CHAPTER 1: ROLE OF BUSINESS

1.1) THE NATURE OF A BUSINESS

PRODUCING GOODS AND SERVICES Business: The organised effort of individuals to produce and sell, for a profit, the products (goods and services) that satisfy individuals’ needs and wants.

Importance of Business to an Economy

○ SME (Small-Medium Enterprise) provide employment to approximately 50% of the workforce

○ Help to increase the national income and living standards

○ Greater choice for customers

Businesses Distribute Wealth to:

○ Governments – in form of tax ○ Employees – for salaries and wages ○ Business owners and Shareholders – in dividends ○ The business itself – through depreciation

Goods: Items that can be seen or touched. They are physical items that can be touched.

Services: Things that are done for you by others in exchange for money.

OTHER FUNCTIONS OF BUSINESS (PWEEII-CQ)

Profit If the business’s sales revenue (income) is greater than its operating expenses, it has earned a profit.

Profits encourage risk taking within starting a business.

e.g. In 2013, Woolworths had a 24% increase in profit due to selling of liquor

Wealth creation

The more that is produced the more wealth is generated within the Australian economy. Wages and

salaries received and products add to the wealth of individuals and households.

e.g. By investing in real estate an individual may create wealth

Employment

Consumers need money in order to purchase products and this is earned through jobs provided by

businesses. Generally, the more that is sold the more employees a business will hire.

e.g. largest industry sector is healthcare and social assistance

Entrepreneurship and risk

An entrepreneur is someone who starts, operates and assumes the risk of a business venture in the hope

of making a profit.

e.g. Bill Gates – co founder of Microsoft Corporation

Incomes

The money received by a person for providing his or her, or a business from a return on its investment. ○ Wage: money received by workers, usually on a weekly basis. ○ Salary: fixed amount of money paid on a regular basis, to a permanent employee. ○ Shareholders are people who are part owners of a company because they own a number of

shares. ○ Dividend: part of a business’s profit that is divided among shareholders.

Innovation An improvement on something already established. An invention is the development of something new. SME’s (Small-Medium Enterprises) generally display a consistent, positive attitude towards innovation. e.g. Vegemite made by entrepreneur Fred Walker e.g. Arnott’s biscuits Choice The act of selecting among alternatives. Most businesses usually offer a range of products as this will increase profits in the long term. e.g. An average supermarket will have approximately 20, 000 product lines Quality of life Refers to the overall wellbeing of an individual, and is a combination of both material and non-material benefits. Businesses’ have a responsibility to help provide what consumers want and to minimise what they do not want. e.g. We desire to have time for the outdoors and recreational activities e.g. businesses implementing environmentally friendly products

1.2) TYPES OF BUSINESSES

CLASSIFICATION OF BUSINESS

Classification depends on:

○ Number of employees

○ Number of owners

○ Market share (proportion of total market sales the business has compared to competitors)

○ Legal structure

SIZE

Small to Medium Enterprises

○ contains less than 200 employees

○ Independently or privately owned

○ Owner responsible for most decisions

Micro businesses ○ Less than 5 employees (including the owner) ○ Make up most of the small business population

Small businesses ○ Less than 20 employees ○ Sole trader or partnership (independently owned) ○ Small market share ○ ADVANTAGES:

○ Independent ○ Not very complex decision making ○ Do not need to employ many workers ○ Flexible ‐ able to quickly respond to consumers

○ Supports local economy ○ Consumers know where their product is from

Medium business ○ 20 – 199 employees ○ Partnership or private company (owned by few people or private

shareholders

Large business ○ More than 200 employees ○ Public company (owned by many public shareholders) ○ Complex decision making process ○ Large market share

Small, Medium and Large Business Classification

Characteristic

Small Medium Large

Business Type

○ Corner stores

○ Hair salons

○ Mechanics

○ Clubs/Pubs

○ Motels/Hotels

○ Engineering

Factories

○ Woolworths

○ Qantas

○ National Australia

Bank

No. of Employees

(ABS)

○ Fewer than 20

employees

○ 20 to 199

employees

○ 200+ employees

Type of Ownership

○ Independently owned

by 1 or two people

○ Owned and

operated by a few

people and private

shareholders

○ Owned usually by

thousands of public

shareholders

Most Common Legal

Structure

○ Sole trader (1

owner)

○ Partnership

○ Partnership

○ Private Company

○ Public company

(numerous)

Decision Making

○ Owner makes major

decisions

○ Owner makes

major decisions

○ More complex

decision making

○ Complex decision

making

○ Decisions made by

senior and middle

management

Source of Finance

○ Owner (usually from

own savings or

loan)

○ Owner’s/partner’s

own savings

○ Loans

○ Private

Shareholders

○ Cash Reserves

○ Retained profit

○ Sale of shares

○ Loans from domestic

and overseas

institutes

Market Share

○ Small in local area.

○ Usually does not

dominate industry

○ Some market

dominance

○ Large percentage of market dominance

Micro Businesses

○ Employ fewer than five people (including the owner)

○ Represents 82% of all non-manufacturing small businesses

○ 58% are sole traders and partnerships

○ Dominated by women, young people seeking self-employment and people who were retrenched from their previous employment.

○ 54% have no employees

GEOGRAPHICAL SPREAD Geographical Spread: Businesses can be classified as local, national or global according to their

geographical spread, which refers to the presence of a business and the range of its production across a

suburb, city, state, country or globe

LOCAL

○ A local business has a very restricted geographical spread; it serves the surround area. ○ The majority of local businesses tend to be small to medium in size. ○ E.g. hairdresser

NATIONAL

○ A national business is one that operates within just one country. ○ As the business grows, it increases its range of products and the area it serves. ○ E.g. Sportsgirl

GLOBAL

○ A global business, commonly referred to as a transnational corporation (TNC), is a large business with a home base in one country that operates partially owned or wholly owned business in other countries.

○ The TNC represents the highest level of involvement in global business. ○ e.g. Coca Cola

Reasons for business to expand (I DIG)

○ Increase in sales ○ Desire to increase profit ○ Increase in market share ○ Global consumers

Examples of Expansion

○ Adapting a business’ offerings to fit customers’ needs ○ Purchasing new equipment, employing people, additional support hours, new location

INDUSTRY SECTOR Primary, Secondary and Tertiary Classifications

Industry Sector Definition Example

Primary ○ Businesses involved in collection of raw

materials

○ Farming

○ Mining

○ Fishing

Secondary ○ Businesses that produce products by taking

company sector outputs

○ Production

○ Manufacturing

Tertiary

- Quaternary

- Quinary

○ Businesses that provide a service

○ Services that involve transfer & processing

of information

○ Services traditionally performed in the

home (domestic based)

○ Retail

○ Dental Services

○ Education

○ Computing

○ Hospitality

○ Cleaning

More employment in tertiary industry sector as most primary and secondary industry sectors sent overseas.

