Notesale: Turn your study into money

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The nature of business (AO1)
“Business shapes the world
...
”
- Dame Anita Roddick (1942 – 2007), Founder of The Body Shop
A business can be defined as a decision-making organization established to produce goods and/or
provide services
...
g
...

Services are intangible products, e
...
haircuts, tourism, public transport, banking, insurance
education, and healthcare
...
There
may be additional or alternative objectives, such as survival, increasing their market share, being the
market leader, or being a socially responsible business
...
Economists call these resources factors of production, which are
comprised of:
●

Land – These are natural resources needed to produce goods and services
...
Hence, these are
sometimes referred to as physical resources
...
Hence, this is
often referred to as human resources
...
Examples include tools, machinery, motor vehicles, physical premises, and
infrastructure
...


●

Entrepreneurship – This refers to the knowledge, skills and experiences of individuals who
have the capability to manage the overall production process
...


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In order to provide goods and services, businesses carry out a number of functions
...


Human resources
Human resources (HR) is the function that handles all aspects related to the workforce
...
Examples
include: recruitment, induction, training, development, appraisal, promotion, remunerating
(rewarding) and dismissal of staff
...
In particular, it must observe different labour laws in all the countries it
operates in
...


Finance and accounts
The finance and accounts function of an organization refers to the responsibility for ensuring that
the business has sufficient funds in order to conduct its daily operations
...


Marketing
Marketing is about identifying the needs and wants of customers so that the business can provide
goods and services to meet these requirements and desires, usually in a profitable way
...


Operations management (production)
Operations (also known as operations management or production) is the process of making
goods and providing services from the available resources of a business to meet the needs and
wants of its customers
...

All four of these functions of a business are interdependent, i
...
depend and are reliant upon one
another
...

Production of a certain good may need to change if recent market research shows changes in
consumer habits, fashions and tastes
...


Businesses add value
Businesses produce new goods and services for numerous reasons including new tastes and
preferences of customers, changes in technology, and some goods and services becoming obsolete
...

Customers are the people or other businesses that purchase goods and services
...
Adding value is the process of producing a particular good or service that is worth more
than the cost of the resources used to produce it
...
Businesses aim
to combine the various human, physical and financial resources to create goods and services that
add value to a good or service
...


Key Terms
●

Adding value is the process of producing a particular good or service that is worth more
than the cost of the resources used to produce it
...


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●

Consumers are the people who use goods and services
...


●

Customers are the people or other businesses that purchase goods and services
...
Businesses combine human, physical and financial resources in an effective
way to create goods and services to meet the needs and wants of consumers
...
g
...


●

Services are intangible products, e
...
haircuts, tourism, public transport, banking, insurance
education, and healthcare
...
Primary, secondary, tertiary and quaternary sectors (AO2)

The primary sector
The primary sector refers to business activity involved with the extraction of natural resources
...
Hence, primary sector production is also known
as extractive production
...
It accounts for the majority of gross domestic product (GDP) and
employment in these economies
...


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The added value of primary sector output is relatively low
...
Hence, workers
in the primary sector are typically paid less than those in the secondary or tertiary sector
...
It encompasses transforming primary sector output into finished goods, ready for
sale or use by the consumer
...
It also includes
businesses that are involved in transforming other secondary sector output into finished goods, such
as assembling the component parts of motor vehicles, laptops, or smartphones
...
It accounts for the majority of gross domestic product (GDP) and
employment in these countries or states
...
Many
economists argue that the secondary sector is the "engine of growth", signifying the importance of
manufacturing and construction for a country's economic growth
...
e
...
Tertiary sector output is the predominant sector in economically
developed countries (or high-income economies)
...


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Examples of tertiary sector business activities include:
●

Advertising

●

Banking

●

Catering

●

Communications (telecommunications and Internet)

●

Distribution

●

Education

●

Health care

●

Insurance

●

Legal services

●

Leisure and entertainment

●

Medicine

●

News broadcasting

●

Real estate (commercial and residential property)

●

Retail

●

Transportation

●

Travel, hotels and tourism

●

Security services

●

Warehousing

The added value of tertiary sector output is very high
...
This is because the plumber
provides high added value services to the consumer by fixing the leak, something that the consumer
has no expertise or time to complete
...


The quaternary sector
The quaternary sector refers to business activity involving the creation or sharing of knowledge and
information
...

Examples of production activities in the quaternary sector include:
●

Tertiary and higher education

●

Information and communications technology (ICT)

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●

Management consultancy

●

Management information systems (MIS)

●

Online educational providers that rely on digital communications technologies

●

Research and development (R&D)

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Software and ‘app’ developers

The added value is extremely high in the quaternary sector
...
It also requires a highly
educated population, yet the vast majority of the world’s population do not progress to further or
higher education
...
This is because they are both service
sectors
...


Video reviewing the sectors of the economy: https://www
...
com/watch?v=jvbFgOepKUQ

Key Terms
●

The primary sector refers to business activity involved with the extraction of natural
resources
...


●

The tertiary sector refers to business activity that involves providing services to customers,
i
...
consumers and business clients
...


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3
...
The
entrepreneur is both willing and able to take calculated risks by investing in a business start-up or
commercial initiative
...

A visionary is an entrepreneur who has the foresight and driving force behind an organization’s
growth and development
...
For example, a visionary will be instrumental behind
an organization’s product development, acquisitions and strategic partnerships
...

The economic success of a nation is largely dependent on the entrepreneurial spirit within the
country
...
Entrepreneurs also
create jobs in the economy, thereby further contributing to the wealth of the country
...
Entrepreneurs share some common sought-after
characteristics and skills:
Creativity

Decisiveness

Drive (motivation)

Effective communicator

Flexibility and
open-mindedness

Leadership

Planner

Risk tolerance

Risk management

Teamwork

Time management

Vision

Top tip!
A successful entrepreneur needs to be a RISER
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4
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Even highly successful large multinational
companies once struggled
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Amazon was founded in 1994, but it wasn't until the fourth quarter of 2001 that
the online company finally declared its first profit
...
Financial
challenges are a major problem for many start-up businesses
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●

Lack of market research – The key to a successful business is having a commercially
viable idea
...
For example, new businesses often overestimate the
size of their potential market
...
No matter how
good an idea might be or how competitively priced it is, customers will not buy it if they are
not informed that it exists
...


●

Limited human resources – Newly established businesses often find it difficult to attract
suitable skilled and experienced staff
...


●

Long hours – Similarly, a common challenge for many new businesses is that the owner(s)
often think they can do everything themselves, partly to help keep costs low
...
For example, the entrepreneur may
spend many hours after the close of business to work on the firm’s financial accounts
...


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Lack of knowledge, skills, and experiences – Too often, new entrepreneurs do not have
sufficient knowledge, skills or experience in the industry they are entering
...
They may also
lack knowledge of the best suppliers, which can cause higher costs and distribution
problems
...
Ultimately, all of this results in the business making huge losses
...
These reasons include:
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Money – Perhaps the key driving force for a person to start their own business is the
ambition or motivation to earn profit for themselves
...
The owner(s) get to keep the profit as a
reward for risk-taking and their entrepreneurship talents
...
Some people do not like to work for other people and prefer the
autonomy that comes with being an entrepreneur
...
The autonomy of being your own boss also speeds up decision-making
...
They enjoy the satisfaction of
achieving what they perceive to be greatness and striving for self-actualisation
...
For example, Linda McCartney (who married Paul McCartney of
the Beatles) was an animal rights activist and entrepreneur who started the famous food
brand Linda McCartney Foods, specialising in vegan and vegetarian meals
...


