The word ‘business’ is very familiar to us.

We are surrounded by businesses and we could

not imagine our life without the products we buy from them. So what is a business, or what
is business studies? Here’s the very posh definition for it: “the study of economics and
management”
Not clear? Don’t worry, by the end of this chapter, you should be getting a clear picture of
what a business is.

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

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.

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.

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
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 unlimited 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.

A summary of everything learned until now, in this section, in case you’re getting confused:
Franchises

The owner of a business (the franchisor) grants a licence to another person or

business (the franchisee) to use their business idea – often in a specific geographical area.
Fast food companies such as McDonald’s and Subway operate around the globe through lots
of franchises in different countries.

ADVANTAGES DISADVANTAGES

Rapid, low cost method of Profits from the franchise

business expansion needs to be shared with the
franchisee
Gets and income from
franchisee in the form of Loss of control over running
franchise fees and royalties of business

Franchisee will better If one franchise fails, it can

understand the local tastes affect the reputation of the
and so can advertise and sell entire brand
appropriately
Franchisee may not be as
Can access ideas and skilled
suggestions from franchisee
Need to supply raw
TO Franchisee will run the material/product and
FRANCHISOR operations provide support and training

TO An established brand and Cost of setting up business

 No full control over
business- need to strictly
follow franchisor’s standards
and rules

Profits have to be shared

trademark, so chance of with franchisor
business failing is low
Need to pay franchisor
Franchisor will give technical franchise fees and royalties
and managerial support
Need to advertise and
Franchisor will supply the promote the business in the
FRANCHISEE raw materials/products region themselves

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

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.

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.

 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