Both parents working means they don’t have time for domestics (e.g. cleaning so they require cleaners)

LEGAL STRUCTURE The four main legal structures of privately owned businesses can be further divided into:

○ Unincorporated businesses, (sole traders, partnerships) ○ Incorporated businesses (privately and publicly owned companies)

Incorporation refers to the process companies go through to become a separate legal entity from the owner/s.

Legal

Structure

Definition Examples Advantages Disadvantages

Sole Trader (Unincorporated)

○ Business that is owned/operated by one person

○ (Unlimited liability)

○ Joe’s Fruit Shop

○ Karen’s Hairdressing

○ Complete control over business

○ Less costly - extra tax because the business is part of you

○ End of business when owner dies

○ Difficulty in raising finance for expansion

Partnership (Unincorporated)

○ Business that is owned/operated between 2 and 20 people

○ Exceptions: ❖ Medical

practitioners (up to 50)

❖ Vets, architects, chemist (up to 100)

○ Warner Bros. ○ Ben & Jerry’s

○ More access to funds because there are more people

○ Greater borrowing capacity

○ Possibility of disputes

○ Difficulty in finding suitable partner

○ Divided loyalty

❖ solicitors , accountants (up to 400)

Private (Incorporated)

○ Business with between 2 and 50 shareholders (limited liability)

○ Swisse Vitamins

○ Bunnik Tours

○ Shareholders have limited liability protection

○ Can pick and choose their part-owners (not listed on stock exchange)

○ Closing the business is complex

○ Growth may be limited

Public (Incorporated)

○ The shares for public companies are listed on the Australian Securities Exchange, and the general public may buy and sell shares in those companies

○ Bank of America

○ HSBC Group

○ Limited liability ○ Listed on stock

exchange ○

○ The original owners may lose control

○ Difficulty of formation

Government ○ Government

owned and

operated

businesses

(GBE’s) and

provide essential

community

services

○ Railcorp

○ Australian Post

○ Provides

essential

community

services, and

healthy

competition to

private sectors

○ Poor management

○ Little scope for

expansion and

modernisation

Franchises ○ Businesses in

which the owner

sells the rights to

their business

logo, name and

model

○ Maccas

○ Subway

○ Baker’s Delight

○ Association with

a well-

established

brand,

reputation and

product or

service

○ Assistance with

outlet design

and equipment

purchasing

○ Restricted territory

in which you may

operate and/or

promote your

business

○ Ongoing payment

of fees to the

franchisor

FACTORS INFLUENCING CHOICE OF LEGAL STRUCTURE (SOF)

How big do you need your business to be?

How much control over the business do you want?

How much money do you need to operate and grow?

SIZE

o Small and micro enterprises usually start as sole traders/partnerships o Sales continues to rise and the business expands to a medium sized business o New equipment must be purchased to afford the expansion o At this stage a partnership of private company may form with new partners/shareholders bringing

extra finance and skills o If expansion is rapid owners may seek the protection of limited liability o As a business grows to a multinational company corporation if may need to become a public

company

OWNERSHIP

○ If the owner wants complete control → sole trader

○ If the owner wishes to share ownership →partnership

○ If the owner wishes to have limited liability they may become a shareholder of a private

company

FINANCE ○ Sole traders and partnerships may find it hard to obtain finance ○ If companies wish to get more finance they may become a private company or partnership so

they have more finance outlets ○ Venture Capital – Money that is invested in small/struggling businesses that have the potential

to become successful. ○ Businesses may choose to become incorporated in order to obtain more finance through shares

(public company)

1.3) INFLUENCES IN THE BUSINESS ENVIRONMENT

INTERNAL INFLUENCES (PL-RMB) Factors within the business that you can control. PRODUCT

○ Product influence will be reflected in the type of business (service, manufacturing, or retailer) ○ Types of goods and services produced will affect the internal operations

○ Eg: if goods are physically large or require many raw materials ○ Main product influences: type of goods and services, type of business, size of business

LOCATION

○ Can make the difference between success and failure ○ Prime location = customer convenience + Visibility ○ Visibility, cost, proximity to suppliers, proximity to customers, proximity to support services

RESOURCES (FKING-HIP)

○ Financial resources - are the funds the business uses to meets its obligations to various creditors. ○ Human resources - These are the employees of the business and are generally its most important

asset. ○ Information resources - include the knowledge and data required by the business

○ E.g: market research, sales reports, economic forecasts, technical material and legal advice.

○ Physical resources - include equipment, machinery, buildings and raw materials. ○ IT IS BY COMBINING THESE RESOURCES THAT ALL GOODS AND SERVICES DEMANDED

BY CONSUMERS ARE PRODUCED MANAGEMENT

○ Many businesses are in transition, having adopted the traditional design and taken on elements of newest designs

○ Eg: that weird fat and tall pyramids mentioning hierarchy

BUSINESS CULTURE ○ Corporate culture is the beliefs and behaviours that determine how a company’s employees and

management interact ○ Eg: Social science staffroom not celebrating anyone’s birthdays

○ Can be important to employees as workers are more likely to enjoy their time in the workplace

○ If you don’t fit in with company culture, you are likely to take less pleasure out of your work

○

EXTERNAL INFLUENCES IN THE BUSINESS ENVIRONMENT (EFGSLIP-TCM) Changes in the external environment make it necessary for managers to make adjustments to business operations. ECONOMIC

○ Economic cycles (or business cycle) are the periods of growth (‘boom’) and recession (‘bust’) that occur as a result of fluctuations in the general level of economic activity.

○ The level of economic activity does not remain at a constant level. ○ E.g. sales in an independent women’s clothing store

FINANCIAL

○ Deregulation is the removal of government regulation from industry, with the aim of increasing efficiency and improving competition = opening financial industry to greater competition

○ Global financial markets ○ As interest rates increase, businesses will become more cautious in taking on extra debt ○ E.g. Coles, Woolworths and Aldi lowering prices

GEOGRAPHIC

○ Australia’s geographic position allows business activity with Asia – Pacific (China) ○ China provides challenging opportunities for business expansion, sales and profit ○ Globalisation – The process that sees goods, people, money, ideas and moving around the world

faster and more cheaply ○ e.g. International brands: Nike, Facebook, Twitter and Skype

SOCIAL

○ Changes in tastes, fashion and culture can lead to business sales and profit opportunities and business growth.

