Unit 1 Definitions and Models

8/13/2019 Unit 1 Definitions and Models

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Unit 1: Business Organization and Environment

Unit 1.1: Nature of Business Activity:

Added Value: is the difference between a products price and the total cost of the inputs thatwent into making it. It is the extra worth created in the production process.

Business: are organizations involved in the production of goods and/or provision services. Capital: refers to all non-natural resources used in the production process. An example is

money, but the term also includes resources such as machinery, tools, equipment, and factories.

Division of Labour: refers to the specialisation of workers in the provision of goods and/orservices by breaking a job down into particular roles or tasks that are repeated by the same

workers.

Entrepreneurs: are people who manage, organize, and plan the other three factors ofproduction. They are risk takers who exploit business opportunities in return for profits.

Factors of Production: are the inputs (or resources) necessary for the production process: land,labour, capital and enterprise.

Functional Areas: is the term used to refer to the different sections of a business. These areusually named as the marketing, production, finance and human resources departments.

Industrialisation: is the process experienced by a country that moves away from primaryproduction towards manufacturing as its principal sector for national output and employment.

Labour: refers to the physical and mental human effort used in the production process. Land: means natural resources that can be found on the planet. This includes renewable and

non-renewable natural resources such as water, fish, wood and physical land itself.

Opportunity Cost: refers to the cost measured in terms of the best alternative that is foregonewhen a choice is made.

Primary Sector: refers to businesses involved in the cultivation or extraction of naturalresources, such as farming, mining, quarrying, fishing, oil exploration and forestry.

Secondary Sector: is the section of the economy where business activity is concerned with theconstruction and manufacturing of products.

Structural Change: refers to a shift in the relative share of national output and employment thatis attributed to each business sector.

Tertiary Sector: refers to the section of the economy where business activity is concerned withthe provision of services to customers.

Unit 1.2: Types of Organizations:

Articles of Association: is the document that sets out the internal organization and rules of alimited company. Detail might include the powers of each director and voting rules.

Certificate of Incorporation: is the name of the document issued to a limited company to showthat it has been legally formed and is therefore a separate legal entity from its owners.

Charities: are not-for-profit organizations established to support good causes, from societyspoint of view.


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Company: refers to a business that is owned by shareholders. It has been issued a certificate ofincorporation, giving it a separate legal identity from its owners.

Deed of Partnership: is the legal contract signed by the owners of a partnership. The formaldocument will specify the name and responsibilities of each partner and their share of any

profits or losses.

Incorporation: means that there is a legal difference of a company and the business itself. Thisensures that the owners are protected by limited liability.

Limited Liability: is a restriction on the amount of money that owners can lose if the businessgoes into bankruptcy, i.e. they cannot lose more than they invested in the business.

Memorandum of Association: is the legal document that specifies the basic information of acompany, such as the name and address of the firm, its objectives and the share capital.

Non-governmental Organization (NGO): are private sector organizations that operate for abenefit of others rather than aiming to make a profit.

Partnerships: are a form of private sector business owned by 2-20 people (known as partners).They share the responsibilities and burdens of running and owning the business.

Private Limited Company: is a business owned by shareholders with limited liability but whoseshares cannot be bought by or sold to the general public.

Private Sector: is the part of the economy under the control of private individuals andbusinesses, rather than the government. Examples include sole traders, partnerships, and

limited companies.

Public Limited Company: is an incorporated business organization that allows the general publicto buy and sell shares in the company via a stock exchange.

Public Corporations (or state-owned enterprises): are organizations wholly owned by thegovernment but run as commercial establishments, e.g. the BBC (British Broadcasting

Corporation) Public-Private Enterprises: occur when the government creates commercial partnerships with

the private sector to provide certain goods or services.

Public Sector: is the part of the economy controlled by the government. Examples include statehealth and education services, the emergency services and national defence.

Stock Exchange: is the market place for trading stocks and shares of public limited companies.Examples include the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE)

Silent Partner (or sleeping partner): refers to an investor of a partnership who is not directlyinvolved in the daily running of the business.

Sole Trader: refers to a self-employed person. He or she runs the business on their own and hassole responsibility for its success (profits) or failure (unlimited liability).

