Preliminary Business Studies - Blake Education

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BUSINESS STUDIES This guide is directly linked to the syllabus with every single dot point of the Preliminary Business Studies syllabus appearing in the margin of the book.

You can write in the guide, so your study is focused and your notes are structured.

l3 Up-to-date coverage of

all three topics of the Preliminary Business Studies course: Nature of business, Business management and Business planning, with an additional chapter—How to write a business report.

l3 Syllabus outcomes with easy-to-understand explanations on each chapter title page—cut through the jargon and understand exactly what’s required of you!

l3 All main headings in each chapter (1.1, 2.1, etc.) are directly from the syllabus, word for word—this way you can easily match the Excel guide to the syllabus!

l3 An alphabetical list of all the Key definitions and concepts you should know for each chapter—an efficient way of learning all the definitions in one go!

l3 A Chapter syllabus checklist with every syllabus dot point listed in checklist

form for each chapter—a fantastic way of testing that you know all the work!

l3 Hundreds of Key Concept questions with answers—questions that test your recall of knowledge in each chapter!

l3 Exam-type questions for every section in each chapter with clock icons to tell

you how much time you will have to answer questions in the exam—this way you can test yourself on exam-type questions under exam-type time pressure!

l3 An Examiner Maximiser feature plus answers to all exam‑type questions—all you need to answer exam-type questions!

l3 A Sample Preliminary exam with Examiner Maximiser feature plus answers— an up-to-date sample paper!

l3 The Excel syllabus summary notes: a detachable section at the end of the guide, where every single syllabus dot point of each chapter is summarised for you— a comprehensive and compact summary of the whole course in 16 pages!

Pascal Press

ISBN 978-1-74125-390-0

PO Box 250 Glebe NSW 2037 (02) 8585 4044 www.pascalpress.com.au

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PRELIMINARY BUSINESS STUDIES

Conquer the syllabus with Excel—the comprehensive guide!

BUSINESS STUDIES Fully revised for Preliminary syllabus changes

A brand-new format that makes even better use of your study time

Robert Barlow 8/03/2017 4:02 PM

Students, teachers and tutors have been using study guides for HSC success for over 25 years.

About the author Robert Barlow, BA, Dip. Ed., was most recently Deputy Principal at Murray High School in Albury. He has had considerable experience with HSC Examination committees and in developing HSC Business Studies curricula. Robert has over ten years experience in the teaching of Business Studies and has also lectured in International Finance and Macroeconomics at Southern Cross University, Lismore. He is also the author of Excel Preliminary Legal Studies and Excel HSC Business Studies.

The Excel Study Guides for Preliminary and HSC courses Preliminary (Year 11)

 HSC Physics

Human Society

 Preliminary Biology

 Success One HSC Physics

 HSC Ancient History Book 1

 Preliminary Business Studies

 HSC & Preliminary Senior Science

 HSC Ancient History Book 2

 Preliminary Chemistry

Mathematics

 HSC Business Studies

 Preliminary Economics  Preliminary Engineering Studies  Preliminary Mathematics General  Preliminary Mathematics General

Revision & Exam Workbook  Preliminary Legal Studies  Preliminary Mathematics  Preliminary Mathematics Revision &

Exam Workbook  Preliminary Maths Extension 1  Preliminary Physics

HSC (Year 12) Science

 HSC Mathematics General 2  HSC Mathematics General 2 Revision

& Exam Workbook  Success One HSC Mathematics

General 2

 Success One HSC Business Studies  HSC Economics  HSC Geography  HSC Legal Studies  HSC Modern History

 HSC Mathematics

 HSC Studies of Religion I & II

 HSC Mathematics Revision &

Technology

Exam Workbook  Success One HSC Mathematics

 HSC & Preliminary Design and

Technology

 HSC Maths Extension 1

 HSC Engineering Studies

 Success One HSC Mathematics

 HSC Food Technology

Extension 1  HSC Maths Extension 2

 HSC Information Processes and

Technology

 HSC Biology

English

Other Subjects

 Success One HSC Biology

 HSC Advanced English

 HSC Hospitality

 HSC Chemistry

 HSC Essay Writing Made Easy

 HSC & Preliminary PD, Health and PE

 Success One HSC Chemistry

 HSC Standard English

 Revise in a Month HSC Visual Arts

9781741253900_PrelimBusStudies_IFC 2015.indd 1

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BUSINESS STUDIES A brand-new format that makes even better use of your study time

Robert Barlow

Preliminary Business Studies-2015.indd 1

28/08/2015 2:30 pm

© 2012 Robert Barlow and Pascal Press Statistics updated 2015 ISBN 978 1 74125 390 0 Pascal Press PO Box 250 Glebe NSW 2037 (02) 8585 4044 www.pascalpress.com.au Publisher: Vivienne Joannou Project editor: Mark Dixon Edited by Ian Rohr Reviewed and answers checked by Kate Dally Indexed by Puddingburn Publishing Services Cover and page design by DiZign Pty Ltd Typeset by Grizzly Graphics (Leanne Richters) Printed by Green Giant Press Reproduction and communication for educational purposes The Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of the pages of this work, whichever is the greater, to be reproduced and/or communicated by any educational institution for its educational purposes provided that the educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. For details of the CAL licence for educational institutions contact: Copyright Agency Limited Level 15, 233 Castlereagh Street Sydney NSW 2000 Telephone: (02) 9394 7600 Facsimile: (02) 9394 7601 E-mail: [email protected] Reproduction and communication for other purposes Except as permitted under the Act (for example a fair dealing for the purposes of study, research, criticism or review) no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above. Students All care has been taken in the preparation of this study guide, but please check with your teacher or the Board of Studies about the exact requirements of the course you are studying as they can change from year to year. The validity and appropriateness of the internet addresses (URLs) in this book were checked at the time of publication. Due to the dynamic nature of the internet, the publisher cannot accept responsibility for the continued validity or content of these web addresses.

© Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 2

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Preliminary Business Studies Contents Conquer the syllabus with Excel .. ....................... v Six steps to Preliminary success! ....................... vi Board of Studies key words .................................. vii

1 Nature of business

.......................................... 1

1.1 Role of business .....................................................2 1.1.1 The nature of a business .................................. 2 1.2 Types of businesses.................................................8 1.2.1 Classification of business .................................. 9 1.2.2 Factors influencing choice of legal structure..... 26 1.3 Influences in the business environment................28 1.3.1 External influences ......................................... 29 1.3.2 Internal influences .......................................... 43 1.3.3 Stakeholders ................................................... 46 1.4 Business growth and decline ...............................47 1.4.1 Stages of the business life cycle .................... 47 1.4.2 Responding to challenges at each stage of the business life cycle ................................. 51 1.4.3 Factors that can contribute to business decline ........................................................... 55 1.4.4 Voluntary and involuntary cessation ................ 57 Key definitions and c oncepts ..................... 60 Chapter syllabus checklist . . ......................... 62 Useful websites .. .............................................. 63 End of chapter questions ............................. 64 Key Concept questions .......................................... 64 Sample Preliminary q uestions . . ............................ 66

2 Business management

............................69

2.1 Nature of management .........................................70 2.1.1 Features of effective management .................. 70 2.1.2 Skills of management ..................................... 71 2.1.3 Achieving business goals ................................ 74 2.2 Management approaches .....................................80 2.2.1 Classical approach .......................................... 80 2.2.2 Behavioural approach ..................................... 83 2.2.3 Contingency approach .................................... 85 2.3 Management process ...........................................86 2.3.1 Coordinating key business functions and resources ....................................................... 87 2.3.2 Operations ...................................................... 87 2.3.3 Marketing ....................................................... 92 2.3.4 Finance ......................................................... 100 2.3.5 Human resources .......................................... 105 2.3.6 Ethical business behaviour ........................... 112 2.4 Management and change....................................114 2.4.1 Responding to internal and external influences .................................................... 115 2.4.2 Managing change effectively ........................ 119 Key definitions and c oncepts ................... 127 Chapter syllabus checklist . . ....................... 128 Useful websites .. ............................................ 129 End of chapter questions ........................... 130 Key Concept questions ........................................ 130 Sample Preliminary q uestions . . .......................... 131

CONTENTS © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 3

iii


3 Business planning.......................................135

How to write a business report.........207

3.1 Small to medium enterprises...............................136 3.1.1 Definition of SMEs ........................................ 136 3.1.2 Role of SMEs ................................................ 137 3.1.3 Economic contribution of SMEs ................... 137 3.1.4 Success and/or failure of SMEs .................... 139

Useful websites ................................... 211

3.2 Influences in establishing a small to medium enterprise ...........................................................142 3.2.1 Personal qualities ......................................... 142 3.2.2 Sources of information................................... 145 3.2.3 The business idea ......................................... 147 3.2.4 Establishment options ................................... 149 3.2.5 Market .......................................................... 152 3.2.6 Finance ......................................................... 154 3.2.7 Legal ............................................................ 157 3.2.8 Human resources .......................................... 159 3.2.9 Taxation ........................................................ 161

Sample Preliminary examination .............. 212 Answers ................................................... 217 Key Concept and Sample Preliminary questions ............................................................... 217 Sample Preliminary examination ....................... 241

Index ........................................................ 248 syllabus summary notes ..................................................... S1

(detachable)

3.3 The business planning process ..........................162 3.3.1 Sources of planning ideas ............................. 163 3.3.2 Vision, goals and/or objectives ...................... 166 3.3.3 Organising resources .................................... 169 3.3.4 Forecasting ................................................... 173 3.3.5 Monitoring and evaluations ........................... 177 3.3.6 Taking corrective action ................................ 181 3.4 Critical issues in business success and failure............................................................187 3.4.1 Importance of a business plan ..................... 188 3.4.2 Management ................................................ 189 3.4.3 Trend analysis ............................................... 191 3.4.4 Identifying and sustaining competitive advantage ..................................................... 191 3.4.5 Avoiding over-extension of finance and other resources ............................................ 191 3.4.6 Using technology .......................................... 193 3.4.7 Economic conditions ..................................... 194 Key definitions and c oncepts ................... 197 Chapter syllabus checklist . . ....................... 198 Useful websites .. ............................................ 200 End of chapter questions ........................... 201 Key Concept questions ........................................ 201 Sample Preliminary q uestions . . .......................... 202

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PRE L IM IN A RY BU SIN ES S S T U D I ES



Conquer the syllabus with : the comprehensive study guide!

Preliminary Business Studies Before you start your revision, a word about the syllabus …

w If you look at the first page of each chapter, you will see the syllabus outcomes (see extract (a) below)—with easy-to-understand explanations (see extract (b) below)—this way you can cut through the jargon and understand what’s required of you! w Then, if you look at the margin of every page of the Excel guide, you will see that every syllabus dot point in the Preliminary Business Studies syllabus is covered (see extract (c) below)—this way you can be completely confident that you are covering all the syllabus, as you have it all there at your fingertips, on every page of the Excel guide! (You can also print out the whole syllabus yourself by going to the Board of Studies website—www.boardofstudies.nsw.edu.au— and clicking on the HSC syllabus link on the home page.) w When you look at the main headings in each chapter (1.1, 2.1, etc.), you will see they are directly from the syllabus, word for word (see extract (d) below)— this way you can easily match the Excel guide notes to the syllabus document!

Contents

PRELIMINARY BUSINESS STUDIES PRELIMINARY OUTCOMES A student:

You should:

P1: discusses the nature of business, its be able to identify issues about the nature of business, role in society and types of business its role in society and types of business structure and Syllabus Requirements provide points for and/or against these issues. structure. P2: explains the internal and external influences on business.

be able to make the relationships between internal and external influences on business evident.

1.1 Role of business

(a) Syllabus Requirements

Businesses exist to make a profit for their owners. In order to do this they produce goods or services that people, other businesses and governments need and want. Businesses sell these goods and services to these consumers.

(b)

Goods are physical products. They are tangible—they can be touched or seen, such as a car or mobile phone, for example. On the other hand, services are not physical. Although the people who produce services can be seen, the services themselves are intangible—they cannot be touched or seen. Examples of services are transport and communications.


To produce goods or services, businesses must acquire and combine inputs. These inputs include the raw materials, labour of employees, the Businesses to make the a profit for theirand owners. In These order to do this they risk-taking exist of managers, machinery power. inputs will be produce goods services that people, other businesses and governments purchased by or businesses, either from other businesses or from the need and want. Businesses sell these goods and services to these consumers. owners of these inputs. An example would be a person offering a business Goods are labour physical They are tangible—they can be touched or his or her forproducts. a wage or salary. seen, such as a car or acquired mobile phone, for example. the other hand, Once businesses have the appropriate mixOn of inputs they add services notby physical. Although thethe people who produce can value to are these combining them in productive processservices to produce be seen, of thegoods services themselves are The intangible—they cannot be or outputs and/or services. productive process is touched completed seen. Examples of services are transport and communications. when the goods or services are offered for sale. Outline the nature of a business.

(c)

BUSINESS STUDIES STAGE 6 SYLLABUS Content

To produce goods or services, businesses must acquire and combine inputs. These inputs include the raw materials, labour of employees, the 1.1.1 The nature of a business risk-taking of managers, the machinery and power. These inputs will be A business is an organisation. This means that the business has goals purchased by businesses, either from other businesses or from the and is managed in a purposeful way to use inputs to produce goods owners of these inputs. An example would be a person offering a business and/or services. The manager or managers of a business will establish his or her labour for a wage or salary. systems and allocate tasks to ensure that the business operates efficiently. Once businesses have acquired thetryappropriate of inputs they add This means that the business will to producemix its output by using the value to theseofby combining the productive toeffective. produce least amount input possible.them The in business will also process aim to be outputs of goods and/or services. The productive process is completed It will try to do this by making sure that customers’ needs are met and when thesatisfied goods orwith services are offered for sale. they are the output.

(d)

Students learn to: As a business produces goods or services it adds value to the inputs it is examine contemporary business issues to: 1.1.1 The nature business using. This is knownofasa the value chain. As the product of a business moves Outline the nature of a business. • discuss the global expansion of one Australian business A business is an organisation. This means thatAn theexample businessofhas from one process to the next, value is added. thisgoals is a and is managed in from a purposeful usethis inputs produce goods is bakery. It buys grain a farmer. way As it to mills grainto into flour, value • discuss the expansion into Australia of one global business and/or services. manager or managers of a business will establish added. As the flourThe is made into bread or other products, more value is added. • explain how changes in external influences have contributed the growth of thethat the business operates efficiently. systems andtoallocate tasks to ensure Producing services This means goods that theand business will try to produce its output by using the process ofindustries producing goods tertiary, quaternaryExplain and the quinary in Australia and services. least amount of inputgoods possible. business will also aim to be effective. Businesses produce and The services because consumers want them. • identify problems that arise for stakeholders when companies go intobyliquidation It will try tothat do consumers this making that arethey methave and The reason wantsure goods andcustomers’ services isneeds because they with the output. utilityare forsatisfied the consumers. Utility means ‘usefulness’ or the ability of a

Students learn about: product to provide satisfaction ofservices wants toit consumers. As a business produces goods or adds value to the inputs it is role of business using. This isplayer knowninasthe theprocess value chain. As the product a business The central of producing goods of and services moves is the from oneitself. process to organisation the next, value is run added. An example of managers this is a is an that by managers. These business It • the nature of a business value is bakery. buys from afunctions farmer. Astoitassist mills with this grain into flour, developItthe keygrain business production. The most – producing goods and services added. As the is madefunction into bread other products, more is added. important keyflour business is or operations. This is thevalue function that deals with the actual production process. Other key business functions are – profit, employment, incomes, choice, innovation, entrepreneurship and risk, wealth Producing goods and services outlined below. Explain the process of producing goods and quality of lifeand services. Businesses produce function goods and servicesthe because consumers want them. connects customer with the products ◗ Marketing—this


Excel

Thethat reason that consumers goods and is because have a business produceswant by giving themservices an opportunity tothey purchase utility for the consumers. Utility means ‘usefulness’ or the ability of a them. product to provideinvolves satisfaction of wants organising to consumers. the planning, and controlling of the ◗ Finance—this Thefinancial central player in the of producing and services is the resources of aprocess business to achieve goods its goals. business itself. It is an organisation that is run by managers. These managers C O N Q U ER T H E S Y L L AB U S WI CONTENTS TH develop the key business functions to assist with production. The most important key business function is operations. This is the function that deals with the actual production process. Other key business functions are 2 PR EL I MI NARY BUS I NE S S S TUDIES Excel Preliminary Business Studies outlined below. ◗ Marketing—this function connects the customer with the products that a business produces by giving them an opportunity to purchase them. ◗ Finance—this involves the planning, organising and controlling of the financial resources of a business to achieve its goals.

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Six steps to Preliminary success! STEP 1

Read and understand—then summarise and memorise

STEP 2

Scan all the definitions in the Key definitions and concepts section and make sure you know all of them by heart. Go through and memorise the definitions that you don’t know—this is an efficient way of learning all the definitions in one go!

Scan and memorise STEP 3

Read each syllabus dot point in the Chapter syllabus checklist and as you go through them, mentally check that you know all of them. This might seem ‘over the top’ … but is actually very important, as it will help you check that you know all the material in each chapter and at the same time lodge it in your long-term memory—if you can answer all these syllabus questions, then you know all the work by heart, and can now aim for top marks in your Preliminary exam!

Double-check and review

STEP 4

Answer and check

STEP 5

This is a little like learning to drive a car: it’s one thing to know all the theory, but you need to practise actually driving the car! Likewise with your Preliminary exam. Once you know the theory—the content in each chapter—you must practise by doing; in this case, the questions in each chapter. Let’s face it, that’s what the Preliminary exam is: a whole lot of questions. The first type of questions are the Key Concept questions. You will have lots of these to answer to ensure that you know the content thoroughly (that’s why there are so many questions!)—make sure you do all of them and always check your answers! Then you have the exam-like questions: these are very important, as they are the type of questions you will be answering in your Preliminary exam—if you can answer all these questions, then you are ready for the main event: the Preliminary exam! The sample exam paper is based as much as possible on recent Preliminary exam papers, so it is worth your while doing them in an exam-like environment—this is the real thing now!

Practice runs STEP 6

Before the exam … a refresher

vi

w Always begin your revision programme by reading each syllabus question in the margin a couple of times—this way you will be completely focused on what exactly you have to know for the Preliminary exam! w Then study the section, highlighting any key concepts in the Excel guide notes, and make your own notes in the margin—by summarising each section in your own words, you will memorise the work effectively so that it’s lodged in your short-term memory! w Now go straight to Step 4 and answer the End of chapter questions as you study each section. Look for the KCq and Prelim icons at the end of sections—answering questions along the way tests you to see if you have really understood the work! w Remember to study in time ‘bites’: study hard, but also give yourself short breaks—concentrate hard when you study, but always remember to recharge your batteries now and then!

Read through the Excel syllabus summary notes when you have finished studying, as they are a compact summary of every chapter and we can guarantee that they are thorough. They summarise every single syllabus dot point in the Preliminary Business Studies syllabus. They will be very useful to look at before a trial exam or the Preliminary exam itself—everything is here for you before you do your Preliminary exam!

SIX STE PS LTO PRE L IMBU INSIN A RYESSSU C ES PRE IM IN A RY SC TU DS I ES



Board of Studies key words

Preliminary Business Studies

This is the glossary of key words from the Board of Studies. Refer to this page when you are answering KCq and Preliminary questions. Remember that these key words are explained in the Examiner Maximiser answer sections in the Sample Preliminary questions and Sample Preliminary examination.

account for (give an) account of analyse apply appraise appreciate assess calculate clarify classify compare construct contrast critically (analyse/evaluate) deduce define demonstrate describe discuss distinguish evaluate examine explain explore extract extrapolate identify interpret investigate justify organise outline predict propose recall recognise recommend recount select summarise synthesise

state reasons for; report on narrate a series of events or transactions identify components and the relationship between them; draw out and relate implications use, utilise, employ in a particular situation estimate the value of make a judgement about the value of make a judgement of value, quality, outcomes, results or size ascertain or determine from given facts, figures or information make clear or plain arrange or include in classes or categories show how things are similar or different make; build; put together items or arguments show how things are different or opposite add a degree or level of accuracy, depth, knowledge and understanding, logic, questioning, reflection and quality to draw conclusions state meaning and identify essential qualities show by example provide characteristics and features identify issues and provide points for and against recognise, note or indicate as being distinct or different from; note differences between make a judgement based on criteria; determine the value of inquire into relate cause and effect; make the relationships between things evident; provide why and/or how look into closely for the purpose of discovery choose relevant and/or appropriate details infer from what is known recognise and name draw meaning from plan, inquire into and draw conclusions about support an argument or conclusion form different parts into a united whole sketch in general terms; indicate the main features of suggest what may happen based on available information put forward (for example, a point of view, idea, argument, suggestion) for consideration or action present remembered ideas, facts or experiences identify from knowledge of experience or character provide reasons in favour retell a series of events carefully choose in preference to another or others express concisely the relevant details put together various elements to make a whole

Contents

© Board of Studies, Teaching and Educational Standards NSW B O AR D O F S T U D I ES K EY CONTENTS WOR DS © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 7

vii vii




Chapter 1

Nature of business PRELIMINARY OUTCOMES A student:

You should:

P1: discusses the nature of business, its role in

be able to identify issues about the nature of business, its role in society and types of business structure and provide points for and/or against these issues.

society and types of business structure.

P2: explains the internal and external

influences on business. P6: analyses the responsibilities of business

to internal and external stakeholders. P7: plans and conducts investigations into

contemporary business issues. P8: evaluates information for actual and

hypothetical business situations.

be able to make the relationships between internal and external influences on business evident. be able to identify the responsibilities of business and relate the implications of these to internal and external stakeholders. be able to plan and conduct investigations into contemporary business issues. be able to give an evidence-based opinion and judgement on both actual and hypothetical business situations.

1 © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 1


Syllabus Requirements

1.1 R ole of business Businesses exist to make a profit for their owners. In order to do this they produce goods or services that people, other businesses and governments need and want. Businesses sell these goods and services to these consumers. Goods are physical products. They are tangible—they can be touched or seen, such as a car or mobile phone, for example. On the other hand, services are not physical. Although the people who produce services can be seen, the services themselves are intangible—they cannot be touched or seen. Examples of services are transport and communications. To produce goods or services, businesses must acquire and combine inputs. These inputs include the raw materials, labour of employees, the risk-taking of managers, the machinery and power. These inputs will be purchased by businesses, either from other businesses or from the owners of these inputs. An example would be a person offering a business his or her labour for a wage or salary. Once businesses have acquired the appropriate mix of inputs they add value to these by combining them in the productive process to produce outputs of goods and/or services. The productive process is completed when the goods or services are offered for sale. Outline the nature of a business.

1.1.1 The nature of a business A business is an organisation. This means that the business has goals and is managed in a purposeful way to use inputs to produce goods and/or services. The manager or managers of a business will establish systems and allocate tasks to ensure that the business operates efficiently. This means that the business will try to produce its output by using the least amount of input possible. The business will also aim to be effective. It will try to do this by making sure that customers’ needs are met and they are satisfied with the output. As a business produces goods or services it adds value to the inputs it is using. This is known as the value chain. As the product of a business moves from one process to the next, value is added. An example of this is a bakery. It buys grain from a farmer. As it mills this grain into flour, value is added. As the flour is made into bread or other products, more value is added.

Explain the process of producing goods and services.

2

Businesses produce goods and services because consumers want them. The reason that consumers want goods and services is because they have utility for the consumers. Utility means ‘usefulness’ or the ability of a product to provide satisfaction of wants to consumers. The central player in the process of producing goods and services is the business itself. It is an organisation that is run by managers. These managers develop the key business functions to assist with production. The most important key business function is operations. This is the function that deals with the actual production process. Other key business functions are outlined below. ◗ Marketing—this function connects the customer with the products that a business produces by giving them an opportunity to purchase them. ◗ Finance—this involves the planning, organising and controlling of the financial resources of a business to achieve its goals.



Producing goods and services



◗ Human resource (HR) management—this refers to systems that have been developed to manage people within an organisation or business. HR management involves the planning of staff needs, acquisition and maintenance of employees, training and development, the supervision and management of the performance of all employees and separation of employees when they leave the business. The key business functions are combined by management to acquire the appropriate mix of inputs, which include raw materials, workers, power, machinery and other equipment. These inputs are used in the operation or production process which transforms these inputs to produce the outputs of the business in the form of goods and/or services. These relationships are illustrated below in Figure 1.1. The business Inputs • • • • • •

Raw materials Workers Machinery Power Management skills Other equipment

Managers • Operations (production) • Marketing (connects customers with products) • Finance (planning, organising and controlling financial resources) • Human Resources (managing people in the business)

Output Produced goods and services

Transformation processes Value adding

Figure 1.1 Producing goods and services

Profit The owners of businesses are motivated to produce goods and services because they can make a profit from producing and selling them. The owners establish goals when setting up the business. A major component of these will be financial goals, which provide a focus for the operations of the business. These financial goals are outlined below. ◗ Profitability is the ability of a business to make a profit and refers to the fact that there is a relationship between the sales revenue of a business and the profit it makes. Obviously, the sales revenue must be greater than expenses or costs of production for the business to make a profit. Otherwise, if expenses are greater than sales revenue, the business is making a loss. ◗ Growth refers to the expansion of a business once it begins operations. The first step towards growth is to have an adequate cash flow as well as being able to earn and increase net profit. This allows the business to have retained profits, which it can use to expand the business. ◗ Efficiency relates to achieving the greatest possible return or output from an input by using the lowest amount of resources or assets. Efficiency is directly linked to the cost of producing the goods and services that are sold by the business. ◗ Liquidity relates to the cash flow position of the business and focuses on whether a business can pay its debts as they fall due. ◗ Solvency refers to the extent to which the assets of a business exceed the liabilities. If assets exceed liabilities then the business is able to meet its debt commitments and is described as solvent.

Outline the role of profit in the nature of a business.

Chapter 1 • NATURE OF BUSINESS © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 3

3



Outline the role of employment in the nature of a business.

Outline the role of incomes in the nature of a business.

4

In order to produce goods and services, businesses will need to employ people. Employees provide their skills and labour in return for an income. There is a special category of employment where people are hired to manage the business and to organise other employees. Most top line managers are contracted to plan and organise the business. In this regard they are different to normal employees who work for wages or salaries. Many top managers are paid incentive bonuses for achieving results which exceed levels defined in their contracts. The human resources (HR) function will usually decide what jobs are needed in the business. This function will also establish minimum educational and training standards to assist in selecting employees to work in each job category. It will also be the role of the HR function to conduct induction programs to introduce new employees to the business. There will be training courses that will refine the skills of the workers to help them perform their current tasks. Some workplace courses will be held to develop employees for more demanding management roles in the future. The HR function will also need to be involved with maintaining employees and will be involved when employees leave the business. Many employees will belong to unions who will represent them in negotiations with their employer over pay and working conditions. From time to time, the business may wish to consult with its employees about the direction that the business is taking. It will be the responsibility of the employees to perform their tasks daily to contribute to the production of goods and services. The number of employees that a business has will depend on its size and whether it produces goods or services. Generally speaking, businesses that produce mainly services tend to be labour-intensive. This means that there are a large number of employees in relation to the machinery (capital goods) that the business has. Examples of this would be education or a hair dressing salon. On the other hand, businesses that produce mainly goods will tend to have fewer employees. One reason for this is the ability of relatively few workers needed to operate machinery in today’s world of automation. This is described as capital-intensive as there are relatively few workers in proportion to the machinery used in production.

Incomes Businesses exist to make a profit for their owners. The type of profit depends on the structure of the business. If the business is a sole trader, the owner is entitled to keep the profits after expenses and taxes have been paid. For companies, the ownership is more complex, with a number of shareholders who may each receive a proportion of the net profits of the business depending on the number of shares that they hold. The share of profit each shareholder receives is called a dividend. At some stage, individual shareholders may sell the shares that they own. This may result in a different type of income. If the share price at the time of sale is higher than the price that the shareholder paid for the shares, the difference in the prices is called a capital gain. In terms of taxation, capital gains are treated differently to profits. If an individual shareholder has held the shares for more than 12 months, the shareholder may only need to pay tax on 50% of the capital gain. The rate of tax paid would depend on the other income of the shareholder.



Employment



The owners of resources who supply these to businesses will earn incomes from them. If a person (or business) owns property that is rented by a business the income from this property is called rent. The owners of the labour used by the business (the employees or workers) will earn salaries or wages. A salary is a fixed yearly payment to an employee, usually divided up into 26 fortnightly payments. This means that salaried employees will not have the opportunity to earn overtime. A wage is a fixed regular payment, usually paid on a daily or weekly basis, made by an employer to an employee. Overtime payments are payments made to workers who receive a wage and are asked to work in excess of the hours that are stated in their employment contracts. Overtime will usually be paid at a higher rate than pay for normal time. Businesses will often need to borrow money from individuals and financial institutions to conduct their normal business or for expansion purposes. The cost of borrowing this money is called interest and represents an income to the lender. Sometimes businesses lend money to other businesses.

Choice Our society is based on choice. There are two ways of viewing choice in the nature of a business. ◗ Businesses provide choice to consumers. ◗ Businesses have many choices available to them in terms of their operations and the other key business functions. Businesses provide consumers with choice. This choice can occur in terms of competition between businesses that sell the same products, such as competing electrical goods retailing outlets. Competition may occur in terms of price, customer service or the range of different products available to satisfy consumers’ wants. There may also be choice provided to consumers in terms of differing quality of products, from relatively inexpensive, lower-quality products to expensive, high-quality items. Secondly, businesses have many choices available to them in terms of their operations and the other key business functions. Some of the choices that exist include: ◗ what type of legal structure (sole trader, partnership, private company, public company) to adopt ◗ what goals will be important to the business ◗ how the business will raise funds to operate ◗ what size of enterprise ◗ what products (and range of products) the business will produce ◗ what will be the mix of labour and capital (employees and machines) ◗ what mix of inputs will be used in production ◗ what markets the business will sell to ◗ whether the business will aim for ecological sustainability and corporate social responsibility. The choices a business makes will usually be decided by the owners or they may delegate these decisions to the managers. The goals of the business will be a major focus for decision making. Other stakeholders of the business, such as customers, governments, suppliers and society in general, will also have input into the decision-making process.

Outline the role of choice in the nature of a business.


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Outline the role of innovation in the nature of a business.

Case

study:

Students learn to: investigate aspects of business using hypothetical situations and actual business case studies to outline possible business strategies appropriate for different stages in the business life cycle.

Innovation Innovation refers to the creation or improvement of products, technologies or ideas. A key to success for any business is to develop a competitive advantage over its rivals. Competitive advantage means that a business develops an advantage by offering consumers greater value, either by means of lower prices, improved quality or by providing greater benefits and service. Many businesses attempt to develop a competitive advantage by being innovative in terms of introducing new products or variations on existing products to the market. Businesses can also be innovative by developing and introducing new techniques, which may make the production process less costly, faster or more efficient in terms of input use.

Australian Solar Timbers (AST) Australian Solar Timbers was founded in 1919 by Stan Ball and Douglas Oakley, two World War I veterans who had been Anzacs at Gallipoli. They had had a dream to open a sawmill after the war. This dream eventuated and the business began operating on the north coast of NSW. It has operated continuously to the present day and is still a family-owned business based in Kempsey. AST has been committed to the environment for many years. One example of this is maximising the use of timber as an input by introducing veneer production. However, the greatest example of AST’s willingness to minimise its impact on the environment through innovation has been the introduction of ‘greenhouse friendly’ solar drying kilns in 1994. Powered by solar energy, these kilns are used to gently dry timber. The process is slower than methods used in other sawmills but the results are superior to those of competitors, both in terms of a superior product and in terms of the impact on the environment. Australian Solar Timber is now recognised as the leading solar kiln dried hardwood timber producer in the world. The AST website highlights the process and its advantages in the following terms: At AST all our flooring products are seasoned by the power of the sun, a completely natural, energy efficient and environmentally-friendly process. Our custom-built computer-controlled and monitored solar kilns capture and intensify the natural heat of the sun. The warm air is then circulated around the kiln chamber to dry the timber to its optimum moisture content for use in domestic and commercial applications. Unlike conventional timber drying systems our solar kilns are not dependent on fossil fuels, which is good for the environment, producing less greenhouse gas emissions. Our solar kilns operate at relatively low temperatures so the drying process is extremely gentle, benefiting the timber quality in producing uniformly dried and stable timber. As well as this substantial innovation which has given AST a competitive advantage over its rivals, AST has pioneered other innovations that have become best practice in the industry. These innovations include efficient processing equipment, diamond tooling and computerised log scanning. In November 2010 AST announced that the business had made a major new investment in the future of solid hardwood flooring with the installation of a high-technology production line. The advantage of this innovation meant that AST had upgraded the production capacity and finish quality for all of AST flooring products. Source: Australian Solar Timbers website: www.astfloors.com.au/

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Entrepreneurship and risk An entrepreneur is a person who is willing to undertake risk in business. Risk means that there is a possibility of something adverse or ‘bad’ happening or, at least, the entrepreneur being exposed to financial loss. There are a number of risks that an entrepreneur needs to consider. ◗ Financial risk involves the actual return from a financial transaction being less than the expected return. Examples of this can include the non-payment of an account or an unexpected increase in the rate of interest. ◗ Market risk means that the value of an investment decreases because of changes in the market. An example of this could be where an entrepreneur invests in coal exploration only to find that the price of coal has fallen in the marketplace. ◗ Technological risk involves managing the risks involved in introducing new technology into a business. One example would be if a business introduced leading-edge technology which required weekly maintenance involving extra cost compared to what it replaced. ◗ Political and economic risk is where a government introduces changes which have an adverse impact on a business. An example of this is where the NSW Government reduced the ‘feed-in’ tariff of 60 cents per kilowatt hour paid to households that installed solar power to 20 cents (in October 2010). This created a substantial drop in demand for new solar power installations, creating financial hardship for many solar power businesses. ◗ Environmental risk is where an environmental disaster has an adverse effect on business. Examples of this are the 2011 earthquake in Christchurch, New Zealand and the tsunami which impacted severely on northern Japan. Both of these disasters had profound impacts on businesses. ◗ Operational risk is where a breakdown of equipment results in financial loss. In September 2010 and February 2011, Virgin Australia suffered operational losses when its computerised check-in system failed. The risks involved mean that the entrepreneur will invest funds and time in a new or existing business on the understanding that, if the business fails, the entrepreneur has to bear the losses. On the other hand, if the business succeeds the entrepreneur is entitled to take the profits. The entrepreneur will finance innovations in an attempt to transform those innovations into marketable goods and services. The most risky type of entrepreneurship is to start a new business, because of the high failure rate. In Australia, 30% of businesses fail within the first year of operation.

Wealth Wealth can be defined as the production and accumulation of assets which satisfy human wants and needs minus any liabilities that are owed. Wealth contributes to the standard of living, which is defined as the income per head of population valued in terms of the goods and services that income will buy. Businesses contribute to the wealth of a nation and wealth is measurable at a date in time. An example of this is if a business produces ten motor vehicles worth $20 000 each. At a particular date, the wealth of the business is $200 000 minus any liabilities or debts that the business owes. Businesses contribute to individuals’ wealth by: ◗ growing so that the business can produce more output which contributes to wealth for the owners and society—as output increases

Outline the role of entrepreneurship and risk in the nature of a business.

Outline the role of wealth in the nature of a business.


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over time, so does the gross domestic product (GDP) of our nation (GDP is the value of the total output of goods and services produced by businesses and governments during a year) ◗ providing employment so that individuals can accumulate savings and purchase assets which become wealth ◗ increasing and improving the machinery that is used in production as well as replacing machinery which has worn out. This machinery in turn will allow production to increase which will contribute to wealth. Outline the role of quality of life in the nature of a business.

Quality of life The term ‘quality of life’ is used as a standard to measure the general well-being of individuals. It is important not to confuse quality of life with the term ‘standard of living’, which uses the income per head of population as a measure of the share of a nation’s goods and services that each individual accesses (as an average). Quality of life is broader than this and includes environmental factors, health, education, recreation and leisure time as well as wealth and employment. Businesses contribute to the quality of life of people by: ◗ taking raw materials or intermediate goods (goods which still have to undergo productive processes before they are finished) and adding value to them—this is part of the role of businesses in the value chain (value chain = products pass through all activities of the chain in order, and at each activity the product gains some value) ◗ improving the quality of goods and services produced ◗ having high standards of customer service ◗ providing the opportunity for employment and training ◗ implementing best practice occupational health and safety programs ◗ implementing environmentally sustainable methods of production— environmental sustainability is about meeting the needs of the present generation without compromising the ability of future generations to meet their needs ◗ developing and implementing programs of corporate social responsibility—corporate social responsibility is a commitment by a business to operate ethically and contribute to economic development while improving the quality of life of our workforce and their families as well as the community at large. KCq page 64

page 66

1.2 T ypes of businesses The type of business that owners establish will depend on a number of different variables, including: ◗ the personal goals of the owners ◗ the financial goals of the owners ◗ whether the business is producing a good or service ◗ the volume of output that will be produced ◗ the number of owners that the business has ◗ what amount of capital funds is required for the business.

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1.2.1 Classification of business Size • SMEs • Large

Explain the classification of business.

Scope of market

Industry type

• Local • National • Global

• • • • •

Primary Secondary Tertiary Quarternary Quinary

Legal structure • • • • •

Sole trader Partnership Private company Public company Government enterprise

Figure 1.2 Classification of business

Businesses can be classified: ◗ in terms of size—small to medium enterprises (SMEs), large ◗ in terms of the scope of the market—local, national, global ◗ by industry type—primary, secondary, tertiary, quaternary, quinary ◗ by legal structure—sole trader, partnership, private company, public company, government enterprise.

Size

Explain size as a classification of business.

Small to medium enterprises (SMEs) There are a number of ways of classifying businesses in terms of size. Businesses can be classified by the number of employees or whether the business exceeds the threshold required to register to pay the Goods and Services tax (GST). This amount is $75 000 per year for businesses making a profit and $150 000 for not for profit organisations such as charities. The Australian Bureau of Statistics (ABS) does not count businesses that do not need to register for the GST. One classification used by the Australian Government and based on employment is a small business is one having fewer than: ◗ 100 full-time (or equivalent) people if it involves the manufacture of goods ◗ 20 full-time (or equivalent) people in any other case, such as the production of a service. The Australian Government also uses another classification for businesses based on the number of full-time equivalent employees. ◗ Very small (1–9)—very small businesses have up to nine full-time equivalent employees—businesses with less than five employees are often described as microbusinesses. ◗ Small (10–49)—small businesses have ten to 49 full-time equivalent employees. ◗ Medium (50–149)—medium-sized businesses have 50 to 149 full-time equivalent employees. ◗ Large (150+)—large businesses have 150 or more full-time equivalent employees. Obviously small to medium enterprises are made up of the first three classes of this classification. Small to medium enterprises are very important to the Australian economy and society. The Australian Bureau of Statistics defines a small business as one that employs less than 20 people and their operators.


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According to the Australian Bureau of Statistics (ABS), as at June 2014: ◗ there were 2 100 162 actively trading businesses in Australia ◗ most Australian businesses are small (97% of Australian businesses or 2 037 157 businesses) ◗ most actively trading businesses in Australia (61%) had no employees; this means that these small businesses were sole trader businesses in terms of legal structure ◗ of those SMEs that employ people, the ABS calculated that at 30 June 2011 small businesses provided almost 46% of total private sector industry employment out of a total labour force of 11 355 700.

Case Students learn to: investigate aspects of business using hypothetical situations and actual business case studies to distinguish between the different types of businesses.

study:

Australian Fastsigns

Australian Fast Signs uses state-of-the-art computer-aided sign-making systems to create high-impact, cost-effective signage. Australian Fastsigns is a small business that was founded in April 1990 by Rick Abrahams. With only a small staff of fewer than five, the workers in the business, based at Bankstown in Sydney, have over 100 years experience in the trade. The business is an independent signage company that offers other businesses a personalised service. The business has embraced technology using computer-aided, digital printing sign-making systems to create high-impact, cost-effective signage. This signage can take the form of external signage, a directory board in the foyer of an office building, a building sign, a banner or vehicle wraps. Digital signage advertising has revolutionised the manner in which marketing companies have promoted brands. LCD displays that show content changing regularly have been in vogue at shopping centres to provide just one example. The business guarantees that it is large enough to deliver highly professional results, yet small enough to be personally involved in every aspect of each job, seeing customers through from their initial enquiry to the final installation of their signage requirements. Australian Fastsigns prides itself on quick delivery of orders, competitive pricing and a large range of signage types in each category. Source: Adapted from the Australian Fastsigns website: www.austfastsigns.com.au/

Small businesses have a number of advantages. One major advantage is independence. Many people who start a small business do so to ‘be their own boss’. The start-up costs are usually quite small and the owner may be able to remain in other employment and work the business part-time. Small businesses are usually well-suited to catering for niche markets. Examples include mobile pet-washing services, boutique apparel shops catering to a specialised market, gourmet food stores and restoration of old photos. Flexibility is another advantage of small businesses as they are usually able to respond quickly to the demand of customers. The owners of a small business can enjoy the profits that the business makes and draw satisfaction that those profits have been made through their own skill and effort. On the other hand, there are disadvantages in operating a small business. The business could suffer from a lack of cash flow which could create problems,

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including the risk that the business will fail, leaving the owner personally liable for any debts. The owner may have to work very long hours compared to an employee and it may be difficult to organise for someone to run the business when the owner is sick or wants to take a holiday. Large businesses In June 2014 the ABS counted that less than 1% of businesses in Australia had 200 or more employees. These businesses obviously fall into the category of large businesses. The survival rate of businesses with a turnover of $2 million or more in 2014 was 95.4% compared to only 73% for businesses with a turnover of less than $50 000 in the same year. Most large businesses, that is, businesses with 200+ employees, have adopted the company legal structure. They have registered and incorporated with the Australian Securities and Investments Commission (ASIC) as either a private company or a public company (see legal structure later in this section). Table 1.1 is an indication of the size (in terms of market capitalisation) of Australia’s seven largest companies. Table 1.1 Australia’s top seven largest companies, June 2015 Code

Company

Market capitalisation in Australian Dollars

Industry

CBA

Commonwealth Bank of Australia

$133 463 000 000

Banking

WBC

Westpac Banking Corporation

$99 908 100 000

Banking

BHP

BHP Billiton Limited

$91 742 000 000

Mining

ANZ

Australia and New Zealand Banking Group Limited

$88 622 000 000

Banking

NAB

National Australia Bank Limited

$83 241 700 000

Banking

TLS

Telstra Corporation Limited

$74 576 500 000

Telecom

WES

Wesfarmers Limited

$47 467 300 000

Retailing

Source: ASX 200 List of companies, 3 June 2015

Local, national, global Another way of classifying businesses is in terms of their location and the scope of their market.

Explain local, national, global as a classification of business.

Local A definition of a local business is one where the customers are usually working or living near where the business is located. The market of the business is small in terms of geographic area and also in terms of the number of customers. In other words, the local business serves the local area. An example of a local business is a convenience store which sells newspapers, milk, bread, smallgoods and groceries. Local businesses also include bakeries, hairdressers, tradesmen (plumbers, electricians, carpenters, etc), doctors, lawyers, accountants, newsagents, restaurants and fast-food outlets, motels, small-scale manufacturing, motor vehicle servicing and repairs, hardware stores and businesses dealing with computing (sales, servicing, web and systems design). Most of these local businesses will be small businesses.


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Figure 1.3 A local business

National A definition of a national business is one where the business has branches or franchises operating in more than one state or territory. The market for these national businesses will usually be found in the large concentrations of people living in metropolitan areas or larger provincial cities such as Newcastle, Wollongong, Albury, Wagga Wagga, Dubbo, Tamworth, Armidale, Bathurst, Orange and Lismore. However, there will certainly be branches of national businesses such as the major banks to be found in smaller towns. A national business is likely to be large, although many franchise operators are small business proprietors. A franchise business is a legal arrangement between a supplier (franchisor) of a well-known product and the franchisee. The franchisee will develop a business selling the product, using the trade name. Once in operation the supplier must not only maintain a continuing interest but also provide assistance to the franchisee. Examples of franchised businesses are McDonalds, LJ Hooker and Electrodry Carpet Cleaning. Examples of national businesses that are not franchises and are big businesses are the four major banks (Commonwealth, ANZ, Westpac, National Australia Bank), Qantas, Virgin Australia, Telstra, Optus and the Westfield Group, which owns and operates shopping centres.

Figure 1.4 A national business

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Global As the name implies the market scope of a global business is the world. There are a number of different types of global businesses. The type of business depends on whether the business expands beyond its home country. International businesses have no investment, staff or sales premises outside their home country. They are merely importers or exporters of goods and/or services. An example of an international business is a farm business that exports cattle and imports machinery from overseas. Multinational corporations (MNCs) are businesses that have their head office or headquarters based in their home country. They expand into global markets by establishing subsidiaries in host countries. MNCs’ subsidiaries are more likely to adapt their products to the local market. Although the subsidiary may appear to be an independent business, the parent company exercises central control over its overseas subsidiaries. An example of an Australian multinational corporation is Harvey Norman, which has subsidiaries in New Zealand, Singapore, Malaysia, Slovenia and Ireland.

Figure 1.5 A global business

Transnational corporations (TNCs) are huge corporate structures that have gone beyond national borders. They tend not to have a nationallybased parent company and their business transactions take place across borders on a global basis. This gives them the opportunity to take advantages of the differences in laws and financial systems between various countries. On the other hand, national businesses are confined to one legal and financial system. Transnational corporations are different to MNCs in that they do not see themselves being based in a single national home. TNCs have subsidiaries located in many countries (like MNCs) but are more likely to interact with local markets and cultures. They are more likely to employ senior executive staff from the country in which a subsidiary business is located. The top five TNCs globally (in terms of annual revenue) are Wal-Mart Stores, BP, Exxon Mobil, Royal Dutch/Shell Group and General Motors. The media report below will help you to discuss the global expansion of one Australian business.


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Nanotek chief offers franchise expansion tips after Russian foray by Michelle Hammond Tuesday 12 July 2011 The head of global car-cleaning franchise Nanotek says franchisors looking to expand internationally must mould their franchise model to the market they’re entering. Jim Cornish is the chief executive of Nanotek, which recently became the first Australian mobile franchise to launch in Russia, following its successful entry into the Middle Eastern market. Nanotek hopes to establish more than 130 mobile units internationally by the end of the year, with Cornish saying exports already contribute to 60% of the company’s operations. Cornish says Russia has huge potential for Nanotek because it is a ‘large, untapped market’. The franchise was launched in Russia under its former name, Ecowash Mobile, due to an extensive operation approval process, which began before the company’s recent transformation to Nanotek. Cornish says the legal process to establish Nanotek in Russia took about two years, admitting it was a difficult market to get into. ‘Russia, like any market, has a lot of peculiarities, so it’s important to have a good partner in those countries who can take the system as it is and give you feedback on how the system should be adapted to suit that market,’ he says. In addition to the language barrier, Cornish says the level of regulation regarding Russia’s franchise industry was scant compared to what he was accustomed to in Australia. The cultural barrier also became apparent but Cornish soon found how to overcome it. ‘It doesn’t matter how much smaller the world gets nothing beats meeting with people face-to-face … you’ve got to make sure you have appropriate face-to-face contact,’ he says. ‘Russia is a developing market so it’s very entrepreneurial—it’s all about networking, relationships and who you know, whereas in the western world we tend to think that technology will solve everything.’ Cornish believes Nanotek will appeal to Russian consumers and prospective franchisees because it’s the sort of system that has a broad appeal. ‘It’s a low cost of entry, it’s an everyday consumable service and it’s a very structured system. The other advantage is the development of the car culture, the phenomenon around shows like Top Gear,’ he says. Cornish says the challenge for franchisors is to brand globally but systemise locally, emphasising the importance of customising franchise models to suit a particular market. ‘It can be tempting to become possessive of the way the system is … but you need to cater to the market by getting the right (locally based) partner and acting on their feedback,’ he says. Cornish offers some tips for franchisors looking to expand internationally. ◗ Now’s a great time to expand given the strength of the Australian dollar. ◗ Focus on entrepreneurial markets. The US has always been viewed as the pot of gold, rather than the BRIC countries of Brazil, Russia, India and China. ◗ Be flexible. You can’t enter a market without customising your franchise model first. Article sourced from: www.startupsmart.com.au/planning/nanotek-chief-offers-franchise-expansion-tips-after-russianforay/201107123198.html Nanotek website: http://nanotekcarcleaning.com.au

Note: Nanotek is a business which began in Australia in 2004 as Ecowash Mobile. The business now has 50 franchises operating in Australia and operations in another 15 nations worldwide, making Nanotek the number one car-washing franchise in the world. The following information will help you to discuss the expansion into Australia of one global business.

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Juniper Networks Juniper Networks is a multinational information technology and computer networking products company. Established in 1996, its head office is in Sunnyvale, California, USA. The company designs and sells internet protocol network products and services. Juniper’s main products include routers, switches and security products. Juniper became a public company in 1999, selling shares at $US34 per share. Today, Juniper Networks has over 50 offices and 8700 staff worldwide. In August 2011 Juniper opened its Melbourne offices with a staff of 50. Juniper’s Melbourne expansion will enable the company to better support its Australian business partners and expanding customer base in the telecommunications and financial markets. Melbourne has a positive reputation in both these markets. Juniper has innovation expertise and it hopes to utilise this competitive advantage by participating in the development of the National Broadband Network (NBN). Source: www.investinaustralia.com/news/global-technology-firm-expandsits-melbourne-base-65k7

Industry—primary, secondary, tertiary, quaternary, quinary This method of classifying businesses is based on industry type as it relates to the output of the business. Primary • Concerned with producing or extracting natural resources • Farming, mining, fishing

Secondary • Manufacturing, processing raw materials, construction

Explain industry type: primary, secondary, tertiary, quaternary, quinary as a classification of business.

Tertiary • Service industries • Retail and wholesale, selling, transport, entertainment

Quaternary • Intellectual activities, education, information processing, software engineering, real estate Specialised service industries Quinary • Voluntary sector • Non-profit sector • Provision of domestic services

Figure 1.6 Classification of business by industry type


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Primary industry Primary industry is concerned with the production or extraction of natural resources. Farming and agriculture to produce food has been traditional in post-colonisation Australia. In primary industries, raw materials such as iron ore or coal are also produced. Mining of various raw materials is a major part of Australian primary industries. Of all industries involved in the primary sector, mining was the greatest contributor to operating profits (before tax) in 2009–2010, contributing 18.9% of all operating profits of all industries. According to the Australian Bureau of Statistics (ABS), in 2009–2010 mining had the highest capital expenditure ($45.6b), highest wages and salaries per employee ($117 500), highest sales and service income per person employed ($1.06m) and profit margin (33.4%) of all the selected industries. Other primary industries include agriculture, forestry products and fishing. Primary industry is responsible for most of the food production consumed in Australia. Secondary industry Secondary industry involves taking raw materials produced by primary industries and transforming them into processed goods and finished products. Secondary industry is concerned with manufacturing, processing and construction. According to the ABS, in 2009–2010 construction recorded the second largest employment (994 000 persons) after retail trade. Activities associated with the secondary sector include iron and steel production and smelting, motor vehicle manufacturing, textile production, chemical and engineering industries, energy utilities, engineering, breweries, construction and shipbuilding. Tertiary industry Tertiary industries are service industries. Businesses in this classification provide services to the population at large and to other businesses. Tertiary industries include retail and wholesale sales. According to the ABS, in Australia in 2009–2010 retail trade recorded the largest employment of any industry with 1.29 million persons. Transportation and distribution, entertainment (movies, television, radio, music and theatre), restaurants, clerical services, media, tourism, insurance, banking, health services and law are all part of the tertiary industry sector. About 75% of Australia’s workforce is employed in tertiary industry. The service sector contributes to the bulk of Australia’s employment. It is possible to develop special categories within the service sector. Two special categories are known as quaternary industry and quinary industry. Quaternary industry Quaternary industry involves intellectual activities and providing information services. These include education, research and development, libraries and information processing, information technology, software engineering, financial planning and other knowledge-based services.

Figure 1.7 A quaternary business 16





Quinary industry An Australian definition of this sub-sector involves not-for-profit activities or activities that you would usually find taking place in someone’s home. These can include activities that may attract financial rewards but are often performed for no payment. These include domestic services such as cleaning, ironing, lawn-mowing and child care. There has been a strong increase in demand for the services provided by this sector as people work longer hours. An example of businesses that operate in this subsector are those restaurants and fast food businesses that sell breakfasts for those workers who do not have time to make this meal at home. This sector is sometimes known as the ‘voluntary’ sector.

Figure 1.8 A quinary industry

Legal structure—sole trader, partnership, private company, public company, government enterprise

Explain legal structure as a classification of business.

A fourth method of classifying business is by legal structure. Businesses can be private sector businesses. This means that they are privately owned with no government ownership. Private sector businesses can be either unincorporated or incorporated. An unincorporated business does not have a separate legal identity or existence from its owners. The owners of unincorporated businesses have unlimited liability. This means that the owners are fully and personally responsible for the debts of the business. Sole traders and partnerships are unincorporated businesses. An incorporated business has a legal identity that is separate from its owners. This offers financial and legal protection to the owners. A corporation can sue and be sued in court, but the owners are only liable to the extent of the funds that they have invested in the business. The owners of a corporation are usually called shareholders and they receive dividends in accordance with the extent of their shareholdings if the business makes a profit. Incorporated businesses can own assets and incur liabilities. Private and public companies are examples of incorporated businesses. Businesses can also be public sector businesses that are owned by local, state or federal government. Government businesses can be fully or partially owned by the government. The taxpayers or constituents of the government owning the business pay the debts and receive the profits of government businesses. Figure 1.9 illustrates legal structure as a classification of business. Chapter 1 • NATURE OF BUSINESS © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 17

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Private sector business

Unincorporated businesses

Sole trader

Public sector business

Incorporated businesses

Partnership

Private company

Government Business Enterprises (GBE) • Federal • State • Local

Public company

Figure 1.9 Legal structure as a classification of business

Explain the legal structure of a sole trader business.

Sole trader Sole traders have the simplest form of legal structure of any type of business entity. They own, manage and usually work in their businesses. There are low establishment costs involved in setting up a sole trader business. These costs are borne by the owner from his or her personal funds. A sole trader may also take out a loan from a lending institution to provide sufficient start-up capital. An important legal and financial feature of sole traders is that their owners have unlimited liability. This means that the owners are fully and personally responsible for the debts of the business. If the business is unable to meet its debts, the assets of the business may be seized and sold to repay creditors. If the business assets do not meet the debts of the creditors then the personal assets of the owner may also be seized and sold. Anyone can start up a sole trader business, but some sole traders must be licensed to trade. Examples of this include hairdressers, solicitors, electricians and builders. EXAMPLE

Figure 1.10 A sole trader business

What is a business name?

A business name is simply a name or title under which a person or other legal entity may conduct its business. A new national business names registration service commenced in May 2012, replacing the state and territory services. Businesses now only need to register or renew their name once with the register and pay a single fee. This will reduce red tape, time and costs for businesses. The new national business names registration service is administered and managed by the Australian Securities and Investments Commission (ASIC). Under the new streamlined service businesses only need to register their name once to have national effect and have the option of registering their name at a cost of $30 annually or $70 for three years. The new service is a positive for businesses as it removes the inconvenience caused by registration of business names under the law of more than one jurisdiction within Australia. Consumers can obtain contact and ownership details of any business registered in Australia, resulting in greater transparency and accessibility. Under the new system, future business owners can also look up the availability of a business name through a real-time automated check. Before choosing a new business name, business owners can search ASIC’s register to make sure that a similar name, or an identical one, is not being used by another business.

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New businesses need to obtain an Australian Business Number (ABN) before they can register a national business name. Source: http://www.asic.gov.au/asic/asic.nsf/byHeadline/12-106MR%20ASIC%20 launches%20national%20Business%20Names%20Register?opendocument

Sole traders make all the decisions and take all the risks associated with the business. They often have limited capital for expansion and finance is difficult to obtain because of the small and often risky nature of the business. There are few requirements for financial reporting so reports do not have to be made public. Management skill is limited to the abilities of the owner, although the advice of management consultants and help from Business Enterprise Centres may be available. It is often difficult for a sole trader to be absent from the business. At times when the owner is away, for whatever reason, the business operations may be on hold. The business will usually cease when the owner dies. By far the greatest disadvantage is the unlimited liability of the proprietor. According to the Australian Bureau of Statistics, in June 2014 small businesses with only one operator accounted for 61% of all actively trading businesses. Table 1.2 Advantages and disadvantages of the sole trader legal structure Advantages

Disadvantages

◗ Independence

◗ Owners may have to work long hours so the business can prosper

◗ You can be your own boss

◗ There is pressure to make the ‘right’ decisions

◗ The owner can make all the business decisions ◗ Relatively easy and inexpensive to start a sole trader business

◗ The start-up funds must be provided by the owner, including money borrowed from lenders

◗ $160 fee to register a business name in NSW

◗ Often, start-up capital is not sufficient and the business may run into cash flow problems

◗ The owner of the sole trader business can keep all the profits

◗ The owner of the sole trader business has unlimited liability meaning they are personally responsible for the debts of the business

◗ There is flexibility: in many cases the owner can choose the hours of work and may even be able to work from home

◗ Often, there will be no other workers in the business—just the owner—making it difficult if the owner is sick or wants to take time off and business operations sometimes cease if the owner cannot be there

◗ Customers often appreciate the personal service that is often found with sole traders

◗ The failure rate of small businesses is high—in June 2007 there were 1 985 822 small businesses operating in Australia; by June 2011 the number of those small businesses that continued to operate had fallen to 1 185 997, a failure rate of 41%.

Partnership A partnership is the relationship which exists between people operating a business with a common purpose and with a view to making a profit. It involves an agreement between two or more parties to enter into a legally binding relationship. There are four elements to a partnership agreement. ◗ There must be a valid agreement between the parties (this means that the agreement is free and no-one is forced into the partnership). ◗ The partnership must be formed to operate a business. ◗ There must be common rights and the ability to make decisions (agency). ◗ The partnership must be formed with the intention to make a profit— a partnership cannot operate a not-for-profit business. The law governing partnerships in NSW is the NSW Partnerships Act (1892). The current version was amended on 6 July 2009. Most partnerships are

Explain the legal structure of a partnership.


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small and the usual legal size of a partnership is from two to 20 people. However, according to the Corporations Regulations 2001 (Cth), a partnership can consist of: ◗ 50 actuaries, medical practitioners, patent attorneys, stockbrokers or trademark attorneys ◗ 100 architects, pharmaceutical chemists or veterinary surgeons ◗ 400 legal practitioners ◗ 1000 accountants. A partnership is referred to as the ‘firm’, and the name of the partnership is the name of the firm. This name may include all the names of the partners or several names and the word ‘company’. Registration of the firm name is necessary if the name does not include all the names of the partners. The registration procedure is similar to that of sole traders. A partnership is the most basic form of collective business organisation and is often associated with professional services such as accountants, solicitors and doctors. Family enterprises are suited to partnerships. Many farms are husband and wife or father and son partnerships. A partnership is an effective way to reduce income tax since each partner is taxed individually and so each can claim the amount of the tax-free threshold before any tax liability arises. There are usually no formalities needed to set up a partnership. Partners should protect themselves by having a formal, written partnership agreement drawn up by a solicitor. A partnership agreement should include: ◗ a description of the business and the name and purpose of the partnership ◗ the address of the principal place of business ◗ names and addresses of all the partners ◗ the amount of capital (equity) invested by each partner ◗ how much interest each partner will earn on this capital (the capital is considered to be lent to the partnership by the partners) ◗ the term (length) of the partnership ◗ the entitlement of each partner to profits or contribution to losses ◗ the roles and authority of each partner ◗ banking arrangements of the business and how the financial records of the partnership will be kept and audited ◗ policies regarding borrowing of funds ◗ procedures for making decisions and how disputes will be resolved ◗ acts requiring majority consent ◗ admission of new partners ◗ provisions for changes or dissolving the partnership ◗ the distribution of assets on dissolution ◗ withdrawal of capital ◗ sale of partnership interest ◗ confidentiality. Matters considered important by the partners can be included in the agreement. Where there is no written agreement, all partners share profits and cover losses equally and take equal responsibility for the activities and trading of the business. Even if there is agreement, partners cannot avoid being responsible for the debts of the business. The liability of partners to repay the debts of the partnership is unlimited. This means that, as with sole traders, the personal assets of partners may also be seized and

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sold to repay creditors. The only exception to this state of unlimited liability is if the partnership is a limited partnership, where a limited partner’s liability is confined to funds invested in the partnership. Table 1.3 Advantages and disadvantages of the partnership legal structure Advantages

Disadvantages

◗ Apart from sole traders, partnerships are the cheapest form of business organisation to establish

◗ Partnerships end when a partner dies, retires, resigns or is declared bankrupt: the agreement then needs to be renegotiated among the remaining partners

◗ Partnerships are easy to establish, with or without a partnership agreement

◗ Partners have unlimited liability and if the business becomes insolvent they could lose all privately owned assets (except tools of trade and insurance policies) to pay the debts of the business

◗ Partnerships are flexible and most partnership activities can be easily changed, including the amount of capital invested, profit shares or number of partners though changes usually require the agreement of all partners

◗ Problems can occur if a partner wants to retire or resign from a firm as it may be difficult to find someone to buy out that partner’s share

◗ Partnerships enable the owners to have more collective capital available and so the business has a larger capital base compared to a sole trader—as a result, it is also easier to borrow funds

◗ There can be problems with decision making and partners must consult each other before decisions affecting the partnership are made

◗ Partners are taxed as individuals and each partner enjoys the tax-free threshold

◗ Each partner is jointly responsible for the actions of others taken in the name of the partnership—it may be difficult to achieve a fair distribution of tasks between partners when their personal qualities or skills vary

◗ More partners mean greater possible specialisation and an improved range of services to potential customers—greater specialisation will attract more customers and improve the overall efficiency of the business, such as different specialist doctors in the one partnership

◗ Profits have to be shared amongst all the partners compared to the sole trader enjoying all the profit

◗ There are more people to share the workload and decision making involved in management compared to a sole trader

◗ There is potential for argument and disagreement between partners

◗ Limited partners have limited liability in a limited liability partnership

◗ It may be difficult to find suitable partners

◗ Losses made by the business can be used by partners to offset tax liability on income earned from outside the business ◗ There are no legal requirements for partners to make public their actions, including their financial dealings and end of year financial results—the only disclosure that may need to be made is the firm name may have to be registered

According to the ABS, In June 2013 there were 310 000 partnerships in Australia but by June 2014 the number of partnerships had fallen to 300 000.

Figure 1.11 A partnership


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Explain the legal structure of companies.

Companies Section 51 (part xx) of the Australian Constitution gave the federal government the power to make laws about corporations formed within the limits of the Commonwealth. The current law governing corporations is the Corporations Act 2001 (Cth). This law was most recently amended in December 2014. The most important form of corporation is the company. A company is: ◗ incorporated by registration under the Corporations Act ◗ a legal entity that is separate to its owners ◗ established for the purpose of holding investments or to operate a business. The Australian Securities and Investments Commission (ASIC) administers the Corporations Act and is responsible for regulating Australian companies. The main features of a company are outlined below. ◗ Perpetual succession means that the company can outlive its founders, unlike sole traders and partnerships. Australia’s oldest continuously operating company is the Australian Agricultural Company founded in 1824. With its headquarters in Brisbane, it was listed on the ASX (ASX code AAC) in August 2001. It employs a staff of 500 and operates 19 cattle stations. ◗ Being a separate legal entity means that the company is a ‘legal person’ separate from its owners. The company can sue or be sued, own assets and borrow and lend money. It has its own legal status. ◗ A company is owned by its shareholders. ◗ Limited liability of the owners (shareholders) of the company means that shareholders are liable for the debts of the company only to the extent of the funds that they have invested in the company as well as any amounts that are unpaid on the shares that they hold. Their personal assets cannot be seized to pay the debts of the company. Australian businesses that wish to adopt the legal structure of a company must register and incorporate the company with ASIC. Once a business has decided on a company structure it can choose a company name and determine structural matters that apply to the company including: ◗ liability of the shareholders ◗ amount of share capital ◗ the objectives of the company. A company name will include one of the following legal elements. ◗ Proprietary Limited (Pty Ltd)—this designation is given to a proprietary company with a limited number of shares. ◗ Unlimited Proprietary (Pty)—this is the designation given to a partnership. ◗ Limited (Ltd)—this means that the company, which is either a proprietary company or a public company, offers its shareholders (owners) limited liability. The word ‘Limited’ or ‘Ltd’ must be included in the name of the business. ◗ No Liability (NL)—this type of company is usually a public company in that it can advertise through a prospectus for shareholder funds from the public. The prospectus must state that it is solely a mining company. The concept of no liability means that shareholders do not have to respond to calls from the company to pay up on the unpaid issue price of shares. As an example, when a NL company begins it may offer the public $1 shares but may only require an initial

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contribution of 40 cents per share with the rest to be paid later. No liability means that investors do not have to pay any more contributions if they do not want to. This type of concession is made to mining only businesses to encourage investment given that mining is a risky business. The company must decide if it will be operated under the replaceable rules specified in Section 141 of the Corporations Act or under a constitution. These replaceable rules and/or constitution establish how a company’s internal management may be governed. They will contain information about: ◗ how the directors are appointed ◗ the powers and duties of the directors ◗ the rules on how the company is to be run ◗ voting rights of the shareholders. The advantage of using the replaceable rules set out in the Corporations Act is that unlike a constitution, they do not have to be continually updated at the company’s expense. Once an application form has been lodged with ASIC, and approval has been given, the company will be issued with a Certificate of Registration and can begin operations. The Corporations Act states: ◗ proprietary (private) companies must have at least one director and they are not required to have a secretary ◗ public companies must have at least three directors and at least one secretary. According to the ABS, in June 2013 there were 710 000 companies in Australia. By June 2014 the number of companies had increased to 750 000. Private company A private company is sometimes called a proprietary company. The main features of a private company include: ◗ shareholding (ownership) between one and 50 owners ◗ the shares are not publicly traded on the Australian Securities Exchange (ASX), hence the ‘private’ nature of the company—shareholders will need to obtain approval from the directors before selling shares ◗ a proprietary company must not engage in fundraising that would require a disclosure document such as a prospectus—this is an extension of the condition that the shares are not publicly traded ◗ the name of the company must include the word ‘proprietary’ (Pty). Proprietary companies are defined under Section 45A of the Corporations Act which also distinguishes proprietary companies as either ‘large proprietary’ or ‘small proprietary’. The differences here relate to issues such as operating revenue, the value of gross assets and the number of employed persons. Large proprietary companies are those that satisfy any two of the following criteria. ◗ Consolidated and operating revenue exceeds A$25 million. ◗ Consolidated and gross assets exceed A$12.5 million. ◗ The company and its controlled entities have 50 or more employees.

Explain the legal structure of a private company.

Some proprietary companies are proprietary limited companies where there are a limited number of shares. These companies are designated by the words ‘Proprietary Limited’ (Pty. Ltd.) in their title. Shareholders still have some protection of limited liability. However, in an unlimited


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proprietary company (partnership) (Pty), shareholders do not have this protection. The vast majority of companies in Australia are proprietary companies. Explain the legal structure of a public company.