●

Family ties – For some entrepreneurs, running their own business is part of a family
tradition
...
Other more well-known examples of businesses owned
wholly or largely by family members include: Mars (still owned by the Mars family), the Trump
Organization, Berkshire Hathaway and Walmart
...


●

Unfilled market opportunities - Some entrepreneurs spot an unfilled gap in the market for
a certain type of good or service, so start their own business
...


●

Making a difference – Finally, some people start their own enterprises in order to be able to
make a difference to others
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1
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Distinction between the private and the public sectors (AO2)
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The main features of the following types of for-profit social enterprises (AO3):
• Private sector companies
• Public sector companies
• Cooperatives
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...


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They operate independently of the
government, although they need to operate within the rules and regulations in the country
...
Such businesses can, but do not always, directly charge customers for such
services
...

Examples of such goods and services deemed to be of benefit to society include:
●

Infrastructure (such as communication networks, transportation networks, road and highway
networks, waste disposal systems, and flood control systems)

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●
●
●
●

Housing (public and social housing)
Health care services
Education
National defence (national security)
Emergency services (ambulance, fire and police)

Key Terms
● The private sector of the economy consists of businesses owned and run by private
individuals and organizations that usually aim to earn a profit for their owners
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Although this person can employ as many people as needed, the sole trader is the only
owner of the business
...
Sole traders can avoid complicated
and costly set-up procedures
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●

Sole traders are likely to be highly motivated as the owners have a sense of achievement
from running their own business and can keep all of the profits made
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●

Hence, decision-making is also swift as the owner does not have to consult anyone else and
seek their permission to execute a decision
...
For example, sole
traders in Hong Kong only need to submit paperwork for the Inland Revenue if their annual
sales revenue exceed HK$2m (around US$260,000)
...


●

The owner can benefit from tax advantages
...


Disadvantages of sole traders / sole proprietors
However, there are some potentially significant disadvantages of being a sole trader too
...


●

The sole trader accepts all the risks of owning and running their own business, including any
losses made or even the collapse of the organization
...
There is no one else to share ideas or
to ask questions, so all pressures, burdens and responsibilities fall on the owner
...


●

Legally, a sole trader is treated as the same legal entity as the business, i
...
it is an
unincorporated business
...


●

There is a lack of continuity in the operations of the business if the owner is unwell, wishes
to take a holiday or wants to retire
...


●

As sole proprietorships are usually small businesses (such as a small convenience store
owner), they are unlikely to be able to gain any economies of scale, perhaps because they
cannot buy their materials or stocks (inventory) in bulk
...
By contrast, larger
businesses (such as supermarket chains) gain these cost-saving benefits, so are able to
charge much lower prices due to their ability to exploit economies of scale
...


Partnership (AO3)
A partnership is a commercial business that strives to earn a profit for its owners
...

For an ordinary partnership, the maximum number of partners is usually capped at twenty owners,
although this does vary from one country to another
...
Highly specialised professional service providers
(such as doctors, solicitors, dentists and accountants) are usually set up as partnerships
...
The owners of a partnership are called
partners
...
In practice, it is usual for all the partners to share responsibility for any
liabilities made by the partnership
...
Setting up an LLP protects each individual partner from being responsible or
liable for another partner’s misconduct or shortcomings
...
stating their responsibilities, voting rights, and how
profits are to be shared between the owners
...
Silent partners (also
known as sleeping partners) can provide additional capital without having any role in the
actual running of the business
...


●

Unlike a sole trader, partners can share the burden of their workload and responsibilities
...


●

Partnerships can benefit from specialization and the division of labour
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●

As with sole traders, business affairs of a partnership are kept confidential, so only the tax
authorities need to know about the financial position of the partnership
...
These potential drawbacks
include:
●

As the business has more than one owner, this can easily lead to disagreements and conflict
between the owners, which can seriously damage the running of the partnership
...

This can also lead to disagreements and conflicts between the owners

●

Unlike with a sole trader, the profits made by a partnership must be shared between all the
owners
...

However, sleeping partners are exempt from unlimited liability
...
There is no maximum number of owners in
limited liability companies, so they can raise finance through their shareholders
...
This
is because such cases would void the Deed of Partnership
...


Privately held companies (AO3)
Companies (also known as corporation) are commercial for-profit businesses owned by
shareholders
...

As incorporated businesses, the owners have limited liability
...
This is because shareholders
are not personally liable for the debts of the company should it go into debt or bankruptcy
...
It is the board of directors and the CEO (or managing director) who are responsible for the
strategic direction of the company
...


Features of privately held companies

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●

The shares of privately held companies cannot be advertised for sale nor sold via a stock
exchange
...


●

Most privately held companies (sometimes referred to as private limited companies) are
small businesses, with shares typically owned by family, relatives, and friends
...
e
...


●

Owners have limited liability, so if the business experiences a financial collapse, then the
owners will only be liable for the capital they invested in the company
...
In some countries,
the maximum number is 50 (Turkey) and in others it is 200 (India)
...


●

There is usually no legal requirement for the company to publish detailed financial accounts
for the general public (this is only needed for corporate tax purposes)
...


●

Significantly more finance can be raised compared with a sole trader (one owner) or a
partnership (up to 20 owners)
...


●

Shareholders have limited liability, so cannot lose more than what they invest in the
company
...


●

Unlike a sole trader or partnership, a privately held company can enjoy continuity in the
event of the death of a major shareholder
...
This can make it difficult to buy and sell
shares in the company
...
For example, there
are higher legal fees and auditing fees (for checking and approving of the financial
accounts)
...


Publicly held companies (AO3)
Features of publicly held companies
●

Also known as a joint-stock company, a publicly held company is owned by shareholders
...


●

Shares in a publicly held company can be bought and sold via a stock exchange (or stock
market), such as the New York Stock Exchange (NYSE), London Stock Exchange, Tokyo
Stock Exchange, and Shanghai Stock Exchange
...


●

In order to protect shareholders, publicly held companies are strictly regulated and are
required to publish their final accounts each year
...


Advantages of publicly held companies
The advantages of establish a business as a publicly held company as a type of for-profit
(commercial) organization include the following points:
●

Additional finance can be raised through a share issue (the process of subsequently selling
more shares in a company)
...
In
2010, Brazil’s state oil company Petrobras raised $70 billion, in the world’s largest share
issue
...


●

As with privately held companies, the shareholders of publicly held companies enjoy limited
liability
...


●

As with privately held companies, publicly held companies enjoy continuity even if a principal
or major shareholder leaves the organization or passes away
...


●

Publicly held companies are the most administratively difficult and expensive form of
commercial for-profit business to set up and run
...


●

As the general public can buy and sell shares freely, there is always a potential threat that a
rival company will make a takeover bid
...
Being too large can cause
inefficiencies in the company, and hence higher average costs of production
...


●

A Deed of Partnership (or partnership deed) is a formal partnership agreement or contract
between the owners, which includes legal agreements such as the formal responsibilities of
each owner, their voting rights, and how profits are to be shared between the partners
...


●

Partners are the co-owners of a partnership business
...


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●

Privately held companies are limited liability companies owned by shareholders but the
shares in the business cannot be advertised or traded on a stock exchange
...


●

Shareholders are the owners of a limited liability company
...


●

A sole trader (or sole proprietor) is the single owner of a business organization, so makes
all the decisions and takes all the risks in running the enterprise
...


●

Unlimited liability means that if the sole proprietorship fails, the sole trader is personally
held responsible for all the debts of the business
...


