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1.1 – Business Activity

The Economic Problem

Need: a good or service essential for living. Examples include water and food and shelter.

Want: a good or service that people would like to have, but is not required for living. Examples include cars and watching movies.

Scarcity is the basic economic problem. It is a situation that exists when there are unlimited wants and limited resources to produce the goods and services to satisfy those wants. For example, we have a limited amount of money but there are a lot of things we would like to buy, using the money.

Opportunity cost

Opportunity cost is the next best alternative forgone by choosing another item. Due to scarcity, people are often forced to make choices. When choices are made it leads to an opportunity cost

SCARCITY → CHOICE → OPPORTUNITY COST

Example: the government has a limited amount of money (scarcity) and must decide on whether to use it to build a road, or construct a hospital (choice). The government chooses to construct the hospital instead of the road. The opportunity cost here are the benefits from the road that they have sacrificed (opportunity cost).

Factors of Production

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Factors of Production are resources required to produce goods or services. They are classified into four categories.

Land: the natural resources that can be obtained from nature. This includes minerals, forests, oil and gas. The reward for land is rent.

Labour: the physical and mental efforts put in by the workers in the production process. The reward for labour is wage/salary

Capital: the finance, machinery and equipment needed for the production of goods and services. The reward for capital is interest received on the capital

Enterprise: the risk taking ability of the person who brings the other factors of production together to produce a good or service. The reward for enterprise is profit from the business.

Specialization

Specialization occurs when a person or organisation concentrates on a task at which they are best at. Instead of everyone doing every job, the tasks are divided among people who are skilled and efficient at them.

Advantages:

Workers are trained to do a particular task and specialise in this, thus increasing efficiency

Saves time and energy: production is faster by specialising

Quicker to train labourers: workers only concentrate on a task, they do not have to be trained in all aspects of the production process

Skill development: workers can develop their skills as they do the same tasks repeatedly, mastering it.

Disadvantages:

It can get monotonous/boring for workers, doing the same tasks repeatedly

Higher labour turnover as the workers may demand for higher salaries and company is unable to keep up with their demands

Over-dependency: if worker(s) responsible for a particular task is absent, the entire production process may halt since nobody else may be able to do the task.

Purpose of Business Activity

So we’ve gone through factors of production, the problem of scarcity and specialization, but what is business?

Business is any organization that uses all the factors of production (resources) to create goods and services to satisfy human wants and needs.

Businesses attempt to solve the problem of scarcity, using scarce resources, to produce and sell those goods and services that consumers need and want.

Added Value

Added value is the difference between the cost of materials bought in and the selling price of the product.

Which is, the amount of value the business has added to the raw materials by turning it into finished products. Every business wants to add value to their products so they may charge a higher price for their products and gain more profits.

For example, logs of wood may not appeal to us as consumers and so we won’t buy it or would pay a low price for it. But when a carpenter can use these logs to transform it into a chair we can use, we will buy it at a higher cost because the carpenter has added value to those logs of wood.

How to increase added value?

Reducing the cost of production. Added value of a product is its price less the cost of production. Reducing cost of production will increase the added value.

Raising prices. By increasing prices they can raise added value, in the same way as described above.

But there will be problems that rise from both these measures. To lower cost of production, cheap labour, raw materials etc. may have to be employed, which will create poor quality products and only lowers the value of the product. People may not buy it. And when prices are raised, the high price may result in customer loss, as they will turn to cheaper products.

In a practical sense, you can add value by:

Branding

Adding special features

Provide premium services etc.

In a practical example, how would you add value to a jewellery store?

Design an attractive package to put the jewellery items in.

An attractive shop-window-display.

Well-dressed and knowledgeable shop assistants.

All of this will help the jewellery store to raise prices above the additional costs involved.

1.2 – Classification of Businesses

Primary, Secondary and Tertiary Sector

Businesses can be classified into three sectors:

Primary sector: this involves the use/extraction of natural resources. Examples include agricultural activities, mining, fishing, wood-cutting, oil drilling etc.

Secondary sector: this involves the manufacture of goods using the resources from the primary sector. Examples include auto-mobile manufacturing, steel industries, cloth production etc.

Tertiary sector: this consist of all the services provided in an economy. This includes hotels, travel agencies, hair salons, banks etc.

Up until the mid 18th century, the primary sector was the largest sector in the world, as agriculture was the main profession. After the industrial revolution, more countries began to become more industrialized and urban, leading to a rapid increase in the manufacturing sector (industrialization).

Nowadays, as countries are becoming more developed, the importance of tertiary sector is increasing, while the primary sector is diminishing. The secondary sector is also slightly reducing in size (de-industrialization) compared to the growth of the tertiary sector . This is due to the growing incomes of consumers which raises their demand for more services like travel, hotels etc.

Private and Public Sector

Private sector: where private individuals own and run business ventures. Their aim is to make a profit, and all costs and risks of the business is undertaken by the individual. Examples, Nike, McDonald’s, Virgin Airlines etc.