Public company A public company has the four features that are included on page 22. Public companies can raise capital funds from members of the general public by selling shares in the ownership of the company. There are two major types of public company. ◗ Unlisted public company: this type of company can have unlimited shareholders and can raise funds for any profitable purpose. It is not allowed to advertise for investors. Unlisted public companies must lodge financial statements and reports with ASIC within three months after the end of the financial year. Unlisted public companies are usually small companies not suitable for listing on the Australian Securities Exchange (ASX). ◗ Listed public company: this type of company is listed on the ASX, with over 2000 listed. This listing enables the company to raise capital funds from members of the public by selling shares. This is known as equity capital because the company is selling equity (ownership) to the investors who become part owners of the company. The public is informed about the initial public offering through a document called a prospectus. The prospectus is a written invitation to the public to buy shares in the business. It must comply with legal requirements, which include describing past performance of the business (assuming that the business existed in another form before incorporation), what assets and liabilities the business has and what expectations of business success and profitability the company has.

Table 1.4 Advantages and disadvantages of the company legal structure Advantages

Disadvantages

◗ Limited liability means that the personal assets of the owners are protected

◗ Shareholders can still lose the amount that they have invested in the business and are also liable for the unpaid value of the shares that they own

◗ It is easy to transfer ownership by selling the shares that a person holds

◗ In proprietary (private) companies, the approval of the directors may be needed to sell shares

◗ The company tax rate is 30% but sole traders and members of partnerships are taxed at individual income tax rates—for 2011–2012, if an individual’s taxable income exceeds $80 000, the tax rate rises from 30 to 37% (therefore it would be a benefit tax-wise if a business earning a taxable income over $80 000 changed its legal structure to that of a company)

◗ The compliance rules of statutory regulators such as ASIC and the rules of the ASX are more demanding for companies compared to unincorporated businesses

◗ A company has a greater opportunity to be a larger business because it can raise capital funds through the sale of shares

◗ Large businesses can become impersonal and lose touch with the wishes of their many owners and there may be a conflict between the goals of the company with the goals of its owners

◗ A business has perpetual succession and it can outlive its owners and continue operations—Australia’s oldest company is more than 150 years old.

◗ Ownership in a company becomes diluted as more shares are sold and sometimes ownership may pass to people who are hostile to the company

◗ The owner or owners of unincorporated businesses may find that it is difficult to borrow funds because of the risks involved to lenders—a company has a greater opportunity to establish a good credit rating ◗ It is easier for companies to secure funds for growth, compared to smaller businesses

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Figure 1.12 A public company listed on the ASX

Government enterprise Government enterprises are also known as Government Business Enterprises (GBEs). All levels of government—federal, state and local— operate businesses, although there has been a trend in the last 20 years for governments to ‘corporatise’ their businesses or even to privatise government-owned businesses. Corporatisation means that the government owning the business retains control but the business is now put on a corporate footing, performing in the same way as companies in the private sector. Often, corporatisation is a first step towards privatisation. Privatisation occurs when a government sells off part or whole of a business that it owns. Governments in Australia have sold off many businesses in the last 20 years for a number of reasons. ◗ There was a belief that governments should not be in business—that businesses could be run more effectively by the private sector. ◗ By selling the asset of the business the government gained much-needed revenue that could be used to embark on other programs. Balanced against this was the argument that once a business was privatised, taxpayers no longer had the benefit of the revenue that the business earned. Examples of businesses that have been privatised are: – C ommonwealth (federal) Government: Commonwealth Bank, QANTAS, Medibank Private, Telstra (17% of Telstra is still owned by the Commonwealth Government with the shares held in the Future Fund) – N ew South Wales Government: State Bank of NSW, TAB Limited (now part of Tabcorp). Governments decide to establish businesses for a number of reasons. ◗ To provide essential services that may be unprofitable, meaning there is no incentive for the private sector to establish such a business (an example of this is the Special Broadcasting Service or SBS, which broadcasts ethnic programs and sporting events not usually covered by other free to air broadcasters). ◗ To provide competition with private sector businesses (for example, the Australian Broadcasting Commission competes with private sector radio and television businesses). ◗ To establish a government monopoly in a strategic area (for example, Australia Post has a monopoly on mail transactions, although there is competition from email and courier deliveries).

Explain the legal structure of a government enterprise.


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◗ To establish businesses in areas where the start-up capital investment is too great to encourage private sector investment (the National Broadband Network which has an estimated start-up investment of $42 billion is an example of this, with the government developing this network in partnership with private businesses such as Telstra and Optus).

Figure 1.13 A government enterprise Table 1.5 Advantages and disadvantages of the government enterprise legal structure Advantages

Disadvantages

◗ The government establishing the enterprise may be able to prevent new competitors from starting up, thus developing a monopoly

◗ If the enterprise has a monopoly there may be no incentive for the business to be efficient

◗ If the government enterprise competes with private businesses it may be able to use taxpayer funds for expansion

◗ Unless the enterprise is corporatised, the management of the enterprise may be less efficient than privately managed businesses

◗ Profits made by government enterprises may add to a government’s revenues

◗ Losses by government enterprises may mean that taxpayers have to offset the losses

◗ Sections of the community will benefit by the government establishing enterprises that are not profitable or where the startup costs are too high for private businesses

◗ Some taxpayers funds will be used to subsidise nonprofitable enterprises

KCq page 64

1.2.2 Factors influencing choice of legal structure A major decision that the owner of a business has to make when the business is starting is what type of legal structure the business should adopt. Each type of legal structure has its advantages and disadvantages, many of which have been mentioned earlier in the chapter. Owners need to examine a number of factors which will influence their decision about what legal structure to choose, including: ◗ size ◗ ownership ◗ finance. Examine size as a factor influencing choice of legal structure.

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Many businesses begin as sole trader enterprises where the owner has a business idea and provides the finance (capital) to begin operations. As the business grows and sales expand the sole trader may have to consider the need to take on partners to provide additional capital and assist in running the business. The original owner may take on partners or may decide that incorporation as a company is the way to go. The owner may also decide that he or she does not want to lose the independence of being the sole entrepreneur and therefore does not want the business to grow.



Size



Some businesses begin as companies because of the size of the operation required. Retail businesses or mining businesses, for example, may have a scale of operations so large that the sole trader or partnership structure is not feasible. There are also the considerations of risk and the ability to raise finance that must be considered. Entrepreneurs may wish to protect personal wealth from the possibility of loss by incorporating and enjoying limited liability. Incorporation also means a business has much greater ability to raise finance through selling shares.

Ownership Many entrepreneurs start sole trader businesses because they want to ‘be their own boss’. People do this to enjoy the freedom and independence that goes with running the business and making the decisions. Many sole traders see an opportunity to lead a more relaxed lifestyle without the tensions that can occur from working as part of a larger organisation. With many businesses that involve professionals, such as doctors, solicitors and accountants, partnerships are a common form of business ownership. This legal structure enables the business to be larger than a sole trader enterprise. The partnership is able to handle more clients or patients and also allows specialisation within the organisation. An example of this would be a partnership of solicitors where one of the partners specialised in family law while another concentrated on conveyancing while a third dealt with criminal matters. As mentioned earlier, the possibility of risk and the desire to grow a business may encourage business owners to opt for the company structure as one that is appropriate. Many owners are happy to broaden the ownership and have developed skills that help them to work well with other stakeholders such as managers and shareholders.

Finance Most sole trader businesses begin with finance invested by the owner. This finance may be a mix of the owner’s personal funds as well as finance borrowed from a lending institution. Many sole traders experience solvency problems because of inadequate cash flow. Solvency refers to the extent to which the current assets of a business exceed its current liabilities. This means that the current assets of the business, such as cash from sales, must exceed the current debts of the business, such as expenses for repayment of loans, rent, telephone, power and supplies, if the business is to remain in operation. The major problem for the sole trader and partnership structures is to generate enough cash flow to cover costs and at the same time provide the owners with sufficient funds for their own living expenses. Many owners will have the financial and business goal of growing the business. Growth provides a business with the opportunity to expand, produce a wider product range, access additional resources, including a more extensive variety of specialist skills and innovations, and help consolidate the position of the business in the market in terms of its competitors and market share. In order to do this, the original owners may need to consider taking on partners (or more partners) or even becoming incorporated so that the business can access a much wider finance base through selling shares. The advantages of incorporation and selling equity are the protection of limited liability and access to more finance. On the other hand, there are now more owners of the business whose goals (such as the expectation of being paid regular dividends) may conflict with the goals of the original owners.

Examine ownership as a factor influencing choice of legal structure.

Examine finance as a factor influencing choice of legal structure.


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There are other financial considerations linked to the choice of legal structure. Firstly, there are the costs associated with any legal structure of a business. This includes legal costs as well as any costs that need to be paid to statutory authorities, such as the costs of incorporation in the case of a company. There are also taxation considerations. A sole trader will be taxed the same as an individual wage and salary earner. With a partnership, each partner is taxed as an individual and each partner also enjoys the tax-free threshold. Therefore it may be profitable for a sole trader to go into partnership with a spouse or children as a method of minimising tax. KCq page 64 Outline the influences in the business environment.

page 66

1.3 Influences in the business environment The business environment refers to all of the factors that ‘surround’ a business and have an impact on it. This environment can be divided into three parts. ◗ External influences have an indirect impact on a business and the business has very little control over them. They include economic, financial, geographic, social, legal, political, institutional, technological, competitive situation and markets. ◗ Internal influences have a direct impact on a business and the business has some control over them. They include products, location, resources, management and business culture. ◗ Stakeholders in a business are individuals, other businesses or organisations that have a vested interest in the business achieving its objectives. Stakeholders include employees, owners and managers, customers, suppliers of inputs, creditors, unions, employer organisations, government organisations, the environment and society as a whole. Figure 1.14 below illustrates the business environment. The business environment

All of the factors that impact on a business

External influences • Indirect impact • Business has little control • • • • • • • • • •

Economic Financial Geographic Social Legal Political Institutional Technological Competitive situation Markets

Internal influences • Direct impact • Business has some control • • • • •

Products Location Resources Management Business culture

Stakeholders • Have vested interest in the business achieving objectives • • • • • • • • • •

Owners and managers Employees Customers Suppliers Creditors Unions Employer organisations Government Community The environment

Figure 1.14 The business environment

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1.3.1 External influences

Outline external influences.

External influences refer to the wider business environment. The business has little control over this environment and, as external influences become uncontrollable, the success of the business depends upon its adaptability.

Economic influences

Explain the impact of economic influences.

Income (gross domestic product)

The global financial crisis (GFC) was a phenomenon that affected most economies in the world. The GFC resulted from a credit crisis in the United States sub-prime mortgage market. The sub-prime mortgage market deals with borrowers who are unable to offer adequate security against a housing loan. If banks need borrowers to repay their loans, many will not be able to. The banks will seize their houses and try to sell them off, but in a market flooded with properties for sale the banks will not recover the money that they lent. In 2007 commercial and investment banks in the USA were affected by the inability of borrowers to repay their bank loans. This placed pressure on these banks (many were forced to close) and has led to a world credit crisis due to the global nature of borrowing and lending. Many nations in the European Union (EU), notably Greece, Spain and Ireland, have serious debt problems, requiring other EU nations to contribute to an economic ‘bailout’. During the GFC, Australia fared relatively well due in part to the government’s economic stimulus package, where funds were injected into infrastructure projects. This had a positive and direct impact on business and helped to keep unemployment levels relatively low compared to countries like the United States. This actual scenario illustrates that no nation or business is immune to the impacts of economic influences. Economic events elsewhere in the world have a significant impact on governments, businesses and individuals in Australia. These events are often part of the economic cycle and the extent of this economic influence depends to a large extent on how the government manages the economy. The economic cycle refers to the growth of income and employment in the economy and how this growth has an impact on businesses and consumers. The economic cycle is illustrated below in Figure 1.15.

Expansion

Boom

Downswing

Recession Time

Figure 1.15 The economic cycle


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Figure 1.15 indicates that there are four separate sections or phases of the economic cycle. There will be an expansion, which will usually be followed by a boom. As the economy has overproduced during the boom, businesses will cut back production and the economy will move into a downswing. Depending on how the government manages the economy, it is possible that the economy will move into recession. Table 1.6 below gives greater detail of what happens to different economic variables in each phase. Table 1.6 Changes to the economy during each phase of the economic cycle Economic variable

Expansion

Boom

Downswing

Recession

Employment

Employment rises as business investment increases

Unemployment is at its lowest as businesses hire more workers to meet rising demand

Unemployment begins to rise as businesses cut back production

Unemployment is at its highest; government and charity spending on welfare increases

Consumer spending

Increases as employment rises

Continues to increase; imports rise as local production cannot meet demand; demand for houses, home units and new motor vehicles rises

Starts to slow as some consumers lose jobs; caution causes many consumers to limit spending to necessities

Is at its lowest as consumers buy only necessities; spending on luxuries is at its lowest; the housing and new motor vehicles sectors are hardest hit

Business investment

Increases as wornout equipment needs to be replaced; build-up of inventories

Continues to rise; businesses find it hard to replace inventories as demand is high

Falls dramatically because of falls in demand and the fact that over-investment occurred in the boom; inventory investment halts as there are unsold stocks to clear

Despite the cost of borrowing (rate of interest) being low, the lack of demand means that investment is low

Business profits and expectations

Profits begin to rise; further expectations of profits

Profit reports are at a maximum with confidence at a high

Many businesses experience reduced profits or losses and expectations are for further losses

Businesses have to withstand losses and there is a large increase in business failure

Wages

Some growth in wages

Wages continue to rise as labour shortages begin to emerge

Wage growth slows; rising unemployment means that any vacancies are easy to fill

Wage growth is non-existent because of the large pool of unemployed labour

Prices

Prices begin to rise

Prices rise steeply as shortages occur; the economy experiences inflation

Prices (especially of goods and services that are not necessities) stop rising

Prices remain stagnant

Interest rates

May increase anticipating further consumer spending and the possibility of inflation

The Reserve Bank will increase interest rates if inflation exceeds three per cent; interest rates will continue to rise

Once prices stop rising, interest rates will be on hold; as the downswing worsens and unemployment rises, interest rates will fall

The Reserve Bank continues to cut interest rates in an attempt to encourage borrowing

Business and consumer outlook

Both groups are optimistic

Because of high profits the outlook of businesses is optimistic; consumers are also optimistic because of full employment and rising wages

Both businesses and consumers are pessimistic; retail sales fall as consumers cut spending

Businesses and consumers are pessimistic and are not enticed into borrowing even by low interest rates

The Australian Government exercises control over the economy using two policies which usually complement each other—monetary policy and fiscal policy. Monetary policy is implemented by Australia’s central bank, the Reserve Bank of Australia (RBA). By varying what is known as the cash rate (benchmark interest rate), the RBA can encourage borrowing and spending by reducing interest rates. The RBA would take this action during downswings and recessions. During expansions and booms the RBA would try to discourage borrowing and spending by increasing interest rates.

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Fiscal policy is implemented through the federal government’s budget which usually occurs in May each year. The government can have a direct impact on spending during downswings and recessions by budgeting for a deficit. This means the government will spend more than it will collect from taxation revenue. It will do this by increasing government spending and reducing taxation. During expansions and booms the government will want to reduce spending in the economy. It will budget either to reduce the deficit or even budget for a surplus. A surplus budget occurs when revenue from taxation exceeds government spending. The operation of these policies will have considerable impact on both consumers and businesses. Businesses will usually benefit from lower interest rates, reduced taxation and increased government spending. On the other hand, businesses will find the environment more difficult when taxation is rising, government spending is being cut and interest rates are rising.

Financial influences Businesses depend on the availability of finance in order to start-up, grow and develop new products. We have seen that when a business begins, the owner(s) usually put some of their own money into the business. Most businesses will also rely on other funds for their start-up and growth. There are basically three sources of finance that a business can access. ◗ Retained profits are that part of the net profit of a business that is not paid out in dividends to shareholders. Instead, these funds are invested back into the business. Retained profits are a special case of equity finance. ◗ Debt finance involves borrowing from sources outside the business, such as banks, finance companies or government. These borrowings must be repaid with interest. Examples include overdrafts, loans and mortgages. ◗ Equity finance involves using the owners’ funds from within the business or selling shares (equity) to new owners who are outside the business to help raise capital. All of these sources of business finance are influenced by the rate of interest. In the section on economic influences we saw that interest rates will fluctuate depending on the economic conditions. Debt finance, which involves borrowing from various financial institutions, will be sensitive to changes in the rate of interest and this will have an influence on business development and expansion. If the rate of interest rises, businesses will be less likely to undertake borrowing as a method of raising finance. On the other hand, if the rate of interest falls, businesses will consider the option of borrowing as a method of raising finance. With retained profits and equity finance there is an indirect influence of the rate of interest. As interest rates rise, investors are less likely to want to put their funds into buying shares in businesses. They would rather access guaranteed returns available from placing their funds into interestbearing deposits. The same applies to retained profits. If interest rates are high, a business may decide to lodge these retained profits with a financial institution to earn interest rather than to plough them back into the business. If, on the other hand, interest rates fall, investors and businesses may be willing to use their funds to buy shares if the expected returns are greater than they would receive from an interest-bearing deposit, thus providing businesses with a source of equity finance. Businesses that interact with the global environment are also impacted by the financial influence of the exchange rate. The exchange rate between the Australian dollar and another country’s currency is the price

Explain the impact of financial influences.


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of that currency in Australian dollars. Australia, like most other countries in the world, has what is known as a floating or flexible exchange rate. This means that the exchange rate between the Australian dollar and other currencies is constantly changing. This creates uncertainty for businesses in environments where transactions may take some months to complete. Financial markets have developed hedging instruments to reduce risk. In 2014 and 2015 the exchange rate of the Australian dollar began to depreciate (fall) against the US dollar where previously it had been at parity with (equal to) the US dollar. This occurred because of improvements in the US economy and the action of the Reserve Bank of Australia to lower interest rates. The Australian dollar also weakened against the Pound sterling and the Euro. As the exchange rate between the Australian dollar and the other currencies depreciated, Australian export businesses, especially in the agricultural and resources sectors, benefitted because it was now cheaper for overseas buyers to buy Australian dollars. However, importers now faced higher prices for foreign goods and services because it now cost them more to buy foreign currency. The prices of foreign consumer goods being bought online also rose. Explain the impact of geographic influences.

Geographic influences The four main geographic influences that impact on businesses are: ◗ location ◗ Australia’s geographic location within the Asia–Pacific region ◗ the process of globalisation ◗ demographic factors. The first influence—location—is an internal influence and will be examined later in this chapter. Australia’s geographic location within the Asia–Pacific region Australia is technically not part of Asia but is well located within the Asia–Pacific region to take advantage of the growing prosperity of regional economically developed and emerging nations. For many years, Japan stood as Australia’s major trading partner but as the massive economy of China emerges, needing many of the commodities that Australian businesses produce, the possibilities of businesses tapping this huge market seem immense. The following table illustrates the importance of our trade with leading countries and institutions in the Asia–Pacific region. This trade indicates the opportunities for Australian businesses to develop markets within the region.

Table 1.7 Importance of trade between Australia and selected counties/institutions in the Asia–Pacific region Trading partner or institution

Trading information

Australia—total exports of goods 2008–2009

$231.7 billion

United States of America

The USA is Australia’s closest security ally and a very important economic partner. Australia, New Zealand and the USA agreed to the ANZUS military and security alliance in 1951. Australia and the USA entered into a free trade agreement (AUSFTA) in 2005. The USA is one of Australia’s top merchandise trading partners, its largest services trading partner and its leading source of foreign investment. In 2008 Australia exported goods and services to the USA worth $18.3 billion and imported goods and services from the USA worth $36.5 billion. Australia’s main exports to the USA are professional services, beef, alcoholic beverages and crude petroleum. Investment between the two countries was valued at $813 billion at the end of 2008.

Japan

Japan has been Australia’s largest export market for 40 years. In 2008–2009 our exports of goods to Japan was worth $52.5 billion. In 2008–2009, Japan was Australia’s top export market for coal, beef, aluminium, liquefied natural gas (LNG), dairy products and woodchips. Japan was also Australia’s third largest source of foreign investment, with a total investment worth $89.5 billion at the end of 2008. A Japan–Australia Economic Partnership Agreement (JAEPA) was signed in July 2014. This landmark agreement strengthened ties with Australia’s second-largest export market and the world’s third-largest economy.

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PRE L IM IN A RY BU SIN ES S ST U D I ES




Trading partner or institution

Trading information

China

In 2008–2009, China was Australia’s largest trading partner, with Australia’s trade with China reaching $83.0 billion. Australia exported goods and services worth $44.4 billion to China. Major Australian exports included iron ore, education services, coal, alumina, wool and copper ores. A China–Australia Free Trade Agreement (ChAFTA) was signed in June 2015 which will benefit trade between both nations.

South Korea

South Korea was Australia’s third largest market for the export of goods in 2008–2009. These exports totalled $19.2 billion dollars for the year and represented an increase of 35.1% year-on-year. Our major exports to South Korea were coal, iron ore and crude petroleum. Our main imports included passenger motor vehicles and refined petroleum. A South Korea–Australia Free Trade Agreement (KAFTA) was signed in April 2014 which improved trade between both nations.

Indonesia

Indonesia is our second closest neighbour. Two-way trade between Australia and Indonesia totalled $11.5 billion in 2008 making Indonesia our 13th largest trading partner. Exports of goods came to $4.3 billion and exports of services came to just over $1 billion. Australia’s major exports to Indonesia include wheat, aluminium, live animals, education-related travel and copper.

India

Australia’s strength in exporting primary products, particularly minerals and fuels, well positions us to supply the growing Indian industrial and consumer demand. Two-way trade totalled nearly $19 billion in 2008.

New Zealand

In 1983, Australia and New Zealand signed the Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA), which created a free trade area between the two countries. Exports of Australian goods came to $9.4 billion and services exports were valued at $3.5 billion to New Zealand in 2008. Australia imported goods and services from New Zealand valued at $7.6 billion and $2.5 billion over the same period. Australia’s major merchandise exports to New Zealand are crude and refined petroleum, medicaments and motor vehicles. New Zealand is Australia’s seventh-largest trading partner and thirdbiggest investment market.

Association of South-East Asian Nations (ASEAN)

Australia values its relationship with ASEAN, which is a key regional institution. Australia has not been admitted as a member of ASEAN, but in August 2007 Australia and ASEAN signed a Joint Declaration on an ASEAN–Australia Comprehensive Partnership. This partnership is part of Australia’s commitment to promoting economic growth in the ASEAN region.

East Asia Summit (EAS)

Australia is a founding member of the EAS which began at a meeting of regional leaders in Kuala Lumpur in 2005. The EAS brings together regional leaders to discuss and act on key challenges facing the region. The 16 EAS countries represent collectively 49% of the world’s population and account for almost 30% of global GDP, and the region is expected to see sustained economic growth. With the 15 other EAS member countries accounting for nearly 60% of Australia’s goods and services export markets, the grouping is of key economic and strategic importance.

Source: Adapted from Australian Bureau of Statistics 1301.0, ‘Australia’s bilateral relationships’, Year Book Australia, 2009–2010.

The process of globalisation Globalisation is the integration of product, capital and labour markets throughout the world. It has resulted from technological and business innovation and changes in political and economic policy. These changes have been caused by the reduction of economic, financial, political and social barriers. There is increasing movement of goods, services, labour, capital, information and ideas across national borders as the barriers between nations are reduced. This allows a better allocation of resources, increased specialisation, increased competition and improved standards of living in some countries. The factors (drivers) that have contributed to globalisation include: ◗ deregulation of financial markets around the world ◗ deregulation of international trade and the removal of trade barriers ◗ the growth of technology, especially the internet ◗ the growth of multinational and transnational corporations ◗ the development of regional trading organisations and blocs such as the European Union and ASEAN ◗ the attitude of governments worldwide. Australia has benefited from globalisation, both in terms of exports (wool, wheat and minerals) and as a borrower of international capital. The standard of living Australians enjoy now can be attributed to its ‘open’ and therefore competitive economy. Australian businesses have responded


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to the ‘openness’ of globalisation by expanding to take advantage of global markets. Harvey Norman, Insurance Australia Group and QANTAS are three businesses that have taken advantage of this situation. Globalisation has had some downsides for Australian businesses with a number having to move their operations offshore to take advantage of cheaper costs in other countries. This has resulted in a loss of jobs and incomes in Australia. The strong performance of the Australian dollar against the US dollar, the Euro and the pound sterling has caused the loss of some export customers of Australian businesses. Demographic factors Demographic factors are part of geographic influences and include population factors such as age, sex, income, cultural background and family. They have a significant effect on business activity. Australia’s population is ageing. The proportion of people in our population over the age of 65 was 4% in 1901 and in 2014 had grown to 14.7%. This increase in the proportion of older people in the population has implications for the workforce as well as the goods and services that businesses will need to produce, from travel and recreation services to aged care and mobility scooters. This changing demographics of an ageing population also has implications for the types of advertising that are currently appearing in the media, such as advertisements for funeral insurance and funeral plans as well as aged care living facilities. At June 2013, there were 100 000 more females than males residing in Australia, with 11.52 million males and 11.62 million females. This statistic has implications for the fertility of the population, the workforce and also the way businesses develop products for this slight imbalance. In terms of income and living standards, these have never been as high as they are today, though some people still face difficult financial circumstances and social exclusion, with the recent natural disasters adding to these difficulties. According to the Australian Bureau of Statistics (ABS), the average weekly disposable income per household (income after income tax is taken out) was $918 in 2011–12. This compares with $510 in 1996–1997. Growth in incomes means that Australians have more discretionary income (income to spend after essential spending). This has significant implications for businesses. Family size has become smaller, and many women now become mothers much later than was the case for previous generations. Many children also live with only one parent and have the other parent living elsewhere. There is also an increase in the breakdown of marriages. Current trends suggest that one in three marriages will end in divorce. These facts again have implications for businesses. With the incidence of both parents or a single parent working there will be an increase in demand for day care of younger children. The increasing rate of marriage breakdown will see the increased demand for counselling services. Another factor that sets the scene for contemporary family life is the evolving cultural character of Australia. Since 1901 the Australian population has changed dramatically in terms of cultural background. Ethnic diversity accelerated after World War II, and since this period Australia has become one of the most ethnically diverse countries in the world. This broad diversity in our population has led to the development of many restaurants selling food that comes from a variety of different cultures. The Sydney suburb of Crows Nest (postcode 2065) has developed into an ‘eat street’ and cuisines from the following cultures are represented there: French, Japanese, Greek, Italian, Chinese, Indian,

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Thai, Nepalese, Spanish, Pakistani, Mexican, Cajun and Creole, Mongolian and Vietnamese. Ethnic food is only one of the many ways that business has been influenced by the growing cultural diversity in Australia.

Social influences Social influences have a significant impact on businesses in terms of the goods and services that they produce. Many businesses scan the external business environment to observe what the latest shift in social influences is. Some of the more easily recognised social trends in recent times in Australia are listed below. ◗ There is a concern generally about the environment and our impact on it, especially with carbon pollution and alternative energies such as solar and wind power, and recycling. ◗ Australia’s rapid ‘take-up’ of gadgetry and technology—Australia ranked first in the G20 nations for its ‘e-readiness’ in 2014. Australia was ranked first overall in the category of social and cultural environment, including aspects such as level of education and literacy, level of internet literacy, degree of entrepreneurship, technical skills of workforce and degree of innovation. As a nation we have embraced gadgetry and technology such as DVD and Blu Ray players, pay television, mobile phones, especially Android phones, and our acquisition of ‘apps’ as well as broadband internet. ◗ There is an increase among most age groups in the awareness of the benefits of exercise and the health problems associated with junk and fast foods. This has caused shifts in demand for fast foods and healthy foods and also an increase in demand for gym memberships and exercise products. ◗ There is a trend towards people dressing more casually in all situations and this has an influence on the type of clothing manufactured and sold. ◗ There is a tendency for children to remain at home longer, well into their 20s, as the costs of rent, housing and utilities (such as electricity) increases. There is also a substantial increase in casual and part-time work in the 16–30 years age group as younger people try to build up savings for post-school education, housing or just to be able to afford to have a good time. The trends that were listed in the previous section on demographic factors are also part of social influences. All of these influences have a significant impact on the way businesses will respond in terms of operations, marketing, finance and human resources.

Legal influences Various governments establish laws and regulations to ensure the smooth operation of the business environment. These laws have been developed either by common law (where judges in courts establish precedents in making decisions in areas which have not been tested before) or statute law (where parliaments enact legislation). The orders made by local governments are called delegated legislation because this power is delegated to them by the state governments. Businesses are influenced by changes to laws and regulations. These changes will have an impact on the costs of doing business, the hours of operation, the way that goods and services are produced and even how products are advertised. One example of the way in which products can be advertised is the total ban on the advertising of tobacco products in the electronic and other media.

Explain the impact of social influences.

Explain the impact of legal influences.


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There are also many laws regarding the employment contract between employers and employees as well as laws regarding workplace health and safety and discrimination in the workplace. Businesses need to constantly scan the business environment for changes to these laws and regulations and implement changes to their practices where necessary. There are changes that will occur with occupational health and safety (OH&S) in 2012 and businesses will need to ensure that they comply with these new laws and regulations. EXAMPLE

Changes to Occupational health and safety laws in Australia

Australia has nine jurisdictions that make OH&S laws (six states, two territories and the Commonwealth). The body that administers Commonwealth OH&S is Safe Work Australia (SWA). SWA was established by an act of parliament, with functions established by the Safe Work Australia Act 2008. SWA is an independent Australian Government agency established in 2009 with the primary responsibility of improving work health and safety and workers’ compensation arrangements across Australia. The agency is jointly funded by the Commonwealth, state and territory governments facilitated through an agreement signed in July 2008. SWA’s functions include developing national policy relating to OH&S and workers’ compensation. SWA also has responsibility for preparing, and as necessary revising, a model act, model regulations and model codes of practice relating to OH&S. The model act and regulations are due to be adopted by the Commonwealth, the six states and the two territory governments by January 2012. This means that each state and territory will pass legislation in line with the provisions set up in the model act so that there will be uniformity across Australia regarding OH&S. SWA represents a genuine partnership between governments, unions and industry. SWA works towards the goal of reducing death, injury and disease in the workplace. SWA has devised a draft model Work, Health and Safety (WHS) Code of Practice. In this code are regulations which cover: ◗ how to manage work health and safety risks ◗ how to consult on work health and safety ◗ managing the work environment and facilities ◗ managing noise and preventing hearing loss at work ◗ hazardous manual tasks ◗ confined spaces ◗ how to prevent falls at workplaces ◗ labelling of workplace hazardous chemicals ◗ preparation of safety data sheets for hazardous chemicals ◗ how to manage and control asbestos in the workplace ◗ how to safely remove asbestos ◗ facilities for construction. Source: www.safeworkaustralia.gov.au

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Political influences Political influences are relatively easy to predict when one side of politics holds government for some time. This was so with the federal government under the Liberal–National Party Coalition from 1996-2007. However, uncertainty can prevail when there is a change of government as there was in the federal sphere in 2007 and particularly with the minority government led by Julia Gillard from 2010–13. This Labor government was defeated by the Tony Abbott–led Liberal–National Party coalition in September 2013. One of the reasons that the John Howard–led Liberal–National Party coalition government lost office in 2007 was its unpopular Work Choices laws, especially the law where employers could make employees negotiate individual workplace contracts. The Work Choices laws were replaced with the Labor government’s Fair Work laws in 2009. The federal government law that establishes employment contracts is the Fair Work Act 2009 (Cth), current version July 2014, which establishes for most employees workplace-level collective bargaining between the employer and employees and their representatives. The Act also provides a safety net of enforceable minimum employment terms and conditions through the National Employment Standards (NES). Businesses have had to cope with these changes to employment law and also to comply with changes to many other laws as a result of political influences. One change to taxation law in the 2015 budget is the reduction in the income tax rate for small businesses (i.e. businesses with an annual turnover of less than $2 million) from 30% to 28.5%. Therefore political change can also be advantageous to business.

Institutional influences

Explain the impact of political influences.

Explain the impact of institutional influences.

There are a number of institutions that have an impact on businesses. Some of the major influences are outlined below. ◗ The Australian Securities Exchange (ASX) is responsible for making markets in the issuing and trading of shares in public companies. By going public, many businesses are able to raise the large sums of equity finance they require to be able to embark on their complex operations. ◗ The Australian Securities and Investments Commission (ASIC) is an independent Australian Government organisation that has the responsibility of regulating Australian companies, financial markets and businesses that deal in and give advice about investments, insurance and superannuation. ASIC has this legal responsibility under the Australian Securities and Investments Commission Act 2001 (Cth). ◗ The Australian Competition and Consumer Commission (ACCC) promotes competition and fair trade in the marketplace to benefit consumers, businesses and the community. It also regulates national infrastructure services. Its primary responsibility is to ensure that individuals and businesses comply with the Commonwealth competition, fair trading and consumer protection laws. The ACCC enforces the Competition and Consumer Act 2010 (Cth). This used to be known as the Trade Practices Act 1974 (Cth). ◗ NSW Fair Trading provides services directly to individuals and businesses to create a fair, safe and equitable marketplace. NSW Fair Trading administers laws that set the rules for fairness in daily transactions between consumers and traders. It investigates unfair practices and ensures that the products sold in NSW are safe and meet


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◗

◗

◗

◗

◗

Explain the impact of technological influences.

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Technological influences Technology is a major influence on any business. The computer is the main business technological application because of the facilities to communicate, research, design and store information as well as the computer’s ability to maintain, control and manage inventory. Similarly, mobile phones are now more than voice communications devices and have similar applications to computers. For businesses where operations take employees into the field away from the home base or head office, the mobile phone is truly an essential piece of equipment. This is easily seen when you consider contractors or employees in the operations of builders, real estate agents, paramedics, sales representatives and customer service personnel in service businesses. Technology in the form of computer-aided design (CAD) and computeraided manufacture (CAM) has an impact on businesses in terms of reducing the number of employees needed, especially in a manufacturing business. The use of all forms of technology would also require a more highly skilled and trained workforce where employees can understand and use the technology available to them. Operations managers have also been influenced by technology. Their roles have changed from being in a supervisory position, controlling



regulations and safety standards. NSW Fair Trading registers businesses, cooperatives and associations, and issues occupational licences so consumers can trust the people they are dealing with. Employer associations are support organisations for employers. Examples are the Business Council of Australia (BCA) and the Australian Chamber of Commerce and Industry (ACCI). These organisations represent the interests of employers in specific areas, such as negotiations with employees and unions, to develop policies and strategies for effective employment relations and to act as lobby groups to further the interests of their members. Unions are organisations that represent groups of employees on issues such as pay and conditions, health and safety, and job security. The role of the union is to support, advise and represent employees when making collective agreements and, in wage negotiations and industrial conflicts, to advise them on their legal rights and responsibilities and to act as a pressure group to highlight workers’ concerns. The peak union body is the Australian Council of Trade Unions (ACTU). Fair Work Australia is the national workplace relations tribunal. It is an independent body with power to carry out a range of functions relating to minimum wages and employment conditions, enterprise bargaining, industrial action and dispute resolution, termination of employment and other workplace matters. The Fair Work Ombudsman was created by the Fair Work Act 2009. The Fair Work Ombudsman’s functions include promoting harmonious, productive and cooperative workplace relations and ensuring compliance with Commonwealth workplace laws. The services of the Fair Work Ombudsman are free to all workers and businesses in Australia. CHOICE (formerly known as the Australian Consumers’ Association) was founded in 1960 with the following mission: to ensure the consumer voice is heard loudly and clearly. CHOICE gives consumers the knowledge, skills and representation to get the most out of all their purchasing decisions by providing a lobby to governments about consumer issues as well as advice.



employees and processes, to that of being team leaders, motivating team members in operations processes. Technology has also had an impact on marketing whereby customers can have information sent by retailers and wholesalers by text message to their mobile phones. A major influence of technology on businesses is the need to constantly upgrade equipment and the resultant need to retrain staff. This can be costly for businesses but in many cases it is essential to use the latest technology to maintain competitive advantage. There is also the influence of online shopping. During 2011, when the exchange rate of the Australian dollar was above parity with the US dollar, there was an increase in online shopping because the exchange rate meant that the goods were cheaper than local retail prices and if they were priced at under $1000 there was no GST payable. The following contemporary media report illustrates this influence of online shopping.

The influence of online shopping on Australian retail business Late in 2010, a number of large retailers including Myer, David Jones, Target and Harvey Norman complained that Australian consumers were increasing their online shopping from overseas sites or from Australian sites importing goods from overseas. This practice was due, in part, to the strength of the Australian dollar and by doing so these online shoppers were avoiding payment of the GST. It is Australian Government policy to exempt imports of $1000 or less from the GST. The major Australian retailers felt that this was putting them at a considerable disadvantage. In managing their operations they had to provide retail outlets in the form of stores located in areas of costly prime urban and suburban real estate, provide fixtures and fittings, staff their operations with trained staff and provide inventories of stock for customers to inspect and buy. Compared to this, online retailers merely had to provide a website, a secure method of payment for customers and to have suppliers of stock to provide goods as ordered. Source: R Barlow, January 2011

Competitive situation influences Market concentration refers to the number and size of businesses in an industry. In Australia, many key markets are highly concentrated, with a few businesses dominating the industry. This is the case in the following industries: iron and steel, telecommunications, the print and electronic media, real estate agents, food production, motor vehicles, airlines, supermarkets, petrol and oil, breakfast cereals, dairy products, banking, finance companies, insurance, retailing of electrical appliances, white goods, paint, pharmaceuticals and furniture. Small businesses can exist in these markets. Recent trends indicate that business size and market dominance are less of an advantage in today’s business world. Where businesses operate in markets with a high degree of concentration the dominant business is often a price maker. This means that this business will establish the prices at which various products will sell. It is able to do this because it is powerful in the market and has the ability to initiate a price war.

Explain the impact of competitive situation influences.


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Price wars can drive smaller businesses out of operation. Other smaller businesses in the same market will usually follow the price lead given by the dominant business. These smaller businesses are called price takers and while they can be dominated by a larger business in terms of price, their advantage lies in providing customers with quality and service as a competitive advantage. Although there are number of key industries where there is market concentration, recent government policy has been to promote competition. The Australian Competition and Consumer Commission (ACCC) enforces the Competition and Consumer Act 2010 (Cth). The ACCC investigates situations where businesses or markets may be operating in an anticompetitive manner. An adverse finding can result in substantial fines for the business concerned as well as negative publicity. With the continued spread of globalisation, many businesses now face competition from businesses in other countries. As mentioned earlier, online shopping and e-commerce is growing in importance in Australia with an estimated 14% of all sales being online sales. There has been a deregulation of barriers to trade worldwide and many free trade treaties have been negotiated. This means that businesses in Australia have to compete to continue in operation. Many businesses are retaliating to the threat of losing sales to online shopping by improving customer service or offering ancillary services (such as the cosmetics departments of stores such as David Jones or Myer offering a free skin cancer screening) to attract customers to their stores. One way that businesses try to create the impression that their products are unique and better than those produced by their competitors is through differentiation. Good or service differentiation refers to the differences between products of competing businesses as perceived by consumers. The business develops a good or service that is unique and customers believe is better than or different to the products produced by competitors. It is based on such features as quality of service, price and product image. The production of differentiated goods or services is a major way for a business to continue being competitive. A business can achieve cost leadership through differentiation and therefore provide value for its customers. There are three ways of achieving differentiation. ◗ Physical appearance or styling of goods means making a good or service appear different to the products of competitors. ◗ Providing the customer with an adequate level of service at a minimum cost makes purchasing the good from a particular business a more pleasant experience than buying from competitors. ◗ Producing a good or service efficiently—that is, with a maximum of quality at a minimum of cost. Explain the impact of markets as an external influence.

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The market for the products of a business has a major influence on how the business will develop those products. Businesses consider the entire population as the total market. However, the people who will want to buy various products will be less than the total population. A business will want to identify its target market to make the job of selling easier. The target market is the specific segment of the total market that the product is aimed at. Most businesses will undertake some level of market research to identify their target market. This will give the business knowledge about who the customers and their product needs are.



Markets



Conducting market research allows the business to divide its market into segments. Market segmentation is the way in which a business divides its potential market into different groups, or segments. Once these segments are identified, specific products can be developed to meet the needs of consumers in those target segments. Consumers can be grouped according to: ◗ demographics—age, gender, marital status, job, level of education and income ◗ sociocultural factors—religion, cultural background ◗ geographics—location (urban, rural, inner city, suburbs) ◗ psychographics—lifestyle and buyer behaviour (needs, wants, personality, impulse behaviour).

Students learn to: examine contemporary business issues to explain how changes in external influences have contributed to the growth of the tertiary, quaternary and quinary industries in Australia.

The following table illustrates the annual growth rate of service industries in Australia over a ten-year period from 1997–1998 to 2007–2008. Table 1.8 Australian average annual rate of growth in the production of

services 1997–1998 to 2007–2008 Service industry

Annual growth rate %

Tertiary Wholesale selling

3.2

Retail selling

4.0

Accommodation, cafés, restaurants

3.5

Finance and insurance

5.2

Property and business services

4.8

Government administration and defence

2.4

Health and community services

4.4

Quaternary Communication services

6.0

Education

1.8

Cultural and recreation

4.3

Quinary Personal and other services

3.2

Source: Adapted from Table 15.2, ‘Average annual rate of growth in the production of goods and services 1997–1998 to 2007–2008’, ABS 1301.0, Year Book Australia, 2009–2010.


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Changes to service industry sectors in Australia—influence of the external environment Service industry sectors include the tertiary sector, the quaternary sector and the quinary sector. They produce the following services. Tertiary—transportation and distribution, retail and wholesale selling, entertainment (movies, television, radio, music and theatre), clerical services, media, tourism, insurance, banking, health services, and law. The tertiary sector contributes to the bulk of Australia’s employment. Quaternary—involves intellectual activities and providing information services. These include education, research and development, libraries and information processing, information technology, software engineering, financial planning and other knowledge-based services. Quinary—includes domestic services such as cleaning, ironing, lawn-mowing and child care. These are the services that you would expect to find being performed at home for no cost. However, many businesses have developed in these areas. These industries have grown in the last 30 years due to many changes that have taken place in the external environment. Economic—although there have been various expansions and recessions, the overall trend has been for incomes and employment to grow. This has allowed increased discretionary spending by consumers on items such as entertainment, tourism, purchasing consumer goods (which has increased demand for employment in retail and wholesale selling), and technology such as computers and mobile phones. There has also been an increase on spending in the quinary sector as many women join the workforce and require services such as child care. Financial—the ‘dot-com’ boom of the late 1990s saw many new technology businesses become established by entrepreneurs borrowing from financial institutions. Although there was a slump in demand in the early twenty-first century, the technology industry has recovered, giving a boost to quaternary industries. Social—demographic and social influences have contributed to the growth of the tertiary sector. An ageing population has increased demand for health care services while the growing trend for Australians to embrace technology has had an impact on services, especially in the quaternary sector. There has also been the increasing trend for ‘two-income families’ to be ‘time poor’. This has led to an increase in business in quinary industries providing services such as mobile dog washes, housekeeping and laundry services that were once provided by householders themselves. Political—this influence has and will continue to have an impact on the growth of all of the tertiary sectors. There will be a great impact on the quaternary sector with the rollout of the National Broadband Network (NBN). The federal government has introduced new measures that will have an impact on growth in the quinary sector with working parents able to receive up to $7500 per child as a child-care rebate. All Australian governments have agreed to introduce a 1:4 staff-tochild ratio for children between birth and two years in long day care and preschool services on 1 January 2012.

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Technological—Australians have taken to technological innovation more enthusiastically than any other nation. This has been a major driver in the expansion of the quaternary sector. Technology has also had a major impact on marketing and HR management. It was noted earlier about the growth of online shopping in Australia. Online spending directed towards international purchases varied between three to 50 % of total spending in 2010, with overall estimates of online spending by households at three %. Meanwhile in early 2011 about 25 % of mobile phone users were shopping online with their mobile, with eBay reporting that an item was bought from a mobile every 15 seconds. The online economy is booming for some online markets, with revenues increasing by up to 40 % during 2010. Marketing—as businesses continue to conduct market research, this increases our demand for services, both to conduct the research and process it as well as increasing the demand for retail and wholesale services. Source: R Barlow, January 2011

KCq page 64

1.3.2 Internal influences

Outline internal influences.

Internal influences have a direct impact on a business, which has some control over these factors. These influences come from inside the business and include products, location, resources, management and business culture.

Products When an entrepreneur converts a business idea into establishing a business, that idea will focus on what type of product the business will produce. The entrepreneur will have to address the following questions. ◗ What to produce? Goods or services or both types of products? ◗ How to produce? What production methods will be used? If the business wants to operate efficiently it will try to use the lowest cost method of production. ◗ How much to produce? This question is related to the marketing key business function. The business needs to consider the target market for its product and how it will price, promote and place its product. ◗ For whom to produce? This question also relates operations to the marketing function of the business and will have an impact on product design and quality. If the business decides to produce a service there will be several considerations to consider compared to producing goods as outlined below. ◗ Service production is often more labour-intensive that the production of goods. In general terms, this means that more employees are needed compared to machinery to produce a service. ◗ The production of services occurs to meet the needs of customers who demand services for themselves, such as a visit to a dentist, or they demand services for the things that they own. Examples of this are a motor vehicle service or advice from a financial planner on whether to sell shares. ◗ Services tend to be tailored to the wants and needs of the customer, such as a customer of a travel agency requiring a particular type of holiday. ◗ Services are generally consumed immediately and cannot be stored as an inventory, such as having a showroom full of motor vehicles.

Explain products as internal influences.


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Explain location as an internal influence.

Location

Explain resources as an internal influence.

Resources

Businesses can decide where to locate based on a number of factors. The decision of where to place a production facility is crucial and is based on the following: ◗ Visibility—how easy is it for the business to be seen by the passing traffic? Is there a good flow of people and vehicles past the business? Is the business noticeable compared to surrounding businesses? ◗ Location of suppliers and closeness to raw materials—businesses prefer to have a location near suppliers when the inputs of the business are bulky or costly to transport. Retail businesses in shopping centres and suburban main streets are always concerned about adequate parking for deliveries. ◗ Closeness to support services—many smaller businesses do not develop their own support services, preferring instead to outsource these functions to other businesses. Therefore it may be necessary to locate the business where the required support services are readily available. ◗ Closeness of customers—businesses need to locate where it is easy for customers to find them and where the greatest potential number of customers will pass the business. Businesses often need to be able to provide adequate off-street parking for customers. It is often a requirement of local government for a business to provide parking or pay a financial levy if it is unable to do so. ◗ Availability of labour—generally speaking, businesses prefer to locate in an area where there is a plentiful supply of labour and where it is relatively easy for workers to travel to the workplace. ◗ Costs—locations away from the centre of the city or town are generally cheaper than inner-city locations.

The resources of a business can be divided into three categories. This is illustrated in Figure 1.16 below. Business resources

Tangible • Financial resources • Physical assets

Intangible • Business reputation— goodwill, brand/product recognition • Intellectual property— copyrights, patents

Human resources • Productive services available to the business from its employees

Figure 1.16 Resources of a business

A business will have tangible resources. These are resources that are visible or able to be easily recognised. They include financial resources and physical assets. Financial resources include the cash flow of the business and its working capital (current assets  current liabilities). This resource is extremely important because it determines the business’s ability to meet its shortterm debts. If a business cannot do this it will quickly become insolvent.

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Financial resources also include the ability of the business to borrow funds from financial institutions. Physical assets include the buildings, plant and equipment, as well as land owned by the business. These resources also include inventories (stocks) of raw materials, semi-finished and finished products. Physical assets can be sold to improve the financial position of the business. The intangible resources of the business are the things that are not visible but are very important to survival and growth. They include the business reputation and the intellectual property of the business. Business reputation is concerned with a notion known as ‘goodwill’. This resource is sometimes valued as an asset in the balance sheet of a business. It has to do with how the customers of the business regard the way the business operates. If customers are pleased with the service and reputation they will be repeat customers and tend to recommend the business to their friends and acquaintances. Business reputation is also concerned with the brand image and reliability of the products of the business. Intellectual property as a business resource involves any patents or copyrights that a business may own as well as any expertise in the applications of technology. The human resources (HR) of a business includes the productive services available to the business from its employees. It involves such things as the commitment and loyalty of employees as well as their training and development. This resource is often referred to as ‘human capital’ and is essential to the business being able to maintain a competitive advantage in the market.

Management Good management is an essential influence if a business is to be successful. A manager’s ability to be effective and efficient will be a critical factor for the success of the business. Managers are responsible for making sure the business is running in the best possible manner. This is important, as effective and efficient management will allow for increased profits, greater opportunities for growth, a positive work environment and high levels of customer satisfaction. Effectiveness is concerned with determining goals and future directions and aligning people and resources to make sure that these are achieved. Efficiency refers to the allocation of resources and output of production. Efficient managers try to achieve maximum output from minimum inputs and cost. Therefore, managers plan and organise the activities of the business so that resources and employees are well coordinated to achieve business goals at minimum cost. In order for managers to be effective and efficient in achieving their goals and objectives, there are three main roles they must undertake. ◗ Interpersonal—the interpersonal role requires the manager to have the ability to relate to and interact with people. It involves the manager acting as a leader, a figurehead and a liaison with stakeholders. Leading includes the capacity to communicate and motivate employees towards the organisation’s goals and objectives. ◗ Informational—this involves monitoring and sharing knowledge, listening to others and acting as the spokesperson for a business. It is a two-way process and an essential role for managers who want to achieve effective communication among the stakeholders of the business.

Explain management as an internal influence.


45



◗ Decisional—decisions made by managers will often have a great impact on the overall success of the business. Decisions involve a manager acting as an entrepreneur with effective forward planning. Managers also need to influence harmony in the business, acting as a negotiator when conflicts arise and a resolution is required. Managers will need to solve problems and crises. Managers must also be efficient at allocating resources to minimise waste.

Business culture

Explain business culture as an internal influence.

Business (or corporate) culture is a series of values, ideas and norms that are shared by the people involved in a business. It is similar to the personality of a business and in some ways becomes the ‘memory’ of a business. This means, for example, that when a certain situation arises, the organisation will ‘remember’ that there is a procedure for dealing with this situation. Business culture evolves and develops over a long period of time. The whole ethos of the business relies on and can be judged by business culture. It is the most important yardstick to use when evaluating the formal and informal decision-making processes of a business. The business culture of each business is unique and is a powerful contributor to the competitive advantage of a business. Factors which managers need to examine to ensure that the business culture is a positive influence on the business include: ◗ strong business and work ethic and positive work climate ◗ team spirit, group loyalty, and team work ◗ confidence, trust, and communication between workers and management ◗ decision making involving all sources of information, regardless of where those sources are on the organisational chart ◗ clear communication between equals and superiors: sharing of relevant facts and feelings ◗ rewards to mangers for performance, growth and development of subordinates and for creating an effective working group ◗ interaction between the business and its parts, with conflict that occurs over projects resolved in the interest of the business.

Describe stakeholders as influences in the business environment.

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1.3.3 Stakeholders A stakeholder in a business is an individual or another party with a vested interest in the business achieving its objectives. Stakeholders are outlined below. ◗ The needs of customers or clients must be met. Satisfied customers are the basis of profit and growth. Quality of service and product are extremely important. ◗ Employees are the greatest resource any business has. The motivation, skills and abilities, performance, decisions and vision of employees are critical to long-term success. Both workers and all levels of management are included. Employee organisations such as unions are also important stakeholders. ◗ Suppliers of stock and equipment and the reliability and quality of their service impact on the image of a business.



KCq page 65



◗ The extension of credit or provision of funds by creditors and financial institutions is critical to the survival of a business. They, in return, expect to be repaid with interest. ◗ Owners or shareholders are the entrepreneurs for the whole venture. Without their initiative and risk undertaking a business would cease to exist. Owners expect a satisfactory return on the money they have invested in the enterprise. ◗ Managers and employers give the business important direction and are responsible for establishing the employment contract with all employees and providing a safe and healthy workplace. Employer associations, which represent employers in lobbying with governments and negotiating with unions, are also important stakeholders. ◗ Sometimes governments may have provided financial and other assistance to a business or even a whole industry. Governments are also stakeholders because businesses must pay various taxes and charges and comply with laws and regulations. ◗ The community provides managers, workers, customers and other groups such as trade unions, employer organisations, pressure groups and government regulating bodies. All these groups have an interest in the survival and fortunes of the business. In today’s world businesses need to display corporate social responsibility. Corporate social responsibility is a commitment by a business to operate ethically and contribute to economic development while improving the quality of life of our workforce and their families, as well as the community at large. ◗ Businesses should strive for ecologically sustainable levels of activity rather than degrade the environment. Ignoring the interests of the environment endangers the welfare of all inhabitants, both present and future. KCq page 65

page 67

Outline the process of business growth and decline.

1.4 Business growth and decline All businesses pass through a life cycle. This life cycle has distinct stages, identified as: ◗ establishment ◗ growth ◗ maturity ◗ post-maturity. Each stage presents its own unique challenges to which each business has to respond. In theory, businesses can continue forever and, in the post-maturity stage, can rejuvenate or even cease operations. Businesses can also move through the life cycle at different rates, some moving to maturity very quickly, only to fail abruptly. Other businesses may take a number of years to move through the growth stage.

1.4.1 Stages of the business life cycle Figure 1.17 illustrates the business life cycle and the stages that impact on businesses. A brief outline of each stage is included on the diagram.

Describe the business life cycle.


47



Establishment

Growth

Maturity

Post-maturity

Renewal Expand sales through marketing

Sales plateau Market share is static

Challenges: • Manage cash flow • Achieve break-even

Expand business by adding partners

Profits decline

Sales ($)

There is a need to promote the business

Borrow finance from lenders

• •

Product extensions Mergers, takeovers, joint ventures

Steady state

• Equipment reaches its limits

Management ensures business remains profitable

Decline Declining sales, profits and cash flow Possible insolvency

Cessation Time

Figure 1.17 Stages in the business life cycle Describe the establishment stage of the business life cycle.

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The establishment stage begins when the entrepreneur’s business idea is implemented and the business starts. Considerations such as the legal structure of the business and what products to produce will have already emerged with the business idea. Decisions will be made about a suitable location. The owners will have to inject relatively large amounts of capital to begin the business. This will be used for the purchase of land and buildings or the renting and equipping of premises with plant and equipment. The business may need to hire employees and train them in various areas such as induction into the business, customer service and appropriate selling techniques. Initially, sales of output will be slow until the product and the reputation of the business become known. The business will have to promote its product and decide what sort of introductory pricing and promotion strategies it will use. It could use a pricing strategy of skimming where the business sets a high price while demand for the product is high and before competitors enter the market. This strategy is likely to be used if the product is unique or when a new product, with unknown demand, is to be launched. Alternatively, the business could use a pricing strategy of penetration. Penetration pricing involves setting the price of a new product lower than the prices of competing products. This is used to undersell the competing products, gain market share and develop brand loyalty. The main method of promotion of the business and its products will be through advertising. There may be sales promotions such as below-theline promotions. This type of promotion involves free samples, point of sale displays, competitions, discounts, cash refunds, free gifts and twofor-one deals. This type of promotion is often used to introduce a new product or give an immediate boost to sales revenue. At this stage the goal of the business will be to achieve break-even where revenues slowly rise to equal costs. Management of cash flow will be important if the business is to survive this stage.



Establishment



Growth Growth is the increase in the size and value of a business over time. Growth provides a business with the opportunity to expand by planning, produce a wider product range, and access additional resources, including a more extensive variety of specialist skills and innovations. This helps consolidate the position of the business in the market in terms of its competitors and market share. The key element in the growth stage is the increase in sales of output. Increasing sales will usually be accompanied by a growth in revenue as well as profit growth and increasing market share. As sales increase, variable costs of the business will also increase. Variable costs are the costs of those inputs that increase as sales increase. An example of this is that as a transport business grows, it will require more fuel to operate its vehicles. The purpose of growth is to increase profits and return on capital invested in the business by the owners. Businesses must monitor their level of growth so that they are achieving sustainable levels. Too much growth too fast can cause cash flow problems, but careful cash flow management can avoid serious liquidity and solvency concerns. Growth requires capital investment and the managers or owners of the business will need to decide how to finance this investment. The main ways of financing investment are to borrow the money from financial institutions (debt financing) or to offer shares in the business to outsiders who then become part owners of the business (equity financing). As the business grows, there will be a number of different impacts. More employees may be needed, especially if the business produces services. This will require the development of a HR management function. This function may be developed within the business or the management may decide to outsource. Another impact on the growing business will be increased competition. Potential competitors may be encouraged to establish rival businesses.

Maturity The key element in the maturity stage is the achievement of a steady level in sales of output. At this stage, profits are stable though competition may be a serious threat. The business attempts to consolidate its financial position. It may implement cost controls in an attempt to increase profits. Therefore, the business will concentrate on maintaining a competitive advantage. This is the stage that the business would like to remain in indefinitely. The maturity stage does have its problems. Business life has become more routine and managers may become complacent and reluctant to take risks at this stage. They may be satisfied to accept the stable market share and be resistant to change. At this stage of the life cycle there may be the need to replace equipment and to upgrade technology. However, owners and managers may be unwilling to raise the finance necessary to replace and upgrade and may be prepared to continue using outdated equipment and technology. Many managers and owners take advantage of the relatively stable conditions of the maturity stage to plan for the future. One element of planning has to do with succession planning, as key personnel may be due to retire or leave the business. Another area of planning deals with new product development. This will occur if the business wishes to maintain its competitive advantage. The products currently being sold may be nearing the end of their product life cycle and may need to be replaced

Describe the growth stage of the business life cycle.

Describe the maturity stage of the business life cycle.


49



with more up-to-date or technologically advanced products. New product development will require finance and research and development. Describe the post-maturity stage of the business life cycle.

Steady state Many businesses do not want to expand past the size they achieved in the maturity stage. Maintaining market share and adequate cash flow are the main goals of the business. The business has a successful product and is patronised by enough loyal customers to generate sufficient profit to remain in business. This means that the market share of the business is remaining constant. There are probably no plans for new product development—just modifications to what has been a successful product. The threat to a business in this phase is if competition increases or the business loses its competitive advantage.

Describe the steady state phase of the post-maturity stage.

Describe the decline and cessation phase of the post-maturity stage.

Decline and cessation In this phase the business may lose its competitive advantage and profits will decline because of the decline in sales. The business has lost touch with its customer base and its products no longer meet the need of consumers. The business is no longer viable. KCq page 65



Figure 1.17 on page 48 indicates that there are three possible outcomes that can occur in the post-maturity stage. These outcomes are: ◗ renewal ◗ steady state ◗ decline and cessation. Businesses in the post-maturity stage will follow one of these paths. Generally, the way in which the business has been managed during the maturity stage will determine which path the business will follow. Renewal If the business has been forward-thinking during the maturity stage, it may have replaced worn-out machinery and outdated technology. It may have also followed a course of new product development (NPD). This process is usually driven by the need of the business to develop or maintain competitive advantage in the marketplace. NPD will focus on satisfying the needs of customers who already consume the products of a particular business as well as attempting to sell to new customers. NPD is necessary to maintain market share because demand for most products will decline over time. NPD is also one way that a business can respond to new technology and changing market conditions. At the same time, management of the business has realised that there is a need for expansion. Expansion could involve mergers and takeovers or the business may decide to grow from its own resources. Expansion and NPD will involve more money than the business has available. This will require the raising of capital, either by taking on partners or selling equity (shares) to potential owners. The business may also decide to become a public company, listing on the ASX. Expansion of the business requires the development of key business functions and the business will need to decide whether it develops the marketing, finance and HR functions in-house or whether it will outsource some or all of them. Whatever happens, expansion will usually mean more employees and an increase in management positions.

Describe the renewal phase of the post-maturity stage.

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Post-maturity



1.4.2 Responding to challenges at each stage of the business life cycle

Examine the responses of businesses to challenges at each stage of the business life cycle.

Establishment Challenges in the establishment stage include deciding on the type of business structure and raising enough finance so that the business can operate with sufficient cash flow so that solvency is not a problem. The big challenge here is to generate enough revenue. The business will need to concentrate on developing its market and establishing a customer base. This means that promotion will be a challenge.

Case

study:

Habbot

Business name: Habbot

Students learn to:

Business life cycle stage: Establishment Location: ‘Pop-up’ shop in old GPO building, Bourke Street, Melbourne 3000 (until October 2011) Type of business structure: Sole trader

investigate aspects of business using hypothetical situations and actual business case studies to: distinguish between the different types of ◗ businesses identify actual businesses at different stages ◗ in the business life cycle

Proprietor: Annie Abbott Start-up date: September 2010 Response to challenges: Annie is a shoe designer who wanted to sell her own designs to retail outlets. The slowdown in retail sales in 2010 meant that boutique shoes retailers did not want to take a risk with stocking a new brand. Retail rents are very expensive in the Melbourne CBD. Annie’s response to this challenge was to sell her own shoe designs from a ‘pop-up’ shop in a location that would have a lot of passing pedestrian traffic. A ‘pop-up’ shop is a temporary storefront that will be set up in a traditional retail space such as a shopping mall. The GPO building location was ideal because there are other ‘high-end’ retailers in the centre including Lisa Ho, Akira and Zimmerman.

outline possible business strategies ◗ appropriate for different stages in the business life cycle.

Annie has been building her business up slowly through the use of her website thedesignfiles.net/2011/09/habbot-shoes-pop-up/. She buys Italian leather and her designs are transformed into shoes by Italian craftsmen. The GPO store is staffed by Annie and this helps her to reach her customers directly. Establishing the business has been expensive despite the pop-up shop. Annie has to work hard to keep overhead expenses down to a minimum. Annie has a studio in her home in St Kilda where she designs her shoes. Storage takes place in a warehouse. Annie’s Habbot website began operating in March 2011. This is one of her major forms of promotion. The other is her personal relationship with her customers. Although her shoes are not cheap (between $300–$400 a pair) they are not the top of the range either. Annie’s business plan is to split her business into three modes in the future: stockists, online and her own direct retail presence. Growth Challenges in the growth stage include dealing with a never-ending range of issues that compete for time and money. Effective management is required and a possible new business plan. The owner or manager will need to train employees and delegate various tasks to successfully negotiate this stage of development.


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Businesses in the growth stage are focused on running the business in a more formal fashion to deal with the increased sales and customers. Better accounting and management systems will have to be set-up. New employees will have to be hired to deal with the expansion of business.

Case

study:

Oobi

Business name: Oobi

Students learn to: investigate aspects of business using hypothetical situations and actual business case studies to: distinguish between the different types of ◗ businesses identify actual businesses at different stages ◗ in the business life cycle outline possible business strategies ◗ appropriate for different stages in the business life cycle.

Business life cycle stage: Growth Location: T he New Toy Factory 15B Botany Road Zetland NSW 2017 Type of business structure: Sole trader Proprietor: Alexandra Riggs Start-up date: 2002 Response to challenges: Oobi is a wholesale business that designs and produces upmarket fashion for babies. At present the business has ten employees and a turnover of about $3 million. Alex started the business in its present form in 2002 with 30 products. Today the business has more than 300 products, which is indicative of its growth. Alex prices her products so that they are affordable. Although she is reluctant to start up a retail business for fear of hurting the retail outlets that she supplies, Alex feels that the business will probably open an online store in the future. Alex took on a variety of roles when she started the business. These included designer, bookkeeper, photographer and warehouse manager. As the business has grown she has delegated those tasks that she is not good at. As the business moved from the establishment stage, growth wasn’t all that rapid. Alex pinpoints the third year of operation as when growth really started to occur. Alex has several business plans from the short-term to a ten-year plan. She constantly updates her business plans. Oobi won the overall award in the Sydney Business Awards in 2011. The Oobi website is www.oobi.com.au/

Maturity Challenges in the maturity stage include avoiding complacency now that the business has developed a stable level of sales. Complacency can allow the business to consider its successful products as ‘cash cows’. A cash cow is a product that has a large market share in a market that is either stable, or slowly growing or even shrinking. Because the cash cow has a high market share in a stable or slowly growing market, it can maintain a profitable position. The business ‘milks’ the operation for profit as long as market share can be maintained. In order to maintain the vitality of the business, some managers and owners often take a variety of actions to renew their growth. One action would be to expand product lines. Another would be to acquire other businesses.

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The managers also need to scan the external environment for influences that could affect the business. One example of this was the change to solar energy feed-in tariffs from 60 cents a kilowatt-hour to 20 cents a kilowatthour by the Keneally Labor government in NSW in 2010. This caused a dramatic reduction in demand for the installation of solar panels which in turn had an adverse impact on many companies that had started up to meet the demand.

Case

study:

ANZ Stadium

Business name: ANZ Stadium Business life cycle stage: Maturity Location: Edwin Flack Avenue, Sydney Olympic Park NSW 2127 Type of business structure: Sydney Olympic Park Authority—government enterprise; Stadium Australia Group Ltd.—private company ANZ Stadium is operated by the Stadium Australia Group Ltd (SAG) under the terms of a lease (which expires on 31 January 2031) from the Sydney Olympic Park Authority (SOPA). Management: John Clarke—Chairman of the Board Start-up date: 1999


Response to challenges: ANZ Stadium is Sydney’s largest sporting arena. ANZ Stadium was purpose-built for the Sydney 2000 Olympic and Paralympic Games. It was the centrepiece in a major urban renewal project unveiled in what is now known as Sydney Olympic Park. ANZ Stadium opened with a seating capacity of more than 110 000, making it the largest Olympic stadium in history and, at that time, the largest stadium in Australia. The stadium has convenient public transport access in the form of rail and is located near the geographic centre of Sydney. Following the Olympics, an $80 million reconfiguration reduced the capacity to 83 500 (or 82 500 in oval mode). The facelift, completed in 2003, included the removal of the north and south upper stands which meant the lower stands were moved 15 metres closer to the action. The major challenge faced by ANZ Stadium in its maturity stage is to host events that will continue to draw big crowds in order to make its operation profitable. Its unique design has enabled it to appeal to major Australian sports. The stadium can be reconfigured from oval to rectangular mode in just 12 hours, making it the only stadium in the world which is designed to host five professional sporting codes—rugby league, rugby union, Australian rules, football and cricket. The stadium has hosted the following crowd record-breaking events: ◗ Olympic record crowd for a single session: 112 524 for track and field in 2000 ◗ world record rugby union crowd: 109 874 at 2000 Bledisloe Cup ◗ world record rugby league crowd: 107 558 at 1999 NRL Grand Final ◗ Australian record football crowd: 104 012 at 2000 Olympic men’s final ◗ Australian record State of Origin crowd: 88 336 in 1999 ◗ AFL record crowd outside Victoria: 72 393 at Swans v Collingwood in 2003 ◗ Australian record aggregate concert crowd: 213 045 over three AC/DC shows in 2010.