○ The three main social issues are: ○ A growing awareness of our vulnerable Kangaroo environment ○ Growing desire to provide family friendly workplaces

○ e.g. more flexible work hours and better childcare options ○ Business catering for workplace diversity

○ e.g. gender, age, language, ethnicity, cultural background, sexual orientation and religious belief

LEGAL

○ Society expects business owners to abide by the laws of a country. ○ Consequently, is it essential that they have a sound knowledge of the laws that will affect their

operations and that they understand and accept the legal responsibilities they owe to all stakeholders.

○ Examples of laws: taxation, industrial relations, WHS, equal employment

INSTITUTIONAL

○ Each level of government imposes a range of regulations on business to standardise and protect their dealings with consumers and competitors.

○ FEDERAL OBLIGATIONS - payment of taxes for employees, provision of employee superannuation and abiding by relevant legislation regulations.

○ STATE OBLIGATIONS - provision of employee entitlements, payments of payroll taxes, abiding by relevant state legislation, abiding by pollution controls

○ LOCAL OBLIGATIONS - approving new development and alterations, fire regulations and parking regulations

○ Regulatory bodies also protect consumers ○ e.g. NSW Fair Trade, NSW Environment Protection Authority

○ Other bodies also protect consumers and influence business ○ e.g. ASX (Australian Securities Exchange), Trade Unions

POLITICAL

○ Labour market reforms: decentralisation of wage determination ○ Social reforms: paid parental leave ○ Environmental management: Emissions Trading Scheme ○ Taxation: GST ○ Major political change can lead to business uncertainty or business confidence ○ Privatisation – The process of transferring the ownership of a government business to the private

sector e.g. Commonwealth Bank, Telstra TECHNOLOGICAL

○ New communication technologies allow information to be rapidly transmitted to an ever-increasing number of customers with a speed that now makes communication almost instantaneous.

○ A business that wants to be locally, nationally and/or globally competitive must adopt the appropriate technology e.g. creating an online store

○ Use of hi tech robotics in manufacturing industries improve productivity, reduce operating costs and limit boring and repetitive tasks

COMPETITIVE SITUATIONS

○ A sustainable competitive advantage refers to the ability of a business to develop strategies that will ensure it has an ‘edge’ over its competitors for a long period of time. (Business aims to chieve this to capture a larger portion of the market)

○ Factors influencing a business’ competitiveness ○ Ease of entry to a market for a new business, local and foreign competition, marketing strategies

employed by competitors, number of competitors

MARKETS ○ Changes in financial – internationally financed flows have expanded very rapidly over the last

three decades. ○ Changes in labour markets – the movement of large numbers of temporary skilled migrant

workers has been very important in Australia; the growing demand for highly trained employees means that such people are increasingly mobile.

○ Changes in consumer markets – improved technologies and communications have also changed consumer markets.

STAKEHOLDERS

A stakeholder is any group or individual who has an interest in or is affected by the activities of a business.

WHAT A BUSINESS MUST PROVIDE TO THE FOLLOWING GROUPS (MEESSC):

MANAGERS ○ Support the actions of management ○ ­Provide adequate resourcing levels and lines of communication

EMPLOYEES

○ ­Fair pay and conditions ○ ­Provide safe working environment ○ ­Access to training and development

ENVIRONMENT

○ Consider impact on environment ○ ­Care and preservation of the environment ○ ­Sound and responsible environmental management

SOCIETY

○ ­Fair and honest business practices ○ ­Ethically responsible decisions

SHAREHOLDERS

○ Provide information about the business’s performance ○ ­Produce an annual report ○ ­Manage the funds so a responsible return is paid

CUSTOMERS

○ Quality products ○ ­Fair prices ○ ­Service during and after sales ○ ­Safety

1.4) BUSINESS GROWTH AND DECLINE - STAGES OF BUSINESS LIFE CYCLE

Business life cycle refers to the stages of growth and development a business can experience.

○ The stages are: establishment, growth, maturity and post-maturity. ○ In each stage of the cycle, a business is confronted with new challenges and presented with

different opportunities.

PHASE FEATURES CHALLENGES

Establishment ○ Just launched in market ○ Low level of sales, output ○ Negative cash flow ○ Heavy promotion to create

customer awareness

○ 33% failure rate due to poor cash flow management

○ Creating a cohesive and efficient work environment

○ High fixed costs (rent & equipment)

○ Pricing is set low, price skimming and penetration strategies

Growth ○ Market expands but ○ Providing sufficient supply to

competitors appear ○ Increasing customer base,

sales, developing new products (old ones deleted)

○ Cash flow slowly becoming positive

○ Development of a formal organisational structure

meet market demand ○ Time lags between orders

and delivery, resulting in dissatisfied customers

○ Maintain funds for re-investment

○ Advertise to maximise market share

○ Ensure staff levels are adequate

Maturity ○ Sales plateau ○ More competitors enter the

market ○ Focus shifts to improving

efficiency in order to maintain profit margins

○ Management team seeks employees with specialist skill sets in all key business areas ensuring business’ objectives are being met

○ Examine value chain to reduce non-value added aspects

○ Innovation ○ Ensure staff remain

motivated ○ Scan environment for

competitors ○ Apply latest technology

Post - maturity RENEWAL

○ Seeking of new markets to satisfy previously unmet demand

○ sales , cash flow and profit begin to increase

○ Focus on production and satisfying customer demand

○ Market research is undertaken to forecast customer trends and demands

○ Management implements programs to realign objectives

○ Cash flow may decline in the short term as new products are developed

○ Research and development in new products and markets is an expensive and lengthy process

○ Overcome employees’ resistance to change

○ Undertaking new strategies involves degree of risk

Post - maturity STEADY STATE

○ Compare alternative supplier options

○ Businesses satisfying customer demand and maintaining profit levels

○ No continued expenditure on research and development

○ Outsource support functions: eg technology, production of products

○ Maintain customer loyalty

○ Business is content ○ Complacent - new

competitors enter market with superior products

○ Loss of competitive edge

Post - maturity DECLINE

○ Customer stops buying products and their business’ cash flow is adversely affected

○ Profits decline ○ Suppliers restrict credit

facilities ○ Suppliers ○ Loss of skilled employees ○ Business is at risk of failing

○ Profits decline ○ Difficult for business to

borrow $ as financial institutions don’t want to lend to high risk businesses

○ Obsolete products = unsold inventory

or ceasing operations

STRATEGIES

○ Establishment: setting goals, rewards programs, develop customer relationships, rent utilities ○ Growth: Rewards programs, keep up with demand, train employees and motivate staff ○ Maturity: Quality control, new advertising, consider celebrity product endorsement ○ Post Maturity: Broadening market e.g. expanding to an online market, competitive prices

TYPES OF MERGERS & TAKEOVERS (GROWTH STAGE)

○ A merger occurs when the owners of two separate businesses agree to combine their resources and form a new organisation.