Public sector: where the government owns and runs business ventures. Their aim is to provide essential public goods and services (schools, hospitals, police etc.) in order to increase the welfare of their citizens, they don’t work to earn a profit. It is funded by the taxpaying citizens’ money, so they work in the interest of these citizens to provide them with services.

Example: the Indian Railways is a public sector organization owned by the govt. of India.

In a mixed economy, both the public and private sector exists.

1.3 – Enterprise, Business Growth and Size

Entrepreneurship

An entrepreneur is a person who organizes, operates and takes risks for a new business venture. The entrepreneur brings together the various factors of production to produce goods or services. Check below to see whether you have what it takes to be a successful entrepreneur!

Risk taker

Creative

Optimistic

Self-confident

Innovative

Independent

Effective communicator

Hard working

Business plan

A business plan is a document containing the business objectives and important details about the operations, finance and owners of the new business.

It provides a complete description of a business and its plans for the first few years; explains what the business does, who will buy the product or service and why; provides financial forecasts demonstrating overall viability; indicates the finance available and explains the financial requirements to start and operate the business.

Some of the content of a regular business plan are:

Executive summary: brief summary of the key features of the business and the business plan

The owner: educational background and what any previous experience in doing previously

The business: name and address of the business and detailed description of the product or service being produced and sold; how and where it will be produced, who is likely to buy it, and in what quantities

The market: describe the market research that has been carried out, what it has revealed and details of prospective customers and competitors

Advertising and promotion: how the business will be advertised to potential customers and details of estimated costs of marketing

Premises and equipment: details of planning regulations, costs of premises and the need for equipment and buildings

Business organisation: whether the enterprise will take the form of sole trader, partnership, company or cooperative

Costs: indication of the cost of producing the product or service, the prices it proposes to charge for the products

Finance: how much of the capital will come from savings and how much will come from borrowings

Cash flow: forecast income (revenue) and outgoings (expenditures) over the first year

Expansion: brief explanation of future plans

Making a business plan before actually starting the business can be very helpful. By documenting the various details about the business, the owners will find it much easier to run it. There is a lesser chance of losing sight of the mission and vision of the business as the objectives have been written down. Moreover, having the objectives of the business set down clearly will help motivate the employees. A new entrepreneur will find it easier to get a loan or overdraft from the bank if they have a business plan.

Government support for business startups

According to startup.com, “a startup is a company typically in the early stages of its development. These entrepreneurial ventures are typically started by 1-3 founders who focus on capitalizing upon a perceived market demand by developing a viable product, service, or platform”.

Why do governments want to help new start-ups?

They provide employment to a lot of people

They contribute to the growth of the economy

They can also, if they grow to be successful, contribute to the exports of the country

Start-ups often introduce fresh ideas and technologies into business and industry

How do governments support businesses?

Organise advice: provide business advice to potential entrepreneurs, giving them information useful in staring a venture, including legal and bureaucratic ones

Provide low cost premises: provide land at low cost or low rent for new firms

Provide loans at low interest rates

Give grants for capital: provide financial aid to new firms for investment

Give grants for training: provide financial aid for workforce training

Give tax breaks/ holidays: high taxes are a disincentive for new firms to set up. Governments can thus withdraw or lower taxation for new firms for a certain period of time

Measuring business size

Businesses come in many sizes. They can be owned by a single individual or have up to 50 shareholders. They can employ thousands of workers or have a mere handful. But how can we classify a business as big or small?

Business size can be measured in the following ways:

Number of employees: larger firms have larger workforce employed

Value of output: larger firms are likely to produce more than smaller ones

Value of capital employed: larger businesses are likely to employ much more capital than smaller ones

However, these methods have their limitations and are not always accurate. Example: When using the ‘number of employees’ method to compare business size is not accurate as a capital intensive firm ( one that employs a large amount of capital equipment) can produce large output by employing very little labour (workers). Similarly, value of capital employed is not a reliable measure when comparing a capital-intensive firm with a labour-intensive firm. Output value is also unreliable because some different types of products are valued differently, and the size of the firm doesn’t depend on this.

Business growth

Businesses want to grow because growth helps reduce their average costs in the long-run, help develop increased market share, and helps them produce and sell to them to new markets.

There are two ways in which a business can grow- internally and externally.

Internal growth

This occurs when a business expands its existing operations. For example, when a fast food chain opens a new branch in another country. This is a slow means of growth but easier to manage than external growth.

External growth

This is when a business takes over or merges with another business. It is sometimes called integration as one firm is ‘integrated’ into the other.

A merger is when the owner of two businesses agree to join their firms together to make one business.

A takeover occurs when one business buys out the owners of another business , which then becomes a part of the ‘predator’ business.

External growth can largely be classified into three types:

Horizontal merger/integration: This is when one firm merges with or takes over another one in the same industry at the same stage of production. For example, when a firm that manufactures furniture merges with another firm that also manufacturers furniture.

Benefits:

Reduces number of competitors in the market, since two firms become one.

Opportunities of economies of scale.

Merging will allow the businesses to have a bigger share of the total market.