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The stadium has also hosted a number of global entertainment acts with great success including U2, the Rolling Stones, Andre Rieu and AC/DC. The stadium has a number of function rooms which are available for hire and any event can be catered for. ANZ Stadium has negotiated with the following clubs and sporting bodies to schedule a number of the home matches at the venue. ANZ Stadium is the Sydney home ground for the following teams: ◗ Wallabies (rugby union) ◗ NSW Waratahs (rugby union) ◗ Socceroos ◗ NSW Blues State of Origin (rugby league) ◗ Sydney Thunder T20 cricket in the Big Bash League ◗ Sydney Swans (Australian Rules football) ◗ Bulldogs (rugby league) ◗ South Sydney Rabbitohs (rugby league) ◗ Parramatta Eels (rugby league) There are detailed plans to build a light-rail linking Parramatta and Strathfield to ANZ Stadium which would enhance the attendance potential of the venue. In February 2015 the NSW government pledged to spend $643 million to bring more major events to NSW. Many of these would be staged at ANZ Stadium. The ANZ Stadium website is www.anzstadium.com.au Post-maturity In the post-maturity stage, the business can proceed along one of three pathways, depending on the considerations of owners and managers. Each pathway has its own challenges as outlined below. Renewal—following the renewal pathway requires a conscious decision and actions on the part of owners and managers. The business faces the challenges of moving into new markets as well as developing new products. This will require raising finance. The business will try to add new products or services to existing markets or expand the existing business into new markets and customer types. Steady state—owners and managers may decide not to pursue renewal as an option for the business. If the products are successful they may be satisfied to allow the business to continue to operate the way it has. The challenges at this stage are to focus on what existing customers are currently demanding. This requires market research for accurate results. A steady state means that the business will be reluctant to commit the expenditure on research and development required for renewal. This can create further challenges because increasing competition means that the steady state will not continue forever. The business may eventually need to consider renewal or consider the consequences of decline. Decline—decline presents dire challenges and is difficult to reverse because: ◗ financial institutions are reluctant to lend money to high-risk businesses ◗ suppliers will restrict credit facilities and may insist on cash payments ◗ products may have become obsolete ◗ well-qualified employees may begin to leave to seek out better opportunities and without a strong workforce, the rate of decline increases. As the business encounters cash flow and solvency problems it may need to face the prospect of cessation.

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Case

study:

Permo-Drive

Business name: Permo-Drive Technologies Limited Business life cycle stage: Establishment, decline, renewal Location: 1 /38 Carrington St, Lismore NSW 2480 Type of business structure: Unlisted public company with 1900 shareholders Chairman: Thomas O’Brian Start-up date: 2000 Response to challenges: Permo-Drive began with the business idea of developing a hybrid hydraulic fuel-saving technology for heavy commercial vehicles. The technology captures energy normally wasted as heat during braking and re-uses that energy to drive the vehicle, reducing fuel and carbon emissions.


The business had counted on receiving a grant from the federal government in 2008 that would help it to bring its technology to market. Unfortunately the grant did not happen and this placed the company close to liquidation by July 2008. Permo-Drive’s directors moved to voluntarily wind-up the company after it was revealed the firm did not have the $7.5 million needed to complete the last stage of production. Shareholders were determined that such a great technological advance would not be lost and rallied to take over the business. One shareholder launched a group called Save Our Technology. This group raised considerable funds to prevent the technology from disappearing offshore. Eventually shareholders decided not to wind-up the company but to restructure the business. Although the employees of the company had been retrenched and re-employed only on a casual basis, all previous staff employed by Permo-Drive at the time of takeover were offered new employment when the company relocated its operations from Ballina to Lismore. As part of the required financial restructure of the company a local business consultant, Paul McMahon, was engaged due to his extensive experience in international banking. Permo–Drive went into liquidation in July 2012.

KCq page 65

1.4.3 Factors that can contribute to business decline Over a number of years, the sales, profits and cash flow of a business can decline. There are a number of factors that can contribute to declining sales, profits and cash flow. These include: ◗ a lack of adequate planning in the business ◗ the business is unable to keep up with customer needs ◗ the business is undercapitalised ◗ the business has problems meeting or satisfying customer demand because of poor service, a drop in dependability or problems with the operations key business function ◗ the business finds that there is no longer a need for its goods or services or that there have been factors in the external environment that have caused demand to decrease—one example of this is the advent of iPods and MP3 players which have changed the demand for CDs. ◗ there may be decreased productivity, efficiency and morale, leading to an overall decline of the business.

Outline factors that can contribute to business decline.


55



Lack of adequate planning Before a business can operate successfully it must have a well thought out business plan that forecasts revenues and expenditures with some accurate assumptions about the market and competition. Changing circumstances and changes in the business environment will cause a business to constantly revise its plans. The Oobi case study mentions that Alexandra Riggs has short- and long-term business plans which she constantly updates. Managers that lack the skills and qualities necessary to be good managers, or those who are complacent or lazy, can find that the business lacks adequate planning to survive in whatever stage of the business life cycle it is in. Lack of planning is a major contributor to business decline. Environmental changes Changes to the external influences faced by the business can contribute to business decline. A number of examples of this have already been noted in this chapter. ◗ The NSW Government reduced the ‘feed-in’ tariff of 60 cents per kilowatt hour paid to households that installed solar power from 60 cents to 20 cents in October 2010. This created a substantial drop in demand for new solar power installations, creating financial hardship for many solar power businesses (legal influence). ◗ The advent of iPods and MP3 players have changed the demand for CDs (technological/competitive situation influence). ◗ The fact that Permo-Drive did not receive a government grant to assist it to bring its product to market almost caused the business to cease in July 2008 (political influence). These examples of environmental factors all affected the revenues of businesses and contributed to business decline. Lack of capital Many businesses operate with limited capital and resources, especially in the establishment stage. For example, a business may spend its initial capital developing the product but run out of finance. This can leave the business with no funds to market and generate awareness about the product. Without sufficient capital to develop the product and to market it successfully, the business will have inadequate cash flow. Without a positive cash flow the business will not be able to purchase stock and materials. This inevitably results in lost sales and falling profits. This situation can continue through the growth and maturity stages and cause business decline. Decline in revenue and cash flow Mature businesses will enter the decline phase when there is a prolonged decline in revenue. This occurs because sales have fallen. This tends to happen gradually and often business owners and managers do not realise that they are in the decline phase until it becomes difficult to reverse this trend. As sales and revenue fall, cash flow is also significantly reduced. Cash flow is the ‘life blood’ of any business and without sufficient inflow of cash to meet short-term debts the business will soon become insolvent. Decline in sales and revenue can occur for many reasons. One example is that of a high revenue-generating product that may only have experienced temporary popularity and a temporary high demand in the market. When this high demand disappears, so does the revenue stream from that product. This can be enough to push the business into decline. The only

56





way that the business can continue, as noted in the Permo-Drive case study, is for the business to raise substantial finance for re-investment or restructuring. Loss of competitive advantage Competitive advantage occurs when a business develops an advantage over competitors by offering consumers greater value, either by means of lower prices, improved quality or by providing greater benefits and service. Competitive advantage is often what distinguishes one business from another. As new businesses enter the market, which is likely to happen during the maturity stage, an existing business may find that the things about the business and the products it produced that gave it a definite advantage over competitors during the growth stage have now disappeared or have been competed away. This means that for the business to avoid decline it must regenerate itself and develop a new competitive advantage. However, many businesses and managers have become complacent and are now resistant to change and this inertia can cause the business to decline. Inertia Inertia is resistance to change when change is occurring. Business owners and managers may resist change as they may be cautious or slow in their decision making or feel that change is pointless as the business is operating successfully with reasonable profits and few problems. This inertia can lead to employees and business culture taking on negative factors that drive productivity and morale down. This can be a major cause of the decline of a business, as managers fail to act when the business is being challenged in the marketplace by new and vigorous competitors. Inertia can cause a business to lose traction and progress with customers. This also shows potential customers that the business does not have a product that is engaging or worth purchasing. There are a number of measures of this decline, including factors such as declining market share, potential reductions in workforce size, reduced operating profit or a sustained fall in the share price if the business is a listed public company. As market share and sales fall and cash flow dries up, the business begins to decline. KCq page 65

1.4.4 Voluntary and involuntary cessation

Define voluntary and involuntary cessation.

In business terms ‘cessation’ means closure of business activity. Voluntary cessation occurs when the owners of a business decide to close the business through their own choice. The closure of the business has not been forced on them by external circumstances. Involuntary cessation means that the owners of a business are forced to close. The business is no longer viable and will not be able to continue operating. Cessation According to the federal government, cessations occur in around six per cent of businesses and account for 80% of businesses closing. Business failure rates of both unincorporated businesses and companies have declined significantly in the last 20 years. Voluntary cessation With voluntary cessation the owner or owners of a business make a decision to cease operations. There are a number of reasons why this happens. The owner may wish to retire or may be experiencing a prolonged

Explain voluntary cessation.


57



illness. The owner may wish to pursue another business opportunity. If the business is a sole trader and the owner dies, the business usually ceases operation. The majority of cessations involve solvent businesses closing for reasons unrelated to their financial position, such as when the owner retires, seeks a different lifestyle or dies. Explain involuntary cessation.

Liquidation

Explain liquidation.

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If the business is incorporated (one of the forms of a company) the appropriate term to use is insolvency. Liquidation normally occurs because a company is insolvent. Insolvency is a situation where a company has insufficient assets to meet its liabilities. Liquidation is the process of terminating or ‘winding-up’ an incorporated business. This involves ceasing business operations and realising its assets by selling them. The funds from this sale will be used to discharge its liabilities by paying creditors either in full or a fraction in the dollar of what they are owed. If there is any money left over, any surplus assets will be distributed among the shareholders. If the company has been placed into receivership, the business will be managed by the receiver. The receiver will examine the assets and liabilities of the business to see if there is any possibility of it continuing to trade. This would be a preferable situation to liquidation because there is a chance that the business will be able to trade its way out of debt. If this happens, employees will keep their jobs, creditors will be paid in full and shareholders may get some return on the funds that they invested in the business. There are several disadvantages that arise through a company being liquidated. The shareholders will lose some or all of their investment. Employees will lose their jobs. Directors may be disqualified from holding that position with another business for some time and may even face



Involuntary cessation Involuntary cessation means that the owners are forced to close the business. This will occur because the creditors of the business have not been paid the money that they are owed. If the business is unincorporated (in other words a sole trader or a partnership), this means that the owner or owners are bankrupt. Bankruptcy means that an individual has insufficient assets to pay his or her debts. Bankruptcy can be either voluntary or involuntary. If a person facing bankruptcy wishes to put an end to accumulating debts, he or she can apply voluntarily to become bankrupt. This means that there will be no more accumulation of debt. However, the bankrupt’s personal possessions will be seized by an official receiver and sold. Only the bankrupt’s tools of trade can be kept by the bankrupt. The money realised from this sale will go towards paying off creditors. The bankrupt will also have to make contributions to creditors if his or her income is above a certain level. During the period of bankruptcy (which is usually three years) the bankrupt is not allowed to own assets worth more than a certain amount. The bankrupt can be discharged within the three-year period if the debts are paid in full. Bankruptcy can also be involuntary. This is a situation where creditors petition the official receiver for a person’s bankruptcy. For both voluntary and involuntary bankruptcy the debt must be more than $5000.



imprisonment. Unsecured creditors may still not receive any dividend from the sale of the company’s assets.

‘Perle to be liquidated’

Students learn to:

by Matt Deans 18th February 2011

examine contemporary business issues to identify problems that arise for stakeholders when companies go into liquidation.

NSW creditors of failed construction company Perle Industries yesterday voted to liquidate the company and assess their legal options. Representatives of 60 Coffs Harbour sub-contractors attended a meeting in Sydney, chaired by administrators Rodgers Reidy. Rather than allow the company to complete its unfinished NSW Government contracts in Wollongong, Sydney and Coffs Harbour, trade companies unanimously voted to wind up Perle Industries. State-wide, Perle has left debts of almost $10 million, $1.6 million of which is owed to sub-contractors locally. It came as the Construction, Forestry, Mining and Energy Union stepped up pressure on Julia Gillard to launch a public inquiry into the collapse of three construction companies, including Perle, contracted by Bovis Lend Lease to work on 22 NSW school sites and three NSW public housing projects. A spokesman for Workplace Relations Minister Chris Evans said he would refer the complaints to Brad Orgill’s Building Education Revolution implementation taskforce. ‘One’s an accident, two is embarrassing but three is an emerging pattern,’ the Construction, Forestry, Mining and Energy Union’s Andrew Quirk said. ‘In each case, Bovis have said they will take the concerns on board but nothing has actually happened.’ A Bovis Lend Lease spokesman defended the company’s management of BER projects, saying all the work had been done in accordance with government procurement requirements and that a sub-contractor prequalification process was in place in all projects. ‘This includes independent financial assessments and evaluating experience and capacity to deliver the required works,’ he said. Coffs Harbour creditors will today meet with solicitors to consider the legal grounds for action against the Department of Housing, Bovis Lend Lease and Perle’s directors. Source: The Coffs Coast Advocate The Coffs Coast Advocate reported that Perle Pty Ltd had gone into receivership on Friday 21 January 2011. KCq page 65

page 67


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Key definitions and concepts Do you know all the key definitions and concepts for this chapter? Go through each term in the list and check that you know them all. Place a bookmark underneath each definition to cover up the one below and slide it down. This way you can focus on each definition by itself. Bankruptcy is when an individual has insufficient assets to pay his or her debts. Business environment r efers to all of the factors that ‘surround’ a business and have an impact on it. Business life cycle c onsists of four distinct stages— establishment, growth, maturity, post-maturity. Capital gain is the ‘profit’ made when a person sells an asset for a price higher than the purchase price. An example of a capital gain would be if a person bought shares one week for $1000 and sold them the next week for $2000. The capital gain would be the selling price minus the purchase price: $2000 – $1000 = a capital gain of $1000. Capital-intensive is where there are relatively few workers in proportion to the machinery used in production. Competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices, improved quality or by providing greater benefits and service. Corporate social responsibility is a commitment by a business to operate ethically and contribute to economic development while improving the quality of life of our workforce and their families as well as the community at large. Corporatisation is where governments retain control over government businesses but put them on a corporate footing, performing in the same way as companies in the private sector. Discretionary spending is spending from incomes after tax and essential spending has taken place. Dividend is the share in the net profit of a company (after tax and other expenses) paid to a shareholder. Effective operation is where a business will try to be effective by making sure that customer’s needs are met and they are satisfied with the output. Efficiency is where a business achieves the greatest possible return or output from an input by using the lowest amount of resources or assets. Efficient operation means that a business will try to produce its output by using the least amount of input possible. Entrepreneur is a person who is willing to undertake financial risk in business by innovating and/or starting up new businesses or investing in existing businesses. Environmental sustainability is meeting the needs of the present generation without compromising the ability of future generations to meet their needs.

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External influences h ave an indirect impact on a business, which has very little control over these influences. Franchise business is a legal arrangement between a supplier (franchisor) of a well-known product and the franchisee. The franchisee will develop a business using the trade name. Once in operation, the supplier must not only maintain a continuing interest but also provide assistance to the franchisee. Goods a re physical products which are tangible—they can be touched or seen, such as a car or mobile phone. Gross domestic product (GDP) is the value of the total output of goods and services produced by businesses and governments during a year. Growth is the expansion of a business once it begins operations. Incorporated business is one that has a legal identity that is separate from its owners. This offers financial and legal protection to the owners. A corporation can sue and be sued in court, but the owners are only liable to the extent of the funds that they have invested in the business. Innovation is the creation or improvement of products, technologies or ideas. Interest is the cost of borrowing money. Internal influences h ave a direct impact on a business and the business has some control over these factors. International businesses h ave no investment, staff or sales premises outside their home country. They are merely importers or exporters of goods and/or services. Involuntary cessation means that the owners of a business are forced to close. The business is no longer viable and will not be able to continue operating. Labour-intensive means that there are a large number of employees in relation to the machinery (capital goods) that a business has. Limited liability m eans that the shareholders (owners) of a company are liable for the debts of the company only to the extent of the funds that they have invested in the company or any amounts that are unpaid on the shares that they hold.



Exchange rate b etween the Australian dollar and another country’s currency is the price of that currency in Australian dollars.


Liquidation is the process of terminating or ‘winding-up’ an incorporated business. This involves ceasing business operations, selling assets and converting them into cash, discharging liabilities (paying out debts) and distributing any surplus assets among shareholders. Liquidity r elates to the cash flow position of the business and focuses on whether a business can pay debts as they fall due. Local business is one where customers are usually working or living nearby, such as a convenience store. Market concentration r efers to the number and size of businesses in an industry. ave their head office Multinational corporations (MNCs) h or headquarters based in their home country. They expand into global markets by establishing subsidiaries in host countries around the globe. National businesses h ave branches or franchises operating in more than one state or territory. No liability (NL) r elates to where shareholders do not have to respond to calls from the company to pay up on the unpaid issue price of shares. NL companies can only be engaged in mining. Overtime payments a re made to workers who receive a wage and are asked to work in excess of the hours stated in their employment contracts. Overtime will usually be paid at a higher rate than pay for normal time. Partnership is the relationship which exists between people carrying on a business with a common purpose and a view to making a profit. It involves an agreement between two or more parties to enter into a legally binding relationship. Place utility is where consumers experience satisfaction because the product is available where it is needed. Possession utility is when consumers experience satisfaction when they consume or use a good or service. Private sector businesses a re privately owned with no government ownership. Profitability is the ability of a business to make a profit. It refers to the fact that there is a relationship between the sales revenue of a business, its costs of production and the profit it makes. Prospectus is a written invitation to the public to buy shares in a business. Quality of life is an indicator of well-being and includes environmental factors, health, education, recreation and leisure time as well as wealth and employment.

Risk is when there is a possibility of something ‘bad’ happening or the entrepreneur being exposed to financial loss. Salary is a fixed yearly payment to an employee which is usually divided up into 26 fortnightly payments. Services a re intangible—they cannot be touched or seen. Examples of services include transport and communications. Solvency r efers to the extent to which the current assets of a business exceed the current liabilities of that business. Stakeholder (in a business) is an individual, other business or organisation that has a vested interest in the business achieving its objectives. Standard of living is the income per head of population valued in terms of the goods and services that income will buy. Time utility is where consumers experience satisfaction because the product is available when it is wanted. Transnational corporations (TNCs) a re huge corporate structures. They tend not to have a nationally-based parent company. Their business transactions take place across borders on a global basis. This gives them the opportunity to take advantages of the differences in laws and financial systems between various countries. Unincorporated businesses d o not have a separate legal identity or existence from their owners. The owners of unincorporated businesses have unlimited liability, meaning they are fully and personally responsible for the debts of the business. Unlimited liability is when the owners of a business are fully and personally responsible for the debts of that business. Utility is the usefulness or the ability of a product to provide satisfaction of wants to consumers. Value chain is the process where, as the product of a business moves from one process to the next, value is added. Voluntary cessation is a situation where owners decide to close the business through their own choice. Wages a re fixed regular payments, usually paid on a daily or weekly basis by an employer to an employee. Wealth is the production and accumulation of assets which satisfy human wants and needs minus any liabilities that are owed.

Rent is the income received from allowing a business to use property that it does not own.

SIX STE PS T O P R EL I MI N ARY S U C C ES S ! Chapter 1 • NATURE OF BUSINESS © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 61

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Chapter syllabus checklist Are you able to answer every syllabus question in the chapter? Tick each question as you go through the list if you are able to answer it. If not, turn to the appropriate page in the guide as listed in the column to find the answer. Refer to page vii to check the meaning of the Board of Studies key words. You can also turn to the Excel syllabus summary notes at the back of the book for a summarised answer to each syllabus question. For a complete understanding of this topic:

Page No.

3

For a complete understanding of this topic:

Page No.

1

Can I outline the nature of a business?

2

23

27

2

Can I explain the process of producing goods and services?

Can I examine ownership as a factor influencing choice of legal structure?

2

24

27

3

Can I outline the role of profit in the nature of a business?

Can I examine finance as a factor influencing choice of legal structure?

3

25

28

4

Can I outline the role of employment in the nature of a business?

Can I outline the influences in the business environment?

4

26

Can I outline external influences?

29

5

Can I outline the role of incomes in the nature of a business?

4

27

Can I explain the impact of economic influences?

29

6

Can I outline the role of choice in the nature of a business?

5

28

Can I explain the impact of financial influences?

31

7

Can I outline the role of innovation in the nature of a business?

6

29

Can I explain the impact of geographic influences?

32

8

Can I outline the role of entrepreneurship and risk in the nature of a business?

30 7

Can I explain the impact of social influences?

35

9

Can I outline the role of wealth in the nature of a business?

31 7

Can I explain the impact of legal influences?

35

10

Can I outline the role of quality of life in the nature of a business?

32 8

Can I explain the impact of political influences?

37

11

Can I explain the classification of business?

9

33

Can I explain the impact of institutional influences?

37

12

Can I explain size as a classification of business?

9

34

Can I explain the impact of technological influences?

38

13

Can I explain local, national, global as a classification of business?

11

35

Can I explain the impact of competitive situation influences?

39

14

Can I explain industry type: primary, secondary, tertiary, quaternary, quinary as a classification of business?

15

36

Can I explain the impact of markets as an external influence?

40

15

Can I explain legal structure as a classification of business?

37

Can I outline internal influences?

43

17

38

43

16

Can I explain the legal structure of a sole trader business?

Can I explain products as internal influences?

18

39

44

17

Can I explain the legal structure of a partnership?

Can I explain location as an internal influence?

19

40

44

18

Can I explain the legal structure of companies?

Can I explain resources as internal influences?

22

41

45

19

Can I explain the legal structure of a private company?

Can I explain management as an internal influence?

23

42

46

20

Can I explain the legal structure of a public company?

Can I explain business culture as an internal influence?

24

43

46

21

Can I explain the legal structure of a government enterprise?

Can I describe stakeholders as influences in the business environment?

25

44

47

22

Can I examine size as a factor influencing choice of legal structure?

Can I outline the process of business growth and decline?

26

45

Can I describe the business life cycle?

47

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3



Page No.

46

Can I describe the establishment stage of the business life cycle?

48

47

Can I describe the growth stage of the business life cycle?

49

48

Can I describe the maturity stage of the business life cycle?

49

3


Page No.

52

Can I describe the decline and cessation phase of the post-maturity stage?

50

53

51

49

Can I examine the responses of businesses to challenges at each stage of the business life cycle?

54

Can I describe the post-maturity stage of the business life cycle?

55

50

Can I outline factors that can contribute to business decline?

55

50

Can I describe the renewal phase of the post-maturity stage?

57

50

Can I define voluntary and involuntary cessation?

56

Can I explain voluntary cessation?

57

51

Can I describe the steady state phase of the post-maturity stage?

50

57

Can I explain involuntary cessation?

58

58

Can I explain liquidation?

58

3

Useful websites Australian Agricultural Company: www.aaco.com.au Australian Taxation Office: www.ato.gov.au Australian Bureau of Statistics: www.abs.gov.au Nanotek: http://nanotekcarcleaning.com.au Juniper Networks: www.investinaustralia.com/news/global-technology-firm-expands-its-melbourne-base-65k7 Australian Securities Exchange: www.asx.com.au Australian Securities and Investments Commission: www.asic.gov.au business.gov.au (the Australian Government’s principal business resource): www.business.gov.au/Pages/default.aspx Corporations Act 2001 Section 9 Dictionary: www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s9.html NSW Partnerships Act 1892—current version 28 May 2012: www.legislation.nsw.gov.au/viewtop/inforce/act%2B12%2B1892%2BFIRST%2B0%2BN Australian Bureau of Statistics—Australia’s bilateral relationships: www.abs.gov.au/AUSSTATS/[email protected]/Lookup/9083718854BDBB26CA25773700169C49 Demographic and social change: www.aifs.gov.au/institute/pubs/factssheets/2011/fw2011/fw2011a.html NSW Fair Trading: http://www.fairtrading.nsw.gov.au/default.html Australian Competition and Consumer Commission: www.accc.gov.au Choice: www.choice.com.au Fair Work Australia: www.fwa.gov.au Safe Work Australia: www.safeworkaustralia.gov.au Resources of a business: http://mystrategicplan.com/resources/internal-and-external-analysis Business life cycle: http://toolkit.smallbiz.nsw.gov.au

Case studies Australian Fastsigns: www.austfastsigns.com.au Australian Solar Timbers: www.astfloors.com.au/aboutast.htm Habbot: http://thedesignfiles.net/2011/09/habbot-shoes-pop-up Oobi: www.oobi.com.au ANZ Stadium: www.anzstadium.com.au


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End of chapter questions

Key Concept questions These questions test whether you have grasped the key ideas in each subsection. They are not difficult questions, but will test your recall of knowledge of the material you have read. If you are unsure what a question is asking you to do, refer to page vii to check the meaning of the Board of Studies key words. If you can answer all these questions, you will know you have a sound knowledge of content. Refer to pp. 217–221 for Answers

16. Define ‘national business’ and give examples of national businesses that are not franchises. 17. Distinguish between international businesses, multinational corporations (MNCs) and transnational corporations (TNCs).

Media report: Nanotek chief offers franchise expansion tips after Russian foray 18. What method did Nanotek use to expand into the global market? 19. Outline the points in favour of Nanotek’s expansion into the Russian market. 20. Outline the points that made Nanotek’s expansion into Russia difficult.


Contemporary issue: Juniper Networks

1.1.1 The nature of a business 1. Explain why businesses produce goods and services. 2. Outline the four key business functions. 3. Outline the role of profit in a business. 4. Distinguish between liquidity and solvency. 5. Explain how a business makes decisions about choice.

21. Outline the points in favour of Juniper’s expansion into the Australian market. 22. Define ‘primary’, ‘secondary’ and ‘tertiary industry’. 23. Distinguish between quaternary and quinary industries as part of the service industry sector. 24. Outline the risks and problems associated with being a sole trader.

6. Explain ASTs competitive advantage.

25. Identify businesses that are suitable for the partnership form of legal structure. Explain a major financial advantage of a partnership.

7. List ASTs other innovations.

26. Outline the main features of any company.

8. Outline ASTs implementation of environmentallyfriendly strategies.

27. Distinguish between a private company and a listed public company.

Case Study: Innovation and Australian Solar Timbers (AST)

1.2 Types of businesses 1.2.1 Classification of business 9. Define ‘small business’ using the Australian Government definition based on employment.

Case study: Australian Fastsigns 10. Classify Australian Fastsigns in terms of size. 11. Outline Australian Fastsigns’ competitive advantage. 12. List the risks that Rick Abrahams has taken as an entrepreneur starting up Australian Fastsigns. 13. Outline the importance of small to medium enterprises to the Australian economy. 14. Compare the advantages and disadvantages of operating a small business.

28. Provide reasons for governments establishing business enterprises.

1.2.2 Factors influencing choice of legal structure 29. Explain why business owners often choose the company legal structure. 30. Examine the impact of solvency on sole traders and partnerships.

1.3 Influences in the business environment 31. Distinguish between external and internal influences in the business environment.

1.3.1 External influences 32. Outline the impacts of changes in interest rates and taxation on businesses.

15. Define ‘local business’.

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33. Distinguish between debt finance and equity finance. 34. Discuss the impact of globalisation on Australia. 35. Outline the demographic trends concerning families. 36. List the social influences that impact on businesses in Australia. 37. Outline the impact of legal influences on business.

1.4.2 Responding to challenges at each stage of the business life cycle Case study: Habbot 58. Outline the response of Habbot to the challenges of the establishment stage.

38. Outline the major change to workplace laws that happened with the change of Australian Government in 2007.

Case study: Oobi

39. List the major institutions that have an impact on businesses.

Case study: ANZ Stadium

40. Assess the importance of mobile phones as a technological influence on business. 41. Outline the role of the ACCC in competitive situation influences. 42. Outline the importance of market segmentation to businesses.

59. Describe the response of Oobi to the challenges of the growth stage.

60. Outline the response of ANZ Stadium to the challenges of the maturity stage. 61. Outline the challenges of the renewal phase of the post-maturity stage. 62. Outline the challenges of the steady state phase of the post-maturity stage.

1.3.2 Internal influences

63. Outline the major challenge of the decline phase of the post-maturity stage.

43. Outline internal influences.

Case study: Permo-Drive

44. Outline the factors a business needs to consider when producing services compared to producing goods.

64. Identify the external influence that contributed to Permo-Drive’s decline.

45. Outline the factors that businesses need to consider when deciding on where to locate.

65. Explain how Permo-Drive responded to the challenges of being in decline.

46. Identify the resources of a business. 47. Explain why good management is a critical success factor for a business. 48. Define ‘business culture’.

1.3.3 Stakeholders 49. List the major stakeholders of a business.

1.4 Business growth and decline 1.4.1 Stages of the business life cycle 50. List the stages of the business life cycle. 51. Outline the decisions that need to be made in the establishment stage. 52. Describe the key element in the growth stage. 53. Describe the key element in the maturity stage. 54. List the three alternative pathways for a business in the post-maturity stage.

1.4.3 Factors that can contribute to business decline 66. List the factors that can contribute to business decline.

1.4.4 Voluntary and involuntary cessation 67. Define ‘voluntary’ and ‘involuntary cessation’. 68. Distinguish between bankruptcy and insolvency. 69. Explain liquidation.

Media article: Perle to be liquidated 70. Identify the stakeholders of Perle mentioned in the article. 71. Explain the difference between being in receivership and liquidation. 72. Outline the liabilities of Perle. 73. Identify the advantages and disadvantages of the liquidation of Perle.

55. Explain the advantages of new product development (NPD) for a business striving for renewal. 56. Describe the steady state phase of the post-maturity stage. 57. Describe the decline and cessation phase of the post-maturity stage.


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Sample Preliminary questions Now for the real thing! The following questions are modelled on the types of questions you will face in the exams. Think about it: if you get extensive practice at answering these sorts of questions, you will be more confident in answering them when it comes to the exams. It makes sense, doesn’t it? Another reason is that the answers given at the back of this guide are structured in a way that helps you learn strategies on how to answer exam-like questions. This will help you aim for full marks! The questions in this section match the numbered syllabus areas in the chapter, so you can test yourself on each section while you read through the study guide or at the end of the chapter if you prefer. For each objective-response question you will have ◗ the correct answer and an explanation, a section reference where you can find the correct answer in the chapter, and reasons why all the other answers are incorrect. ◗ F or each short-answer or extended-response question you will have an ‘Examiner Maximiser’ feature that tells you how to answer the question in order to earn full marks, plus a comprehensive answer with a section reference showing you where to find the answer in the chapter. Look for the min in each section and time yourself. ◗ This way you will know how much time you have to answer these questions in your exam. When you mark your work, highlight any questions you found difficult and earmark these areas for extra study. Refer to pp. 221–225 for Answers

3. Which one of the following terms relates to achieving the greatest possible return or output from an input by using the lowest amount of resources or assets? A growth B liquidity C efficiency D profitability 4. A government introduces a carbon price of $23 per tonne for the highest polluting businesses. This price will make Cagu’s investment in establishing a new coal mine uneconomic.

SHORT-ANSWER QUESTION 5. Light Horse Clothing has developed a sensational new fabric that will not crush and never needs ironing. This has taken considerable investment in research and development. The clothes made from this fabric are an instant success and Light Horse’s market share rises dramatically. Soon, competing businesses have developed fabrics that are superior to Light Horse’s. One business—Ugly Man Clothing— has developed an uncrushable fabric that repels stains. Light Horse’s market share, sales and profits fall and the business experiences cash flow problems. a Outline the role of innovation in providing competitive advantage for a business. (2 marks) b Explain TWO risks that entrepreneurs at Light Horse Clothing have undertaken. (4 marks)

20 min


What is the risk that Cagu has taken as an entrepreneur? A market risk B operational risk C environmental risk D political and economic risk

1.2 Types of businesses

25 min

OBJECTIVE-RESPONSE QUESTIONS


1. Which of the following is a characteristic of a service? A it is physical B it is tangible C it cannot be touched D it does not have inputs

1. Approximately what percentage of Australia’s labour force is employed by small to medium enterprises (SMEs)? A 7.1% B 46% C 62.5% D 97%

2. What key business function connects the customer with the products that a business produces? A finance B operations C marketing D human resources

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What classification best describes Zuki’s?



2. Zuki’s is a gardening and outdoor maintenance business started by Zuki some years ago. She decided to sell franchises and now 65 franchises operate in all states.


A local B national C global D SME 3. Klongie is an Australian-based business that has expanded into the global market, with subsidiaries in ten countries.

What type of business is Klongie? A exporting business B international business C transnational corporation D multinational corporation

3. What kind of influence is the incidence of children remaining at home longer, well into their 20s? A social B location C financial D demographic 4. A manager monitors the business and shares knowledge with subordinates, listens to others and acts as the spokesperson for a business.

4. Research Australia is a business promoting Australian health and medical research.

To what industry area does Research Australia belong? A research B tertiary C quaternary D quinary

SHORT-ANSWER QUESTION 5. Ann resigns from her office job and establishes a craft shop business as a sole trader. While the freedom of being her own boss is good, Ann finds there are some disadvantages. Perhaps the most worrying aspect is the fact that she could lose all her assets if the business fails. a Define ‘unincorporated business’. (2 marks) b Outline TWO disadvantages of the sole trader legal structure. (2 marks) c Explain TWO advantages of incorporating a business. (4 marks)

What management role is being used when the manager takes this course of action? A leading B decisional C informational D interpersonal

SHORT-ANSWER QUESTION 5. Rod and Kris had a computer software business. Rod wrote many successful programs for which people were willing to pay good money. As the business grew, Rod and Kris had to move the business from Rod’s study in their apartment to an office which they bought using a mortgage. They also upgraded the computer equipment that Rod was using. The reputation of the business grew as new customers used the business on the recommendations of existing customers. a i Distinguish between physical resources and intangible resources. (2 marks) ii Using the stimulus, identify TWO physical resources and TWO intangible resources. (2 marks) b Explain why cash flow is important as a (2 marks) financial resource. c Discuss why intangible resources are important to this business. (2 marks)

1.3 Influences in the business environment 25 min

1.4 Business growth and decline

20 min



1. Which one of the following is an internal influence in the business environment? A economic B competitive C technological D business culture

1. A business observes the following about itself: sales of output are slow, the business is making a loss but the amount of loss is falling, managing cash flow is difficult, market share is increasing slowly and more employees need to be hired as sales increase.

2. Which statement is correct about unemployment during the downswing? A unemployment starts to fall B unemployment is at its lowest C unemployment starts to rise D unemployment is at its highest

In what stage of the business life cycle is this business? A establishment B growth C maturity D post-maturity


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2. What strategy is a business likely to use in the post-maturity stage? A price skimming B penetration pricing C new product development D below-the-line promotions

Juliette and Pablo established Pelican Housework Services (PHS) seven years ago to take advantage of time poor two-income families who had moved into the new estate in town. They did house cleaning, garden watering and maintenance and laundry. They chose a partnership as the appropriate structure for the business.

3. Challenges to businesses in this stage are focused on running the business in a more formal fashion to deal with the increased sales and customers. Better accounting and management systems will have to be set-up. New employees will have to be hired to deal with the expansion of business.

As the town expanded, so did the business. Juliette and Pablo were working long hours. They saw a need to provide a wider range of services but this would mean more equipment and more personnel. Neither of them had enough time to interview prospective new employees. Personal service was an essential part of their competitive advantage.

In what stage of the business life cycle will these challenges occur? A establishment B growth C maturity D post-maturity

4. After long-term planning a business develops a superior, sturdy laptop to supply to schools under a government program. The government stops the program as part of budget cuts and the business goes into decline.

What has caused the problem for the business? A inertia B lack of adequate planning C changes to legal influences D loss of competitive advantage

Juliette and Pablo decided to hire you as a management consultant to help their business. The issues that they ask you to solve are: • outline possible ways that they could expand their business • discuss new products that they could introduce into the business • explain how to maintain competitive advantage as the business progresses through the business life cycle • outline changes to management to cope with business growth. You are to prepare a report that addresses these issues for presentation to Juliette and Pablo. (20 marks)

SHORT-ANSWER QUESTION 5. a Distinguish between voluntary and involuntary cessation. (2 marks) b Outline the process of liquidation (2 marks) c Discuss the advantages and disadvantages of liquidation for creditors of the liquidated (4 marks) business.

Business report

35 min

In your answer you will be assessed on how well you: • demonstrate knowledge and understanding relevant to the question • use the information provided • communicate using relevant terminology and concepts • present a sustained, logical and cohesive response in the form of a business report.

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35 min

In your answer you will be assessed on how well you: • demonstrate knowledge and understanding relevant to the question • use relevant business case study/studies • communicate using relevant business terminology and concepts • present a sustained, logical and cohesive response. Explain the challenges that a business may have to face during the establishment and growth stages of the business life cycle. (20 marks)



Extended-response question


Chapter 2

Business management PRELIMINARY OUTCOMES A student:

You should:

P2: explains the internal and external

be able to make the relationships between internal and external influences on business evident.

influences on business. P4: assesses the processes and interdependence

of key business functions. P5: examines the application of management

theories and strategies. P6: analyses the responsibilities of business

to internal and external stakeholders. P7: plans and conducts investigations into


hypothetical business situations. P9: communicates business information and

issues in appropriate formats. P10: applies mathematical concepts

appropriately in business situations.

be able to make a judgement about the processes and interdependence of key business functions and draw out the relationships between them. be able to inquire into management theories and strategies. be able to identify the responsibilities of business and relate the implications of these to internal and external stakeholders. be able to plan and conduct investigations into contemporary business issues. be able to give an evidence-based opinion and judgement on both actual and hypothetical business situations. be able to communicate business information and issues using appropriate formats. be able to use mathematical concepts appropriately in business situations.




2.1 N ature of management Managers and their actions are essential to business success. Managers plan, organise, communicate, implement, motivate and evaluate business activities. Managers set goals and outline the strategies to achieve these by organising the resources and staffing. They develop the policies and procedures that will assist in achieving goals. Managers monitor and analyse results through control systems. This helps them to evaluate and solve problems and to adopt corrective strategies where actual performance has not been consistent with planned performance. Managers may also take on leadership roles, such as setting directions and effectively communicating the new directions to enhance stakeholder motivation. They also initiate changes in response to internal and external influences. Outline the features of effective management.

2.1.1 Features of effective management A manager’s ability to be effective and efficient will be a critical factor in the success of the business. Managers are responsible for making sure the business is running in the best possible manner. This is important, as effective and efficient management will allow for increased profits, greater opportunities for growth, a positive work environment and high levels of customer satisfaction. Effectiveness is concerned with determining goals and future directions, and aligning people and resources to make sure that these goals are achieved. Efficiency refers to the allocation of resources and output of production. Efficient managers try to achieve maximum output from minimum inputs and cost. Therefore, managers plan and organise the activities of the business so that resources and staff are well coordinated to achieve business goals at minimum cost. Managers have the responsibility to guide a business throughout its life cycle. Managers must be able to direct the talents and skills of all employees towards achieving the goals of the business. It is the role of managers to: ◗ provide leadership and direction (efficiency) ◗ enable the goals and needs of stakeholders to be achieved (efficiency) ◗ achieve the effective use of staff and resources (effectiveness). Effective and efficient managers will display the following features or characteristics. ◗ Leadership skills—this is the main feature of effective management. A manager must have confidence in the ability to lead his or her team. Effective management is also about the ability to delegate tasks appropriately to others in the business. ◗ Integrity—an effective manager needs to have integrity and be able to be trusted. This integrity and trust will ensure the confidence of both owners and subordinates in the business. Owners will want to be assured that the manager will always work in the business’s best interest. Subordinates will want to feel secure in the workplace and in being trusted to use their initiative in their roles. ◗ Self-motivated—effective managers need to be able to take the goals of the business and develop clear strategies for achieving them without the need to be managed by the owners. An effective manager leads by example by demonstrating commitment and effort.

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◗ Team player—effective management will lead the team in the effort to grow the business and to use staff and resources effectively. An effective manager is capable of working well with staff at all levels. ◗ Conflict resolution skills—because the manager has to interact with all levels of responsibility in the business, he or she will often be called to resolve conflicts that will naturally occur in any organisation. An effective manager will be able to anticipate the development of conflicts and take action to resolve them before they develop into much larger issues. ◗ Optimism—an effective manager will be able to motivate other employees by conducting business with an attitude of optimism. This will generate good morale among employees and allow them to derive satisfaction from their work. ◗ Dependability—efficient managers can be relied on by the rest of the stakeholders of the business. This means that they set examples by being visible and active in the workplace and by being diligent in the performance of their many roles. Dependable managers are there when ‘the going gets tough’. ◗ Ability to remain calm—the modern business can often be a hectic operation with many tasks to be managed at the same time. An efficient manager will operate in a calm manner in order to instil confidence in other stakeholders. A manager that panics or operates without considering the consequences of actions will not be efficient. ◗ Customer service skills—a business will be successful if it develops an expanding customer base. It will be the manager’s job to ensure that appropriate guidelines are implemented so first-time customers become satisfied repeat customers. ◗ Knowledge of the industry—an effective manager will need to deal with the many stakeholders of the business, such as customers, employee and employer associations, governments and the community. This means that the manager will need to have a sound experience, knowledge and understanding of the business and how it operates within the industry. Study hint: you can use the acronyms LIST CODACK to help you remember these ten features. Source: Material adapted from kathrynvercillo.hubpages.com/hub/10-Traits-of-a-Successful-Manager KCq page 130

2.1.2 Skills of management

Outline the skills of management.

Successful managers have a range of skills. These are critical as the major cause of business failure is poor management skills. No manager will be exceptional at all these skills all the time but effective managers will be able to identify the areas where their strengths lie and when they need to seek advice from those skilled in other areas.

Interpersonal skills Interpersonal skills are people skills. Interpersonal skills involve managing and motivating people. Strong interpersonal skills allow a manager to build effective relationships with staff. This may be achieved through the use of positive and assertive language, active listening, ongoing feedback, empowerment, clarity in expectations, empathy and understanding. Managers who know their staff well will be more influential in motivating, organising and engaging them to improve productivity and respond positively to change. Poor interpersonal skills in managers can lead to an unproductive workplace.

Describe interpersonal skills of management.

Chapter 2 • BUSINESS MANAGEMENT © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 71

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Skills of management

Interpersonal

Communication

Strategic thinking

Vision

Problem solving

Decision making

Flexibility

Adaptability to change

Reconciling conflicting interests of stakeholders

Figure 2.1 Skills of management

Describe communication skills of management.

Communication skills

Describe strategic thinking skills of management.

Strategic thinking

Describe the vision skills of management.

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Strategic thinking involves developing a big picture understanding of the future direction of the business. Good strategic thinking is ongoing in nature and involves a manager articulating the vision, goals and objectives of the business, usually through a strategic plan. A strategic plan will identify what the business wants to achieve for the future (usually the next three to five years) and will outline actions, resources, methods, controls and corrective actions that are necessary to achieve these goals and objectives. Strategic thinking is, however, more than the implementation of a strategic plan. It is management’s ability to continuously and critically analyse and evaluate the internal and external environment, anticipate threats and opportunities, synthesise up-to-date information, prioritise goals and align people and new ideas with the vision and goals of the business. Strategic thinking can be seen as the key to proactive management.

Vision Vision is the picture of the future for the business. A vision gives a longterm focus for planning and organising business activities. Managers who are able to communicate a vision for the business have the ability to simplify decisions around the business’s future direction. They are able to motivate people to action towards the vision. Managers with vision are able to coordinate a wide range of different people and business functions to achieve a shared sense of direction. This will improve efficiency and effectiveness. An example of a vision is Gerry Harvey’s aim to make Harvey Norman a global brand.



Managers need to ensure that their communication with other stakeholders is efficient and effective. There are three factors that managers need to consider to achieve this. ◗ They need to communicate using language that ensures the message is understood. ◗ They must ensure that they receive and understand communications that have been sent to them and that ambiguity is avoided. ◗ They need to impose control over the flow of information. It is also important to remember that in today’s world there are many methods and forms of communications such as written letters and other formal communication, e-mail, social media such as Facebook and Twitter, and verbal communication, including instructions.



Problem solving This is one of the most important skills of managers and one of the most complex, especially in the dynamic, ever-changing business environment. The most traditional approach to problem solving involves managers recognising problems, analysing their causes, identifying alternative solutions and assessing the consequences of each alternative. The next step is to select the best action to implement given the context of the issue.

Decision making

Describe problem-solving skills of management.

Describe decision-making skills of management.

Decision making is the outcome of problem solving. Good decision making requires a mixture of skills: creative development and identification of options, clarity of judgement, firmness of decision, and effective implementation. When faced with making a decision, managers will have a number of alternatives to consider. There is a process that managers will follow to arrive at what they consider to be the best decision for their business. Firstly, managers need to gather the facts that are relevant to making the decision. The next step is to consider all of the possibilities with appropriate team members. Once the possibilities have been considered, the implications of each option need to be analysed in terms of desired goals. Finally, it is up to the manager to select the best option. The manager must ensure that the decision is implemented effectively and will also need to explain the reasons for the decision to the relevant stakeholders.

Flexibility Flexibility means that managers must be able to adjust their behaviour to new information or changing circumstances. Managers must always be open and experimental when it comes to new ways of doing things. The internal influences that impact on managers require a flexible approach, especially in the area of human resource management. Some issues include: ◗ the assignment of employees to workplace teams ◗ workforce planning ◗ workforce acquisition (hiring new employees) ◗ new product or services development and launch ◗ annual performance evaluation ◗ promotion planning ◗ reorganisation and restructuring of the workforce and workplace ◗ expansion of the business.

Adaptability to change Influences from the external business environment are constantly changing. This means that an effective manager must be adaptable and able to respond to change. Adaptability to change involves a number of considerations. A manager must be open-minded and be able to consider a broad range of ideas and opinions. Managers need to be able to lead their workforces, analyse their observations and organise ideas so that they can be translated into action. It is also important to not always ‘go by the book’ as sometimes the creative approach will yield a better result. Managers should always inspire their workers to ‘test the boundaries’ and to think and work outside their ‘comfort zone’. Workers need to be encouraged to constantly update their skills so that they can better cope with change. Finally, managers and workers should always be looking to make improvements.

Describe flexibility skills of management.

Describe the adaptability to change skills of management.


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Describe the management skill of reconciling the conflicting interests of stakeholders.

Reconciling the conflicting interests of stakeholders A stakeholder is an individual, organisation or even another business that has a vested interest in the business achieving its objectives. Stakeholders can be classified as: ◗ internal stakeholders, such as shareholders, managers and employees ◗ external stakeholders, such as customers, suppliers, governments and the community. Managers need to be skilled in settling conflicts of interest among stakeholders. Most conflicts are avoided if managers comply with the law, follow the industry codes of practice and utilise their management skills. At times, negotiation and compromise will be necessary. The skills that will help a manager reconcile conflicts between stakeholders include: ◗ establishing relationships with various groups of stakeholders ◗ listening to and identifying the needs of various stakeholders and areas of conflict ◗ communicating with the relevant stakeholders to discover areas of potential compromise ◗ making decisions and explaining the rationale behind those decisions to relevant stakeholders ◗ gathering support from diverse groups of stakeholders ◗ minimising the negative impact of decisions. KCq page 130

Outline the process of achieving business goals.

2.1.3 Achieving business goals Most small business owners and managers have goals for the business they would like to achieve. Goals need to be defined in the early stages of the process of developing a business strategy. When formulating business goals, the following points should be considered in terms of future achievement. ◗ There should be a definite time horizon for goals to be achieved. Goals could be set for periods of 12 months, three years or five–ten years (strategic goals). ◗ The goals should aim towards achieving the mission of the business. ◗ Goals should be easily understood and written in clear and concise language. ◗ Where possible, goals should be measurable so that progress towards achieving them can be easily monitored. ◗ Goals should be meaningful—this means that achieving the goals will be important to the progress of the business. Most businesses will establish goals that deal with: ◗ profits ◗ market share ◗ growth ◗ share price ◗ social goals ◗ environmental goals. These goals can be classified into two groups: financial goals and social and environmental goals. Figure 2.2 identifies these groups.

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Social and environmental goals

Financial goals

Profits

Market share

Growth

Share price

Social

Environmental

Figure 2.2 Business goals

Financial goals are central to the success of most businesses. As indicated in Figure 2.2 these goals include profits, market share, growth and share price. Social and environmental goals relate to the desire of the business to be seen as a ‘good corporate citizen’ and these goals may stem from the desire of the owners to contribute something back to the community in which the business operates.

Profits

Outline profits as a goal of business.

Businesses calculate profit as the total revenue from selling the products of the business minus total costs. This calculation is taken over a specific period of time, usually a year. Revenue must be greater than the related expenses for a profit to be made. If expenses are greater than revenue, the business has made a loss. Making a profit is the main driving purpose for running most businesses. Business owners expect a profit over the long term as this is critical to survival, investors’ return on capital and growth of the business. Investors have an expectation that the business will be profitable. They will have invested funds and will expect a return on that investment. If, for example, an investor put a sum of $10 000 into a car-wash business and at the end of the year the business makes a profit and pays the investor a dividend of $1500, the investor has a dividend yield of 15%. The investor will compare this yield with other investments to see if this investment will continue or whether the $10 000 would yield a greater dividend elsewhere. If this expectation of a reasonable dividend is not being met many investors will reconsider their continued investment in the business.

Market share Market share is the proportion of sales of one business to the total sales of all businesses in the market for a particular product. Most businesses would have the goal of increasing market share. The market share of a business indicates how well it is performing and how successful is its competitive advantage. Competitive advantage is the advantage a business has over its competitors. This advantage is gained by offering consumers greater value, either by means of lower prices, improved quality or by providing greater benefits and service. Market share is a financial goal of a business because increasing market share will increase the ability to make profits in the long term. It also denies competitors’ access to some customers in the market. However, in the short term, attempting to increase market share could reduce profits as increased expenditure on advertising and reducing prices of products to increase sales will lead to lower revenue and increased costs.

Outline market share as a goal of business.


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Businesses are very aware of their market share and that of their competitors. The following table indicates fluctuating market shares in the highly competitive passenger motor vehicle market in Australia. Businesses work hard to maintain (and even increase) their market share. Table 2.1 Market shares in the passenger motor vehicle industry in Australia, 2008–2012 Aug 2008 %

Dec 2009 %

Dec 2010 %

Dec 2011 %

Dec 2012 %

Toyota

Make

24.4

21.4

20.7

18.0

19.6

Holden

13.3

12.8

12.8

12.5

10.3

Ford

11.3

10.3

9.2

9.0

8.1

Mazda

N/A

N/A

N/A

8.8

9.3

Source: Federal Chamber of Automotive Industries Outline growth as a goal of business.

Growth

Outline share price as a goal of business.

Share price

Growth is the increase in the size and value of a business over time. Growth provides a business with the opportunity to expand, produce a wider product range, access additional resources, including a more extensive variety of specialist skills and innovations, and help consolidate the position of the business in the market in terms of its competitors and market share. Growth can be achieved both internally (within the business) and externally (from other businesses). Internal expansion can be achieved through increases in demand for a product, improved productivity and new market opportunities, such as advances in technology. External expansion is achieved by purchasing other businesses or by mergers or acquisitions. The purpose of growth is to increase profits and return on capital. Businesses must monitor their level of growth so that they are achieving sustainable levels. Too much growth too fast can cause cash flow problems, but careful cash flow management can avoid serious liquidity and solvency concerns.

At first glance share price as a goal of business seems only to refer to companies where the owners are shareholders, whether the company is publicly listed on the Australian Stock Exchange (ASX) or not. Share price can be treated as one component of a wider idea of the concept of business value. Business value can include a whole range of assets that can increase in value, thus expanding the worth of the business. It includes such things as the value of human resources, customer value, supplier value, alliance partner value and managerial value (to mention a few). An important feature of the business value concept is that it includes intangible items that add value to a business, such as intellectual property. This could include copyrights and patents. The goodwill generated by the business, while difficult to estimate accurately, could add significant value to the sale price of a business. The assumption is that the owner of a business, whether a sole trader or a large company, will want to see the share price (or business value) increase. There are a number of reasons that owners would like to achieve this goal. Firstly, it increases their capital gain should they decide to sell their ownership. Secondly, a high share price or high business value reduces the likelihood of a takeover threat. It also allows the business to raise finance more easily. The ways to achieve a high share price (or business value) include business growth (referred to earlier in this section), good management,

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achieving a profit increase over last year’s result, expanding into new markets and increasing sales and market share.

Social Many businesses incorporate social goals as part of their overall goals. These goals are a commitment by a business to operate ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the community at large. This is known as corporate social responsibility. Social goals can also aim at supporting various charities and sporting or cultural organisations. One example is the scheme employed by the NSW Department of Education and Communities (DEC). Employees can have contributions deducted from their payroll to support Stewart House, an organisation located at Curl Curl on Sydney’s northern beaches whose mission is to care for children in need from all parts of NSW and the ACT. Stewart House enjoys unprecedented support from the NSW Department of Education and Communities and NSW Health and the NSW Teachers Federation.

Environmental Environmental goals focus on the business and its operations being ecologically and environmentally sustainable. A simple definition of environmental sustainability is the one used by the Food and Agriculture Organisation, a body within the United Nations leading international efforts to defeat hunger: ‘environmental sustainability is about meeting the needs of the present generation without compromising the ability of future generations to meet their needs’. Environmental sustainability involves: ◗ facilitating the use of renewable resources, such as plantation timber ◗ conserving and establishing priorities for the use of non-renewable resources, such as fossil fuels ◗ keeping environmental impact below the level required to allow affected systems to recover and continue to evolve. The following contemporary media report shows how a business can embrace social and environmental goals while also pursuing the goal of profit.

Outline social goals as goals of business.

Outline environmental goals as goals of business.

Social and Environmental Goals—Village Roadshow Limited (VRL) An example of a business that holds the ideas of corporate social responsibility, ethical responsibility and environmental sustainability as a key concern is Village Roadshow Limited (VRL). VRL operates a number of theme parks on Queensland’s Gold Coast, including Sea World and Sea World Resort, Warner Bros. Movie World, Wet ’n Wild, Village Roadshow Studios, Paradise Country and Australian Outback Spectacular. It is clear that VRL views corporate social responsibility (CSR) as a key concern because of the way that it tries to improve the quality of life of the community at large. It also demonstrates ethical dealings with the stakeholders of the businesses. In terms of CSR, Village Roadshow has the following impressive achievements. ◗ VRL has been a supporter for many years of animal research and rescue and conservation. Sea World has been assisting stranded, sick, injured and orphaned marine animals for over 35 years, with a dedicated marine rescue vessel and staff on call, funded almost entirely from Sea World’s business funds. Chapter 2 • BUSINESS MANAGEMENT © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 77

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◗ In terms of outreach and education, Sea World interacts with approximately one million visitors annually on marine environment education and conservation issues, and operates extensive visitation programs for schools. ◗ A major charity supported by VRL Gold Coast Theme Parks is for children with life-threatening medical conditions and illnesses. This support takes place through Starlight and the Make a Wish Foundation, in keeping with VRL policy. Support during 2010 was also extended to a number of other worthy causes and local charities. In terms of environmental sustainability, VRL has: ◗ reduced energy usage ◗ introduced of solar heating and power ◗ achieved a 45 % reduction of town water usage since 2005 ◗ recycled paper and cardboard, plastics, cans and glass, compact fluorescent light globes, green waste, lead acid batteries, copier toner cartridges, electronic office equipment, fluoro tubes, and oil. A recycling program for beverage containers is being implemented and it is estimated that 20 tonnes of beverage containers will be saved from landfill each year from the combined sites. Source: www.villageroadshow.com.au

Discuss businesses achieving a mix of financial, social and environmental goals.

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A business will have a number of financial, social and environmental goals along with the personal goals of the owners. Sometimes these goals will conflict. There may even be conflict within one area of goals, for example, financial. Sometimes the conflict will occur because of the time horizon under consideration. Short-term goals apply to the immediate future while long-term goals are more strategic and look several years into the future. Short-term financial goals will be concerned with generating a sufficient cash flow while long-term goals will have growth as a focus. This may even cause conflicts between shareholders and managers. Shareholders may be willing for the business to take more risks, especially with investment projects. This could mean that the share price of the business will rise and their investment is worth more. If the investment projects do not pay off they can sell their shares and purchase equity in another business. On the other hand, managers may be more cautious and may be unwilling to undertake activities with a high degree of risk. They may prefer to prioritise the goal of having enough cash flow for the business to operate. Therefore, there are conflicts between goals and some of these conflicts arise because of the differing viewpoints of various stakeholders. However, the Village Roadshow Limited example above illustrates that businesses can pursue social and environmental goals and still achieve financial goals. In 2010, VRL made a net profit of $117.2 million, a 300% increase over the net profit for 2009. Many businesses pursue social and environmental goals to encourage customers to support them through buying the business’s products so that in pursuing one or two goals the business contributes toward the achievement of others.



Achieving a mix of financial, social and environmental goals



Staff involvement The productivity of a business or its output per person can achieve its fullest potential because the employees are effective and efficient in the way they go about their tasks. The same is true for the achievement of business goals. The most valuable resource that a business has is its workforce (human resources). It is through the efforts of the workforce that the products of the business are designed and produced. The marketing function of the business ensures that the customer is connected to the product and that they will be repeat customers. Since the 1970s employees have been encouraged to participate in decision making as the workplace has changed from an autocratic ‘topdown’ approach to a workplace which is consultative and cooperative. Innovation Innovation is the creation of better or more effective products, processes, services, technologies or ideas. Today, many managers favour the team approach where the opinion and contribution of team members is encouraged along with discussion of work-related issues. Innovation is promoted through businesses making use of the social and intellectual capital of its employees. Employees are well-placed to promote ideas on product and service innovation and meeting the challenges of new demands in the market. The recruitment process focuses on choosing the most talented candidates for employment. This will increase competition between employees in terms of being innovative and the focus on innovation will help the business maintain competitive advantage. Motivation Motivation is the force that gives purpose and direction to behaviour. Businesses that use the team approach, involve employees in decision making and promote the use of self-managed teams will have motivated employees who are focused on achieving the best results. There may be monetary incentives such as performance-based pay schemes to encourage workers to strive for better results. This is a scheme where employees are paid a base rate of pay and are able to share in a bonus if the team achieves its goals. According to the Victorian Department of Innovation, Industry and Regional Development, research indicates that self-managed teams have greater motivation than individuals or loosely connected groups. Mentoring Mentoring staff is important in achieving business goals. Mentoring is a system where an experienced member of staff is attached to either new recruits or promising employees to enhance their workplace skills and increase their value to the team. Mentoring is a cost-effective method for a business to promote staff internally as it can avoid expensive and timeconsuming recruitment processes and ensure that valuable knowledge stays within the business. Mentoring can also help businesses: ◗ improve staff retention rates and team relations ◗ increase profits through improved performance and productivity ◗ provide staff with the opportunity to develop innovative ideas. This is one method of staff involvement that will contribute to the achievement of both financial and social goals.

Explain staff involvement in achieving business goals.

Outline staff involvement in innovation.

Outline the importance of staff motivation.

Outline the importance of mentoring staff in terms of achieving business goals.


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Outline the importance of training in terms of achieving business goals.

Training As mentioned earlier in this section, the most valuable resource that a business has is its workforce or human resources. In order to ensure its workforce has the ability to achieve its goals to an ever-increasing degree, a business must invest in expanding employee knowledge and skills. Businesses need to employ both training and development to enhance the knowledge and skills of their workforces. Training involves educating an employee in the skills and processes of the job that the employee currently holds. The more skilful the workforce of a business is, the greater the ability of the business to achieve its goals. Development involves selecting employees for educational programs that focus on roles that the employee may aspire to in the future. Development usually applies to employees who have been identified as having the potential to fill managerial positions in the future. All employees will need training to assist them to perform their current roles and constantly update their skills, especially in relation to new technology. At the same time, managers will be identifying employees as possibilities for promotion in the future. These will be employees that show initiative and commitment to achieving the goals of the business. KCq page 130

page 131

2.2 M anagement approaches Management approaches have been developed to help explain how businesses are organised and managed in given circumstances at particular times. As conditions change over time, these approaches or theories become dated. However, a range of approaches, including the classical, behavioural and contingency approaches, have been used by managers over the last two centuries to help us understand the process of managing business operations, especially in relation to human resources, appropriate organisational structures and leadership styles. Outline the classical approach to management.

2.2.1 Classical approach The classical approach to management was developed in the late nineteenth century, during the industrialisation era when there was a need for an efficient approach to the mass production process. The business environment was relatively stable and straightforward. Elements of the classical approach are still used in a wide variety of businesses, especially in the manufacturing industry. Key people in the development of the classical approach to management include: ◗ Henri Fayol, who identified the importance of planning, organising and controlling for management ◗ Fredrick Taylor who, through his ‘time and motion studies’, believed in the importance of specialisation, the division of labour and a hierarchical organisational structure in order to improve productivity through efficient worker organisation ◗ Max Weber, who noted the importance of an authoritarian leadership style ◗ Henry Ford, who applied the theories of the classical approach, especially division of labour, to his car assembly line. This enabled him to mass produce motor vehicles.

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Management as planning, organising and controlling

Classical approach Hierarchical organisational structure

Autocratic leadership style

Figure 2.3 The classical approach to management

Management as planning, organising and controlling Planning Planning is the key to the short- and long-term success of a business. ‘A business that fails to plan, plans to fail’ is a well-known saying among business entrepreneurs. Careful and effective planning will help a business to be proactive and focused on a common direction. Planning involves: ◗ establishing goals and objectives ◗ developing strategies and tactics to help achieve objectives ◗ setting up evaluation and control procedures. Planning is an ongoing rather than a once-a-year task. Planning is usually a cyclical activity where plans are made, implemented and evaluated and changes are made. The modified plan is then implemented and so the cycle continues. The different types of plans that managers must be able to develop and implement, depending on their level of responsibilities, are outlined below. ◗ Strategic plan—this is a long-term plan that outlines the vision and future direction for the business. It is usually developed by the CEO and other senior executive managers. ◗ Tactical plans—these are more detailed plans that translate the goals and objectives from the strategic plan into the strategies, actions and tasks for the short to medium term. These plans may run for several months or a year and will be developed by higher and middle management. ◗ Operational plans—these are the ongoing plans that deal with the day-to-day functions necessary to achieve goals and objectives. These will be the responsibility of floor managers and supervisors.

Explain management as planning, organising and controlling.

Organising Organising is the next management process after planning. To achieve its plans, management will need to arrange business, staff and resources effectively. Organising connects the plans with the means to achieve them and will deal with issues such as what tasks need to be done, who will do them, how tasks will be grouped and how supply chains and chains of command will be established.


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Controls Controls are developed by managers. Having planned and organised activities, managers then need to control the process by evaluating operations and output and making comparisons between planned and actual performance. If necessary, corrective action may need to be taken. Standards may be based on benchmarks, such as past performance, industry averages and world’s best practice. By having these controls in place managers are better able to monitor the performance of their businesses and take action to improve performance. Controls and standards should be identified and established in the business plan and could be: ◗ feedforward controls (at the beginning of the production process) ◗ concurrent controls (during the production process) ◗ feedback controls (at the end of the production process). Businesses will often establish controls in: ◗ management ◗ human resource management ◗ inventory management ◗ sales and marketing management ◗ finance ◗ production. By having these controls in place, managers are better able to monitor the performance of their business and take action to improve it. Explain hierarchical organisational structure.

Hierarchical organisational structure The developers of the classical management approach believed that there was one way to do a job and complex tasks should be broken down into a series of simplified, easier tasks. This is referred to as the division of labour. A major advantage of this is training can be quick and simple, workers require only a basic level of education, and they become specialists in their task, allowing for better resource allocation and increased efficiency and productivity. The tasks are well defined and management has little flexibility in the task design or planning. The division of labour led to a hierarchical or pyramidal management structure. This structure has: ◗ a limited number of senior managers who dominate decision making— usually a board of directors and executive directors who are involved with strategic planning ◗ a series of middle managers who coordinate the supervisors through the development of tactical plans ◗ supervisors, who put the operational plan into action and ‘get the job done’ through managing the workers and following orders from higher management ◗ workers, who perform the tasks and form the base of the hierarchical structure. A hierarchical organisational structure is based on a long chain of command and a short span of control. A long chain of command means that there is a well-defined, long line of authority that stretches from the top manager (usually a CEO) through middle layers of management to supervisors and workers at the bottom of the hierarchy. A short span of control means each manager or supervisor has a limited number of workers who report to them and for whom they are responsible.

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Senior management

Middle management

Supervisors

Workers

Figure 2.4 Hierarchical structure of management

Autocratic leadership style Autocratic or authoritarian leadership is usually found in businesses that follow a hierarchical organisational structure and undertake a classical approach style of management. An autocratic leader is one who: ◗ is controlling ◗ is rigid in decision making with little or no participation allowed by staff ◗ has limited flexibility ◗ uses top-down communication and high levels of authority ◗ exerts power through his or her position ◗ establishes defined lines of command and responsibilities.

Explain autocratic leadership style.

Autocratic leadership is characterised by: ◗ high levels of authority and obedience up the chain of command ◗ limited amounts of flexibility ◗ little participation by staff in decision making ◗ strict adherence to defined lines of command. KCq page 130

2.2.2 Behavioural approach

Outline the behavioural approach to management.

Behavioural theories began to develop in the mid-twentieth century as the business environment started to become more complex, although it was still relatively stable. Workers were better educated than they were in the past and were recognised as individuals with needs. The human relations movement identified the importance of aligning business and individual needs to achieve business goals. The inflexibility in the classical management approach to task design and the lack of opportunities for career development and contributions to decision making led to the development of an alternative management approach. These new management theorists observed that to achieve high productivity, it was essential to understand human behaviour and motivation. Contributors to the behavioural management approach include the following people. ◗ Elton Mayo, an Australian psychologist, discovered through the Hawthorne Studies that people would increase productivity when human needs such as a sense of involvement and belonging in the workplace were met, along with being given responsibility and recognition by supervisors. ◗ Abraham Maslow developed the hierarchy of needs, which groups needs into physiological (food, water, shelter), safety, belonging and love


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(positive relationships), esteem (feeling valued) and self-actualisation (achieving one’s potential). Once basic needs such as food and safety are met then people are motivated by higher needs such as belonging, esteem and self-actualisation. ◗ Douglas McGregor developed the Theory X and Y arguments that a manager’s assumptions about workers would be self-fulfilling. The Theory X managers assume that workers do not like work, are lazy, are unwilling to take on responsibilities, need to be directed and will resist change. This leads them to control, coerce and punish employees, who then do become lazy and resistant and need direction. Theory Y managers, building on Maslow’s hierarchy of needs, assume that workers can enjoy work, will be self-directed and will take on responsibilities in order to achieve their own goals of belonging, esteem and selfactualisation. For example, Gerry Harvey is noted for encouraging employees’ self-direction by providing a desk and resources and telling the employee to ‘go to it’. This respect encourages the employees to be motivated and enthusiastic, take risks, be creative and take on additional responsibilities in order to achieve the business’s goals. Explain management as leading, motivating and communicating.