○ An acquisition occurs when a business takes control of another business by purchasing a controlling interest in it.

○ Vertical integration occurs when a business expands at different but related levels in the production and marketing of a product.

○ Horizontal integration occurs when a business acquires or merges with another firm that makes and sells similar products.

○ Diversification occurs when a business acquires or merges with a business in a completely unrelated industry.

FACTORS THAT CONTRIBUTE TO BUSINESS DECLINE ○ Not assessing demographics e.g. Myer in Hurstville (Asians want cheap products)

○ Ignorance of Competition e.g. Diva closing down, Lovisa growing

○ Not keeping up with trends

○ Bad product quality

○ Location is not good for visibility e.g. Miranda Spotlight

○ Poor customer service and management

○ Prices not competitive e.g. Woolworths vs IGA

○ Not convenient

○ Lack of advertising and marketing

○ Consumer Finance e.g. people cannot afford to buy luxury goods

○ Failure to plan and set realistic business goals

FACTORS THAT CONTRIBUTE TO RENEWAL

○ Re-evaluate consumer trends

○ Change name

○ Put more finances into advertising

○ Provide free product samples and coupons

○ Retrain staff or consider a change in management

VOLUNTARY AND INVOLUNTARY

CESSATION - LIQUIDATION

Voluntary administration occurs when an independent administrator is appointed to operate the business in hopes of tracking out of the present format. Voluntary/involuntary liquidation is the process of an appointed liquidator converting the business’ assets into cash. LIQUIDATION

○ Equivalent of bankruptcy for a company ○ Life of company comes to an end ○ Occurs because company is unable to pay its debts when they are due, becomes insolvent

Voluntary cessation occurs when the owner ceases to operate the business of their own accord. Can be

due to loss of enthusiasm or decision to retire.

Involuntary cessation occurs when the owner is forced to cease trading by the creditors of the business,

who are asking for their money back but not getting it. Can be due to death of the owner, lack of demand

for the product, or unfavourable economic conditions which discourage consumer spending. Most common

cause is the inability of the business to repay its debts

CHAPTER 2: BUSINESS MANAGEMENT

2.2) NATURE OF MANAGEMENT

MANAGEMENT: the organisation and coordination of the activities of a business in order to achieve

defined objectives.

FEATURES OF EFFECTIVE MANAGEMENT

○ Things get done

○ Goals are met

○ Measurable change (turnover rate, market share, expansion, sales/revenue, profit maximisation)

○ Stakeholders are satisfied

○ Not in decline

○ (planning, leading, organising, controlling)

Effectiveness VS Efficiency

Effectiveness: measures the degree to which a goal has been achieved

Efficiency: compares the resources needed to achieve the goal (the costs) against what was actually

achieved (the benefits)

SKILLS OF MANAGEMENT

○ Problem Solving Skills

○ Interpersonal: skills needed to work and communicate with other people and to understand their

needs. Includes the ability to communicate, motivate, lead and inspire. (E.g. pastoral care at

school)

○ Communication Skills

○ Strategic Thinking Skills: allows a manager to see the business as a whole and to take the broad,

long term view. (E.g. School strategic plan and vision for the future building works)

○ Flexibility/ Adaptability to Change: integrating new information and drawing conclusions from it. A

business may need to adopt new methods and approaches to reach the needs of the situation. (E.g.

21st century learning may require internet connection in all classrooms)

○ Reconciling the conflicting interests of stakeholders: Meet the expectations of stakeholders.

Different stakeholders require different demands. (E.g. Businesses are expected to adhere to social

expectations for customers like quality products, products at reasonable prices)

○ Vision: clear, shared sense of direction that allows people to attain a common goal. (E.g. Teachers

have visions for your marks and plan learning activities to prepare you)

○ Decision Making Skills: process of identifying the options available and then choosing a specific

course of action to solve a specific problem. (E.g. Completing a SWOT analysis, plan a course of

action)

ACHIEVING BUSINESS GOALS

GOAL: A desired outcome (target) that an individual or business intends to achieve within a certain time

frame.

Best method to write effective goals is SMART

○ Specific ○ Measurable ○ Achievable ○ Realistic ○ Time bound

PROFITS (financial) SOCIAL (non - financial) MARKET SHARE ENVIRONMENTAL GROWTH PERSONAL SHARE PRICE STAFF INVOLVEMENT (IMMT)

○ Involving employees in the decision making process, giving them necessary skills and rewards ○ Managers should pursue workplace practices that increase labour productivity – measures how

much an employee can product in a set period of time ○ Gains employee confidence, positively influences performance and if staff are more involved, they

will be much happier and have increased outputs INNOVATION

○ Entrepreneurs – employees who take on entrepreneurship within a business ○ Practices to boost innovation may include:

○ Rewards given to innovative employees ○ Trustful management - not excessive control ○ Using techniques (eg: brainstorming)

MOTIVATION

○ The individual, internal process that directs, energises and sustains a person’s behaviour ○ Tips for motivating staff:

○ Encourage suggestions ○ Offer advancement opportunities ○ Recognise achievements

○ Provide a family friendly workplace

MENTORING ○ Developing another individual by offering tutoring, coaching and modelling acceptable behaviour ○ Socialisation – when a new employee undergoes in the first few weeks of employment through

which he or she learns how to cope/succeed ○ Mentoring is important because it: ○ Assists with the training and development of all employees ○ Participants learn what is expected of them

TRAINING

○ Teaching staff how to perform their job more efficiently and effectively by boosting their knowledge and skills GOAL OF TRAINING IS TO IMPROVE EMPLOYEE PRODUCTIVITY

○ Multiskilled employees are better able to – ○ Adapt to a rapidly changing technological environment ○ Provide better customer service ○ Participate effectively in work teams ○ Work more efficiently

MONETARY AND NON MONETARY REWARDS Monetary – Money related rewards e.g. bonuses, pay rises Non – Monetary – More personalised rewards e.g. employee of the month, parental leave, holidays

2.2) MANAGEMENT APPROACHES CLASSICAL APPROACH The classical approach to management stresses how best to manage and organise workers so as to improve productivity (output). LEADERSHIP STYLE: AUTHORITARIAN Management makes decision and tells staff

POSITIVES NEGATIVES

○ Fast decisions ○ Well defined procedures ○ No favouritism and bias

○ Stress on staff ○ Lack of employee involvement ○ Employee discouragement ○ Main priority is output

Eg: Military officer during wartime, schools, churches ORGANISATIONAL STRUCTURE: HIERARCHICAL

○ One way communication – Top down

○ Division of labour - means the degree to which a total task can be

divided into small, usually unskilled, tasks, e.g production line

○ Rigid chain of command - is a very strict line of authority from the top

of a business to the bottom.