Vertical merger/integration: This is when one firm merges with or takes over

another firm in the same industry but at a different stage of production. Therefore, vertical integration can be of two types:

Backward vertical integration: When one firm merges with or takes over another firm in the same industry but at a stage of production that is behind the ‘predator’ firm. For example, when a firm that manufactures furniture merges with a firm that supplies wood for manufacturing furniture.

Benefits:

Merger gives assured supply of essential components.

The profit margin of the supplying firm is now absorbed by the expanded firm.

The supplying firm can be prevented from supplying to competitors.

Forward vertical integration: When one firm merges with or takes over another firm in the same industry but at a stage of production that is ahead of the ‘predator’ firm. For example, when a firm that manufactures furniture merges with a furniture retail store.

Benefits:

Merger gives assured outlet for their product.

The profit margin of the retailer is now absorbed by the expanded firm.

The retailer can be prevented from selling the goods of competitors.

Conglomerate merger/integration: This is when one firm merges with or takes over a firm in a completely different industry. This is also known as ‘diversification’. For example, when a firm that manufactures furniture merges with a firm that produces clothing.

Benefits:

Conglomerate integration allows businesses to have activities in more than one country. This allows the firms to spread its risks.

There could be a transfer of ideas between the two businesses even though they are in different industries. This transfer o ideas could help improve the quality and demand for the two products.

Drawbacks of growth

Difficult to control staff: as a business grows, the business organisation in terms of departments and divisions will grow, along with the number of employees, making it harder to control, co-ordinate and communicate with everyone

Lack of funds: growth requires a lot of capital.

Lack of expertise: growth is a long and difficult process that will require people with expertise in the field to manage and coordinate activities

Diseconomies of scale: this is the term used to describe how average costs of a firm tends to increase as it grows beyond a point, reducing profitability. This is explored more deeply in a later section.

Why businesses stay small

Not all businesses grow.Some stay small, employ a handful of workers and have little output. Here are the reasons why.

Type of industry: some firms remain small due to the industry they operate in. Examples of these are hairdressers, car repairs, catering, etc, which give personal services and therefore cannot grow.

Market size: if the firm operates in areas where the total number of customers is small, such as in rural areas, there is no need for the firm to grow and thus stays small.

Owners’ objectives: not all owners want to increase the size of their firms and profits. Some of them prefer keeping their businesses small and having a personal contact with all of their employees and customers, having flexibility in controlling and running the business, having more control over decision-making, and to keep it less stressful.

Why businesses fail

Not all businesses are successful. The main reasons why they fail are:

Poor management: this is a common cause of business failure for new firms. The main reason is lack of experience and planning which could lead to bad decision making. New entrepreneurs could make mistakes when choosing the location of the firm, the raw materials to be used for production, etc, all resulting in failure

Over-expansion: this could lead to diseconomies of scale and greatly increase costs, if a firms expands too quickly or over their optimum level

Failure to plan for change: the demands of customers keep changing with change in tastes and fashion. Due to this, firms must always be ready to change their products to meet the demand of their customers. Failure to do so could result in losing customers and loss. They also won’t be ready to quickly keep up with changes the competitors are making, and changes in laws and regulations

Poor financial management: if the owner of the firm does not manage his finances properly, it could result in cash shortages. This will mean that the employees cannot be paid and enough goods cannot be produced. Poor cash flow can therefore also cause businesses to fail

Why new businesses are at a greater risk of failure

Less experience: a lack of experience in the market or in business gets a lot of firms easily pushed out of the market

New to the market: they may still not understand the nuances and trends of the market, that existing competitors will have mastered

Don’t a lot of sales yet: only by increasing sales, can new firms grow and find their foothold in the market. At a stage when they’re not selling much, they are at a greater risk of failing

Don’t have a lot of money to support the business yet: financial issues can quickly get the better of new firms if they aren’t very careful with their cash flows. It is only after they make considerable sales and start making a profit, can they reinvest in the business and support it

1.4 – Types of Business Organizations

Sole Trader/Sole Proprietorship

A business organization owned and controlled by one person. Sole traders can employ other workers, but only he/she invests and owns the business.

Advantages:

Easy to set up: there are very few legal formalities involved in starting and running a sole proprietorship. A less amount of capital is enough by sole traders to start the business. There is no need to publish annual financial accounts.

Full control: the sole trader has full control over the business. Decision-making is quick and easy, since there are no other owners to discuss matters with.

Sole trader receives all profit: Since there is only one owner, he/she will receive all of the profits the company generates.

Personal: since it is a small form of business, the owner can easily create and maintain contact with customers, which will increase customer loyalty to the business and also let the owner know about consumer wants and preferences.

Disadvantages:

Unlimited liability: if the business has bills/debts left unpaid, legal actions will be taken against the investors, where their even personal property can be seized, if their investments don’t meet the unpaid amount. This is because the business and the investors are the legally not separate (unincorporated).

Full responsibility: Since there is only one owner, the sole owner has to undertake all running activities. He/she doesn’t have anyone to share his responsibilities with. This workload and risks are fully concentrated on him/her.