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Researchers such as McGregor and Mayo decided that the key functions of management were: ◗ leading ◗ motivating ◗ communicating. Leading involves creating a vision, strategic thinking, aligning people to the vision and motivating people to achieve the goals of the business. Businesses tend to overemphasise the importance of management (planning, organising, controlling) as opposed to leadership. The ability to lead effectively includes understanding human behaviour and responding to the needs of the stakeholders while providing a clear direction for the future in a way that inspires these stakeholders. Motivation is a complex process and each stakeholder will be motivated by different needs. Managers need to be aware of the range of motivational triggers for the different stakeholders. The goal of motivating employees is to develop a desire within them to be productive and work with high levels of energy and enthusiasm. Employees are motivated by a range of forces in addition to financial rewards, including promotion, career opportunities, professional learning, participation in the decision-making process, delegation of authority and a sense of empowerment and teamwork. Mary Parker Follett (1868–1933) made important contributions to understanding the importance of motivation. She felt that the interactions of management and workers were extremely important. Follett identified a leader as ‘someone who sees the whole rather than the particular’. Her theories stated that managers and workers should approach their tasks in partnership and that managers could motivate workers by leading rather than commanding. Managers need to be effective communicators. Communication allows people within an organisation to develop a clear understanding of what is happening. The range of communication tools today includes informal one-to-one communication via meetings, phone calls and e-mails, and more formal communication via group meetings, committees, written reports, web pages and conferences. Conferences also allow networking opportunities, although social networking sites such as MySpace and



Management as leading, motivating, communicating



Facebook and methods specific to an association also allow for the gathering and transfer of information. Communication is a two-way process and the appropriate choice of communication tools is an important management skill, one which allows for more effective exchange of information and better working relationships.

Teams Flatter management structures have developed as a result of behavioural approaches to management. Flatter management structures involve the removal of middle management and the empowerment of employees by decision making at lower levels of the business hierarchy. With fewer levels of management and fewer managers, there is a wider span of control and a shorter chain of command. A wider span of control means managers have more workers responsible to them; a shorter chain of command means that there are fewer levels in the organisational hierarchy, allowing employees at lower levels of the organisation to have greater responsibility and accountability and access to high-level managers. Many businesses have adopted the team approach as a response to a flatter structure. A team approach is where groups of workers interact together in the workplace to achieve a common business goal. Teamwork requires people to work together in a collaborative and coordinated manner for a common purpose. Usually teams are self-directed and democratic in nature, allowing each member of the team—regardless of their position— to have the opportunity to contribute and express their opinion. Many workers recognise that being a team player is one of the most important skills in the workplace. The benefits of teams include greater flexibility and increased efficiency, motivation, cooperative action, communication and involvement in the decision-making process. These structures also allow for greater responsiveness to consumer needs and changes in their preferences and adaptability to external environment and market conditions.

Participative/democratic leadership style A participative/democratic leadership style is one that encourages the leader and the employees to work together in the decision-making process so as to make informed decisions. At times, the leader may ask for a majority vote regarding an issue but at other times the leader will still make the final decision, regardless of the employees’ viewpoint. Features of this style include: ◗ encouraging employee participation in decision making ◗ establishing effective two-way systems of communication, including feedback ◗ allowing for greater flexibility and negotiation of goals and tasks.

Explain the behavioural approach of management with reference to teams.

Explain the behavioural management approach with reference to participative/democratic leadership style.

KCq page 130

2.2.3 Contingency approach

Outline the contingency management approach.

The contingency or situational approach to management emerged in the early 1960s from organisational research conducted in the United States and England. Given the pace of change and the complexity of the business environment in the twenty-first century, businesses and management need to be responsive and adapt to internal and external influences. The contingency approach focuses on how management and the organisation can approach changing situations and adapt to them.


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Explain how the contingency management approach assists management in adapting to changing situations.

Adapting to changing situations The contingency management approach is sometimes known as a situational approach to management and it recognises that all businesses, internal business situations and external environments are constantly changing. Effective managers will be able to use various management approaches to select and integrate the best techniques for any given situation. The contingency management approach to appropriate actions is one of ‘it depends’, arguing that the solution to any one problem depends on the relevant factors. The most appropriate management method and leadership style will depend on the situation. An autocratic leadership style is more appropriate for an army officer in war, who will need to centrally plan, organise and control the situation, whereas a participative/democratic leadership style with emphasis on leading, motivating and communicating would be more appropriate for a workplace project team responsible for developing a new design through research, creativity and discussions. The theory assumes that the manager is flexible and able to adapt to different management methods and leadership styles as circumstances change. KCq page 130

Outline management process.

page 132

2.3 M anagement process Management process embraces the whole business. It focuses on aligning all aspects of the business with the wants and needs of clients. It promotes business effectiveness and efficiency while striving for innovation, flexibility and integration with technology. Management process attempts to improve processes continuously. It is argued that management process enables businesses to be more efficient, more effective and more capable of change than a traditional hierarchical management approach. Studies have indicated that management process helps businesses gain higher customer satisfaction, product quality, delivery speed and speed in terms of time-to-market. Management process is concerned with coordinating the four key business functions and the resources of the business. The four key business functions are: ◗ operations ◗ marketing ◗ finance ◗ human resources. Business

Operations • The core business function • Combines inputs to produce outputs

Marketing • Connects the customer with the product • Makes decisions about price, place, packaging

Finance • Ensures achievement of financial goals such as growth, profits, solvency

Human resources • Acquisition • Development • Maintenance • Separation

Figure 2.5 Key business functions

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2.3.1 Coordinating key business functions and resources Managers and their actions are essential to business success. Managers plan, organise, communicate, implement, motivate and evaluate business activities. Managers set goals and outline the strategies to achieve these goals by: ◗ developing business operations through acquiring inputs and producing outputs that will be sold to customers ◗ connecting operations directly with the customer ◗ raising finance and developing budgets so that production and distribution of the output of the business can take place ◗ organising the human resources and staffing. A manager’s ability to be effective and efficient will be a critical factor for the success of the business. Therefore, managers plan and organise the activities of the business so that resources and staff are well coordinated to achieve goals at minimum cost. There is interdependence between the key business functions—they coexist and rely on each function making contributions to the success of the mission of the business. The core business function is operations and produces the output of the business. It cannot work in isolation from the other functions. Most of the workers in the business will be employed in operations and it will be the responsibility of human resources to recruit, develop and maintain these workers. The business will be able to sell the output produced by operations through the marketing key business function. Marketing connects the customer to the product and will also add quality to the product with customer service. Finally, the finance function will develop budgets into which all the other functions will have input and which will be used to finance the output and the machinery needed to produce it. Because of the interdependence of key business functions there must be management to coordinate these functions. It is management that organises the smooth functioning of these various departments, developing cooperation between them, so that the business will be better able to achieve its goals. With small to medium enterprises (SMEs) key business functions will often overlap and will be carried out by the same person. This will change as the business progresses through the business life cycle. Chapter 1 contains case studies of businesses in different stages of the business life cycle.

Outline the management process of coordinating key business functions and resources.

KCq page 130

2.3.2 Operations Operations refers to the activities of a business that acquires and combines inputs, changing them into finished goods and services. Operations management is concerned with managing the process that transforms inputs (such as raw materials, labour, power and transport) into outputs of goods and services. A major task in operations management is to ensure the efficiency of operations by using the least amount of input possible. At the same time operations management needs to be effective by making sure that customer’s needs are met and that customers are satisfied with the output. Operations management is important in a business for the following reasons. ◗ Operations is the core key business function. ◗ Most employment in a business is in the operations function.

Outline operations as part of management process.


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◗ Operations management has direct links to all other key business functions in a business—the other functions exist because of operations. ◗ Operations is the part of the business most commonly seen by customers. ◗ A large proportion of the assets of a business are in operations.

Operations— the core key business function

Assets— a large proportion of the assets of a business are in operations

Employment— most employment in any business is in operations

Operations management

Visibility— operations is the part of the business most commonly seen by customers

Other key business functions are linked to operations—they exist because of operations

Figure 2.6 Importance of operations management

Goods and/or services

Goods only—pure goods output • Tangible • Can be stored • Output produced before consumption • Low customer contact • Can be transported • Quality easy to examine Religious service

Computer servicing

Airline

Restaurant

Hairdresser

Flour mill

It is very difficult to find a business that is the producer of only goods or only services. Most businesses will produce a combination although businesses will regard themselves as primarily a goods or services producer. Sometimes the output of a ‘service’ business may include waste. For example, although a trucking business may consider that it produces the service of transport, one of its outputs is particles of burnt fuel (exhaust) in the atmosphere. There is a classification of businesses in terms of their output, ranging from businesses that produce goods only to businesses that produce both goods and services to businesses that produce services only. This continuum is shown below in Figure 2.7.

Coal producer

Describe how management process applies to businesses that produce goods and/or services.

Services only—pure services output • Intangible • Cannot be stored • Production and consumption at same time • High customer contact • Cannot be transported • Quality difficult to examine

Figure 2.7 Business output: goods only to services only

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The major focus of operations management is to manage the process of transforming inputs into outputs of goods and/or services. As noted earlier this management of operations has to be both efficient (using the least amount of inputs) and effective (meeting and satisfying the customers’ needs). The inputs that will be used to produce services will be different to the inputs needed to produce goods. Table 2.2 Differences in producing goods and services Producing goods

Producing services

◗ Inputs will be combined and will often be physically transformed, e.g. production of bread where flour, yeast, water, power, labour, plant and equipment, marketing and sales staff, transport and finance and accounting are all combined

◗ The operations manager in service industries requires greater people skills and areas such as human resources management become important, especially in the training and development of staff

◗ The manufacturing or production of goods is less labour-intensive than the production of services

◗ Producing services tends to be labour intensive

◗ Technology such as computer-aided design (CAD) or computer-aided manufacture (CAM) can be used to reduce labour needs

◗ Technology is needed by the larger workforce to manage the output of services, e.g. storing airline bookings, recording insurance policy details

The production process Consider a business to be a large room with two doors where the inputs needed by the business go into one door and the outputs or products appear from the other. A business needs inputs in order to produce an output of goods and/or services. The activities of a new business will be designed to turn inputs into goods and services that customers are willing to pay for. This is known as the transformation process. During the transformation process the business adds value to the inputs, changing them into goods and services which become part of the output of the business. The value added by the business can be measured by working out the cost of the inputs and subtracting that cost from the sales revenue gained from selling the output. Therefore, the transformation process is about adding value to inputs. This is illustrated in Figure 2.8 below.

Describe the production process.

Transformed resources • Materials • Information • Customers Input Resources

Operations processes Transformation

Output Goods and services

Transforming resources • Human resources • Facilities

Figure 2.8 Operations processes

It is important for businesses to identify processes that add value. There are three main types of processes. ◗ Job production is the creation of single items by either one worker or a team of workers. ◗ Batch production refers to a specific group of components which go through a production process together; as one batch finishes, the next one starts. ◗ Flow production is a continuous process of parts and sub-assemblies passing on from one stage to another until completion.


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Inputs Inputs can be classified in a number of ways. Inputs in this case will be defined as: ◗ transformed resources, which include materials, information and people such as customers ◗ transforming resources, such as human resources and facilities. Transformed resources are those which will be transformed or changed into finished products by operations processes. In most businesses, transformed resources will include materials, information and customers. This transformation will add value to these resources. Adding value involves giving a product greater usefulness or utility to consumers. As the product becomes more useful to consumers they are willing to pay more for it. Adding value to a product not only includes the materials from which the product is made but all of the processes involved in the transformation. The processes include the storage, marketing and distribution of the product or anything that makes the final product more useful to customers. An example of a business using transformed resources would be an airline. The airline will process information in the form of customers’ bookings. The airline will also allocate resources to processing materials such as fuels and lubricants as well as food and beverages for passenger meals. The major operations task of an airline is to process passengers or customers by transporting them from one location to another. Examples of transformed resources are listed below. ◗ Materials, including raw materials, are transformed by manufacturing processes as well as materials which may have undergone some processing already. Materials can also be transformed by storage, where they are kept in warehouses. ◗ Information can be transformed in a number of ways. In the example of the airline used above, customers will make bookings through use of the internet, the telephone or via a travel agent who will use one of these telecommunications methods. The airline will then store the information in a database to retrieve and use in the future. The airline will also use information via market research to decide the best method of operations. ◗ Customers as transformed resources refers to the customer as a resource in the production process. The production process will act upon the customer and turn that person into a transformed resource. In fact, the production process is usually not complete until the customer has been transformed. It is easiest to view customers as transformed resources if we consider them consuming services such as transport, entertainment, accommodation and retail. Customers who travel from one city to another have been transformed in terms of location. Customers who buy clothing from a retail outlet will become transformed in terms of their appearance. The second part of the classification of resources is known as transforming resources. Transforming resources are those which will cause the change or transformation process in business operations. The main transforming resources are human resources: the people who operate, maintain and manage the operation and facilities such as plant and equipment. Transforming resources are listed below. ◗ Human resources refers to the people who will be the key to the transformation process. They will combine the resource inputs, operate and maintain the equipment, and manage the overall operation.

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INPUTS Syllabus Requirements

Transformed resources Transforming resources Output • Materials • Human resources will also deal with customers • People Information • Facilities on the sales side of the operation • and People (customers) where necessary will also be involved in distribution of output.

◗ Facilities refers to the buildings, plant, equipment and fittings that are essential to the business achieving its core function—producing its Making the change output. This includes items such as computers, display cabinets, machinery, shelving and refrigeration, although facilities will vary from business to business. Inputs

Transformed resources • Materials • Information • People (customers)

Transforming resources • Human resources • Facilities

Output

Making the change

Figure 2.9 The production process

Quality management

Explain quality management.

Quality management (QM)

Planning to develop policy focusing on quality as the foremost goal

Quality control (QC)

Quality assurance (QA)

Quality improvement (QI)

• Feedback control • Review process • Checks reliability of output • Assesses employees • Stops production if standards not met

• Monitors and evaluates processes • Undertaken by people outside operations • Seeks to find out who/what is to blame for problems

• Aims to reduce rate at which mistakes occur • Analyses production and suggests improvements

Figure 2.10 Quality management

Quality management involves planning to develop a policy that focuses on setting performance objectives that clearly set quality as a foremost goal. Quality management includes all the activities that businesses use to strive for and achieve quality. Quality is important in terms of the goal of customer satisfaction. Customer satisfaction can be defined as how the goods and services supplied by a business meet or exceed customer expectations. Generally speaking, if customers have their expectations met they are satisfied. If their expectations are exceeded then the customer has had a pleasant experience. Customers usually equate satisfaction with a business or product with quality. The three main strands to quality management are: ◗ quality control ◗ quality assurance ◗ quality improvement.


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Quality control Quality control (QC) is a feedback control. It is a review process whereby everything that is involved in the operations process of production is reviewed. The QC process is undertaken to ensure that a predetermined or minimum level of quality in a good or service has been achieved during operations. The process also checks that output is dependable. QC may have a focus on output but it also examines the people in the production process. A QC team will assess employees to make sure that they have appropriate skills and qualifications to perform their operational tasks. QC teams perform a series of routine checks of output though it is not the job of the team to correct any problems it discovers. The QC team will stop the production process if it discovers that minimum standards of quality are not being met. The team makes a report and the appropriate people on the production line take corrective action. Once this action has been taken then the operations manager will restart the production process. Quality assurance Quality assurance (QA) involves monitoring and evaluation of the various processes of a project, service or facility to ensure that minimum levels of quality are being achieved by the production process. QA monitoring will usually be undertaken by personnel outside the operations area or at least not involved in operations processes. The monitors are independent third parties. It is easy to confuse QA with QC. QA is similar but there are some basic differences. QA is process-oriented while QC is concerned with evaluating the product. This means that QA is less concerned with the output of goods or services and more concerned with the way the product has been produced. In terms of overall management of both QC and QA it is important to establish overall plans along with a finite timetable of activities and a cut-off date for reporting. With both QC and QA, having a plan is an essential part of the system. The plan should outline what control and assurance activities will be implemented and a timetable for this. The timetable should also include a definite date for reporting. Quality improvement Quality improvement (QI) is a process which aims to reduce the rate at which mistakes occur in the production process. It involves analysing what has happened in the operations processes and what actions will be taken to improve performance. QI may require significant changes to be made to a product. There is a distinction between QA and QI. QA is essentially an external audit on operations processes, not output or product. In one sense there will be some employees that will resent the QA process because it seeks to find who was responsible for a mistake in the process. On the other hand, QI is exactly that—it is aimed at improvement. The objective of the process is to find out where the business is now and work out ways to make things better. Unlike QA, QI deliberately avoids apportioning blame. KCq page 130 Outline the role of marketing in management process.

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Marketing is the process that connects customer wants with business products. ‘Products’ refers both to the goods we buy and the services we use. Businesses create products that are purchased by customers. These



2.3.3 Marketing



customers can be individual consumers or other businesses that are buying the products to use in their own production line. Marketing gives customers the opportunity to purchase the products they want at the right price and place. Marketing provides businesses with the opportunity to create products, make profits, improve market share and fulfil their goals and objectives. Marketing has a central strategic role as it brings together the products of the business and the customers for those products. Successful marketing is the key to a successful business. The strategic marketing process involves the planning, pricing and promotion of the products of the business as well as the distribution and servicing of the product. This is all covered in the marketing plan. The marketing plan depends for its success on the plans of other business functions: it relies on operations to create products of the right quality, on human resources for the best staff and on accounting and finance for adequate funding of marketing strategies. A business must understand what the customer wants to ensure the development of the right products for the right target market. The ability of a business to understand its customers and be responsive to the changing wants and needs of its target markets will allow efficient allocation of resources and greater market share. This contributes to the profit margin and growth of the business.

Identification of the target market The target market is the specific segment of the total market that the product is aimed at. Most businesses will undertake some level of market research to identify their target market. This will give the business knowledge about who the customers (consumers) and their product needs are. Conducting market research allows the business to divide its market into segments. Market segmentation is the way in which a business divides its potential market into different groups, or segments. Once these segments are identified, specific products can be developed to meet the needs of consumers. Consumers can be grouped according to: ◗ demographics—age, sex, marital status, job, level of education and income ◗ sociocultural factors—religion, cultural background ◗ geographics—location (urban, rural, inner city, suburbs) ◗ psychographics—lifestyle and buyer behaviour (needs, wants, personality, impulse behaviour). An example of a psychographic consumer group can be found within the total mass market for milk, whereby people with low calcium levels who are watching their weight would prefer to buy high calcium, low-fat milk. This would be a psychographic consumer group as it relates to the consumers’ lifestyle and buyer behaviour.

Outline the identification of the target market as part of management process.

Table 2.3 Five common marketing strategies for different target markets Marketing strategy

Description

Examples

Undifferentiated

A business provides one product for the whole market

Electricity or gas

Differentiated

Different products are created in a market for different customers

Motor vehicles—family sedans, utilities, vans

Concentrated

A business focuses its product on one segment of a market

Rolls-Royce cars

Niche

A market segment is identified and catered for with specially developed products

Food for the lactose intolerant

Micro-marketing

The needs of an individual are catered for

Tailor-made clothes


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Marketing mix

Outline the role of the marketing mix in management process.

The marketing mix is at the centre of a business’s marketing strategies. It comprises all the things a business can do to increase demand for its product and give it a competitive marketing advantage. The ‘Four Ps’ of product, price, promotion and place make up the basis of the marketing mix. These are outlined in Figure 2.11. • Positioning • Branding • Packaging

• Distribution channel • Intermediaries • Physical distribution

Product

Price

Place

Promotion

• Methods • Tactics • Price/quality/ interaction

• Personal selling • Advertising • Below-the-line promotions • Public relations

Figure 2.11 The ‘Four Ps’—components of the marketing mix

Outline product as part of the marketing mix.

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Product A product is a good or service that satisfies a customer’s need or want. Every product is a combination of tangible and intangible benefits. The tangible benefits of a computer are its physical appearance, operating system and memory size, while the intangible benefits are feelings such as belonging, status and the opportunities associated with having the product, including after-sales service (e.g. the AppleCare Protection Plan). To the consumer, products represent a bundle of benefits that satisfy their needs. In marketing those products, businesses need to think in terms of both tangible and intangible benefits to ensure effective positioning, branding and packaging strategies. Positioning involves the development of a product image (in the mind of the consumer) in relation to other similar products. Price, quality, perceived benefits and competition are key methods of positioning. A business needs to understand their product’s point of difference with competitors’ products to assist in the positioning, and thus the perception, of their customers. For example, R.M. Williams are positioned to produce high-quality and high-priced clothing made in Australia. Customers will expect that the clothes will fit well, be hard wearing and long lasting. The point of difference is that they are Australian designed and made. Branding involves the development of names and symbols in the form of logos and trademarks for a product or service. This identifies the product and helps to differentiate it from competitors. A producer will promote its brand or symbol so that it may become widely recognised, memorable and favoured in the mind of consumers. It may even become so widely known that the brand becomes the product, such as iPod for MP3 player and Blackberry for personal digital assistant (PDA). Businesses register their brand names, trademarks and logos and strongly defend their ownership and exclusive rights to these symbols (e.g. by lawsuits against competitors using the symbols). Developing brand awareness and brand loyalty are important objectives in this marketing tactic. A good brand image allows a business to set the product apart (differentiate it) from competitors and increase market share and potential profits. Brands such as Rip Curl, R.M. Williams,



Donna Karan (DKNY), Oakley and Sony allow the manufacturer to charge higher prices than competitors because of the brand’s reputation for quality and status and the trust the consumer has in it. Packaging is the way a product is physically presented to the consumer and has become a highly influential way of affecting consumer choice. Originally packaging was primarily used to protect and secure the product but it has become a specialised tactic to attract the attention of new customers, make the product distinctive and provide visual cues for repeat buyers. Labelling also contributes to this tactic, as it communicates information for the consumer (e.g. ingredients, use-by dates and relevant warnings, such as age restrictions), helping the customer make an informed decision. Business managers need to be aware of consumers’ increasing expectations of socially responsible products and concerns related to the creation of needs and materialism. Marketing managers need to find the balance between effective and excessive packaging of products, to use environmentally-friendly materials, to label the packages correctly, and to provide options for appropriate disposal. Price Price is the amount of money charged for products that are for sale. Price is an essential factor in influencing the buying decisions of potential customers. It will directly affect the amount of product sold and the profit made for the business. It is a strategy in the marketing mix that is often overlooked by managers, who may focus more on promotional strategies and tactics. There are a number of ways to regard price. To the customer, price represents the value of the product and enables comparisons to be made between it and its competitors. To the manufacturer, the price represents the cost of producing the product, as well as any mark-up for profit margin. To the government, price represents the value of the product to which the goods and services tax will be added (if applicable). To businesses buying the product as an intermediate good or service for use in their own production the price represents a cost of production. Prices will commonly be based on cost, the market and the prices charged by the competition. Businesses often find it difficult to set their prices. It is essential that managers understand the value of their product compared with those of their competition, that the buyer is aware of the value of the product, and that the manager can link the marketing objectives to the price set. Three different pricing methods are: ◗ cost based ◗ market based ◗ competition based. Cost-based pricing is a system where the business adds a profit margin (mark-up) to the cost of producing the product. The costs related to the product include fixed and variable costs. The cost per unit is calculated by dividing the total cost of production by the number of units produced. The cost per unit becomes the cost base of the price. Business will then either add a percentage mark-up or a fixed dollar amount to the price of the product. For example, a business produces an MP3 player at a cost of $100 per unit. The percentage mark-up (profit margin) determined by the business is 40%. Therefore, the selling price will be $100 + (40%  $100), which will be $140. Alternatively, the business could just add a fixed dollar amount, say $55 per unit. The selling price would then be $100 + $55 = $155.

Outline price as part of the marketing mix.


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Although cost-based pricing covers the costs of production, this pricing method ignores the state of the market or market demand. Using either the percentage mark-up or the fixed profit amount, the business may have settled on a price that is too much for the market to support, so that customers do not buy the product, or far too low, limiting the profit return. Market-based pricing is a system where prices are set by demand and supply of the market. This means that prices will be established where demand meets supply. If there is a large demand but little supply, prices will be higher. Conversely, if there is a large supply but little demand, prices will be lower. If retailers are left with large quantities of the product in stock this is an indication that the price is set too high. On the other hand, if the product is continually sold out this indicates that the price has been set too low. The online marketplace eBay uses market-based pricing. Competition-based pricing is a system where a business sets its prices based on its competitors’ prices. This does not mean that all businesses selling a particular product will charge exactly the same price. Depending on the positioning, branding and relationship marketing for the product, some businesses will charge a higher price than others. For example, computer game console producers such as PlayStation, Xbox and Wii use competition-based pricing to help set their prices. Managers will choose different pricing strategies for their products depending on their marketing objectives and other internal and external factors. These could include the need for high profit returns, greater market share, quick sales to assist liquidity, high levels of competition or low consumer confidence. Managers need to review these pricing tactics regularly to make sure they are in line with their objectives, financial needs and the current business situation. Pricing strategies include: ◗ skimming ◗ penetration ◗ loss leaders ◗ price points. Skimming involves setting a high price while demand for the product is great and before competitors enter the market. This will occur when a new product is introduced. It gives the business quick profits because of the high profit margin. It is likely to be used if the product is unique or when a new product, with unknown demand, is launched. The strategy has a better chance of success if there are not many substitutes and there are enough customers willing to buy the product. For example, recent release DVDs are priced higher than others, at over $30. This type of pricing relies on customers’ specific psychographic factors. The length of time price skimming can be used for a DVD is limited because the product is not ‘new’ for long and there are many other DVDs competing for the consumer dollar. Penetration pricing involves setting the price of a new product lower than the prices of competing products. This is used in the introduction stage of the product life cycle to undersell the competing products, gain market share and develop brand loyalty. This strategy is often used to launch a new product at an ‘introductory price’. This tactic could be successful if there is little brand loyalty and customers are sensitive to price moves. Managers will, however, have to be careful that they have customer loyalty before they increase prices or they risk losing customers to other price-competitive substitutes. An example of this is hair shampoo at the grocery store. The average price of hair shampoo at Coles and Woolworths is $5–10, depending on

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the brand. A new shampoo comes onto the market and is initially priced at $4.50. This encourages customers to try it out and, if they like it, they may develop brand loyalty and continue to purchase the product once it enters the growth stage and the price increases. Loss leaders are products that are priced well below cost in order to attract customers. If the products are well known and advertised extensively, customers who buy these products would be expected to purchase other products being sold at regular prices at the same time. Supermarkets, electrical goods stores and bottle shops use this strategy by offering ‘specials’ to attract customers, who often then purchase other products as well. For example, Harvey Norman may offer prints from your digital camera for 15 cents, even though the prints cost the business 20 cents to print. Once you are at the shop, however, you may decide that you want to get one of your photos put onto canvas. Price points are psychological pricing strategies that are based on customers’ perception of value for their money. Two types of price points are: ◗ setting prices at a point, such as $19.95, where customers think they are not paying as much for the product as they really are ($19.95 seems more like $19 than $20) ◗ pricing a ‘base level product’ to attract customers’ attention to a range on offer. The product range will include products with additional features at higher prices. Each price connected to an additional feature is said to be a price point related to the customers’ perceived value of the product and the amount they are willing to spend. We have seen that price establishes a value in the mind of the consumer. Consumers also make judgements about quality based on the price of products. There is a general assumption by consumers that the higher the price of a product, the better the quality. Clothes, technology items, gemstones and wines are often positioned to reflect this price–quality association. This assumption is not always correct and businesses have been known to increase sales of a product simply by increasing its price, even when the quality of the product has not changed. Promotion Outline promotion as part of the marketing mix. Promotion is a means of communicating with the market about a product. The objective of promotion is to create an image of the product in the minds of consumers that will generate sales. It is used to let consumers know about the benefits of a product and to persuade them to buy it. Publicity Advertising and public A number of strategies are used in the promotion of products including: relations ◗ personal selling ◗ advertising Promotional ◗ below-the-line promotions mix ◗ public relations. The promotional mix is the combination of promotion techniques used Personal to inform and influence a target market. There are four main methods Sales selling and that make up the promotion mix: personal selling, advertising, belowpromotions relationship the-line promotions and public relations. marketing Personal selling is generally the most successful strategy for many products and services. It involves personal interaction between the salesperson and the customer. Sales representatives, through their depth of knowledge and Figure 2.12 The promotional mix personal characteristics, attempt to persuade the customer to purchase their product. Although this is an expensive method of promotion it allows the representatives to adapt their messages to suit the situation.


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The main feature of this method of promotion is the interaction and personal contact. The salesperson is able to explain the features of the product, including demonstrating the operation where applicable, and the customer is able to ask questions. Sales representatives are able to adjust their sales approach depending on the target market. A major advantage of this approach is that a sale can be made at any time in the approach by mutual agreement. Advertising uses the media, such as television, radio, the internet, newspapers, magazines and billboards, to communicate with the public about a product. The cost of using each medium varies, with television being the most expensive. Advertising is often used to build up a brand image over time, as done by Qantas and Telstra. The advertising medium chosen by a business will depend on factors such as cost, the target market and the marketing objectives aligned to the tactic. For maximum retention, the advertisement should present the product’s image in a unique way. Although it is an important marketing strategy, advertising does not always give value for money because of its high cost. Each medium has its advantages and disadvantages and managers will need to consider this carefully in their decision making. Below-the-line promotions include free samples, point of sale displays, competitions, discounts, cash refunds, free gifts and two-for-one deals. This type of promotion is often used to introduce a new product or give an immediate boost to sales revenue. These promotions often give a product a point of difference compared to its competitors. Public relations (PR) is concerned with developing a positive public image that is reported by relevant television, radio, print and online media outlets as news items. PR is thought of as ‘free advertising’, as it can introduce a product to a wider group of people at a lower price than other methods of promotion and help build brand awareness and trust. PR has been used effectively by Richard Branson, with his Virgin brand, and McDonald’s, with Ronald McDonald Houses. There are risks in this approach as managers have less control of the story and negative publicity may result. For effective PR, managers need to do their research on the best media outlet, be prepared for difficult questions and maintain a professional working relationship with journalists. Opinion leaders are people such as celebrities, sportspeople and experts in specialised fields (e.g. dentists), as well as organisations such as CHOICE (formerly the Australian Consumers Association) whose opinions are respected by the community. The expectation is that potential customers will want to model their behaviour on that of the opinion leader by purchasing and using the product. For example, Kieren Perkins and Olivia Newton-John are used in advertising Nintendo DS Brain Training, and Nicole Kidman fronts for Chanel. Magazines such as CHOICE and special interest magazines such as MacWorld are respected in a different way. The opinions given by these information sources are seen as independent and unbiased, allowing consumers to be better informed and aware of the strengths and weaknesses of a product. Marketing managers need to consider these opinion leaders when developing their public relations strategy, as the level of credibility of such publications could directly affect the sales of a product. Word-of-mouth occurs when customers who have used a product communicate their feelings about it to potential customers, usually their

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friends and families. Word-of-mouth cannot be controlled directly by businesses but it is well recognised for directly influencing how people choose a product. Businesses look out for ways to facilitate the spread of positive word-of-mouth messages about their products. New forms of word-of-mouth marketing, such as buzz marketing, are attempts by business to control this communication process. Buzz marketing involves people being paid to recommend products in an unassuming way, avoiding the ‘hard sell’ approach. For example, at a supermarket the person might have a conversation recommending a product loud enough for potential customers to overhear. With the development of internet marketing the range of word-of-mouth opportunities is vast. The use of blogs, forums, viral marketing, e-mail and social network sites such as Facebook means word-of-mouth marketing has increasing potential. Sylvie Fortin, author of an internet marketing book, noted that in 2008 most businesses still had not tapped into the full potential that the internet can provide for effective communication with the customer. Place In the marketing mix, place refers to the distribution process. In placing their products, businesses must make sure the product reaches the customers. The methods include selling directly to the public, to a warehousing firm for redistribution, to various types and sizes of retail outlets or to another producer. The distribution method and channel choice determine the distribution strategy for the business. When a manager is choosing the method of distribution the most important considerations relate to their target market’s buying behaviour. An understanding of what, where, when and how much a customer will buy will assist the business to provide the customer with easy access to their products. A distribution channel is the link between the producer and the customers of the product. It may be achieved through direct or indirect channels. Direct channels are used when a manufacturer distributes the product directly to the customer. Indirect channels are used when distribution occurs through independent intermediaries, such as agents, brokers or retailers. Intermediaries are businesses specialising in distribution and are able to get the product to the customer more efficiently than the producer. Most businesses outsource the distribution of their product to intermediaries because it is less expensive, the intermediaries have greater expertise and established networks, and the business can concentrate on its prime function. The distribution channel intensity that a manager chooses is critical to the success of the marketing plan. The channel choice will affect the type of customer, the perception of the product and the ease of access.

Outline the importance of place in marketing products.

Distribution channels

Intensive

Channel 1

Channel 2

Channel 3

Selective

Channel 4

Channel 1

Channel 2

Exclusive

Channel 1

Figure 2.13 Distribution channels link producers/suppliers and consumers.


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A manager must choose between: ◗ intensive channel distribution ◗ selective channel distribution ◗ exclusive channel distribution. Intensive channel distribution means that the product is made available in as many places as possible (e.g. supermarkets, service stations, corner stores) using as many distribution channels as possible. It is used for inexpensive, frequently bought, high demand products, such as bread and milk. These are convenience products that the customer wants to use as little effort as possible to purchase. Selective channel distribution is used when availability of products and the number of distribution channels is limited. These products are infrequently purchased and more expensive goods, which consumers will make some effort to access. Examples are Oakley sunglasses and Apple computers. Exclusive channel distribution is where individual outlets are given exclusive distribution rights, usually for expensive products such as motor vehicles (e.g. the Ferrari) or exclusive fashion (e.g. Sass & Bide). Physical distribution refers to the activities involved in moving the product from the producer to the point of consumption. It includes transportation, warehousing, inventory control, order processing and merchandise handling. A business needs to select the most cost-efficient method of moving its goods from the point of manufacture to the next stage in the selected channel. Transportation methods include road, rail, air and sea. A major consideration will be whether the product has special transportation needs (e.g. fresh flowers and seafood need refrigeration). The form of transport chosen will depend on the type of product, distance to be covered, required speed of delivery and cost. Warehousing involves the storing of products in a secure manner, with ready access so that they can be easily dispatched to retailers in smaller quantities when needed. Products in storage must be able to be accessed quickly to meet demand and this will require equipment such as conveyor belts and forklifts. Inventory control ensures products are available for sale when needed, without the business having the costly problem of holding too much stock. Many businesses operate a JIT (just-in-time) inventory control system. This minimises the amount of stock a wholesaler or retailer needs to have on hand. Major distribution centres with convenient access to transport links can process orders and deliver goods efficiently and quickly. The ordering process is increasingly becoming computerised to improve accuracy and efficiency. Businesses such as Woolworths are able to link their inventory needs directly to their order process and distribution centres. This reduces the time a business is out of stock of a product and the time to have the order completed. KCq page 130 Outline the role of finance in the management process.

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2.3.4 Finance The strategic role of financial management is to provide the financial resources to allow the implementation of the business strategic plan. The strategic plan outlines the goals, objectives and future direction of a business. Financial management involves determining the financial resources available to implement the strategies necessary to achieve the goals and





objectives of a business. The key to any business realising its objectives is the successful financing of its operations. Financial management must be flexible and adaptable to change given the dynamic nature of the business environment. A range of ongoing activities is involved in the strategic management of financial resources. These include: ◗ setting policies and procedures regarding cash and credit controls ◗ determining the mix of equity and debt finance raising ◗ budgeting, including monitoring actual and planned performance ◗ record keeping and analysis through the use of financial statements and ratios ◗ implementing financial controls ◗ taxation management. The focus of this section will be on record keeping, where managers are involved in monitoring and controlling the finances of the business. Financial information provides managers with important data to assist their decision making with regard to reaching the financial objectives and goals of the business. Financial information gives managers and other stakeholders a record of past performance. This is used to identify areas performing strongly and areas of concern. From this analysis, managers can prepare strategies and plans for the future. Accounting is the collection, analysis and interpretation of financial information. Its essential role is to provide a control process by which managers can assess their operations and take corrective actions where appropriate. Three types of significant financial statements are: ◗ cash flow statements and cash flow forecasts ◗ the income statement (or revenue or profit and loss statement) ◗ the balance sheet, which businesses now refer to as the statement of financial position.

Case

study:

Coco’s Coastal Café

Coco’s Coastal Café is a hypothetical business located on the Far North Coast of NSW. It has a great location overlooking the beach and tourists and locals flock to the café in summer and winter to enjoy the fine food, superb service and incredible location. People can relax and enjoy a meal or coffee before or after a swim in summer or shelter from the cooler southerlies in the winter while watching the humpback whales migrate up and down the coast. Coco has what he feels are good management skills where he employs strategic thinking and vision in managing the café. He has good people skills, is adaptable to change, makes decisions after consultation with his team and has high personal standards. Coco is a good financial manager and has financial goals that include:

Students learn to: investigate aspects of business using hypothetical situations and actual business case studies to examine effective cash flow management and assess the role of the income statement and the balance sheet when describing the financial performance of a business.

◗ satisfactory liquidity and efficient working capital management ◗ acceptable net profit ◗ growth of the business ◗ a good return on the capital he has invested in the business. You will have the opportunity to analyse Coco’s cash flow statement, income statement and balance sheet.


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Outline the role of cash flows in financial management.

Explain the purpose of the cash flow statement.

Cash flows Cash flow is the difference between cash inflows (money coming into the business) and cash outflows (money going out of the business). For a business to survive it is necessary to have more cash inflows than cash outflows. A cash flow budget helps a business to predict the inflows and outflows over specified periods of time, usually for periods of one to three months. Cash inflows and outflows will not always be regular. By planning ahead a business can respond appropriately to periods of lower cash inflows and periods of excess cash. Close monitoring of the cash flow position is important so that the business can meet its short-term financial commitments and take advantage of excess cash periods to assist the growth and profit of the business. Maintaining an adequate cash flow is a major goal of any business.

Cash flow statement The cash flow statement is an important financial report that forecasts the monthly cash inflows and outflows of the business. This statement helps business managers meet their financial obligations and respond to periods of cash shortages and surpluses. On the next page is an example cash flow statement for Coco’s Coastal Café. It does not show all the itemised cash inflows (receipts) and cash outflows (payments). Each month begins with the opening bank balance. To this is added the monthly inflows (receipts). Cash payments (outflows) are subtracted from this amount to give the net cash situation for the month. This amount becomes the opening balance at the bank for the next month. If the net cash at the end of the month is close to zero or negative the business will have a cash flow management problem and trouble paying its accounts in the coming month. There are several steps that a business can take to manage its cash flow effectively so that there is sufficient cash to meet immediate needs. With cash receipts, a business can manage inflows of cash by: ◗ providing discounts for early payment of accounts or surcharges for late payment ◗ using online banking options such as Bpay ◗ selling assets and leasing them back ◗ using factoring, whereby a business sells its accounts receivable to a factoring business for a discount—while there is some loss, the business has cash in hand rather than trying to chase up debtors ◗ using an overdraft to make up for occasional shortfalls of cash. With cash payments a business can manage outflows of cash by: ◗ arranging for utility bills (power, telephone, insurance) to be paid monthly rather than yearly ◗ delaying payments until the last available moment but ensuring that payments are not late ◗ seeking discounts for early repayments.

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Cash flow statement for Coco’s Coastal Café January to June 2011 Amounts in $’000 Item

Jan

Feb

Mar

Apr

May

Jun

Opening balance at bank

10

40

65

55

75

70

Receipts

80

70

40

60

50

40

Students learn to:

Payments

50

45

50

40

55

50

Net cash (Cash balance)

40

65

55

75

70

60

investigate aspects of business using hypothetical situations and actual business case studies to examine effective cash flow management. Use the short-answer question on Ben and Lucy’s Bookstore (page 133) to examine effective cash flow management.

Figure 2.14 Example of a cash flow statement

Receipts are added to the Opening balance at bank. From this total, Payments are subtracted. This leaves the Net cash at the end of the month. This amount becomes the Opening balance at bank for the next month.

Income statement

Explain the role of the income statement.

The income statement is also referred to as the profit and loss statement or the statement of financial performance. It outlines the level of revenue (sales), costs of goods sold and operating expenses, and calculates whether a business has made a profit or loss over a particular period of time, usually a year. If revenue is greater than expenses, then the business will make a profit. Alternatively, if revenue is less than expenses, the business will make a loss. An income statement is essential to understanding changes in profits and expenses during the reported period and over time, and can be compared with those of other businesses and against standards. Key terms and calculations to understand for the income statement include: ◗ Sales revenue = all goods sold ◗ Cost of goods sold (COGS) = (opening stock + purchases)  closing stock ◗ Expenses = Total operating costs of the business ◗ Gross profit = Sales revenue  COGS ◗ Net profit = Gross profit  expenses. Coco’s Coastal Café Income statement for the year ending 30 June 2011 $’000 Sales revenue

900

Less Cost of goods sold

500

Gross profit

$’000

400

Less Operating expenses Selling expenses

50

General expenses

40

Depreciation

30

Total operating expenses

120

Operating profit

280 70

Less Interest payment on loans Net profit before tax

210 63

Less Tax Net profit after tax

147

Figure 2.15 Example of an income statement


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The sales revenue for Coco’s Coastal Café would include both cash and credit sales. In Coco’s business, most of the sales revenue was made up of cash sales ($700 000) with the rest being credit sales. To arrive at the cost of goods sold, Coco would need to value his stock at the beginning of the statement period and add to that stock any purchases he makes during the year. He would need to subtract from that amount the value of any stock he had left over at the end of the year. Selling expenses would include advertising and wages. We have assumed that Coco’s business is incorporated, that is, Coco has made his business into a company and he pays the company tax rate of 30%. Describe the purpose of the balance sheet.

Balance sheet The balance sheet is a statement showing the financial position of a business at a particular point in time (usually 30 June). The balance sheet shows the short- and long-term assets (what the business owns) and the short- and long-term liabilities (what the business owes) and the equity (capital provided by the owners). The document is called the balance sheet because one side balances with the other. This is explained further in the following section on ‘The accounting equation and relationships’. A balance sheet is essential in assessing the level of liquidity, gearing and solvency. This will influence the decisions of financial managers regarding appropriate sources of finance for the business. Coco’s Coastal Café Balance sheet for the year ending 30 June 2011 Assets

$’000

Current assets

Liabilities

$’000

Current liabilities

Cash

50

Bank overdraft

10

Accounts receivable

20

Accounts payable

15

Inventory

30 100

Non-current assets Equipment and furniture

Non-current liabilities 60

Motor vehicle

30

Investments

40

Intangible assets Goodwill

25 Mortgage

Total equity 10

Capital Add Profit Less Drawings

Total assets

75

240

Total liabilities and Total equity

50 147 57 240

Figure 2.16 Example of a balance sheet

Intangible assets are assets that are not physical in that they cannot be seen or touched. The intangible asset of goodwill, for example, represents the value that a new owner of Coco’s business would get or the contribution to the profitability of the business because of the rapport that Coco has developed with customers in general. Drawings represent what Coco has taken out of the business for his personal needs.

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Table 2.4 Key terms to understand for the balance sheet Term

Explanation

Examples

Current assets

Short-term assets that can be changed into cash quickly— within the year—to help pay short-term debt

Cash at bank, inventory (stock), accounts receivable (debtors)

Accounts receivable (also referred to as debtors)

Amounts owed to the business by people—these people are in debt to the business

Goods or services that are ‘buy now pay later’

Non-current assets

Longer-term assets that are used to assist business production and are used for more than one year

Buildings, property, equipment, furniture, computers, motor vehicles

Total assets

Current assets + non-current assets

Current liabilities

Short-term debts of the business that must be repaid within the year

Overdrafts, accounts payable (creditors)

Accounts payable (also referred to as creditors)

Amounts the business owes to other people—the business has received trade credit from other businesses and must repay in the short term, usually 30–60 days

Suppliers that get paid at the end of the month

Non-current liabilities

Longer-term debts to be repaid over periods greater than one year

Mortgages, bank loans

Total liabilities

Current liabilities + non-current liabilities

Total equity

The investment (capital) contributed by the owners of a business—it is the owners’ share of the total value of the business after debts have been paid—this capital is owed to the owners by the business

The accounting equation and relationships This basic equation shows the relationship between assets and liabilities and therefore the value of the total equity. Total equity = Assets  Liabilities OR Assets = Liabilities + Total equity. This accounting equation is fundamental to the accounting framework. The structure of the balance sheet is based on the accounting equation. This equation shows the relationship between assets, liabilities and the value of the total equity. The total equity represents the net worth of the business and is calculated by the difference between total assets and total liabilities (TE = A  L). Liabilities (total debt) must be covered before the owners can realise the worth of their capital in the business. This debt finance (represented as liabilities), in addition to total equity (retained profits and owners’ capital), contributes to the purchase of the business assets (A = L + TE).

Explain the accounting equation and its relationships in the accounting framework.

KCq page 130

2.3.5 Human resources Human resource (HR) management refers to systems that have been developed to manage people within an organisation or business. HR management involves: ◗ the planning of staff needs ◗ recruitment (acquisition) and maintenance of employees ◗ training and development ◗ the supervision and management of the performance of all employees ◗ separation of employees when they leave the business ◗ the management of issues such as conflict resolution and the changing nature of the workplace.

Outline the role of human resources in the management process.


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Strategic role of human resources The strategic role of HR is to ensure that the productivity of a business or its output per person can achieve its fullest potential because the employees are effective and efficient in the way they go about their tasks. This definition of the strategic role of HR means that it is the overall objective of HR managers to develop an environment where the chances of employees successfully carrying out their tasks are high. This clearly places the focus of strategic HR management on the output or the results achieved by the employees. There has been a large volume of research into strategic HR management and much of this research concludes that the idea of best practice in HR management will give a business a competitive advantage through its employees ‘building profits by putting people first’. Outline the recruitment process in human resources.

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Recruitment Recruitment of HR is sometimes called acquisition. The HR function of a business will have identified the need to recruit staff in a particular area. In the recruitment stage, society at large is informed that a business needs a number of employees. The way in which society is informed can be by advertisements in newspapers or journals or online or perhaps even on electronic media such as radio or television. The advertisement will usually be in the form of a job description which will contain information such as: ◗ position title and position number ◗ remuneration or salary scale ◗ a contact person within the business ◗ a short description of the role ◗ a list of duties ◗ the skills and qualifications needed for the position ◗ a set of criteria to which the applicant can respond in a written application ◗ an address to which applications can be sent (either by post or e-mail) ◗ a closing date for applications. Recruiting HR is most concerned with: ◗ ensuring that there are stable workforce levels and that the business does not suffer because a position needs to be filled ◗ preventing a high rate of turnover, especially with new employees— turnover can be expensive in any organisation as the whole acquisition process needs to be put in motion again if a new employee does not last ◗ succession planning and ensuring that key roles in the business are filled as soon as possible ◗ acquiring employees within the budgets established by the finance function. Once an advertised position has closed and there is a ‘pool’ of applicants, a selection process will take place. In larger organisations and state and Commonwealth public services this process is usually a merit selection process. This will involve: ◗ establishing a selection panel ◗ ‘culling’ the applicants, which involves selecting only those applicants that the panel feels will best fill the position ◗ notifying the selected applicants of the interview place and time ◗ conducting the interview ◗ selecting the successful applicant and notifying him or her ◗ notifying unsuccessful applicants ◗ notifying the appropriate HR manager of the outcome of the selection.





Some recruitment processes may involve written tests and medical examinations. HR personnel involved in the recruitment stage follow strict procedures and keep detailed records to avoid any challenge on the grounds of discrimination from an unsuccessful applicant. There are two broad areas from which businesses can recruit suitable people to fill a vacancy—from within or from outside the business. Internal recruitment Internal recruitment means that a business will try to fill a position from within the organisation. This may involve promotion or a change in role for the successful employee. Internal recruitment is good for filling job positions which require knowledge of the organisation and its corporate culture. Because the business is recruiting from within its own ranks there needs to be a clearly defined set of procedures to prevent different managers from ‘poaching’ talented staff from other departments. Another concern is that the recruitment process is transparent and fair. Methods of internal recruitment include: ◗ the use of staff notice boards ◗ intranets ◗ in-house bulletins or newsletters ◗ staff meetings. External recruitment External recruitment means that a business will look outside its own ranks to fill a position. It is appropriate to do this if a business is expanding into a totally new area or it needs the skills and advice that it knows do not exist among its own employees. Methods of external recruitment include: ◗ job centres such as Centrelink or private job agencies ◗ job advertisements—the most common form of external recruitment ◗ recruitment agencies provide employers with details of suitable candidates for a fee—they are sometimes referred to as ‘head-hunters’ and often specialise in particular employment areas ◗ personal recommendations—often referred to as word-of-mouth and can be a recommendation from a colleague at work. With each type of recruitment there are advantages and disadvantages as indicated in the table below. Table 2.5 Advantages and disadvantages of internal and external recruitment Internal recruitment

External recruitment

Advantages

◗ There is a lower cost and the process is quicker because recruitment is from within the business ◗ It may improve the morale of existing staff ◗ It should only require a short induction period ◗ It provides for recognition of, and reward for, good performance of internal staff ◗ The business is aware of the skills and abilities of the person selected

◗ It avoids the jealousy that could arise if an inside favourite is promoted ◗ There is a larger pool of potential employees to select from ◗ It can lead to a change in the culture of the business as an outside recruit brings new ideas and a fresh perspective to the job

Disadvantages

◗ It can reinforce existing negative attitudes within the business ◗ Limits the number of potential candidates for the job ◗ It runs the risk of ‘group think’, where there are no new ideas coming into the business and the person selected will think how he or she has been conditioned to think by the culture of the business ◗ Problems can occur if most of the candidates for the position are from the one department ◗ Those that are not promoted may become discontented ◗ It may encourage ‘in-fighting’ for promotions among internal staff ◗ The business does not gain new skills and competencies

◗ The person selected may clash with the culture of the business ◗ A long period of orientation and induction may be needed ◗ Internal applicants who were overlooked may face a slump in morale ◗ The selection process may take longer than for an internal appointment ◗ External recruitment is more costly than internal recruitment


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Outline the training process in human resources.

Training The second HR management function is training, which is sometimes referred to as development. Broadly speaking, training is concerned with improving the skills and performance of employees through educational programs. These programs may be offered in-house or by a provider outside the business. The four strands to this process are: ◗ induction ◗ performance appraisal ◗ training ◗ development. Induction is the educational process of making a transition to a new workplace and even a new role. The main idea behind induction is to familiarise the new employee with the workplace so that performance will be more effective. Induction will probably be offered in two formats—a face-to-face ‘hands-on’ induction where new employees are introduced to the workplace by a supervisor, and online or written induction courses where the new employees are required to complete programs and submit them by a due date. Induction may involve the new employee completing programs including: ◗ an introduction to the business which provides the employee with essential information on the history and corporate culture of the business and an awareness of the geographical layout—e-mail addresses, passwords and security codes may be issued here ◗ customer service so that new employees understand the nature and the needs of the customers of the business ◗ occupational health and safety training, especially training specific to the needs of the business ◗ equal employment opportunity and anti-discrimination programs that apply to the business ◗ any issues in the business that deal with legal compliance (for example, confidentiality for a receptionist at a medical clinic) ◗ record-keeping requirements ◗ leave requirements. Performance appraisal is a process of evaluating the performance of employees. It is usually conducted by an employee’s supervisor and may take the form of evaluating work samples as well as formal and informal interviews. The appraisal will help to rectify any problems that the employee has encountered working for the business. Other outcomes of performance appraisals may include promotion, an increase in pay or the payment of an annual bonus. Sometimes negative feedback at an appraisal can find an employee placed on an improvement program or even having his or her employment terminated. Training involves educating an employee in the skills and processes of the job that the employee currently holds. Many employees that are hired are apprentices and will be required to work with a master tradesman as well as attend an appropriate TAFE course. Some training will be carried out in-house, while other training may involve completing correspondence or online courses. Development involves selecting employees for educational programs that focus on roles that the employee may aspire to in the future. Development usually applies to employees who have been identified as having the potential to fill future managerial positions. It is usually a long-term

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educational process which may even involve the employee enrolling in part-time or correspondence university courses. Within the development program will be strands involving knowledge, changing attitudes and increasing skills.

Employment contracts

Outline employment contracts in human resources. Employment contract

Common law (judge-made law)

Statutes (parliament-made law)

Awards

Agreements

Figure 2.17 Legal framework of the employment contract

Laws made by parliaments (statute laws) and common law decisions (that is, laws made by the courts when giving decisions in cases before them) form the legal framework of employment relations and provide the basis for employment contracts. The purpose of the framework is to: ◗ provide protection for employees and employers ◗ provide guidelines to deal with disputes and issues ◗ help create an efficient and fair workplace. Contracts are agreements between employers and employees to ensure that responsibilities are performed and rights are protected. A contract usually has three parts: an offer, an acceptance and a consideration (something of value, usually skills in exchange for payment). Written and verbal contracts are legally enforceable by courts. Contracts are either contracts of service (the standard employer–employee relationship) or contracts for services, where a ‘contractor’ such as a plumber or builder will perform a specific job for a set time. Traditionally, the contract between employees and employers has been based on common law precedents (landmark decisions), which are often formalised through parliament-made law to aid consistency and fairness across workplaces. Statute law and employment contracts Most employment contracts in Australia today are based on the current federal legislation or statutes. Statutes are laws passed by parliaments and they take priority over common law. Statutes are often amended and changed to reflect changing workplace conditions and government policy. The current Commonwealth statute law that establishes employment contracts is the Fair Work Act 2009 (Cth) which establishes for most employees workplace-level collective bargaining between the employer and employees and their representatives. The Act also provides a safety net of enforceable minimum employment terms and conditions through the National Employment Standards (NES). The NES sets out ten minimum workplace entitlements which apply to all employers and employees in the national workplace relations system.


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Awards Awards are legally binding orders, usually made by a court or industrial tribunal, which define working conditions and set wage rates and other entitlements. Awards are usually industry-wide. Enterprise agreements Enterprise agreements are agreements made at an enterprise (workplace or industry) level between employers and employees about terms and conditions of employment. Fair Work Australia has the power to assist in the process of making such agreements and also has the power to deal with disputes arising under the terms of agreements and to assess and approve agreements. Enterprise agreements have terms that override any award provisions. They must comply with all employment laws requiring minimum entitlements to parental, annual and long service leave. An enterprise agreement is made between one or more employers and: ◗ employees ◗ one or more relevant employee organisations (unions). Other employment contracts Casual workers are temporarily or irregularly employed and are paid by the hour. The hourly rate may be higher than that for permanent workers but casual workers do not have leave entitlements, superannuation or ongoing permanent employment. Casual workers have less security than part-time employees as they can be terminated quickly, usually immediately. Part-time employment is employment for a number of hours less than the standard full-time hours in the relevant award or agreement. This is usually on a permanent basis. Employees are still entitled to holiday, sick and long service leave on a pro rata basis. This means that if a part-time employee is employed for half the normal working hours, he or she is entitled to half the leave entitlements of a full-time employee. Flexible employment can refer to people who are independent contractors or people employed in casual or part-time employment. Independent contractors have contracts for services and are employed for a specific task in a set time. Outline the processes of voluntary and involuntary separation in human resources.

Separation—voluntary/involuntary Separation

Voluntary • Retirement • Resignation • Voluntary redundancy

Involuntary • Involuntary redundancy • Dismissal

Figure 2.18 Voluntary and involuntary separation

Separation is the process where employees leave the business. They will leave through retirement, resignation, redundancy or dismissal. This implies that separation can be voluntary or involuntary.

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Voluntary separation involves either retirement or resignation. There may also be the category of voluntary redundancy. Involuntary separation involves the category of involuntary redundancy and dismissal. Depending on the way that an employee separates from a business, they may be entitled to considerable or very few benefits, especially in the case of dismissal. The HR department will be involved in the separation regardless of the reason. One process that will occur will be where the employee returns items that belong to the employer such as keys, uniforms, tools and equipment, laptops, ID tags, mobile phones and corporate credit cards. The separated employee will also be decommissioned from IT resources and corporate telephone systems. Finally, there will be an exit interview. Retirement can occur for a number of reasons, the most common being that the employee has reached retirement age and as a result has met the age qualification to receive a superannuation pension. In order to qualify for receipt of this pension, the employee: ◗ must have reached retirement age ◗ must plan to leave the workforce permanently. However, an employee can retire without reaching retirement age and receive superannuation pension if he or she is: ◗ medically retired ◗ retired because of disability. Obviously these last two categories will occur on the basis of comprehensive medical examinations and advice to both the employer and employee. Generally there is no set retirement age in Australia. Some view retirement age as when a person qualifies for the age pension. Many employers establish a ‘minimum’ retirement age and generally this is 55 for women and 60 or 65 for men, although with age discrimination legislation and the need to expand the workforce many older Australians are being encouraged to keep working beyond these minimum limits. Most people will retire on reaching eligible age for a superannuation pension or for sickness or disability reasons. Resignation occurs when an employee decides to leave the organisation but has not reached the age of retirement. There are a number of reasons that an employee may wish to resign from the business, including: ◗ the employee may have found a position with better compensation and benefits ◗ a new position may offer a higher level of status or promotion ◗ a new position may be a more challenging role ◗ a new position may be with a business that has more prestige than the business with which the employee is currently employed ◗ the employee may wish to have time out of the workforce for a number of reasons. Resignation will involve the employee formally giving the employer the appropriate notice. In many occupations this is one month although the harder it is to fill a position, the greater will be the period of notice. Voluntary redundancy usually occurs when a business wants to reduce its labour force. In many cases, voluntary redundancy will be offered to employees nearing retirement. The employee has the choice to take the redundancy package or to remain in employment with the business. Redundancy packages are comprised of:


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◗ a payment for years of service (for example, four weeks pay for each of the first five years of completed service plus three weeks pay for each year after the fifth year) ◗ payouts of recreation or other payable leave ◗ payout of long service leave ◗ payout or rollover of any superannuation funds. With voluntary redundancy the employee is free to seek employment elsewhere. Involuntary redundancy means that an employee is retrenched without wanting to be. It is usually not related to poor performance at work but because of economic cycles and the need for the business to reduce its workforce. Employee entitlements with involuntary redundancy are usually the same as for voluntary redundancy. Dismissal occurs when an employer terminates an employee’s position, usually because the employee has either performed poorly or for criminal acts against the employer. In Australia, an employee can be fairly dismissed if the conduct of that employee is serious enough to justify dismissal. Serious misconduct includes theft, fraud, violence and serious breaches of occupational health and safety procedures. For a dismissal to be deemed fair it is sufficient that an allegation of theft, fraud or violence has been reported to the police. In other cases, the employer must give the employee a reason why he or she is at risk of being dismissed. The reason must be valid and based on the employee’s conduct or capacity to do the job. KCq page 130 Describe ethical business behaviour.

2.3.6 Ethical business behaviour Managers need to focus on the quality of their management both of people and processes. People need to be treated ethically and fairly with respect for their rights. Processes need to be implemented so that the highest quality of output can be achieved at the lowest cost with the least impact on the environment. There is a difference between complying with or obeying the law on the one hand and ethical business behaviour on the other. Legal compliance involves making sure that the laws and regulations relating to the operation of a business are strictly observed. Most of our laws are based on ethical principles but this does not necessarily mean that strict compliance with the laws relating to business operations is ethically responsible. It is possible for a business to undertake legal compliance while not being ethically responsible, simply by just obeying ‘the letter of the law’. Ethical responsibility in managing a business is where managers understand value systems and morality or what is ‘right’ or ‘wrong’ with regard to the production of goods or services. Ethical managers will implement programs where the operations of a business not only comply with the law but will also build into those programs morally and socially appropriate processes. A most important area of ethical responsibility relates to how managers deal with all the stakeholders of the business. The Australian Institute of Management has a Code of Conduct and Guides to Good Management Practice to assist managers in their daily operations. The Personal Guide to Good Management Practice is reproduced on the following page.

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Case

study:

Ethical management

Guides to Good Management Practice

Students learn to:

Managers have personal responsibilities, and should:

investigate aspects of business using hypothetical situations and actual business case studies to identify the qualities of managers who have exhibited high personal and ethical standards.

1. Demonstrate integrity and humanity and observe the principles of the UN Declaration of Human Rights, avoiding all discriminatory practices including those relating to race, sex, religion and politics. 2. Have regard for the interests of society in acting loyally and honestly in carrying out the policies of the organisation. 3. Not injure or attempt to injure, maliciously or recklessly, directly or indirectly, the professional reputation of others. 4. Respect the confidentiality of information which comes to them in the course of their duties. 5. Engage in continued learning to improve managerial competence and pursue new ideas and advances in technology. 6. Accept only such work as they believe they are competent to perform and as necessary obtain expert advice. 7. To respect the codes of other institutes and associations relevant to their responsibilities. 8. When called upon to give a professional opinion, do so objectively as possible. Reproduced courtesy of the Australian Institute of Management

There are also guides for the manager and the organisation and the manager and the community.

CASE STUDY: Glenn Stevens

Case

study:

Glenn Stevens

By the end of 2014, Glenn Robert Stevens had been Governor of the Reserve Bank of Australia (RBA) since 2006. This position is one of the highest offices in Australia because the Governor of the RBA oversees the monetary policy of the nation. This policy determines the interest rates which impact on businesses and individuals throughout the country.

Students learn to: investigate aspects of business using hypothetical situations and actual business case studies to identify the qualities of managers who have exhibited high personal and ethical standards.

Announcing his appointment in August 2006, Peter Costello, the then Treasurer said, Mr Stevens has impeccable credentials and the necessary experience which will enable him to accept the important responsibilities associated with the position as head of the Reserve Bank of Australia. The government is confident that the Bank and Australia will benefit greatly from the dedication and expertise he will bring to this office. Stevens was born in Sydney in 1958. He was educated at the University of Sydney where he received the degree of Bachelor of Economics with first class honours in 1979. He subsequently obtained a Masters degree from the University of Western Ontario.


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In 1990 Mr Stevens accepted a position as Visiting Scholar at the Federal Reserve Bank of San Francisco (the Federal Reserve is equivalent to the RBA). On his return to Australia he took up a position with the RBA as head of the Economic Analysis Department. Subsequently, he was appointed head of the International Department, and was Assistant Governor (Economic) from 1996 to 2001, prior to his appointment as Deputy Governor in December 2001. As governor of the RBA, Glenn is committed to the style of operation of the Bank established under previous governor, Ian Macfarlane. This includes the independence of the Reserve from government manipulation, the two–three per cent inflation target over the course of the economic cycle, and the accountability of the Reserve when the decision is made to change interest rates. Early in 2008, before the Global Financial Crisis (GFC) impacted on the world, the RBA Board, under Stevens, lifted the official interest rates by 50 basis points (0.5%). Stevens drew strong criticism from the media but maintained the interest rate stance until it was clear that the GFC would have a serious impact on employment and economic growth in Australia. By the end of 2008, the Reserve Bank board, chaired by Stevens, had cut interest rates a total of 300 basis points (3%). Monetary policy under the management of Glenn Stevens and the Reserve Bank Board has delivered low levels of inflation with reasonable economic growth and relatively low unemployment, while other western economies have suffered during the GFC. Governor Stevens is Chairman of the Reserve Bank Board. He is also chairman of the Payments System Board, the Council of Financial Regulators and the Financial Markets Foundation for Children. In addition, he serves as director of the Anika Foundation. The Anika Foundation was set up in 2005 to raise funds for the purposes of supporting research into adolescent depression and suicide. Depression and suicide have become one of the largest (but least supported) medical and social problems of our time. Professionals on the board of the foundation work on a completely voluntary basis using their expertise to make investments.

Personal life Stevens is a committed Christian and plays the guitar at his local church. He has spent most of his life living in the Sutherland Shire. He is also a recreational pilot with a Commercial Pilot License (CPL). Material adapted from www.rba.gov.au/about-rba/people/gov.html

KCq page 131

page 133

2.4 M anagement and change The pace of change in business is increasingly rapid. Change may involve using new and different technologies, restructuring operations, developing new products, using different marketing techniques and using different employment practices. Change is a necessary response to the shifting business environment and is essential for a business to remain competitive. In responding to change business managers may find it necessary to alter objectives in the strategic plan, adjust aspects of production, staff

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management and the marketing mix, or take corrective action to improve performance or respond to stakeholder feedback. As a business moves through the business life cycle it will find that competition from other businesses has diminished the competitive advantage that the business had in earlier stages. In order to re-establish that competitive advantage managers will need to be prepared to consider and implement change.

2.4.1 Responding to internal and external influences In Chapter 1 we learned that businesses operate in the business environment. The business environment refers to all of the factors that ‘surround’ a business and have an impact on it. Two areas of this environment—external and internal influences—have significant impacts on businesses and each business will need to develop responses to changes in these influences. External influences have an indirect impact on a business and the business has very little control over them. These include economic, financial, geographic, social, legal, political, institutional, technological, competitive situation and market influences. Internal influences have a direct impact on a business and the business has some control over them. They include products, location, resources, management and business culture. Businesses also need to consider internal influences that impact on them as a result of accelerating technology. These include: ◗ e-commerce ◗ new systems and procedures ◗ new business cultures.

Outline management responses to internal and external influences.

Sources of change External sources of change

Internal sources of change

• Changing nature of markets • Economic • Financial • Geographic • Social • Legal • Political • Technological

Effects of accelerating technology including: • E-commerce • New systems and procedures • New business cultures

Figure 2.19 Internal and external influences

The external and internal influences that impact on businesses were covered in depth in Chapter 1 (pages 28–46). Businesses need to develop the ability to respond to the challenges that arise from the impacts of these influences. Examples of this include responding to changes in external influences such as: ◗ changes in industrial relations legislation ◗ changes in laws affecting carbon emissions by businesses ◗ changes in society, such as the changing roles of women and changing work patterns. Businesses need to consider how the impact of accelerating technology will affect all aspects of their operations. Chapter 2 • BUSINESS MANAGEMENT © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 115

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Internal sources of change are changes that occur within the business. There is a wide range of internal influences but the focus, in this case, is on how accelerating technology affects the internal business environment through e-commerce, new systems and procedures and new business cultures. Businesses adopt new technology in order to achieve efficiencies and to remain competitive and relevant to the market. New technology includes hardware, software, data storage, design, production and communications. New technology only achieves its maximum benefits when employees understand the purpose of and need for the technology and are effectively trained in its use. It is important that the infrastructure is available to support the technology network. E-commerce E-commerce is the buying and selling of products on the internet. It is a growing area of business operations as it allows consumers fast and convenient access to goods and services, opportunity to undertake comparison shopping, safe transfer of funds, product delivery, support and marketing opportunities. The number of internet users worldwide has increased. In 2005 16% of the world’s population—1.04 billion people—were using the internet. By 2014 this usage had grown to 40% of the world’s population—2.88 billion people. In October 2014 the Australian Communication and Media Authority (ACMA) released its Consumer engagement in e-commerce report, which showed that 88% of household internet users had performed at least one e-commerce activity in the six months prior to the report being published. This change to business operations has led to a need for a range of new rules and regulations to provide security and privacy. Many traditional business methods have been replaced by new techniques and many businesses have benefited from the opportunities provided by the adoption of e-commerce practices. The following example indicates the power of e-commerce.

EXAMPLE: eBay Inc. eBay began in 1995 with the purpose of providing an internet platform to allow millions of consumers’ access to global commerce, payments and communication. Initially eBay focused on online commerce by providing a marketplace for people to buy and sell goods and it has grown to be one of the largest and leading e-commerce platforms in the world. eBay has now expanded and also owns other e-commerce sites such as Shopping.com (a comparison shopping site), StubHub (an online ticketing business) and classifieds such as Rent.com. Over 300 million people use eBay sites across America, Australasia and Europe and in 2010, the total value of goods sold on eBay was $62 billion—more than $2000 every second. The success of its e-commerce marketplace has allowed the company to expand into PayPal and Skype. PayPal allows businesses and consumers to securely and quickly send and receive payments online and Skype provides online communications.

