are introduced to some businesses, other businesses will
then need to update their systems.
Environmental
Environmental factors are not usually controllable by organisations. The weather is an
example that may have an impact of business. Localised flooding or rail delays due
to snow can delay or halt the production process as businesses fail to receive stock.
24 hour news cycles and Internet stories have made consumer much more aware of
environmental issues. Protest groups such as Green Peace attract much more coverage
than in the past.
Competitive
Probably the biggest concern for most businesses is (rightly or wrongly) the actions of
their competitors. Businesses look at how their product competes in terms of what it
can do, what it looks like, what price it is or what offers are being made and what after
sales service is available.
7.4
SWOT analysis
SWOT analysis is a tool that management can use to help with decision making. It is
used to evaluate where the organisation is now and where it should be in the future. It
helps with:
1. planning;
2. deciding the way forward for the organisation;
3. looking at strategies which could be used.
SWOT analysis considers all internal and external factors. Internal factors are the
resources within the organisation. External factors are those things within the
organisation's environment that are happening now or are likely to happen in the future.
SWOT analysis depends on identifying internal strengths and weaknesses and
external opportunities and threats.
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Strengths
internal areas where the organisation performs well.
Weaknesses
internal areas where the organisations performs poorly.
Opportunities
external areas in which the organisation could be involved in
the future.
Threats
external areas which pose a threat to the organisation e.g.
competitors, government, changes in the economy.
SWOT analysis is a tool that can be effectively used for any decision making, however,
it is most often used when making strategic decisions and in marketing decisions.
Strengths
The following questions should be considered:
•
What advantages do you have?
•
What do you do well?
•
What relevant resources do you have access to?
•
What do other people see as your strengths?
This should be considered from the organisation's own point of view and from the point
of view of the people they deal with. It is important to be honest and realistic.
In looking at strengths, the organisation should think about them in relation to its
competitors - for example, if all the competitors sell at low prices, then competitive low
pricing is not a strength in the market, it is a necessity.
Weaknesses
The following questions should be considered:
•
What could you improve?
•
What do you do badly?
•
What should you avoid?
Again, this should be considered from an internal and external basis.
Opportunities
•
Where are the good opportunities facing you?
•
What are the interesting trends you are aware of?
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Useful opportunities can come from such things as:
•
Changes in technology and markets on both a broad and narrow scale
•
Changes in government policy related to your field
•
Changes in social patterns, population profiles, lifestyle changes, etc.
•
Local Events
•
A positive upturn in the economy
A useful approach to looking at opportunities is to look at the strengths and ask
whether these open up any opportunities. Alternatively, look at weaknesses and ask
whether the organisation could open up opportunities by eliminating them.
Threats
•
What obstacles do you face?
•
What is your competition doing?
•
Are the required specifications for your job, products or services changing?
•
Is changing technology threatening your position?
•
Do you have bad debt or cash-flow weakness?
•
Could any of your weaknesses seriously threaten your business?
Strengths and weaknesses are internal factors. Opportunities and threats are external
influences.
SWOT analysis should not be seen as a one off exercise. It should be part of the
continuing process of evaluating how the organisation is doing now and what it should
be doing in the future.
SWOT analysis
Q2: A small consultancy business might draw up a SWOT analysis from the
statements given. Identify if they are strengths, weaknesses, opportunities or threats.
1. We are able to respond very quickly as we have no red tape, no need for higher
management approval, etc.
2. Will developments in technology change this market beyond our ability to adapt?
3. Our company has no market presence or reputation.
4. We are able to give really good customer care, as the current small amount of work
means we have plenty of time to devote to customers.
5. Our business sector is expanding, with many future opportunities for success.
6. Our lead consultant has strong reputation within the market.
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TOPIC 7. DECISION MAKING
7. Our local council wants to encourage local businesses with work where possible.
8. We have a small staff with a shallow skills base in many areas.
9. A small change in focus of a large competitor might wipe out any market position
we achieve.
10. Our competitors may be slow to adopt new technologies.
11. Our cash flow will be unreliable in the early stages.
12. We have little overhead, so can offer good value to customers.
..........................................
7.5
Conclusions from SWOT analysis
SWOT analysis is most often laid out in a grid form as below.
Strengths
Weaknesses
Opportunities
Threats
In each box under the appropriate heading a list is made, and this provides a snapshot
of where the organisation is at this time and what the possibilities are for the future.
Having to actually go through the physical process of writing it down allows for a
greater degree of thought to go into the process. Discussion will provide items
previously not considered.
It is common for a number of people to work on the SWOT analysis with others adding
to it during the process. It is probable that different managers will have different views
on each of the elements.
It is also possible that some threats may also be opportunities, depending on how the
organisation reacts to them.
Strengths may become weaknesses very quickly and vice versa.
Drawing conclusions from a SWOT analysis
The purpose of SWOT analysis is to help make decisions. These involve mainly what
needs to be done now and what is likely to happen in the future. The conclusions will
be the basis for the future of the organisation so it is important that the SWOT is
correctly interpreted.
The strengths will identify areas where the business is doing well at this present time,
and where possibilities for the future exist. For example, having new products in the
development stages ready for launch will provide a very good platform for the business
to progress.
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TOPIC 7. DECISION MAKING
The weaknesses will highlight the areas where attention needs to be paid now in order
to ensure survival. For example, having a high level of borrowing will make the
business vulnerable to changes in the economy. As part of the strategic plan steps
should be taken to reduce borrowing.
Opportunities have to be carefully measured to make sure that the business makes the
best of them. These opportunities could come about from any of the factors mentioned
in the PEST analysis. To take advantage of these opportunities the business must
include them in their strategic planning.
As with opportunities, threats come from the political, economic, socio-cultural,
technological, and competitive forces. It is necessary for the business to take action to
deal with these threats to ensure survival.
The SWOT analysis should not be thought of as a one-off process. Evaluation of the
conclusions drawn should take place to ensure that decisions were pertinent. Carrying
out another SWOT analysis will allow the business to see if their conclusions were
correct.
Strengths and weaknesses
These are the things that the organisation has control over and refer to the resources of
the organisation or the factors of production. The skills of workforce and management,
including its entrepreneurial skills will be included in the study. How well the capital is
being used to provide efficient production and distribution will be considered, as will its
financial performance and the range of products. These can be compared to the market
leader to analyse how successful the organisation is in these areas.
The strengths and weaknesses will reflect the current position of the organisation.
These strengths and weaknesses are often obvious. They may be rarely considered, it
is only when management decide to spend time looking at them that they will be dealt
with appropriately. The organisation can build on its strengths, using them to their best
advantage and work to reduce or get rid of its weaknesses.
When making strategic decisions the organisation will look at all aspects of the
organisation including:
•
Human resources
The workforce, including all levels of management, represent an investment by
the organisation, and also a resource which will have strengths or weaknesses in
the quality of the management team, the level of entrepreneurial skills, and the
numbers and skills of the workers.
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•
Capital
A major strength of an organisation will be its financial performance. A profitable
business will have money available to carry out some changes it needs to make
to respond to changes in the market. It will also have the ability to attract
investment from shareholders or lending from the bank for major changes.
Assets represent investment in the organisation by the owners. The higher the
level of this investment, the more attractive it is to potential investors and banks.