3
...
They aim to primarily
provide a solution to important social or environmental issues
...
As they are not always revenue-generating,
SPOs often need financial funding and suitable human resources
...
Although there is no universally

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accepted definition of a social enterprise (and the legal definition differs between countries), it is
essentially an organization that focuses on meeting social objectives (such as improving social and
environmental well-being) and not only commercial business objectives such as profit maximization
or maximizing shareholder returns
...
Whilst traditional businesses might donate money to charitable causes or have
ethical objectives, they primarily aim to earn a profit
...
e
...
Their activities, by definition, purposely create social
benefits
...


* Whilst traditional businesses may allocate some funds to CSR, it is not their main or most
important focus
...
A growing number of traditional businesses are reporting on the triple bottom line
as part of their CSR and sustainability goals
...
The
differences between an organization's mission and purpose are outlined in the table below
...
Nevertheless,
social enterprises generate revenue like any business organization, but hold community objectives
for the wellbeing of others in society, rather than primarily aiming to earn profit for their owners
...


●

Non-profit social enterprises (AO3):
(iv) Non-governmental organizations (NGOs)

Note that social enterprises can, and often are, for-profit organizations
...
In other words, profit follows as a consequence of its social and environmental goals, rather
than as a result of its commercial activities
...

Such organizations do not focus on generating profits for their shareholders but strive to build and
improve communities
...
Unlike traditional charities, for-profit social
enterprises need to earn a profit (or financial surplus) in order to survive
...


The triple bottom line
For-profit social enterprises have three main objectives, commonly referred to as ‘the triple bottom
line’
...
1949),
comprises of the following:
1
...

2
...

3
...
e
...


Top tip!
Remember that social enterprises can be not-for-profit or for-profit
...

HL students should learn this section of syllabus thoroughly as the focus of the Paper 3 exam (HL
only) is on a social enterprise
...
identify and describe a human need (worth 2 marks)
2
...
write a decision-making document that includes a business recommendation or plan of
action (worth 17 marks)

(i) Private sector companies (AO3)
Private sector companies are for-profit business organizations that operate in the private sector
...

For-profit social enterprises can operate as private sector companies in the private sector of an
economy
...
This differs from commercial or traditional for-profit
companies that aim to maximise earnings for their shareholders (owners)
...

Therefore, for-profit social enterprises in the private sector earn their revenues and profit in socially
responsible ways and use the surplus to directly benefit the society or environment rather than
distributing the profit to owners in the form of dividend payments
...
It does not include any private sector enterprises (sole traders,
partners, limited liability companies, and private sector social enterprises)
...
They can be owned wholly or
partially by the government
...

Quite often, the public sector is unable to provide the necessary resources and finances to operate
an enterprise, so some of the funding required comes from the private sector
...
A PPP is a jointly established enterprise by a
government and one or more private sector businesses
...
The exact arrangements will differ from
case to case and from country to country, but often involve the public sector having a majority share
in the joint venture
...

Examples of service providers in the public sector that operate as for-profit social enterprises
include:
●

Broadcasting services, such as national broadcasters of television and radio services
...


●

Housing associations to provide social housing for people
...


●

Public transport providers, such as buses and mass rail transit
...


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Advantages of public sector companies
The advantages of establishing public sector enterprises as a form of for-profit social enterprise
include:
●

Providing a viable solution for the government to finance projects that it simply does not have
enough money for unless it is able to charge for the services provided
...


●

By being able to charge for their services, public sector companies help to reduce the debt
burden of the economy and taxpayers in particular
...


Limitations of public sector companies
However, there are potential drawbacks of establishing public sector enterprises
...


●

In addition, most public sector enterprises are expensive to operate (involving high set-up
costs and running costs)
...


●

Hence, it can be difficult to persuade private sector partners or investors to help fund public
sector companies
...


●

Public sector companies are often associated with bureaucratic policies and procedures,
which can cause inefficiencies and delays to decision making
...


(iii) Cooperatives (AO3)
Cooperatives are for-profit social enterprises that are owned and managed by their members
...
Cooperatives exist throughout the world, but are predominant in the
agricultural and retail sectors of the economy in many parts of Europe
...
However, any profits of the cooperative are shared with its
members
...
Like limited liability
companies, cooperatives have a separate legal entity from their shareholder owners
...


●

All member shareholders are expected to help run the cooperative, although it is overseen
by an elected board of directors that makes long-term strategic decisions
...


●

Members of a cooperative have limited liability, restricted to the amount they invested in the
business
...
The organizational structure is rather flat as there is decentralised decision
making
...


●

Cooperatives are tax exempt because the focus of the business is on serving the collective
interests of its member-owners and the community (such as home care associations for the
elderly)
...


●

Similarly, as the owners have equal voting rights, the cooperative is more democratic so the
members feel equally important to the success of the business
...


●

There is an absence of pressure from external investors and shareholders, so the
member-owners of the cooperative can run the business that best suits their own interests
...


●

Unlike partnerships or sole traders, there is continuity in a cooperative should a key owner
leave the organization, for whatever reason
...
These include
the following points:
●

As cooperatives are not profit-driven, it can be difficult to attract investors, financiers and
member-shareholders
...


●

Most cooperatives have very limited sources of finance as their capital depends on the
amount contributed by their members
...
This
can limit the success of the cooperative
...
Despite some members having more to
contribute to the organization and greater responsibilities, they only get one vote as do all
other members
...


Key Terms
●

Cooperatives are for-profit social enterprises that are owned and managed by their
members
...


●

Private sector companies are for-profit business organizations that operate in the private
sector
...


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●

Public sector companies operate in a commercial-like way (selling goods and/or services
in order to generate a financial surplus) but are owned and/or controlled by government
authorities
...


●

Social enterprises are organizations that use commercial business principles and practices
to achieve social and/or environmental objectives by competing with other rival businesses
...
Non-profit social enterprises (AO3)
Features of non-profit social enterprises (AO3)
Some social enterprises are not run for profit, such as non-governmental organizations (NGOs)
...
The difference is that the surplus is reinvested back in the social
enterprise and/or the community
...
Non-profit social enterprises operate in a commercial-like way but they do not distribute any
profits or financial surplus to their owners or shareholders
...


Social enterprises are an example of social purpose organizations (SPOs) that aim to primarily
provide a solution to important social or environmental issues, and not only commercial gains
for its owners
...
This
provides employees with a sense of social purpose and the feeling of being able to make a
positive difference to the social cause
...


Advantages of non-profit social enterprises
The advantages of establishing a business as a non-profit social enterprise include the following
points (which apply to both NGOs and charities):
●

Non-profit social enterprises exist for the benefit of local communities and societies
...


●

Non-profit organizations, including non-profit social enterprises, are exempt from paying
corporate and profits taxes
...


●

There can be a positive impact on employees and donors who feel that the non-profit
enterprise is pursuing a socially meaningful ambition
...
These include the following points (which apply to both NGOs and charities):
●

There are strict guidelines and restrictions that non-profit social enterprises must follow;
not all trading activities are permitted
...


●

NPOs depend on the goodwill of the general public and donors to fund their operations
...


●

There is a lack of financial and cost control because, unlike in a for-profit organization,
managers at NPOs are not expected to earn a profit for their owners or shareholders
...
Whilst it might be socially acceptable that
the managers at a bank or private law firm is paid an annual bonus, gets to travel on
business class and is offered a company car, the equivalent benefits for a person
working for a charity might be deemed to be rather unethical
...

(iv) Non-governmental organizations (NGOs) (AO3)
A non-governmental organization (NGO) is a type of non-profit social enterprise that operates in
the private sector of the economy
...

Instead, it is operated a voluntary group to promote a social cause, such as the protection of
human and animal rights, protection of the environment, and development aid
...