○ Small spans of control - is the number of subordinates who report

directly to a specific manager

ORGANISATION + ALLOCATION OF TASK: PLANNING, ORGANISING AND CONTROLLING

MANAGEMENT FUNCTION DEFINITION OPERATION

Planning The process of setting goals and Planning the tasks that need to

deciding on the methods to achieve them Types of strategies:

○ Strategic (3-5 years) ○ Tactical (1-2 years) ○ Operational (day to day)

be planned

Organising The process of rearranging the resources of the business to achieve the goals

Organising the work and workplace in such a way as to maximise productivity and efficiency

Controlling The process of evaluating and modifying tasks to ensure that the set goals are being achieved

Changing production procedures if goals are not being achieved

BEHAVIOURAL APPROACH This method stresses that people (employees) should be the main focus of the way in which the business is organised. LEADERSHIP STYLE: PARTICIPATIVE/DEMOCRATIC Managers encourage a high degree of employee participation in decision-making as well as open communication channels.

○ Participative or democratic leaders share their decision-making authority with their subordinates. ○ This style of leadership is most effective when a business is operating in an environment

undergoing rapid change.

POSITIVES NEGATIVES

○ Motivated employees ○ Good business culture ○ Faster communication from staff to CEO ○ Incentives

○ Slower decision making process

ORGANISATIONAL STRUCTURE: TEAMS

○ Teamwork – Involves people who interact regularly and coordinate their work towards a common goal

○ Behavioural theorists claim that productivity and efficiency is higher when people work in a team structure. Work teams are a feature of modern business.

○ Short chain of command, and wide span of control, sense of cohesion ORGANISATION/ALLOCATION OF TASK: MOTIVATION, LEADING, COMMUNICATION (MLC)

MANAGEMENT FUNCTION DEFINITION OPERATION

Motivation Providing workers with the desire to carry out work to a high standard. Energising and encouraging employees to achieve the business’ goals.

Monetary and non monetary awards

Leading Having a vision of where the business should be in the long and short term.

Guiding a team to success ○ Managing change ○ Guiding and directing ○ Motivating and inspiring ○ Solving problems ○ Getting the job done

Communication Exchanging information between people; the sending and receiving of messages. Various management roles are carried out by interacting and communicating with others.

Manager telling employees a plan

CONTINGENCY APPROACH (aka it depends)

○ Stresses the need for flexibility and adaptation of management practices and ideas to suit changing circumstances

○ Managers need to be adaptable and flexible in order to solve problems

○ Reacting quickly to change by thinking strategically about the future

○ EACH SITUATION = UNIQUE SOLUTION

ADAPTING TO CHANGING CIRCUMSTANCES Businesses need to responsive to changes in its environment and be adaptive in:

○ the nature of the work - can change due to technology or downsizing ○ differences between employees and managers ○ size of the business - businesses grow and contract

2.3.2) MANAGEMENT PROCESS - OPERATIONS

GOODS/SERVICES

PRODUCTION PROCESS

1. Inputs - raw materials

● Types of inputs: materials, capital equipment, labour, information

● In terms of KFC: ingredients, store itself, kitchens, equipment, people, ability to fry

2. Transformation (includes people)

● Elaborately transformed manufactures: highly processed and valued products (eg:

computer)

● Simply transformed manufactures: ability to be further processes by a wide range (eg:

screw)

3. Outputs - final product and how it gets to consumer

QUALITY MANAGEMENT

● Quality control: Involves the use of inspectors at various points in production process to check for

problems and defects

○ Specifications/benchmarks are set before physical checks are completed

○ Actual performance is then compared to established criteria

○ If it passes it meets customer expectations

● Quality assurance: Use of a system so business achieves set standards in production

○ Eg: ISO (International Organisation for Standardisations) is a series of quality certifications

○ More focused on prevention rather than treatment

● Total quality management: ongoing business-wide commitment to excellence that is applied to

every aspect of the business’ operation

○ Sharing responsibility among all members of business for quality, which becomes a

commitment and responsibility of every employee

2.3.3) MANAGEMENT PROCESS - MARKETING

Marketing (Simplified Definition) – The total system of interacting activities designed to plan, price, promote

and distribute products to present to potential customers.

IDENTIFICATION OF THE TARGET MARKET

MARKET SEGMENTATION

○ Mass Marketing – the seller mass produces, mass distributes and mass promotes one product to all

buyers (e.g. mobile phones, gas, water, electricity, bread, fashion)

○ Market Segmentation – occurs when the total market is subdivided into groups of people who share

one or more common characteristic (e.g. feminine hygiene products target females, car magazines

target men, David Jones targets mid 30-50 year old, professional women)

○ Niche Market – narrowly selected target market segment (e.g. organic foods, sports channels

(ESPN))

The four main marketing segmentations:

Demographics Geographic Lifestyle Behavioural

○ Age ○ Gender ○ Education ○ Family size ○ Income ○ Culture ○ Religion

○ City ○ Urban ○ Suburban ○ Regional ○ Climate ○ landform

○ Motives ○ Opinions ○ Interests ○ Personality ○ aspirations ○ Opinion leader

○ Purchase occasion ○ Benefit ○ Use rate ○ Loyalty

MARKETING MIX - THE 4 P’S

PRODUCT ○ Product positioning - what do customers

think of your product ○ Product packaging - packaging of the

product ○ Product branding - name, slogan, logo

PRICE Methods of calculating price: 1) Cost Based Total cost of producing or purchasing a product plus a mark-up for profit. Commonly used in retail stores. 2) Market based Setting prices according to the interaction between the levels of supply and demand AKA whatever the

market is prepared to pay e.g. house prices 3) Competition based Choosing a price that is either below, equal to or above that of the competition e.g. Coles vs Woolworths vs IGA vs ALDI MARKETING DETERMINES THE PRICE OF GOODS

PROMOTION 1) Advertising - print, radio, TV, billboards

2) Personal selling- sales rep directed to a

customer attempting to make a sale. Developing a long term, cost effective and strong relationships with customers e.g. monthly emails and letters to door directed with your name (personalised)