Lack of capital: As only one owner/investor is there, the amount of capital invested in the business will be very low. This can restrict growth and expansion of the business. Their only sources of finance will be personal savings or borrowing or bank loans (though banks will be reluctant to lend to sole traders since it is risky).

Lack of continuity: If the owner dies or retires, the business dies with him/her.

Partnerships

A partnership is a legal agreement between two or more (usually, up to twenty)people to own, finance and run a business jointly and to share all profits.

Advantages:

Easy to set up: Similar to sole traders, very few legal formalities are required to start a partnership business. A partnership agreement/ partnership deed is a legal document that all partners have to sign, which forms the partnership. There is no need to publish annual financial accounts.

Partners can provide new skills and ideas: The partners may have some skills and ideas that can be used by the business to improve business profits.

More capital investments: Partners can invest more capital than what a sole trade only by himself could.

Disadvantages:

Conflicts: arguments may occur between partners while making decisions. This will delay decision-making.

Unlimited liability: similar to sole traders, partners too have unlimited liability- their personal items are at risk if business goes bankrupt

Lack of capital: smaller capital investments as compared to large companies.

No continuity: if an owner retires or dies, the business also dies with them.

Joint-stock companies

These companies can sell shares, unlike partnerships and sole traders, to raise capital. Other people can buy these shares (stocks) and become a shareholder (owner) of the company. Therefore they are jointly owned by the people who have bough it’s stocks. These shareholders then receive dividends (part of the profit; a return on investment).

The shareholders in companies have limited liabilities. That is, only their individual investments are at risk if the business fails or leaves debts. If the company owes money, it can be sued and taken to court, but it’s shareholders cannot. The companies have a separate legal identity from their owners, which is why the owners have a limited liability. These companies are incorporated.

(When they’re unincorporated, shareholders have limited liability and don’t have a separate legal identity from their business).

Companies also enjoys continuity, unlike partnerships and sole traders. That is, the business will continue even if one of it’s owners retire or die.

Shareholders will elect a board of directors to manage and run the company in it’s day-to-day activities. In small companies, the shareholders with the highest percentage of shares invested are directors, but directors don’t have to be shareholders. The more shares a shareholder has, the more their voting power.

These are two types of companies:

Private Limited Companies: One or more owners who can sell its’ shares to only the people known by the existing shareholders (family and friends). Example: Ikea.

Public Limited Companies: Two or more owners who can sell its’ shares to any individual/organization in the general public through stock exchanges (see Economics: topic 3.1 – Money and Banking). Example: Verizon Communications.

Advantages:

Limited Liability: this is because, the company and the shareholders have separate legal identities.

Raise huge amounts of capital: selling shares to other people (especially in Public Ltd. Co.s), raises a huge amount of capital, which is why companies are large.

Public Ltd. Companies can advertise their shares, in the form of a prospectus, which tells interested individuals about the business, it’s activities, profits, board of directors, shares on sale, share prices etc. This will attract investors.

Disadvantages:

Required to disclose financial information: Sometimes, private limited companies are required by law to publish their financial statements annually, while for public limited companies, it is legally compulsory to publish all accounts and reports. All the writing, printing and publishing of such details can prove to be very expensive, and other competing companies could use it to learn the company secrets.

Private Limited Companies cannot sell shares to the public. Their shares can only be sold to people they know with the agreement of other shareholders. Transfer of shares is restricted here. This will raise lesser capital than Public Ltd. Companies.

Public Ltd. Companies require a lot of legal documents and investigations before it can be listed on the stock exchange.

Public and Private Limited Companies must also hold an Annual General Meeting (AGM), where all shareholders are informed about the performance of the company and company decisions, vote on strategic decisions and elect board of directors. This is very expensive to set up, especially if there are thousands of shareholders.

Public Ltd. Companies may have managerial problems: since they are very large, they become very difficult to manage. Communication problems may occur which will slow down decision-making.

In Public Ltd. Companies, there may be a divorce of ownership and control: The shareholders can lose control of the company when other large shareholders outvote them or when board of directors control company decisions.

Seite 2

Joint Ventures

Joint venture is an agreement between two or more businesses to work together on a project. The foreign business will work with a domestic business in the same industry. Eg: Google Earth is a joint venture/project between Google and NASA.

Advantages

Reduces risks and cuts costs

Each business brings different expertise to the joint venture

The market potential for all the businesses in the joint venture is increased

Market and product knowledge can be shared to the benefit of the businesses

Disadvantages

Any mistakes made will reflect on all parties in the joint venture, which may damage their reputations

The decision-making process may be ineffective due to different business culture or different styles of leadership

Public Sector Corporations

Public sector corporations are businesses owned by the government and run by directors appointed by the government. They usually provide essentials services like water, electricity, health services etc. The government provides the capital to run these corporations in the form of subsidies (grants). The UK’s National Health Service (NHS) is an example. Public corporations aim to:

to keep prices low so everybody can afford the service.

to keep people employed.

to offer a service to the public everywhere.