•
Marketing
◦
Product range
◦
Marketing mix
◦
Distribution network
◦
Production process
Opportunities and threats
The organisation cannot directly control these factors. However they will be able to
take advantage of any opportunities that come along, and try to avoid or take steps to
overcome threats.
The external influences will come from the business environment in which the
organisation operates. Evaluation of these opportunities and threats is critical to the
success or failure of the business.
There are many advantages to using a SWOT analysis. It is important for a business
to continually stop and reflect on what it has achieved and the possibilities that exist
in the future; a SWOT analysis allows a business to do that. Having the ability to turn
weaknesses into strengths and threats into opportunities allows the business to grow
and improve. A SWOT analysis can be shared amongst all staff, giving the business a
sense of direction and purpose. Tactical decisions can be made as a result of the SWOT
analysis. These decisions can be assigned to specific employees or departments.
Carrying out SWOT analysis at regular intervals can allow progress to be recorded.
There are also disadvantages to producing SWOT analysis. The biggest disadvantage
is that nothing happens and the production of the SWOT becomes a paper exercise.
Threats are external; by their very nature it may not be possible to turn a threat into an
opportunity due to factors outwith the businesses control. Businesses who produce
SWOT analysis may become complacent and miss future issues. Carrying out the
analysis can be time consuming, meaning the business becomes slow to respond to
changes.
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7.6
Role of the manager
There are many management theorists who have their own views of the role of
managers.
Henry Mintzberg published his book The Nature of Managerial Work in 1973 with his
findings of his study of what managers actually do as opposed to what they ought to do.
He found that managers perform a wide variety of roles which can be broadly grouped
into 3 areas:
•
Interpersonal - the relationships a manager had to have with others.
•
Informational - the collecting and passing on of information.
•
Decisional - the making of different kinds of decisions.
Henri Fayol, another management theorist, identified what he called the 5 functions of
management:
Plan
Looking ahead, seeing potential opportunities or problems and
devising solutions, setting targets, and setting aims and
strategies.
Organises
Arranging the resources of the organisation to be there when
people need them and acquiring additional resources if
required.
Commands
This involves the issuing of instructions, motivating staff and
displaying leadership.
Co-ordinates
Making sure everyone is working towards the same goals, that
all the work being done fits together, and people are not
duplicating work or working against each other.
Controls
Looks at what is being done, checks it against what was
expected, and makes any necessary adjustments. This is the
monitoring and evaluating role of management.
Modern managers are likely also to include:
Delegate
Gives subordinates the authority to carry out tasks. This helps
with motivation and reduces the manager's workload. The
overall responsibility will still lie with the manager who
delegated the authority.
Motivate
Rather than simply telling workers to work harder, which is not
likely to be successful, you encourage them by helping to them
enjoy their tasks through team-working, participation in
decision making, and by giving them some powers.
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TOPIC 7. DECISION MAKING
7.7
Aids to decision making
There is a number of tried and trusted ways of helping managers come to generate new
ideas, to co-operate and finally to arrive at what is hoped to be the best decisions.
Brainstorming
The step-by-step process of the decision-making model may make it difficult to be
creative in finding alternative solutions. Brainstorming is when a group meet to try to
come up with as many alternative solutions as possible. Each member of the group
comes up with as many ideas as they can, no matter how extreme they might appear.
All the ideas are written down as they are suggested.
Once every one has finished, the group work their way through each of the ideas in
turn discussing the possibilities contained in each. This way they can often come up
with the most creative ideas because it encourages every one to participate in an
informal setting without the members of the group feeling that they are in some way
being judged.
Benchmarking
This involves comparing what you do with what the very best organisations do. You
could for example look at what the market leader does and then try to copy them. In this
case the market leader is the 'benchmark' or ideal standard that you want to achieve.
Benchmarking is used widely in operations to ensure quality. However, it is equally
valid as a method to aid decision making in any of the organisation's functional areas.
Factors affecting quality decisions
There are many factors that will affect the quality of a decision:
•
The ability and skill of the manager - if the manager has not had proper training or
not skilled enough to make decisions then a poor decision may be made.
•
The appropriate use of decision making models - if the SWOT analysis has been
misunderstood the decisions taken as a result will bot benefit the business.
•
The quality of the information used to make the decision - if out-of-date or based
information is used the outcome will be flawed.
•
The level of risk taken - the more high risk the better the information must be.
•
The managers own interests - are the managers more interested in Management
by Objectives or business growth?
•
The finance available to implement the decision.
•
The time available to make the decision.
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7.8
89
Summary questions
Summary questions
Q3: To maximize sales in the next 5 years is an example of a tactical decision.
Go online
a) True
b) False
..........................................
Q4: To merge with a competitor is an example of a tactical decision.
a) True
b) False
..........................................
Q5: Arranging work rotas is an example of an operational decision.
a) True
b) False
..........................................
Q6: Strengths and weaknesses are external to the business.
a) True
b) False
..........................................
Q7: The Role of the manager is to plan, organise and communicate.
a) True
b) False
..........................................
Q8: Brainstorming is a suitable aid to decision making.
a) True
b) False
..........................................
Q9: Conducting an appraisal is the managers job.
a) True
b) False
..........................................
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TOPIC 7. DECISION MAKING
7.9
End of topic tests
End of topic 7 test
Complete the sentences using one from the following types of decision making:
Go online
A(a) tactical
A(a) strategic
An(an) operational
decision is made by middle managers whereas
Q10:
decision can be made by anyone in the organisation normally lower level managers.
..........................................
decision is made daily or short term whereas
Q11:
decision is a medium term decision.
..........................................
Q12:
decision carries a medium amount of financial risk but
decision carries virtually no financial risk.
..........................................
Q13:
whereas
decision is made to help the smooth running on a daily basis
decision is made to help implement the strategic objectives.
..........................................
Q14: A business deciding to extend weekend opening hours is an example of
decision making.
..........................................
Q15: Use following meanings to match with internal constraints that make the decision
making difficult.
•
Meaning implementing decisions may be difficult.
•
Meaning the organisation cannot afford to implement the decision.
•
Meaning that new technology needs to be purchased or decisions shelved.
•
Meaning a recruitment drive may be necessary.
•
Meaning a staff training programme may be necessary.
•
Meaning a simpler solution may need to be found.
Managers may be unable to cope with
complex decisions.
Staff skills may make the decision difficult
to implement.
Finance may be restricted.
The decision may be constrained by the
lack of technology.
Staffing levels may be too low for the
suggested solution to be used.
Staff may be resistant to change.
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TOPIC 7. DECISION MAKING
..........................................
Q16: SWOT analysis is an example of structured decision making.
a) True
b) False
..........................................
Q17: PEST analysis involves looking at the external factors that influence the
organisation.
a) True
b) False
..........................................
Q18: SWOT analysis is not often used by organisations as it results in poor decisions.
a) True
b) False
..........................................
Q19: SWOT analysis stands for strengths, weaknesses, opportunities and threats.
a) True
b) False
..........................................
Q20: The use of PEST and SWOT analysis always guarantees that the right decision
will be made.
a) True
b) False
..........................................
Q21: Which of the following internal areas may be analysed as strengths and
weaknesses.
a)
b)
c)
d)
e)
f)
g)
Products
Finance
Technology
HR
Organisational structure
Sales and marketing
All of the above
..........................................
