Business objectives - Forms of business -Business choices - Moving from entrepreneur

to leader

Chapter 21, 22, 23, 24 and 25 – January, 2017

BUSINESS OBJECTIVESOVERVIEW

I Distinction between aims and objectivesI aims: general ideas what business wants to achieve in

long-term (i.e., be a ’market leader’)I objectives: goals or targets that need to be met to achieve aims

(i.e., annual sales targets)I Business needs to have objectives because:

I objectives motivate people (i.e., used to determine bonuses)I objectives drive (or motivate) ownersI objectives define the strategies of businesses (i.e., markets

that have to be targeted in order to grow by 10%)

BUSINESS OBJECTIVESOVERVIEW

I Business objectives should be SMART:I specific: stating clearly what is trying to be achievedI measurable: capable of numeric measurementI agreed: have the approval of everyone involvedI realistic: able to be achieved given the resources availableI time-specific: have a stated time by which they should be

achieved

I these elements will allow the business to define a clearmetric for defining success (i.e., increase turnover by 8% inthe next 12 months)

BUSINESS OBJECTIVESSURVIVAL

I Survival can be the main objectiveI for new businesses orI if new competitors join the marketI if trading conditions become more difficult (i.e., British

Airways)

I Question 1 page 127

BUSINESS OBJECTIVESPROFIT MAXIMISATION

I Profit maximisation is more likely with businesses that areowned by institutional shareholders that have to maximisethe returns on their investment (i.e., pension funds,investment funds)

I Profit satisficing is a more common objective ofentrepreneurs

I Maximising profit means:I keep costs as low as possibleI raise prices as high as possible

I Examples of profit maximisation are: skim pricing (=settingprices unnaturally high as customers in this market are notprice sensitive)

I Disadvantage of profit maximisation: focuses too much onshort-term profits and ignores long-term opportunities

BUSINESS OBJECTIVESOTHER OBJECTIVES

I sales maximisation: increase sales (growing sales is animportant performance indicator).Note: physical sales level 6= sales revenue

I market share: increasing market share helps to increaserevenue and raise profile of business (i.e., control prices,dominate market)

I cost efficiency: reducing costs may be important ifcompetition increases or if there is an economic downturn.Low costs are important to gain a competitive edge in themarket.Note: See page 128 for examples of cutting costs as well asdrawbacks of this particular objective.

BUSINESS OBJECTIVESOTHER OBJECTIVES

I employee welfare: better employee welfare means happier,better motivated, more productive and more flexible staff.Note: See page 128 for examples of measures that can betaken to reach this objective.

I customer satisfaction: satisfied customers are in general loyalcustomers.Note: See page 128 for examples of keeping customerssatisfied.

I social objectives: helps to develop relationship with localcommunity.Note: See page 128 for examples of achieving this.

BUSINESS OBJECTIVESKEY TERMS

I aims:

I objectives:

I sales maximisation:

FORMS OF BUSINESSSOLE TRADERS

I Simplest form of business organisation is a sole trader (orsole proprietor)

I Sole trader = one owner but can employany number ofpeople

I Can be involved in any business activity: (i) primarysector (i.e., farmer, fishermen), (ii) secondary sector (i.e.,building, manufacturing), or (iii) tertiary sector (services)

I Sole traders have legal reponsibilities:I pay income tax and National Insurance contributionsI register for value added tax (VAT) if turnover reaches a

thresholdI request licence to trade (if selling alcohol, taxi service, or

public transport)I request planning permission (i.e., if converting a

warehouse into a nightclub)I comply with legislation at business practice (i.e., safe

working conditions)

FORMS OF BUSINESSADVANTAGES AND DISADVANTAGES OF SOLE TRADERS (SEE TABLE 1 PAGE 130)

FORMS OF BUSINESSPARTNERSHIPS

I Partnership:I has more than one owner, who share responsibilities and

profitsI Examples: accountants, doctors, estate agents, solicitors, ...I no legal formalities are are required when partnership is

formedI Partners may draw up a Deed of Partnership (legal

document which states partners rights in the event of adispute), which covers issues such as:

I amount of capital each partner has to contributeI profits/losses that have to be shared amongst partnersI procedure for ending partnershipI level of control each partner hasI rules for taking on new partners

I In the absence of a Deed of Partnership, partners will besuject to Partnership Act (1890)

FORMS OF BUSINESSADVANTAGES AND DISADVANTAGES OF PARTNERSHIPS (SEE TABLE 2 PAGE 131)

FORMS OF BUSINESSLIMITED PARTNERSHIPS

I Limited partnership: some partners provide capital buttake no part in the management of the business

I sleeping partner: partner will have limited liability (partnercan only lose the original amount of money invested)

I Limited Partnerships Act 1907 defines the elementsdiscussed above: There must be at least one partner withunlimited liability

I Limited Liability Partnership Act, 2000 allows all partners tohave limited liability. Business has to agree to comply witha number of regulations (i.e., filing annual reports, ...).