Advantages:

Some businesses are considered too important to be owned by an individual. (electricity, water, airline)

Other businesses, considered natural monopolies, are controlled by the government. (electricity, water)

Reduces waste in an industry. (e.g. two railway lines in one city)

Rescue important businesses when they are failing through nationalisation

Provide essential services to the people

Drawbacks:

Motivation might not be as high because profit is not an objective

Subsidies lead to inefficiency. It is also considered unfair for private businesses

There is normally no competition to public corporations, so there is no incentive to improve

Businesses could be run for government popularity

1.5 – Business Objectives and Stakeholder Objectives

Business objectives

Business objectives are the aims and targets that a business works towards to help it run successfully. Although the setting of these objectives does not always guarantee the business success, it has its benefits.

Setting objectives increases motivation as employees and managers now have clear targets to work towards.

Decision making will be easier and less time consuming as there are set targets to base decisions on. i.e., decisions will be taken in order to achieve business objectives.

Setting objectives reduces conflicts and helps unite the business towards reaching the same goal.

Managers can compare the business’ performance to its objectives and make any changes in its activities if required.

Objectives vary with different businesses due to size, sector and many other factors. However, many business in the private sector aim to achieve the following objectives.

Survival: new or small firms usually have survival as a primary objective. Firms in a highly competitive market will also be more concerned with survival rather than any other objective. To achieve this, firms could decide to lower prices, which would mean forsaking other objectives such as profit maximization.

Profit: this is the income of a business from its activities after deducting total costs. Private sector firms usually have profit making as a primary objective. This is because profits are required for further investment into the business as well as for the payment of return to the shareholders/owners of the business.

Growth: once a business has passed its survival stage it will aim for growth and expansion. This is usually measured by value of sales or output. Aiming for business growth can be very beneficial. A larger business can ensure greater job security and salaries for employees. The business can also benefit from higher market share and economies of scale.

Market share: this can be defined as the proportion of total market sales achieved by one business. Increased market share can bring about many benefits to the business such as increased customer loyalty, setting up of brand image, etc.

Service to the society: some operations in the private sectors such as social enterprises do not aim for profits and prefer to set more economical objectives. They aim to better the society by providing social, environmental and financial aid. They help those in need, the underprivileged, the unemployed, the economy and the government.

A business’ objectives do not remain the same forever. As market situations change and as the business itself develops, its objectives will change to reflect its current market and economic position. For example, a firm facing serious economic recession could change its objective from profit maximization to short term survival.

Stakeholders

A stakeholder is any person or group that is interested in or directly affected by the performance or activities of a business. These stakeholder groups can be external – groups that are outside the business or they can be internal – those groups that work for or own the business.

Internal stakeholders:

Shareholder/ Owners: these are the risk takers of the business. They invest capital into the business to set up and expand it. These shareholders are liable to a share of the profits made by the business.

Objectives:

Shareholders are entitled to a rate of return on the capital they have invested into the business and will therefore have profit maximization as an objective.

Business growth will also be an important objective as this will ensure that the value of the shares will increase.

Workers: these are the people that are employed by the business and are directly involved in its activities.

Objectives:

Contract of employment that states all the right and responsibilities to and of the employees.

Regular payment for the work done by the employees.

Workers will want to benefit from job satisfaction as well as motivation.

The employees will want job security– the ability to be able to work without the fear of being dismissed or made redundant.

Managers: they are also employees but managers control the work of others. Managers are in charge of making key business decisions.

Objectives:

Like regular employees, managers too will aim towards a secure job.

Higher salaries due to their jobs requiring more skill and effort.

Managers will also wish for business growth as a bigger business means that managers can control a bigger and well known business.

External Stakeholders:

Customers: they are a very important part of every business. They purchase and consume the goods and services that the business produces/ provides. Successful businesses use market research to find out customer preferences before producing their goods.

Objectives:

Price that reflects the quality of the good.

The products must be reliable and safe. i.e., there must not be any false advertisement of the products.

The products must be well designed and of a perceived quality.

Government: the role of the government is to protect the workers and customers from the business’ activities and safeguard their interests.

Objectives:

The government will want the business to grow and survive as they will bring a lot of benefits to the economy. A successful business will help increase the total output of the country, will improve employment as well as increase government revenue through payment of taxes.

They will expect the firms to stay within the rules and regulations set by the government.

Banks: these banks provide financial help for the business’ operations’

Objectives:

The banks will expect the business to be able to repay the amount that has been lent along with the interest on it. The bank will thus have business liquidity as its objective.

Community: this consists of all the stakeholder groups, especially the third parties that are affected by the business’ activities.

Objectives:

The business must offer jobs and employ local employees.

The production process of the business must in no way harm the environment.

Products must be socially responsible and must not pose any harmful effects from consumption.

Public- sector businesses

Government owned and controlled businesses do not have the same objectives as those in the private sector.

Objectives:

Financial: although these businesses do not aim to maximize profits, they will have to meet the profit target set by the government. This is so that it can be reinvested into the business for meeting the needs of the society

Service: the main aim of this organization is to provide a service to the community that must meet the quality target set by the government

Social: most of these social enterprises are set up in order to aid the community. This can be by providing employment to citizens, providing good quality goods and services at an affordable rate, etc.