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TOPIC 7. DECISION MAKING
Q22: Which of the following external areas may be analysed as opportunities or threats.
a)
b)
c)
d)
e)
f)
Competitors
Suppliers
Economic climate
Technological changes
Social or demographic changes
All of the above
..........................................
Q23: Opportunities and Threats are external to the organisation.
a) True
b) False
..........................................
Q24: Strengths and Weaknesses are external to the organisation.
a) True
b) False
..........................................
SQA style questions
Q25: Distinguish between a strategic decision and a tactical decision. (3 Marks)
Go online
..........................................
Q26: Describe four main roles of a manager when conducting a staff appraisal. (4
Marks)
..........................................
Q27: Describe the three main types of decision that an organisation could make. (3
Marks)
..........................................
Q28: Explain the factors that could affect the quality of a decision made by a manager.
(4 Marks)
..........................................
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Topic 8
End of unit tests
94
TOPIC 8. END OF UNIT TESTS
End of unit 1 test
For each sentence categorise each type of organisation.
Go online
1. PLC
2. Social enterprise
3. Co-operative
4. Public corporation
5. Franchise
6. Local authority
Q1: An organisation which operates as a business but shares profits in the form of
dividends paid to customers.
..........................................
Q2: A form of government which looks after local affairs and is funded through council
tax and fees from libraries and leisure centres etc.
..........................................
Q3: A type of business organisation owned by two or more shareholders, with shares
that can be sold on the stock exchange.
..........................................
Q4: This is a private sector organisation which allows a business to sell the right to
another business to use their brand and sell their products.
..........................................
Q5: An organisation which operates as a business but reinvests any profits for the
benefit of customers or the local community.
..........................................
Q6: An organisation which is owned and run by the government on behalf of the public.
This type of organisation has an appointed chairman and board of directors.
..........................................
Decide which of the following factors are internal or external to the business.
Q7:
Raising prices as a result of rising transport costs.
a) External
b) Internal
..........................................
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TOPIC 8. END OF UNIT TESTS
Q8: Outsourcing to a recruitment firm to employ more suitable employees.
a) External
b) Internal
..........................................
Q9: Changing product range as a direct result of customer feedback.
a) External
b) Internal
..........................................
Q10: Shortening overtime to comply with the Governments new working time
regulations.
a) External
b) Internal
..........................................
Q11: Deciding to arrange a short term overdraft to pay suppliers of the new product
range.
a) External
b) Internal
..........................................
Q12: Complete the table using following descriptions.
a) Where an organisation structures itself around the needs of its customers.
b) Where core workers are at the centre and peripheral workers are at the edges.
c) Where there are few levels within an organisation.
d) Where the levels are organised by product / project.
e) Where an organisation is structured depending on the products or services that it
provides.
f) The number of layers of levels within an organisation.
g) Where an organisation is structured using different sections of the country or
countries around the world.
1. Entrepreneurial
structures
2. Flat structures
3. Hierarchy
4. Matrix structures
5. Customer grouping
6. Place / territory
grouping
7. Product / service
grouping
..........................................
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TOPIC 8. END OF UNIT TESTS
Q13: Complete the paragraph using following words.
customers
loans
interest rates
industrial action
donations
suppliers
economic policies
vote
Employees exert influence by standard of work, the more effort they put in the higher the
quality of product. If they are unhappy, they may take
which will negatively
decide whether or not to buy
affect the business's reputation and output.
product. This can have a huge effect on the business's survival. The Government
such as the level of VAT or corporation tax which affect business's
sets
can change prices/discounts offered which directly affects a
profit margin.
business profit margin and it can change credit periods with affects a business cash flow.
which affects how much a business repays when taking out
Banks can vary
which means the
a loan. They can also decide whether or not to grant
business may end up paying a higher rate to a different lender. Managers make tactical
which will affect the future of the business and whether it makes it strategic
at AGMs on decisions affecting the
aims or not. Shareholders are able to
future direction of the business.
..........................................
Q14: Complete the table using following objectives.
a) To reward customers and local community
b) Provision of a high quality service
c) Profit maximisation
d) Corporate and social responsibility
e) To raise awareness of a cause
f) Efficient use of tax payer money
1. Private sector
2. Public sector
3. Third sector
..........................................
Q15: Complete the paragraph using following words.
shrunk
exploitation
growing
consultancy
tertiary
usable
quaternary
transforming
service
.
The sectors of industry are known as primary, secondary, tertiary and
Each provides a different function within the chain of production. The primary sector is
of raw materials from the earth or sea. This includes
responsible for the
organisations who are involved in coal mining, fishing or deep sea oil exploration.
Although this sector of industry was traditionally strong in Scotland, in recent years
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TOPIC 8. END OF UNIT TESTS
97
these industries have
. The secondary sector is responsible for
the raw materials into
products through construction or manufacturing. A
sector
wide range of business organisations operate in this area. The
is now Scotland's most important sector of industry as it accounts for jobs in the
industry. Tourism, e-commerce and call centres all significantly contribute
to the Scottish economy. Finally, the quaternary sector of industry provides business
support for all organisations.
services such as IT or management support
part of the Scottish economy.
are a
..........................................
SQA style questions
Q16: Describe two potential business objectives of a public limited company. (2 Marks)
..........................................
Q17: Describe the role of the quaternary sector of industry. (3 Marks)
..........................................
Q18: Compare organisations in the public and private sectors in terms of ownership,
finance, control and objectives. (4 Marks)
..........................................
Q19: Discuss the effects of franchising for the franchiser. (5 Marks)
..........................................
Q20: Explain the external factors that affect multinationals. (5 Marks)
..........................................
Q21: Describe the internal factors affecting businesses today. (4 Marks)
..........................................
Q22: Discuss the use of customer groupings to allow a business to stay customer
focussed. (5 Marks)
..........................................
Q23: Describe the main characteristics of a matrix structure. (4 Marks)
..........................................
Q24: Explain the influence that different stakeholders can have on a business. (5
Marks)
..........................................
Q25: Describe the conflict that can exist between different groups of stakeholders. (4
Marks)
..........................................
© H ERIOT-WATT U NIVERSITY
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GLOSSARY
Glossary
A social enterprise
an organisation that applies commercial strategies to maximize improvements in
human and environmental well-being, rather than maximising profits for external
shareholders.
Autocratic
a management style where a manager makes all of the decisions.
Capital
the money invested into the business by the owner.
Centralised organisations
where senior managers make key decisions.
Chain of command
the line of communication and authority from the top to the bottom of the hierarchy.
Consultation
where managers ask employees their opinions.
Corporate culture
the shared values, beliefs and ethos of the organisation.
Customer grouping
where an organisation organises itself around the different needs of customers.
Decentralised organisations
where workers have more authority to make decisions.
Delegation
when managers give employees some of their work increasing their responsibility.
Democratic
a management style where a manager delegates and encourages others to make
decisions.
Demographics
characteristics of the population such as age, employment and buying habits.
Durable goods
are goods that can be used again and again.
Entrepreneurial structures
have core workers centred around the key employees usually the founders.
Factors of production
these are land, labour, capital and enterprise.
© H ERIOT-WATT U NIVERSITY
GLOSSARY
Flat structures
have few levels in the hierarchy.
Goods
are things we can see and touch.