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New systems and procedures The introduction of new technology such as a new online database, computer-aided design (CAD), computer-aided manufacturing (CAM) or customer relationship management (CRM) will allow the operation of new systems and procedures within the business. They make it necessary to implement a range of internal changes, which may include changes in the organisation and functioning of a business, such as plant layout and processes, employment relations, such as staff skilling and availability of jobs, and communications and marketing, including research through record keeping, data storage and promotion. One example of businesses adopting new technology is the introduction of self-service checkouts in supermarkets such as Woolworths and Coles. The supermarket provides a number of checkout points where customers can scan and pay for their groceries without staff assistance. This area is supervised by a member of staff who will offer assistance if necessary. This change will affect the layout of the shop, the availability of jobs (as self-service reduces the need for staff), the training of staff who supervise the self-service and the development of methods to inform the customer about this new service. New business cultures Business culture refers to the way in which managers and employees in a business behave and operate. Technology has greatly influenced the way things are done within the workplace. In 2010 the Radicati Group in Palo Alto in the United States estimated the average projected number of corporate e-mails sent and received per person, per day in 2010 was 110. This was estimated to increase to 112 in 2011, 115 in 2012, 117 in 2013 and 119 in 2014. By January 2011, workers in small and medium size businesses were expected to spend half their working day in e-mail management. In order to ensure efficiency and productivity, managers will need to develop strategies to minimise the negative effects of such changes to business culture. Business culture can often change with new managers and the adoption of new ideas and processes to manage the accelerating effects of technology. A change in business culture can lead to changes in aspects such as communications, employment arrangements, job security, motivation and training, downsizing, promotion and rewards and, ultimately, job loyalty and quality of working life. Structural responses to change

Outsourcing

Flat structures

Strategic alliances and networks

Figure 2.20 Structural responses to change

The three structural responses to change are: ◗ outsourcing ◗ flat structures ◗ strategic alliances and networks. Influences of the changing business environment such as globalisation and accelerating use of technology have made it essential that business managers continually seek new ways to remain competitive. One way of


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remaining competitive is for a business to adjust its structural arrangements so as to accommodate and respond to change. Ways to do this include outsourcing, introducing flat structures, and the development of strategic alliances and networks. Outsourcing Outsourcing is the contracting of support services or non-core business activities and services (such as accounting, employment relations and marketing) to other businesses. Businesses outsource to cut costs and concentrate on the prime function of the business, often engaging outside organisations or individuals to undertake specific activities that have traditionally been carried out internally. Such activities may include financial advice and management, recruitment and selection, promotions, customer service, catering, cleaning, security and transport. The benefits of adopting outsourcing as a response to change are access to greater expertise, such as more efficient methods of supplying and distributing products, better understanding of rules and regulations, such as in accounting, use of better quality technology and IT specialists, and time and cost savings through economies of scale and sharing resources, such as transport, with other businesses. The shortcomings of this approach are that it reduces the level of control a business has regarding its functions. Flat structures A flatter organisational structure was developed from the behavioural approach to management. Flatter management structures involve the removal of middle management and the empowerment of lower levels of the business hierarchy by involving them in decision making. Many businesses have also adopted the team approach as part of a flatter structure. A team approach is where groups of workers interact together to achieve a common business goal. Teamwork requires people to work together in a collaborative and coordinated manner for a common purpose. The benefits of this structural change include reduction in wage costs, improved communications, improved efficiency through less bureaucracy, duplication and ‘red tape’, feelings of ownership and value on the part of the workers, increased productivity because of better understanding of the problems that arise, and faster response to changes. The shortcomings relate to possible lack of direction, potential for coalitions to form, loss of promotional opportunities, and uncertainty in the chain of command and responsibility for decision making. Strategic alliances and networks This structural response to change is also referred to as international coalitions, strategic partnering and strategic networks, but is most commonly known as strategic alliances. The development of strategic alliances and networks by businesses has been a response to globalisation and rapid changes in technology as businesses recognised that if they grouped together they could all benefit. Strategic alliances are joint formal agreements that allow businesses shared access to particular resources, such as products, expertise or distribution channels, while they remain independent. The specific benefits may include shared access to new technology and equipment, access to distant markets, shared costs on research, marketing and distribution, and the spreading of commercial risk. For example, Jetstar formed a strategic alliance with IBM Global Business Services in October 2007 to provide the technology for Jetstar’s web check-in facilities. Another well-known example of a strategic alliance is the oneworld airline alliance, as detailed in the following example. 118





EXAMPLE: The oneworld alliance Oneworld is a global alliance that brings together 12 of the world’s biggest airlines. It includes Qantas, British Airways, American Airlines, Cathay Pacific, Finnair, Iberia, Japan Airlines, Royal Jordanian, Mexicana, S7 Airlines (Russia’s largest domestic air carrier), LAN, airberlin, SriLankan Airlines, Qatar Airways and Malaysia Airlines. A major benefit of the alliance is that a traveller will be able to book a wider range of travel options and destinations at a lower price than one airline could provide. The alliance covers a global network of more than 675 destinations in over 130 countries. The alliance also provides the traveller with all the benefits and privileges of their airline’s frequent flyer program and customer service, with easier baggage transfer and access to the other airlines’ airport lounges. Members of the alliance are able to increase their business opportunities as they have greater access to a larger market share of international travellers, including corporate clients, and each other’s distribution channels. KCq page 131

2.4.2 Managing change effectively A manager’s responsibility is to plan the process by which change will be introduced, implemented and evaluated. Poorly planned changes will not be well received and will result in much resistance from staff and other stakeholders. Unless stakeholders embrace the changes they will have limited chance of success. Essential aspects of managing change effectively include: ◗ identifying the need for change ◗ setting achievable goals ◗ creating a culture of change ◗ overcoming resistance to change ◗ implementing change effectively using management consultants.

Identifying the need for change

Outline how businesses manage change effectively.

Explain the importance of identifying the need

for change. Before initiating change, key decision makers in the organisation must recognise the need for change. Managers must be careful not to adopt Identify change for the sake of Identify it. Clearly communicating the reasons behind the need for need in’ for and support from the relevant stakeholders. change will encourage ‘buy change change Making change purposeful and linking it with the vision and future direction of the business will help people develop a sense of purpose for Implement Set change achievable the Implement change and reduce their resistance to it.Set effectively goals change achievable Aeffectively businessusing may need to implement change because of changes in the goals external environment. There may also be information from controls such management consultants as changes in cash flow which could mean that a business needs to take corrective action. Some (of the many) reasons for a business to respond to certain changes include the need: Create Overcome culture resistance ◗ to remain productive of change to change ◗ to maintain competitive advantage Create Overcome compliant ◗ to be legally culture resistance to change new technology of change ◗ to incorporate Figure 2.21 Managing change effectively ◗ to aid efficiency and customer expectations ◗ to respond to stakeholder suggestions ◗ to provide a motivating and challenging workplace ◗ to increase sales and market share ◗ to resolve disputes ◗ to ensure a successful and profitable business. Chapter 2 • BUSINESS MANAGEMENT © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 119

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Case Students learn to: investigate aspects of business using hypothetical situations and actual business case studies to explain how SMEs manage change effectively.

study:

Ballina Airport Car Storage

Ballina Airport Car Storage is a family-run business owned and operated by William and Allyson Small. When the business was first established it was located two kilometres from the airport. This meant that a shuttle bus was needed to take customers from the storage facility to the airport and to collect customers when their incoming flight arrived. There were a number of external influences that would impact on the business. The amount of passenger traffic through the airport would increase with Jetstar and Virgin Australia operating services between Ballina and Sydney as well as REX. Also, Jetstar introduced services from Ballina to Melbourne, increasing the potential for more business. At the same time, the owner of the airport, Ballina Shire Council, had plans to expand the facilities at the airport by extending the terminal building. The open air car park was expanded and paid parking was introduced. The increase in passengers and the fact that they now had to pay to park their cars in the open overnight made William and Allyson’s business more attractive. The competitive advantages that William and Allyson’s business has are that they plan their business carefully, scanning the environment for changes that will impact on their operation. Another aspect to their competitive advantage is customer service based on the principle that ‘nothing is too much trouble’. Being a partnership, they discuss how they will react to change and make plans to implement their ideas. To respond to the changes in the external environment, William and Allyson did three things. In 2005 the business relocated to the Ballina Byron Gateway airport, just 100 metres from the terminal. This made it one of the closest car parking facilities of competing airports, such as the Gold Coast Airport. William and Allyson have worked hard on keeping overheads down in order to provide affordable storage rates, with the cost of vehicle storage less than a return taxi or shuttle bus fare from Ballina and other nearby locations. William and Allyson also added extra services to make the business have a wider appeal to both the business and leisure traveller. The services that Ballina Airport Car Storage provides are: ◗ g round level fully enclosed undercover car park with 80 spaces—important during the storm season as cars parked in the open can suffer hail damage ◗ short- and long-term car parking/storage ◗ special rates for long-term storage ◗ availability for cars, motorbikes, boats, caravans and RVs ◗ a 24-hour back to base alarm system ◗ the charges are based on a 24-hour clock and not calendar days ◗ it offers a full range of car servicing and repair options which can be carried out while the customer is away, including registration, pink slips, repairs, services and any other mechanical or panel work, carried out offsite using qualified, reliable tradespersons ◗ a courtesy valet to terminal front door on request, with the business happy to help those in need, such as the aged or infirm, parents with children or those with lots of luggage ◗ car detailing. Source: Adapted from the Ballina Airport Car Storage website www.ballinacarstorage.com.au/index.html

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Business information systems An essential asset of any business is its ability to develop a sustainable competitive advantage. A major way that businesses can develop a sustainable competitive advantage is through the knowledge of managers. Managers are facing greater challenges than ever as increased globalisation causes rapid changes to the business environment. This combines with rapid changes in technology and increased competition to create a highly complex situation. In today’s business environment managers have to process an increased quality and quantity of information when making decisions. This complex situation can lead to ‘information overload’, creating a gap between the current knowledge of managers and the information required for the business to develop its sustainable competitive advantage. In order to have access to up-to-date information, managers must search for that information from outside the business, using a process known as environmental scanning. Environmental scanning is the practice of monitoring a business’s internal and external environment so that it can gather, analyse and use information for tactical or strategic purposes. Managers will look for changes that pose threats or create opportunities. Environmental scanning of the business environment will involve collecting both objective and subjective information. The most effective method of environmental scanning is continuous scanning, which involves ongoing data collection and analysis on a broad range of factors. This type of scanning is sometimes called continuous learning. Business information systems (BIS) are a major method used by managers in the process of continuous scanning. Business information systems represent an organised system of controls and processes. Businesses use these controls and processes to analyse information needed to manage their businesses effectively. Managers are provided with information that compares the actual results of the business in the key functional areas with the planned results from the business plan. This analysis assists managers to make and modify operational, tactical and strategic decisions. These controls and procedures can include accounting systems, procedural reporting tools and computer-based assets. The business information system uses computerised systems to gather relevant data, both from inside and outside an organisation. This gathering of data can take place 24-hours a day. Data is then processed and stored in a database where it is constantly updated and made available to all in the business who have the need to access it in the form that suits their purposes.

Setting achievable goals A business needs to set achievable goals. These goals need to be SMART goals—Specific, Measurable, Achievable, Realistic and Timed. It is important to have short-term wins when undertaking change so that people involved in the process feel a sense of achievement in their work and that their efforts are visibly recognised and rewarded. This can build momentum in the change process. On the other hand, if people involved in the change feel that the goals are too difficult to achieve or their efforts are not seeing results they may become disillusioned, frustrated and negative towards the change process, thus undermining any further efforts. As an example, Gerry Harvey’s ambition to have Harvey Norman become a global brand may overwhelm those responsible for achieving the goal.

Explain how business information systems assist managers to identify the need for change.

Explain the importance of setting achievable goals when managing change.


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A SMART goal for Harvey Norman would be to be operating four stores in two different countries in the next 12 months. This goal is: ◗ specific and measurable—four stores in two countries ◗ achievable and realistic—it is not a large number of stores to open and the expansion will only be in two countries ◗ timed—it is planned to occur in 12 months. Explain the importance of creating a culture of change when managing change.

Creating a culture of change A culture of change is one that readily accepts that change is ongoing and that the only thing certain in business is that it is always changing. This type of culture allows the removal of structural barriers to change, encourages greater levels of innovation and a readiness and willingness to be adaptable and flexible. The behavioural management teamwork approach and change agents (see below) are important to help develop such a culture of change, especially given the increasing pace and complexity of change in the business environment. Change agents are key workers who, by their actions and attitudes, lead others in the organisation to see the need for change, and reduce anxiety and fears and gather support and facilitate the requirements for change. Change agents and workplace teams have the ability to foster collaboration and transfer information at a faster rate to a wider and more diverse range of people than an individual manager or CEO. Change agents and teams may have developed strong relationships, allowing them to use their power and influence in gaining support for change. They also find out underlying resisting forces and develop strategies to overcome this concern among relevant stakeholders. Effective managers must be aware of and gather support from such change agents, teams and coalitions in order to make it more likely that change will be accepted and successful. Consider the following contemporary media report.

Transformation and change at ANZ Bank Students learn to: examine contemporary business issues to:

◗ d iscuss strategies that could reconcile the conflicting interests of stakeholders

◗ c ompare and contrast approaches to management

◗ e xplain the benefits of quality management practices.

During the 1990s the ANZ Bank had several years of poor performance. It was partly due to this that John McFarlane was appointed CEO of the bank in the late 1990s. Mr McFarlane realised that the public image of the bank was not good and to maintain service for customers the bank needed to change the internal culture. The process began in 2000 with a three-pronged strategy called ‘Perform, Grow and Breakout’ which, if successful, would lead to improved financial performance, strengthening of the brand and improved, sustainable leadership and long-term success. The major focus of this process was on the employees of the bank at all levels. In the Australian banking industry the last area of real competition and competitive advantage are its people. McFarlane felt that if the ANZ wanted superior performance then it would need to transform its people at every level into happy and productive employees. If this happened, value for shareholders and improved service for customers would follow. The top management decided that in order to successfully change the culture of the bank there was a need to implement performance management as a strategy to motivate employees and encourage them to embrace and drive the cultural change. The performance management strategy was based on very clear key result areas (KRAs) across financial, customer, people and community measures. All staff had to undergo performance management with a system of rewards linked to performance. This became a way that the bank could

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recognise the successful achievements of all employees, monitor their progress in the business, and reward outstanding achievement. This became an important motivational tool for the bank. The bank was also able to increase productivity by gradually reducing the number of employees. In order to do this the bank reduced the number of employees but increased pay rates in line with increased productivity. A major success of the strategy occurred through ‘building employee engagement’ at all levels rather than pushing change on the organisation from the top down. It involved all levels of employees with the following results. ◗ T he strategy built trust between all levels in the organisation from the CEO down. ◗ T here was a significant improvement in employee satisfaction (measured at 50% in 1997, it had risen to 85% in 2004, according to employee surveys). A major problem with introducing change from the management point of view was to overcome the inertia or unwillingness to act on the part of managers. ANZ Group General Manager, Shane Freeman, acknowledged that the ANZ should have focused much earlier on having better employment relations management information. For example, making information about the bank readily available to managers is very important for improving effectiveness, efficiency and workplace culture issues. This case study of cultural change management at the ANZ indicates effective change management by the CEO and the management team. This effective change management came from: ◗ recognising that change needed to occur ◗ e stablishing the goals that the business needed to achieve (improve public image and financial performance) ◗ d eveloping the strategies to achieve these goals (‘Perform, Grow and Breakout’) ◗ implementing a performance management strategy with clear key result areas which applied to all employees and recognised and rewarded outstanding performance ◗ linking financial remuneration to employee productivity ◗ involving and engaging employees in developing the change and monitoring progress through surveys such as employee satisfaction. Source: Adapted from Human Resources, 29/11/05 www.hcamag.com/news/profiles/anz-bank-breaking-out-of-the-mould/111735/.22222221 1.05ustralia’s leading 2222

Resistance to change Business managers usually realise the need for change and may indeed have planned the necessary changes. Change, however, may be difficult to implement as there is often resistance from within the organisation. Resistance to change is the perception that a change will threaten an individual or group. Managers often view resistance to change by stakeholders as a negative factor in the change process. An effective manager will, however, be able to analyse the reasons behind the resistance and adopt strategies that will reduce the perceived threats and encourage commitment to the proposed change plans.

Explain the reasons for resistance to change in a business.


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Excel Preliminary Business Studies 4/09/2015 10:08 am


Resistance

Financial costs • • • •

Inertia of management staff

Purchasing new equipment Redundancy payouts Retraining Reorganisation of plant layout

Staffing

Cultural incompatibility

• Deskilling • New skills • Loss of job prospects / promotional opportunities

Figure 2.22 Reasons for resisting change

The main reasons for this resistance include: ◗ financial costs (purchasing new equipment, redundancy payouts, retraining, reorganisation of plant layout) ◗ inertia of managers and owners ◗ cultural incompatibility in mergers and takeovers ◗ issues relating to staffing (de-skilling, new skills, loss of job prospects/ opportunities for promotion). Financial costs Organisational change may cause large financial costs. These include the costs of: ◗ purchasing new equipment ◗ redundancy payouts ◗ retraining ◗ reorganising plant layout. Before embarking on a course of change, managers should examine the costs and benefits and the flow-on costs. Business managers may defer change because the benefits do not outweigh the financial costs and may negatively impact on profit levels and return on equity for investors. Purchasing new equipment Rapid changes in technology increase the ongoing requirements to update equipment. Existing equipment is often still working despite the fact that it is out of date (obsolete). Managers may resist the purchase of new equipment when assessing the costs of purchase against the return on the investment. Redundancy payouts Introducing any change that aims to improve efficiency (new technology, flatter management structures, outsourcing or relocating overseas) often creates surplus workers in a business, making them redundant (no longer of use). These changes will involve costly redundancy payouts to these workers (somewhere between six and 20 weeks of pay, depending on length of service and age, plus other entitlements such as holiday and long service leave pay). A business may defer changes in order to avoid such large outlays of money. Retraining Changes such as new systems and procedures, flatter management structures and the use of new technology create a need for staff retraining.

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This is costly as operations are interrupted as the workers learn the required new skills. There may be a decline in productivity and an increase in errors as the workers try to become more proficient in the newly acquired skills. Reorganising plant layout The plant layout is how a business is physically organised. New technologies such as robotics and CAD and CAM software, changes in production process, flatter management structure and other internal and external influences often make it necessary to reorganise the plant layout. This may be a resistance factor because of the cost, the inconvenience, the unavailability of appropriate space and the loss in production time. Inertia of management and owners Inertia is resistance to change when change is occurring. Business owners and managers may be inert (resist change) as they may be cautious or slow in their decision making or feel that change is pointless as the business is operating successfully with reasonable profits and few problems. Cultural incompatibility in mergers/takeovers Cultural incompatibility is when two cultures are unable to coexist. In business, this most often occurs when there has been a merger or takeover. Mergers and takeovers bring two businesses together, either willingly (merger) or by force (takeover) to form a third, new business. Many employees and managers will have difficulty adjusting after a merger or takeover because of the different underlying values, beliefs and business practices that have developed over time. Poor planning of cultural integration in the merger and takeover process will affect the success of this change. Staffing Employees often resist change—some of the main reasons include: ◗ de-skilling ◗ need to acquire new skills ◗ loss of career prospects and promotion opportunities. De-skilling is the reduction in the level of skill needed by an employee to perform a task. Changes in technology and the adoption of new techniques and practices may mean that existing skills are no longer needed or valued. De-skilling can also occur as the result of a takeover or merger. This can be quite a threatening experience as the employee’s status and importance are at risk. As a result, many workers will not enthusiastically embrace the changes that bring about this situation. With many change initiatives workers have to acquire new skills. These new skills are necessary to deal with changing technology and new operational and management systems. Acquiring new skills is costly in financial and human terms, as extra time and effort may be required and mature staff, particularly, may find acquiring new skills challenging. Workers may resist becoming ‘multi-skilled’ as it will increase expectations in their job performance and require greater worker intensification with little financial reward and at a cost to the quality of their working life. Adoption of flatter management structures, team approaches, strategic alliances and outsourcing, mergers and takeovers, new technology and changes in strategic direction, and new systems and procedures will all impact on the career and promotional opportunities of staff. These changes may threaten individual positions, the importance of a skill set and/or the chance to move up the corporate ladder. For example, the move to a


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flatter management structure will remove a significant number of middle management positions, thereby taking away a clear line of career progression and the number of authority positions available as a career goal. To address this resistance businesses must work with the staff to set short- and long-term goals and provide support for career development. Explain the role of management consultants in managing change.

Management consultants An American professor from the Massachusetts Institute of Technology, Arthur D Little, founded the first management consultant business in 1886. Management consultants are businesses that assist other businesses and organisations improve their performance by analysing existing problems. After the analysis has been conducted the management consultants develop plans for improvement. Management consultants specialise in tasks that their clients would find costly both in financial and time terms. The functions of management consultants include: ◗ providing information and analysis of situations requested by clients ◗ problem solving ◗ making recommendations ◗ assisting with implementing recommendations ◗ improving organisational effectiveness ◗ assisting with change management. Management consultants assist businesses to implement change by: ◗ assisting the management of a business to realise and to define measurable stakeholder aims, create a business model for their achievement and monitor the progress of the change process ◗ ensuring effective communications systems that inform various stakeholders of the reasons for and details of the change and the benefits of successful implementation ◗ devising an effective education, training and skills program ◗ developing strategies to counter resistance from employees and align them to the business’s overall strategic direction ◗ providing personal counselling to alleviate any change-related fears ◗ monitoring the implementation and fine-tuning as required. KCq page 131

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Key definitions and concepts Do you know all the key definitions and concepts for this chapter? Go through each term in the list and check that you know them all. Place a bookmark underneath each definition to cover up the one below and slide it down. This way you can focus on each definition by itself. Batch production r efers to a specific group of components which go through a production process together. As one batch finishes, the next one starts. Business culture r efers to the way in which managers and employees in a business behave and operate. Business value includes a whole range of assets of the business that can increase in value, thus expanding the worth of the business. Continuous scanning involves ongoing data collection and analysis on a broad range of factors from the business environment. Corporate social responsibility is a commitment by a business to operate ethically and contribute to economic development while improving the quality of life of our workforce and their families as well as the community at large. Development involves selecting employees for educational programs that focus on roles that the employee may aspire to in the future. Dismissal is where an employer terminates an employee’s position, usually because the employee has either performed poorly in the workplace or for criminal acts against the employer. Distribution channel is the link between the producer and the customers of the product. Division of labour involves breaking down complex tasks into a series of simplified, easier tasks performed by a number of workers. Each worker performs the same task repetitively. E-commerce is the buying and selling of products on the internet. Environmental scanning is the practice of monitoring a business’s internal and external environment so that it can gather, analyse and use information for tactical or strategic purposes. Environmental sustainability is meeting the needs of the present generation without compromising the ability of future generations to meet their needs. Exclusive channel distribution is where individual outlets are given exclusive distribution rights, usually for expensive products. Flexibility is the ability of people to adjust their behaviour to new information or changing circumstances. Flow production is a continuous process of parts and sub-assemblies passing on from one stage to another until completion.

Induction is the educational process of making a transition to a new workplace and even a new role. Innovation is the creation of better or more effective products, processes, services, technologies or ideas. Intensive channel distribution m eans that the product is made available in as many places as possible. Interpersonal skills r efer to people or communication skills. These skills involve managing and motivating people. Involuntary redundancy is when an employee is retrenched without wanting to be. Job production is the creation of single items by either one worker or a team of workers. Management consultants a ssist other businesses and organisations to improve their performance by analysing existing problems. Market segmentation is the way in which a business divides its potential market into different groups, or segments. Mentoring is a system where an experienced member of staff is attached to either new recruits or promising employees to enhance their workplace skills and increase their value to the team. Motivation is the force that gives purpose and direction to behaviour. Performance appraisal is a process of evaluating the performance of employees. It is usually conducted by an employee’s supervisor. Positioning involves the development of a product image (in the mind of the consumer) in relation to other similar products. Selective channel distribution is when availability of products and the number of distribution channels is limited. Separation is the process whereby employees leave the business. They will leave through retirement, resignation, redundancy or dismissal. Stakeholder is an individual who has an interest in a business achieving its goals and objectives. Strategic role of human resources is to ensure that the productivity of a business or its output per person can achieve its fullest potential because the employees of the business are effective and efficient in the way they go about their tasks. Training involves educating an employee in the skills and processes of the job that the employee currently holds.


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Transformed resources a re those which will be transformed or changed into finished products by operations processes. In most businesses, transformed resources will include materials, information and customers.

Transforming resources a re those which will cause the change or transformation process in business operations. The main transforming resources are human resources and facilities such as plant and equipment. Vision is the picture of the future for the business.

Chapter syllabus checklist Are you able to answer every syllabus question in the chapter? Tick each question as you go through the list if you are able to answer it. If not, turn to the appropriate page in the guide as listed in the column to find the answer. Refer to page vii to check the meaning of the Board of Studies key words. You can also turn to the Excel syllabus summary notes at the back of the book for a summarised answer to each syllabus question.


Page No.

1

Can I outline the features of effective management?

70

2

Can I outline the skills of management?

71

3

Can I describe interpersonal skills of management?

71

4

Can I describe communication skills of management?

72

5

Can I describe strategic thinking skills of management?

72

6

Can I describe vision skills of management?

72

7

Can I describe problem-solving skills of management?

8

3


Page No.

19

Can I discuss businesses achieving a mix of financial, social and environmental goals?

78

20

Can I explain staff involvement in achieving business goals?

79

21

Can I outline staff involvement in innovation?

79

22

Can I outline the importance of staff motivation?

79

23

Can I outline the importance of mentoring staff in terms of achieving business goals?

79

73

24

Can I outline the importance of training in terms of achieving business goals?

80

Can I describe decision-making skills of management?

73

25

Can I outline the classical approach to management?

80

9

Can I describe flexibility skills of management?

73

26

Can I explain management as planning, organising and controlling?

81

10

Can I describe the adaptability to change skills of management?

73

27

Can I explain hierarchical organisational structure?

82

11

Can I describe the management skill of reconciling the conflicting interests of stakeholders?

74

28

Can I explain autocratic leadership style?

83

29

83

12

Can I outline the process of achieving business goals?

Can I outline the behavioural approach to management?

74

30

84

13

Can I outline profits as a goal of business?

75

Can I explain management as leading, motivating and communicating?

14

Can I outline market share as a goal of business?

75

31

Can I explain the behavioural approach of management with reference to teams?

85

15

Can I outline growth as a goal of business?

76

32

85

16

Can I outline share price as a goal of business?

Can I explain the behavioural management approach with reference to participative/ democratic leadership style?

76

33

17

Can I outline social goals as goals of business?

85

77

Can I outline the contingency management approach?

34

18

Can I outline environmental goals as goals of business?

77

Can I explain how the contingency management approach assists management in adapting to changing situations?

86

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Page No.

3


Page No.

35

Can I outline management process?

86

52

36

Can I outline the management process of coordinating key business functions and resources?

Can I describe the purpose of the balance sheet?

104

87

53

105

37

Can I outline operations as part of management process?

87

Can I explain the accounting equation and its relationships in the accounting framework?

54

38

Can I describe how management process applies to businesses that produce goods and/or services?

Can I outline the role of human resources in the management process?

105

88

55

Can I outline the recruitment process in human resources?

106

39

Can I describe the production process?

89

56

108

40

Can I explain quality management?

91

Can I outline the training process in human resources?

41

Can I outline the role of marketing in management process?

57

92

Can I outline employment contracts in human resources?

109

42

Can I outline the identification of the target market as part of management process?

58 93

110

43

Can I outline the processes of voluntary and involuntary separation in human resources?

Can I outline the role of the marketing mix in management process?

94

59

Can I describe ethical business behaviour?

112

44

Can I outline product as part of the marketing mix?

94

60

Can I outline management responses to internal and external influences?

115

45

Can I outline price as part of the marketing mix?

95

61

Can I outline how businesses manage change effectively?

119

46

Can I outline promotion as part of the marketing mix?

97

62

Can I explain the importance of identifying the need for change?

119

47

Can I outline the importance of place in marketing products?

99

63

121

48

Can I outline the role of finance in the management process?

Can I explain how business information systems assist managers to identify the need for change?

100

64

121

49

Can I outline the role of cash flows in financial management?

Can I explain the importance of setting achievable goals when managing change?

102

65

122

50

Can I explain the purpose of the cash flow statement?

Can I explain the importance of creating a culture of change when managing change?

102

66

Can I explain the reasons for resistance to change in a business?

123

51

Can I explain the role of the income statement?

103

67

Can I explain the role of management consultants in managing change?

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3

Useful websites Features of effective management: kathrynvercillo.hubpages.com/hub/10-Traits-of-a-Successful-Manager Business goals: http://study.com/academy/lesson/what-are-business-goals-definition-examples-quiz.html Village Roadshow Example: www.villageroadshow.com.au Employee participation in decision making: www.business.vic.gov.au/busvicwr/_assets/main/lib60037/08_hpt3-1employeeparticipationindecision.pdf Developing staff through mentoring: https://www.business.qld.gov.au/business/employing/staff-development/developing-staff-mentoring

Case studies Ballina Airport Car Storage: www.ballinacarstorage.com.au/index.html Australian Institute of Management—Guides to Good Management Practice: www.aim.com.au/about/conduct.html Glenn Stevens: www.rba.gov.au/about-rba/people/gov.html eBay: www.ebay.com


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Oneworld: www.oneworld.com Business information systems: www.businessdictionary.com/definition/management-information-system-MIS.html Contemporary Media Report: Transformation and change at ANZ Bank: www.hcamag.com/news/profiles/anz-bank-breaking-out-of-the-mould/111735

End of chapter questions Key Concept questions These questions test whether you have grasped the key ideas in each subsection. They are not difficult questions, but will test your recall of knowledge of the material you have read. If you are unsure what a question is asking you to do, refer to page vii to check the meaning of the Board of Studies key words. If you can answer all these questions, you will know you have a sound knowledge of content. Refer to pp. 225–228 for Answers

2.2 Management approaches 2.2.1 Classical approach 10. Outline the main features of the classical approach to management.

2.2.2 Behavioural approach 11. Outline the ideas behind the behavioural approach to management. 12. Outline the features of the participative/democratic leadership style.

2.2.3 Contingency approach

2.1 The nature of management 2.1.1 Features of effective management 1. Identify the features or characteristics of effective and efficient management.

13. Explain how the contingency management approach assists management in adapting to changing situations.

2.3 Management process

2.1.2 Skills of management

2.3.1 Coordinating key business functions and resources

2. Explain why strategic thinking is an important management skill.

14. Outline the strategies that managers use to coordinate the key business functions and resources.

3. Outline management skills that will help to reconcile the conflicting interests of stakeholders.

Habbot and Oobi case studies (refer to Chapter 1)

2.1.3 Achieving business goals

15. Using the Habbot and Oobi case studies, analyse different ways of coordinating key business functions for a SME.

4. Explain the importance of market share as a business goal.

2.3.2 Operations

5. Define ‘corporate social responsibility’.

16. Explain why operations management is important. 17. Outline the process of quality management.

6. Define ‘environmental sustainability’.

Contemporary media report (social and environmental goals): Village Roadshow Limited (VRL) 7. Outline the achievements of VRL in terms of corporate social responsibility. 8. Describe the actions taken by VRL in the area of environmental sustainability. 9. Explain why it is difficult to achieve a mix of business goals.

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2.3.3 Marketing 18. Explain how businesses identify their target market. 19. Outline the elements of the marketing mix.

2.3.4 Finance 20. Explain the importance of the cash flow statement. 21. Describe the income statement. 22. Describe the purpose of the balance sheet.




2.3.5 Human resources 23. Outline the strategic role of human resources. 24. Explain the goals of recruitment. 25. Distinguish between ‘training’ and ‘development’. 26. Outline the main features of employment contracts. 27. Distinguish between ‘voluntary’ and ‘involuntary’ redundancy.

2.3.6 Ethical business behaviour 28. Describe ethical business behaviour.

Case studies: Guides to Good Management Practice and Glenn Stevens 29. Using these case studies, identify the qualities of Glenn Stevens that indicate he has achieved high personal and ethical standards.

2.4 Management and change 2.4.1 Responding to internal and external influences 30. Distinguish between ‘external’ and ‘internal’ influences and list these influences. 31. Outline the impact of e-commerce in Australia.

2.4.2 Managing change effectively 32. Identify the essential aspects of managing change effectively. 33. Explain the importance of identifying the need for change.

Case Study: Ballina Airport Car Storage 34. Identify the external and internal influences that caused changes to the business of Ballina Airport Car Storage. 35. Outline the competitive advantages of the business. 36. Outline the response of the business to changes in the external environment. 37. Outline the operation of business information systems. 38. Explain the importance of setting achievable goals when managing change. 39. Describe a culture of change.

Contemporary media report: Transformation and change at ANZ Bank 40. Suggest a management theory that fits the process that was put in place by the senior management of the ANZ. Give reasons for your answer. 41. Describe the cultural change that took place at the ANZ. 42. List the stakeholders in the ANZ mentioned in the case study. 43. Discuss how the strategies used to promote change would help to reconcile the conflicting interests of stakeholders.

44. Explain how the senior management of the ANZ were able to manage changes at the bank effectively. 45. Discuss the benefits of the quality management practices implemented at the ANZ. 46. Outline the reasons for resistance to change. 47. Outline the ways that management consultants assist businesses to implement change.


2.1 The nature of management OBJECTIVE-RESPONSE QUESTIONS

1. What is the skill of management that involves managing and motivating people? A vision skills B flexibility skills C interpersonal skills D communication skills


30 min

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2. Which one of the following is a social goal of business? A a business conserves the use of non-renewable resources B a business aims to improve the quality of life of its workforce C a business tries to increase its intellectual property and goodwill D a business tries to deny competitors’ access to some customers in the market 3. Which statement is true about a business achieving a mix of financial, social and environmental goals? A it cannot be achieved because of conflicts between goals B it can be achieved because of different time horizons involved C it cannot be achieved because of conflicts between stakeholders D it can be achieved because a business can assign different priorities to goals 4. What area of staff involvement is a system where an experienced member of staff is attached to new recruits? A training B innovation C motivation D mentoring

SHORT-ANSWER QUESTION Monica is the manager of a private company—Spanish Mackerel—which produces trendy clothing for teenagers. The business has 30 shareholders. Monica’s main goal as manager is to ensure that there is enough cash flow for the business to operate. Because of this goal, she is unwilling to undertake activities with a high degree of risk. Many of the shareholders, however, want the business to take more risks with investment projects so that the company will grow and the value of their shareholding will increase. 5. a Outline TWO reasons why shareholders would want to see their share price increase. (2 marks) b Explain why rapid growth can create problems for a business. (4 marks) c Identify the conflict between the stakeholders in the example and recommend TWO ways in which Monica, as manager, can reconcile this conflict. (4 marks)

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2.2 Management approaches

20 min

OBJECTIVE-RESPONSE QUESTIONS 1. What is a weakness of the behavioural management approach? A decision making is time consuming B management must formulate a variety of plans C excessive supervision and over-specialisation D little opportunity for workers to be motivated 2. Which one of the following is an advantage of the classical approach to management? A Management style depends on the situation. B Productivity is increased through the division of labour. C Democratic leadership can make management more decisive. D Communications are improved because of flatter management structures. 3. Which of the following would indicate a management approach following the behavioural approach? A flat organisation structure and democratic leadership style B flat organisation structure and autocratic leadership style C hierarchical organisation structure and autocratic leadership style D hierarchical organisational structure and a small span of control 4. A business adopts a management approach based on managers adapting to different situations.

What type of management approach is this? A classical B democratic C behavioural D contingency

SHORT-ANSWER QUESTION Brian has become CEO of Gum Drops Press Ltd and has introduced a number of changes to the business. He has eliminated two complete levels of management and there is now the CEO, division managers and the ordinary employees. He holds weekly meetings with his managers and often consults with employees about how they think things should be done. Some employees have told him that things are much better than the autocratic orders that the previous CEO used to issue. Others have said that things were better the old way as everyone knew what they had to do and there was none of this democracy and debate about how to go about a job. Brian has observed that there are some managers and ordinary employees who have the power to influence other managers and workers to




get things done and he is thinking of giving them more official power in the company. 5. a Outline ONE strength and ONE weakness of the classical approach to management theory. (2 marks) b Explain the advantages of the behavioural approach to management. (2 marks) c Discuss the usefulness of contingency management theory. (2 marks)

2.3 Management process

30 min

OBJECTIVE-RESPONSE QUESTIONS 1. What is the definition of ‘operations management’? A using the least amount of input possible B ensuring customers’ needs are met and they are satisfied C organising the process that transforms inputs into outputs D combining inputs by changing them into finished goods and services 2. A business implements a marketing strategy of price penetration.

What is the purpose of this strategy? A to convince consumers that they are buying a high-quality product B to establish high prices for a product when it is introduced to the market C to set a low price for the product at the introductory stage to create demand for it D to allow consumers to compare the price of the new product against a similar product

3. Which one of the following items would be found in the income statement of a business? A equipment B gross profit C investments D accounts payable 4. A business offers an employee the opportunity to cease work before reaching the age of 65 with entitlements for years of work with the business as well as payment for unused leave entitlements. It also offers the employee full payment of the pension.

What kind of separation is this? A retirement B resignation C voluntary redundancy D involuntary redundancy

SHORT-ANSWER QUESTION Below is the cash flow statement for Ben and Lucy’s Bookstore for the last four months of 2011. Unfortunately, they have lost some of their records.

Ben and Lucy’s Bookstore September to December 2011 Amounts in $’000 Item

Sept

Oct

Nov

Dec


20

Cash receipts

40

20

50

100

Cash payments

30

80

20

40

Net cash

5. a Calculate Ben and Lucy’s cash flows to identify the months in which they have a cash flow (2 marks) problem. b Explain the importance of the cash flow statement to a business. (4 marks) c Evaluate TWO strategies that a business can use to manage cash flow effectively. (4 marks)

2.4 Management approaches OBJECTIVE-RESPONSE QUESTIONS

1. Which one of the following is an example of an internal influence in business? A an airline offers discounts to customers booking online B an ageing workforce where workers need more sick leave C irrigation farmers’ water allowances are reduced due to drought D a government law requires businesses to put workers on workplace agreements 2. What is an appropriate sequence for managing change effectively? A set achievable goals; create culture of change; implement change; identify need for change B identify need for change; set achievable goals; create culture of change; implement change C create culture of change; identify need for change; implement change; set achievable goals D implement change; set achievable goals; create culture of change; identify need for change 3. What is a driving force for change if the management of Cottage Industries wants to introduce computers at all employees’ workstations? A the costs of staff training to be able to use the computers B the reduction in the workforce needed at Cottage Industries


30 min

133


C the reorganisation of all workstations to accommodate the computers D the cost savings achieved at Cottage Industries by introducing the computers 4. Which one of the following is a function of management consultants? A de-skilling B acquiring new skills C purchasing new equipment D improving organisational effectiveness

• R eports from branch managers indicate that fewer customers are patronising their stores.

Rising interest rates have forced Juanita to delay the expansion of her processed foods factory. Many stakeholders are relieved because they will not have to contend with the new systems and procedures that will accompany the expansion. Reorganising the plant layout was going to be a big problem as well as retraining staff, and many managers were trying to find ways of helping the workers accept the changes. 5. a Describe ONE external influence on change and ONE internal influence on change. (2 marks) b Explain TWO reasons for resisting change. (4 marks) c Examine how managers can create a culture of change in a business. (4 marks)

35 min

In your answer you will be assessed on how well you: • demonstrate knowledge and understanding relevant to the question • use the information provided • communicate using relevant terminology and concepts • present a sustained, logical and cohesive response in the form of a business report. Michael & Albert is a long established department store selling men’s and women’s fashion, home wares, outdoor goods, books and CDs, kitchenware and furniture. It has two branches in the city and several branches as major retailers in suburban shopping malls. The senior management team control the operation of the business with a firm hand, issuing instructions to branch managers for them to implement in their stores. Throughout the business there is a clearly defined chain of command. Local branch managers do not have much freedom in the operation of their stores and there is no consultation

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The following areas of concern have been noticed by the senior management. • T here has been a substantial drop in sales revenue and profit.

SHORT-ANSWER QUESTION

Business report

with sales staff. Ten years ago this business was Australia’s largest retail seller but recently there have been concerns expressed about its future.

• T here have been complaints from customers about rude sales staff who do not know much about the products they are selling. • T here is a lack of morale in assistant, store and department managers and sales staff. The senior management of Michael & Albert has commissioned you to investigate the business and write a report making recommendations about the following. • O utline an appropriate management theory that could be used to improve the management of the business. • D iscuss the changes that need to be made to improve the operation of the business. • Explain how a new management approach could be used to manage the introduction of changes effectively. (20 marks)


35 min

In your answer you will be assessed on how well you: • demonstrate knowledge and understanding relevant to the question • use relevant business case study/studies • communicate using relevant business terminology and concepts • present a sustained, logical and cohesive response. Outline the skills of management and explain how these skills can be used to manage change effectively. (20 marks)




Chapter 3

Business planning PRELIMINARY OUTCOMES A student:

You should:

P1: discusses the nature of business, its role in

be able to identify issues about the nature of business, its role in society and types of business structure and provide points for and/or against these issues.

society and types of business structure.

P3: describes the factors contributing to the

success or failure of small to medium enterprises. P4: assesses the processes and interdependence

of key business functions.

P6: analyses the responsibilities of business to

internal and external stakeholders. P7: plans and conducts investigations into


hypothetical business situations. P9: communicates business information and

issues in appropriate formats. P10: applies mathematical concepts appropriately

in business situations.

be able to provide the characteristics and features of the factors contributing to the success or failure of small to medium enterprises. be able to make a judgement about the processes and interdependence of key business functions and draw out the relationships between them. be able to identify the responsibilities of business and relate the implications of these to internal and external stakeholders. be able to plan and conduct investigations into contemporary business issues. be able to give an evidence-based opinion and judgement on both actual and hypothetical business situations. be able to communicate business information and issues using appropriate formats. be able to use mathematical concepts appropriately in business situations.




Outline the importance of small to medium enterprises.

3.1 Small to medium enterprises Small to medium enterprises (SMEs) are very important to both the Australian economy and society overall. According to the Australian Bureau of Statistics (ABS), most Australian businesses are small (97% of Australian businesses or 2 037 157 businesses). Most (61%) of these small businesses do not employ any staff. This means that these are either sole trader businesses or partnerships in terms of legal structure. There may be some private companies, but most small businesses in Australia come under the close supervision and control of the owner. Of those SMEs that employ people, the ABS calculated that at 30 June 2011 small businesses provided almost 46% of total private sector industry employment. This was out of a total labour force of 11 355 700.

Define ‘small to medium enterprises’.

3.1.1 Definition of SMEs There are a number of definitions of SMEs. The purpose for which the definition is being used will have an impact on the criteria being used to make the definition. The definition of a SME can be based on net profit, sales turnover, the number of employees, the industry type or even the type of legal structure. Sometimes a definition with a number of these criteria will be used. Definitions also vary by country. For the purposes of this book, Australian definitions will be used. According to the Asia-Pacific Economic Cooperation Group (APEC), over 95% of SMEs employ less than 100 people, and most employ less than 50. The group compares definitions of SMEs of member countries: the definition for Australia is manufacturing industries (less than 100 employees) and services industries (less than 20 employees). The Australian Treasury advised that for taxation purposes a medium business is ‘in most cases, defined as an entity with annual total income of greater than $10 million’, while a separate definition applies to small businesses: ‘broadly, a small business entity for taxation purposes is one with a turnover of less than $2 million’. The Fair Work Act 2009 (Cth) defines a small business (this definition applies from 1 January 2011) as: ‘[a business] with less than 15 employees in total (including part-time employees) will be regarded as a small business’. The reason for this definition is that under the Fair Work Act a small business (less than 15 employees) is exempt from unfair dismissal claims initiated by any employee who has not completed 12-month’s service. In its publication Small and Medium Enterprises: Business Growth and Performance Survey—AUSTRALIA (8141.0) the ABS uses another classification for businesses based on the number of full-time equivalent employees. ◗ Very small (1–9): have up to nine full-time equivalent employees. Businesses with less than five employees are often described as microbusinesses. ◗ Small (10–49): have ten to 49 full-time equivalent employees. ◗ Medium (50–149): have 50 to 149 full-time equivalent employees. ◗ Large (150+): have 150 or more full-time equivalent employees. This ABS definition is the one that will be used throughout this chapter.

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KCq page 201





3.1.2 Role of SMEs Although 61% of small businesses do not employ any staff, of those that do the ABS has calculated that at 30 June 2011 SMEs provided almost 46% of total private inductry sector employment. This was out of a total labour force of 11 355 700. In December 2012 the Australian Government produced a report titled Australian Small Business—Key Statistics and Analysis. The main focus of the report was to clarify the role of SMEs in the Australian economy and how that role was changing over time. The report used data mainly sourced from the ABS. Some of the findings of the report are listed below. ◗ SMEs perform a critical role in the Australian economy as highly flexible and responsive suppliers to large businesses. SMEs are also customers of large businesses as well as suppliers of final goods to customers. ◗ As a major employer and producer, the SME sector makes a substantial contribution to Australia’s gross domestic product (GDP). In 2010–11 SMEs were estimated to have contributed around 57% of private sector industry value added. ◗ SMEs are making a substantial contribution to domestic production in a wide range of industries. For example, SMEs contribute 95% of the value of Australia’s agriculture, forestry and fishing production; 80% of the value of Australia’s construction industry output; 67% of property and business services production and 42% of the value of national manufacturing industry output. As well, SMEs play a major role in Australia because they: ◗ are well placed to create job opportunities because they are labour-intensive ◗ provide a stimulus to growth in regional areas ◗ stimulate competition and provide consumers with choice ◗ interact with large businesses as an essential part of the supply chain as well as providing logistics ◗ provide managerial and entrepreneurial experience and assist in developing human resources by providing opportunities for people that may not occur in larger businesses ◗ are often competing with other SMEs, which provides the incentive for innovation—ABS research indicates that the main motivation for SMEs to innovate is to improve productivity, increase revenue or increase responsiveness to customer needs ◗ have a strong presence in corporate social responsibility: in 2006 a Sensis survey (part of the Sensis Business Index) indicated that 86% of SMEs participated in and donated to charitable activities.

Outline the role of SMEs.

KCq page 201

3.1.3 Economic contribution of SMEs

Explain the economic contribution of SMEs.

Information provided earlier in this chapter indicates the economic contribution of SMEs. In terms of contributing to private sector value added SMEs were estimated to have contributed around 57% of the value of GDP in 2010–11. SMEs as a group also make major production contributions to agriculture, forestry and fishing production, Australia’s construction industry, property and business services production and manufacturing industry. SMEs generate $16 billion or 9% of Commonwealth revenue.

Chapter 3 • BUSINESS PLANNING © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 137

137



The contribution of the SME sector to employment is significant. In June 2011 SMEs provided almost 46% of total private sector industry employment (The ABS calculated this as 4.8 million out of a total of 10.5 million people.). There is also evidence to suggest that SMEs contribute more to employment growth than large businesses. According to the Organisation for Economic Cooperation and Development (OECD) economic contribution estimates for 2007–08, Australian small business contributed around 39% of private industry value added or 31.8% of total value added to the Australian economy. This indicates that SMEs are vital to the economy in stimulating almost one-third of economic growth. SMEs, as noted earlier, often operate in a very competitive environment. However, this competition often does not take place in the form of lower prices. Instead, competition tends to take place in other ways, such as offering superior service or as innovation. This innovation can be improved goods and services, operational processes or organisational and management processes. The most common form of innovation for small businesses is the implementation of new or significantly improved operational processes. Table 3.1 below shows information about the number and proportion of businesses in various categories undertaking innovation in 2008–09. It is important to note that the number of businesses varies considerably between each employment size group. For example, an innovation-active rate of 67% for businesses with 200 or more employees represents approximately 2000 businesses, whereas an innovation-active rate of 33% for businesses with 0–4 employees represents approximately 143 000 businesses. The conclusion here is that one contribution of SMEs to the economy is substantial innovation, which means that there is a considerable amount of investment and research and development undertaken by SMEs. This also generates employment. Table 3.1 Businesses undertaking innovation, Australia 2012–2013 Number of persons employed

Classification

Estimated number of businesses ’000

Businesses which introduced innovation %

Businesses with any innovative activity (innovation-active businesses) %

0–4

Small

466

28.9

34.7

5–19

Small

243

45.8

51.0

20–199

Small–medium

58

58.3

63.4

200 or more

Large

4

66.8

74.3

Source: Adapted from ABS 8158.0, Innovation in Australian Businesses 2012–13

In 2011–12 expenditure on research and development (R&D) by all Australian businesses was $18 321 million; business expenditure on R&D increased by 2% in current price terms during this time. This followed an increase of 7% in current price terms in 2010–11. Business human resources devoted to R&D in 2011–12 increased by 15% from 2010–11. Table 3.2 Research and development (R&D) expenditure, Australia 2008–09 Small business

Medium business

0-19

20-149

150+

85.7%

63.4%

74.3%

Number of employees Expenditure on R&D

Total SME

Source: Office of the Chief Economist, Commonwealth of Australia, May 2015

138





The Australian Government recognises the contribution of SMEs to the economy and supports SMEs through legislation. The Financial Management Accountability (FMA) Act 1997 (Cth) requires government agencies to purchase a minimum level of SME products and services. The government has committed agencies to source at least ten per cent of their purchases by value from SMEs. KCq page 201

3.1.4 Success and/or failure of SMEs

Explain the success and/or failure of SMEs.

In this section it is important to define and establish criteria which will indicate the success and/or failure of small businesses in Australia. Success There are many ways to measure the success of a SME. The most obvious criterion or standard would be a measurement in financial terms. The owners of small businesses usually establish these enterprises as an alternative to being employed and earning a wage or salary. A major goal of these owners is for the business to generate enough revenue to enable them to survive financially. Another financial goal is for the business to grow. The case study on Oobi (Chapter 1, page 52) indicates how the business has grown in the ten years from 2002–2012. In terms of product lines alone, the business has increased these ten-fold. Other indications of financial success are that the business now employs ten people and has a turnover of about $3 million. A key factor in the financial success of this business is establishing and continually revising business plans. Many SME owners, however, have a different perspective on how to judge success and their criteria or standards are non-financial goals. Many SME owners consider personal satisfaction and achievement, pride in their job and a flexible lifestyle as their main measure of success. A survey of 290 SME owners in Western Australia rated both financial and non-financial measures to be important in judging the success of a business, with the non-financial factors being more important. One study conducted on 195 small businesses in northern NSW by university researchers found that a number of SME owners measured the success of their businesses in terms of achieving the goals of corporate social responsibility (CSR) and environmental sustainability. The study was titled Small Business Engagement With Sustainability in Regional Australia (published July 2009) and was carried out by Trevor Lucas, formerly Southern Cross University (now deceased), Robert Cunningham (University of Western Australia) and Geoff Lamberton (Southern Cross University). The researchers defined a small business as a for-profit organisation with less than 20 employees that was listed in telephone or Chamber of Commerce directories. The conclusions that could be drawn from the responses of these businesses to the researchers’ surveys are listed below. ◗ Financial criteria ranked below customer/service oriented criteria as indicators of a successful business. Quality of products and service was the third ranked business success criteria. ◗ Donations and sponsorships were the dominant criteria of social responsibility. However, some responding businesses found it difficult to make contributions in this area as obligations to employees took precedence. ◗ Recycling initiatives were the dominant criteria of environmental responsibility. Efficient waste management, including toxic waste disposal and purchase of environmentally friendly and natural products, also figured prominently.


139



In summary, the success of SMEs can be measured by: ◗ the achievement of non-financial goals, such as personal satisfaction and achievement, pride in the job and a flexible lifestyle ◗ the achievement by the owners and the business of corporate social responsibility and environmental sustainability goals ◗ the achievement of financial goals, such as providing an income for the owners and business growth. Failure Just because a business ceases trading does not mean that the business has failed. In Chapter 1 we noted that with voluntary cessation, the owner or owners of a business make a decision to cease operations. There are a number of reasons why this happens: the owner may wish to retire or be experiencing a prolonged illness or may wish to pursue another business opportunity. If the business is a sole trader and the owner dies, the business usually ceases operation. The majority of cessations involve solvent businesses closing for reasons unrelated to their financial position. Therefore, if a business stops trading through voluntary cessation that business has not failed, but simply ceased to exist. If a business undergoes involuntary cessation this means that the owners are forced to close the business. This will occur because the creditors of the business have not been paid the money that they are owed. If the business is unincorporated (in other words a sole trader or a partnership), this means that the owner or owners are bankrupt. Bankruptcy means that an individual has insufficient assets to pay his or her debts. Business failures involve costs, including: ◗ costs to government of organising and regulating orderly exits because of involuntary cessation (such as administration of the Bankruptcy Act) ◗ losses to creditors ◗ personal costs to employees and owners ◗ search costs as people look for new jobs (including welfare payments) ◗ costs of reorganising resources generally. A Productivity Commission staff research paper titled Business Failure and Change: An Australian Perspective, published in December 2000, found that although business failures involved costs there were some beneficial outcomes. ◗ Business failures are the outcome of inefficient and unprofitable businesses ceasing to trade and they are replaced by businesses that are efficient and profitable. ◗ OECD research indicates that some of the growth of productivity is due to the exit of failed businesses where productivity is poor. ◗ Entrepreneurs involved in business failure learn and improve from the experience. They also experiment with new production processes. Numbers of entries and exits of businesses In its publication Counts of Australian Businesses including entries and exits June 2010–June 2014 (8165.0), the ABS listed the following information. Of the 2 100 162 businesses operating in June 2010: ◗ 61.7 % of the businesses that were actively trading in Australia in June 2010 were still operating in June 2014 ◗ half of the businesses that started operating in 2010–11 were still operating in June 2014 ◗ the business entry rate increased from 11.2% in 2012–13 to 13.7% in 2013–14 ◗ the business exit rate decreased from 14.0% in 2012–13 to 12.7% in 2013–14. 140





Table 3.3 Survival of businesses by type of legal organisation, June 2010–June 2014 Operating in June 2010

Survived to June 2011

Survival rate %


Survival rate %


Survival rate %


Survival rate %

688 651

608 271

88.3

552 095

80.2

49 651

72.1

454 457

66.0

Private sector Total companies Sole proprietors

635 027

514 971

81.1

431 829

68.0

366 971

57.8

317 784

50.0

Total partnerships

354 336

311 589

87.9

277 751

78.4

249 739

70.5

224 648

63.4

Trusts

445 987

402 823

90.3

368 382

82.6

338 292

75.9

313 003

70.2

649

548

84.4

500

77.0

460

70.9

382

58.9

2 124 650

1 838 202

86.5

1 630 557

76.7

1 452 113

68.3

1 310 274

61.7

Public sector All organisational types

Source: ABS 8165.0, Counts of Australian Businesses, including Entries and Exits, June 2010–June 2014 © Commonwealth of Australia, 2015

Table 3.3 provides some interesting information about success and failure of SMEs in Australia between 2010 and 2014. We make the assumption that if businesses survive then that indicates some kind of success. It is also important to note that of the businesses that did not survive, some would have ceased voluntarily and therefore did not fail. However, many of the businesses that did not survive would have failed. The first piece of information that we can gather from Table 3.3 is that the survival rate is much lower if the business does not employ anyone except the owner. Secondly, as the size of businesses increases (in terms of the number of employees), the survival rate is much higher. Thirdly, survival rates for all employment size ranges decrease over time. If we examine survival rates over the same period of time, 88.3% of businesses that were there in June 2010 survived in June 2011, and the survival rate in June 2012 was 80.2%. The conclusion that can be drawn here is that large businesses tend to have a better chance of survival than small businesses. Table 3.4 Reasons for success and failure of SMEs Reasons for success

Reasons for failure

The owner(s) are capable and skilful managers

Lack of appropriate management skills and inexperience of owners

The business has an adequate cash flow, in part due to having sufficient capital but also with sales generated by promotions

Inadequate capital which in turn leads to inadequate cash flow and solvency problems

The owners have developed a sound business plan which is continually revised and updated

Only 28% of SMEs had business plans in place and only 38% of SMEs had planned ahead (Australian Financial Review, 29.5.2010)—so lack of adequate planning contributed to failure

Successful businesses had employed ICT (information and communications technology) which raised business productivity and lowered costs

Businesses that failed were more likely to use outdated business systems or had not embraced up-to-date technology

Advice of professionals is incorporated in business plans

Unwillingness to access and accept appropriate advice from accountants, legal professionals and banks

The owners have marketed the business and its products successfully; they make customer service a priority

The business has problems meeting or satisfying customer demand because of poor service, a drop in dependability or problems with the operations key business function

The business and its owners scan the market for changes in consumer tastes and preferences and respond to these changes

The business finds that there is no longer a need for its goods or services

KCq page 201


page 203 Chapter 3 • BUSINESS PLANNING

141



Outline the influences in establishing a SME.

3.2 Influences in establishing a small to medium enterprise There are a number of factors that will have an influence in establishing a SME. In the previous section it was noted that a major factor for the success of a SME was that the owners are capable and skilful managers. Conversely, a major reason for failure was the lack of appropriate management skills. Therefore, personal qualities, which include qualifications, skills, motivation, entrepreneurship, cultural background and gender, will be an important influence in establishing a SME. Other influences include: ◗ sources of information ◗ the business idea and competition ◗ establishment options ◗ market ◗ finance ◗ legal influences ◗ human resources ◗ taxation.

Outline personal qualities as influences in establishing a SME.

Explain qualifications as a personal quality.

3.2.1 Personal qualities Of all the personal qualities needed to establish a SME perhaps the most important is effective management skills. This involves developing an awareness of what is happening in the business at any particular time and responding to changes in both external and internal influences. At the same time these skills involve keeping a strategic perspective about where the business is headed in the future.

Qualifications A number of experts would argue that there are no specific qualifications needed to establish a SME. However, if the SME is to operate in an area where specific expertise is required for the purposes of licensing, such as a plumber or electrician, or a particular profession, such as being a pharmacist or chiropractor, it will be necessary to possess or acquire the particular qualifications. However, there are many areas in which SMEs operate where it is not necessary to have any technical or academic qualifications. Operating a sandwich bar or coffee shop would not require specific qualifications but management skills would be very important if the business was to be successful. Access to expert advice is available through the Commonwealth Scientific and Industrial Research Organisation’s (CSIRO) Small and Medium Enterprise Engagement Centre (SME-EC). The CSIRO is Australia’s national science agency and one of the largest and most diverse research agencies in the world. The SME-EC is a team of business and technically qualified managers that work across all parts of CSIRO. The objectives of the SME-EC are to: ◗ increase the number of Australian SMEs that grow their businesses through the application or use of scientific research and technical services ◗ assist SMEs in developing research programs to meet their needs. The SME-EC will help SMEs define their technical issues and identify the most appropriate way to address them, using CSIRO or external resources. When significant interactions with CSIRO are involved the SME-EC can assist the SME in developing research programs to meet their needs.

142





Owners and managers of SMEs can access many other agencies with qualified experts to provide guidance, technical support and advice. Owners and managers that have foresight will access expert advice to help them develop competitive advantage in the marketplace and grow their businesses. CPA Australia is one of the world’s largest accounting bodies with a membership of more than 129 000 finance, accounting and business professionals in more than 100 countries. In a 2010 forum on SME issues, CPA Australia made the following observation: Owners and managers of SMEs need to improve basic management practice including planning for the recovery [from the GFC], thereby minimising financial risk. They also need to exploit new opportunities in a timely fashion as market forces dictate. Finally, SMEs stand to benefit from professional guidance to help meet the challenges of an increasingly complex, uncertain marketplace. Source: Report of the Forum on SME Issues: Unlocking the potential of the SME Sector CPA Australia/CGA-Canada, page 9

Skills There are two areas of skills that need to be explained. The first area of skill applies to the particular industry in which the business operates. If, for example, the business is a motor mechanics, people working in the business will need to have a basic level of skill to operate the business successfully. There is also a need for people in the business to continually update their technical or professional skills so that excellent service can be given when customers want their vehicles serviced. Mechanics would need to understand and be able to provide service for engines with the latest technology as well as being able to service the computers which today control the engines in many vehicles. The second area of skill refers to the skills of management. These skills were examined in detail in Chapter 2. Owners and managers can access expert knowledge from organisations such as the CSIRO’s Small and Medium Enterprise Engagement Centre. Management skills would also include updating knowledge and technology relevant to a particular industry.

Motivation It is one thing to have a brilliant idea that could be the beginnings of a successful business. However, it is another thing to translate that idea into a successful, operating business. The bridge between having the idea and being able to implement it successfully is motivation. Motivation is the quality that drives a person into action or provides him or her with the incentive to achieve a desired goal. Motivation provides the drive to persevere even when it appears futile.

Entrepreneurship An entrepreneur is a person who is willing to undertake risk in business. ‘Risk’ means that there is a possibility of something adverse or ‘bad’ happening or at least the entrepreneur being exposed to financial loss. We saw in Chapter 1 that there are a number of risks (financial and market, technological, political, environmental and operational). The risks involved mean that the entrepreneur will invest funds and time in a new or existing business on the understanding that if the business fails, the entrepreneur has to bear the losses. On the other hand, if the business succeeds the entrepreneur is entitled to take the profits. The

Explain skills as a personal quality.

Explain motivation as a personal quality.

Explain entrepreneurship as a personal quality.


143



entrepreneur will finance innovations in an attempt to transform them into marketable goods and services. The most risky type of entrepreneurship is to start a new business because of the high failure rate. In Australia, approximately 30% of businesses fail within the first 12 months of operation. Therefore, entrepreneurship is a most important personal quality in establishing a SME and requires courage and foresight to bear risk to achieve potential success and profit. Explain cultural background as a personal quality.

Cultural background Different cultural groups have different inclinations when it comes to establishing a SME. Establishing a business is not necessarily confined to one or a few different cultural backgrounds. People from some cultures and different ethnic backgrounds (for example, expatriate Lebanese) establish businesses to serve people from the same cultural or ethnic background (other Lebanese residents) in a particular geographic area. Examples of this include the predominance of businesses operated by Chinese people in the Haymarket area of the Sydney CBD known as ‘Chinatown’. Similarly, there are a number of businesses operated by people of Italian background in the Norton Street area of Leichhardt, especially in the restaurant trade. People from different cultural backgrounds also establish businesses to serve the community in general. According to the ABS, about 30% of Australia’s SME operators were born overseas. In 2011 ABS surveys indicated the following data about the place of birth of SME operators. Table 3.5 Place of birth of SME operators—Australia 2011 Place of birth

% of SME operators

Australia

70

Europe

13

Asia

10

Other

7

Aboriginal people are far less likely to operate small businesses compared to non-Indigenous Australians. Data from the 2006 census indicates that 6800 (6%) of employed Indigenous people worked in their own business. This compares with 17% of employed non-Indigenous people. The overwhelming majority of Indigenous SME operations (89%) were located in major cities and large regional centres. Most of these Indigenous businesses were in the ‘usual’ areas of hairdressing and building trades. There were, however, some Indigenous businesses that were culturallybased, such as those specialising in Aboriginal art and artefacts. The reasons for the relatively low proportion of Indigenous people operating SMEs include cultural reasons, such as placing the welfare and interests of the community before an individual’s accumulation of wealth. There are also issues involving lack of access to finance and lower levels of education. Explain gender as a personal quality.

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Gender According to the ABS, in 2011 68% of business operators were male and 32% were female. This represents a decrease in the proportion of female SME operators over the 15-year period from 1996–2011. In 1996 the proportions were 67% male and 33% female.





There is evidence to suggest that businesses run by women are usually better planned and managed compared to those run by men. Women also have a tendency to be averse to running up debts and this tends to contribute to the success rate of businesses run by women. Women also have superior communication skills (important in business) as compared to men.

KCq page 201

3.2.2 Sources of information

Outline sources of information for SMEs.

The online world provides today’s SME operator with almost too much information about running a small business. One of the first ‘hits’ on Google when searching for ‘sources of information for small businesses in Australia’ is the website for business.gov.au, which is an initiative of the Australian Government. The home page for this site provides information under the headings of: ◗ thinking of starting a business ◗ starting a business ◗ growing a business. There is also the NSW Government’s counterpart, Small Business NSW. The smallbusiness.nsw.gov.au website provides information on small business programs and other resources and contains ready-to-use, relevant information for people who are starting, running or growing a business. Apart from online resources there are many readily available sources of information for potential and existing SME operators as summarised in Figure 3.1. Government • • • • • •

Financial • • • • •

Local council NSW Government—Small Business NSW NSW Office of Fair Trading Austrade Department of Foreign Affairs and Trade ASIC

Accountant Bank/Bank manager Investment adviser Auditor Australian Tax Office (ATO)

Educational • TAFE • University • Trade association

Small business Institutional • • • • •

Business enterprise centres (BECs) Australian Bureau of Statistics (ABS) Market research Chambers of Commerce and Industry Council of Small Business Operators of Australia (COSBOA) • NSW Business Chamber • Australian Securities Exchange (ASX)

Online

Professional • • • •

Management consultant Financial planner Solicitor Surveyor

• Government websites • Media websites (e.g. smh.com.au; MySmallBusiness)

Figure 3.1 Sources of information for SMEs


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Figure 3.1 organises the various sources of information for small businesses (or even all businesses) into different classifications. It is important to note that all of these classifications have the potential to overlap. For example, every area of classification and every organisation listed in the diagram would have a website. Indeed, many websites contain links to other helpful websites. Financial This is a most important classification of information sources for a SME. All SMEs should have an accountant. This source of financial advice is essential if the business is to know what its financial position is at a particular time. The business will also have a bank where takings are deposited and from where finance can be borrowed. The bank manager or the staff at the particular branch of a bank can be extremely helpful to in terms of how to organise the financial side of the business. A business will often want its accounts audited as this is important in knowing where funds have come from and where they have been spent. Finally, the Australian Taxation Office (ATO) has a good deal of advice for business, both online and in regional offices. Professional There are a number of professional sources of information that a business can access. Most businesses would need the advice of a solicitor, especially partnerships where there will need to be a partnership agreement established. In many cases legal advice will be provided by the owner’s personal solicitor. Many individuals secure the services of financial planners to assist them in making strategic financial decisions. Financial planners can be very helpful in guiding the owners to make sound financial plans so the business can enjoy a reasonable cash flow and at the same time invest funds for growth. Management consultants were discussed in Chapter 2 (page 126). Briefly, management consultants are businesses that assist other businesses and organisations to improve their performance by analysing existing problems. SME owners may wish to engage management consultants to assist them if the business encounters problems. Some businesses will need the services of specialised professionals, such as surveyors, planners and engineers. Educational The owners of SMEs may need information that comes via educational institutions. This may be to undergo general or specialist business-related courses. For example, someone wishing to open a conveyancing business will want to acquire the appropriate legal qualifications, usually from a university, while someone wishing to operate a plumbing business will want to acquire the appropriate qualifications through TAFE. Many trade associations and professional organisations also offer educational courses and qualifications that are appropriate to specific industries. Institutional There are a number of institutional sources of information for businesses. Some are part of state and federal government, but most are not-for-profit private institutions such as business enterprise centres (BECs) or various chambers of commerce and industry, with the peak body being the Australian Chamber of Commerce and Industry (ACCI). All of these organisations have websites to make it easy for business owners and operators to access the available information.