They are usually funded by a combination of sources:
●
●
●
●

Government grants or donations
International organizations
Charitable organizations
Commercial businesses, as part of their corporate social responsibilities (CSR), and

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●

Private donors and philanthropists
...


Top tip!
There is no universally accepted legal definition of an NGO and a charity; the meaning will differ
from country to country
...
Many private
fee-paying international schools also operate in this way
...

Charities can operate in the public sector, i
...
, they are run and operated by the
government or public sector agencies
...
Charities tend operate on a smaller scale with a specific
focus, such as developing the arts, helping people with illnesses such as sight or hearing
impairments, relieving homelessness, or other publicly beneficial actions
...


Key Terms
●

A non-governmental organization (NGO) is a type of non-profit social enterprise that
operates in the private sector as a voluntary group to promote a social cause
...


●

Social enterprises are business entities that generate revenue just like any business
organization, but hold community objectives for the wellbeing of others in society, rather
than primarily aiming to earn profit for their owners
...
2 Types of business entities

Business Management 2022-2023

To talk about business entities, we must clarify that there are different classifications:
1
...
Private sector
b
...
By the nature of the business
...
For profit enterprises
b
...
Non-profit enterprises: NGOs
To start operating a business legally you must choose a legal form:
3
...

a) Sole trader
b) Partnerships
c) Companies: Private held and Public held
d) Cooperatives

Distinction between the private and the public
sectors (AO2)
The private sector of the economy consists of businesses owned and run by private individuals
and organizations that usually, but not always, aim to earn a profit
...

Examples of private sector businesses, which are covered in this section of the syllabus, include
the following:
•

Sole traders

•

Partnerships

•

Privately held companies

•

Publicly held companies

•

Social enterprises, including cooperatives and non-governmental organizations

•

Multinational corporations (MNCs)

Business organizations that operate in the public sector consist of those controlled by a regional
and/or national government, with the main aim being to provide essential goods and services
for the general public
...
In some cases, such as government housing or state-funded education, the service
is provided by and/or funded by the government
...
2 Types of business entities
•

Housing (public and social housing)

•

Health care services

•

Education

•

National defence (national security)

•

Emergency services (ambulance, fire and police)

Business Management 2022-2023

Key terms
•

The private sector of the economy consists of businesses owned and run by private
individuals and organizations that usually aim to earn a profit for their owners
...


Types of business entities by Legal Structure

Check the following table to start being familiar with the different business entities by legal
structure, there are four types (all of them commercial for-profit businesses)

Unit 1
...


sign
of

Privately
held
companies

The company and
the owners are
separate legal
entities
...


Transparency
Privacy
...


Some tax
concessions

Partnerships

Business Management 2022-2023

Finance
Funded by owners,
investors, and
internal and external
sources
...


Profits
Owners keep
all the profit

Liability
Unlimited
liability

Observations
It tends to be the first
option when starting up
a business, for testing
the market with
minimal waste and
admin
...


Owned by two or
more people (max
20 members,
depends on the
country)

A limited need for
published
accountability
...


Funded by owners,
investors,
and
internal and external
sources

Partners
responsibilities
...


At least
one of the
owners
must have
unlimited
liability

Typical option when
there are more than
one persona starting up
a business
...


Owned by
shareholders

No legal requirement
for the company to
publish detailed
financial statements
for the general
public, but to the
Commercial Register
...


Shared among
the
shareholders
...


The shareholders
are the company's
founders,
management, or a
group of private
investors
...


Typical formula for
family businesses
...


Unit 1
...

Starting up fees
depends on the
country

Ownership
Owned by
shareholders
...
Anyone
that buys shares in
the stock
exchange
...


Cooperatives

All member
shareholders are
expected to help
run the
cooperative
...

Some cooperatives
are employeeowned

Finance
Funded by owners,
investors, and
internal and external
sources
...


Profits
Shared among
the
shareholders
...


Limited
liability

In what sectors are
cooperatives normally
found?
- Agriculture
- Financial

Shares can be bought
and sold by the
general public
(without prior
approval of existing
owners)
...


Funded by owners,
investors, and
internal and external
sources

There is an elected Board
of Directors in charge of
making long-term
strategic decisions
...

The organizational
structure is rather flat
...
The vision pulls you
...
Vision statement and mission statement (AO2)
A vision statement is an inspiring or aspirational declaration of what an organization ultimately
strives to be, or wants to achieve, in the distant future
...
The vision statement is intended to act as a clear
guide for key stakeholders when planning and implementing current and future corporate
strategies
...
It is, therefore, a written
declaration that normally remains unchanged over time
...

Vision and mission statements give stakeholders of an organization a sense of purpose and
direction
...

A firm’s mission and vision statements serve to guide the organization’s strategies and strategic
objectives
...
One useful way to remember the key difference is:
Vision statement = Some day
Mission statement = Every day

In other words, a vision sets out the ultimate dream of an organization; where is strives to be
some day / one day in the distant future (if it ever gets there)
...
These do
not change on a day to day basis, so the mission statement is what the business is in existence
for, every day
...
Without a clear
vision statement, a business will not know what it is ultimately aiming for and so may lack
motivation to keep going
...

Examples of vision statements include:
●

To be earth’s most customer centric company; to build a place where people can come
to find and discover anything they might want to buy online - Amazon

●

To stay connected with friends and family, to discover what's going on in the world, and
to share and express what matters to them - Facebook

●

To create a better everyday life for the many people - IKEA

●

To be our customers’ favourite place and way to eat and drink - McDonald’s

●

A computer on every desk and in every home - Microsoft (original vision when it was
founded in 1975)

●

To empower every person and every organization on the planet to achieve more Microsoft

●

A just world without poverty - Oxfam

●

Inspire the world, create the future - Samsung

●

To be a world class corporation constantly furthering the interest of all its stakeholders
-Tata Motors

●

To accelerate the world's transition to sustainable energy - Tesla

Mission statements
A mission statement is a declaration of the purpose of an organization
...

Examples of mission statements include:

●

We work hard every day to make American Express the world's most respected service
brand - American Express

●

To refresh the world in mind, body and spirit - Coca-Cola

●

To give people the power to build community and bring the world closer together
...


●

Based on public relations (i
...
tp make the organization "look good" - what the business
aspires to and what it actually does on a regular basis may not align
...


●

Virtually impossible to really analyse or disagree with, so may be ignored or not taken
seriously by stakeholders such as employees
...

●

What similarities are there between these mission statements?

●

Why might these mission statements be considered to be 'inspirational'?

2
...
Examples include "to generate greater
shareholder value by targeting new market segments" or "to achieve sales growth of $500
million in the Asia Pacific region in 2022”
...
They give people a sense of common purpose, thus
promoting a greater sense of belonging and team spirit (cohesiveness)
...

They are often based on the Peter Drucker’s SMART objectives acronym: Specific,
Measurable, Agreed, Realistic, and Time specific
...
"
Alternatives for the 'A' and 'R' in SMART are: specific, measurable, achievable, relevant
and time-related
...


1
...
They
are specific targets with definitive timelines
...
Strategic objectives are targets that the whole organization is striving to achieve
...
It is often related to what the owners of the business want to
focus on, such as business survival, growth, or profit maximization
...
Hence, they can help to motivate employees and
raise labour productivity
...

They give people a sense of common purpose, thus promoting a greater sense of belonging
and team spirit (cohesiveness)
...

Organizations will have varying objectives
...
Organizational objectives also change due to changes in the external business
environment
...
Growth
2
...
Protecting shareholder value
4
...
Growth refers to an
increase in the size of a business and its operations
...