They help the economy by contributing to GDP, decreasing unemployment rate and raising living standards.

This is in total contrast to private sector aims like profit, growth, survival, market share etc.

Conflicts of stakeholders’ objectives

As all stakeholders have their own aims they would like to achieve, it is natural that conflicts of stakeholders’ interests could occur. Therefore, if a business tries to satisfy the objectives of one stakeholder, it might mean that another stakeholders’ objectives could go unfulfilled.

For example, workers will aim towards earning higher salaries. Shareholders might not want this to happen as paying higher salaries could mean that less profit will be left over for payment of return to the shareholders.

Similarly, the business might want to grow by expanding operations to build new factories. But this might conflict with the community’s want for clean and pollution-free localities.

2.1 – Motivating Workers

Motivation

People work for several reasons:

Have a better standard of living: by earning incomes they can satisfy their needs and wants

Be secure: having a job means they can always maintain or grow that standard of living

Gain experience and status: work allows people to get better at the job they do and earn a reputable status in society

Have job satisfaction: people also work for the satisfaction of having a job

Motivation is the reason why employees want to work hard and work effectively for the business. Money is the main motivator, as explained above. Other factors that may motivate a person to choose to do a particular job may include social needs (need to communicate and work with others), esteem needs (to feel important, worthwhile), job satisfaction (to enjoy good work), security (knowing that your job and pay are secure- that you will not lose your job).

Why motivate workers? Why do firms go to the pain of making sure their workers are motivated? When workers are well-motivated, they become highly productive and effective in their work, become absent less often, and less likely to leave the job, thus increasing the firm’s efficiency and output, leading to higher profits. For example, in the service sector, if the employee is unhappy at his work, he may act lazy and rude to customers, leading to low customer satisfaction, more complaints and ultimately a bad reputation and low profits.

Motivation Theories

F. W. Taylor: Taylor based his ideas on the assumption that workers were motivated by personal gains, mainly money and that increasing pay would increase productivity (amount of output produced). Therefore he proposed the piece-rate system, whereby workers get paid for the number of output they produce. So in order, to gain more money, workers would produce more. He also suggested a scientific management in production organisation, to break down labour (essentially division of labour) to maximise output

However, this theory is not entirely true. There are various other motivators in the modern workplace, some even more important than money. The piece rate system is not very practical in situations where output cannot be measured (service industries) and also will lead to (high) output that doesn’t guarantee high quality.

Maslow’s Hierarchy: Abraham Maslow’s hierarchy of needs shows that employees are motivated by each level of the hierarchy going from bottom to top. Mangers can identify which level their workers are on and then take the necessary action to advance them onto the next level.

One limitation of this theory is that it doesn’t apply to every worker. For some employees, for example, social needs aren’t important but they would be motivated by recognition and appreciation for their work from seniors

Physiological Needs – food, rest, shelter (fulfilled by receiving wages)

Safe/security Needs – protection against danger & poverty. Having fair treatment (fulfilled by having job security)

• Social Needs – friendship, belonging in a group (fulfilled by having colleagues at work)

• Esteem Needs – having status and recognition (fulfilled by being recognised for good work)

• Self-actualisation – achieving your full potential, feeling that you have done a good job (fulfilled by being promoted & being given more responsibility)

• Maslow’s theory also suggests that each level in the hierarchy (starting from Physiological needs) needs to be achieved before moving on to the next

Herzberg’s Two-Factor Theory: Frederick Herzberg’s two-factor theory, wherein he states that people have two sets of needs:

Basic animal needs called ‘hygiene factors’:

status

security

work conditions

company policies and administration

relationship with superiors

relationship with subordinates

salary

Needs that allow the human being to grow psychologically, called the ‘motivators’:

achievement

recognition

personal growth/development

promotion

work itself

According to Herzberg, the hygiene factors need to be satisfied, if not they will act as de-motivators to the workers. However hygiene factors don’t act as motivators as their effect quickly wear off. Motivators will truly motivate workers to work more effectively.

Motivating Factors

Financial Motivators

Wages: often paid weekly. They can be calculated in two ways:

Time-Rate: pay based on the number of hours worked. Although output may increase, it doesn’t mean that workers will work sincerely use the time to produce more- they may simply waste time on very few output since their pay is based only on how long they work. The productive and unproductive worker will get paid the same amount, irrespective of their output.

Piece-Rate: pay based on the no. of output produced. Same as time-rate, this doesn’t ensure that quality output is produced. Thus, efficient workers may feel demotivated as they’re getting the same pay as inefficient workers, despite their efficiency.

Salary: paid monthly or annually.

Commission: paid to salesperson, based on a percentage of sales they’ve made. The higher the sales, the more the pay. Although this will encourage salespersons to sell more products and increase profits, it can be very stressful for them because no sales made means no pay at all.