Unlimited Liability: is a feature of sole trades and ordinary partners who are legally liable for allmonies owned to their creditors, even if this means that they have to sell their personal

possession to pay for this.


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Unit 1.3: Organizational Objectives:

Aims: are the long term goals of a business, often expressed in the firms mission statement.They are a general statement of a firms purpose or intentions and tend to be qualitative in

nature.

Corporate Social Responsibility (CSR): is the consideration of ethical and environmental issuesrelating to business activity. A business that adopts CSR acts morally towards its stakeholders.

Ethics: are the moral values that determine and affect business behaviour and decision-making,such as taking actions that are in the best interest of the natural environment.

Mission Statement: refers to the declaration of an organizations overall purpose. It forms thefoundation for setting the objectives of a business.

Objectives: are the relatively short-term targets of an organization. They tend to be expressed asSMART objectives.

SMART Objectives: are objectives that are specific, measurable, achievable, realistic, and timed. Social Audit: refers to an independent assessment of how a firms actions affect society such as

a review of the firms environmental impact, its contributions to society and staff welfare.

Social Responsibility: refers to a business being conscientiously devoted to the wellbeing ofsociety as a whole. Such organizations behave ethically and consider the needs of all their

stakeholders.

Strategy: refers to the various methods that business can use in an attempt to achieve theirmission or vision. Strategies then form the long-term plans for the organization.

Tactics: refer to the short-term methods that firms can use to achieve their objectives. Vision Statement: is an organizations long term aspirations, i.e. where it ultimately wants to be.

Unit 1.4: Stakeholders:

Conflict: refers to situations where people have disagreements on certain matter due todifferences in their opinions. It can lead to arguments and tension between various stakeholder

groups.

Directors: are the senior members who have been elected by shareholders of a company to runthe business on their behalf.

External Stakeholders: of a business are not part of the organization but have a direct interest inits actions, e.g. customers, suppliers, financiers, and the government.

Industry Trade Groups (or trade associations): are organizations that specialise in promoting theaims of a particular industry through education and public relations campaigns.

Internal Stakeholders: of a business are members of the organization, i.e. the employees,shareholders, managers and directors of the business.

Managers: are the people responsible for the daily running of a business or a department withinthe business. They are accountable to the directors and responsible for their staff teams.

Pressure Groups: consist of individuals with a common concern who seek to place demands onorganizations to act in a particular way or to influence a change in their behaviour.

Shareholder Concept: refers to the notion that shareholders are the key stakeholder group asany business ultimately belongs to its stakeholders.


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Special Interest Group (SIG): refers to the organization of people who have a common interest(such as environmental protection) and collectively act to achieve that interest.

Stakeholder Mapping: is an analytical tool developed by Johnson and Scholes which placesdifferent stakeholder groups into quadrants depending on their relative levels of power and

interest in an organization.

Stakeholders: are individuals or organizations that have a direct interest (known as a stake) inthe activities and performance of a business, e.g. shareholders, employees, customers, and

suppliers.

Stockholders (or shareholders): are the owners of a company. Shares in a company can be heldby individuals and other organizations.

Unit 1.5: External Environment:

Balance of Payments: is an annual record of a countrys export earnings and its importexpenditure. A surplus exists if the value of exports exceeds that of imports (vice versa for a

deficit)

Deregulation: refers to the removal of government and regulations which constrain an industry.It should therefore enhance efficiency and encourage more competition within the industry.

Direct Tax: is a levy on the income of individuals or businesses, such as personal income tax andcorporation tax.

Economic Growth: measures changes in the Gross Domestic Product of a country over time.Growth is said to occur if there is an increase in GDP for two consecutive quarters.

Ethics: are the moral values and judgements (of what is right) that society believes organizationsshould consider in their decision making.

Exchange rate: refers to the value of a countrys currency in terms of another currency. External Shocks (or exogenous shocks): are unforeseeable and unexpected changes in the

external business environment that tend to affect all businesses in the economy.

Fiscal Policy: refers to the government policies that deal with taxation and governmentexpenditure in order to affect the level of economic activity.

Gross Domestic Product: is the total value of a nations annual output. It is used as an indicator ifthe level of economic activity in a country.