●

Economies of scale - these are cost-saving benefits for firms as they grow larger, such
as being able to purchase raw materials in bulk at a discounted price from their
suppliers
...


Growth can be pursued by internal and/or external methods
...
Instead, it uses its own resources to do so, such as using retained profits to invest
in production facilities in new locations
...

Methods of measuring the growth of a business include:
●

Sales revenue - the monetary value of the products that the business has sold, per time
period
...


●

Profits - the financial surplus that remains after all costs of production have been
deducted from a firm's sales revenue
...


●

Number of employees - the more people that are hired by the business, the larger it
tends to be
...


An increase in any of the above measures suggests that the business will have grown
...
Take the example below which shows the
growth in the number of DP Business Management candidates
...
By the end
of 2021, this number increased to 30,861 candidates
...
52 = 752%

Ultimately, given the continual challenges and changes in the corporate world, growth is
crucial to an organization's long-term survival
...
Profit as a business objective is important for two main
reasons:
●

It acts as a reward for the owners and investors of the business
...


Profit acts as an incentive for entrepreneurs to take risks and start up new businesses
...
Profit as an internal source of finance enable the business to grow further
without the need to over rely on external sources of finance that incur interest and debt
...
For many businesses and their owners/shareholders, profit is the most important
organizational objective
...

There could be liquidity issues for a business that does achieve profit in the long-term, which
could possibly lead to bankruptcy and business closure
...
Protecting shareholder value is about safeguarding
the interests of the owners of a limited liability company (one owned by shareholders either as a
private or publicly traded company)
...

Free market economists argue that above all else, businesses exist to protect the interests of
their owners
...
business", that is, leave businesses to get on with what they
do best - business
...
It is not, according to this school of thought, for
businesses to decide and take responsibility for the needs of society - so long as they operate
within the law and the customs of the country(ies) in which they operate
...
"
Protecting shareholder value encompasses both short- and long-term objectives, including
survival, profit, and growth in order to give owners a financial reward/return on their investments
...
Every business must earn enough revenue to keep it operating
or else it will collapse
...


●

Profit - The profit motive provides a financial return for shareholders in the form of
dividend payments
...


●

Growth - Enlarging the business can help to increase sales revenues, profits, and
customer loyalty
...


●

Market share - Firms may aim to increase their market share (their sales revenue as a
proportion of the entire market's sales revenue) in order to gain the benefits of being the

market leader
...

●

Ethical objectives and corporate social responsibility - For a business to remain
relevant, profitable, and competitive, it is not enough to only sell more goods and
services
...
Doing so can also improve the corporate image
of the company
...


ETHICAL OBJECTIVES (A02)
Ethics are, essentially, about what is deemed to be right and what is considered to be wrong,
i
...
morality from society's point of view
...
Read more about ethics as a key concept here
...
Ethical objectives are organizational goals based on moral guidelines in
order to influence or determine business decision-making
...
This means such businesses act morally
towards their various stakeholder groups, including employees, managers, customers,
shareholders, suppliers, financiers, local community (including consideration for the natural
environment), the government, and even competitors
...


As part of its corporate social reasonability (CSR) strategy, businesses may establish an
ethical code of practice - a formal documented policy setting out the way the business
believes it should behave, including how to respond to situations that challenge its integrity or
social responsibility or accusations/situations of unethical business practices
...


There are both advantages and limitations of businesses pursuing ethical objectives
...
However, there
can be substantial advantages from doing so
...
This can generate additional
long-term gains for the business such as improved sales and consumer loyalty
...


●

Higher sales revenue - Due to improvements in education and the growing use of social
media platforms, customers tend to prefer to buy from businesses that act morally and
have ethical goals
...
Hence, ethical businesses can gain from higher sales revenue in the
long-term
...
For example, customers are likely to prefer to be loyal to cosmetics

companies that do not test their products on animals but actively take actions to protect
the natural environment
...
For example, acting in the best interest of the
environment can help to reduce the costs of excessive packaging and waste
...
Higher
staff morale also helps to improve labour productivity and the level of employee
motivation
...
In particular, highly qualified and skilled employees
may not be willing to work for unethical businesses
...


●

Avoiding fines and penalties - Acting unethically can result in lawsuits (legal action taken
against the businesses) and expensive fines as well as other penalties imposed by the
courts
...


Limitations of ethical business objectives
Pursuing ethical business objectives also have their limitations and can be challenging and
expensive to accomplish
...
These costs are potentially extremely high
...
The costs of production are also
higher for ensuring employees are paid fair wages rather than exploiting workers
...
Furthermore, rival businesses might not implement ethical
objectives and could have lower costs as a result
...

●

Lower profits - The compliance costs of acting ethically, such as the adoption of green
technologies or the sourcing of fair trade raw materials, means higher production costs
for the business and hence lower profitability
...


●

Subjectivity - The notion and concept of ethics is subjective
...


●

Stakeholder conflict - Although customers might prefer to purchase from businesses
with ethical objectives and employees might prefer to work for ethical business, the
directors and owners of the business might not be so keen due to some of the
disadvantages outlined above
...
Shareholders
may be reluctant to accept lower profits, at least in the short term
...


Overall, there is an ethical dilemma for managers if higher compliance costs resulting from
ethical business activities cannot be covered by higher prices which customers are willing and
able to pay for
...


1
...
All stakeholder groups are directly
affected by the performance of the business
...


Robert Edward Freeman (b
...
Freeman's Strategic Management: A Stakeholder Approach (1984),
widely regarded as being the foundation of stakeholder theory, defines stakeholders as:
"Any group or individual who can affect or is affected by the achievement of the organization's
objectives
...
" (page 117)

The learning outcomes (or assessment objectives) for this section of the IB Business
Management syllabus are:
●
●
●

Internal stakeholders (AO2)
External stakeholders (AO2)
Conflict between stakeholders (AO2)

The interests of internal stakeholders (AO2)
Internal stakeholders are individuals or groups who are part of the organization
...

2
...

4
...
Employees
Employees are workers within an organization
...
They can have a major impact on the organization and are
directly affected by the financial health of the organization
...

The interrelated interests of employees include:
● Improved terms and conditions of employment
● Better pay and bonuses
● Equal opportunities
● Improved job satisfaction
● Improved job security, and
● Wider opportunities for career progression

2
...
Many businesses, especially large firms, tend to have three
broad levels of management:
●

Senior management refers to the team of higher-ranking managers or directors that
plan and oversee the long-term aims and strategies of the organisation
...


●

Middle management refers to the group of managers in charge of running individual
departments
...

Middle managers are accountable to the senior management team and are
responsible for their departmental staff
...
They are accountable to the middle managers and are responsible for their
team of workers
...


●

Aiming to improve customer relations in order to maintain or improve the organization’s
competitiveness
...


3
...
In a large company, there is likely to be directors responsible for each key functional
area of an organization: marketing, human resource management, finance and accounts, plus
operations management
...


●

Non-executive directors do not work at the organization but are consultants used
for their particular expertise
...


Directors must also keep company records and report any changes to the authorities
...
Most
PSCs are likely to be people who hold:
1
...
more than 25% of voting rights in the company
3
...


●

Directors also need to be aware that the information of all PSCs is available to the
general public, apart from their home address and date of birth
...


●

They are concerned with the organization’s return on investment for their shareholders
...


4
...
They own a part of the business
...


●

They also have voting rights (based on the number of shares they own) on how the
company should be run
...


Top tip!
Students often confuse the terms ‘shareholders’ with ‘stakeholders’
...


The interests of external stakeholders (AO2)
External stakeholders are people or organizations not part of the business but have a direct
interest in its decisions, actions and performance
...
Customers
2
...
Financiers
4
...
Pressure groups
6
...
The government, and
8
...
Customers
Customers are the firm’s clients who pay for the goods and/or services of the business
...