Bonus: additional amount paid to workers for good work

Performance-related pay: paid based on performance. An appraisal (assessing the effectiveness of an employee by senior management through interviews, observations, comments from colleagues etc.) is used to measure this performance and a pay is given based on this.

Profit-sharing: a scheme whereby a proportion of the company’s profits is distributed to workers. Workers will be motivated to work better so that a higher profit is made.

Share ownership: shares in the firm are given to employees so that they can become part owners of the company. This will increase employees’ loyalty to the company, as they feel a sense of belonging.

Non-Financial Motivators

Fringe benefits are non-financial rewards given to employees

Company vehicle/car

Free healthcare

Children’s education fees paid for

Free accommodation

Free holidays/trips

Discounts on the firm’s products

Job Satisfaction: the enjoyment derived from the feeling that you’ve done a good job. Employees have different ideas about what motivates them- it could be pay, promotional opportunities, team involvement, relationship with superiors, level of responsibility, chances for training, the working hours, status of the job etc. Responsibility, recognition and satisfaction are in particular very important.

So, how can companies ensure that they’re workers are satisfied with the job, other than the motivators mentioned above?

Job Rotation: involves workers swapping around jobs and doing each specific task for only a limited time and then changing round again. This increases the variety in the work itself and will also make it easier for managers to move around workers to do other jobs if somebody is ill or absent. The tasks themselves are not made more interesting, but the switching of tasks may avoid boredom among workers. This is very common in factories with a huge production line where workers will move from retrieving products from the machine to labelling the products to packing the products to putting the products into huge cartons.

Job Enlargement: where extra tasks of similar level of work are added to a worker’s job description. These extra tasks will not add greater responsibility or work for the employee, but make work more interesting. E.g.: a worker hired to stock shelves will now, as a result of job enlargement, arrange stock on shelves, label stock, fetch stock etc.

Job Enrichment: involves adding tasks that require more skill and responsibility to a job. This gives employees a sense of trust from senior management and motivate them to carry out the extra tasks effectively. Some additional training may also be given to the employee to do so. E.g.: a receptionist employed to welcome customers will now, as a result of job enrichment, deal with telephone enquiries, word-process letters etc.

Team-working: a group of workers is given responsibility for a particular process, product or development. They can decide as a team how to organize and carry out the tasks. The workers take part in decision making and take responsibility for the process. It gives them more control over their work and thus a sense of commitment, increasing job satisfaction. Working as a group will also add to morale, fulfill social needs and lead to job satisfaction.

Opportunities for training: providing training will make workers feel that their work is being valued. Training also provides them opportunities for personal growth and development, thereby attaining job satisfaction

Opportunities of promotion: providing opportunities for promotion will get workers to work more efficiently and fill them with a sense of self-actualisation and job satisfaction

2.2 – Organization and Management

Seite 3

2.3 – Recruitment, Selection and Training of Workers

The Role of the H.R. (Human Resource) Department

Recruitment and selection: attracting and selecting the best candidates for job posts

Wages and salaries: set wages and salaries that attract and retain employees as well as motivate them

Industrial relations: there must be effective communication between management and workforce to solve complaints and disputes as well as discussing ideas and suggestions

Training programmes: give employees training to increase their productivity and efficiency

Health and safety: all laws on health and safety conditions in the workplace should be adhered to

Redundancy and dismissal: the managers should dismiss any unsatisfactory/misbehaving employees and make them redundant if they are no longer needed by the business.

Recruitment

Job Analysis, Description and Specification

Recruitment is the process from identifying that the business needs to employ someone up to the point where applications have arrived at the business.

A vacancy arises when an employee resigns from a job or is dismissed by the management. When a vacancy arises, a job analysis has to be prepared. A job analysis identifies and records the tasks and responsibilities relating to the job. It will tell the managers what the job post is for.

Then a job description is prepared that outlines the responsibilities and duties to be carried out by someone employed to do the job. It will have information about the conditions of employment (salary, working hours, and pension scheme), training offered, opportunities for promotion etc. This is given to all prospective candidates so they know what exactly they will be required and expected to do.

Once this has been done, the H.R. department will draw up a job specification, a document that outlines the requirements, qualifications, expertise, skills, physical/personal characteristics etc. required by an employee to be able to take up the job.

Advertising the vacancy

Internal recruitment is when a vacancy is filled by an existing employee of the business.

Advantages:

Saves time and money- no need for advertising and interviewing

Person already known to business

Person knows business’ ways of working

Motivating for other employees to see their colleagues being promoted- urging them to work hard

Disadvantages:

No new skills and experience coming into the business

Jealousy among workers

External recruitment is when a vacancy is filled by someone who is not an existing employee and will be new to the business. External recruitment needs to be advertised, unlike internal recruitment. This can be done in local/national newspapers, specialist magazines and journals, job centres run by the government (where job vacancies are posted and given to interested people; usually for unskilled or semi-skilled jobs) or even recruitment agencies (who will recruit and send along candidates to the company when they request it).

When advertising a job, the business needs to decide what should be included in the advertisement, where it should be advertised, how much it will cost and whether it will be cost-effective.