Growth
the process of becoming larger as an organisation, either organically through
increased sales or through mergers/acquisitions.
Hierarchy
the number of layers of levels within an organisation.
Matrix structures
short term project based grouping where staff are used from different departments.
Multinationals
a company which operates in at least two countries.
Non-durable goods
are things we can normally only use once.
Objectives
the goals of an organisation.
Operational decisions
short term, day-to-day decisions made by all employees.
Primary sector
this is where raw materials are extracted from the land or sea.
Private Sector
business organisations which operate in order to make a profit for the private
individuals who own them.
Profit maximisation
the process of ensuring that the maximum amount of revenue is achieved whilst
incurring the lowest possible level of costs.
Public Sector
business organisations which are operated by the government on behalf of the tax
payer.
Quaternary sector
this can also be described as the support sector, and activity here is based
around organisations which provide information, especially (but not exclusively)
to businesses.
Sales maximisation
refers to plans and strategies employed by a business to increase its sales or
revenues to the highest attainable level.
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GLOSSARY
Secondary sector
this is where the raw materials extracted in the primary sector are transformed into
usable products through manufacturing and construction.
Services
are things that are done for us. Service industries produce non-tangible products
unlike manufacturing industries which produce tangible products.
Shareholder
an individual who buys a share in a business, in return for an annual divided.
Social responsibility
how a business is perceived by the public, as an employer, as an environmentally
responsible organisation, and in terms of contribution to local community.
Span of control
the number of subordinates who directly report into a manager.
Ssatisficing
an organisation which aims for "satisficing" as an objective is literally looking to
hold a satisfactory position - in other words to be "good enough" (but no more than
that).
Staff turnover
the frequency in which staff leave the business and new staff have to be recruited.
Stakeholders
in business are those people who have a key interest in the business.
Strategic decisions
long term decision made by senior managers and owners that affects the overall
direction of the company.
Strategic objectives
are those objectives which are identified and set by the top layer of management.
Subordinate
a worker/employee.
Survival
within the context of a business objective, survival is to continue to trade (and
break even).
Tactical decisions
medium term decisions made by middle managers to support strategic decisions.
Tactical objectives
are made in the light of strategic objectives and are more focused in their nature.
© H ERIOT-WATT U NIVERSITY
GLOSSARY
Tall structures
have many levels in the hierarchy.
Tertiary sector
also known as the service industry, this is where the goods produced by
businesses in the primary and secondary sectors are provided to the consumer,
and where services and skills are sold.
Third Sector
organisations which are non-profit, and exist to benefit society.
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ANSWERS: TOPIC 1
Answers to questions and activities
1 The role of business in society
Category of goods or services (page 3)
Q1:
Non-durable goods
Q2:
Durable goods
Q3:
Services
Q4:
Non-durable goods
Q5:
Services
Q6:
Non-durable goods
Q7:
Services
Q8:
Durable goods
Q9:
Durable goods
Supplying the resources (page 4)
Q10: Capital
Q11: Enterprise
Q12: Land
Q13: Labour
Sectors of industry - descriptions (page 5)
Q14: Tertiary
Q15: Primary
Q16: Secondary
Q17: Quaternary
Sectors of industry - professions (page 6)
Q18: Secondary
Q19: Quaternary
Q20: Tertiary
Q21: Primary
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ANSWERS: TOPIC 1
Sectors of the economy - descriptions (page 7)
Q22: Public Sector
Q23: Third Sector
Q24: Private Sector
Summary questions (page 7)
Q25: b) False
Q26: a) True
Q27: a) True
Q28: b) False
Q29: a) True
Q30: a) True
End of topic 1 test (page 8)
Q31: The term "business" can be used to refer to any organisation which is set up
to achieve a set of objectives. Therefore a "business" can exist in any of the three
sectors of economy - the private sector, the public sector or the third sector. Business
is vital to the economy of a country. Businesses use the four factors of production in
order to provide these goods and services for consumers. The factors of production
are land, labour, capital and enterprise. As well as operating in a sector of the
economy, business organisations are classified as operating in different sectors of
industry. These are known as the primary, secondary, tertiary and quaternary sectors.
From removing natural resources from the ground, to manufacturing them into useable
products, then selling them to customers, and offering advice to organisations at all
stages of this process, every business plays a role in this chain of production.
Q32: Secondary sector
Q33: Public sector
Q34: Primary sector
Q35: Third sector
Q36: Quaternary sector
Q37: Tertiary
Q38: Private sector
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ANSWERS: TOPIC 1
SQA style questions (page 10)
Q39:
•
Consumers' wants may be unrealistic and consumers are fickle.
•
Consumers do not know what they want in the future so businesses must anticipate
future needs.
Q40: Goods are things we can see and touch while services are things that are done
for us.
Q41:
•
Factors of production are the resources that business needs to produce goods and
services.
•
They are:
◦
◦
◦
◦
land;
labour;
capital;
enterprise.
Q42:
•
Primary sector has businesses that are involved in extracting natural resources.
•
Secondary sector includes businesses that are involved in manufacturing and
construction.
•
Tertiary sector is the service sector where businesses provide services rather than
goods.
•
Quaternary sector is where support and information is provided, for example, IT
consultancy.
Q43:
•
The private sector is where businesses provide goods or services to consumers
with the aim of making a profit for the business owners.
•
The public sector refers to government run organisations such as the NHS,
education and the armed forces.
•
The third sector contains charities and other voluntary organisations and social
enterprise.
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ANSWERS: TOPIC 2
2 Types of organisations
Limited companies (page 14)
Q1: incorporation
Q2: b) the company's name, location and what it will do.
Q3: b) two directors and one company secretary.
Q4: c) Public limited companies can raise money by selling shares on the stockmarket
- private limited companies cannot.
Franchise - terms (page 18)
Q5: Franchiser
Q6: Franchisee
Q7: Royalty
Q8: Investment
Multinationals (page 20)
Q9: a) two thirds of global trade and 80% of investment.
Q10: domestic
Q11: c) Multinationals have a large role in formulating international policy.
The Dean Tavern (page 23)
Q12: Due to the nature of a small mining village community, the vast majority of
residents would have contributed towards the profits of the Dean, and also there would
be few customers from outside the local community. This means it made sense for the
profits to be distributed locally. Most families would be relatively poor, therefore any
money received back from the pub would be gratefully received.
Q13: A greater number of customers will come from outside the local community, and
a much smaller proportion of the local community will use the pub. Also, the village
has grown in size with a lot of new housing, therefore profits will not stretch as far. It
makes more sense therefore to share these profits with community groups that benefit
everyone.
Summary questions (page 24)
Q14: b) PLC
Q15: a) True
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ANSWERS: TOPIC 2
Q16: a) Franchisee
Q17: c) Franchise
Q18: b) To use any money raised to further the venture
Q19: b) False
Q20: a) raise awareness of and funds for a chosen cause.
Q21: a) True
End of topic 2 test (page 25)
Q22: 1d; 2a; 3e; 4b; 5g; 6f; 7h; 8c
Q23:
•
A public sector organisation is owned by the government whereas a third sector
organisation is owned by (but does not benefit) private individuals.
•
A public sector organisation like the NHS is controlled by government ministers
or their appointed managers whereas a charity operating in the third sector is
controlled by a board of trustees.