FORMS OF BUSINESSLIMITED COMPANIES ♣

I Limited companies have a separate legal identity from itsowner

I Company can own assets, form contracts, emply people,sue or be sued

I Main features of limited companies:I capital is raised by selling sharesI owners/shareholders have limited liabilityI limited companies are run by directors who are elected by

shareholdersI limited companies pay corporation tax (instead of income

tax on profits)I Forming a limited company:

I send Memorandum of Association and Articles of Associationto the Registrar of Companies

I if documents are acceptable then the company gets aCertificate of Incorporation

FORMS OF BUSINESSPRIVATE LIMITED COMPANIES

I Private limited companies can be small or medium-sizedbusinesses or large businesses (size of limited companies)

I Main features of private limited company:I business name ends in Limited or Ltd.I shares can only be transferred privately (cannot be

advertised for sale)I are often family businessesI directors of these businesses tend to be shareholders and

are involved in running the business

FORMS OF BUSINESSADVANTAGES AND DISADVANTAGES OF PRIVATE LIMITED COMPANIES (SEE TABLE 3PAGE 132)

FORMS OF BUSINESSFRANCHISING

I using franchises helps reducing risks (i.e., business failure)I franchisor: company which owns the franchise and it

allows another business (franchisee) to use its businessideas and methods in return for fees

I Examples: Domino’s Pizza, McDonald’s, Subway, ...

FORMS OF BUSINESSFRANCHISING

I Services provided by the franchisor to its franchisees:I gives a licence to make a product (already tested in the

market)I a recognized brandI a start-up package (i.e., advice, equipment, training, contacts

for capital)I ingredients and materials to make the productI marketing support (i.e., national advertising, ...)I ongoing training: helps maintain standards, sales, develop

new productsI business services at competitive prices (i.e., good deals with

insurance, delivery, ...)I exclusive area contracts: prevents competition between

franchisees

FORMS OF BUSINESSFRANCHISING

I Fees paid by the franchisee to the franchisor:I initial start-up fee (covers advice, equipment, and right to

use the name)I percentage of sales for ongoing servicesI profits are made on the sales of the material sold to the

franchiseeI one-off fees charged for management services (i.e., training)

FORMS OF BUSINESSADVANTAGES AND DISADVANTAGES OF FRANCHISING (SEE TABLE 4 AND 5 PAGE 133)

FORMS OF BUSINESSSOCIAL ENTERPRISES ♣

I Social enterprises: trade with the aim of improving humanand environmental well-being (rather than profit)

I Also known as not-for-profit organisations. In general socialenterprises:

I have a clear social/environmental missionI income are donations or through own tradeI reinvest most of profitI not connected to governmentsI are accountable and transparent

I Forms of social enterprises:I co-operatives: owned and controlled by their membersI worker co-operatives: jointly owned by their employeesI mutual organisations: owned by their customers (or

members) rather than by shareholdersI charities: raise money for causes or draw attention to

disadvantaged groups in society

FORMS OF BUSINESSLIFESTYLE BUSINESSES

I Aims to make enough money and provide the flexibilityneeded to sustain a particular lifestyle

I Examples: tradespeople (i.e., plumber, electrician),consultants, florists, small retail stores, B&B, small lifestylefarms

I Main features of lifestyle businesses:I small business with one ownerI personal interest of entrepreneur = nature of businessI owner may undertake variety of different ventures (sell

music instruments, teach to play instrument, ...)I less stressful than other forms of businessesI are considered an alternative to retirement

FORMS OF BUSINESSONLINE BUSINESSES

I Main features of online businessesI customers access business over internetI payment is collected electronically (i.e., credit card, PayPal,

debit card)I requires secure websitesI low set-up costsI paid-for or sponsored advertising is main source of revenue

I See Table 6 page 135 and the Maths tip

FORMS OF BUSINESSTHE GROWTH OF BUSINESSES

I Growth of business is important because:I higher profile in the marketI larger revenuesI lower unit costs (economies of scale)I higher profits

I Businesses may evolve:: (i) start as private limitedcompanies, and then decide to go public and become (ii)public limited companies

FORMS OF BUSINESSPUBLIC LIMITED COMPANIES

I Public limited company: owned by shareholders andcompany name ends by plc

I run by board of directors under supervision of chairperson(accountable to the shareholders)