3) Public relations/Publicity - free news story about

a business’s products. PR are those activities aimed at creating and maintaining favourable relations between business and customer e.g. Aldi’s low price appearance in the Sydney Morning Herald, celebrity promotion, competitions

4) Sales Promotion - Refers to activities or

materials used by the business to attract interest and support for the good or service e.g. free samples, coupons, buy 1 get 1 free sales

PLACE/DISTRIBUTION 1) Producer to consumer All services from tax advice to car repairs use this

2) Producer to retailer to consumer A retailer is an intermediary who buys from the producer and resells to customer. Often used for bulky or perishable products e.g. furniture and fruit. USED BY SONY AND PANASONIC

3) Producer to wholesaler to retailer to customer Most common method. A wholesaler is an intermediary who buys bulk from a producer, then sells in smaller quantities to retailers. Producers will use the services of a wholesaler when a large number of retailers sell the product and the producer finds it difficult to deal with them all e.g. oil companies, seafood

2.3.4) MANAGEMENT PROCESS - FINANCE

FINANCIAL OBJECTIVES (not part of syllabus)

○ Profitability, solvency, liquidity, efficiency

BALANCE SHEETS

BALANCE SHEET FOR (BUSINESS NAME) FOR (FINANCIAL PERIOD)

ASSETS LIABILITIES

Current assets - Cash 5,000 - Accounts receivable 5,000 - stock/inventories 10,000

Non - current assets

Current liabilities - Credit card 10,000 - Overdraft 5,000 - Accounts payable 25,000

Non - current liabilities

- Equipment 15,000 - Car 25,000 - Building/property 5,000

- Loans 1,000 - Mortgages 5,000

Owners equity - Capital contribution 18,000 - Drawings (2,000) - Retained profit 3,000

Total: 65,000 Total: 65,000

A = L + OE (Assets = Liability + Owner's Equity)

Current - less than 12 months

Non current - more than 12 months

Liquidity – the amount of cash a business has access to and how readily it can convert its assets into cash

so that debt can be paid

Current assets ○ Current ratio = —————————

Current liabilities

○ This can then be expressed in terms of a ratio and a textual statement ○ Rule of thumb for ratio is 2 current assets for every dollar of current liability. ○ If not, it means the business does not have enough liquid assets to pay its short term debts

Solvency/Gearing - ability to pay long-term debts on time Total liabilities

● Debt to equity = ————————— Owner’s equity

A balance sheet shows the value of assets, value of liabilities and owner’s equity (proprietorship) balances

at a certain point in time. It is called a balance sheet because at that point in time assets are equal to

liabilities and owner’s equity.

INCOME STATEMENTS

INCOME STATEMENT FOR (BUSINESS NAME) FOR (FINANCIAL PERIOD) Sales 1,000,000 Less CoGS (200,000)

Opening stock 50,000 Purchases 200,000 Less closing stock (50,000)

Gross Profit 800,000 Less Expenses

Wages 330,000 Advertising 85,000 Utilities 12,000 Insurance 5,000 Bad debt 14,000 Phone 2,000

Net profit $351,000

CoGS = OS + P - CS (Cost of goods sold = opening stock + products - closing stock)

GP = Sales - CoGS (Gross profit = sales - cost of goods sold)

NP = GP - Expenses (Net profit = gross profit - expenses)

Net profit - how much goes into the owner’s pocket

Order for Income Statement

1. Sales

2. Less CoGS

3. Gross profit

4. Less Expenses

5. Net profit

Profitability

NP GP Net profit ratio (NPR) = —————— x 100 Gross profit ratio (GPR) = —————— x 100 Sales Sales = some percentage = some percentage

Income statements are used to help the business to calculate how much profit it has made over a period of

time by showing profits or losses, expenses and income.

CASH FLOW STATEMENTS

CASH FLOW STATEMENT FOR (BUSINESS NAME) FOR (FINANCIAL PERIOD)

Operating Activities - Receipts from customers 25,000 - Payments to suppliers (15,000)

Net operating cash balance 10,000

Investing Activities - Purchases of equipment (75,000) - Proceeds of sale of equipment 5,000

Net investing activities 70,000

Financing Activities

- Proceeds of borrowings (35,000) - Payments of borrowings 15,000

Net financing activities (20,000)

Net cash increase/decrease (80,000) Opening cash balance 20,000 Cash at end of period (60,000)

A cash flow statement shows the movement of cash receipts (inflows, such as money from sales) and cash

payments.

Formulas are used to COMPARE

○ Other businesses

○ Industry standards

○ Time periods

2.3.5) MANAGEMENT PROCESS - HUMAN RESOURCES

HUMAN RESOURCE CYCLE

IDENTIFYING STAFFING

NEEDS

○ Human resource planning: development of strategies to meet business’ future staffing needs, future

demand, estimating supply for future demand

○ Job analysis: specifying staff needs

■ 1) Job descriptions: written statement describing employee’s duties

■ 2) Job specification: key qualifications

RECRUITMENT

○ Involves finding and attracting the right people for job vacancies through different means (print,

advertisement agencies)

○ Method for recruitment depends on size of business, type of position available, nature of labour

force

○ Organisations can choose internal/external recruitment methods

○ Employee selection criteria can include

○ Written application

○ Testing

○ Interview

○ Background checks

TRAINING

○ Training: teaching staff to do job more effectively and efficiently by boosting knowledge and skills

○ Development: preparing employees for more responsibilities in the future (eg: gaining more

experience, better knowledge and skills)

○ Aim: long term change in employees skills, knowledge attitudes, behaviour to improve work

performance

○ Types of training: formal (eg: simulations), informal (eg: coaching)

MAINTENANCE

○ Monetary awards (eg: pay rise, bonuses)

○ Non - monetary awards (eg: maternity leave, sick leave, nice office)

EMPLOYMENT CONTRACTS

○ Award: minimum conditions (Eg: pay rates, holidays, long service leave)

○ Enterprise agreement: negotiated agreement between employer and union or group of employees

○ Common law contract: covers employees that aren't under any award for enterprise agreement

SEPARATION - VOLUNTARY/INVOLUNTARY

○ Redundancy: when a person’s job no longer exists, can be due to technological changes,

organisational restructure, merger, acquisition

○ Retrenchment: when a business dismisses an employee as there is not enough work to justify

paying them

○ Dismissal: unacceptable employee behaviour so it is necessary to terminate the employment

contract

2.4) MANAGEMENT & CHANGE

RESPONDING TO EXTERNAL AND INTERNAL INFLUENCES

○ External influences have an indirect impact on a business and the business has very little control

over them

○ Internal influences have a direct impact on a business and the business has some control over them

MANAGING CHANGE EFFECTIVELY

○ Threat - if you don’t do this then i will...