Indirect Tax: is a levy on the purchase of goods and services, e.g. sales taxes and excise duties. Inflation: occurs when the general price level in an economy continuously rises. It is measured

by changes in the cost of a representative basket of products purchased by the average

household.

Interest rate: is a measure of the price of money in terms of the amount charged for borrowedfunds or how much is offered on money that is saved.

Monetary Policy: refers to the government policies concerned with changing interest rates tocontrol the money supply and the exchange rate.

PEST Analysis: is a decision making framework used to analyse the opportunities and threats ofthe political, economic social and technological environments on business activity.


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Protectionism: refers to any measure taken by a government to safeguard its businesses fromforeign competitors. This presents a threat for businesses trying to operate in overseas markets.

Tariffs: are a method of protectionism whereby the domestic government taxes foreign imports. Trade Cycle (or business cycle): refers to the fluctuation in the level of economic activity over

time. Economies tend to move through the cycle of booms, recessions, slumps, recovery and

growth.

Unemployment refers to the number of people in the workforce who are willing and able towork but cannot find employment.

Unit 1.6: Organizational Planning Tools:

Business Plan: is a report detailing how a business sets out to achieve its aims and objectives. Itrequires managers to plan their marketing, financial and human resources.

Decision Making: is the process of choosing between alternative options available. Decision-making framework: refers to a systematic process of dealing with business problems,

concerns or issues in order to make the best decision.

Decision Trees: are a type of quantitative decision-making tool that calculate the probablevalues of different options, helping to minimise the risks in decision making.

Executive Summary: is a written statement placed at the beginning of a business plan andsummarises the information given in the main business plan, including the conclusions.

Fishbone Diagram (or Cause-and-Effect model) is a decision making framework based onidentifying the root causes of a problem or issue.

Intuitive decision making: refers to decision making that is based on gut feelings, hunch and/prinstinct rather than relying on quantitative or scientific techniques.

Planning Tools: are the various methods that businesses use to aid their decision making suchas: SWOT analysis and decision trees.

Scientific Decision Making: refers to the decision making that is based on a systematic andlogical framework to remove subjectively and emotions from decision making.

Strategy: refers to any medium-to long-term plan of how a business intends to achieve its goals. SWOT Analysis: is a popular analytical tool used to assess the internal strengths and weaknesses

and the external opportunities and threats of an organization or a decision.

Unit 1.7: Growth and Evolution:

Ansoffs Matrix: is an analytical tool to devise product and market growth strategies, dependingon whether firms want to market new or existing products in either new or existing markets.

Backward Vertical Integration: takes place when a business amalgamates with a firm operatingin an earlier stage of production, e.g. a car manufacturer taking over a supplier of tyres or other

components.

Barriers to entry: are the obstacles that make it difficult for a new firm to enter a market.Examples include high set-up costs and the market power of established firms in the industry.

Conglomerates: are businesses that provide a diversified range of products and operate in anarray of different industries.


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Cost Leadership: is one of Porters Generic strategies that concentrate on gaining a competitiveadvantage by reducing costs.

Differentiation: occurs when a firm makes its products distinct from those of its competitors,e.g. by packaging or branding to make the product seem unique.

Diseconomies of Scale: are the cost disadvantages of growth. Unit costs are likely to eventuallyrise as a firm grows, e.g. lack of control, coordination and communication.

Diversification: is a high risk growth strategy that involves a business selling new products innew markets, i.e. spreading risks over a diverse variety of products and markets.

Economies of Scale: refer to lower average costs of production as a firm operates on a largerscale, e.g. easier and cheaper access to finance.

Economies of Scope: are cost-saving benefits of production a large range of related product bysharing production facilities and resources.

External Diseconomies of Scale: refer to an increase in the average costs of production as a firmgrows due to factors beyond its control, mainly because there are too many firms in the

industry.

External Growth (or inorganic growth): occurs when a business grows by collaborating with,buying up or merging with another firm.

Focus: occurs when a firm targets a niche or single segment of a market, either by focusing onbeing a low-cost producer or by differentiation.

Forward Vertical Integration: is a growth strategy that occurs with the acquisition or merger of afirm operating at a later stage in the chain of production, e.g. a book publisher merges with a

book retailer.