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Government Both the NSW and Australian governments have departments and agencies specifically designed to assist all businesses. There is also an important source of government advice available through local councils. The NSW government has designed Small Business NSW specifically to provide SMEs with helpful advice, particularly during the establishment and growth stages of the business life cycle. KCq page 201

3.2.3 The business idea The business idea is a concept (developed by an individual or group) which has the possibility of being translated into the establishment of a profitable business. The best business idea will be one where a new product will be developed that consumers will want to buy, though this is easier said than done. Ideas such as the iPod or mass-produced sliced bread or the incandescent globe (light bulb) are three such ideas that have been successful.

Explain the business idea as an influence in establishing a SME.

Translating the idea into an actual business or operating process is the second problem (the first is to come up with an idea). In their book Your own business: a practical guide (2000), Wal Reynolds, Alan Williams and Warwick Savage describe this translating process as the ‘sorting-out’ process. This process is illustrated in Figure 3.2, The sorting-out curve. This curve illustrates the steps from the business idea to taking the big step of entry into business. After the business idea comes discussion and research. Solutions to problems that occur must be found otherwise the idea will fail. Before taking the giant step of going into business the entrepreneur must undertake a full appreciation of the risks involved. 100%

Stage 1: The discussion period 100% Stage 1: The discussion period

Stage 2: The first assessment

Stage 2: The first assessment Stage 3: The research period

Stage 3: The research period Stage 4: The appreciation of commitment

Stage 4: The appreciation of commitment

Stage 5: The appearance of problems Stage 5: The appearance of problems

Stage 6: Identifying alternative solutions Stage 7: Full appreciation of risk

Stage 6: Identifying alternative solutions

Stage 8: The need for decision Stage 7: Full appreciation of risk 0%

Stage 8: The need for decision

The big step: Entry into business

Time

Original Idea

The big step: Entry into business 0% Time

Original idea Figure 3.2 The sorting-out curve

Source: Your own business: a practical guide, Reynolds, Williams and Savage, 2000. Reprinted with the permission of Cengage Learning Australia Pty Ltd.

100%

Stage 1: The discussion period

© Pascal Press ISBN 978 1 74125 390 0

Chapter 3 • BUSINESS PLANNING

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Stage 2: The first assessment


Stage 3: The research period

28/08/2015 2:30 pm


Competition

Explain competition as an influence in establishing a SME.

The entrepreneur should make an assessment of competing businesses. This will assist him or her to refine the business idea and help in translating this idea into a viable ‘start-up’ business. The first part of this assessment will be to identify who the competitors are. Once competitors have been identified the next step will be to research these competitors to find out answers to the following questions. ◗ How successful are they and what is the competitive advantage of each competitor? ◗ What is the market share of each competitor? ◗ What growth strategies are the competitors using? ◗ What new products or services are they going to introduce? Part of the research may involve visiting the businesses of competitors as a potential customer and finding out information about pricing, customer service, store layout and any promotions they are using. At this point, the entrepreneur will need to refine what is the competitive advantage of the new business. This may be a revolutionary new product or product differentiation. Product differentiation is the differences between products of competing businesses as perceived by consumers and is based on such features as quality of service, price and product image. The production of differentiated goods or services is a major way for a business to continue being competitive. Three ways of aiming for product differentiation are: ◗ physical appearance or styling of goods ◗ providing the customer with an adequate level of service at a minimum cost ◗ producing a good or service efficiently, that is, with a maximum of quality at a minimum of cost. Entrepreneurs also need to remember that competitive advantage is not a static concept and competitors will react if one business has a particularly good idea or process, resulting in the advantage being competed away over time. Businesses need to introduce new goods or services or continually differentiate products if they want to maintain a competitive advantage in the marketplace.

Case Students learn to: investigate aspects of business using hypothetical situations and actual business case studies to identify ways that SMEs gain a competitive advantage.

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study:

Winkiwoo

Competitive advantage means that a business develops an advantage over competitors by offering consumers greater value, either by means of lower prices, improved quality or by providing greater benefits and service. There are a number of ways that a SME can gain a competitive advantage over its rivals. These are: ◗ create a unique business idea ◗ d ifferentiate the product of the business so that it is different and unique compared to the product of competitors ◗ p rovide superior customer service that will encourage repeat customers and word-of-mouth advertising ◗ use innovation as part of the differentiation process ◗ expand into the global market to take advantage of a wider market or reduce costs by establishing offshore ◗ use up-to-date technology to streamline the product and reduce costs.





The story of Winkiwoo shows how a number of these factors have combined to save a business that was going to fail and given it competitive advantages over rivals. Winkiwoo was part of the Eastmon Group in Glen Innes in northern NSW. Operating for more than 50 years, Eastmon used to run a chain of stores specialising in developing photographs, an industry that has all but died out along with analog film technology. The business regenerated by reinventing itself as a global digital photo printer, selling $20 Facebook photobooks to customers in over 80 countries, including Afghanistan. Winkiwoo is the first Facebook application in the world to allow people to easily design a photobook using their Facebook photos and those of their friends. Winkiwoo will deliver photobooks anywhere in the world. Part of the competitive advantage developed by Winkiwoo stems from the fact that there has never been a way to print Facebook images despite the site having the world’s largest collection of photos. This underlines how significant both the application and the launch deal will be. Another advantage of the Winkiwoo process is speed—80% of people who commence building a photobook through the traditional applications fail to complete the process. With Winkiwoo, however, a book can be built and ready to order in just 30 seconds with the finished product being a high-quality, high-gloss book. Users will probably want to spend more time organising their books, though the speed with which a book can be built from ground-up is a testament to the application. It is worth mentioning that in addition to photobooks, users can also create what is known as a statusbook: a high-quality record/print-out of their statuses (or those of their friends) for whatever date range is chosen by the user. Winkiwoo’s advantages include: ◗ speed ◗ robustness—Winkiwoo is a global application and is designed from groundup to withstand enormous spikes of traffic ◗ usability—it is especially usable in what could be the complex process of finding, sorting, laying out and organising Facebook photos. Source: www.wiliam.com.au/wiliam-blog/the-launch-of-winkiwoo

KCq page 201

3.2.4 Establishment options There are several options available for entrepreneurs who want to establish a business. The entrepreneur can establish a new business, buy an existing business or buy a franchise business.

New business Starting a new business is a logical outcome of the business idea and the analysis and research required in the ‘sorting-out’ process. It is also the option that involves the most risk. The important factor in any new business is to produce or sell a product that is in demand. As noted, the best business idea will be one where a new product will be developed that consumers will want to buy. This will be the first task for an entrepreneur wanting to establish a new business. The second step is to determine whether there is a viable market for the product and if the proposed new business has a competitive advantage.

Outline the options for the establishment of a SME.

Explain new business as an establishment option.


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There are a number of issues and problems that need to be addressed to strengthen the chances of the new business surviving as below. ◗ A clear determination of what is the core business is required—what the main function of the business is. ◗ Preparing a mission statement that clearly outlines the purpose of the business. ◗ A carefully prepared business plan will be essential if the entrepreneur wants to approach financial institutions to borrow money to assist with establishing the business. ◗ The business plan will need to contain a forecast of cash flow for the business as well as a financial forecast for the first year of operation. There should also be sales forecasts, an analysis of costs and an analysis of when the break-even point will be reached (this will be explained later in the chapter). Advice from an accountant should also be sought. ◗ The entrepreneur will need to determine where the business will be located. The factors affecting the location of the business were discussed in Chapter 1 (page 44). ◗ Decisions will also need to be made on what methods will be used to promote the business and its products. Table 3.6 below compares the advantages and disadvantages of establishing a new business. Table 3.6 Advantages and disadvantages of establishing a new business Advantages

Disadvantages

The business starts with a ‘clean sheet’ and premises can be organised the way the owner wants them

It will take a new business some time to establish a customer base, promote the business, generate sales and establish a positive cash flow

There are no hidden problems or issues from a previous owner

The existing and potential markets are not yet established

There are no capital gains or goodwill costs when a business starts from scratch

Many costs may not be anticipated and there may also be legal issues and problems that need to be addressed

Establishment costs may be able to be reduced through operating from home

There may be time delays in the building of new premises, fitting out with furniture and fittings and also with registering the business name and gaining the appropriate licences for operation

A new business has no commitments to suppliers or customers

Consumer demand for the new business’s product is uncertain and there will also be uncertainty about potential competitors; the new business will have to develop its own procedures

It may be possible to enter the market gradually by beginning the business part-time and expanding to full-time eventually

There are no benchmarks and no previous record of cost data or how the business has performed There is uncertainty about how much capital will be adequate There is a large commitment of time and money

Explain purchasing an existing business as an establishment option.

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Existing business A second option is to purchase an existing business. Before purchase, an entrepreneur should conduct due diligence on the target business. Due diligence is a term normally used with the acquisition of a company, but the principle applies when buying a SME. Due diligence means that there should be a thorough investigation of the business in order to evaluate its worth. Another definition of due diligence is that it is an investigative process to make sure that you get what you are paying for. When considering buying a business, due diligence would include fully understanding all of the obligations. These include debts, pending and potential legal actions, leases, warranties, long-term customer agreements and employment contracts. A potential buyer would also need to be aware of any intellectual property, such as copyrights and patents, which were held by the target business.





The due diligence investigation process for buying an existing business could include the areas listed below. ◗ The location of the business and the layout of the premises need to be suitable for the new owner’s purposes. ◗ Will the new owner need to keep trading under the old name of the business and, if so, for how long? ◗ A prospective buyer should be able to examine the accounts of the business for the previous few years to be sure of its financial state. ◗ The price should include intellectual property and the prospective buyer should have the business valued independently to determine whether the sale price is realistic. ◗ A list of assets and liabilities should be included in the sale price. ◗ The reputation of the business within the community and among the customer base is an important factor to consider. Table 3.7 below compares the advantages and disadvantages of buying an existing business. Table 3.7 Advantages and disadvantages of buying an existing business Advantages

Disadvantages

The potential buyer knows total cost of acquisition

Investigation of the business may not reveal all of its problems

Because there is an established cash flow and a history of financial records it should be easier to obtain finance

There could be legal or financial delays that impede the purchasing process

The target business has established performance in the market and there is historical data to observe

There may be problems with the location of the business or the layout of the premises may be unsuitable

The target business has an established customer base

Customer loyalty may not translate to new owners

Because the target business is already in operation it will have established a cash flow

The sellers of the business may make claims that are exaggerated or false

Because the business is already established there is less risk of it failing

The business may come with negative customer perceptions

The business already has a network of existing suppliers, equipment exists and there is a core of staff already trained with appropriate skills There is a set of established procedures in terms of operating the business

Franchise business Buying a franchise business can represent a compromise between the decision to start a new business or buy an existing concern. The franchise system works in the following way: at some stage an idea is translated into a successful business. The owner of the business realises that he or she can make more money if the business idea is franchised to people who are willing to operate a standard business model. These people are called franchisees and the business owner (franchisor) sells the logo and other intellectual property to them. To purchase a franchise, the franchisee must pay an initial fee for the rights to the business. The franchisor usually provides training and may assist with the equipment required by that particular franchise. As the business continues the franchisee will generally pay the franchisor an ongoing royalty payment, either on a monthly or quarterly basis and usually calculated as a percentage of the franchise operation’s gross sales. After the contract has been signed the franchisee will open an outlet of the franchise business, under the direction of the franchisor. The outlet will need to conform to the model established by the owner or franchisor. The franchisee will not have as much control as he or she would over his or her own business but may benefit from investing in an already established brand.

Explain purchasing a franchise business as an establishment option.


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Franchisor Successful business idea

Franchisee • • • • •

Logo Business model Training Premises Ongoing support

Franchisee

• Initial franchise fee • Monthly fee (% of sales) • Rent for premises

Franchisee

Figure 3.3 How franchising works

Examples of franchise businesses in Australia include most of the fastfood outlets such as McDonald’s, KFC and Red Rooster. Baker’s Delight and Brumby’s are examples of franchises operating in the bread-making and baking industries. Most real estate businesses in Australia are franchises, including LJ Hooker, Century 21, Elders and Professionals. Other franchises include Barbeques Galore, Michel’s Patisserie, Hudson’s Coffee and Hotondo Homes. A comprehensive list of franchise businesses in Australia can be found on the website www.franchisedirectory.com.au/. Table 3.8 below compares the advantages and disadvantages of buying a franchise business. Table 3.8 Advantages and disadvantages of buying a franchise business Advantages

Disadvantages

A prospective franchisee may need less capital to get into business by buying a franchise

The franchisor will do ‘due diligence’ on the franchisee, who will be subject to close investigation before being granted a franchise

Franchise businesses usually have a lower risk of failure as assistance will be provided by the franchisor who does not want his or her business model to fail

Consumer demand may fall for the products sold by the franchise and there may also be external influences that impact adversely: a fast-food franchise may be affected if the government bans advertising of fast-food products during children’s television program times

Start-up finance is easier to obtain for a proven business model

The franchisor may not always provide accurate information to potential franchisees

There are cost reductions through purchasing equipment and stock from the franchisor

With some franchise businesses the fees and charges can be excessive, leaving the franchisee with low profit margins

The franchisor is there to provide training and advice

Sales and profits of franchisees may be threatened if the franchisor changes product lines or introduces new products

KCq page 201

Explain the market as an influence in establishing a SME.

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3.2.5 Market It is extremely important when establishing a small business to have a very clear idea of the market for the products that the business will produce and sell. There are two types of market, the first being the total market. This comprises all of the people that want to buy a particular product. Therefore, it is possible to speak of the total market for milk as being all the consumers who want to buy milk. However, it is possible to divide this total market up into portions or segments. Market segmentation is the way in which a business divides its potential market into different groups, or segments. Once these segments are identified, specific products can be developed to meet the needs of consumers in those target segments.





Consumers can be grouped according to: ◗ demographics—age, gender, marital status, job, level of education and income ◗ sociocultural factors—religion, cultural background ◗ geographics—location (urban, rural, inner city, suburbs) ◗ psychographics—lifestyle and buyer behaviour (needs, wants, personality, impulse behaviour). Continuing with the example of the market for milk we established that there is a total mass market but people with low calcium levels who are watching their weight would prefer to buy high calcium, low-fat milk. This would be a psychographic consumer group as it relates to the consumers’ lifestyle and buyer behaviour. The ‘market’ in this case is what is termed the target market. The target market is the specific segment of the total market at which the product is aimed. Most businesses will undertake some level of market research to identify their target market. This will give the business knowledge about the customers (consumers) and their product needs.

Goods and/or services For the business to succeed it must tailor the products of its goods and/ or services to the characteristics and needs of the consumers in the target market. Once the business has a good appreciation of the characteristics of the target market it is then in a position to design and modify its product to suit. A product is a good or service that satisfies a customer’s need or want. Every product is a combination of tangible and intangible benefits. The tangible benefits of a computer are its physical appearance, operating system and memory size, while the intangible benefits are the feelings of belonging, status and opportunities associated with having the product, including after-sales service. To the consumer, products represent a bundle of benefits that satisfy their needs. In marketing those products, businesses need to think in terms of the tangible and intangible benefits to ensure effective positioning, branding and packaging strategies. It is very difficult to find a business that is the producer of only goods or services. Most businesses will produce a combination although businesses will regard themselves as primarily a goods or services producer. Refer to Table 2.2 on page 89 on the differences in producing goods and services.

Price Price is the amount of money charged for products that are for sale. Price is an essential factor in influencing the buying decisions of potential customers. It will directly affect the amount of product sold and the profit made for the business. It is a strategy in the marketing mix that is often overlooked by managers, who may focus more attention on promotional strategies and tactics. The issues related to price are discussed in more detail in Chapter 2.

Location Location is an important factor with regard to the market when a new business is in the establishment phase. Entrepreneurs establishing new businesses will consider location factors in terms of their total and target market. Refer back to Chapter 1 for information on the importance of location.

Explain goods and/or services as an influence in establishing a SME.

Explain price as an influence in establishing a SME.

Explain location as an influence in establishing a SME.


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With the technology available today and current trends in marketing many businesses find that it is essential to have an online presence so that internet marketing can take place. Many customers research products and purchase them online so an online location is also important for SMEs in the establishment stage. KCq page 201 Explain finance as an influence in establishing a small business.

Outline the sources of finance a business can access.

3.2.6 Finance Finance is the essential ingredient that provides the answer to the question ‘Will the business survive?’. In order to survive, a business must generate an adequate cash flow. Cash flow refers to the movement of cash into and out of a business and relates to the availability of shortterm funds to meet short-term debts. The ability of a business to properly manage cash flow and working capital is vital to success. Problems with liquidity will affect business operations and success faster than a low profit margin because the business will be unable to pay suppliers and wages and other operating costs, causing it to be unable to function. The concept of liquidity means that a business is able to pay off its debts as they become due. The key to liquidity for a business is cash flow. If the business has borrowed too much and debt repayments exceed the ability of the business to generate cash from sales, the business will soon become insolvent and cease trading. Cash flow problems are one of the top ten reasons why businesses fail. In order to generate sufficient cash flow a business needs to establish itself with sufficient capital. Sufficient capital will mean that the business is not accessing its current assets (cash flow) to acquire much needed equipment or to pay for unexpected debts. The business will remain solvent. A business acquires sufficient cash flow by having adequate capital at start up. These capital funds are usually a combination of funds put into the business by the owner (equity) and funds borrowed from various lenders. There are several sources of finance as outlined below.

Sources of finance A business can finance its operations in two ways as below. ◗ Debt funding involves borrowing from sources outside the business. This is known as external borrowing. ◗ Equity funding involves using the owners’ funds from within the business (internal) or selling equity to new owners from outside the business (external). Businesses usually use a combination of debt and equity funding. Finance

Debt— external

Short term • Overdraft • Commercial bills • Factoring

Equity— internal

Long term • Mortgage • Debenture

• Provided by others • Provided by people who buy shares in the business

• Retained profits

Figure 3.4 Sources of finance 154





Internal sources of finance Internal funds are obtained from within the business. They will be either equity or retained profits. Equity is funds put into the business by the owners. For sole traders or partnerships it will be the owners’ personal funds and for companies it will be from the issuing of shares. A business can also use retained profits as a source of funds to finance new or existing projects. Another way that funds from owners’ equity can be used to finance business projects is through the sale of assets. Quite often when takeovers or mergers occur the new entity will have surplus assets which it will sell. The proceeds can be used to fund projects to meet the goals of the new entity. For large public companies share issues are the main source of equity funding. Retained profits are the profits not distributed to the owners or shareholders as a dividend but instead invested back into the business. As retained profits are funds that are withheld from shareholders they are an indirect method of investment from these shareholders. This delayed return is essential if a business is to invest in the future. External sources of finance External funds are borrowed from outside the business and are known as debt funding. External funding may be short-term (repaid within one year) or long-term borrowing (repaid over longer than a one-year period). The two main examples of short-term borrowing are overdrafts and commercial bills. An overdraft is an arrangement between the business and its bank that allows the business to overdraw its cheque account by an agreed amount. Interest is charged on the amount of funds that are overdrawn. The overdraft is secured against the assets of the business so if the business defaults on repayment the bank may be able to recover some or all of its losses. Although overdrafts are a short-term loan, businesses may run overdrafts on a continual basis. Generally speaking, the costs of maintaining an overdraft facility can be split into three different categories. The first is an ongoing overdraft service fee which is charged every month and can be up to $20 depending on the lender. There can also be a fee that applies to each cheque written by the business with the overdraft. Finally, there is the interest cost which can vary from what the standard variable rate (SVR) is to a rate approaching 14% depending on the lender. Various interest rates can be investigated at the website of Canstar at www.canstar.com.au/. Commercial bills are non-bank bills of exchange that are issued by companies or merchant or investment banks. The bill itself is the indicator of the borrower’s debt and the commitment of the borrower to repay this short-term debt at the due date. The title ‘commercial’ indicates that the bills are not issued by banks. Commercial bills are usually drawn for short periods ranging from three to six months. Commercial bills are highly liquid and can be converted into cash easily by selling them at a discount (selling the bill for less than the amount written on the bill) to the banking system. They also guarantee payment. The use of these bills imposes strict financial discipline on all parties. Factoring is the selling of a company’s accounts receivable (money that is owed to the business) to a finance company for immediate cash. Factoring provides the business with quick access to its cash from credit sales, assisting the working capital and liquidity of the business. As a result, the business does not have to wait for its usual accounts receivable turnover, which may be 30 or 60 days for payment of credit sales.


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Factoring operates with the finance company buying the accounts receivable of the business at a discount. An example would be if a business had accounts receivable of $100 000 and sold them to a finance company for $90 000. Although the business has lost $10 000, it now has cash in hand and does not have to follow up on outstanding accounts receivable. The finance company now owns the accounts receivable and if it collects all these accounts it will have made $10 000 (or 11.1%) on the transaction. Long-term funds are mainly used to purchase assets and include mortgages and debentures. Other sources of funding involve leasing, venture capital and grants. Mortgages are loans with a fixed schedule of payments where an asset is provided as security. For longer mortgages this is property and for shortterm loans it could be plant and equipment. Security against the loan is necessary in case the borrower defaults. If that happens, the bank can seize the asset offered as security and sell it in an attempt to recover the loan value. Mortgages for businesses are usually much shorter than mortgages for private housing. Debentures are issued by large businesses. Usually a business will advertise the fact that it is issuing debentures by offering prospective lenders a prospectus which sets out the purpose of the issue and gives some information about the performance of the business. Debentures are usually secured, which means that if the issuing business becomes insolvent (cannot pay its debts) debenture holders will receive preference to be paid what they are owed before shareholders. Money lent to the business to buy debentures will earn a fixed interest rate as specified in the prospectus. Returns on debentures are usually higher than other market rates because of the sacrifice of liquidity by the debenture holders. Repayment is guaranteed at a set date. Finance companies make most debenture issues although large companies also raise funds in this way. One long-term option that a SME should consider is that of leasing equipment rather than purchasing it. Many businesses that require motor vehicles and office equipment such as computers will lease them. The advantages of leasing are that the cost is lower than the purchase of the equipment, there are tax concessions, the business does not have to maintain the leased assets and the equipment can continually be updated. The only disadvantage is that the business does not own the equipment at the end of the lease. Operational leases are quite similar to rental agreements and usually contain provisions stating that the arrangement cannot be cancelled without a large penalty, the lessee is not expected to purchase the asset and the lessor is usually responsible for servicing and maintenance. Matching the sources of finance to the purpose of the funds Businesses need to match the terms and sources of its finance to the purpose of the funds and the type of business structure. Businesses would need to consider the following issues. ◗ Short-term assets should be funded by short-term finance. ◗ Long-term assets should be funded by long-term finance. ◗ Low levels of equity can make a business vulnerable: a ratio of 50:50 is often suggested for SMEs. ◗ Debt funding does have advantages and does allow further growth to take place and therefore greater profits. Profits that are earned can help in servicing the money that has been borrowed. ◗ It is important to build up reserves of equity.

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Cost of finance A major source of finance for a SME is to borrow from a bank. However, there are issues that have developed since 2009 that have increased the cost of borrowing to small businesses compared to the standard variable mortgage rate (SVR). The SVR is the rate that a bank will charge a person borrowing money to buy a home. The reason that the comparison is made between a SME wishing to borrow funds from a bank with an individual borrowing to buy a home is that many SMEs are unincorporated. If the business is a sole trader or even a partnership and wanting to borrow funds a bank will often ask the SME proprietor to offer his or her home as security against the loan. Since 2009 the major banks have claimed that the costs of sourcing funds for lending from overseas have increased. In 2008 the interest rate on a small business loan was about the same as a standard variable home loan. But since then, the gap has widened to as much as 1.5 percentage points. This means that in February 2012 the SVR is 7.3% while the interest imposed on a small business loan is 8.8%. The reason for the increased interest on small business loans stems from the claims of the banks that small business is much riskier even with a loan secured against the home. The experience in the banking sector is that the chances of the loan going bad are much greater than for a non-business borrower, and when it does go bad the ability of banks to recover the loan is less. It has already been noted above that interest rates on debentures will be higher than other forms of borrowing because the lender is being compensated for loss of liquidity as well as the higher risk involved.

Outline the cost of finance for SMEs.

KCq page 201

3.2.7 Legal Legal issues are extremely important for any business. There are local council orders and planning consents with which to comply and also state and federal government legislation that a business must implement. Legal issues concerning SMEs include: ◗ business name ◗ zoning ◗ health and other regulations.

Business name A business name is simply a name or title under which a person or other legal entity may conduct its business. A new national business names registration service commenced in May 2012, replacing the state and territory services. Businesses now only need to register or renew their name once and pay a single fee. This will reduce red tape, save time and cut costs for businesses as well as removing the inconvenience caused by having more than one jurisdiction within Australia. The new registration service is administered and managed by the Australian Securities and Investments Commission (ASIC) and businesses have the option of registering their name at a cost of $34 annually or $79 for three years. Consumers can also obtain contact and ownership details of any business currently registered in Australia, resulting in greater transparency and accessibility. Future business owners can also search ASIC’s register to make sure that a similar name (or identical one) is not being used by another business.

Outline legal issues as an influence in establishing a SME.

Explain business name as a legal issue in establishing a SME.


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New businesses need to obtain an Australian Business Number (ABN) before they can register a national business name. Source: www.asic.gov.au/asic/asic.nsf/byHeadline/12-106MR%20ASIC%20 launches%20national%20Business%20Names%20Register?opendocument Explain zoning as a legal issue in establishing a SME.

Explain health and other regulations as a legal issue in establishing a SME.

Zoning Local governments in NSW exist under the provisions in the Local Government Act 1993, amended in 2009. The amendments to the Act in 2009 make further provisions for strategic planning and reporting by councils. In NSW local councils implement and exercise planning powers in conjunction with the state government. SMEs in the establishment stage are influenced by zoning of land within the Local Government Area (LGA). Zoning policy ensures that the structures that businesses erect in the LGA comply with that policy and also with state and local government environmental planning policies. Zoning is also important to ensure that the business that is carried out in a particular planning zone is an appropriate use for that zone. For example, it would be unsuitable for a waste disposal business to build an incinerator next to a hospital or school. New businesses are also influenced by policies associated with development applications where the council and the planning authorities will assess whether a business development proposal should go ahead. When there is a dispute between businesses and councils over zoning and planning issues the matter is often resolved in the NSW Land and Environment Court.

Health and other regulations The main levels of government that will have a legal impact on SMEs in the area of health regulations are state and local government. Local councils can have a significant influence on business in some of the supervisory and planning functions they are required to perform. Many councils have a department which deals with public health issues and this function will supervise the following activities: building supervision, including the management and removal of asbestos; food hygiene; litter control; noise control and pollution. As an example of how health regulations may impact on a small business, Auburn City Council in Sydney’s west has guidelines for the operation of hair and beauty salons and Environmental Health Officers routinely inspect these businesses. There are a number of objectives to these inspections, including: ◗ to ensure the health of the public is protected when they receive treatments or services from a premises ◗ to ensure operators are aware of their obligations to carry out safe, clean and hygienic procedures ◗ to ensure that the premises where procedures are undertaken comply with the relevant standards. If a business violates any of the local orders which a council has made on any health matters it may be prosecuted and fined. Local councils also formulate and implement policies for providing for waste disposal services. This allows businesses to get rid of waste in a convenient and relatively low-cost method. Workplace health and safety Other regulations that will apply to SMEs concern workplace safety for both the owner and any employees. Workplace safety laws and regulations have undergone substantial change in Australia with the federal (Commonwealth) government working to secure uniform workplace safety regulations across the nation.

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The organisation tasked with overseeing workplace health and safety (WHS) regulations is Safe Work Australia (SWA). Safe Work Australia has developed model WHS Regulations, Codes of Practice, guidance materials, and compliance and enforcement policies to support the model WHS Act. The Commonwealth, states and territories (with the exception of Western Australia and Victoria) implemented the new work health and safety laws on 1 January 2012. Following implementation, Safe Work Australia now monitors and evaluates the national work health and safety framework. The SWA website provides information for businesses about safety in the workplace. This information includes: ◗ National Standards and guidance material ◗ advice on working with hazardous substances and dangerous goods ◗ advice on risk assessment through safe design ◗ publications on education and training resources to assist businesses in the development of effective work health and safety guidelines as well as training packages. KCq page 201

3.2.8 Human resources The working of the human resource (HR) management key function in a SME is quite often much more informal than in a larger business or corporation. The acquisition of HR may be as simple as placing a poster in a shop window advertising a vacant position and requesting people to register interest with the owner. Training will often take place informally, with priority given to customer service. SME owners will rely on employees to have appropriate skills training when they join the business.

Skills Skills that are needed in the workplace can be classified into two categories—general and specific skills. Specific skills are those that are required (often by law) to perform a particular job. General skills are those that are transferable from one workplace to another.

Outline human resources as an influence in establishing a SME.

Explain skills as part of human resources in SMEs.

General skills There are a number of general workplace skills that are transferable from one job to another. In some cases a business will assume that a potential employee has basic general skills. One example would be that if a person had completed Year 12 at high school, potential employers could reasonably assume that that person had basic computer skills. On the other hand, some general skills such as customer relations may need to be acquired through a training program. General workplace skills that are transferable and needed in most jobs include: ◗ communication ◗ numeracy ◗ information technology (computing skills) ◗ team working ◗ problem solving ◗ managing your own learning ◗ customer relations ◗ time management ◗ flexibility ◗ planning and organisation ◗ motivation and enthusiasm ◗ showing initiative. Chapter 3 • BUSINESS PLANNING © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 159

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Specific skills Specific skills are those that are acquired through specialist training. This training would take place at a school, TAFE, university or other accredited educational provider and usually lead to the award of a qualification. Examples of occupations where specialist skills would be needed include carpenter, electrician, nurse, teacher, doctor, solicitor, accountant and HR manager. There will be many cases where the owner of a SME will contribute to the skills development of employees either through on-the-job training, where the employer trains the employee while work takes place, or by employing a person as an apprentice and contributing to the expenses of training at TAFE. There are some cases where SMEs will assist employees by contributing towards HECS costs while the employee attends university part-time or by correspondence. Outline costs as part of human resources in SMEs.

Explain wage costs as part of human resources in SMEs.

Explain non-wage costs as part of human resources in SMEs.

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Costs Costs in this case refer to the wage and non-wage costs of employing people to work in a business. In many cases, an entrepreneur will start a business and be the sole worker: in Australia in 2009 62.7% (or nearly 1 281 098) of small businesses did not employ any staff. A business owner has to weigh the costs of performing the work without any staff against the costs of hiring staff. Wage costs There are two levels to the wage costs involved when a business employs staff. The first level involves the actual wages paid. The business will need to observe any legal requirements such as enterprise agreements or contractual arrangements. The wage system will be designed to offer incentives to employees to encourage them to strive to maximise their output. Wage structures where there are wage increases based on achievement will motivate employees to produce quality work. This will result in employee satisfaction. The business will also offer a wages package designed to retain employees because a rising turnover becomes costly in HR terms. It will also be important to develop a wage system that all employees recognise as equitable both horizontally (employees at the same level) and vertically (employees at different status levels in the business). The second level of wage costs involves employee benefits which may be part of legislation, enterprise agreements or awards, or offered as an incentive by the employer. In terms of employee benefits, the business will offer a superannuation scheme and various types of leave, such as community service, family, sick and long service leave, as well as paid parental leave. The business will also have to insure employees against accidents or illnesses that are caused by the job through the workers’ compensation scheme. In some businesses employees are offered a health insurance plan. In Australia, some employee benefits may fall into the category of fringe benefits and therefore be subject to taxation. Non-wage costs Non-wage costs are the costs to the employer of providing rewards to the staff that do not fall into the category of financial rewards. These rewards meet the intrinsic needs, values and beliefs a person has regarding their job. Non-wage rewards include personal satisfaction, job enrichment through interesting and challenging tasks, decision making, leadership, educational opportunities and a positive work environment with effective management.





A manager could apply the FIERCE approach to non-monetary rewards to keep employees feeling stimulated and valued. This covers: ◗ flexibility in working arrangements, such as timing of work hours and working from home ◗ interest in the employee, professionally and personally ◗ educational opportunities, including both formal and informal training that supports employee skill and career development ◗ recognition, both formally through promotions and achievement awards, and informally, with a note or quick word of congratulations ◗ clear communication systems ◗ equity among employees so they see that all are treated in a respectful, fair and professional manner. Non-wage costs (non-monetary rewards) are hard to measure in terms of return on investment but are vital to the employee-employer relationship and many jobs have built-in non-monetary rewards. Increasingly, however, employees in all types of industries need more than financial rewards to stay motivated and productive.

KCq page 201

3.2.9 Taxation All three levels of government levy various taxes and charges. The federal government levies income tax on individuals, company tax on incorporated businesses and the goods and services tax on final goods and services at the point of sale. The federal government also levies a capital gains tax that may apply to some businesses as well as a fringe benefits tax on employers who are judged to have given their employees benefits such as unlimited use of a business vehicle. The NSW Government levies payroll tax on businesses that have a total wages bill over a certain threshold while local governments levy rates on residential, commercial and industrial properties. These rates are paid by the owner of the properties.

Federal and state taxes Income tax The federal tax that will affect all businesses is income tax, whether personal or company. Company (income) tax is levied on businesses that have incorporated. The rate of company tax is a flat 30% at present. The 2015–16 budget made a concession to small businesses that had incorporated, reducing the company tax rate for Small Business companies to 28.5%. Small Businesses were defined for this concession as those with aggregated turnover of less than $2 million. However, many small businesses are not incorporated. This means that a sole trader will be taxed the same as an individual wage and salary earner. With a partnership, each partner is taxed as an individual and each partner also enjoys the tax-free threshold. Therefore it may be profitable for a sole trader to go into partnership with a husband or wife or children as a method of minimising tax. There exists a tax advantage for a small business to incorporate. For 2015–16 if an individual’s taxable income exceeds $37 000, the tax rate rises from 19% to 32.5%. Therefore it would be a benefit tax-wise if a business earning a taxable income over $37 000 changed its legal structure to that of a company.

Outline taxation as an influence in establishing a SME.

Explain federal and state taxes as influences in establishing a SME.

Goods and services tax (GST) The federal government imposes a goods and services tax (GST) of ten per cent on the supply of most goods and services by businesses registered for GST. A number of supplies are GST free (many basic foodstuffs, medical and educational services, exports, etc). Chapter 3 • BUSINESS PLANNING © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 161

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GST turnover is gross business income. If it exceeds $75 000 in any month or over a 12-month period, the business must register for GST. If a business is registered for GST it needs to include GST in the price it charges customers for goods and services. GST is paid at each step in the supply chain. Businesses do not actually bear the economic cost of the GST: this is borne by the final consumer, who cannot claim GST credits. While businesses do not bear the economic cost of GST, they collect it. GST registered businesses need to put aside the GST they have collected so it can be paid when due. Businesses report GST amounts to the Australian Taxation Office (ATO) and claim GST credits (GST the business has paid when purchasing inputs) by lodging an activity statement or an annual GST return. The business must pay the ATO the GST amount due by the reporting date. An impact on GST registered, newly-established SMEs will be additional financial record-keeping to comply with the requirements of the ATO. Payroll tax The NSW Government charges payroll tax to businesses that have a total wages bill over a certain threshold. The payroll tax wages threshold for the period 1 July 2015 to 30 June 2016 is $750 000 and the rate of payroll tax from 1 July 2015 is 5.45%. Stamp duty The NSW Government also levies stamp duty on transfers of land. This could impact on a new business in the establishment stage. Explain local government rates and charges as influences in establishing a SME.

Local rates and charges In NSW, local governments mainly raise funds by taxes on land value (council rates) of residential, industrial and commercial properties. Land value is determined by the NSW Valuer-General’s Department. Local councils levy rates on all land within their boundaries and the business rate is usually higher than the residential rate per dollar of land value. This has implications for entrepreneurs thinking about establishing a small business. If the business can legally and operationally be run from home there is a good chance that the residential rate will apply, compared to being established on land zoned for business. Local councils implement policies for providing infrastructure, such as footpaths, and regulating the use of these by businesses. Many hospitality businesses, such as restaurants and cafes, like to increase their operations by having footpath dining. Councils regulate this and can apply charges per table. Many councils also impose a levy on businesses by requiring them to provide a minimum amount of parking for customers: if the business cannot do this, the council imposes a charge. Some councils also develop and rent out business premises to both retail and industrial concerns. KCq page 201

Outline the business planning process.

page 203

3.3 The business planning process Planning is the most critical element in the process of establishing a business. American inventor and politician Benjamin Franklin is attributed with the quote ‘by failing to prepare you are preparing to fail’. Over time this quote has evolved into a catchphrase for prospective

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entrepreneurs—‘if you fail to plan you are planning to fail’. Careful planning will be an important step in establishing a successful business. There are different types of plans that businesses must develop and implement, as below. ◗ Strategic plan—a long-term general plan that outlines the vision and future direction for the business. ◗ Tactical plan—more detailed plans that translate the goals and objectives from the strategic plan into actions and tasks for the short to medium term. These plans may run for several months or a year. ◗ Operational plans are the ongoing plans that deal with the day-to-day functions necessary to achieve the business goals and objectives. The planning process begins with the situational analysis where the entrepreneur takes stock of the things that enhance the business or detract from it, as well as the opportunities and threats that it faces. The next step is to establish the vision for the business as well as the goals that the owner would like the business to achieve. Following the development of vision and goals, the owner needs to organise the key business functions of operations, marketing, finance and human resources. As part of the planning process forecasts need to be made of revenues and costs, a forecast of when the business will break-even (where costs equal revenue) and projections of cash flow. At this stage there needs to be careful monitoring and evaluation of sales, budgets and profit before taking corrective action. This business planning process is summarised in Figure 3.5. Situational analysis Taking corrective action

• • • •

SWOT analysis Product life cycle Market analysis Competitor analysis

• Vision • Goals/objectives

Organising key business functions • Operations • Marketing • Finance • Human resources

Monitoring and evaluations • Sales • Budget • Profit

Forecasting • Total revenue, total cost • Break-even analysis • Cash flow projections

Figure 3.5 The business planning process

3.3.1 Sources of planning ideas The major sources of information for SMEs was summarised in Figure 3.1 on page 145 and outlined in more detail in section 3.2.2. These are sources of information as distinct from sources of planning ideas. Nevertheless, these information sources will be helpful in finding sources of planning ideas. The Small Business NSW website has detailed information relating to the business planning process.

Identify and explain the sources of planning ideas.

(www.smallbiz.nsw.gov.au/start/earlystages/planningyourbusiness/Pages/default.aspx).


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There is an example below from the website on how to write a business plan. EXAMPLE

How do I write a business plan?

Your business plan is essential for your business—it’s your blueprint for the future. It sets the direction for your business and keeps you on track once you’re up and running. It’s also a requirement when you’re seeking finance. Depending on what type of business you intend to start, your business plan could include these elements. ◗ Executive summary—a one-page overview written after your business plan is finalised. ◗ Introduction—explains the purpose and objectives of going into business. ◗ Marketing analysis—looks at the industry you are entering and how you fit in. ◗ Marketing plan—your marketing strategy. ◗ Operations plan—how you’ll set up the business, i.e. structure, location, regulations. ◗ Management plan—how you’ll manage your business. ◗ Financial plan—how you’ll finance your business, costing and financial projections. Business planning is an ongoing business activity—you should regularly review and revise your business plan. Source: Small Business NSW: www.business.gov.au/Howtoguides/ Thinkingofstartingabusiness/Pages/HowdoIwriteabusinessplan.aspx

Apart from using the information sources listed in Figure 3.1 to source planning ideas, the owner/entrepreneur should tap into the knowledge and expertise of people close to the business. Relatives, employees, professional people such as accountants and solicitors and business enterprise centres can be valuable sources of planning ideas. In the final analysis the responsibility for planning ideas rests with the owner of the business. Explain situational analysis as a source of planning ideas.

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Situational analysis Before a situational analysis is undertaken it is assumed that the owner of the business has determined what the core business will be and will have developed a concise mission statement. In Chapter 1 we investigated the business Australian Solar Timbers (AST). A look at AST’s website reveals the mission of AST: Family owned since 1919 Australian Solar Timbers (AST) as it is now known has operated continuously in the NSW hardwood industry, which over the decades has seen it pioneer, innovate and adapt to today emerge as the nation’s most modern, innovative and environmentally sound hardwood flooring manufacturer. A situational analysis is a current snapshot of up-to-date information and facts that impact on the business. This involves analysing the internal and external factors that affect the business. Situational analysis will include: ◗ SWOT analysis ◗ consideration of the product life cycle ◗ market analysis ◗ competitor analysis. A situational analysis allows a business to understand its internal and external situations, its customer base, its total and target markets and what the business is capable of achieving.





SWOT analysis A SWOT analysis is one element of a situational analysis. ‘SWOT’ stands for Strengths, Weaknesses, Opportunities and Threats. The SWOT analysis allows a business to examine the influences in its internal environment (when it is analysing its strengths and weaknesses) and its external environment (when it is analysing its opportunities and threats). Table 3.9 Example of a SWOT analysis Internal (within the business environment)

Strengths w Effective and efficient management and good business planning w Excellent reputation with customers and suppliers w Operational order w Loyal, motivated and skilled employees w Achieving or exceeding financial objectives w Competitive advantage in price, product, promotional strategies w Use of up-to-date technology

Weaknesses w Ineffective and inefficient management: poor decision making and planning w Poor reputation and image with customers and suppliers w Dissatisfied and/or incompetent employees w Operational chaos w Failing to meet financial objectives w Outdated product, unsuitable pricing and promotional strategies w Outdated and unreliable technology

External (outside the business’s control)

Opportunities w New and fast growing markets w Weak competition w Research and reports w Changes in fashion and taste w Improved economic conditions w Favourable government laws and regulations w Social and environmental responsibility

Threats w Market/product oversupply w New/increased competition, including new products w Research and reports w Changes in fashion and taste w Economic slowdown w Government laws and regulations with a negative impact w Social and environmental responsibility

Product life cycle Product life cycle refers to the four stages (see below) that a product goes through from its launch on the market to its removal, and its associated levels of sales, volume and market share. ◗ Introduction—new product and little competition but low sales and high costs; little or no profit. ◗ Growth—sales increase, profits rise, high levels of promotion, competition grows. ◗ Maturity—high competition, sales steady, profits may begin to decline. ◗ Post-maturity (either decline or renewal of the product)—decline (sales fall, negative profits, product may stop being made); renewal (product is relaunched with increased promotion, increased sales and profits). The stage at which the product is on the product life cycle will affect the type of strategies used in the marketing mix. Introduction

Growth

Maturity

Post-maturity

Renewal Steady state Decline

Sales ($)

Time

Figure 3.6 The product life cycle


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Market and competitor analysis Market analysis is an important part of situational analysis. The business operator must know estimates of market size and potential sales as these two elements will have a direct bearing on what finance is needed for the business as well as how many people to employ. Market analysis should include the following. ◗ Estimates on the size of the total market and the target market. ◗ An analysis of the customers in the potential market of the business and the types of products they are likely to buy. This analysis should also take into account any actual or predicted shifts in demographics. For example, a suburb that is predominantly settled by people in the 60 plus age group may gradually change demographics to younger families with young children. This will have a bearing on the products that a business will market. ◗ Sales forecasts and cash flow forecasts. ◗ Variation in demand for products—are the products sold by the business the subject of seasonal demand? ◗ Competitor analysis—identifying competitors of the business, the customer service they provide, products sold, selling methods and their strengths and weaknesses. ◗ Forecasts of external factors, such as economic, legal and political influences that are likely to affect the market. KCq page 202 Explain vision, goals and/or objectives as part of the business planning process.

3.3.2 Vision, goals and/or objectives Vision A vision statement outlines what a business wants to be or how it wants the world in which it operates to be (an ‘idealised’ view of the world). It is a long-term view and concentrates on the future. It can appeal to emotions and be a source of inspiration. It is also the foundation for the practical statement of the mission of the business. The difference between mission and vision is this: the mission of a business is what the business does best every day. It defines the purpose and main objectives of a business. The vision of a business is what the future looks like because the business achieves its mission successfully. The vision of a business encompasses the values of the business. The following are examples of vision statements: ‘A computer on every desk and in every home’ (Bill Gates) and ‘To organise the world’s information and make it universally accessible and useful’ (Google). Goals and/or objectives It is important to be able to define what a goal and an objective are and to be able to recognise the difference between them. A goal is a subjective, general description of what the owner would like the business to achieve. When formulating goals there is no need to be specific. An example of a goal is ‘I would like the business to be successful and financially strong’. On the other hand, an objective is a specific description of what needs to be achieved. An objective is usually expressed in precise terms without using emotive language. An example of an objective, derived from the example of the goal expressed earlier in this section, is ‘The business will break-even during the first six months of operation and will record a net profit of $50 000 at the end of the first year’.

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Objectives are often expressed to meet the SMART criteria so that they are achievable. SMART stands for Specific, Measurable, Achievable, Realistic and Timed. It is important to have short-term wins when establishing a business so that the people involved in the start-up process feel a sense of achievement and so their efforts are visibly recognised and rewarded. This can build momentum in establishing the business. Objectives are the way that goals are converted into effective action plans. They are the focus for strategies that will be used to achieve the business’s goals.

Business goals In a small enterprise it is usually the owner who sets goals and outlines the strategies to achieve them by organising the resources and staffing. In a medium enterprise this role would be the manager’s responsibility. Owners or managers develop the policies and procedures that will assist in achieving goals. They monitor and analyse results through control systems, which helps them to evaluate, identify and solve problems and adopt corrective strategies where actual performance has not been consistent with planned performance. Business goals should aim to meet most of the SMART criteria. ◗ While goals do not have to be specific they need to be easily understood, clear and concise. ◗ Goals should be measurable so they can be tracked and it judged whether or not they have been achieved. ◗ Goals should be formulated to achieve the vision and mission of the business within the context of being realistic and achievable in terms of resources. ◗ Goals should be set with a time frame for achievement in mind. Goals can be developed in terms of a number of categories, depending on the preferences of the owner or manager. In Chapter 2 we saw that most businesses will establish goals that deal with: ◗ profits ◗ market share ◗ growth ◗ share price ◗ social ◗ environmental. These goals can be classified into two groups—financial goals and social and environmental goals. Businesses can also develop goals that will include statements on the reputation of the business, such as ‘this business will only sell the highest quality goods’. Businesses may also develop cultural goals, such as ‘this business supports the development of young people in music and the performing arts by offering scholarships to assist talented students’. Most businesses develop goals focused on customers and providing excellent service. Goals must also be consistent with the values and culture of the business. Goals should be seen as opportunities for the business, not a burden that is out of reach or an idealistic statement that can never be achieved. Goals can provide a framework for developing key performance indicators (KPIs) for the business and for individuals working within it. KPIs are indicators that let a business (or its owner or manager) know when a goal is being achieved or a contribution is being made towards achieving it. An example would be if a business established a goal to make a profit

Explain business goals as part of the business planning process.


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of more than $100 000 over a year, and the six-monthly financial report indicated that the six-month profit was $60 000. The owner or manager would feel that this indicated that the business is well on the way to achieving that goal. Explain long-term growth as part of the business planning process.

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Long-term growth Growth is the increase in the size and value of a business over time. Growth provides a business with the opportunity to expand, produce a wider product range, access additional resources, including a more extensive variety of specialist skills and innovations, and help consolidate the position of the business in terms of its competitors and market share. The main purpose of growth is to increase profits and return on capital. Businesses must monitor their growth so that they are achieving sustainable levels. Too much growth too fast can cause cash flow problems, but careful cash flow management can avoid serious liquidity and solvency concerns. Most businesses will start to grow from the day of establishment. However, with good business planning which sees the development of strategies to achieve the objectives of the business, long-term growth at a manageable pace can be achieved. Businesses need to develop goals which will help them focus on longterm growth. Growth goals can focus on a mixture of revenue growth, expanding into new markets, increasing market share, developing new goods and services or increasing the value of the business. When the process of identifying the goals for business growth is complete, the business (or its owner or manager) needs to collect the information it needs to achieve these goals. Much of this work may have already taken place through the situational analysis (page 164). The business needs to research its customers to determine the products they require and the services they expect a business to provide. A thorough analysis of competitors is needed to develop competitive advantage as well as strategies to develop new markets or increase market share. It is also important to scan the external environment to find out what will impact on business in the years ahead. When the business is undergoing its SWOT analysis it needs to focus on the opportunities for growth. The owner or manager needs to consider whether the business has adequate resources of staff, skills, production facilities, sales, marketing and financing. Once opportunities have been identified, the business needs to narrow the list down to those opportunities that are achievable and will yield the best growth results. Next is the planning stage. Now that the growth opportunities have been identified and selected the business needs to use its research to make a detailed plan of how to pursue the strategies that will lead to long-term growth. The business will need adequate resources to implement these strategies so finance and equipment will need to be incorporated into the plan so that cash flow problems do not occur. The business will need to establish benchmarks (or KPIs) so that it can determine whether it is on-track, otherwise corrective action may need to be taken. It is important to remember that the goal of achieving long-term growth is an ongoing strategy. Figure 3.7 summarises the process for planning long-term growth.





Growth • Increase size of business • Increase profits and return on market share

Identify goals for business growth • • • •

Revenue growth Increase market share Expand into new markets Develop new products

Research—collect information • • • •

Check situational analysis Customer research Competitor research Scan external environment

SWOT opportunities • Check resources for adequacy • Identify opportunities; select those that are achievable and yield most growth

Planning stage • Detailed plan of strategies • Develop KPIs

Figure 3.7 Planning for long-term growth

Case

study:

Global car-cleaning franchise Nanotek

In Chapter 1 a contemporary media article was presented discussing the global expansion of one Australian business. The business was Nanotek, which began as a car-cleaning business which expanded globally using the franchise method. This article can be used to address the aspect of the syllabus where you have to explain how SMEs can enter the global market for long-term growth.

Students learn to: investigate aspects of business using hypothetical situations and actual business case studies to explain how SMEs can enter the global market for long-term growth.

The article on Nanotek can be found on page 14.

KCq page 202

3.3.3 Organising resources Organising is an ongoing task for most owners and managers. In today’s business world, things change quickly and variations occur. Owners and managers must remember that the organisation and management of resources is constantly changing. Flexible owners and managers are able to change courses when necessary and still meet the customers’ needs. Change is inevitable. Organisational changes such as adding new positions or eliminating certain processes can change the structure of the business.

Outline the process of organising resources as part of the business planning process.


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In order to implement plans to achieve business goals as well as implementing strategies for long-term growth, a business needs to organise its resources. These resources are the core components of the key business functions of the business. Whether the business decides to outsource non-core functions or to produce them itself, the business will need to develop an organisation which includes: ◗ operations—the core business ◗ marketing—how to connect the output of the business with customers ◗ finance—acquiring finance to operate the business, budgets, cash flow planning and keeping financial records ◗ human resources—how the business will acquire, develop and maintain its personnel. Explain organising operations as part of the business planning process.

Explain organising marketing as part of the business planning process.

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Operations Operations refer to the activities of a business that acquires and combines inputs, changing them into finished goods and services. The management and organisation of operations is concerned with this process of transforming inputs (such as raw materials, labour, power and transport) into outputs of goods and services. A major task in organising operations is to ensure their efficiency by using the least amount of input possible. At the same time, organising operations needs to be effective by making sure customers’ needs are met and they are satisfied with the output. In the establishment stage of a business the owner will want to ensure that costs are kept as low as possible. The owner can develop a plan which will organise the business and its operations so that it: ◗ develops an efficient scale of operations which minimises costs ◗ uses up-to-date technology in production and other business functions ◗ controls production costs (inputs such as labour and raw materials) and overheads costs (establishing and maintaining the plant and equipment, power costs) ◗ controls the costs of research and development and selling costs such as advertising. Apart from organising production techniques and costs, the business will need to plan: ◗ quality control ◗ customer service ◗ inventory control ◗ product development, including the development of new products to introduce to the market. By taking these steps the owner will have organised operations so that the business can produce its output in an efficient, cost-effective way.

Marketing Organising the marketing process involves the planning, pricing and promotion of the products of the business, as well as the distribution and servicing of the product. This is all covered in the marketing plan of the business. The marketing plan depends for its success on the plans of the other business functions. It relies on the operations functions to create products of the right quality, on HR for the best staff and on accounting and finance for adequate funding of marketing strategies. The planning of a successful marketing initiative centres on obtaining good information about customer needs, competitors and the internal and





external business environments. Marketing planning itself focuses largely on the following five steps but should be seen as an ongoing process. ◗ Situational analysis—the business needs to focus on its existing situation and determine where the business is going. The first section of the marketing plan reviews and analyses the current situation of the business. It includes SWOT, product, market (including customer analysis) and competitor analysis. ◗ Establishing marketing objectives—the business must focus on what direction it wants to go in. Some common marketing objectives that flow from the business plan are to increase the market share of existing products, develop new products, expand existing markets and develop new markets. These marketing objectives will be linked to the firm’s overall business objectives but will provide marketing performance targets. ◗ Identifying target markets—the target market is the group of consumers within the total market to which a business tries to sell its product. The total market can be broken down into segments, each having different characteristics. The business can then target particular segments. ◗ Developing marketing strategies—a business needs to develop strategies to achieve its objectives. Having identified its target market the business must plan its sales by focusing on how to use the ‘Four Ps’ of the marketing mix (see Chapter 2, page 94) to achieve its marketing objectives. For example, to increase market share one strategy could be to increase advertising of the product. ◗ Implementing, monitoring and controlling—the business needs to identify and reflect on its achievements. Implementation involves putting the marketing plan into action. Monitoring will involve comparing actual performance with what has been planned. Successful monitoring is achieved through controls—data that measures the progress of the marketing plan. Corrective action and revision of the strategy may be necessary if planned performance is not occurring. Marketing planning is summarised in Figure 3.8 (see overleaf page 172).

Finance The purpose of organising and planning finance is to determine the financial requirements to start the business and then to keep it profitable and liquid. Organising and planning finance involves determining the financial resources available to implement the strategies necessary to achieve the goals and objectives of a business. The key to any business realising its objectives is the successful financing of its operations. Planning finance must be flexible and adaptable to change given the dynamic nature of the business environment. A range of ongoing activities is involved in the strategic organisation and planning of financial resources. These include: ◗ setting policies and procedures regarding cash and credit controls ◗ determining the mix of equity and debt finance raising ◗ budgeting, including monitoring actual and planned performance ◗ record keeping and analysis through the use of financial statements— analysis of financial performance using various financial ratios should be undertaken ◗ implementing financial controls ◗ taxation management.

Explain organising finance as part of the business planning process.


171



Organising finance will require policy decisions to be made in a number of areas, including: ◗ whether to operate on a cash basis only or allow credit purchases ◗ checking on credit history of customers ◗ payments policy—will the business offer discounts for prompt payments and how will the business respond to customers whose accounts are overdue ◗ policies on managing accounts receivable and managing accounts payable to creditors of the business. Marketing planning

Situational analysis • • • •

SWOT analysis Market analysis Product analysis Competitor analysis

Establish marketing objectives • • • •

Increase market share New products Expand existing markets Develop new markets

Identify target markets

Develop marketing strategies • Use ‘Four Ps’

• Implementation: put plan into action • Monitoring: compare actual with planned performance • Corrective action: make adjustments to plan

Figure 3.8 The marketing planning process

Explain organising human resources (HR) as part of the business planning process.

172

Human resources HR management involves: ◗ the planning of staff needs ◗ acquisition and maintenance of employees





training and development the supervision and management of the performance of all employees separation of employees when they leave the business the management of issues such as conflict resolution and the changing nature of the workplace. A business can achieve its fullest potential if the employees are effective and efficient in the way they go about their tasks. It is the major role of HR to ensure that the productivity of a business or its output per person is at a maximum so that these goals can be achieved. The ABS noted in 2009 that 1 313 761 small businesses (or 67% of small businesses) did not employ any staff. That means that two-thirds of small businesses do not need to hire staff. However, it does not mean that these businesses do not need to do any HR planning. The owner of the business must ensure that he or she has the appropriate technical training to work in the business. If the business was a hairdressing salon, the owner would need appropriate TAFE qualifications in that area. There are also workplace health and safety regulations that the business needs to implement. For SMEs that do need staff there will generally be a closer relationship and contact between owners and/or managers and other employees. This will encourage employee participation in decision making and working in teams. For this to be successful, some training programs would need to be implemented so that workers have the necessary communication and organisational skills. It will be up to owners and managers to provide this training. Owners and managers will also need to plan for the future in terms of acquiring new HR, providing appropriate training and development programs and maintenance of employees as well as developing policies and procedures for separation. There will also need to be mechanisms to resolve conflict in the workplace. ◗ ◗ ◗ ◗

Outsourcing Many small businesses, especially those that do not employ any staff, will need to plan to outsource some of the key business functions to a specialist business. Operations is a function that cannot be outsourced, otherwise the business would not exist. However, a small business owner may wish to outsource the functions of marketing, finance and HR to specialist businesses. In many micro or small businesses some of the key business functions might not exist in any formal fashion. Where the owner is the only employee there may not be a HR function if there is no intention of hiring any employees. The marketing function of some businesses may be limited to a shopfront window display.

KCq page 202

3.3.4 Forecasting Financial forecasting is often difficult but it is not like trying to forecast the weather. The weather is something over which a business owner has no control but with a business that is starting up, the owner can exercise a considerable degree of control over what happens. Financial forecasting is a goal that the owner establishes for the business and then makes a determined effort to achieve. At this stage of the planning process forecasting will involve forecasts of: ◗ total revenue and total cost ◗ break-even analysis ◗ cash flow projections.

Outline forecasting as part of the business planning process.


173



Explain forecasting total revenue and total cost as part of the business planning process. Explain how revenue is forecast.

Revenue The total revenue earned by a business will usually be made up of two components—sales revenue and other revenue that the business earns. This other revenue can be made up of interest earned from any investments, rents received and any royalties or licence fees earned by allowing someone else to use the business’s intellectual property. It is unlikely that there will be much of this other revenue in the establishment phase. An established business has a relatively easy task when forecasting sales revenue. It can use data from previous years and factor in forecasts for growth or decline depending on market trends. Sales revenue forecasts for a new business involve studying the industry in which the business operates, compiling a consumer profile and getting a sense of the sales of competitors to gather enough information to do some simple sales projections. It is very important that the owner conducts diligent research of the industry, competitors and the external environment to make sales projections. Business enterprise centres, the local chamber of commerce and industry and the ABS can be helpful in this research. It is also important to remember that forecasts are only a guide. In order to make a sales revenue forecast after the research has been completed, a business should estimate its market share in terms of customer numbers. Next, an estimate needs to be made about how often customers will buy per year. The business must also forecast the average dollar amount of each purchase. These figures should be multiplied to arrive at a forecast of sales revenue. Cost Cost is easier to predict than sales revenue. There are two elements to cost— fixed and variable costs. Fixed costs refer to inputs that do not change as production or output increases. Examples of these costs include rent, insurance, utility connection costs (such as telephone and electricity) and council rates. Variable costs refer to the costs of inputs that vary as output varies. As output increases, for example, the business may use more power and it will need more inputs of raw material and possibly more labour. Examples of variable costs include wages, raw materials and power costs. Total cost = Fixed costs + Variable costs. The reason that costs are easier to forecast than revenue is because the amount of fixed costs is known as these have to be incurred by the business before production begins. It is also easier to make forecasts of variable costs because these can be calculated by knowing the costs per unit of each variable input and multiplying that cost by the number of units the business predicts it will produce and sell.

Explain how cost is forecast.

Explain forecasting break-even analysis as part of the business planning process.

174

Total revenue, total cost

Break-even analysis A business reaches its break-even point at the point of output or sales volume where sales revenue equals the total costs of the business. At that point the business neither makes a profit nor a loss. The break-even point lets the business know what it is going to take in terms of sales volume just to survive. It provides a good indication of the viability of a business. At the break-even point the business is covering all costs and increased sales from the break-even point will result in profit. Decreases in sales result in costs exceeding revenue and the business making a loss. Breakeven analysis can be used to determine the level of sales needed to generate a level of profit and is often used in strategic planning.





Costs and revenue $’000

0

Profit Revenue > Cost

Sales revenue

As mentioned in the paragraph above, at the break-even point the business earns just enough to cover all costs. At the break-even sales volume Total cost (output level): (fixed costs + variable costs) Break-even occurs at the output (sales volume) where: Sales revenue = Total cost Sales revenue = Fixed costs  Variable costs. Loss The Costs break-even point is illustrated in Figure 3.9. > Revenue Figure 3.9 shows that the break-even point occurs at the sales volume (or Break-even point output point) where total cost is equal to sales revenue. At this point the business is covering all costs. For sales volumes to the left of this point, the business is making a loss because total cost is greater than sales revenue. For sales volumes to the right of the break-even sales volume, the business is making a profit because sales revenue is greater than Fixed total costs cost.

Costs and revenue $’000

Profit Revenue > Cost

Total cost (fixed costs + variable costs)

Loss Costs > Revenue Break-even point

0 Calculating the break-even point (break-even sales volume) When a business breaks even, it earns just enough from sales to cover all Break-even sales Sales= volume volume (output) costs. This means that the dollar value of sales total cost (see Fig. 3.9). or output Break-even Figure 3.9 The break-even point (VC). Total costs = Fixed (FC)  Variable costs’000 Salescosts volume The dollar value of(output) sales = Fixed costs  Variable costs. The dollar value of sales = the amount of goods sold (sales volume)  the retail price per unit. Variable costs (VC) = the amount of goods sold (sales volume)  the variable cost per unit of output. EXAMPLE

Sales revenue

Fixed costs Sales volume or output ’000

Calculating break-even point

Here is an example to help you calculate the break-even point. Geraldine and Rodney operate a business called Texan Boots. They have fixed costs (FC) of $20 000. Rodney has calculated that the variable costs are $50 per unit. Geraldine has set the selling price at $60 per unit. What is the volume of sales when the business breaks even? Solution: Call the volume (quantity) of sales at the break-even point ‘Q’. We know these facts about the break-even point: Sales revenue = Total cost or Sales revenue = Fixed costs  Variable costs Sales revenue in this example is $60  Q Total cost in this example is FC + VC = 20 000 + $50  Q Therefore: $60  Q = 20 000 + ($50  Q) Subtract ($50Q) from both sides $60Q  $50Q = 20 000 $10Q = 20 000 Divide both sides by 10 Q = 2000 Therefore, when 2000 units of Texan Boots are sold, Geraldine and Rodney will break-even. Sales of more than 2000 units will mean that Texan Boots will make a profit.


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Calculating the break-even point can also be used to evaluate a business expansion or any other business expenditure. The business is simply asking how much additional revenue will be required to cover the additional cost. Explain cash flow projections as part of the business planning process.

Cash flow projections A cash flow projection is probably the most important financial tool available to a business. It is the cash flow that shows the owner of the business if, and when, it will run out of cash. Adequate cash flow is essential to run a business. A cash flow projection allows the business to take action before problems occur and even do ‘what if’ calculations before taking on new projects. The cash flow is a 12-month projection that forecasts the receipts and payments for a business. In a start-up or establishment situation it is preferable to have a start-up month that specifically indicates the costs incurred to start the business. This will be an important document to prepare if the business is seeking to borrow from a financial institution. There are a number of reasons why a business owner should do a written cash flow projection. These include: ◗ the cash flow projection gives a format for planning the most effective use of the business’s cash (cash management) ◗ this projection gives the business a schedule of anticipated cash receipts ◗ the projection also gives a schedule of the priorities for paying accounts ◗ a list of all bill-paying details ◗ an estimate of the amount of money the business needs to borrow in order to finance its day-to-day operations—this is perhaps the most important aspect of a completed cash flow forecast ◗ the cash flow projection provides an outline to show the business and the lender that the business will have enough cash to make loan repayments on time. There are two parts to a cash flow projection. ◗ Receipts of money—these will come from cash sales, payments of accounts receivable, finance from loans (including drawing on overdrafts) and injections of funds into the business by the owner. ◗ Payments of money, such as cash expenses, payments of accounts, loan repayments and any drawings taken by the owner. Calculating the cash flow The cash flow projection or cash flow statement measures the end of the month cash balance with the following formula: Cash balance + cash receipts  cash payments = end of month cash balance. The end of month cash balance becomes the starting cash balance of the next month. In Chapter 2 we examined the hypothetical cash flow statement of Coco’s Coastal Café. Let us assume that Coco is starting up his café in January and decides to invest $10 000 in the business to get it going. Cash flow statement for Coco’s Coastal Café January to June 2011 Amounts in $’000 Item Opening balance at bank

176

Jan

Feb

Mar

Apr

May

Jun

10





During January, Coco has cash receipts of $80 000. This includes payments for sales as well as loan funds he has obtained. He also has cash payments of $50 000 which includes the cost of inputs as well as interest on loan funds plus money he takes from the business for his own use (drawings). At the end of January his cash flow statement looks like this: Jan Opening balance at bank

10

plus Cash receipts

80

less Cash payments

50

This will give Coco an end of the month cash balance of $40 000 and a starting cash balance for February of $40 000. Coco has estimated his cash receipts for the next five months to be: Item

Feb

Mar

Apr

May

Jun

70

40

60

50

40

Receipts

His estimate for cash payments for the next five months is: Item Payments

Feb

Mar

Apr

May

Jun

45

50

40

50

50

When we put these amounts together and follow the formula Cash balance + cash receipts  cash payments = end of month cash balance, with the end of month cash balance becoming the starting cash balance of the next month, Coco’s cash flow projection for the first six months of 2011 looks like this: Cash flow statement for Coco’s Coastal Café January to June 2011 Amounts in $’000 Item

Jan

Feb

Mar

Apr

May

Jun


10

40

65

55

75

70

Receipts

80

70

40

60

50

40

Payments

50

45

50

40

55

50


40

65

55

75

70

60

KCq page 202

3.3.5 Monitoring and evaluations Businesses need to continually monitor the implementation of the business plan to determine whether it is working effectively. To assist in the monitoring process, businesses put in place a number of controls that will indicate whether or not the implementation of the plan is meeting with success. The three main types of controls that businesses use are: ◗ feedforward controls ◗ concurrent controls ◗ feedback controls.

Outline monitoring and evaluations as part of the business planning process.

Feedforward controls Feedforward controls aim at preventing anticipated problems in advance of operations taking place. Because feedforward controls are put in place to anticipate and correct problems businesses should implement them as much as possible. However, feedforward controls are often difficult to


177



implement because of the problem of obtaining enough information in advance. Concurrent controls Concurrent controls involve the use of corrective action as operations are taking place. Concurrent controls can be as simple as direct supervision on the shop floor to the use of surveillance cameras or any other method of observing the workplace in real time. These controls are not as efficient as feedforward controls because resources and time are needed to fix problems. Feedback controls A third type of control is feedback control. This takes place after the situation or problem has occurred. This is the least efficient of the controls because it uses the most resources and because it is correcting an existing problem. An example of a feedback control is a customer survey. Three critical areas of monitoring involve sales, budgets and profit. Once the business has examined what has occurred in these areas it will evaluate the data and consider what needs to happen next. Explain monitoring and evaluating sales as part of the business planning process.

Explain monitoring and evaluating budgets as part of the business planning process.