○ Manipulation - skilful or devious exertion of influence over someone to get them to do what you want

IDENTIFYING THE NEED FOR CHANGE

○ Having up to date measurements/information

○ Business Information Systems

○ Gathers data, organises and summarises and then converts into practical information used

by management to make decisions

SETTING ACHIEVABLE GOALS

○ SMART goals

○ Vision statement - purpose and key goals

RESISTANCE TO CHANGE

○ Find out why there is resistance to change

○ Includes management problems, fear of job loss, disruption to routine, time, fear of the unknown,

inertia and cost

STRATEGIES TO OVERCOME RESISTANCE TO CHANGE

○ Reasonable changes

○ Allow employees to participate in the change process

○ Discuss upcoming change - reduces fear of the unknown

○ Clearly articulate the purpose for the change

○ Build trust among employees

○ Follow a sensible time frame, do not rush through changes

MANAGEMENT CONSULTANTS

○ Someone who has specialised knowledge and skills within an area of business, helpful in providing

change management advice

○ Methodical approach to dealing with change from perspective of a business and an individual level

○ They provide:

○ Wide range of business experiences

○ Specialised knowledge and skills

○ External viewpoint

○ Access to the latest research

○ Awareness of industry best practices

CHAPTER 3: BUSINESS PLANNING

3.1) SMALL TO MEDIUM ENTERPRISES

DEFINITION:

○ 20 or fewer employees if the organisation is non-manufacturing (services)

○ Fewer than 100 employees if involved in the manufacturing of goods

○ Microbusiness: less than 5 employees

ROLE

○ Production: 50% of all products

○ Research & development: 20%

○ Exports: increasing amount

○ Employment: 73% of private sector

ECONOMIC CONTRIBUTION

○ GDP: 50% of total output is provided by SME’s

○ Created 80% of Australia’s employment gains in the past 10 years

○ BOP

○ Inventions and innovations

SUCCESS/FAILURE

● 5 common keys to SME success

○ Flexibility

○ Reputation

○ Entrepreneurial activities/abilities

○ Access to information

○ Focus on market niche

● Reasons for failure

○ Failure to plan

○ Economic downturn

○ Leadership crisis

○ Illness

○ Poor customer service

3.2) INFLUENCES IN ESTABLISHING A SMALL TO MEDIUM ENTERPRISE

PERSONAL QUALITIES

Qualifications

○ No qualifications are necessary, but some do require official qualifications to operate

Motivation

○ Personal drive and desire to achieve

Entrepreneurship

○ Assuming the risk of starting a business

Cultural Background

○ Arising from your community’s traditions and beliefs

○ Arising from your community’s long held experience in a particular

trade or commercial operation

Gender

○ Women are now setting up more small businesses than men

Skills

SOURCES OF INFORMATION

○ Professional advisors

○ Accountants

○ Solicitors

○ Bank managers

○ Management consultants

○ Trade associations

○ Unis and TAFES

○ Community based services

THE BUSINESS IDEA

○ Concept developed by individual or group that has possibility of being implemented into the

establishment of a profitable business

○ COMPETITION

○ Making an assessment of competition by identifying how successful competitors are in terms

of competitive advantage, market share, new products, services etc

ESTABLISHMENT OPTIONS

Establishment Option Definition Advantages Disadvantages

Starting from scratch ○ When one has created something unique, and recognises a gap in the market

○ ­Owner has freedom to set up as preferred

○ Owner can determine pace of growth

○ ­High risk and uncertainty

○ ­Time is needed to set up

○ Start-up is slow

Buying an existing business

○ Everything associated with the business is purchased

○ Purchaser needs to know WHY the business is for sale

○ ­Sales to existing customers generate income

○ Good business history = success

○ ­Image may be hard to change

○ Employee resentment

Franchise ○ Avoids many problems when starting a new business

○ An established business formula

○ ­Immediate benefits from franchisor’s goodwill

○ Franchisor often offers training

○ Little scope for individuality

MARKET CONSIDERATIONS

GOOD OR SERVICE?

PRICE

○ Percentage markup - add a % to the cost

○ RRP - price recommended by wholesaler or manufacturer

○ Price leadership and competition - following a major business who sets a price

○ What the market will bear - auction - auction reading consumer sentiment

LOCATION

○ Shopping centre vs shopping strip

ONLINE

○ Email, internet research, website, online banking

FINANCE

Finance refers to the funds required to carry out the activities of a business

SOURCES

○ Equity - funds contributed by the owners

○ Debt - money obtained through loans

○ How much will depend on the type, the source and the length (term)

○ No interest on equity but profit is paid to owners

○ Unlimited vs limited liability can be considered the cost of equity finance

Short Term Debt Medium Term Debt Long term debt

Bank overdraft Term Loan Mortgage

Trade credit Personal loans

Bank Bills Leasing

COST

○ How much will it cost to start the business?

○ Establishment costs - expenses in setting up the business

■ E.g - legal fees, furniture, equipment, phone and electricity connection

○ Operating costs - the running costs of the business over a year

■ E.g - wages, advertising, insurance, interest repayments, vehicle running costs

LEGAL

BUSINESS NAME

○ Sole traders can operate under their own name

○ Business name registration service is managed and administered by ASIC (Australian Securities

and Investments Commission)

ZONING

○ Small businesses in the establishment stage are influenced by zoning of land within the Local

Government Area

○ Zoning policy ensures that structures that business erect comply with that policy and also with state

and local government environmental planning policies

○ Ensures that business carried in a particular planning zone is an appropriate use

HEALTH & OTHER REGULATIONS

○ Local councils often oversee building supervision, including management and removal of asbestos,

food hygiene, litter control, noise control and pollution

○ Workplace safety for both employer and employees that work in the business - SWA (Safe Work

Australia) oversees WHS regulations

HUMAN RESOURCES

MAIN SOURCES OF EMPLOYEES FOR A BUSINESS

○ Temporary/casual services

○ TAFE/Uni/Schools

○ Internal searches

○ Word of mouth

○ Private employment/ recruitment agencies

○ Job services

○ Advertisements

SKILLS

○ General: skills transferable from one workplace to another

○ Specific: skills often required by law to perform a particular job

COSTS

○ Wage: business needs to observe any legal requirements such as enterprise agreements or

contractual arrangements

○ Employee benefits - leave, superannuation scheme etc

○ Business will have to ensure the employees against accidents or illnesses

○ Non wage: providing rewards to staff that aren't financial (eg: personal satisfaction, job enrichment,

positive work environment)