•
A public sector organisation is mainly funded through taxes whereas a third sector
organisation is funded through donations or fundraising activities.
SQA style questions (page 26)
Q24:
1. PLC: Company with shares traded on the stock exchange which can be bought by
any member of the public. Limited liability.
2. Multinational: Very large businesses with a presence in a number of different
countries.
3. Franchise: A business agreement where the franchiser agrees to allow the
franchisee the right to use the brand name and product in return for a royalty fee.
Q25:
•
International trade opens up new business opportunities and allows a global
presence to be created for the business and its products/services.
•
This allows access to a larger market and further development of products.
Q26: Any two from:
•
It allows growth for their brand without making significant financial investment in
property and without the need to recruit and train a large workforce of their own.
•
It reduces competition: if a franchisee buys into their brand, that means they are
not launching their own product in competition.
•
It reduces risk: the risk of failure is shared with the franchisee.
© H ERIOT-WATT U NIVERSITY
ANSWERS: TOPIC 2
•
They retain control over the image and product they have created.
•
There is guaranteed income from royalties paid by the franchisees.
Q27: To raise awareness of and funds for a specific cause.
Q28:
•
Because shares can be bought publicly on the stock exchange, meaning that the
original owners have no say in who owns shares.
•
This means that an outside individual or company could buy a majority
shareholding.
Q29:
•
A social enterprise exists to provide goods or services for the benefit of a local
community.
•
This includes sharing/reinvesting profits for the benefit of that community.
Q30:
•
A private sector organisation is owned by private individuals (shareholders)
whereas a public sector organisation is owned by the government/taxpayer.
•
A private sector organisation is financed through sales of shares, owner
investment, bank loan, whereas a public sector organisation is financed through
taxes.
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ANSWERS: TOPIC 3
3 Objectives
Identify the business objectives (page 31)
Q1:
Managerial
Q2:
Sales maximisation
Q3:
Satisficing
Q4:
Social responsibility
Q5:
Growth
Q6:
Survival
Q7:
Sales maximisation
Q8:
Provision of a service
Q9:
Growth
Q10: Profit maximisation
Business objectives (page 33)
Q11: Any eight from:
•
Innovation
•
Market position
•
Management performance and development
•
Productivity
•
Physical and financial resources
•
Public responsibility
•
Employee performance and relations
•
Environmental concerns
•
Maximisation of use of available resources
•
Public profile
Volkswagen cars - a social responsibility (page 35)
Q12: a) Manufacturing, usage and recovery
Q13: usage
Q14: c) Lowest fuel consumption
Q15: Long vehicle lifespan and increased service intervals.
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ANSWERS: TOPIC 3
Summary questions (page 36)
Q16: a) True
Q17: a) True
Q18: b) False
Q19: a) True
Q20: b) False
End of topic 3 test (page 37)
Q21: Sales maximisation
Q22: Growth
Q23: Objective
Q24: Managerial
Q25: Profit maximisation
Q26: Social responsibility
SQA style questions (page 37)
Q27:
•
Objectives help to identify the goals of the business, how these goals are to be
achieved and the end result.
•
Objectives differ in each organisation and they also depend on the type of
organisation.
Q28:
•
Strategic objectives outline the main goals and objectives of the organisation and
they are set by the senior management in the organisation.
•
Tactical objectives are set to reflect the strategic objectives. They are more
focussed and demonstrate how the strategic objectives can be achieved through
the performance of each department within the organisation.
Q29:
•
Identify any four business objectives from profit maximisation, survival, sales
maximisation, growth, social responsibility, managerial objectives, provision of a
service.
•
A suitable explanation should be provided for each objective identified.
Q30:
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ANSWERS: TOPIC 3
•
Social responsibility is the public perception of the business and how the business
treats the environment.
•
Poor perception can mean that a business may lose business from its customers
and it may be more difficult to attract investment from external sources.
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ANSWERS: TOPIC 4
4 External and internal environments
External environment - events (page 41)
Q1: Political
Q2: Environmental
Q3: Social
Q4: Competitive
Q5: Economic
Q6: Technological
Diageo offers to sell Whyte & Mackay Scotch whisky arm (page 42)
Q7: b) Concerned that the competition commission may force them to
Q8: Bell's
Q9: a) Political
Q10: c) Economic
Q11: a) Political
Summary questions (page 45)
Q12: a) True
Q13: b) False
Q14: a) True
Q15: a) True
Q16: b) False
Q17: b) False
Q18: b) False
Q19: a) True
Q20: a) True
Q21: b) False
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ANSWERS: TOPIC 4
End of topic 4 test (page 47)
Q22: a) Consumers are worried they will have less money to spend.
Q23: c) Businesses put contingency plans in place to stockpile stock in case there are
problems with deliveries.
Q24: b) Business' expenses will fall.
Q25: a) A new competitive pricing strategy is adopted.
Q26: b) Consumers are willing to spend more in a product if they feel it will positively
benefit others.
Q27: c) Business must be willing to spend more on new equipment.
Q28: c) Environmental
Q29: a) Competitive
Q30: c) Political
Q31: a) Technological
Q32: b) Economic
Q33: b) Social
Q34: b) a competitor changing their prices.
Q35: a) the shared values and beliefs of employees and managers.
Q36: a) a breakthrough in new technology.
Q37: b) a manager trying to change the corporate culture.
Q38: b) a competitor changing their prices.
Q39: b) the competency of its staff.
SQA style questions (page 50)
Q40: Any four from:
•
Legislation - any appropriate law with an appropriate effect, i.e., new laws on sale
of alcohol have to be complied with or face a fine from the government.
•
Taxation rates may change which will affect the profitability of an organisation.
•
Level of NHS funding may affect the number of or the prices charged by private
hospitals.
•
Government initiatives in education have meant that private public partnerships
have allowed companies to bid to build new schools.
•
Credit - any relevant government policy with an appropriate explanation of the affect
on the organisation, i.e., giving loans to banks to help with credit crunch in 2009.
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ANSWERS: TOPIC 4
Q41: Any four from:
•
Economic factors such as a recession can cause customers to have less
disposable income.
•
Interest rates can rise which means borrowing money is more expensive.
•
Inflation rate can change forcing up the price of raw materials.
•
Social factors such as changes in trends and fashion.
•
Changes in patterns of employment can affect productivity.
•
The introduction of new technology which is continually changing.
•
Competitive factors such as the prices charged by a similar organisation.
•
Environmental factors such as the weather/flooding.
Q42: Any two from:
•
Finance may be restricted which might mean the organisation cannot afford to
implement the best decision.
•
Staff may not agree with the decision and resist the change making it less effective.
•
The organisation may have policies in place that are restrictive and the decisions
may need to be altered to suit policies.
•
The decision may be constrained by the lack of technology and mean that new
technology needs to be purchased or decisions shelved.
•
Managers may not have the appropriate skills or initiative to make the best
decisions and may be unable to cope with complex decisions or situations resulting
in a poor decision being made.
Q43: Any three from:
•
The organisation needs to take into account the ideas/principles of the owners.
•
They need to design appropriate logos, motifs and uniforms.
•
They need to consider a corporate design for shops and outlets.
•
They have to make staff aware of the corporate culture and image.
◦
◦
This can be expensive.
May involve staff training costs.