●

They demand products that are of an acceptable quality for the price they pay
...


●

Customer service is paramount, such as the provision of after-sales support
...


2
...
The
interests of competitors (or rivals) include:
●

Competitors are interested in the organization’s operations, such as its product range
and pricing strategies
...


●

Competitors also have a vested interest in the behaviour and operations of the business
in question as this can affect the reputation and sales of the industry as a whole
...
For
example, Cathay Pacific Airways (CPA) is partially owned by Air China (which holds
30% of the shares in Hong Kong's flagship carrier) and Qatar Airways (which owns
9
...
Porsche owns more than 31% of the shares in Audi (which
itself is part of the Volkswagen Group)
...


5

3
...
The interests of financiers as an
external stakeholder group include the following:
●

They are interested in the financial health of an organization in order to judge the ability
of the business to repay its debts and to generate profits
...


●

They also demand a positive yield (competitive financial return) on their investment
funds
...
Labour unions (trade unions)
A labour union is an organization that aims to protect the interests of its worker members
...
A worker becomes a member of a trade union by paying a subscription fee, usually on
a yearly basis
...

Labour unions originated in the 19th century in the UK and the USA
...
Labour unions are organizations recognized as legal
representatives of workers, thereby serve to act in the best interest of their members
...

There is often conflict between the interests of employees and employers
...
Pressure groups
Pressure groups are organizations consisting of like-minded individuals who come together for a
common cause or concern
...
Pressure groups are set up as legal
business entities to pursue these specialist interests
...


Pressure groups strive to influence government and public opinion in order to create the desired
social change, such as protection of the environment, fairer terms of international trade or the
upholding of human rights
...
Action from pressure groups help to hold businesses accountable
for the impact of their operations and activities on local communities and the natural
environment
...
Suppliers
Suppliers are the organizations that provide the goods and support services for other
organizations
...

Foxconn is Apple’s supplier (manufacturer) of iPhones
...


●

They demand prompt payment from their business clients for the orders placed and the
deliveries made
...


●

Having a good professional relationship with suppliers means the business is more likely
to receive timely deliveries and better credit terms
...
The government
The government is an external stakeholder of all organizations operating within the country
...
This
is enforced by government policies, such as:
●

Consumer protection legislation

●

Employment laws

●

Environmental protection guidelines
7

●

Equal opportunities legislation

●

Health and safety standards and regulations

●

Taxation policies and laws
...
The local community
The local community refers to the general public and local businesses (not necessarily
competitors though) that have a direct interest in the activities of the business in question
...


●

They expect the business to create jobs in the local area
...


Conflict between stakeholders (AO2)
Different stakeholder groups have different interests, which can conflict
...
If this is not
managed, it often leads to protracted disagreements, disputes and arguments in the workplace
...


●

Similarly, senior managers and directors may demand large bonuses for their work, but
this may also reduce the profits available to distribute to the company’s shareholders
...


●

Customers may want lower prices, but this reduces the firm’s profit margin so can upset
the company’s shareholders
...

8

●

The local community wants businesses to operate in a socially responsible way and
create jobs in the local area, although this can create congestion and noise and air
pollution in the local area, thereby upsetting other members of the community
...

Nevertheless, there can be possible areas of mutual benefits between stakeholders’ interests
...
Business growth can also generate more tax revenues for
the government
...


●

Customers want value for money, with competitive prices and good quality
products
...


●

Improved financial rewards for all employees will cost more, but can result in a more
motivated, loyal and productive workforce
...


In reality, it is likely that stakeholder conflict is likely to exist at least to some extent (especially
for large organizations) due to the varying interests of the different stakeholder groups
...


9

1
...
Define the term economies of scale
- Economies of scale mean that when a business increases the size of its operations it
will then benefit from lower average costs (cost per unit) as they will have to produce
more quantity
...
Explain two competitive advantages that businesses can benefit from pursuing
growth objectives
...
This is because, usually larger
businesses are rewarded with higher profits and gain better reputation
...
The more sources of finance
a firm has, the more opportunities it will have in order grow bigger
...
This is key in order
to attract and retain better-skilled workers which will then increase the firm’s
productivity and profitability in the long-term
...
Which means that they will be able to offer higher wages and salaries
for the employees and as a result they may feel that their job is secured
...
5 Growth and evolution
This section of the IB Business Management syllabus examines the growth and evolution of
business organizations
...

An example of business growth is Starbucks, which opened as a single coffee store in Seattle, USA
in 1971
...
More than half
of their outlets are located outside of the United States
...
For example,
although Samsung is best known for its smartphones and consumer electronic products, the
multinational conglomerate is also involved with weapons manufacturing, life insurance and theme
park management
...

The learning outcomes (or assessment objectives) for this section of the syllabus are:
● Internal and external economies and diseconomies of scale (AO2)
●

The difference between internal and external growth (AO2)

●

External growth methods (AO3):
1
...
Takeovers
3
...
Strategic alliances
5
...
Hence, these are often described as the cost-saving benefits
enjoyed by a firm as it grows
...

This causes the firm’s average costs of production to rise due to problems such as
miscommunication, misunderstandings, and poor (inefficient) management of resources
...
e
...
At this level of output,
profit is maximised
...


Top tip!
It is incorrect to state that economies of scale means that as a firm increases its output, its costs will
fall
...
When referring to
economies of scale, it is vital to specify average costs
...

However, it is cheaper for Coca-Cola to make each can on a larger scale
...

2

Economies and diseconomies of scale can be further categorised as internal or external economies
and diseconomies
...


Internal economies of scale (AO2)
Internal economies of scale occur for a particular organization (rather than the industry in which it
operates) as it grows
...
For example, the costs of hiring an advertising agency such as WPP or Omnicom Group to
design, arrange, and execute advertising campaigns for a firm's existing and new products, can be
spread over a higher level of sales for a large firm
...
With lower average costs, the firm can reduce its prices to gain competitive advantages
and attract more customers
...


Type

Explanation

Financial economies of scale

Banks and other lenders charge lower interest to larger
businesses for overdrafts, loans and mortgages
because they represent lower risk
...


Managerial economies of scale

Larger businesses can afford to hire specialist
functional managers, thus improving the organization’s
efficiency and productivity
...


Purchasing economies of scale

Larger firms can gain huge cost savings by buying vast
quantities of stocks (raw materials, components,
semi-finished goods and finished goods)
...
Hence,
inefficiencies will harm smaller firms to a greater extent
...


External economies of scale (AO2)
External economies of scale occur when a firm’s average cost of production falls as the industry as
a whole (rather than the firm itself) grows
...

For example, the location can reduce unit costs for all firms in the area
...
Examples of locations with specialist labour include:
●

The City, London - for bankers and financiers

●

Silicon Valley, California (USA) - for high-tech software companies

●

Bengaluru, Karnataka (India) - for IT and software developers

●

Hollywood, Los Angeles - for movie actors
...

Other examples of external economies include:
●

Specialist research and development facilities in the local area

●

The relocation of suppliers and other support services to the area

●

New production processes and techniques that improve the efficiency of all firms in the
industry
...
This results in higher average costs of production
...
Most of these problems arise because the larger
business makes communication and coordination more difficult
...


4

External diseconomies of scale (AO2)
External diseconomies of scale occur when issues outside of the organization raises the average
costs of production for all businesses in the industry
...


Key Terms
●

Bureaucracy refers to excessive corporate policies, procedures, and paperwork that result
in inefficiencies and higher average costs of production
...