Franchise: refers to an agreement between a franchisor selling its rights to other businesses(franchisees) to allow them to sell products under its name in return for a fee and royalty

payments. Horizontal Integration: is an external growth strategy that occurs when a business acquires or

merges with a firm operating in the same stage of the chain of production.

Joint Venture: refers to a growth strategy that combines the contributions and responsibilities oftwo different organizations to a shared project by forming a separate legal enterprise.

Management buy-out (MBO): is a defensive growth strategy that involves the managementteam of the target business buying shares in the company to become the owners.

Market Development: is a medium-risk growth strategy that involves selling existing products innew markets, i.e. an established product is sold in a new market.

Market Penetration: is a low-risk growth strategy that involves businesses choosing to focus onselling existing products in existing markets.

Merger: is a form of growth whereby two (or more) firms agree to form a new organization,thereby losing their original identities.

Organic Growth: occurs when a business grows internally, using its own resources to increasethe scale of it operations and sales revenue.

Porters Generic Strategies: outline the ways that any business can gain a competitiveadvantage, i.e. cost leadership, focus, or differentiation.


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Product Development: is a medium risk growth strategy that involves selling new products inexisting markets.

Takeover (or acquisition): is a form of external growth whereby one firm buys up another bypurchasing a controlling interest in that company.

Unit 1.8: Change and the Management of Change:

Change Management: is the management process of planning, forecasting, controlling andsteering change within an organization.

Change Masters: are skills managers in the art of change management. They are able to dealwith change by adapting and reacting quickly to different scenarios.

Driving Forces: are the forces (or reasons) acting for change, i.e. benefits to the organizationfollowing the implementation of change, such as reduced costs or improved productivity.

Force Field Analysis: is Kurt Lewins model of change management that deals with forces for andagainst change.

Resistance to change: refers to the pressures from staff against change being introduced, i.e. areluctance to change, due to factors such as unfamiliarity or a lack of understanding.

Restraining Forces: are the causes of resistance to change, i.e. the forces that act against anyproposal for change.

Stakeholder mapping: is a management tool for dealing with change and conflict by identifyingthe level of influence of various stakeholder groups and their likely reaction to change.

Unit 1.9: Globalization:

Closer Economic Partnership Arrangement (CEPA): is a WTO-compliant free trade agreementbetween 2 or more countries.

Common Market: refers to a customs union, such as the European Union, that allows the freemovement of factors inputs (land, labour, capital and enterprise) between member countries.

Customs Union: refers to an affiliation of countries that trade freely with each other by imposethe same trade barriers to non-member countries.

Free Trade: occurs when countries trade without any international trade barriers, such as tariffs,quotas, and bureaucratic procedures.

Globalization: is the integration and interdependence of economic, social, technical, and culturalissues of the worlds economies.

Multinational Corporations (MNC): are companies that operate production or service facilitiesoutside their home country.

Regional Trading Bloc: refers to a group of countries that agree to freer international trade witheach other by removing trade barriers.

Protectionism (or protectionist measures): refers to government policies used to safeguard theinterest of domestic industries from foreign competition, e.g. imposing tariffs.


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Unit 1 Business Models:

Inputs, processes and outputs (1.1) Factors of production and their returns (1.1) The chain of production (1.1) Factors to Consider when setting up a business (1.2) Stakeholders of an organization (1.4) Stakeholder Mapping (1.4) PEST Analysis (1.5) SWOT Analysis (1.5) Trade Cycle (1.5) Business Plans (1.6) Decision Making Frameworks (1.6) Force Field Analysis (1.6) Cost Benefit Analysis (1.6) 6 Thinking Hats (1.6) Pareto Principle (1.6) The 5 Whys (1.6) Decision Trees (1.6) Ishikawas Fishbone Model (1.6) Economies and Diseconomies of Scale (1.7) Porters Generic Strategies (1.7) The Ansoff Matrix (1.7) Summary of the Ansoff Matrix (1.7) Kotters 6 Change Approaches Model (1.8) Forces of Change (1.8) Lewins Force Field Analysis (1.8) Krugers four groups in change (1.8) Change Phases Model (1.8) Change Masters Model (1.8) Iceberg Model (1.8) Storeys Change Model (1.8) Stakeholder Analysis (1.8)

Unit 1 Definitions and Models

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