•
Will have large cost implications for changing logos, uniforms etc throughout an
organisation.
•
May require the organisation to hold launch events or press conferences.
•
Clearly defined policies and procedures.
•
Empowerment/employee views.
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ANSWERS: TOPIC 5
5 Business structures
Department activities (page 54)
Q1:
This department is always on the lookout
for new ideas.
This department is interested in setting
budgets to minimise overspends.
This department is interested in the
production process.
This department is interested in the
identification and fulfilment of customer
needs.
This department is interested in ensuring
a smooth flow of information across the
organisation.
This department is interested in dealing
with customer complaints to ensure
repeat customers are not put off.
An example is the improvement to the
camera on a smart phone.
Finding the best borrowing rate will
ensure a bank load can be repaid.
Increasing the amount of automation will
decrease the manufacturing errors and
reduce loss.
Effective promotion, such as paying a
celebrity to endorse your product, may
increase sales.
Technology such as video conferencing
and email ensures business deals can be
conducted globally.
A consistent approach to customer
satisfaction is important.
Types of grouping (page 56)
Q2:
It is common for a business to group its activities according to product. This is useful
for a company such as Mackie's who produce ice-cream and crisps as it allows each
staff member to have specific knowledge.
Car manufacturers may group their activities according to place. This would be helpful
as the European market is different to the market in the UK, or America.
Customer grouping is important to a business like the Royal Bank of Scotland. They
deal with young savers and provide support for school learners. They also work closely
with businesses and people looking to invest in their retirement.
Q3:
•
•
•
•
Staff in product/service groupings are organised around a specific product or
service and will have different areas of expertise whereas staff with similar
expertise work together in functional grouping.
A business grouped by functional departments will be responsible for the whole
organisation whereas in a product/service grouping each functional area will be
responsible for a specific product or service only.
In product/service grouping it is easier to identify areas that are performing well
whereas in functional grouping results tend to be for the organisation as a whole.
In product/service grouping each department is more responsive to change
however in functional grouping the organisation can become very large and
unresponsive.
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ANSWERS: TOPIC 5
•
In functional grouping the organisation will have a clear structure but in
product/service grouping the structure may be less clear and line relationships less
clear.
Q4: Advantages
•
Service and product is tailor-made to customer needs.
•
Promotions can be directed towards specific customer groups.
•
Customer loyalty is built up due to personal service.
•
Quick response to change.
Disadvantages
•
Is an expensive system, due to high staff costs.
•
New staff are required if new customer group is formed.
•
Duplication of resources.
•
Competition between departments (either advantage or disadvantage depending
on explanation).
Management structures - descriptions (page 60)
Q5: Flat structure
Q6: Decentralised structure
Q7: Entrepreneurial structure
Q8: Tall structure
Q9: Matrix structure
Management structures - definition and justification (page 60)
Q10: This allows new initiative to be developed using the best people from across the
businesses and gives staff new skills by working with others.
Q11: It is clear to see who is in charge of who, who should make decisions and how
information should pass through the organisation.
Q12: The business benefits from having a small number of people make decisions as it
means issues can be resolved quickly.
Q13: This structure work well in smaller organisations and are more responsive to
change.
Summary questions (page 61)
Q14: b) False
Q15: a) True
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ANSWERS: TOPIC 5
Q16: a) True
Q17: b) False
Q18: b) False
Q19: a) True
Q20: b) False
Q21: a) True
End of topic 5 test (page 62)
Q22: Centralised structures have a strong head office or several top managers who
keep the major responsibilities and power in the company.
Q23: The span of control is the number of employees or ranks of employees for which
a manager is responsible. If there are a great number of employees, the span is
considered to be wide and if there are only a few, then the span is narrow.
Q24: Hierarchical organisations include both tall and flat structures but are always in
the shape of a pyramid or triangle, with only a few people at the top and the number of
people in each level increasing on the way down. The span of control goes from those
above to those below.
Q25: A superior is someone who has a higher position than someone else in a
company or organisation.
Q26: The chain of command is the way that people with authority in an organisation
are ranked, from the person with the most authority to the next one below, and so on.
Q27: A tall structure is also referred to as a line and staff structure. There are a number
of levels of management and a long chain of command running from the top to the
bottom.
Q28: A flat structure is similar to a tall structure in that it is also a line structure.
However, there are relatively few levels of management making the chain of command
much smaller and widening the span of control.
Q29: A matrix structure will have people from various sections of the business
working together in teams which are created for specific projects and time periods and
supervised by a project manager.
Q30: Decentralised structures spread the responsibility across various sections of the
business.
Q31: An organisation is a company or other group of people that works together for a
particular purpose.
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ANSWERS: TOPIC 5
SQA style questions (page 64)
Q32: Any four from:
•
One senior member of staff makes all the important decisions.
•
Decisions are therefore made quickly.
•
Staff are very rarely consulted on decision making.
•
Stifles staff initiative as they are not consulted.
•
Is mainly used in smaller organisations.
•
Employees know who they are accountable to.
•
May place over-reliance on key members of staff.
Q33: Any two from:
•
In a decentralised structure decision making is delegated to departments whereas
in a centralised structure it is made by head office.
•
In a decentralised structure staff are more motivated due to empowerment whereas
in a centralised structure staff can be de-motivated due to not being consulted.
•
In a decentralised structure senior directors have less responsibility whereas in a
centralised structure senior directors carry all the burden of decision making.
•
Decentralised is often seen as being used in a flatter structure where as centralised
tends to exist in hierarchical structure.
•
It is harder to promote a corporate image in a decentralised structure than in a
centralised structure.
•
In a decentralised structure decisions can be made which only benefit one
department but in a centralised structure decisions will be made to suit the whole
organisation.
Q34: Any three from:
•
Staff with similar expertise work together in functional grouping but in product
grouping staff are organised around a specific product or service and will have
different areas of expertise.
•
The organisation will have functional departments which service the whole
organisation whereas in product grouping each functional area will be responsible
for a specific product or service only.
•
In both methods departments can be more concerned with their own results than
the organisation as a whole.
•
Departments may compete against each other in both forms of grouping.
•
In product grouping it is easier to identify areas that are performing well whereas in
functional grouping results tend to be for the organisation as a whole.
•
In product grouping each department is more responsive to change but in functional
grouping the organisation can become very large and unresponsive.
•
In functional grouping staff will know exactly who to turn to but in product grouping
this may not be the case.
•
In functional grouping the organisation will have a clear structure but in product
grouping the structure may be less clear and line relationships less clear.
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ANSWERS: TOPIC 5
Q35: Any three from:
•
Marketing can be tailored to specific customers needs.
•
Customer loyalty can be easily built up.
•
There is a high level of customer care given.
•
The organisation can respond to the needs of customers quickly.
•
Can be expensive due to high staffing costs to meet customer needs.
•
New staff are needed if there is a new customer grouping or product created.
•
Competition between customer groupings/departments can exist.