178

Sales In the section on forecasting we saw that forecasting sales revenue was a key element in predicting the break-even point (page 174). Forecasting sales revenue is also an important element in forecasting cash receipts as part of the cash flow projection. To forecast sales revenue a business needs to predict what the volume of sales will be and multiply this by the price it will charge. Therefore, the business should already have a good idea of what its sales volume will be. This will enable the business to compare the actual sales volume with what it had predicted. This is a feedback control because the information is only obtainable after any problems have occurred. If there is a considerable difference between the actual sales volume compared to what was predicted, the business will need to evaluate the situation to determine what has happened. If there is an actual shortfall of sales compared to predictions the business will need to investigate the reasons for this. The business will also need to investigate the background to the shortfall. There will need to be an investigation of the methods of promotion, sales techniques and customer service to see if any corrective action is needed there. The type of product and market segments will also need to be investigated. These evaluations will allow the business to take corrective action.

Budgets A budget is a plan predicting revenue (from sales and investments) and expenses of a business for a future time period. Budgets identify anticipated sources of revenue and expenses and are derived from the overall strategic business plan. There are various types of budgets as below. ◗ The operating budget relates to the day-to-day operation of the business and includes sales, labour costs and administrative expenses. ◗ Financial budgets include the balance sheet, cash flow and income (profit and loss) statements. Budgets are often adjusted because of the changing business environment. Interpretation of the differences between planned and actual budgets is





an essential element of understanding performance and the required adjustments for future planning. Budgets also assist in making decisions about the availability of funds to pursue additional initiatives to achieve business goals and objectives. Once budgets have been implemented they need to be monitored, controlled and evaluated. Financial data must be analysed, interpreted and evaluated to help the business identify how closely actual performance compares to budgets over a period of time. This amounts to much more than simply whether sales are down or up—monitoring, controlling and evaluating includes the regular examination of costs, cash, working capital and assets. The owner or manager is responsible for researching the information needed to identify differences between budgeted and actual figures and noting the relevant trends. Where differences between budgeted and actual figures arise, owners and managers will need to explain the differences and propose corrective actions. This will assist with ongoing resource allocation and overall financial performance as the business makes any necessary operational changes arising from differences or from indications that sales forecasts are being met or exceeded.

Profit Profit is the difference between the revenues and the costs of running the business. The section on break-even analysis (Fig. 3.9, page 175) indicates that a business will make a loss until the break-even point is reached. If sales volume increases past the break-even point, a business will make a profit. This profit will be forecast in the income statement forecast. The purpose of the income statement forecast is to project the revenues and expenses of a business over a given period of time, usually one year. There are three things that need to be predicted to forecast the income statement of a business: the sales projection, the cost of goods projection and the overhead costs projection. Once the income statement forecast (which will indicate gross and net profit) has been made it is important to monitor the actual performance of the business with the forecasts of sales, cost of goods and overhead costs. Any significant adverse change in one of these variables will mean that the business may not achieve its profit target unless its takes corrective action. Earning an adequate net income is the main objective of any business. However, whether the net income earned will be enough is a matter for the business owner to decide over time. This is part of the process of evaluating the profit results for the business. If there is not enough income to cover expenses, then the business will not make a profit. In some cases, the business will make a profit but not enough to pay the bills. This is typically due to several reasons. One is the business may be owed money from various sources and these delayed payments mean it cannot pay its own bills on time. This creates cash flow problems and can lead to business failure.

Explain monitoring and evaluating profit as part of the business planning process.


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Case Students learn to: investigate aspects of business using hypothetical situations and actual business case studies to explain how the business plan is determined in at least one SME.

study:

Coco’s Coastal Café

In Chapter 2 the case study of the imaginary business of Coco’s Coastal Café was introduced to examine effective cash flow management and assess the role of the income statement and the balance sheet when describing the financial performance of a business. This case study will be expanded to explain how the business plan is determined in Coco’s business. The following information is known about Coco and his business. ◗ T he business started in January 2011. ◗ I t has a great location which could give it an advantage over competing businesses. ◗ C oco invested $10 000 of his own funds and he makes loan repayments so he has also borrowed money from a financial institution. ◗ C oco has what he feels are good management skills where he employs strategic thinking and vision in managing the café. ◗ C oco has good people skills, is adaptable to change, makes decisions after consultation with his team and has high personal standards. ◗ C oco is a good financial manager and has financial goals that include satisfactory liquidity and efficient working capital management, acceptable net profit, growth of the business and a good return on the capital he has invested.

Determining the business plan Coco began planning his business during the winter of 2010 when the local council offered a lease by tender of a kiosk which overlooked a popular beach in his home town. This was when he had the business idea. He had trained and worked as a barista and knew that he could develop the kiosk into an appealing place to have a meal or coffee. Coco had taken Business Studies in High School and scored 90% in the HSC. From his studies he knew that if he wanted to borrow funds from a financial institution the first question he would be asked would be ‘Where is your business plan?’. He also knew that planning was essential if the business was going to be successful. To begin the planning process, Coco used a search engine on his computer to look for business plan templates. The first website he used was one where there were free plans for a variety of businesses. He looked at the Café Bistro Coffeehouse Business Plan at the website: www.bplans.com/restaurant_cafe_ and_bakery_business_plan_templates.php This was a business that had incorporated and Coco was not ready to take that step yet. However, Coco found a lot of information that he could adapt to his business. He next tried the Small Business NSW website and found that this had an amazing amount of information that he could use. He also tried the business.gov.au website and immediately liked the template he found there for a business plan (that template is in this chapter on pages 182–186). Coco had always been a believer in seeking help and advice from experts. He visited his nearest business enterprise centre in Lismore and came away with a different business plan template and many pages of notes that he took during his meeting with the consultant. Coco felt that he should put together a team that he would employ in running the business. He could not pay team members any wages yet because he had no cash flow so he put the following proposal to prospective team members. ◗ K eep working in your current jobs until the business is nearly ready to start.

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◗ O nce employed each worker would have an employment contract that paid well above the industry rates of pay and he would also provide generous provisions in the agreement for sick leave, holidays and a performance bonus if monthly sales exceeded an agreed amount. ◗ T hey would meet once a week to develop and refine the business plan. Some things worried Coco about developing the business plan, especially the section on finances where he had to make assumptions about what was going to happen in the external environment. He also had to forecast start-up costs and make projections about cash flow, balance sheet forecast, income statement forecast and a break-even analysis. To ease his worry, Coco went to see Ian, his accountant. Ian quickly showed Coco how to develop these financial forecasts so that they were realistic. Ian also suggested that Coco see a solicitor to obtain legal advice, especially since Coco needed to have a liquor licence as part of his restaurant operation. His team would also need responsible service of alcohol training. Coco looked in the phone book under ‘solicitors’ and decided to ask Fiona to advise him. Fiona was a former school friend of his cousin, Geraldine. Coco had already determined the broad goals for his business. As time passed and he held his weekly meetings with his team (Michael, the chef, Bev, the head waitperson and assistants Julia and Kona) the plan started to fall into place. Each time they met they would add a number of ideas to the many sections of the business plan templates that each of the team had. The team decided, during one meeting, to research the competition by visiting competing businesses as customers and assessing their strengths and weaknesses and try to come up with a competitive advantage for Coco’s Coastal Café. The expert advice that he had sought was an immense help as was his online research. His target date for start-up was New Year’s Day 2011. By late October 2010 he made an application for a loan through a local credit union. When asked for his business plan Coco was proud to produce the well-researched and immaculately presented document. The branch manager asked a number of questions to which Coco gave confident answers. One day an official-looking envelope appeared in the letter box. It was his loan approval. He lost no time lodging a tender for the kiosk near the beach. Very soon he got word that the shire council had accepted his tender. He was nearly ready to start! He had to refurbish the kiosk, buy new furniture and install a new kitchen and a rather expensive coffee maker. His team had quit their jobs and were helping him set the business up when they were not attending courses to get the necessary and appropriate training and qualifications. The business launch on 1 January 2011 was a resounding success with patrons queued up for tables. Coco silently thanked his Business Studies teacher all those years ago for inspiring him to enter the business world. The planning experience was hard but it was the key to his success. Source: R Barlow, March 2012

KCq page 202

3.3.6 Taking corrective action When a business receives information that actual performance has varied from what it has planned it may need to take corrective action. Whether corrective action needs to be taken will depend on how large or how serious the variation from established benchmarks, forecasts, budgets or plans is. If a business has experienced undesirable variations from established benchmarks, forecasts and budgets, this will require action by owners and managers. If actual performance is ‘on-track’ and minor deviations

Explain taking corrective action as part of the business planning process.


181



from the plan occur there is no need to interfere. A ten per cent deviation in the cost of morning tea may not be as important as a three per cent increase in on-costs of employing staff. Small variations are easily dealt with and may require only minor changes through basic corrective action. If there are significant variations from established benchmarks owners and managers may need to make major structural adjustments to the operation of the business by taking immediate corrective action. With both small and major variations to established benchmarks one course of corrective action could be to change these standards or benchmarks. Changes in the external environment may make changes to standards necessary. Figure 3.10 summarises this process. Corrective action Minor

Major

Immediate corrective action

Do nothing

Basic corrective action

Major structural adjustment to business

Change • Benchmarks • Forecasts • Budgets

Figure 3.10 Taking corrective action

Example: Prepare a small business plan Students learn to: prepare a small business plan based on a hypothetical or actual business and presented in a business plan/report format.

A business plan can be quite a lengthy and comprehensive document. There are many websites that offer templates of business plans and the Useful websites at the end of this chapter lists the URLs of sites where sample plans and templates can be viewed. The following is a summary of the information that would need to be included in a business plan. The source for the information contained in this section is the business.gov.au business plan template at the web address www.business.gov.au/business-topics/templates-and-downloads/business-plantemplate-and-guide/Pages/default.aspx

This template is 26 pages long.

The business plan The title page of the business plan should contain the business logo and information about you and your business including: ◗ your name and title ◗ the name of the business ◗ the address of the business ◗ the ABN of the business. Note: ABN stands for Australian Business Number. The ABN is a unique 11-digit identifying number that businesses use when dealing with other

182





businesses. For example, you generally need to put your ABN on your invoices or other documents relating to sales. If you do not, other businesses may withhold 46.5% from any payment to you for tax purposes.

What information should be in the business plan? Business plan summary—executive summary An executive summary is a document produced for business purposes that summarises a longer report so readers can rapidly become acquainted with a large body of material without having to read it all. This summary should be no longer than one page. It should make a case for business success. There should be a brief statement for each of the following headings. Note that there is an expansion of each of these headings in the plan. The The The The

business market future finances

The business Business details Registration details Business premises These three sections will list a brief description of the products being sold by the business (details), registration details, which include business and trading name, date of registration, the state/s that the business is registered in and the structure of the business (sole trader, partnership or company). There should also be a brief statement listing the ABN of the business and whether the business is registered for the GST as well as that registration date. A list of registered domain names and licences and permits should also be supplied. The address and contact details of the business premises should be listed as well as a description of the premises and its surrounding location (e.g. shopping mall, stand-alone building, etc). The ownership status of the business should also be given. This requires details on whether the business is owned by the operator or leased. Organisation chart Management and ownership Key personnel These three sections should show an organisation chart which lists the owner/manager and any other employees. The chart should indicate a hierarchy in the management structure of the business. The management and ownership section should list the names of the owners and the relationship between the owners and managers. In many cases these roles will be carried out by the same person. The owners/managers should attach a list of their business experience. The key personnel section will list the current staff, their job titles, their skills and strengths and an estimate of how long the business expects to retain them. There should also be a section on future staff requirements, recruitment options, training programs needed and skill retention strategies.

Products/services


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Innovation The products/services section should provide a list and description of each product produced and sold by the business. The price of each product (including GST) should also be listed. This section is completed by making brief statements about: ◗ market position ◗ unique selling position (competitive advantage of the business’s products) ◗ anticipated demand ◗ pricing strategy ◗ value of products to customer ◗ growth potential of products in the market. With the innovation section, brief statements should be made about research and development and any innovation activities as well as what strategies the business will use to manage intellectual property. Insurance Risk management Legal considerations This section should include details about: ◗ workers’ compensation ◗ public liability insurance ◗ professional indemnity (e.g. in a medical practice) ◗ product liability insurance ◗ assets of the business ◗ revenue protection insurance. With regard to risk management, the business should list the possible risks that could impact on the business, the likelihood that these risks could eventuate, an assessment of what would happen to the business if the risk occurred and strategies to manage these risks. Legal considerations should address any legislation that could affect the business and its operations. Operations Because operations is the central focus of the business this section is quite comprehensive. The business should outline the production process, the people involved and how the product is delivered to consumers. The business should list suppliers and indicate plans for maintaining relationships with them. The business should also compile a schedule of plant and equipment, noting the purchase date, price and running costs. The business should also maintain an inventory schedule which indicates stocks of finished goods and inputs. Details should also be listed under the following headings. ◗ Technology—what types of technology will the business need and how much will it cost? ◗ Trading hours—what are the trading hours of the business and what are the anticipated peak times? ◗ Communication channels—how can customers contact the business? ◗ Payment types accepted—will the business accept cash, cheques, credit cards?

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◗ Credit policy—what is the business’s credit policy for customers/ suppliers? How long is the credit period? What are the collection strategies/procedures? What credit does your business receive? What are the terms? ◗ Warranties and refunds—what will be the warranty terms? What is the refund/exchange policy of the business? ◗ Quality control—what is the quality control process? What checks or balances does the business have in place to ensure the product or service offered is produced to the same standard of quality? What steps does the business take to meet product safety standards? ◗ Memberships and affiliations—does the business belong to any industry association or does the owner have any professional or business affiliations? Sustainability plan This plan refers to the business establishing environmental targets and how it plans to achieve them. The business should include statements about the environmental impact of the business, any consultation and engagement with the community and what impacts the business has on the community. The business should also assess environmental risks and strategies to prevent these as well as prepare a schedule for an overall action plan with environmental targets and estimated achievement dates. The market Market research Market targets The business should list the research that it has undertaken to assess and analyse its market. Copies of surveys should be attached. An assessment of sales targets should be made. This includes identifying target markets and estimating sales volume. Be careful to identify the time period. Environmental/industry analysis Is the region in which the business operates experiencing population growth? Is the region’s economy stable? Are there seasonal variations in demand for the product and supply of input? What is the size of the market? What recent trends have emerged in the market? What growth potential is available and where does the business fit in? How will the market/customers change when the business enters the market? Customers of the business This section should make a statement about consumer demographics, key customers (e.g. large buyers) and how the business will maintain a good relationship with customers. The policy on customer service should be outlined. SWOT analysis The business should include a detailed statement of the SWOT analysis it has conducted similar to Table 3.9 (page 165). Your competitors This is where the business needs to make an analysis of its competitors. It should draw up a schedule like the one below.


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Competitor analysis Name of competitor Establishment date Size

Number and turnover of staff

Market share % Unique value to customers

What is the competitive advantage of the competitor?

Strengths Weaknesses

List up to five competitors in this way. Advertising and sales In this section the business should outline the promotional strategies it will use to introduce its products to the market. It should also clearly specify sales and marketing objectives, identifying the sales team and the role of each member. The business should identify what is its unique selling position here. There should also be a statement about sales and distribution channels. The future Vision statement Mission statement Goals/objectives These three items were explained in detail on pages 166–168. Action plan The action plan can be a simple schedule that identifies milestones from the objectives, when is the expected completion date for each milestone and the person responsible for managing the achievement of that milestone. The finances Key objectives and financial review The business should list its major financial objectives and specify how much start-up finance is needed. A list of potential sources of finance is important. Assumptions This is an important section. The tables below will be based on the assumptions that are made here. Assumptions could include estimates for interest rate changes, seasonal adjustments or natural events such as drought or floods. Start-up costs for [YEAR] The business needs to indicate the start-up date and itemise estimated start-up costs and estimated capital and equipment costs. See the table on: www.business.gov.au/business-topics/templates-and-downloads/business-plantemplate-and-guide/Pages/default.aspx (page 21)

Balance sheet forecast Income statement forecast Expected cash flow Break-even analysis 186





These forecasts were discussed in section 3.3.4 (pages 173–177) and section 3.3.5 (pages 177–181). Examples of the formats of the balance sheet and income statement can be found in section 2.3.4 (pages 100–105), as well as the web address. Source: www.business.gov.au/business-topics/templates-and-downloads/businessplan-template-and-guide/Pages/default.aspx (pages 22–25)

Supporting documentation Any additional documentation required should be attached. A summary list of attachments should be included here. Students should investigate a number of sources for business plans before finalising a format.

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Outline critical issues in business success and failure.

3.4 Critical issues in business success and failure Critical issues in business success and failure refer to any of the aspects of a business that are identified as vital for successful targets to be reached and maintained. In Chapter 1 we investigated the factors that can contribute to business decline. If business decline is allowed to continue, the business will fail. The issues that were critical in business decline leading to failure include: ◗ a lack of adequate planning in the business ◗ the business is unable to keep up with customer needs ◗ the business is undercapitalised ◗ the business has problems meeting or satisfying customer demand ◗ the business finds that there is no longer a need for its goods or services ◗ there may be decreased productivity, efficiency and morale, leading to overall decline of the business. Earlier in this chapter it was noted that planning is the most critical element in the process of establishing a business. It follows, then, that planning is a critical issue in business success. Critical issues in business success and failure are summarised in Figure 3.11 and include: ◗ importance of a business plan ◗ management (staffing and teams) ◗ trend analysis ◗ identifying and sustaining competitive advantage ◗ avoiding over-extension of finance and other resources ◗ using technology ◗ economic conditions.


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Avoiding over-extension of finance and resources

Economic conditions A business may face challenges due to a poor economy

Cash flow problems are among the top five reasons why businesses fail

Trend analysis

Using technology

Critical issues

The rewards for successful adoption of new technologies can be substantial in developing a competitive advantage

Reviewing past information can help businesses understand current trends to exploit a market niche

Management: Staffing and teams

Identifying and sustaining competitive advantage

Importance of business plan

This distinguishes a business from its competitors

If you fail to plan, you plan to fail

People are the most important resource of a business

Figure 3.11 Critical issues in business success and failure

Explain the importance of a business plan as a critical issue in business success and failure.

3.4.1 Importance of a business plan In order to survive and succeed businesses need to set strategic directions, establish goals, make and implement decisions and monitor this planning process as they move towards achieving their goals. Business planning focuses on plotting and sequencing the actions that a business will take along the path to success and sustainability. Successful businesses use their business plans to assess the effectiveness of the operational, marketing, financial and HR strategies that they are implementing. Business planning provides a framework for identifying and examining the elements of financial sustainability. Financial sustainability is critical to the success of the business. Once these financial elements have been identified and examined the business can implement procedures to maximise their effectiveness. Careful business planning allows the business to support the choices made in the plan by specifying in detail: ◗ the revenues needed to realise objectives ◗ the means to achieve those revenues ◗ information needed to evaluate, develop and sustain the business ◗ support structures and resources required for operations ◗ initial and ongoing risk ◗ opportunities and pitfalls of growth ◗ measures of success ◗ the case for future investment and growth. Palo Alto Software, a US company that has developed business software, commissioned the University of Oregon’s Department of Economics to write a report on the results of a survey it had put to its customers. Eason Ding and Tim Hursey from the University of Oregon wrote a report which concluded: Except in a small number of cases, business planning appeared to be positively correlated with business success as measured by our variables. While our analysis cannot say that completing a

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business plan will lead to success, it does indicate that the type of entrepreneur who completes a business plan is also more likely to run a successful business. Source: smallbiztrends.com/2010/06/business-plan-success-twice-as-likely.html

Highly experienced business coach and company director Peter McLean has issued this advice about business planning: Small business plans are nothing more than ordered common sense. A plan makes sure that the right things get done, in the right way and in the right sequence. Effective small business owners have a business plan, and everyone in their business knows exactly the part they play in ensuring its success. Source: http://EzineArticles.com/?expert=Peter_McLean

A business plan will help a business to be successful by: ◗ giving a strategic or long-term direction to the business which can be translated into day-to-day operational plans ◗ identifying the roles of employees so that each employee will operate efficiently, contributing to the success of the business ◗ allocating the resources of the business so that they are used efficiently and the business operates at the lowest possible cost ◗ developing standards or benchmarks for performance so that the business, its owner and employees will know if they are meeting their targets. KCq page 202

3.4.2 Management Staffing and teams Managers and their actions are essential to business success. Managers plan, organise, communicate, implement, motivate and evaluate business activities. Managers set goals and outline the strategies to achieve these goals by organising resources and staffing. A manager’s ability to be effective and efficient will be a critical factor for the success of the business. Effectiveness is concerned with determining goals and future directions, and aligning people and resources to make sure that these goals are achieved. Efficiency refers to the allocation of resources (including staffing) and output of production. Efficient managers try to achieve maximum output from minimum inputs and cost. One of the most important skills of management is the ability to relate to people, to motivate them and to get the best performance from them. This set of skills is known as interpersonal skills or people skills. People skills involve managing and motivating people. Strong interpersonal skills allow a manager to build effective relationships with staff. This may be achieved through the use of positive and assertive language, active listening, ongoing feedback, empowerment, clarity in expectations, empathy and understanding. Managers who know their staff well will be more influential in motivating, organising and engaging staff to improve productivity and respond positively to change. Poor people skills in managers can lead to an unproductive workplace. As a business is being established, owners and managers develop a structure within which the business will operate to produce and sell goods and/or services. The business needs people with the right skills, knowledge and abilities to fill in that structure. People are the most important resource of the business because they either create or undermine the reputation for quality in both products and service.

Explain management—staffing and teams—as a critical issue in business success and failure.


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Many businesses today employ a team approach in the workplace as a HR management strategy. A team approach is where groups of workers interact in the workplace to achieve a common business goal, such as designing a new product or improving the efficiency of the layout of the workplace. One advantage of this strategy is that it reduces the need for layers of middle management as there is a more direct link between the workers at the lowest level and top management. Teamwork requires people to work together in a collaborative and coordinated manner for a common purpose. The benefits of teams in the workplace include flexibility and increased efficiency, motivation, working together and being involved in decision making. Teams also allow for greater responsiveness to consumer needs and adaptability to the external environment. Many workers recognise that being a team player is one of the most important skills in the workplace. Teams are commonly self-directed and democratic in nature, allowing each member of the team, regardless of his or her position, to have the opportunity to contribute. Teams may be project orientated, where the team works closely together for a short time until the completion of a project, or issue orientated, as is the case with a standing team, which is a longer-term team that focuses on an ongoing issue within a business (e.g. a workplace health and safety committee). Such a team may meet once a month to consider workplace health and safety issues and its membership may come from all levels and areas within the business. A business must respond to change effectively in order to remain competitive. The right staff can carry a business through a period of change and ensure its future success. Because of the importance of selecting and maintaining a committed and competent workforce, effective HR management is crucial to the success of all businesses. Human resource management (HRM) refers to systems that have been developed to manage people within an organisation or a business. These systems include: ◗ the planning of staff needs ◗ the acquisition and maintenance of employees ◗ the training, development and appraisal of employee performance ◗ the supervision, management and compensation of all employees ◗ the separation of employees when they leave the business ◗ the management of issues such as conflict resolution and the changing nature of the workplace. Regardless of the management title that a supervisor may have, all managers are managers of human resources as they interact with employees under their direction. This means that all managers need to have a basic background in sound HRM practices. This will enable managers to lead their teams effectively in change management and making a successful contribution to the achievement of business goals. If managers accept the idea that part of their role is to be a manager of people they will understand that the most important resource of any business is the human resources that contribute daily to establishing and maintaining competitive advantage. The acceptance of this idea will also mean that managers allocate their employees tasks that interest and motivate them and where their contribution will maximise the output of the business.

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3.4.3 Trend analysis Trend analysis is a tool used by management to gauge past economic history and prepare for future events. Trend analysis involves gathering information and data and using a computer program to indicate the trends and analyse them. The use of this tool is critical to the success of the business. There are two ways in which trend analysis may be employed. ◗ Within the business to look at what has occurred with operations over a period of time—this can be useful to determine the strength of certain products in the market and will help to see whether the market will continue to show sufficient demand for the product. ◗ Outside the business to observe economic and other trends—this can be useful in protecting the business against problems, such as rising interest rates, high exchange rates (if the business has a large export market) and a fall in overall demand in the economy. Trend analysis can also be useful in identifying trends which may lead to market segmentation and the establishment of niche markets. Trend analysis also helps to reduce uncertainties in business, such as slow sales, maintaining inventories that are too large and seasonal consumer demand. Reliable information allows management to make crucial business decisions regarding current operations.

Explain trend analysis as a critical issue in business success and failure.

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3.4.4 Identifying and sustaining competitive advantage Many businesses attempt to develop a competitive advantage by being innovative in terms of introducing new products or variations on existing products to the market. Businesses can also be innovative by developing and introducing new techniques which may make the production process less costly or faster or the efficiency of input use may improve. In Chapter 1 we saw the example of innovative practice in the case study of Australian Solar Timbers (AST) (page 6). The competitive advantage of AST stems from maximising the use of timber as an input by introducing veneer production. This means that the business is efficient in the use of resources and can offer products at lower prices. At the same time, AST also has solar-powered drying kilns which, apart from being environmentally friendly, help the business reduce its power costs, which in turn give it a competitive edge. Developing and sustaining competitive advantage is critical in today’s highly competitive markets. Businesses must continually monitor and investigate the environment to maintain competitive advantage. Competing businesses will reduce competitive advantage if other businesses ‘rest on their laurels’. Once a business has lost competitive advantage it is difficult to regain. The business will slide into decline and could eventually fail.

Explain identifying and sustaining competitive advantage as a critical issue in business success and failure.

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3.4.5 Avoiding over-extension of finance and other resources Finance A critical area of the finances of a business is the extent of borrowing. Many small businesses borrow funds from financial institutions as part of their start-up finance. The rest is usually provided from the owner’s personal funds. Many new entrepreneurs do not want to dilute their ownership of the business by selling off equity (ownership) to outsiders

Explain avoiding over-extension of finance and other resources as a critical issue in business success and failure.


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as a means of raising funds. This means that some amount of borrowing will take place. The amount of borrowing relative to the amount of money invested in the business by the owners is an area of gearing which is measured by the debt to equity ratio. Gearing or leverage is the ratio of debt funding to equity funding in a business. The gearing ratio or leverage of a business is critical to long-term stability. A highly-geared business is one with greater levels of debt to equity finance. A high level of gearing would be 80%. This means that for every 80 cents worth of total liabilities (debt) there is $1 of owners’ equity. A high gearing ratio indicates a high risk for the business. This is because the amount of owners’ funds available to cover the liabilities of the business is low, increasing the risk of the business not meeting its liabilities and not remaining solvent. Alternatively, too low a level of gearing, such as 30% (30 cents of total liabilities to every $1 of owners’ equity), would mean that the business is not using its equity funds efficiently and is restricting opportunities for business growth. This could cause overextension of other resources such as buildings, plant and equipment. Debt financing does allow for growth but will also increase the risk to the long-term stability of a business. The ideal gearing ratio is difficult to determine. Many small businesses look at a ratio of about 50% but the optimum ratio will change with changing circumstances, such as current economic conditions. Other resources As mentioned earlier in this section, people are the most important resource of the business. In a small business the extent of HR may be just the one person—the owner. At best, most small businesses will have fewer than five employees. There is a danger that HR will be over-extended in a small business as the small (or non-existent) staff are burdened with too many roles and tasks and simply do not have enough time or energy to carry them out. The result will be that the business will fail. One phenomenon that can contribute to this failure is given the term ‘bottlenecking’. This refers to production not being able to continue until certain tasks are performed but there is not enough labour or time to perform these tasks. There are several ways to overcome this over-extension of HR in a small business. One way is to outsource non-core key functions such as finance and accounting, marketing and, if needed, HR management. If the owner is the only employee of the business it may be necessary to hire either part-time or full-time workers to take some of the load off. The owners of small businesses can also review their strategic or longterm goals to assist with over-extension of resources. Long-term goals based on foolproof systems that are meant to work properly without the constant intervention of the owner can be established. It may mean that the owner has to hire staff and train them to carry out processes in the business instead of the owner doing everything. Many small business owners who have taken this step have ended up developing streams of income from franchising. Although franchising the business has not happened yet, establishing, reviewing and refining long-term goals and expanding the business is what Alexandra Riggs did with Oobi (Chapter 1, page 52). Alexandra made the decision to hire and train employees and to delegate various tasks so she was able to concentrate on working to her strengths.

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3.4.6 Using technology It is important to distinguish between the types of technology that are available for businesses to use. Technology can be divided into two major categories. There is leading-edge technology, which can sometimes be described as cutting-edge technology. This type of technology is very new and only just being introduced to the market. There is also established technology which has been in use for some time. Most users are familiar with the applications and potential of this technology. Established technology is a technological application where the cost, performance and the servicing of the technology is readily available. It has been established and used in business situations for a relatively long time. An example of established technology would be internet usage by a business. According to the ABS (8129.0, Business Use of Information Technology, 2013–14), 95% of businesses had internet access as at 30 June 2014. Overall, businesses were most likely to undertake financial activities as an internet activity during the year ended 30 June 2014 (85%). The second most commonly reported activity for using the internet was communication excluding email (34%). Businesses were least likely to use the internet for information sharing or data exchange with businesses or organisations which were not customers or clients (16%). Most of these businesses (99%) had broadband connection to the internet. In the year ended 30 June 2014 almost half of all businesses had a web presence (47%) and nearly a third had a social media presence (31%). A strong relationship existed between the size of a business and the likelihood that the business had a web presence: 38% of businesses with 0–4 employees had a web presence, increasing to 96% of businesses with 200 or more employees. Surprisingly, small businesses (0–4 employees) were foremost in providing online ordering (22.2% of small businesses) and online payment capabilities (17.4%) compared to any other business size. All of the technology mentioned in the previous three paragraphs is established technology. Businesses in today’s world would be left behind without using this technology, making its use critical to business success. Not only does this technology have the capacity to save time but it is an important marketing tool as it helps to connect the business with its customers. However, there are risks involved with a business employing leadingedge technology. This technology is so new that in many cases it is still being developed and modified for adoption into the world of business. One risk of using leading-edge technology is that it can create unforeseen problems such as choosing the wrong product or application. Other risks are outlined below. ◗ The technology may not be developed enough for what the business wants compared to established technology. ◗ Software applications may be released before they are ready to be pressed into widespread use. There may be ‘bugs’ in the software that may be costly for businesses. ◗ There is the potential loss of substantial amounts of money in lost employee time, both in training and development in using the technology, and also in lost production due to problems with the new software. ◗ There may be problems and costs in receiving technical support from suppliers.

Explain using technology as a critical issue in business success and failure.


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The above are reasons for businesses to be cautious in choosing to use leading-edge technology as the wrong choice could cause the business to make substantial losses or even to fail. On the other hand, the rewards for successful early adoption of new technologies can be substantial in terms of developing a competitive advantage in the marketplace, which could be critical in leading to business success. In summary, successful businesses have employed technology which raised productivity and lowered costs. Businesses that failed were more likely to use outdated business systems or have not embraced up-to-date technology.

Explain economic conditions as a critical issue in business success and failure.

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3.4.7 Economic conditions We saw in Chapter 1 that economic conditions are an external influence on businesses and as such they are events over which businesses have very little control. Businesses must be able to respond to changes in economic conditions and must be aware of potential changes. Some changes to economic conditions are the result of government policy and action. Others are the result of a combination of events to which governments around the globe will inevitably respond. Changes to economic conditions place businesses and entrepreneurs at economic risk. If the change is not managed, the business can fail. Examples of changes to economic conditions that particularly affect businesses are changes in consumer demand and rising or falling unemployment, changes in the interest or exchange rates, the introduction of new taxes and charges by governments or the imposition of levies or the abolition of subsidies or grants. One ongoing example of economic risk and changing economic conditions is that facing businesses in the solar energy industry in NSW as a result of changes made to subsidies for installation by both the NSW and federal governments. The first major blow to businesses in this industry came when the NSW Government suddenly reduced the ‘feed-in’ tariff of 60 cents per kilowatt hour to 20 cents per kilowatt hour paid to households that installed solar power. This change was made in October 2010. This created a substantial drop in demand for new solar power installations, creating financial hardship for many solar power businesses. The second major blow came at the end of February 2012 when the federal government suddenly ended its solar hot water rebate. This reduced the incentive for households to install solar hot water systems, thus greatly reducing the demand for these systems. The following contemporary media report indicates the problems created by this event.





Solar hot water rebate axing fallout by Energy Matters The unexpected end to the federal government’s solar hot water rebate has sent shock-waves throughout the industry and stirred up fears a similar fate may await rebates for rooftop solar power systems. Late Tuesday afternoon, the Parliamentary Secretary for Climate Change and Energy Efficiency, Mark Dreyfus, announced the sudden closure of the Renewable Energy Bonus Scheme that provided rebates of $1000 to install a solar hot water system or $600 to install a heat pump. Systems must have been installed, ordered with a deposit or purchased on or before 28 February 2012. Applications lodged up to 30 June 2012 will continue to be processed. The announcement has since been vigorously criticised by the industry, its supporters and those considering installing a solar hot water system. Clean Energy Council (CEC) Acting Chief Executive Kane Thornton said the sudden end to the rebate will put more than 1200 manufacturing jobs and 6000 installation, sales and administrative jobs at risk. Cutting this program without warning in the middle of a financial year is yet another example of stop-start policy making that continues to plague the entire clean energy sector. It has given the industry no time to prepare and makes business planning almost impossible. The Australian Solar Energy Society (AuSES) called on the Australian Government to reinstate the rebate. ‘It seems Australians are now being punished for supporting one of the most successful clean energy programs introduced in recent years,’ said AuSES Chief Executive, John Grimes. ‘The disastrous solar policy roller-coaster continues. Another solar scheme shut down without notice, more solar jobs lost. That’s bad policy and bad process.’ Mr Grimes said with water heating being the single largest source of carbon pollution associated with Australian households, it makes sense to encourage Australians to invest in solar hot water. Professor Ray Wills, Chief Executive of the Sustainable Energy Association of Australia (SEA), echoed the views. The renewable energy industry continues to be plagued by government decisions at both federal and state levels that lead to boom/bust cycles and fail to provide the conditions needed to grow the industry sustainably ... In 2012 we should have learnt something from the poor decisions of 2011—it appears we have not. Solar hot water systems and heat pumps will still be eligible for Small-scale Technology Certificates (STCs), which are usually exchanged for a point-of-sale discount on systems. Depending on the state where the systems will be installed, state government incentives may also apply. The rebate situation for rooftop solar panel systems currently remains unchanged. However, the solar credits rebate will be further slashed by 33% in a few months. Given the sudden and premature axing of the Renewable Energy Bonus Scheme, some fear a nasty surprise may be lurking for the solar credits incentive also.

Students learn to: examine contemporary business issues to discuss the influence of government on SMEs and assess the effect of two changes in the business environment on SMEs.

Source: News item provided courtesy of Energy Matters Australia—solar power and wind energy. www.energymatters.com.au/index.php?main_page=news_ article&article_id=3080


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A second potential change to the business environment and an illustration of the influence of the government on SMEs is illustrated in the following contemporary media article.

Tax cut a boon as work dries up by Rachel Wells 15 March 2012 James Anderson, who runs a small landscaping business in Tullamarine, says the government’s plan to reduce company tax by one percentage point would help offset the slowdown his business is already beginning to see. We are starting to see more and more people who are being scared into not spending,’ says the co-owner of Normark Landscapes, which was founded by his father 35 years ago. I think the European situation is weighing heavily on people’s confidence. And with confidence down it is getting harder to convince people to spend money. At the moment we have a twospeed economy with one sector doing very, very well and the rest doing poorly. Something needs to be done to meet that difference.’ While it may not be a lot, Mr Anderson, who works on both commercial and residential landscaping projects, says the tax break would help the business ride out any downturn, without losing staff. ‘It’s not a lot but we’ll take anything we can at the moment,’ he says. Mr Anderson says while work is steady right now, he says new projects are ‘drying up’. ‘Landscaping is always the last thing that gets done in any building project. So with very few new projects coming on, we’re really going to see the impact of that in another six months or so. A tax cut would enable us to retain staff and even invest in staff training and new machinery and equipment,’ he says. ‘Without it, it will be very challenging.’ Source: www.smh.com.au/small-business/finance/tax-cut-a-boon-as-workdries-up-20120314-1v3m1.html.

One method that many businesses use to manage changes to economic conditions and economic risk is through environmental scanning. Environmental scanning is monitoring a business’s internal and external environment so that it can gather, analyse and use information for tactical or strategic purposes. Managers will look for changes that pose threats or opportunities for the business. Environmental scanning of the business environment will involve collecting both objective and subjective information. By undertaking environmental scanning, businesses will be able to develop strategies that will help them to succeed or at least to avoid failure. KCq page 202

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Key definitions and concepts Do you know all the key definitions and concepts for this chapter? Go through each term in the list and check that you know them all. Place a bookmark underneath each definition to cover up the one below and slide it down. This way you can focus on each definition by itself. ABNstands for Australian Business Number. The ABN is a unique 11-digit identifying number that businesses use when dealing with other businesses.

Franchisoris the owner of the business who ‘licences’ the business idea to people who are willing to operate a standard business model (franchisees).

Bottleneckingrefers to production not being able to continue until certain tasks are performed.

Gearing or leverageis the ratio of debt funding to equity funding in a business.

Break-even pointis the point of output or sales volume where sales revenue equals the total costs of the business.

Goal is a subjective, general description of what the owner would like the business to achieve.

Budgetis a plan predicting revenue (from sales and investments) and expenses of a business for a future time period.

Gross Domestic Product (GDP)is the total amount of goods and services produced in a nation in a year.

Business ideais a concept that is developed by an individual or a group of people which has the possibility of being translated into the establishment of a profitable business. Competitive advantageis an advantage over competitors gained by offering consumers greater value, either by means of lower prices, improved quality or by providing greater benefits and service. Critical issues in business success and failurerefers to any of the aspects of a business that are identified as vital for successful targets to be reached and maintained. Due diligenceis the process of conducting a thorough investigation of the target business in order to evaluate its worth for acquisition. Another definition of due diligence is that it is an investigative process to make sure that you get what you are paying for. Environmental scanningis monitoring a business’s internal and external environment so that it can gather, analyse and use information for tactical or strategic purposes. Executive summaryis a document that summarises a longer report in such a way that readers can rapidly become acquainted with a large body of material without having to read it all. Fixed costsare the costs of inputs that do not vary as production or output increases. Examples include rent, insurance, utility connection costs. Four Psare the strategies involved in the marketing mix of product, price, promotion and place.

Growthis the increase in the size and value of a business over time. Key performance indicators (KPIs)are indicators that let a business (or its owner or manager) know when a goal is being achieved or a contribution is being made towards achieving a goal. Labour intensiverefers to a business that employs a high proportion of labour compared to capital equipment. Market segmentationis the way in which a business divides its potential market into different groups or segments. Mission statementis a concise outline of the overall activities and aims of a business and contains its philosophies, goals, ambitions and statements about business culture. Objectiveis a specific description of what the business needs to do to achieve a particular goal. Objectives are the way that goals are converted into effective action plans. Operational plansare the ongoing plans that deal with the day-to-day functions necessary to achieve business goals and objectives. Outsourcingrelates to contracting with other businesses to supply some of the key business functions or inputs needed for production. Penetration pricingis a pricing strategy that involves setting the price of a new product lower than the prices of competing products. Price pointsare psychological pricing strategies based on customers’ perception of value for their money.

Franchiseis a right granted to an individual or group to market the goods or services of a successful business within a certain territory or location.

Product differentiationis the differences between products of competing businesses as perceived by consumers. It is based on such features as quality of service, price and product image.

Franchiseesare business people who are willing to operate a standard business model, with other assistance from the franchisor. Franchisees pay a regular fee to the franchisor.

Product life cyclerefers to the four stages that a product goes through from its launch on the market to its removal, and its associated levels of sales, volume and market share.


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Situational analysisis an analysis that allows a business to understand its internal and external situations, its customer base, its total and target markets and what the business is capable of achieving. Skimmingis a pricing strategy that involves setting a high price while demand for the product is high and before competitors enter the market. Small to medium enterprises (SMEs)are (definition based on the number of full-time equivalent employees): very small (1–9); small (10–49); medium (50–149) and large (150+). Strategic planis a long-term general plan that outlines the vision and future direction for the business. Tactical plansare more detailed plans that translate the goals and objectives from the strategic plan into actions and tasks for the short to medium term.

Target marketis the specific segment of the total market at which the product is aimed. Team approachis where groups of workers interact in the workplace to achieve a common business goal. Total marketcomprises all of the people that want to buy a particular product. Trend analysisis a tool used by management to gauge past economic history and prepare for future events. Variable costsare the costs of inputs that vary as output varies. Vision statementis a statement that outlines what a business wants to be or how it wants the world in which it operates to be.

Chapter syllabus checklist Are you able to answer every syllabus question in the chapter? Tick each question as you go through the list if you are able to answer it. If not, turn to the appropriate page in the guide as listed in the column to find the answer. Refer to page vii to check the meaning of the Board of Studies key words. You can also turn to the Excel syllabus summary notes at the back of the book for a summarised answer to each syllabus question. For a complete understanding of this topic:

Page No.

1

Can I outline the importance of small to medium enterprises?

136

2

Can I define ‘small to medium enterprises’?

136

3

Can I outline the role of SMEs?

4

3


Page No.

14

Can I outline sources of information for SMEs?

145

15

Can I explain the business idea as an influence in establishing a SME?

147

137

16

148

Can I explain the economic contribution of SMEs?

Can I explain competition as an influence in establishing a SME?

137

17

149

5

Can I explain the success and/or failure of SMEs?

Can I outline the options for the establishment of a SME?

139

18

149

6

Can I outline the influences in establishing a SME?

Can I explain new business as an establishment option?

142

19

150

7

Can I outline personal qualities as influences in establishing a SME?

Can I explain purchasing an existing business as an establishment option?

142

20

151

8

Can I explain qualifications as a personal quality?

Can I explain purchasing a franchise business as an establishment option?

142

21

152

9

Can I explain skills as a personal quality?

143

Can I explain the market as an influence in establishing a SME?

10

Can I explain motivation as a personal quality?

22

143

Can I explain goods and/or services as an influence in establishing a SME?

153

11

Can I explain entrepreneurship as a personal quality?

23 143

Can I explain price as an influence in establishing a SME?

153

12

Can I explain cultural background as a personal quality?

24 144

Can I explain location as an influence in establishing a SME?

153

13

Can I explain gender as a personal quality?

144

25

Can I explain finance as an influence in establishing a SME?

154

198

3





Page No.

26

Can I outline the sources of finance a business can access?

154

27

Can I outline the cost of finance for SMEs?

157

28

Can I outline legal issues as an influence in establishing a SME?

157

29

Can I explain business name as a legal issue in establishing a SME?

157

30

Can I explain zoning as a legal issue in establishing a SME?

158

31

Can I explain health and other regulations as a legal issue in establishing a SME?

158

32

Can I outline human resources as an influence in establishing a SME?

159

33

Can I explain skills as part of human resources in SMEs?

159

34

Can I outline costs as part of human resources in SMEs?

160

35

Can I explain wage costs as part of human resources in SMEs?

160

36

Can I explain non-wage costs as part of human resources in SMEs?

160

37

Can I outline taxation as an influence in establishing a SME?

161

38

Can I explain federal and state taxes as influences in establishing a SME?

161

39

Can I explain local government rates and charges as influences in establishing a SME?

162

40

Can I outline the business planning process?

41

3

For a complete understanding of this topic: 50

Page No.

Can I explain organising human resources (HR) as part of the business planning process?

172

51

Can I outline forecasting as part of the business planning process?

173

52

Can I explain forecasting total revenue and total cost as part of the business planning process?

174

53

Can I explain how revenue is forecast?

174

54

Can I explain how cost is forecast?

174

55

Can I explain forecasting break-even analysis as part of the business planning process?

174

56

Can I explain cash flow projections as part of the business planning process?

176

57

Can I outline monitoring and evaluations as part of the business planning process?

177

58

Can I explain monitoring and evaluating sales as part of the business planning process?

178

Can I explain monitoring and evaluating budgets as part of the business planning process?

178

Can I explain monitoring and evaluating profit as part of the business planning process?

179

61

Can I explain taking corrective action as part of the business planning process?

181

162

62

Can I outline critical issues in business success and failure?

187

Can I identify and explain the sources of planning ideas?

163

63

188

42

Can I explain situational analysis as a source of planning ideas?

164

Can I explain the importance of a business plan as a critical issue in business success and failure?

43

Can I explain vision, goals and/or objectives as part of the business planning process?

189

166

Can I explain management—staffing and teams—as a critical issue in business success and failure?

65

44

Can I explain business goals as part of the business planning process?

191

167

Can I explain trend analysis as a critical issue in business success and failure?

45

Can I explain long-term growth as part of the business planning process?

66 168

Can I explain identifying and sustaining competitive advantage as a critical issue in business success and failure?

191

46

Can I outline the process of organising resources as part of the business planning process?

169

Can I explain avoiding over-extension of finance and other resources as a critical issue in business success and failure?

191

47

Can I explain organising operations as part of the business planning process?

170

193

48

Can I explain organising marketing as part of the business planning process?

170

Can I explain using technology as a critical issue in business success and failure?

49

Can I explain organising finance as part of the business planning process?

171

Can I explain economic conditions as a critical issue in business success and failure?

194

59

60

64

67

68

69


3

199


Useful websites Fair Work Australia: www.fwa.gov.au APEC: www.apec.org.au/docs/iss1.htm Australian Bureau of Statistics (ABS): www.abs.gov.au ABS Cat 8165.0 Counts of Australian Businesses, including Entries and Exits, June 2010 to June 2014: www.abs.gov.au/ausstats/[email protected]/mf/8165.0 Australian Taxation Office (ATO): www.ato.gov.au SME Trends and Achievements—report prepared for Telstra Business, 2007: www.telstrabusiness.com/business/ShowDoc?nodePath=%2FBEA+Repository%2FResources%2FPress+Releases%2FPDF_ SMETrendsAndAchievements//binary&versionId=2 Small Business NSW: www.smallbusiness.nsw.gov.au Sensis Business Index: about.sensis.com.au/small-business/sensis-business-index Business Failure and Change: An Australian Perspective—Productivity Commission Staff Research Paper: www.pc.gov.au/__data/assets/pdf_file/0005/8258/bfacaap.pdf CSIRO Small and Medium Enterprise Engagement Centre: www.csiro.au/Portals/Partner/SMEEngagement.aspx CPA Australia/CGA Canada—SME Forum: www.cpaaustralia.com.au/cps/rde/xbcr/cpa-site/report-of-the-forum-on-sme-issues.pdf business.gov.au: www.business.gov.au/Pages/default.aspx Australian Franchises Opportunities Exchange: www.franchisedirectory.com.au Canstar (to compare business borrowing rates): www.canstar.com.au Business names: www.asic.gov.au/asic/asic.nsf/byHeadline/12-106MR%20ASIC%20launches%20national%20Business%20Names%20 Register?opendocument Auburn City Council Public Health Policy and Regulations: www.auburn.nsw.gov.au/Environment/PublicHealth/Pages/PublicHealth.aspx Safe Work Australia: safeworkaustralia.gov.au/Pages/default.aspx Sources of Planning Ideas—Small Business NSW: www.smallbusiness.nsw.gov.au/supporting-business/small-biz-connect-advisory-program Australian Solar Timber (AST) mission statement: www.astfloors.com.au/aboutast.htm A business plan doubles your chances for success, says a new survey: smallbiztrends.com/2010/06/business-plan-success-twice-as-likely.html Business Plan Resources, The Small Business Plan, Peter McLean: ezinearticles.com/?Business-Plan-Resources—The-Small-Business-Plan—Seven-Critical-Components&id=401069 Australian Bureau of Statistics, 8129.0, Business Use of Information Technology, 2013–14: www.abs.gov.au/ausstats/[email protected]/mf/8129.0 Energy Matters: www.energymatters.com.au/index.php?main_page=news_article&article_id=3080 The launch of Winkiwoo: www.wiliam.com.au/wiliam-blog/the-launch-of-winkiwoo

Business plans Business.com: www.business.com/guides/sample-business-plans-929 Bplans (business plan templates): www.bplans.com/sample_business_plans.php Small Business NSW—business strategy and planning: www.smallbusiness.nsw.gov.au/supporting-business/small-biz-connect-advisory-program Business.gov.au, business plan template: www.business.gov.au/Documents/BusinessPlanTemplate.doc

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End of chapter questions Case study: Winkiwoo

Key Concept questions These questions test whether you have grasped the key ideas in each subsection. They are not difficult questions, but will test your recall of knowledge of the material you have read. If you are unsure what a question is asking you to do, refer to page vii to check the meaning of the Board of Studies key words. If you can answer all these questions, you will know you have a sound knowledge of content. Refer to pp. 233–237 for Answers

3.1 Small to medium enterprises 3.1.1 Definition of SMEs 1. Outline the definition of business size according to the ABS.

10. Explain why Eastmon was facing cessation and failure as a business. 11. Outline the business idea of Winkiwoo. 12. Identify factors that give Winkiwoo a competitive advantage.

3.2.4 Establishment options 13. Distinguish between buying a franchise business, buying an existing business and starting a new business.

3.2.5 Market 14. Distinguish between total market and market segmentation. 15. Explain why businesses need to think in terms of the tangible and intangible benefits of their products to develop marketing strategies. 16. Outline the ways in which price can be regarded. 17. Explain visibility as a factor to consider in developing marketing strategy.

3.1.2 Role of SMEs 2. Outline the role of SMEs as employers and producers.

3.2.6 Finance

3.1.3 Economic contribution of SMEs

18. Distinguish between debt and equity funding.

3. Outline the OECD assessment of the contribution of the SME sector to value added in Australia.

19. Distinguish between an overdraft and a mortgage.

3.1.4 Success and/or failure of SMEs 4. Outline the ways that SMEs can measure success. 5. Describe the reasons for SMEs failing.

3.2 Influences in establishing a small to medium enterprise

20. Explain why the costs of a small business loan are generally higher than the standard variable interest rate (SVR).

3.2.7 Legal 21. Explain zoning as a legal issue in establishing a small business.

3.2.8 Human resources

3.2.1 Personal qualities

22. Distinguish between specific skills and general skills.

6. Explain why entrepreneurship is a most important personal quality in establishing a SME.

23. Distinguish between wage and non-wage costs.

7. Explain why Indigenous people are underrepresented as SME owners.

3.2.2 Sources of information

3.2.9 Taxation 24. Identify federal, state and local government taxes, rates and charges by completing the following table.

8. Identify a classification of sources of information that could be used for starting a SME.

Fringe benefits tax, payroll tax, income tax, company tax, rates, GST, parking levies, stamp duty, capital gains tax.

3.2.3 The business idea 9. Explain the relationship between the business idea and competitive advantage.


201


Federal government

State government

Local government

3.3.6 Taking corrective action 39. Explain why a business may not need to take corrective action when actual performance has varied from what was planned.

3.4 Critical issues in business success and failure 3.4.1 Importance of a business plan 40. Explain how having a business plan contributes to the success of a business.

3.4.2 Management

3.3 The business planning process

41. Outline the benefits of using teams in a business.

3.3.1 Sources of planning ideas

3.4.3 Trend analysis

25. Define ‘situational analysis’ and identify the components of a situational analysis.

42. Explain why trend analysis is critical to the success of a business.

3.3.2 Vision, goals and/or objectives

3.4.4 Identifying and sustaining competitive advantage

26. Distinguish between

43. Outline the ways that a business can develop competitive advantage.

a vision and mission b goals and objectives 27. Outline the criteria for establishing business goals. 28. Describe the benefits of growth to a business.

3.4.5 Avoiding over-extension of finance and other resources

Case Study: Nanotek

44. Explain why a high debt to equity ratio can mean that a business has over-extended its finance.

29. Outline the method that Nanotek has used to enter the global market.

3.4.6 Using technology

30. Explain why Russia was targeted as an opportunity by Nanotek to expand into the global market to achieve long-term growth. 31. Identify areas from the case study that indicate that Nanotek is poised to achieve long-term growth because of its expansion into global markets.

3.3.3 Organising resources 32. Explain why a business needs to organise its resources.

3.3.4 Forecasting 33. Explain why cost is easier to forecast than revenue. 34. Explain the significance of the break-even point. 35. Outline the importance of a cash flow projection.

45. Outline the risks to a business of using leading-edge technology.

3.4.7 Economic conditions 46. Outline changes in economic conditions that can put businesses at risk of failure.

Contemporary media report: Solar hot water rebate axing fallout 47. Discuss the influence of government on SMEs in the solar hot water industry. 48. Assess the impact of this change to the business environment on SMEs.

3.3.5 Monitoring and evaluations

Contemporary media report: Tax cut a boon as work dries up

36. Outline monitoring and evaluations as part of the business planning process.

49. Discuss the influence of government on SMEs over reduction of tax rates on small business.

Case Study: Coco’s Coastal Café

50. Assess the impact of this change to the business environment on SMEs

37. Outline the sources of information used by Coco to help him determine his business plan. 38. Explain how Coco determined his business plan.

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3.1 Small to medium enterprises

30 min

3. Which alternative best describes the economic contribution of SMEs to Australia? A SMEs, through intense competition, are responsible for lower prices. B SMEs make major contributions to the education sector of the economy. C SMEs contribute more than two-thirds of expenditure on research and development. D SMEs are vital to the expansion of the economy in stimulating almost one-third of economic growth. 4. According to small business owners, which goals are most important in judging the success of small businesses? A avoiding voluntary cessation B avoiding involuntary cessation C achievement of financial goals D achievement of environmental sustainability goals

SHORT-ANSWER QUESTION 5. a Outline the contribution of the SME sector to employment in Australia. (2 marks) b Explain TWO measures of success for SMEs. (4 marks) c Discuss the idea that some business failures may have beneficial outcomes. (4 marks)

3.2 Influences in establishing a small business OBJECTIVE-RESPONSE QUESTIONS

1. Maria operates a successful fast-food business. Her business is well planned and managed as she does not like running up debts. Maria also has superior communication skills.

OBJECTIVE-RESPONSE QUESTIONS 1. Which alternative provides the best definition of a small business? A a business with 10–49 employees B a business with 50–149 employees C a business with more than 150 employees D a business with a turnover of less than $10 million 2. Which alternative describes a role of SMEs in Australia? A SMEs are located only in large cities. B SMEs compete with large businesses. C SMEs are a major employer and producer. D SMEs provide opportunities for investment because they are capital-intensive.

To what personal quality does this scenario refer? A gender B motivation C entrepreneurship D cultural background

2. Which term best matches the following definition?

The distinctions between products of competing businesses as perceived by consumers. A customer service B sorting out process C product differentiation D competitive advantage


30 min

203


3. Which alternative is an advantage of new business as an establishment option? A Training, mentoring and advice are readily available. B Start-up finance is easier to obtain for a proven business model. C There is a set of established procedures in terms of operating the business. D Establishment costs may be reduced through operating from home. 4. Which one of the following is a NSW Government tax? A income tax B payroll tax C company tax D fringe benefits tax

SHORT-ANSWER QUESTION Raoul wants to start a new mobile dog-wash business. The only equipment he needs is his mobile dog-wash van which he can attach to the tow bar of his SUV. He hopes that he can have a profitable business by operating from home. Raoul lives in an area where there are many wealthy professional people who work long hours. Many of these people have dogs but are too time-poor to groom them. Raoul sees an opportunity to target these people. 5. a Describe the basis on which Raoul has segmented his target market. (2 marks) b Discuss the advantages of establishing a new business operating from home. (4 marks) c Assess TWO sources of debt finance appropriate to Raoul’s business. (4 marks)

3.3 The business planning process

30 min

2. Which element of a situational analysis allows a business to examine the influences in its internal and external environments? A market analysis B SWOT analysis C customer analysis D consideration of the product life cycle 3. Which alternative best describes the following statement?

The business will be selling 2000 units after six months of operation and will be making a profit of $25 000. A goal B vision C mission D objective

4. What type of controls involve the use of corrective action as operations are taking place? A feedback B budgetary C concurrent D feedforward

SHORT-ANSWER QUESTION Jill and Jana design and manufacture women’s shoes. Their market is the average working woman. They have calculated their fixed costs at $15 000. Jill has calculated that their variable costs are $70 per pair of shoes produced. Jana has set the retail price of a pair of shoes at $85. 5. a Calculate how many pairs of shoes Jill and Jana need to sell to break even (show working). (2 marks) b Explain the significance of the break-even point for a business. (4 marks) c Examine why fixed costs are easier to predict than variable costs. (4 marks)

OBJECTIVE-RESPONSE QUESTIONS 1. Which alternative refers to a long-term general plan that outlines the vision and future direction for the business? A action plan B tactical plan C strategic plan D operational plan

204

3.4 Critical issues in business success 30 min and failure OBJECTIVE-RESPONSE QUESTIONS 1. Why is the team approach frequently used in the workplace as a human resource management strategy? A Workers are better supervised by middle management. B An autocratic management style makes clear chains of command easier.




C Unproductive, excessive communication between workers is eliminated. D There is increased flexibility and involvement of team members in decision making. 2. A business has $8000 of debt funding while the level of equity that the owners have in the business is $10 000.

Which statement is correct about this business? A The business has a low gearing ratio and is in danger of over-extending its finance. B The business has a low gearing ratio and is in no danger of over-extending its finance. C The business has a high gearing ratio and is in danger of over-extending its finance. D The business has a high gearing ratio and is in no danger of over-extending its finance.

3. A business has adopted technology in the form of a website. It has purchased a secure payment facility and customers are able to order and pay for goods online. Since it has developed this system sales have increased slightly but there has been a 70 % reduction in overdue accounts and bad debts.

Which statement about the use of technology by this business is correct? A The business is using established technology with success. B The business is using established technology without success. C The business is using leading-edge technology with success. D The business is using leading-edge technology without success.

4. A nation has experienced increased consumer demand for manufactured goods and falling unemployment. To prevent inflation from increasing the Central Bank increases interest rates by two per cent and the government introduces a 15 % consumer tax on all manufactured items.

Which statement about the impact of these economic conditions on businesses in this nation is correct? A Those farming businesses that export will be the worst affected. B All businesses will be badly impacted by the increase in interest rates. C Only businesses that produce manufactured items will be affected by the consumer tax. D Businesses that produce manufactured items and have business loans will be the worst affected.

SHORT-ANSWER QUESTION Victor was keen to establish a new lawn-mowing business. Even though he had done no research he reasoned that everyone had lawns that needed mowing. He thought that he would not need to borrow any money for the business and did not have much of his own to put into it. He was not frightened of hard work. He had heard that he should draw up a business plan but he did not think much of that idea. After two weeks in business Vic found that he did not have enough time to cope with customer demand. Many dissatisfied customers rang up to complain that their lawns had not been mowed. Vic did not know much about employing people and the business did not have enough finance to buy more mowers and vehicles. 5. a Identify TWO critical issues in business success and failure from this scenario. (2 marks) b Explain why it is important for a business to have a business plan. (4 marks) c Discuss ways that Victor could improve his business situation. (4 marks)

Business report

In your answer you will be assessed on how well you: • demonstrate knowledge and understanding relevant to the question • use the information provided • communicate using relevant terminology and concepts • present a sustained, logical and cohesive response in the form of a business report. In an effort to encourage more mothers to return to the workforce, the government offered a generous tax concession for fees paid to registered child-care centres. This encouraged Sue and Lisa to set up a child-care centre, which they called First Steps, and obtain registration. Both women had university qualifications in early childhood education. At first, the centre did really well with many mothers needing child-care places for their children. First Steps had developed a reputation for providing excellent care and a stimulating learning environment that was not found in other centres. However, several problems occurred which threatened the existence of First Steps. The economy plunged into recession with rising unemployment. Other newly-established child-care centres came up with creative ideas which appealed to parents,


35 min

205


resulting in First Steps losing more clients. Finally, two events occurred that caused panic at the centre. The first was a government requirement for all centres to have minimum sized rooms: First Steps’ rooms were below minimum size. The second event was a letter from the centre’s bank foreclosing on their loan in 60 days. Sue and Lisa have employed your consulting business to help them with their business problem. You have to write a report that discusses: • the influence of government on SMEs, specifically First Steps • e ffects of changes in the business environment on SMEs, specifically First Steps • c hanges to First Steps’ business plan to help the centre survive • strategies to ensure business success.

(20 marks)


35 min

In your answer you will be assessed on how well you: • demonstrate knowledge and understanding relevant to the question • use relevant business case study/studies • communicate using relevant business terminology and concepts • present a sustained, logical and cohesive response. Outline ways that SMEs can gain a competitive advantage and explain how one SME determines its business plan. (20 marks)

206




How to write a business report PRELIMINARY OUTCOME A student:

You should:

P9: communicates business information and

be able to communicate business information, issues and concepts using appropriate terminology and formats.

issues in appropriate formats.

HSC OUTCOME A student:

You should:

H9: communicates business information,

be able to communicate business information, issues and concepts using appropriate terminology and formats.

issues and concepts in appropriate formats.

HOW TO WRITE A BUSINESS REPORT © Pascal Press ISBN 978 1 74125 390 0 Preliminary Business Studies-2015.indd 207

207



In any communication it is important to ensure that the message gets across and important details are included. Time wasted in reading longwinded reports takes a business person away from his or her main purpose. Writing a good report is a skill that you should develop. The Business Studies Syllabus has the following objective: The student develops skills to communicate business information and issues using appropriate formats. Throughout your Preliminary and HSC Courses you will be required to communicate using the business report format. The most important test will come in the HSC Examination, where 20% of the possible marks will be allocated to Section III which requires you to write a business report responding to a hypothetical situation. There are a number of unique features in the business report format. Many reports begin with an executive summary. The purpose of an executive summary is to present the reader with a concise form of the report. It allows business executives to gain an idea of what the report is about without having to read the whole document. It is best to leave writing your executive summary until you have finished your report, and then take a key point from each section, even though the executive summary should be at the beginning. Other features of reports include: ◗ the use of headings to draw attention to what each paragraph or section is about ◗ a brief introductory paragraph after each heading to introduce some theory about what will appear in the points afterwards ◗ the use of bullet points to arrange material in a concise manner—it is a good idea to explain each bullet point with an expanded description ◗ writing in a concise fashion (i.e. getting straight to the point) ◗ using underlining or bold type for emphasis ◗ using illustrations, such as graphs and diagrams, or using statistics to reinforce a point that you have made ◗ a brief but definite conclusion with recommendations for action to be taken—this should be consistent with the points that you have made in your report. Remember that in an examination you should plan what you are going to write. Never write anything just to fill up space. If what you are writing is not going to earn marks for you, you are just using up valuable time for no reward. It is important to remember that practice makes perfect. You may experience difficulty with your first few reports but you will gradually be able to master what is a relatively easy and efficient style of communication. Remember that you are trying to get a message across to the reader. To assist you in developing your skills in report writing, a contemporary media report has been included. The article will be presented the same way it was in the newspaper. It will then be rewritten in business report format so that you can compare the difference in styles. This will also give you a basis for practise. Find short articles on business from a newspaper and rewrite them in report format. Try doing the first few on a computer. You can always edit and improve your writing and it does not matter if you make mistakes. For examinations you will have to practise doing them by hand. This contemporary media report would also make a good case study on the topic ‘The nature of business’ in the section Stages of the business life cycle as well as the topic on ‘Business planning’ (all sections of the topic). 208





‘Boutique a top performer’ by Jacklyn Wagner, Northern Star, 3 April 2012

The owner of SOBI, Kim Winter, talks about her business’s internet shopping.

WHEN Kim Winter bought SOBI Boutique in August 2008, the Global Financial Crisis (GFC) had just hit. It forced her to re-think the way she ran her business. Not only did Ms Winter survive the GFC but SOBI was awarded the Top Performer Award and Ladies Fashion and Encouragement Award at Lismore Shopping Square’s Retailer Awards 2011 last month. ‘When I took over the business I had a great time for the first 12 months, then the GFC really hit and the hard work began,’ she said. ‘At first I was in denial that people’s spending habits had changed. By 2010 I really noticed that customers wanted a lot more for much less.’ So Ms Winter changed suppliers and began buying smaller quantities of stock. The other part of her strategy was to make greater use of Facebook to market her clothing. ‘I regularly put up posts about new stock, competitions and photos,’ she said. ‘I post most days and find that photos get the most amazing reaction.’ Ms Winter also keeps the dispatch and payment side of her business simple, sending out stock in pre-paid envelopes and taking payments by direct debit and credit card payment over the phone. ‘I have a laptop in the shop and stay really involved in the conversation with my customers,’ she said. ‘This made it easier to respond to people’s changing demands and react to what the buying trends are. I can also contact my customers when I am going to buy new stock and ask them what they want.’ Ms Winter likes the freedom of being an independent retailer as she has complete control over buying and ordering. ‘I buy much smaller quantities than the bigger chains and concentrate on buying quality merchandise,’ she said. ‘That’s important to my customers because they want to be assured that they are not going to see 50 of the same sort of dress in town.’ The downside of this independence for Ms Winter is that she is often the last to get paid or have a break. ‘I have to do my own bookwork and if I have a bad week it’s my problem.’ SOBI’s Facebook address is www.facebook.com/sobilismore. Source: Northern Star


209



BUSINESS REPORT: SOBI Brief, concise summary of the main features of the report. Written last, but appears first. This is all you need to read if you want a ‘snapshot’ of the article.

Executive summary This report will examine the following issues about SOBI Boutique of Lismore, NSW owned by Kim Winter. ◗ The impact of the GFC took about a year to affect Kim Winter’s business. ◗ Consumer patterns changed for the worse. ◗ The business plan needed modification by changing suppliers and buying less. ◗ Intensive online marketing through Facebook was used. ◗ Customer contact is maintained by computer. ◗ Goods are dispatched by mail at no cost to the customers. ◗ Payments are made by secure direct debit. ◗ Promoting customer satisfaction has seen the business win awards. ◗ As a sole trader the owner has a big workload. Being flexible and responding to challenges in the external environment by promoting customer satisfaction has led to the success of this business.

Write term in full. Thereafter use recognised abbreviation.

Use of bullet points keeps report concise. Each point can be expanded if required.

Impact of Global Financial Crisis (GFC) on a SME The GFC had an impact on business and consumer confidence. Occurrences like the GFC are external influences to which businesses have to develop a response in order to overcome events which could lead to business cessation. ◗ Kim Winter purchased SOBI Boutique in August 2008 at the start of the GFC. ◗ T he impact of the GFC was not immediate—it took about a year to affect the business. ◗ The business took some time to realise that consumer spending patterns had changed. ◗ The main change was that people wanted a lot more for a lot less.

Response to external influences (economic changes because of GFC)

Use of appropriate terminology.

Many businesses, especially SMEs, do not have business plans. Those SMEs that do need to constantly revise their business plans to take account of external influences.

Headings for each section.

◗ T he impact of the GFC forced Kim Winter to rethink how the business was run (adjusting her business plan). ◗ Kim changed suppliers and started buying smaller quantities of stock. ◗ Kim made greater use of Facebook to market clothing. ◗ Kim introduced promotional marketing (competitions).

Use of technology and customer service Brief introductory paragraph after the heading to introduce theory about what will appear in the points afterwards.

Today’s business environment requires the use of technology in all aspects of the business, including operations, marketing, finance and human resource management. laptop in the shop keeps Kim in touch with her customers, making it easy ◗ A to determine trends and respond to changes in demand. ◗ Goods are dispatched in pre-paid envelopes. ◗ Payment is received by direct debit. ◗ Customers are updated electronically about changes in stock.