I shares of public limited companies can be bought and soldon the stock market

I stock market: market for second-hand shares

FORMS OF BUSINESSSTOCK MARKET FLOTATION

I stock market flotation occurs when a company goes publicI also known as initial public offering (IPO): company’s shares

are offered to the public for the first timeI publish a prospectus (document advertising the company

and inviting investors) (see page 138 regarding its content)I costs associated with the process of going publicI conditions that have to be fulfilled before starting to trade:

I ...I has to receive payment of 25% for the value of shares

I full listing vs. Alternative Investment Market (AIM)I AIM: designed for companies that want to avoid the high

costs of a full listing

FORMS OF BUSINESSADVANTAGES OF LIMITED COMPANIES

I similar to the advantages of private limited companiesI other advantages

I large amounts of capital canbe raisedI production costs may decrease as firms get larger

(economies of scale)I larger companies may dominate the marketI larger choice of financing if needed (i.e., banks prefer to

give loans to plc)I executives are put under pressure to perform well (pressure

comes from media and financial analysts)

FORMS OF BUSINESSDISADVANTAGES OF PUBLIC LIMITED COMPANIES

I high setting-up costs can be very highI outsiders can get power of the company (since shares are

public)I company’s accounts are public and could be used by the

competitionI size may become a disadvantage because of lack of

personal interactionI compliance with company legislation will use a lot of

resourcesI divorce of ownership and control: senior managers may

pursue their own objectivesI large public limited companies may be inflexible

BUSINESS CHOICESOPPORTUNITY COST

I Common choices that businesses have to make:I invest in advertising campaignI retrain workforceI maintain buildings

I businesses will define an order of preference to its spendingI the next best alternative is called the opportunity cost of the

choiceI Our example: benefit lost by not retraining the workforce

BUSINESS CHOICESNON-MONETARY OPPORTUNITY COST

I opportunity costs can be measured in monetary termsI Our example: opportunity cost of investing in the

advertising campaing is the benefit forgone from retrainingthe workforce

I monetary benefit: output of workers increases (productivityincreases)

I non-monetary benefit: workers may feel moreconfident/happy and therefore they will be moreproductive

I opportunity costs can be of professional as well as personalnature (i.e., family holiday)

BUSINESS CHOICESBUSINESS CHOICES AND TRADE-OFFS

I decisions often come with trade-offs: opting for one choiceinvolves compromising another

I an important trade-off is between risk and rewardI high rewards are often associated with high riskI sometimes the risky scenarios will occur (i.e., 2008 crisis)

I see Figure 1 page 142I see example on trade-offs when running your own

business (Table 1 page 143)

BUSINESS CHOICESWEIGHING UP TRADE-OFFS

I when faced with trade-offs, following actions could helpI obtain information (list and assess advantages and

disadvantages)I balance short term and long termI evaluate what support you have

MOVING FROM ENTREPRENEUR TO LEADEROVERVIEW

I a business can grow and an entrepreneur may see his/herrole change

I as the business grows, entrepreneurs have to adapt to newfunctions

I need for formality (i.e., formal communication channels,formal organisational structure)

I need for shared ownership (i.e., new capital required to fundexpansion)

I greater responsibilities to others (i.e., growing staff meansmore people will be affected by decsisions)

I need for motivation and inspiration (i.e., workforce needsto be motivated and encouraged)

I need for strategy and vision (i.e., as business grows leaderwill be more involved in designing business strategies thanin production)

MOVING FROM ENTREPRENEUR TO LEADERTHE DIFFICULTIES IN DEVELOPING FROM AN ENTREPRENEUR TO A LEADER

I adapting the mindset (i.e., learn to delegate, trust in others,sacrifice autonomy from entrepreneurship)

I stress (i.e., worry that debtors won’t pay, presence ofconflicts in the organisation)

I sharing ownership and control (i.e., loosing control of ownbusiness)

I trust (i.e., trust between leaders and employees)I lack of leadership qualities (i.e., management,

communication, problem solving, decision making, andorganisational skills)

MOVING FROM ENTREPRENEUR TO LEADEROVERCOMING DIFFICULTIES

I methods used to adapt and overcome difficultiesI delegation and trust: good leaders will surround

themselves with talented, hones, and trustworthy peopleI earn respect: praise, be fair but tough, open, and honestI maturity and experience: some may have a talent to be

leaders, others will develop into one through experienceI education: many leadership skills can be learned (i.e.,

negotiation, communication, decision-making, languages,...)

I reduce stress: see Figure 1