●

Economies of scale are the benefits of lower average costs (cost per unit) by operating on
a larger scale, i
...
, the cost-saving benefits enjoyed by a business as it grows
...


●

External economies of scale occur when a firm’s average cost of production falls as the
industry grows, i
...
, all firms in the industry benefit
...


●

Internal diseconomies of scale are the higher unit costs that occur due to problems within
the organization, such as miscommunications and bureaucracy
...
These cost savings are generated within the business by operating on
a larger scale
...
e
...


THE DIFFERENCE BETWEEN INTERNAL AND EXTERNAL GROWTH (AO2)
Organizations that pursue growth can choose from two broad methods: internal and/or external
growth
...
Instead, it uses its own resources to do so, such as

5

using retained profits to invest in production facilities in new locations
...

Organic growth, or natural growth, comes about from increased sales revenues and higher profits,
with retained profits being reinvested in the organization
...

Business organizations pursue internal growth for several reasons, including:
●

To foster brand awareness and brand loyalty

●

To increase market share

●

To maintain its corporate culture

●

To maintain ownership and control of the organization

●

To avoid the comparatively high expenses and risks associated with external growth
...
In some cases, organic growth can even lead to
diseconomies of scale caused by inefficiency and coordination problems of being too large
...
For example, McDonald’s uses franchisees
who buy McDonald’s restaurants and operate using the franchisee’s brands and products
...
Mergers and
acquisitions are other examples
...


External growth is usually faster than internal growth, but also more expensive to execute (especially
in the cases of mergers and acquisitions)
...
Gaining trust from partner companies can be another
hurdle for achieving inorganic growth
...

Key Terms

6

●

External growth (or inorganic growth) is the method of expansion that involves a business
merging with or taking over another organization
...


EXTERNAL GROWTH METHODS (AO3)
External growth (or inorganic growth) refers to the expansion and evolution of a business by using
third party resources and organizations rather than relying on internal sources and activities
...


Mergers and acquisitions (M&As)(AO3)
An acquisition involves one company buying a controlling interest (majority stake) in another
company with the agreement of the directors and shareholders of the target company
...
For example, in 2017 e-commerce giant
Amazon bought Whole Foods, the American organic-food grocer for $13
...
In September
2022, Adobe Systems Inc
...
, a
collaborative design software maker founded in 2016
...
The original business entities in the
merger agreement cease to operate in their former legal structure
...
e
...
An example was the acquisition
of The Body Shop by L’Oreal (the world’s largest cosmetics and beauty firm) back in 2006
...
Volkswagen buying Škoda (1994), Bentley (1998), Lamborghini (1998), Bugatti (1998),
and Porsche (2012)
2
...
Tata Motors purchasing Jaguar Land Rover from Ford (2008)
4
...


7

5
...
Facebook buying Instagram (2012) and WhatsApp (2014)
7
...


Top tip!
It is not necessary for a firm to acquire the entirety of another company
...

When an acquisition occurs between two or more companies operating in different stages of the
production process, this is called a vertical M&A
...
A typical example is
a manufacturer buying a retailer, such as a car manufacturer buying car showrooms (retailers that
sell cars directly to private customers)
...
An example is IKEA buying Baltic Forests in Romania back
in November 2015 so as to control its supply of timber
...
This type of integration is known as a conglomerate M&A (or diversification, under the
BMT 2 - Ansoff matrix model)
...
Another example is the Virgin Group, a global conglomerate with over 400 strategic
business units from Virgin Atlantic or Virgin Wines
...


Takeovers (AO3)
Like mergers, a takeover involves a company purchasing a controlling interest (majority stake) in
another company
...

Mergers and acquisitions (M&As) share similar advantages and disadvantages as takeovers
...


Advantages of M&As and takeovers
●

These are relatively quick growth methods, especially if the organization wishes to enter
new markets (with new/existing products in new/existing markets)
...


8

●

Growth through M&A enables the newly formed company to benefit from greater economies
of scale
...


●

M&As enable the larger organization to spread its fixed costs and risks, and to share its
resources and expertise
...


●

The cost savings and synergies created by a merger or acquisition enables the organization
to earn greater profits, gain market power, and increase its market share
...
This
helps to enhance the company's competitiveness
...
For example, Coca-Cola's acquisition of Costa Coffee in
2018 allowed the soft drinks company to diversify into the mainstream coffee retail market
during a time when there has been growing perception that its signature soft drinks are
unhealthy
...
This is usually because the target company is
experiencing liquidity problems
...
For a company to buy out a rival firm is often
unaffordable
...
For example, in 2014, Facebook bought WhatsApp for a staggering $19
...


●

There is potential loss of management control of the company, especially in the case of a
hostile takeover of the business
...
For
instance, there is no need to have two separate marketing or finance directors from the
integrated companies
...
There is likely to be resistance to change from
the workforce and trade union members, especially if an acquisition results in mass-scale
job losses due to the purchasing company’s desire to cut costs
...
e
...
This can happen due to several reasons, such as a lack of effective
cost control, culture clashes, resistance to change, and a loss of focus on core business
operations (in the case of vertical M&As or a diversification strategy)
...


●

M&As do not always work, especially in the case of organizational culture clashes
...
It is a high-risk growth strategy, especially if
the company pursues a diversification growth strategy
...


●

Unlike strategic alliances and joint ventures as methods of external growth, M&As cannot be
easily reversed if the new business venture goes wrong
...
Hence, it
tends to be a riskier external growth strategy than strategic alliances and joint ventures
...
The newly created business is
funded by its parent companies
...


At the end of the pre-determined time period for the JV, there are three possible options:
●
●
●

The joint venture is dissolved (discontinued)
One of the parent companies buys out the JV
The JV project is extended for a period of time
...


●

The parent companies combine their expertise, technologies and financial resources, to
create the new business, thereby increasing its chances of success
...


10

●

Joint ventures are generally cheaper than M&As, which involve high legal and administrative
costs
...


●

The parent companies can enjoy the benefits of growth without losing their individual
corporate identities
...


●

For international joint ventures, the partner company can provide local knowledge to cope
with any problems related to cultural differences and business etiquette in overseas
markets
...
This might be due to different organizational
cultures and management styles
...


●

In the case of poor performance, a joint venture is more difficult to terminate than a strategic
alliance
...


●

Many joint ventures are short-lived as they do not succeed or are purchased outright by one
of the parent companies
...


Strategic Alliances (AO3)
Strategic alliances are created when two or more organizations join together to benefit from
external growth without having to set up a new separate entity or to make major changes to their
own business models
...


11

For a SA to work, information sharing and genuine willingness to support other companies is vital
...
Strategic alliances are built on trust and a true desire to grow
together
...
This created synergies, such as the sharing of: industry expertise,
research and development, financial resources, distribution channels, and the spreading of
risks
...


●

Businesses in a SA retain their individual corporate identities, without the expenses of
establishing a new company with its own legal status (as in the case of joint ventures)
...


●

As with a JV, a strategic alliance fosters cooperation rather than competition
...


●

There is greater flexibility with a strategic alliance than a joint venture because membership
(of the alliance) can change without having to terminate the coalition
...


Disadvantages of strategic alliances
●

Unlike a JV, there are few barriers to entry and exit in a strategic alliance
...

This can be destabilising for the business venture
...
This can limit the options for an
organization’s external growth strategies
...


●

As with all cases of working with and relying on third parties, there is the potential of conflict
and misunderstandings
...


12

Franchising (AO3)
Franchising is a growth method that involves two parties, with the franchisor giving the licensing
rights to a franchisee to sell goods and services using the franchisor’s branded or trademarked
products
...
In addition, the franchisee must also pay
royalties to the franchisor, based as a pre-determined percentage of the franchisee’s sales revenues
...