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ANSWERS: TOPIC 6
6 Stakeholders
Internal and external stakeholders (page 66)
Q1:
1. external
2. internal
3. external
4. internal
5. internal
6. internal
7. internal
8. external
9. external
10. internal
11. external
12. external
13. external
14. external
15. external
16. external
17. external
Interests of stakeholders (page 67)
Q2: A 15, 3 and 5: B 14 and 8: C 12, 1 and 19: D 21 and 18: E 13 and 4: F 11, 6 and
9: G 20, 17 and 7: H 16, 2 and 10
Was Royal Mail sold too cheaply? (page 68)
Q3:
•
Shareholders
•
Government
•
Royal Mail workers
•
Investment companies
•
Trade Unions
•
Taxpayers
Q4:
•
The Government wanted to sell at a lower price, whereas taxpayers may feel that
a higher price could have been raised.
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ANSWERS: TOPIC 6
•
Shareholders wish to receive as many dividends as possible whereas workers were
thinking of striking.
•
Customers may be concerned that privatisation will result in increased prices,
whereas Shareholders will with to maximize profits.
Q5: For example: The Government issued shares at 330p. Today each share is worth
497.7p.
Based on the information in the example, today's share price is higher than that
highlighted in the case study. This increase indicates that the Government sold the
shares too cheaply as the Government did not benefit from this increase.
Summary questions (page 70)
Q6:
a) True
Q7:
b) False
Q8:
a) True
Q9:
a) True
Q10: b) False
End of topic 6 test (page 71)
Q11: b) False
Q12: b) False
Q13: a) True
Q14: a) True
Q15: a) True
Q16: a) True
SQA style questions (page 71)
Q17: Any four from:
•
Customers are interested in the best price for quality products.
•
Employees are interested in job security.
•
Managers are interested in future promotion prospects.
•
Suppliers are interested in receiving payment for supplies.
•
Banks are interested in the stability of the organisation in order to repay loans.
•
Local community are interested in the social responsibility of the organisation.
•
Local community are interested in jobs being created.
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ANSWERS: TOPIC 6
•
Owners/shareholders are interested in the profits that the organisation makes.
•
Government are interested in the firm complying with laws.
•
Government are interested in organisations paying taxes.
Q18: Any four from:
•
Suppliers can vary the period of credit and/or the level of discount offered to firms.
•
Customers support firms by buying their products and increasing advertising
through word of mouth.
•
Banks have the power to grant loans to firms and to set the rate of interest charged.
•
The government can reduce the tax burden faced by business.
•
The community as a whole can rally round a local business to show support.
•
The local community can influence how businesses in their area behave through
the local newspapers (e.g. by writing letters for or against things the business has
done); or through protesting against a business's decisions such as the closure of
a factory.
•
Local government can influence business organisations through planning and other
legislation for which local government are responsible.
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ANSWERS: TOPIC 7
7 Decision making
Decision types (page 76)
Q1:
1. strategic
2. tactical
3. strategic
4. tactical
5. operational
6. operational
7. strategic
8. tactical
SWOT analysis (page 83)
Q2:
1. strength
2. threat
3. weakness
4. strength
5. opportunity
6. strength
7. opportunity
8. weakness
9. threat
10. opportunity
11. weakness
12. strength
Summary questions (page 89)
Q3:
b) False
Q4:
a) True
Q5:
a) True
Q6:
b) False
Q7:
b) False
Q8:
a) True
Q9:
b) False
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ANSWERS: TOPIC 7
123
End of topic 7 test (page 90)
Q10: A tactical decision is made by middle managers whereas an operational
decision can be made by anyone in the organisation normally lower level managers.
Q11: An operational decision is made daily or short term whereas a tactical decision
is a medium term decision.
Q12: A tactical decision carries a medium amount of financial risk but an operational
decision carries virtually no financial risk.
Q13: An operational decision is made to help the smooth running on a daily basis
whereas a tactical decision is made to help implement the strategic objectives.
Q14: A business deciding to extend weekend opening hours is an example of a tactical
decision making.
Q15:
Managers may be unable to cope with
complex decisions.
Meaning a simpler solution may need to
be found
Staff skills may make the decision difficult Meaning a staff training programme may
to implement.
be necessary
Finance may be restricted.
Meaning the organisation cannot afford to
implement the decision
The decision may be constrained by the
lack of technology.
Meaning that new technology needs to be
purchased or decisions shelved
Staffing levels may be too low for the
suggested solution to be used.
Meaning a recruitment drive may be
necessary
Staff may be resistant to change.
Meaning implementing decisions may be
difficult
Q16: a) True
Q17: a) True
Q18: b) False
Q19: a) True
Q20: b) False
Q21: g) All of the above
Q22: f) All of the above
Q23: a) True
Q24: b) False
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ANSWERS: TOPIC 7
SQA style questions (page 92)
Q25: Any three from:
•
A strategic decision is long term whereas a tactical decision is medium term.
•
A strategic decision is made by directors/senior managers but a tactical decision is
made by heads of department or middle managers.
•
Strategic decisions carry high levels of financial risk whereas tactical decisions
carry less of a financial risk.
•
Strategic decisions shape the main objectives of an organisation whereas the
tactical decisions help to put the strategic decisions into place.
Q26:
•
Plan out the timing and purpose of the appraisal interview in advance to ensure the
employee is fully aware of the purpose.
•
Organise a suitable venue and time.
•
Control the meeting to allow the employee to have an input into the appraisal.
•
Command - may have to tell the employee that the meeting is taking place if they
are unhappy with the appraisal and against it.
•
Co-ordinate the appraisal meetings before and after to ensure appropriate
feedback is given.
•
Delegate some meetings - peer to peer appraisal or junior managers for
experience.
•
Motivate the staff with suggestions during the appraisal and give praise for any
achievements.
Q27:
1. Operational
•
•
•
Day-to-day decisions.
All staff including lower level managers.
Low financial risk decision.
2. Tactical
•
•
•
Medium term.
Made by middle managers.
Taken to achieve strategic decisions.
3. Strategic
•
•
•
•
Long term decisions.
Shaping the objectives of an organisation.
Taken only by very senior managers.
Carry a large financial risk.
Q28: Any four from:
•
The ability and skill of the manager - if the manager has not had proper training or
not skilled enough to make decisions then a poor decision may be made.
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ANSWERS: TOPIC 7
•
The appropriate use of decision making models.
•
The quality of the information used to make the decision.
•
The level of risk taken.
•
The managers own interests.
•
The finance available to implement the decision.
•
The time available to make the decision.
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ANSWERS: TOPIC 8
8 End of unit tests
End of unit 1 test (page 94)
Q1:
Co-operatives
Q2:
Local authority
Q3:
PLC
Q4:
Franchise
Q5:
Social enterprise
Q6:
Public corporation
Q7:
a) External
Q8:
b) Internal
Q9:
a) External
Q10: a) External
Q11: b) Internal
Q12: 1b; 2c; 3f; 4d; 5a; 6g; 7e
Q13: Employees exert influence by standard of work, the more effort they put in the
higher the quality of product. If they are unhappy, they may take industrial action which
will negatively affect the business's reputation and output. Customersdecide whether
or not to buy product. This can have a huge effect on the business's survival. The
Government sets economic policies such as the level of VAT or corporation tax which
affect business's profit margin. Suppliers can change prices/discounts offered which
directly affects a business profit margin and it can change credit periods with affects a
business cash flow. Banks can vary interest rates which affects how much a business
repays when taking out a loan. They can also decide whether or not to grant loans which
means the business may end up paying a higher rate to a different lender. Managers
make tactical decisions which will affect the future of the business and whether it makes
it strategic aims or not. Shareholders are able to vote at AGMs on decisions affecting
the future direction of the business.