TAXATION

Tax Leveled

Income Tax ○ Taken from employee’s salary/wage directly

Federal government

Fringe Benefits Tax ○ Provision of benefits to an employee (eg:

cars) IN PLACE of salary/wage

Federal government

Goods & Services Tax ○ 10% of most goods and services in Aus

Federal government

Company Tax ○ Paid on earnings of a company

Federal government

Capital gains Tax ○ Calculated on profit made on sale of assets

Federal government

Stamp Duty ○ Documents that give evidence to

transactions

NSW government

Land Tax ○ If land is higher than $376k

NSW government

Payroll Tax - Payable on wages paid to employer over

$638k

NSW government

3.3) BUSINESS PLANNING PROCESS

A business plan is the ‘roadmap’ for future growth and development within a business. It sets out the

desired goals and direction of the business

ELEMENTS OF BUSINESS PLAN

1) Executive summary

2) Goals

3) Strategies

4) Business description and outlook - situational analysis

5) Management and ownership

6) Operation plans

7) Marketing plans

8) Financial plans

9) HR plans

BENEFITS OF DEVELOPING A BUSINESS PLAN

○ Tests viability of a business

○ Assists a business to be productive rather than reactive

○ Assists in maintaining business operation especially focus on goals and objectives

○ Indicating owner’s ability and level of commitment

○ Forces the small business owner justify his or her own plans and actions

○ Identifies the business’ strengths weaknesses

SOURCES OF PLANNING IDEAS

● Info for planning can come from many resources:

○ Internal sources (management & employees)

○ External sources (economical, political, social, technological, geographical sources have

impact on business)

○ Specialists can also help (accountants, bank, solicitors)

SWOT ANALYSIS

● Strengths, weaknesses, opportunities, threats

VISION

A vision statement broadly states what the business aspires to become in the future.

GOALS / OBJECTIVES

Long term growth - maintaining profits over time by continually expanding

○ Does not happen by accident - requires comprehensive, strategic planning

○ Exploiting the business’ competitive advantage

Strategies can include:

○ Customer feedback

○ Supplier + customer partnerships

○ Product innovation

○ Sigma sis - a management approach

ORGANISING RESOURCES

Organising is determining what is to be done, who is to do it and is to be done

STEP 1 - DEVELOP PLANS AND ESTABLISH GOALS

STEP 2 - DETERMINE ACTIVITIES

STEP 3 - GROUP ACTIVITIES (in terms of finance, hr, marketing, operations)

When you establish a business you need to know what resources you need, what activities you need and

how it relates to the key business functions.

FORECASTING

TOTAL REVENUE

Total amount received from sales calculated by multiplying the price by quantity sold

P x Q = TR

TOTAL COST

Sum of fixed (stay that way no matter) costs and variable (costs that change) costs

● Fixed costs: costs that do not vary regardless of how many units you produce

● Variable costs: costs that depend on the numbers of goods and services produced

FC + VC = TC

BREAK EVEN ANALYSIS

Used to determine the level of sales that need to be generated to cover the total cost of production

BEQ = FC / (P - VC(p.u))

*Break even point is units sold not money

CASH FLOW PROJECTIONS

○ Most important financial tool available to a business

○ Shows the changes to the cash position brought about by the operating, investing and financial

activities of the business

○ Month by month projections of cash inflows and outflows

○ Tells the managers how much cash and capital is needed and when

○ Different from cash flow statement in that one projects into the future while one states what has

happened in the past

MONITORING AND EVALUATIONS

Monitoring: the process of measuring actual performance against planned performance

Evaluating: the process of assessing whether the business has achieved stated goals - has the business

achieved goal, if not, where and why not

You can monitor and evaluate sales, budgets and profit

CORRECTIVE ACTION

○ If goals aren’t achieved, something needs to change

○ Are standards too unrealistic?

○ Have external influences changed?

○ Goals and standards, product, material, management practices, marketing strategies, personnel

changes

3.4) CRITICAL ISSUES IN BUSINESS SUCCESS AND FAILURE

IMPORTANCE OF A BUSINESS PLAN

○ Helps test viability of the business

○ Assists business to be proactive rather than reactive

○ Assists in maintaining the business operation, especially focusing attention on the goals and

objectives

○ Indicates the owner’s ability and level of commitment

○ Forces the small business owner to justify his or her plans and actions

○ Identifies the business’ strengths and weaknesses

MANAGEMENT - STAFFING AND TEAMS

Modern definition of management: working with and through other people to achieve business goals in a

changing environment

○ Managers are crucial to the success of the business

○ Business must employ the right people

○ Strategies to improve staffing:

○ External recruitment to find the right people to employ

○ Conducting a skills audit

○ Keep a skills inventory

○ Teams can have greater benefits than individual work

○ Development and training of team leaders and team members

IDENTIFYING AND SUSTAINING COMPETITIVE ADVANTAGE

Refers to the strategies used by a business to gain an ‘edge’ over its competition

Strategy 1 - Price/cost strategy

○ Leading on costs - lower prices

○ Efficiency of operation - streamlining production process

○ Low cost - finding the cheapest labour to do the work in your business

○ Economies of scale - reducing the costs of input by increasing the level of output

○ Technology - replacing expensive workers with cheaper machines

Strategy 2 - Differentiation

○ Offering something not already offered by rivals

○ High product quality

○ Innovative design

○ Positive brand image

○ Top quality service

Evaluating long term success

○ Sustaining the competitive advantage is crucial for long term success

○ A business can protect itself by:

○ Research + development

○ Intellectual property rights (patent, trademark)

○ Exclusive contracts with suppliers

○ Lobbying government to limit foreign competition

○ Dynamic management to stay ahead of competition

AVOIDING OVEREXTENSION OF RESOURCES

Excessive expenditure at startup that is financed through debt is dangerous.

Strategies to avoid financial overextension

○ Leasing instead of purchasing

○ Planning and forecasting

○ Raise capital instead of borrowing

○ Start small and then grow

Strategies to avoid stock and employee overextension

○ Appropriate inventory management systems

○ Use technology instead of workers; outsourcing

USING TECHNOLOGY

○ Leading edge technology: newness means problems can arise from choosing wrong product or

application

○ Established technology: cost, performance and servicing of technology is readily available (eg:

internet usage)

ECONOMIC CONDITIONS

○ Businesses must be able to respond to changes in economic conditions and also be aware of

potential changes

○ Can place businesses and entrepreneurs at economic risk

○ If change is not managed, the business can fail