Franchising is hugely popular in the fast food, hotels and restaurants industries
...

As with all forms of businesses, establishing a franchisee can be very expensive
...
For example, to purchase a
franchised McDonald's restaurant in the UK means having at least £100,000 ($130,000) in
unencumbered funds (sources of finance that are free of debt or other financial liability)
...
This screening process can
take over 12 months, before a McDonald's franchise agreement is approved
...
It is advantageous for
the franchisor to use partner firms to purchase, own and run additional franchised outlets
...


●

Franchisees fund the growth of the franchise as they pay an upfront fee to purchase the
franchise license
...


●

The franchisor benefits from selling the franchise agreement to someone who has been
vetted and is more motivated to succeed than salaried managers employed to run a
particular store, unit or outlet
...


Advantages of franchising for the franchisee
●

The success rate of franchising is very high in most industries
...


●

In many cases, the franchisee benefits from the brand recognition and brand loyalty
established by the franchisor
...
ATL Activity 3 below (McDonald's) shows that franchisees can become owners of
some of the world’s most iconic brands / businesses
...
This improves the chances of
success for the franchisees
...


●

They gain from the purchasing economies of scale of the franchisor, rather than facing much
higher costs (of inventory, for example) if operating as a sole trader of a much smaller,
independent organization
...
Breaking the franchise agreement with such franchisees can be both
time consuming and costly
...
This means the franchisor may need to closely monitor the
operations of their franchisees; after all, their reputation and overall business model is at
stake
...

This would not be the case if the franchise chose to grow organically
...


Disadvantages of franchising for the franchisee
●

Buying a franchise is usually very expensive
...
Even after paying for the start-up
costs and running costs of the business, the franchisee must also pay a percentage of its
sales revenues to the franchisor as royalty payments
...


●

The franchisee is constrained by the standards and practices set by the franchisor
...


●

Like the franchisor, each individual franchisee is at risk of a damaged reputation if another
franchisee of the business makes a serious blunder
...


●

Brand acquisition is the process of taking over another firm’s brands rather than the entire
company
...


●

A joint venture (JV) is an external growth method that involves two or more organizations
agreeing to create a new business entity, usually for a finite period of time
...
By contrast, takeovers are almost always hostile
in nature
...


●

A takeover (or hostile takeover) involves one company buying a controlling interest
(majority stake) in another company against the wishes of the target company
...
For example, a multinational
clothes retailer, such as ZARA, will want to expand its operations in retail outlets and shopping malls
across the globe
...

Business organizations vary in size, and this can be measured in several different ways:
●

Sale turnover

●

Market share

●

Gross profit

●

Profit after interest and tax

●

Number of customers

●

Number of employees

●

Number of retail outlets or stores

●

Market capitalisation (value of the business)
...

However, in general, a small organization is one that has relatively:
●

low sales turnover

●

low gross profit figure

●

few employees

●

minimal market share

●

very few retail stores, if not only one

●

low market value

Different stakeholders will be interested in the size of an organization for different reasons
...
By
contrast, smaller and less well-known businesses may be less stable and lack the financial
and human resources to provide after-sale services
...
Larger businesses will also tend to provide
employees with greater opportunities for team working and career progression
...
Business size is an objective way to
measure their performance in meeting the growth objectives of the organization
...


●

The government wants to measure the size of businesses in order to provide financial and
professional assistance to small start-up businesses and to ensure all businesses conform
to tax laws of the country
...
They may also want to
consider the potential environmental impacts of larger organizations operating in their
communities
...
McDonald's, for example, is the
world's largest fast-food restaurant as measured by sales revenue and strives to grow in order to
maintain or increase its market share, sales revenues, profits, and shareholder value
...
This reduces their unit costs of production, so the
large firm is in a position to charge lower prices to their customers, yet be able to offer more
choice for their customers
...
For example, the Volkswagen group gains economies of scale in the production
of components for the various divisions it owns brands, including Audi, Bentley, Bugatti,
Lamborghini, and Porsche
...
Having more sources of finance can enable these organizations to
become even larger as they pursue their growth objectives
...
This will help to attract and retain better skilled workers,
thereby improving the larger firm’s productivity and profitability in the long-term
...
The power of
branding suggests that customers trust well-established brand names and are prepared to
pay a premium price for them
...


●

Spreading risks - Large organizations tend to be less of a risk for the owners, investors and
creditors (such as banks and suppliers)
...
For example, small organizations are
more at risk of failing during a recession
...
e
...
Not all organizations want to grow or evolve
...
Many businesses actually prefer to serve a smaller number
of familiar or loyal customers
...


17

Despite the benefits of economies of scale for larger firms, there are many advantages of
operating on a smaller scale too
...
By contrast, the rivals of a large company have
access to their balance sheet and profit and loss account
...
Becoming a much larger
organization often involves selling shares on a stock exchange, and whilst this can raise a
significant amount of finance, it dilutes ownership and control of the company
...


●

Autonomy - The owners of small organizations enjoy autonomy (independence in decision
making)
...
Unlike large companies, the owners of small organizations do
not face pressures from a board of directors and shareholders
...
Hence, they generally have a closer relationship with their clients, which
can provide smaller firms with competitive advantages over their larger rivals
...
They also
tend to have lower running costs
...
This also
includes wanting to avoid the increased workload associated with business growth
...
Small firms that specialise in niche markets, such
as sporting equipment for paddle boarding or fencing, can be highly profitable and earn
extremely high profit margins
...


Developments in Internet technologies has enabled small businesses to access resources and
markets previously only available for large organizations
...


18

1
...
A multinational company (MNC) is any business
organization that has operations overseas, irrespective of whether it produces/sells goods and/or
provides services, i
...
, MNCs operate in two or more countries
...
This means MNCs spend on foreign direct investment (FDI) in overseas markets
...

Examples of large multinational companies with operations in many parts of the world include
Adidas, Amazon, Apple, BMW, Coca-Cola, HSBC, McDonald's, Royal Dutch Shell, Samsung, Saudi
Aramco, Tesla, Toyota, and Walmart
...
For example,
Saudi Aramco, the world's largest oil company, earns annual sales revenues that exceed the GDP of
Italy, Brazil, Canada, and Russia
...


The business operations of multinational corporations (MNCs) can have both positive and negative
impacts on their host countries
...
This has huge economic benefits, such as higher incomes, consumption,
savings and tax revenues
...


●

Support for the workforce – In addition to job creation, MNCs create other opportunities
for domestic workers
...

Local workers may also benefit from training and development opportunities
...
For example, they are likely to purchase stocks from domestic suppliers
of raw materials, semi-finished goods and finished goods
...
In addition, MNCs are also likely to use the services
of local firms, such as insurance and distribution
...
Domestic customers no longer have to rely only on local suppliers and
must compete with the prices and quality of the products offered by MNCs
...
This covers aspects of the
prices, quality and customer care of local firms
...
The additional finance can be spent to further
improve the economy, such as better infrastructure to further entice foreign direct
investment
...
A fall in their market share and
profit can eventually lead to bankruptcies and some job losses in the economy
...


●

Exploitative business practices – MNCs have been known to be socially irresponsible,
especially when operating in less economically developed countries where rules and
regulations are less stringent
...
For example, Coca-Cola’s bottlers
have been accused of causing water shortages in certain parts of India and South America
...
MNCs and globalization have been blamed for causing a cultural shift in how
people live, especially for the younger generation
...


●

A multinational company (MNC) is any business organization that has operations
overseas, i
...
it operates in two or more countries

---