Q14: 1c; 1d; 2b; 2f; 3a; 3e
Q15: The sectors of industry are known as primary, secondary, tertiary and quaternary.
Each provides a different function within the chain of production. The primary sector is
responsible for the exploitation of raw materials from the earth or sea. This includes
organisations who are involved in coal mining, fishing or deep sea oil exploration.
Although this sector of industry was traditionally strong in Scotland, in recent years
these industries have shrunk. The secondary sector is responsible for transforming
the raw materials intousable products through construction or manufacturing. A wide
range of business organisations operate in this area. The tertiary sector is now
Scotland's most important sector of industry as it accounts for jobs in the service
industry. Tourism, e-commerce and call centres all significantly contribute to the Scottish
© H ERIOT-WATT U NIVERSITY
ANSWERS: TOPIC 8
economy. Finally, the quaternary sector of industry provides business support for all
organisations. Consultancy services such as IT or management support are a growing
part of the Scottish economy.
SQA style questions (page 97)
Q16: Any two from:
•
Profit miximisation - where the PLC aims to raise as much profit as possible by
selling as many units for as high a selling price as possible, whilst minimizing costs.
•
Social responsibility - ensuring that the organisation operates in a way which
allows a positive image for the organisation to be portrayed, for example, through
developing strong links with a charity or through demonstrating good environmental
credentials.
•
Growth - to grow the organisation either organically or through acquisition, to
become a larger and more successful company.
Q17:
•
This can also be described as the support sector, and activity here is based
around organisations which provide information, especially (but not exclusively) to
businesses.
•
IT consultancy, research and development, and consultancy services (for example
management consultants such as Accenture) operate in this sector of activity.
•
Businesses in other sectors of industry need this sector to provide the expertise
needed to develop their products and services for customers.
Q18:
•
Public sector organisations are owned by the government on behalf of the
country whereas private sector organisations are owned by private individuals
(shareholders).
•
Public sector organisations are financed through taxes whereas private sector
organisations are funded through a variety of ways, for example, investment
by private individuals, share issues, bank loans, commercial mortgages and
debentures.
•
Public sector organisations are controlled by government ministers or civil servants,
whereas private sector organisations are controlled by the sole proprietor, partners
or board of directors.
•
The objectives of a public sector organisation will include provision of a service,
efficient use of tax payers' money, and social responsibility, whereas a private
sector organisation's objectives will include profit miximisation, growth or social
responsibility.
Q19: Any five from:
•
It allows growth for their brand without making significant financial investment in
property and without the need to recruit and train a large workforce of their own.
•
It reduces competition - if a franchisee buys into their brand, that means they are
not launching their own product in competition.
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ANSWERS: TOPIC 8
•
It reduces risk - the risk of failure is shared with the franchisee.
•
They retain control over the image and product they have created.
•
There is guaranteed income from royalties paid by the franchisees.
•
If one franchisee fails to maintain appropriate standards this can have a negative
impact on the whole franchise.
•
Should a franchisee fail to perform to the required level, they have a very long term
contract which may be difficult to end early.
Q20: Any five from:
•
Different governments have different laws - this is an issue for multinationals as
they have to abide by the legislation in both their country of origin and the country
where they manufacture.
•
Interest rates differ between countries - this makes budgeting difficult as repayment
rates will differ between countries.
•
Exchange rates are constantly changing - multinationals transfer goods between
countries and may lose profit when one currency is weak against another.
•
Different countries have differing attitudes to working conditions - this means
managers working in more than one country needs to be aware of local customs
for fear of offending the workforce.
•
Multinationals operate in a global economy where competition is fierce - the global
market place greatly increases the number of competitors operating in a single
market.
•
Consumers' taste differs from one country to another which means MNCs have to
group product teams by geography to ensure all consumers are satisfied.
•
Language differences need to be taken into consideration as consumers have been
offended in the past when the literal translation of a product in one country means
something completely different in another country.
•
The cost of installing new technology/access to new technology as there will be
different cost structures from country to county - MNCs need to be aware of this
when rolling out new technology across their brand.
Q21: Any four from:
•
Ability of staff - if staff are knowledgeable and well trained the business is more
likely to be a success.
•
Ability of management - a strong leadership team will drive the organisation to meet
its objectives.
•
Availability of finance - a well resourced business is more likely to meet customer
needs through product availability and the production of quality outputs.
•
Availability of ICT - the use of ICT can positively influence the quality and quantity
of output.
•
Availability of information - the value and quantity of information available will affect
a business's ability to make effective decisions.
•
Changes in costs - the profitability of a business will be affected if costs are not
closely monitored and controlled.
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ANSWERS: TOPIC 8
Q22: Any five from:
•
Allows the business to be responsive to customer needs as the employees
understand their customer.
•
A high degree of personal service can be offered to individual customers as a
relationship can be built.
•
Business can build up customer loyalty as the customers feel valued.
•
Will result in higher staff costs for the business as highly trained staff are required.
•
Duplication of some functional areas which can lead to higher costs than is
necessary.
•
Different prices and levels of service offered makes forward planning more difficult.
Q23: Any four from:
•
Normally set up to carry out a specific project.
•
Will consist of different specialists from functional areas.
•
Each team will have a project leader.
•
Can be motivational to the staff concerned as they get the chance to do something
different.
•
Gives staff increased experience in different situations.
•
Is a relatively costly structure if many different teams are required.
•
Can be difficult to co-ordinate staff from different areas.
•
Each staff can have two managers, the project manager and their own functional
manager, which can cause confusion and conflict.
Q24: Any five from:
•
Employees: Exert influence by standard of work, the more effort they put in the
higher the quality of product. If unhappy, may take industrial action which will
negatively affect the business's reputation and output.
•
Customers: Decide whether or not to buy product. This can have a huge affect on
the business's survival. Change of tastes - if the business fails to respond to the
customers' changing habits it will not be as successful.
•
Government: Sets economic policies such as the level of VAT or corporation tax
which affect businesses profit margin. Sets legislation e.g. minimum wage which
affects a businesses cash flow through the increased payment of wages.
•
Suppliers: Can change prices/discounts offered which directly affects a business'
profit margin. Can change credit periods which affects a business cash flow. May
refuse to supply if they object to the business' ethical policies which means the
business may end up paying more for their supplies.
•
Banks: Can vary interest rates which affects how much a business repays when
taking out a loan. Decide whether or not to grant loans which means the business
may end up paying a higher rate to a different lender.
•
Managers: Make tactical decisions which will affect the future of the business and
whether it makes its strategic aims or not.
•
Shareholders: Able to vote at AGMs on decisions affecting the future direction of
the business.
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ANSWERS: TOPIC 8
Q25: Any four from:
•
Managers will wish to maximise profits whereas consumers will wish prices to stay
low.
•
Local residents may wish services to be provided which the council taxpayers do
not wish to pay for.
•
Shareholders may want a larger return on their investment whereas managers may
wish higher salaries.
•
Employees will want to be sure of their job security whereas directors may wish to
start a programme of enlargement.
•
Banks may wish to increase the amount of monthly payments whereas managers
may be concerned about cash flow.
•
Suppliers may increase prices which will affect the price customers pay for goods.
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