When a person is interested in a job, they should apply for it by sending in a curriculum vitae (CV) or resume, this will detail the person’s qualifications, experience, qualities and skills.The business will use these to see which candidates match the job specification. It will also include statements of why the candidate wants the job and why he/she feels they would be suitable for the job.

Selection

Applicants who are shortlisted will be interviewed by the H.R. manager. They will also call up the referee provided by the applicant (a referee could be the previous employer or colleagues who can give a confidential opinion about the applicant’s reliability, honesty and suitability for the job). Interviews will allow the manager to assess:

the applicant’s ability to do the job

personal qualities of the applicant

character and personality of applicant

In addition to interviews, firms can conduct certain tests to select the best candidate. This could include skills tests (ability to do the job), aptitude tests (candidate’s potential to gain additional skills), personality tests (what kind of a personality the candidate has- will it be suitable for the job?), group situation tests (how they manage and work in teams) etc.

When a successful candidate has been selected the others must be sent a letter of rejection.

The contract of employment: a legal agreement between the employer and the employee listing the rights and responsibilities of workers. It will include:

the name of employer and employee

job title

date when employment will begin

hours to work

rate of pay and other benefits

when payment is made

holiday entitlement

the amount of notice to be given to terminate the employment that the employer or employee must give to end the employment etc.

Employment contracts can be part-time or full-time. Part-time employment is often considered to be between 1 and 30-35 hours a week whereas full-time employment will usually work 35 hours or more a week.

Advantages to employer of part-time employment (disadvantages of full-time employment to employer):

more flexible hours of work

easier to ask employees just to work at busy times

easier to extend business opening/operating hours by working evenings or at weekends

works lesser hours so employee is willing to accept lower pay

less expensive than employing and paying full-time workers.

Disadvantages to employer of part-time employment (advantages of full-time employment to employers)

less likely to be trained because the workers see the job as temporary

takes longer to recruit two part-time workers than one full-time worker

can be less committed to the business/ more likely to leave and go get another job

less likely to be promoted because they will not have gained the skills and experience as full-time employees

more difficult to communicate with part-time workers when they are not in work- all work at different times.

Training

Training is important to a business as it will improve the worker’s skills and knowledge and help the business be more efficient and productive, especially when new processes and products are introduced. It will improve the workers’ chances at getting promoted and raise their morale.

The three types of training are:

Induction training: an introduction given to a new employee, explaining the firm’s activities, customs and procedures and introducing them to their fellow workers.

Advantages:

Helps new employees to settle into their job quickly

May be a legal requirement to give health and safety training before the start of work

Less likely to make mistakes

Disadvantages:

Time-consuming

Wages still have to be paid during training, even though they aren’t working

Delays the state of the employee starting the job

On-the-job training: occurs by watching a more experienced worker doing the job

Advantages:

It ensures there is some production from worker whilst they are training

It usually costs less than off-the-job training

It is training to the specific needs of the business

Disadvantages:

The trainer will lose some production time as they are taking some time to teach the new employee

The trainer may have bad habits that can be passed onto the trainee

It may not necessarily be recognised training qualifications outside the business

Off-the-job training: involves being trained away from the workplace, usually by specialist trainers

Advantages:

A broad range of skills can be taught using these techniques

Employees may be taught a variety of skills and they may become multi-skilled that can allow them to do various jobs in the company when the need arises.

Disadvantages:

Costs are high

It means wages are paid but no work is being done by the worker

The additional qualifications means it is easier for the employee to leave and find another job

Workforce Planning

Workforce Planning: the establishing of the workforce needed by the business for the foreseeable future in terms of the number and skills of employees required.

They may have to downsize (reduce the no. of employees) the workforce because of:

Introduction of automation

Falling demand for their products

Factory/shop/office closure

Relocating factory abroad

A business has merged or been taken over and some jobs are no longer needed

They can downsize the workforce in two ways:

Dismissal: where a worker is told to leave their job because their work or behaviour is unsatisfactory.

Redundancy: when an employee is no longer needed and so loses their work, through not due to any fault of theirs. They may be given some money as compensation for the redundancy.

Worker could also resign (they are leaving because they have found another job) and retire (they are getting old and want to stop working).

Legal Controls over Employment Issues

There are lot so government laws that affect equal employment opportunities. These laws require businesses to treat their employees equally in the workplace and when being recruited and selected- there should be no discrimination based on age, gender, religion, race etc.

Employees are protected in many areas including

against unfair discrimination

health and safety at work (protection from dangerous machinery, safety clothing and equipment, hygiene conditions, medical aid etc.)

against unfair dismissal

wage protection (through the contract of employment since it will have listed the pay and conditions). Many countries have a legal minimum wage– the minimum wage an employer has to pay its employee. This avoids employers from exploiting its employees, and encourages more people to find work, but since costs are rising for the business, they may make many workers redundant- unemployment will rise.

An industrial tribunal is a legal meeting which considers workers’ complaints of unfair dismissal or discrimination at work. This will hear both sides of the case and may give the worker compensation if the dismissal was unfair.