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Benefits of being in business Many owners and managers of SMEs prefer the independence of ‘being your own boss’ to being in employment. Some of the benefits include: ◗ S OBI won the Top Performer Award and Ladies Fashion and Encouragement Award at Lismore Shopping Square’s Retailer Awards 2011 in March 2012 ◗ the freedom of being independent and in control of ordering and buying ◗ customer satisfaction, achieved by buying quality merchandise.

Downsides Sometimes resources—especially human resources—can become over-extended in a SME. Quite often the owner can have too many roles and is unable to discharge all of these efficiently. In her business, Kim: ◗ is the last one to get paid and to have a break ◗ does her own bookwork.

Conclusion Being flexible and responding to challenges in the external environment by promoting customer satisfaction has led to the success of this business. Kim will need to keep monitoring the environment and modifying her business plan.

Brief, definite conclusion, with recommendations for action to be taken that are consistent with rest of report.

Useful websites HSC Online: hsc.csu.edu.au/business_studies/intro/writing/writing.html Business Report Format: www.buzzle.com/articles/business-report-format.html


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Sample Preliminary examination Are you ready to tackle a Preliminary exam paper? Try to complete the paper in as much of an exam-like environment as you can. Give yourself two hours for the exam paper. Do not look at the answers until you complete all the questions. Then mark the exam. Good exam technique is essential in order for you to maximise your marks. Allocating your time effectively Section I: Objective-response questions. You should allow about 30 minutes. Section II: Short-answer questions. You should allow about 1 hour. Section III: Business report. You should allow about 35 minutes. Section III: Extended-response question. You should allow about 35 minutes. w Keep track of time. Do not spend too much time on any one section. Move onto a new question where you may gain more marks rather than spending too long on previous questions. w You may answer questions in any order. For example, you can leave the objective-response section till last. Use your reading time to check the general instructions and then find the questions you can best answer first. Come back to the harder questions later. To answer objective-response questions: w Read the question (stem) carefully. Check what key words are being used (e.g. calculate, identify). w Look carefully at any related source material provided. w Choose the best response. w If you do not know the answer, make the best choice you can. There are no marks deducted for wrong answers. To answer short-answer questions: w Read and highlight key words at the beginning of the question. These key words are common to all Preliminary papers and require you to respond accordingly. w Attempt to fill the entire space provided on the paper for these questions. It has been given to you as a guide to the length your response should be. w Do not restate the question. It is not required and uses up valuable space and time. w You can answer in point form or full-sentence style. In either case, you need to present your response in a logical order. w Do not include irrelevant information in your answer. It will gain no marks and wastes your time.

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To answer the business-report question: w Read and highlight the key words at the beginning of the question. These key words are common to all Preliminary papers and require you to respond accordingly. w It is important that you arrange and organise your argument in a fluent manner. In order to access the top band of marks you must structure your response in business-report format with headings and subheadings, and material organised in dot points. w Respond to all points required by the question. w Make sure that your report makes a recommendation that is consistent with the rest of your report. w Do not restate information provided by the examiners but make sure you refer to it. To answer the extended-response questions: w In extended-response questions you must be succinct and make sure you link your ideas together. w Read and highlight key words at the beginning of the questions. w It is important that you arrange and organise your argument in a fluent manner. You should structure your response in a traditional essay format with clear introduction, main body and conclusion. w For each new issue or theme you introduce to your argument, ensure that you start a new paragraph. w In discussion questions, make sure you give points for and against. w Continually refer to the question from the exam paper. Make sure that your response is consistent with the question being addressed. w If your answer will not fit in the space provided, you have the right to ask for another booklet. Check the BOSTES NSW website resources Go to the BOSTES NSW website at www.boardofstudies.nsw.edu.au and look through the past exam papers and the sample answers provided for recent papers. Then also read through the examiners’ reports of past papers. These are also very worthwhile as they give insights into the most common student mistakes and misunderstandings. See also www.boardofstudies.nsw.edu.au/syllabus_hsc/ glossary_keywords.html




Sample Preliminary examination General instructions w Reading time – 5 minutes w Working time – 2 hours 30 minutes w Write using black or blue pen. w Draw diagrams using pencil. w Board-approved calculators may be used. Total marks – 85 Section I 15 marks Attempt Questions 1–15. Allow about 30 minutes for this section. Section II 30 marks Attempt Questions 16–21. Allow about 1 hour for this section. Section III 20 marks Attempt Question 22. Allow about 35 minutes for this section. Section IV 20 marks Attempt Question 23. Allow about 35 minutes for this section. Refer to pp. 241–247 for Answers

SECTION I 15 marks Attempt Questions 1–15. Allow about 30 minutes for this section. 1. Which alternative indicates the voluntary cessation of a business? A The owner of the business has retired. B A company has been placed into receivership. C The owner of the business has opted for voluntary bankruptcy. D Creditors of the business want it liquidated to recover outstanding debts. (1 mark) 2. The sales of a business have reached a peak some time ago and have remained stable for two years.

Towards which stage of the business life cycle could this business be heading? A growth B maturity C decline D establishment (1 mark)

3. Roberto establishes a home housework business where clients can have their housework done and shopping orders filled while they are at work. In what industry is Roberto working? A secondary B tertiary C quaternary D quinary (1 mark) 4. The management team at Select Executive Placements has a style of management which quite often involves seeking the opinions of team members and empowers employees by decision making at lower levels of the business hierarchy. What is the theory of management used by Select Executive Placements? A political B classical C behavioural D contingency (1 mark) 5. The management of Energy Monitors Ltd wants to invest a large amount of money in the development and testing of a device that will save households that purchase it hundreds of dollars a year off their electrical bills. The investment may require the business seeking additional funds from new investors. Between which two groups of stakeholders is this proposal likely to cause conflict? A employees and customers B management and customers C customers and environment D shareholders and management (1 mark) 6. Paul is a manager who has the ability to manage his staff well and can motivate them to work in groups to improve their productivity. He also has the skill of being able to formulate long-term goals which are not necessarily apparent in the business at the time. Which management skills does Paul have? A vision and interpersonal B vision and communication C strategic thinking and interpersonal D strategic thinking and communication (1 mark) 7. Which one of the following is an example of an internal influence on change in business? A an airline which offers discounts to customers booking online B an ageing workforce where workers need more sick leave C irrigation farmers’ water allowances are reduced due to drought D a government law requires businesses to put (1 mark) workers on workplace agreements

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8. Molly has just opened a boutique and is trying to position her products in the market as top quality items. She prices all of her lines with very high prices.

What pricing strategy is Molly using? A skimming B penetration C price points D loss leaders

(1 mark)

9. The government of a nation wants to make its consumption taxes fairer by being able to tax services as well as goods. It abolishes existing consumption taxes on goods and introduces a 12% tax on all goods and services. Fresh food and fuel are exempt from the tax. To reduce the inflationary impact of the tax the Central Bank increases interest rates by one per cent.

Which statement about the impact of these economic conditions on businesses in this nation is correct? A Farming businesses will be the worst affected by the tax. B All businesses will be badly impacted by the 12 per cent tax. C Only businesses that produce manufactured items will be affected by the new tax. D Businesses that produce services and have business loans will be the worst affected by the tax. (1 mark)

10. Which one of the following is a cost of business failure? A Search costs, such as welfare payments, as people look for new jobs. B Inefficient and unprofitable businesses are replaced by ones which are efficient and profitable. C The exit of failed businesses where the productivity is poor is compensated by growth in productivity. D Entrepreneurs involved in business failure learn from the experience and experiment with new production processes. (1 mark) 11. Which one of the following statements about business survival is true? A The survival rate is lower as businesses increase in size. B Survival rates for large businesses are better than for SMEs. C Survival rates for all employment size ranges increase over time. D Business survival rates are higher if the business only employs the owner. (1 mark)

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12. Chris and John decide to establish a gentlemen’s clothing factory to supply to fashionable suburbs. Their target market is wealthy men. They are going to introduce their products to the market with a skimming strategy. Only exclusive outlets will be able to sell their goods. Which elements of the marketing mix are being considered? A place, product, price B price, promotion, place C product, price, promotion D promotion, place, product (1 mark)

13. Alex and Harry’s Sports Store is attempting to prepare a cash flow forecast for the second half of 2013. It has predicted the following cash sales and cash payments.

Cash flow projections for Alex and Harry’s Sports Store Sept

Oct

Nov

Dec

Cash sales

3000

Cash payments

4000

4000

2000

6000

3000

4000

2000

What is the closing cash balance for December? A 2000 B 0 C 2000 D 6000 (1 mark)

14. What is a disadvantage of a business leasing equipment? A The business does not own the equipment. B The business does not have to maintain the equipment. C The business does not have to purchase the equipment. D There are no tax advantages to the business from leasing equipment. (1 mark) 15. The government decides to pass a law offering farmers a subsidy to assist them to cope with loss of exports due to the strong Australian dollar.

What type of external influence is this? A legal B political C financial D economic

(1 mark)




SECTION II

QUESTION 18 (5 marks) Lucy’s Lolly Shop

30 marks Attempt Questions 16–21. Allow about 1 hour for this section.

Income statement for the year ending 30 June 2011 $’000 Sales revenue

QUESTION 16 (5 marks)

Less Cost of goods sold

Business life cycle

Sales ($)

B

C

?

Gross profit E

A

$’000

900 ?

Less Operating expenses Selling expenses

50

General expenses

40

Depreciation

30

Total operating expenses

120

Operating profit

280

Less Interest payment on loans

D Time

70

Net profit after tax

?

a Identify each of the four stages of the business life cycle.

Lucy’s Lolly Shop had the following amounts in its books (amounts in $’000):

A

B

Opening stock 1000 Purchases 600 Closing stock 900

C

D

(2 marks)

b Explain what happens in the phase of the cycle marked E. (3 marks)


a Calculate the cost of goods sold.

(1 mark)

b Calculate gross profit.

(1 mark)

c Calculate net profit.

(1 mark)

d Outline the importance of the income statement. (2 marks)


Monica and Robert operate a business involved in town and regional planning. The business is known as GeoDesign Ltd. The business targets urban developers and individuals who want their planning problems solved.

Manson’s Modern Furniture Supplies has decided to move towards flatter management structures and to introduce work teams. a Outline the impact flatter management structures will have on the chains of command and the spans of control in the business? (1 mark)

a Identify the legal structure of this business. (1 mark)

b Outline TWO advantages for a business which adopts flatter management structures. (2 marks)

b Outline the concept of limited liability.

c Explain ONE factor that a business must consider when adopting the work team approach. (2 marks)

(2 marks)

c Describe the registration and incorporation process for businesses wanting to become companies. (2 marks)

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Costs and revenue $(’000) 200

Emily, Rose and Josephine are accomplished dressmakers and want to start a fabric and dressmaking business. They even have a business name picked out—Elegant Threads. Unfortunately they have no idea of the influences necessary to operate a business—aspects such as innovation, choice, competitive advantage and entrepreneurship.

Total sales revenue

180

Total cost

160 140

They also have no idea about what goals the business should have apart from making enough profit, giving something to the community and being environmentally responsible.

120 100 80

They would really like to know about establishment options—whether to establish a new or existing business. Unfortunately there are no franchise businesses for the area of their expertise.

60 40 20 0

10

20

30

40

50

60

70

80 90 100 Sales volume (’000)

a Calculate the sales volume at the break-even point. (1 mark)

Emily decides to approach Business Advice Consultants for help. You have been asked to investigate options and to present the women with a report. Your report should:

w outline the influences in the nature of business— specifically choice, innovation and competitive advantage and entrepreneurship

b Calculate the amount of profit at a sales volume of 80 000 units. (1 mark)

w describe the possible business goals, especially those

c Explain the importance of break-even analysis. (3 marks)

w discuss establishment options by comparing

QUESTION 21 (5 marks) a Outline the concept of the business idea.

(1 mark)

b Define ‘product differentiation’.

(1 mark)

c Identify TWO methods that a business can use to achieve product differentiation. (3 marks)

SECTION III 20 marks Attempt Question 22. Allow about 35 minutes for this section. In your answer you will be assessed on how well you: w demonstrate knowledge and understanding relevant to the question w apply the hypothetical business situation w communicate using relevant business terminology and concepts w present a sustained, logical and cohesive response in the form of a business report.

relating to profit, social goals and environmental goals establishing a new business with buying an existing one.

SECTION IV 20 marks Attempt Question 23. Allow about 35 minutes for this section. In your answer you will be assessed on how well you: w demonstrate knowledge and understanding relevant to the question w apply relevant business case study/studies and contemporary business issues w communicate using relevant business terminology and concepts w present a sustained, logical and cohesive response.

QUESTION 23 (20 marks) Distinguish between the classical and behavioural approaches to management and explain why identifying and sustaining competitive advantage is a critical issue in business success. Refer to pp. 241–247 for Answers

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Answers Chapter 1: Nature of business KCq

• 20 full-time (or equivalent) people in any other case, for example, the production of a service. 10. Australian Fastsigns has only a small staff of fewer than five, meaning that the business could be classified as very small or even as a micro business.

Key Concept questions (pages 64–65)

1. Businesses produce goods and services because consumers want them. The reason that consumers want goods and services is because these have utility for the consumers. Utility means usefulness or the ability of a product to provide satisfaction of wants.

11. The business has embraced technology, using computeraided, digital printing sign-making systems to create highimpact, cost-effective signage. 12. The risks that Rick Abrahams undertook include financial, market, technological and operational.

2. The four key business functions are:

13. Small to medium enterprises (SMEs) are very important to the Australian economy. According to the Australian Bureau of Statistics (ABS), most Australian businesses are small (97% or 2 037 157 businesses). Of those SMEs that employ people, the ABS has calculated that at June 2011 SMEs provided 46% of total private sector industry employment out of a total labour force of 11 355 700.

• operations (most important key business function; concerned with the actual production of the product of the business) • marketing (connects the customer with the products that a business produces by giving them an opportunity to purchase them) • finance (involves the planning, organising and controlling of the financial resources of a business to achieve its goals)

14. Advantages and disadvantages of operating a small business can be compared by using a table.

• human resource management (refers to systems that have been developed to manage people within an organisation or business).

Advantages

Disadvantages

3. It is possible for owners to make a profit from producing and selling goods and services. The potential to make a profit motivates people to start a business.

Independence—many people who start a small business do so to ‘be their own boss’

The business could suffer from a lack of cash flow which could create liquidity and solvency problems

4. Liquidity relates to the cash flow position of the business and focuses on whether a business can pay debts as they fall due. Solvency refers to the extent to which the current assets of a business exceed the current liabilities—if current assets exceed current liabilities then the business can meet its short-term debt commitments and is described as solvent.

The start-up costs of a small business are usually quite small and the owner may be able to remain in other employment and work the small business part-time

There is a risk that the business will fail, leaving the owner personally liable for any debts

Small businesses are usually well suited to catering for niche markets such as mobile pet washing services

The owner may have to work very long hours compared to an employee of a larger business

Small businesses are flexible and are usually able to respond quickly to the demand of customers

It may be difficult to organise for someone to run the business when the owner is sick or wants to take a holiday

5. The goals of the business will be a major focus for decision making about choice. The choices a business will make will usually be decided by the owners or delegated to the managers. Other stakeholders, such as customers, governments, suppliers and society in general, will also have input into the decision-making process. 6. The competitive advantage of AST stems from maximising the use of timber as an input by introducing veneer production. This means that the business is efficient in the use of resources and can offer products at lower prices. At the same time, AST also has solar-powered drying kilns which, apart from being environmentally friendly, help the business reduce its power costs which in turn give it a competitive edge. Other innovations include efficient processing equipment, diamond tooling and computerised log scanning.

The owners of a small business can enjoy the profits that the business makes and they can draw satisfaction that those profits have been made through their own skill and effort

15. A definition of a local business is one where the customers are usually working or living near where the business is located. The market of the business is small in terms of geographic area and also in terms of customer numbers.

7. Other innovations include efficient processing equipment, diamond tooling and computerised log scanning. 8. One example is maximising the use of timber as an input by introducing veneer production. However, the greatest example of AST’s willingness to minimise its impact on the environment has been the introduction of ‘greenhouse friendly’ solar drying kilns in 1994, as well as the introduction of other applications of solar power.

16. A definition of a national business is one where the business has branches or franchises operating in more than one state or territory. Examples of national businesses that are not franchises are the four major banks (Commonwealth, ANZ, Westpac, National Australia), Qantas, Virgin Australia, Telstra, Optus and the Westfield Group.

9. A small business is a business having fewer than: • 100 full-time (or equivalent) people if it involves the manufacture of goods

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17. International businesses have no investment, staff or sales premises outside their home country. They are merely importers or exporters of goods and/or services. Multinational corporations (MNCs) are businesses that have their head office or headquarters based in their home country. They expand into global markets by establishing subsidiaries in host countries around the globe. Transnational corporations (TNCs) are huge corporate structures that have gone beyond national borders. They tend not to have a nationally-based parent company and business transactions take place across borders on a global basis.

By far the greatest disadvantage is the unlimited liability of the proprietor. 25. A partnership is the most basic form of collective business organisation and is often associated with professional services such as accountants, solicitors and doctors. Family enterprises are suited to partnerships. A partnership is an effective way to reduce income tax since each partner is taxed individually and can claim the amount of the tax free threshold before any tax liability arises. 26. The main features of a company are: • perpetual succession (the company can outlive its founders unlike sole traders and partnerships)

18. Nanotek used franchises to expand into the global market. The first overseas franchise was launched in Russia.

• being a separate legal entity (the company is a ‘legal person’ separate from its owners and can sue or be sued, own assets and borrow and lend money—it has its own legal status)

19. Points in favour of Nanotek’s expansion into Russia are the low cost of entry and the development of a car culture in Russia; Russia is a large, untapped market; export markets contribute 60% of the company’s operations; there is little regulation of the franchise industry in Russia and the franchising system appeals to Russians.

• it is owned by its shareholders • limited liability of the owners (shareholders) of the company (shareholders are liable for the debts of the company only to the extent of the funds that they have invested as well as any amounts that are unpaid on the shares that they hold—their personal assets cannot be seized to pay the debts of the company).

20. Factors that made Nanotek’s expansion into Russia difficult are the extensive approval process, which took two years. There were also the language and cultural barriers as well as the need to customise franchise models to suit the market. 21. Points in favour of Juniper’s expansion into the Australian market are the Melbourne expansion will enable the company to better support its Australian business partners and expanding customer base in the telecommunications and financial markets. Also, Juniper has innovation expertise and hopes to utilise this competitive advantage by participating in the development of the National Broadband Network (NBN).

27. A private company is sometimes called a proprietary company. The main features of a private company include: • shareholding (ownership) between one and 50 owners • the shares are not publicly traded on the Australian Securities Exchange (ASX), hence the ‘private’ nature of the company—shareholders will need to obtain approval from the directors before selling shares

22. Primary industry is concerned with the production or the extraction of natural resources. In primary industries, raw materials such as iron ore or coal are produced.

Secondary industry involves taking raw materials produced by primary industries and transforming them into processed goods and finished products. Secondary industry is concerned with manufacturing, processing and construction. Tertiary industries are service industries. Businesses in this classification provide services to the population at large and to other businesses. Tertiary industries include retail and wholesale sales.

23. Quaternary industry involves intellectual activities and providing information services. These include education, research and development, libraries and information processing. Quinary industry involves not-for-profit activities or activities that you would usually find taking place in someone’s home. These can include activities that may attract financial rewards but are often performed for no payment. An example of businesses that operate in this sub-sector are restaurants and fast-food businesses that sell breakfasts for workers who do not have time to make this meal at home. 24. Sole traders make all the business decisions and take all the risks associated with the business. They have limited capital for expansion and finance is difficult to obtain because of the small and often risky nature of the business. Management skill is limited to the abilities of the owner. It is often difficult for a sole trader to be absent from the business. At times when the owner is away, for whatever reason, the business operations may be on hold.

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• a proprietary company must not engage in fundraising that would require a disclosure document such as a prospectus.

A listed public company is listed on the ASX. Over 2000 companies are listed on the ASX. This listing enables the company to raise capital funds from members of the public by selling shares.

28. Governments establish business enterprises to: • provide essential services that may be unprofitable meaning there is no incentive for the private sector to establish such a business • provide competition with private sector businesses • establish a government monopoly in a strategic area • establish businesses in areas where the start-up capital investment is too great to encourage private sector investment. 29. The possibility of risk and the desire to grow a business may encourage owners to opt for the company structure. Limited liability minimises risk of financial loss. The possibility of many potential shareholders contributing funds will assist growth. Many owners are happy to broaden the ownership and have developed skills that help them to work well with other stakeholders, such as managers and shareholders. 30. Many sole traders and partnerships experience solvency problems because of inadequate cash flow. The current assets of the business, such as cash from sales, must exceed the current debts of the business, such as expenses for repayment of loans, rent, telephone, power and supplies.

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Labor Government’s Fair Work laws in 2009. The current (2011) federal government law on employment contracts is the Fair Work Act 2009 (Cth) which establishes for most employees workplace-level collective bargaining between the employer and employees and their representatives.

The major problem for the sole trader and partnership structures is to generate enough cash flow to remain solvent and at the same time provide owners with sufficient funds for their own living expenses. 31. External influences have an indirect impact on a business and the business has very little control over them. They include economic, financial, geographic, social, legal, political, institutional, technological, competitive situation and market influences. Internal influences have a direct impact on a business and the business has some control over these factors. They include products, location, resources, management and business culture.

39. Major institutions that have an impact on businesses include the ASX, ASIC, ACCC, NSW Fair Trading, the BCA, ACCI, ACTU, Fair Work Australia, the Fair Work Ombudsman and CHOICE. 40. Mobile phones are now more than voice communications devices and have similar applications to computers. For businesses where operations take employees into the field the mobile phone is truly an essential piece of equipment. This is easily seen when you consider contractors or employees in building, real estate, paramedics, sales representatives and customer service personnel in service businesses. Mobile phones can also be used by consumers to compile shopping lists and to order goods.

32. Businesses will usually benefit from lower interest rates, reduced taxation and increased government spending. On the other hand, businesses will find the environment more difficult when taxation is rising, government spending is being cut and interest rates are rising. 33. Debt finance involves borrowing from sources outside the business, such as banks, finance companies or government. These borrowings must be repaid with interest and examples include overdrafts, loans and mortgages. Equity finance involves using the owners’ funds from within the business or selling shares (equity) to new owners.

41. The Australian Competition and Consumer Commission (ACCC) enforces the Competition and Consumer Act 2010 (Cth) The ACCC investigates situations where businesses or markets may be operating in an anti-competitive manner. 42. Conducting market research allows the business to divide its potential market into different groups, or segments. Specific products can then be developed to meet the needs of consumers in those target segments.

34. There are a number of points in favour of globalisation from Australia’s point of view, including Australia has benefited from globalisation, both in terms of exports (wool, wheat and minerals) and as a borrower of international capital. The standard of living Australians enjoy now can be attributed to its ‘open’ and therefore competitive economy. On the other hand, globalisation has had some downsides for Australian businesses with a number moving their operations offshore to take advantage of cheaper costs in other countries. This has resulted in a loss of jobs and incomes in Australia.

43. Internal influences have a direct impact on a business, which has some control over these factors. These influences come from inside the business and include products, location, resources, management and business culture. 44. Service production is often more labour-intensive that the production of goods. Services tend to be tailored to the wants and needs of the customer and are generally consumed immediately and cannot be stored.

35. Family size has become smaller and many women now become mothers much later than was the case for previous generations. Many children also live with only one parent and have the other parent living elsewhere. There is also an increase in the breakdown of marriages. Current trends suggest that one in three marriages will end in divorce. These facts again have implications for businesses. With the incidence of both parents or a single parent working there will be an increase in demand for day care. The increasing rate of marriage breakdown will see an increased demand for counselling services. Another factor that sets the scene for contemporary family life is the evolving cultural character of Australia.

45. Factors include visibility—how easy is it for the business to be seen by the passing traffic and is there a good flow of people and vehicles past the business? Other factors include location of suppliers and closeness to raw materials, closeness to support services, closeness of customers, availability of labour, costs of a particular location. 46. The resources of a business are financial resources (includes the cash flow of the business and its working capital: current assets  current liabilities). Physical assets include the buildings, plant and equipments as well as land owned by the business. Business reputation is concerned with notions known as ‘goodwill’. It has to do with how the customers regard the way the business operates. Intellectual property involves any patents or copyrights that a business may own as well as any expertise in the applications of technology. The human resources include the productive services available to the business from its employees.

36. Social influences that impact on businesses in Australia include concern about the environment, our rapid ‘takeup’ of gadgetry and technology, a greater concern about exercise and health issues, dressing more casually and children remaining at home for longer. 37. Businesses are influenced by changes to laws and regulations. These changes will have an impact on the costs of doing business, the hours of operation, the way that goods and services are produced and even how products are advertised. One example is the total ban on the advertising of tobacco products in the electronic and other media.

47. Managers are responsible for making sure the business is running in the best possible manner. Effective and efficient management will allow for increased profits, greater opportunities for growth, a positive work environment and high levels of customer satisfaction. Effectiveness is concerned with determining goals and future directions and aligning people and resources to make sure these are achieved. Efficiency refers to the allocation of resources and output of production.

38. The John Howard-led Liberal-National Party Government lost office in 2007. Its workplace law was called Work Choices. The Work Choices laws were replaced with the

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48. Business (or corporate) culture is a series of values, ideas and norms that are shared by the people involved in a business. It is similar to the personality of a business and in some ways becomes the ‘memory’ of a business. 49. Major stakeholders include customers, employees, suppliers of inputs, creditors and financial institutions, owners or shareholders, managers, the government, the community and the physical environment. 50. The stages of the business life cycle are establishment, growth, maturity and post-maturity. The post-maturity stage can be divided into three separate phases—renewal, steady state and decline. In the decline stage the business can cease operations. 51. Considerations such as the legal structure of the business and what products to produce will have already emerged with the business idea. Decisions will be made about a suitable location. The owners will have to inject relatively large amounts of capital for the purchase of land and buildings or the renting and equipping of premises with plant and equipment. 52. The key element in the growth stage is the increase in sales of output. Increasing sales will usually be accompanied by a growth in revenue as well as profit growth and increasing market share. As sales increase, variable costs will also increase. 53. The key element in the maturity stage is the achievement of a steady level in sales of output. At this stage, profits are stable though competition may be a serious threat so the business attempts to consolidate its financial position. It may implement cost controls in an attempt to increase profits. Basically, the business will concentrate on maintaining a competitive advantage. 54. The three alternative pathways for a business in the postmaturity stage are renewal, steady state and decline, which can lead to cessation of business. 55. New product development (NPD) is usually driven by the need of the business to develop or maintain competitive advantage in the marketplace. NPD will focus on satisfying the needs of existing customers as well as attempting to sell to new customers. NPD is necessary to maintain market share because demand for most products will decline over time. NPD is also one way that a business can respond to new technology and changing market conditions. 56. In the steady state phase, the level of sales remains very stable. Many businesses do not want to expand past the size they achieved in the maturity stage. Maintaining market share and adequate cash flow are the main goals of the business. The business has a successful product and is patronised by enough customers to generate sufficient profit to remain in business. This means that the market share of the business is remaining constant. 57. In this phase the business may lose its competitive advantage and profits will decline with the decline in sales. The business has lost touch with its customer base and its products no longer meet the need of consumers. The business is no longer viable. 58. The challenges at this stage were to develop a retail outlet for Annie Abbott’s shoes and to connect with potential customers. Existing retailers did not want to take on an unknown brand during the retail slump of 2010. Annie’s response was to sell her own shoe designs from a ‘pop-up’

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shop in a location that would have a lot of passing pedestrian traffic. A ‘pop-up’ shop is a temporary storefront. The GPO building location was ideal because of other ‘high-end’ retailers in the centre. There is also a constant flow of pedestrians. Annie has been building her business up slowly through the use of her website and personal contact with customers. 59. Challenges in the growth stage mean that effective management is required and possibly a new business plan. The owner or manager will need to train employees and delegate various tasks to successfully negotiate this stage of development. Alexandra Riggs started Oobi in its present form in 2002 with 30 products. Today the business has more than 300 products, a turnover of about $3 million and ten employees, which is indicative of the growth of the business. Alex prices her products so that they are affordable. Although she is reluctant to start up a retail business for fear of hurting the retail outlets she supplies, Alex feels that the business will probably open an online store in the future.

Alex took on a variety of roles when she started the business, including designer, bookkeeper, photographer and warehouse manager. As the business has grown she has delegated the tasks she is not so good at.

60. Challenges in the maturity stage include avoiding complacency now that the business has developed a stable level of sales. ANZ Stadium was built for the 2000 Olympics and Paralympics. After the games, stadium management took the following actions. • An $80 million reconfiguration reduced the capacity to 83 500 (or 82 500 in oval mode). • The north and south upper stands were removed. • The lower stands were moved 15 metres closer to the action.

This reconfiguration gave ANZ Stadium its competitive advantage. The stadium can be reconfigured from oval to rectangular mode in just 12 hours.

The major challenge faced by ANZ Stadium in its maturity stage is to host events that will continue to draw big crowds that make its operation profitable. Its unique design has enabled it to appeal to major Australian sports as well as having the ability to host large concerts. As well, the management has developed a thriving hospitality function using its corporate boxes and function rooms.

61. Following the renewal pathway requires a conscious decision and actions on the part of owners and managers. The business faces the challenges of moving into new markets as well as developing new products. This will require raising finance. The business will try to add new products or services to existing markets or expand the existing business into new markets and customer types. 62. The challenges of the steady state stage are to focus on what existing customers are currently demanding. This requires market research for accurate results. A steady state means the business will be reluctant to commit expenditure on research and development required for renewal. This can create further challenges as increasing competition means the steady state will not continue forever.

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63. During the decline phase the business encounters cash flow and solvency problems and it may need to face the prospect of cessation.

Sample Preliminary questions (pages 66–68)

64. Permo-Drive had counted on receiving a grant from the federal government in 2008 that would help it bring its technology to market. Unfortunately the grant did not occur and this placed the company close to liquidation by July 2008.

Note:

65. Shareholders were determined that such a great technological advance would not be lost and rallied to take over the business. One shareholder launched a group called Save Our Technology. This group raised considerable funds to prevent the technology from disappearing offshore. Eventually shareholders decided not to wind-up the company but to restructure the business. 66. Factors contributing to business decline include lack of adequate planning, environmental changes, external influences, lack of capital, decline in revenue and cash flow, loss of competitive advantage and inertia. 67. In business terms cessation means closure of business activity. Voluntary cessation occurs when the owners of a business decide to close through their own choice, not because of external circumstances. Involuntary cessation means that the owners of a business are forced to close as the business is no longer viable. 68. Bankruptcy and insolvency both refer to the inability to repay debt. If the business is unincorporated (in other words a sole trader or a partnership) this means that the owner or owners are bankrupt. If the business is incorporated (one of the forms of a company) the appropriate term to use if it is unable to pay its debts is insolvency. 69. Liquidation is the process of terminating, or ‘winding–up’, an incorporated business. This involves ceasing business operations and realising assets by selling them. The funds from this sale will be used to discharge liabilities by paying creditors, either in full or a fraction in the dollar of what they are owed. If there is any money left it will be distributed among shareholders. 70. Creditors (and thus stakeholders) of Perle including subcontractors, NSW State Government, Australian Government, the Construction, Forestry, Mining and Energy Union (CFMEU), Brad Orgill’s Building Education Revolution implementation taskforce and Bovis Lend Lease.

73. Creditors of Perle who are out of pocket may receive some fraction of what they are owed when the assets are sold. On the other hand, by liquidating Perle there will be many projects left unfinished.

means Examiner Maximiser

1.1 1. C is the correct answer. Services are intangible—they cannot be touched or seen. A and B are not correct as both of these alternatives are characteristics of goods. D is not correct. It is an absurdity as all products, whether goods or services, have inputs. [1.1.1] 2. C is the correct answer. Marketing is the process that connects the customer with the products produced by a business. A (finance) involves the planning, organising and controlling of the financial resources of a business. B (operations) is the function that deals with the actual production of goods and/or services. D (human resources) refers to systems that have been developed to manage people within an organisation or a business. [1.1.1] 3. C is the correct answer. Efficiency involves achieving the greatest possible return or output from an input by using the lowest amount of resources or assets. A (growth) refers to the expansion of a business once it begins operations, B (liquidity) relates to the cash flow position of the business and D (profitability) is the ability of a business to make a profit. [1.1.1] 4. D is the correct answer. Political and economic risk is where a government introduces changes which have an adverse impact on a business. That is the case in this example. A (operational risk) refers to a situation where a breakdown of equipment results in financial loss. B (market risk) is not correct because that risk means that the value of an investment decreases because of changes in the market. Although this looks like it could fit the situation, the change was initiated by the government. C (environmental risk) is not correct because that risk refers to a situation where an environmental disaster has an adverse effect on business. [1.1.1] 5 a

71. If placed into receivership the business will be managed by the receiver. The receiver will examine the assets and liabilities to see if there is any possibility of the business continuing to trade. Liquidation is the process of terminating an incorporated business. This involves ceasing operations and realising assets by selling them. The funds from this will be used to discharge liabilities. 72. Perle has debts of almost $10 million, $1.6 million of which is owed to sub-contractors in Coffs Harbour.

EM

EM In this part of the question you have to sketch in general terms the role that innovation plays in providing competitive advantage for a business.

Many businesses attempt to develop a competitive advantage by being innovative in terms of introducing new products or variations on existing products to the market. Businesses can also be innovative by developing and introducing new techniques which may make the production process less costly or production may take place quicker or the efficiency of input use may improve. [1.1.1]

b EM In this part of the question you have to make the relationship between the actions of entrepreneurs at Light Horse Clothing and risky behaviour clear.

One risk that the entrepreneurs at Light Horse have taken is financial risk, which involves the actual return from a financial transaction (investing in the development of fabric) being less than the expected return. A second risk is market risk, which means that the value of an investment decreases because of changes in the market. A competitor has developed a better fabric causing falling sales for Light Horse. [1.1.1]

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1.2 1. B is the correct answer. SMEs employed 46% of the labour force in June 2011. A (7.1) is not correct—SMEs provided employment for 7.1 million people in 2009 but this is not a percentage. C is not correct (the figure has been made up) and D is not correct as 97% of Australian businesses are SMEs but the question relates to employment. [1.2.1] 2. B is the correct answer. A definition of a national business is one where the business has branches or franchises operating in more than one state or territory. A (local) is not correct because the business has 65 franchises operating. C (global) is not correct because there is no information that the business has expanded into other countries. D (SME) is not correct as, although each individual franchise may be an SME (like each McDonalds’s franchise) taken overall, the business is not a SME. [1.2.1] 3. D is the correct answer. MNCs are businesses that have their head office or headquarters based in their home country. They expand into global markets by establishing subsidiaries in host countries around the globe. A is not correct because Klongie is doing more than just exporting. It has established subsidiaries overseas. B (international business) is not correct for the same reason as A. C (TNC) is not correct because TNCs have grown so large they tend not to have a nationally-based parent company. The information provided indicates that Klongie is an Australian-based business. [1.2.1] 4. C is the correct answer. Quaternary industry involves intellectual activities and providing information services including research and development. A (research) is not correct in the context of this question—the question refers to industry area as a classification. B (tertiary) is not correct as although this business is a service business there is a more refined area in this classification. D (quinary) is not correct. An Australian definition of this sub-sector involves not-for-profit activities or activities that you would usually find taking place in someone’s home. [1.2.1] 5. a

In this part of the question you have to state the meaning of unincorporated business and ‘identify’ their essential qualities. [1.2.1] EM

An unincorporated business does not have a separate legal identity or existence from its owners. The owners of unincorporated businesses have unlimited liability. This means that the owners are fully and personally responsible for the debts of the business. b

EM In this part of the question you have to indicate the main features of two disadvantages of the sole trader legal structure. [1.2.1]

The start-up funds must be provided by the owner. This includes money borrowed from lenders. Often, start-up capital is not sufficient and the business may run into cash flow problems. A second disadvantage is that the owner of the sole trader business has unlimited liability. This means the owner is personally responsible for the debts of the business.

c

An incorporated business has perpetual succession. This means that it can outlive its owners and continue

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EM In this part of the question you have to make the relationships between incorporation and the business gaining advantage from that evident. [1.2.1]



operations. A second advantage of incorporation is that an incorporated business has a greater opportunity to be a larger business because it can raise capital funds through the sale of shares.

1.3 1. D is the correct answer. Internal influences are influences that the business has some control over. A, B and C are all external influences. [1.3.1, 1.3.2] 2. C is the correct answer. A describes the situation during expansion, B describes the situation during the boom and D describes the situation during recession. [1.3.1] 3. A is the correct answer. This is a relatively new social trend in Australia for children to remain at home well into their twenties. B (location) can be considered as an internal influence referring to the choice a business makes in terms of where it will be located. It could also refer to geographic location in the world. C (financial) refers to the impact of external forces, such as the exchange and interest rates, on businesses. D (demographic) refers to influences of population factors such as age, sex, income and cultural background. [1.3.1] 4. C is the correct answer. The informational role is all about effective, two-way communications. A (leading) has been ‘made up’ as a distractor, B (interpersonal) involves the manager acting as a leader, figurehead and a liaison with stakeholders and D (decisional) involves a manager acting as an entrepreneur with effective forward planning. [1.3.2] 5. a i

EM In this part of the question you have to indicate how physical resources are different from intangible resources.

Physical resources can be seen and touched. The intangible resources of the business are the things that are not visible. [1.3.2]

ii EM In this part of the question you have to use the stimulus to recognise and name two physical resources of the business and two intangible resources of the business.

Two physical resources are the office and computers. Two intangible resources are the software (intellectual property) and goodwill (business reputation). [1.3.2]

b

Cash flow of the business refers to its working capital (current assets  current liabilities). This resource is extremely important because it determines the ability to meet short-term debts. If a business cannot do this it will quickly become insolvent. [1.3.2]

EM In this part of the question you have to provide reasons why cash flow is important as a financial resource.

c EM In this part of the question you have to provide reasons why intangible resources are important to the business.

The intangible assets of this business are the software and the goodwill. Both represent the competitive advantage of the business. If Rod and Kris have taken out copyright on the software this will either deny use of the software to other businesses or they will have to pay to use it. The goodwill is the ‘essence’ that attracts customers and keeps them as repeat consumers. [1.3.2]

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1.4

either in full or a fraction in the dollar of what they are owed. An advantage of this for creditors is that they will receive some of the money they are owed. A disadvantage is that often they will only get a fraction of what they are owed. Another disadvantage is that unsecured creditors may still not receive any dividend from the sale of the company’s assets. [1.4.4]

1. A is the correct answer. During this phase it is unlikely that the business will be making a profit as it tries to enter the market with promotions, price skimming, penetration pricing or other strategies. It will also have cash flow problems. Output will be rising slowly and new staff may need to be hired. B (growth) is not correct because at this stage the business will be making a profit and will be looking to expand by either selling equity or borrowing finance. C (maturity) is not correct because during this stage market share is generally static and the information given indicated that market share was rising. D (postmaturity) is not correct as the information given does not indicate any of the three phases of post-maturity. [1.4.1]

Business report EM The answer to this question must be written in business report format. In order to access the top band of marks in your answer to this question, you should:

• sketch in general terms possible ways that Juliette and Pablo could expand their business

2. C is the correct answer. A business will do this to try to regain its competitive advantage if it wants to enter the renewal phase in post-maturity. A, B and D are all strategies that businesses will use in the establishment stage to attempt to enter the market. [1.4.1]

• identify issues and provide points for and/or against new products that they could introduce into the business

3. B is the correct answer. During this stage the informality of the establishment stage gives way to more formal structures. A (establishment) is not correct as in this stage the challenges for businesses are trying to get products into the market and to secure a satisfactory cash flow. C (maturity) is not correct—the main challenge in the maturity stage is to avoid complacency now that the business has developed a stable level of sales. D (post-maturity) is not correct as there are specific challenges with each phase in this stage. [1.4.1]

• indicate the main features of changes to management to cope with business growth

• provide ways in which Juliette and Pablo could maintain competitive advantage as the business progresses through the business life cycle

• present a sustained, logical and cohesive response in the form of a business report and clearly communicate using relevant business terminology and concepts.

Executive summary • PHS is in the maturity or early post-maturity stage of the business life cycle. • The owners need to decide whether to scale back the number of clients they have to a manageable level or whether to expand the business.

4. C is the correct answer. The government has changed the law that put computers in schools. This has contributed to the business decline. A (inertia) is not correct as there is no evidence of inertia in the scenario. B (lack of adequate planning) is not correct as the scenario acknowledges the fact that the business had a strategic plan. D (loss of competitive advantage) is not correct as there is no information in the scenario to suggest this. [1.4.2] 5. a

• Expansion means injecting more finance into the business. This can be done from the owners’ personal funds, by borrowing or by selling equity in the business. • To assist with expansion and to maintain competitive advantage they should consider introducing new products. • As the business expands the owners will need to concentrate on management and outsource some functions, especially in the human resources and accounting areas.

EM In this part of the question you have to note the differences between voluntary and involuntary cessation.

With voluntary cessation, the owner or owners of a business make a decision to cease operations. Involuntary cessation means that the owners are forced to close the business. This will occur because the creditors of the business have not been paid the money that they are owed. [1.4.4]

b

Liquidation occurs because a company is insolvent. Insolvency is a situation where a company has insufficient assets to meet its liabilities. Liquidation is the process of terminating, or ‘winding–up’, an incorporated business. This involves ceasing business operations and realising assets by selling them. [1.4.4]

Business expansion • Juliette and Pablo chose the partnership structure when they started the business. In order to expand the business they will need additional funds. • These funds can be provided by Juliette and Pablo. Alternatively, they could take on more partners or they could even incorporate the business and sell shares. All of these methods increase the equity of the business. These methods also have the advantage that the business has not borrowed any more money and there will be no negative impact on cash flow. A disadvantage is that by taking on partners or selling shares they are losing some amount of control over the business.

EM In this part of the question you have to indicate the main features of the process of liquidation.

c EM In this part of the question you have to identify the advantages and disadvantages of liquidation for creditors of the liquidated business and provide points for and/or against these issues.

• Another way of raising funds for expansion is by borrowing them from a financial institution. By doing this they are not losing control of the ownership of the business. However, there will be an impact on the cash flow of the business because borrowing will require regular repayments on the loan.

Liquidation involves a business ceasing operations and realising its assets by selling them. The funds from this sale will be used to discharge liabilities by paying creditors

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Introducing new products • Introducing new products is one way that Juliette and Pablo could appeal to a wider market but it would involve more equipment and employees. • New products could include a shopping service where the client supplies a shopping list and PHS acquires and delivers the goods. This would appeal to time-poor clients who do not have the time to shop. However, online shopping would be a competitor here. The difference would be the customer service provided by PHS. • PHS could also offer rubbish and green waste removal and pet exercise and care. • Introducing new products could require the lease or purchase of motor vehicles and tools as well as the hiring and training of staff. This would involve some time and expense but the funds provided during the expansion would help with this.

Maintaining competitive advantage PHS has progressed to maturity or is in the early stages of post-maturity. Juliette and Pablo must decide whether they are going to operate the business with the stable market and a steady clientele or whether to expand. In order to maintain competitive advantage they need to consider three aspects. • Firstly, the introduction of new products will increase competitive advantage over rivals and attract new customers. • Secondly, in order to do this they need to expand the business. Their current competitive advantage relies on the excellent service they provide. New staff will need to be trained carefully to maintain this high standard. • Thirdly, both new product development and expanding the business and staff means that the company will be entering the renewal phase of the business life cycle. This will require a commitment from the owners as well as a new business plan.

Changes to management • With the expansion either Juliette and/or Pablo need to change their roles in the business and withdraw from the operations side and concentrate more on management. • PHS could outsource the HR function of hiring employees. They would need to specify what qualities they required to the HR business charged with hiring new staff. One of the two owners could concentrate on training and development of staff so that high service standards are maintained while the other owner could concentrate on supervision in the new product area to ensure staff have appropriate equipment and clients are satisfied. • PHS could outsource the accounting function to free up the owners’ time for management.

Recommendations After observing the business and its operations and discussions with the owners my recommendations are listed below. • Juliette and Pablo should expand the business. This expansion should be financed by selling equity. Initially they could look for new partners depending on how much finance they require. Later on they could consider the benefits and disadvantages of incorporation.

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• As the business expands it will need to introduce new products. PHS should consider introducing a shopping service and rubbish and green waste removal as well as pet exercise and care. • New products will require more vehicles and equipment. PHS should consider leasing two utility vehicles and four more vehicles for service staff and it should purchase equipment such as chain saws, ladders, heavy-duty mulchers and pressure cleaners. • The owners should concentrate on management and outsource some HR functions and accounting. They should become heavily involved in training and development of staff.

Extended-response question EM In order to access the top band of marks in your answer to this question, you should:

• indicate the challenges that a business may face during the establishment and growth stages of the business life cycle • make the relationships between the two stages of the business life cycle and the respective challenges evident • clearly support your response with reference to relevant case study/studies • present a sustained, logical and cohesive response and clearly communicate using relevant business terminology and concepts. Answers could include the following points: • Identify and briefly describe the business life cycle. Use a diagram to illustrate the business life cycle. All businesses pass through a life cycle. This life cycle has distinct stages identified as establishment, growth, maturity and post-maturity. Each stage presents its own unique challenges to which each business has to respond. • Identify the challenges that exist during the establishment stage and relate these to the fact that they are occurring because of and during this stage. Challenges in the establishment stage include deciding on the type of business structure and raising enough finance so that the business can operate with sufficient cash flow and avoid insolvency. The big challenge here is to generate enough revenue. The business will need to concentrate on developing its market and establishing a customer base. This means that promotion will be a challenge. • Use the case study of Habbot to illustrate how a business in the establishment stage encounters and manages these challenges. Annie Abbott is a shoe designer who wanted to sell her own designs to retail outlets. The slowdown in retail sales in 2010 meant that boutique shoes retailers did not want to take a risk with stocking a new brand. Retail rents are very expensive in the Melbourne CBD. Annie’s response to this challenge was to establish her own business (Habbot) and sell her own shoe designs from a ‘pop-up’ shop in a location that would have a lot of passing pedestrian traffic. The GPO building location was ideal because there were other ‘high-end’ retailers in the centre including Lisa Ho, Akira and Zimmerman. Annie has been building her business up slowly through the use of her website. She buys Italian leather and her designs are transformed into shoes by Italian craftsmen. The GPO store is staffed by Annie and this helps her to reach her customers directly. Establishing the business has been expensive despite keeping the pop-up shop. Annie has to

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work hard to keep overhead expenses down to a minimum. She has a studio in her home in trendy St Kilda where she designs her shoes while storage takes place in a rented warehouse.

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Annie’s Habbot website began operating in March 2011. This is one of her major forms of promotion; the other is her personal relationship with her customers. Although her shoes are not cheap (between $300–$400) they are not top of the range either. Annie’s business plan is to split her business into three modes in the future: stockists, online and her own direct retail presence.


1. Leadership skills, integrity, self-motivated, team player, conflict resolution skills, optimism, dependability, ability to remain calm, customer service skills and knowledge of the industry. 2. Good strategic thinking is ongoing in nature and involves a manager articulating the vision, goals and objectives of the business, usually through a strategic plan. Strategic thinking is management’s ability to continuously and critically analyse and evaluate the internal and external environment, anticipate threats and opportunities, synthesise up-to-date information, prioritise goals and align people and new ideas with the vision and goals of the business. Strategic thinking can be seen as the key to proactive management.

• Identify the challenges that exist during the growth stage and relate these challenges to the fact that they are occurring because of and during this stage. Challenges in the growth stage include dealing with a neverending range of issues that compete for time and money. Effective management is required and a possible new business plan. The owner or manager will need to train employees and delegate various tasks to successfully negotiate this stage of development.

3. Management skills which help to reconcile conflicting interests of stakeholders include: • establishing relationships with various groups of stakeholders

Businesses in the growth stage are focused on running the business in a more formal fashion to deal with the increased sales and customers. Better accounting and management systems will have to be set-up while new employees will have to be hired to deal with the expansion of business.

• listening to the needs of various stakeholders and identifying areas of conflict • communicating with the relevant stakeholders to discover areas of potential compromise

• Use the case study of Oobi to illustrate how a business in the establishment stage encounters and manages these challenges.

• making decisions and explaining the rationale behind those decisions to relevant stakeholders

Oobi is a wholesale business owned by Alexandra Riggs. The business designs and produces upmarket fashion for babies. At present the business has ten employees and a turnover of about $3 million. Alex started the business in its present form in 2002 with 30 products. Today the business has more than 300 products, which is indicative of the growth. Alex prices her products so that they are affordable.

• gathering support from diverse groups of stakeholders • minimising the negative impact of decisions. 4. The market share of a business indicates how well it is performing and how successful is its competitive advantage over its competitors. 5. Corporate social responsibility is a commitment by a business to operate ethically and contribute to economic development while improving the quality of life of our workforce and their families as well as the community at large.

Alex took on a variety of roles when she started the business. These included designer, bookkeeper, photographer and warehouse manager. As the business has grown she has delegated those tasks that she is not so good at.

6. Environmental sustainability is about meeting the needs of the present generation without compromising the ability of future generations to meet their needs.

As the business moved from the establishment stage, growth was not all that rapid. Alex pinpoints the third year of operation when growth really started to occur.

7. VRL has been a supporter for many years of animal research, rescue and conservation. Sea World (one of VRL’s theme parks) interacts with approximately one million visitors annually on marine environment education and conservation issues, and operates extensive visitation programs for schools. A major charity supported by VRL Gold Coast Theme Parks is for children with life-threatening medical conditions and illnesses. This support takes place through Starlight and the Make-a-Wish Foundation, in keeping with VRL policy.

Alex has several business plans, from the short-term to a tenyear plan. She constantly updates her business plans. • Complete the extended response with a short paragraph that is consistent with what has been written earlier. There are different challenges during each stage of the business life cycle. During the establishment stage the main challenges are to develop sufficient cash flow to survive and to market the output of the business. During the growth stage the main challenges are to operate the business more formally, to delegate some tasks to subordinates, to ensure adequate training of staff and to refine the business plan. The case studies illustrate how businesses in each stage met these challenges successfully.

8. VRL’s actions in the area of environmental sustainability include: • reduction of energy usage • introduction of solar heating and solar power • a 45% reduction of town water usage since 2005 • a comprehensive recycling program which will reduce landfill by 20 tonnes per year.

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9. A business will have a number of goals: financial, social, environmental and even the personal goals of the owners. These goals will conflict. This is because the goals may be targeted at different groups of stakeholders, such as owners or managers who have different viewpoints. There may even be conflict within one area of goals, for example, financial. Sometimes the conflict will occur because of the time horizon under consideration. 10. The classical approach to management has a number of distinct features which include: • a hierarchical organisational structure with a chief executive at the top and several layers of management below that level • an autocratic management style where commands are given and expected to be carried out and there is little consultation with employees • a long chain of command through a number of levels of management which have a short span of control • very little flexibility. 11. Behavioural theories were based on the idea that workers were better educated than they had been in the past and were recognised as individuals with needs. The human relations movement identified the importance of aligning business and individual needs to achieve business goals. These new management theorists observed that it was essential to understand human behaviour and motivation to achieve high productivity. 12. Features of the participative/democratic leadership style are: • encouraging employee participation in decision making • establishing effective two-way systems of communication, including feedback • allowing for greater flexibility and negotiation of goals and tasks. 13. The contingency management approach (sometimes known as a situational approach) recognises that all businesses, internal business situations and external environments are constantly changing. Effective managers will be able to use various management approaches to select and integrate the best techniques for any given situation. 14. Strategies used by managers to coordinate the key business functions and resources include: • developing business operations through acquiring inputs and producing outputs that will be sold to customers • connecting operations directly with the customer through marketing • raising finance and developing budgets so that production and distribution of the output of the business can take place • organising the human resources. 15. Annie Abbott performs most of the key business functions herself. She is heavily involved in operations, where she designs shoes, contracting out the assembly to Italian craftsmen. Materials are stored in a warehouse. Her marketing is done either by her own efforts with personal customer service as well as through her website, which would have been designed by professionals. She would probably outsource the finance function and work with her accountant to develop budgets. In terms of human resources, she contracts out some work and performs the rest herself.

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At Oobi, Alexandra Riggs performed most, if not all, of the key business functions when the business was starting up. Now that the business has entered the growth stage she has delegated functions such as finance and marketing along with some parts of the operations function. As the owner of the business she keeps a tight control on the functions to ensure they are coordinated.

16. Operations management is important in a business for the following reasons. • Operations is the core key business function. • Most employment in a business is in the operations function. • Operations management has direct links to all other key business functions in a business: the other functions exist because of operations. • Operations is the part of the business most commonly seen by customers. 17. Quality management involves planning to develop a policy that focuses on quality and setting performance objectives that set quality as a foremost goal. Quality management includes all the activities that businesses use to strive for and achieve quality. There are three main strands to quality management: quality control, quality assurance, and quality improvement. 18. The target market is the specific segment of the total market that the product is aimed at. Most businesses will undertake some level of market research to identify their target market. This will give the business knowledge about customers (consumers) and their product needs. Conducting market research allows the business to divide its market into segments. Once these segments are identified, specific products can be developed to meet the needs of consumers. 19. The marketing mix is at the centre of a business’s marketing strategies. It comprises all the things a business can do to increase demand for its product and give it a competitive marketing advantage. The ‘Four Ps’ of product, price, promotion and place make up the basis of the marketing mix. 20. The cash flow statement is an important financial report that forecasts the monthly cash inflows and outflows of the business. This statement helps managers meet their financial obligations and respond to periods of cash shortages and surpluses. 21. The income statement (also referred to as the profit and loss statement or the statement of financial performance) outlines the level of revenue (sales), costs of goods sold and operating expenses, and calculates whether a business has made a profit or loss over a particular period of time, usually a year. 22. The balance sheet is a statement showing the financial position of a business at a particular point in time (usually 30 June). The balance sheet shows the short- and longterm assets (what the business owns) and the short- and long-term liabilities (what the business owes) and the equity (capital provided by the owners). A balance sheet is essential in assessing the level of liquidity, gearing and solvency which in turn influences decisions regarding appropriate sources of finance for the business. 23. The strategic role of human resources is to ensure that the productivity of a business or its output per person can achieve its fullest potential because the employees are

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• He was not swayed by media criticism in the discharge of his duties, indicating courage.

effective and efficient in the way they go about their tasks. It is the overall objective of HR managers to develop an environment where the chances of employees successfully carrying out their tasks are high.

• He has led his team well judging by the outcomes he has achieved for all Australians in terms of keeping inflation in check while promoting economic and employment growth.

24. The goals of recruiting human resources include: • ensuring that there are stable workforce levels and that the business does not suffer because a position needs to be filled

• He volunteers for charitable work for children who are in dire need of support.

• preventing a high rate of turnover, especially with new employees, as turnover can be expensive

• He is a committed member of his church. There is evidence that Glenn Stevens measures up directly with five out of eight of the criteria listed in the Guide to Good Management Practice.

• succession planning and ensuring that key roles in the business are filled as soon as possible • acquiring employees within the budgets established by the finance function. 25. Training involves educating an employee in the skills and processes of the job that the employee currently holds. Development involves selecting employees for educational programs that focus on roles that the employee may aspire to in the future. Development usually applies to employees who have been identified as having the potential to fill managerial positions in the future. 26. Contracts are agreements between employers and employees to ensure that responsibilities are performed and rights are protected. A contract usually has three parts: an offer, an acceptance and a consideration (something of value, usually skills in exchange for payment). Written and verbal contracts are legally enforceable by courts. Contracts are either contracts of service (the standard employer–employee relationship) or contracts for services, where a ‘contractor’ such as a plumber or builder will perform a specific job for a set time. 27. Voluntary redundancy usually occurs when a business wants to reduce its labour force. The employee is free to seek employment elsewhere. In many cases, voluntary redundancy will be a choice offered to employees nearing retirement.

Involuntary redundancy means that an employee is retrenched without wanting to be. It is usually not related to poor performance at work but because of economic cycles and the need to reduce the workforce. Employee entitlements with involuntary redundancy are usually the same as for voluntary redundancy.

28. Ethical responsibility in managing a business is where managers understand value systems and morality or what is ‘right’ or ‘wrong’ with regard to the production of goods or services. Ethical managers implement programs that not only comply with the law but are also morally and socially right. A most important area of ethical responsibility relates to how managers deal with all the stakeholders of the business. 29. The information in the case study on Glenn Stevens indicates that he has the following qualities and attributes. • He has engaged in continued learning to improve managerial competence and has pursued new ideas and advances in technology. • According to the Treasurer at the time of Glenn’s appointment as governor, he has impeccable credentials and experience and is dedicated. • He had significant background experience to prepare him for this most senior role in Australian society. • He is committed to the independence of the RBA. This is essential if it is to implement monetary policy in an objective way.

30. External influences have an indirect impact on a business and the business has very little control over them. They include economic, financial, geographic, social, legal, political, institutional, technological, competitive situation and markets

Internal influences have a direct impact on a business and the business has some control over them. They include products, location, resources, management and business culture.

31. In November 2011 the Australian Communication and Media Authority’s (ACMA) e-commerce report said 59% of adults bought goods or services online in the six months to April 2011, up from 53% from two years ago.

E-commerce is a growing dimension of business in Australia. By the end of 2011 three out of five consumers had used the internet to buy goods and services. This represented an increase of 53% of consumers using e-commerce over the previous two years. The use of online shopping is impacting on the sales of traditional retailers, with many consumers buying goods online from overseas.

32. Essential aspects of managing change effectively include: • identifying the need for change • setting achievable goals • creating a culture of change • overcoming resistance to change • implementing change effectively using management consultants. 33. Before initiating change, key decision-makers in the organisation must recognise the need for change. Managers must be careful not to adopt change for the sake of it. Clearly communicating the reasons behind the change will encourage ‘buy in’ and support from the relevant stakeholders. Making change purposeful and linking it with the vision and future direction of the business will help people develop a sense of purpose and reduce their resistance to change. 34. Internal—in 2005 the business changed its location to be adjacent to the airport terminal. External—the Ballina Shire Council introduced paid parking in the airport car park and airlines added more services to more locations. 35. The competitive advantages that William and Allyson’s business has are they plan their business carefully, scanning the environment for changes that will impact on their operation. Another aspect to their competitive advantage is customer service based on the principle that ‘nothing is too much trouble’. Being a partnership, they discuss how they will react to change and make plans to implement their ideas.

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36. To respond to the changes in the external environment, William and Allyson did three things: they relocated to the Ballina Byron Gateway airport, just 100 metres from the terminal. This made it one of the closest car parking facilities of competing airports such as the Gold Coast Airport. They have also worked hard on keeping overheads down in order to provide affordable storage rates. Finally, customer service is a major feature and customers appreciate the personal touch. 37. The business information system uses computerised systems to gather relevant data, both from inside and outside an organisation. This gathering of data can take place 24-hours a day. Data is then processed and stored in a database where it is constantly updated and made available to all in the business who have the need to access it in the form that suits their purposes. 38. When managing change it is important for a business to set achievable goals. These goals need to be SMART goals: Specific, Measurable, Achievable, Realistic and Timed. It is important to have short-term wins when undertaking change so the people involved feel a sense of achievement and that their efforts are recognised and rewarded. This can build momentum in the change process. 39. A culture of change readily accepts that change is ongoing and that the only thing certain in business is that it is always changing. This type of culture allows the removal of structural barriers to change, encourages greater levels of innovation and a readiness and willingness to be adaptable and flexible. The behavioural management teamwork approach and change agents are important to help develop such a culture, especially given the increasing pace and complexity of change in the business environment. 40. ANZ Bank management used a behavioural management theory, as below.

was a significant improvement in employee satisfaction (50% in 1997, 85% in 2004, according to employee surveys).

The bank was also able to increase productivity by gradually reducing the number of employees. In order to do this the bank reduced the number of employees but increased pay rates in line with increased productivity. There was also increased value for shareholders and improved customer service.

However, a major problem with introducing change from the management point of view is to overcome the unwillingness to act on the part of managers. ANZ Group General Manager Shane Freeman acknowledged that ANZ should have focused much earlier on having better employment relations management information.

44. Effective change management came from: • recognising that change needed to occur • establishing the goals that the business needed to achieve (improve public image and financial performance) • developing the strategies to achieve these goals (Perform, Grow and Breakout) • implementing a performance management strategy with clear key result areas that applied to all employees and recognised and rewarded outstanding performance • linking financial remuneration to employee productivity • involving and engaging employees in developing the change and monitoring progress through surveys (e.g. employee satisfaction). 45. Benefits included successfully managed change, increased productivity, increased employee satisfaction, building of trust at all levels of the business, increased value for shareholders and improved customer service. 46. The main reasons for this resistance include:

• The change was not driven from the top down and there is evidence of consultation with lower levels in the hierarchy.

• financial costs (purchasing new equipment, redundancy payouts, retraining, reorganisation of plant layout)

• A major success of the strategy involved ‘building employee engagement’, which also indicates a democratic and participative style of management.

• cultural incompatibility in mergers and takeovers

• A major focus of the change was motivating employees, which is a key part of behavioural management theory. 41. Top management decided that in order to successfully change the culture of the bank there was a need to implement performance management as a strategy to motivate employees and to encourage them to embrace and drive the cultural change. The performance management strategy was based on very clear key result areas across financial, customer, people and community measures. All staff had to undergo performance management from divisional managers and business unit managing directors, down to front-line support and staff dealing with customers. A system of rewards was linked to performance. This became a way that the bank could recognise the successful achievements of all employees. 42. CEO, customers, ANZ employees, shareholders, managing directors, divisional manager, general manager. 43. A major success of the strategy occurred through ‘building employee engagement’ at all levels. It built trust between all levels in the organisation from the CEO down and there

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• inertia of managers and owners • issues related to staffing (de-skilling, new skills, loss of prospects for promotion). 47. Management consultants assist businesses to implement change by: • assisting the management of a business to realise and to define measurable stakeholder aims, create a business case for their achievement and monitor the progress of the change process • ensuring effective communications systems that inform various stakeholders of the reasons for and details of the change as well as the benefits of successful implementation • devising an effective education, training and skills program for the business • developing strategies to counter resistance from employees and align them to the business’s overall strategic direction • providing personal counselling to alleviate any changerelated fears • monitoring of the implementation and fine-tuning as required.

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Sample Preliminary questions (pages 131–134) Note:

EM


The first strategy that Monica could use to reconcile the conflict is communicating with the shareholders to discover areas of potential compromise.

The second strategy is to make decisions about managing adequate cash flow and explaining the rationale behind that decision to the shareholders. [2.1.2]

2.1

2.2

1. C is the correct answer. Interpersonal skills involve managing and motivating people. A (vision skills) involve having a picture of the future for the business. B (flexibility skills) means that managers must be able to adjust their behaviour to new information or changing circumstances. D (communication skills) involves sending and receiving messages from subordinates through a variety of media. [2.1.2]

1. A is the correct answer. Because the preferred method of decision making in the behavioural management approach is by consensus it can often take considerable time to make a decision. This is in contrast to the classical approach where autocratic managers make decisions on the spot. B is a weakness of the contingency management approach while C and D are weaknesses of the classical approach. [2.2.2]

2. B is the correct answer. Where a business tries to improve the quality of life of its workforce it is pursuing a social goal. A is an environmental goal, C is aimed at increasing business value or share price and D is aimed at increasing market share. [2.1.3]

2. B is the correct answer. Division of labour is a classical approach strategy which does increase productivity. A is a key feature of the contingency approach. C is not correct as democratic management is a part of behavioural theory but it does not make for decisive management. D is a strength of behavioural theory. [2.2.1]

3. D is the correct answer. Businesses can achieve a mix of goals by assigning different priorities to them. This means that any alternative with ‘it cannot be achieved’ (A and C) is not correct. Although these conflicts do exist they are not barriers to achieving a mix of goals. B is incorrect as although there may be different time horizons involved with the achievement of goals this is not the reason that a business can achieve a mix of goals simultaneously. [2.1.3] 4. D is the correct answer. Mentoring involves attaching an experienced member of staff to either new recruits or promising employees to enhance their skills and increase their value to the team. A (training) involves educating an employee in the skills and processes of the job that the employee currently holds. B (innovation) is the creation of better or more effective products, processes, services, technologies, or ideas. C (motivation) is the force that gives purpose and direction to behaviour. [2.1.3] 5. a

In this part of the question you have to indicate the main features of TWO reasons why shareholders would want to see the share price increase. EM

Firstly, an increase in share price increases shareholders’ capital gain should they decide to sell their ownership in the business. Secondly, a high share price or high business value makes it harder for the business to be taken over. [2.1.3]

b

Businesses must monitor their level of growth so that they are achieving sustainable levels. Too much growth too fast can cause cash flow problems, but careful cash flow management can avoid serious liquidity and solvency concerns. [2.1.3]

c

In this part of the question you have to provide reasons why rapid growth can create problems for a business.

3. A is the correct answer. The behavioural approach favours flat management structure and a democratic leadership style. B, C and D are all variants of the classical approach, with B being a contradiction. The autocratic leadership style identifies it as the classical approach. [2.2.2] 4. D is the correct answer. With this approach, managers change their style depending on the situation. With A (classical) and C (behavioural) there are clearly defined management styles which do not vary with changing circumstances. B (democratic) has been made up to provide a distractor but this approach would be the same as behavioural. [2.2.3] 5. a

Strengths include easy to understand, great emphasis on planning, emphasises careful selection and training of staff and logical structural arrangements for supervision and control. Weaknesses include theory is too simple and inflexible, little opportunity for workers to be motivated, autocratic leadership style, excessive supervision and over-specialisation. [2.2.1]

b

Some of the reasons are outlined below.

EM

In this part of the question you have to recognise and name the conflict that exists between the stakeholders and provide reasons in favour of TWO ways in which Monica can resolve this conflict. EM

The conflict is between Monica and the shareholders. She is cautious in terms of growth and wants to generate adequate cash flow. Shareholders want her to take more risks to grow the business.

EM In this part of the question you have to ‘outline’, which means you must indicate the main features of one strength and one weakness of the classical approach to management theory.

EM In this part of the question you have to provide reasons why certain features are advantages of the behavioural approach to management.

• The behavioural approach is more flexible and adaptable to a changing business environment and people’s needs. • The behavioural approach allows employees to feel valued. They are encouraged to take on responsibility • Communications are improved as a two-way process because of flatter management structures and the use of a team approach • Managers make more informed decisions because they encourage worker participation and consultation. [2.2.2]

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c EM In this part of the question you have to ‘discuss’, which means that you must identify issues surrounding contingency management theory and provide points for and against its use and usefulness in business.

The cash flow position of the business determines its liquidity and focuses on whether a business can pay debts as they fall due. The ability of a business to generate cash is a vital objective as a serious cash flow crisis can lead to business failure. The yearly management of cash flow is essential to even out fluctuations in the levels of cash inflows and outflows.

The cash flow statement is important because it shows the pattern of inflows and outflows of cash. Where Ben and Lucy have one month where cash flow is negative this may not be a cause for concern, but if several months in succession have negative cash flows the business is in danger of failing. [2.3.4]

b

The main feature of this theory is its flexibility as it advocates adapting management approaches to changing circumstances. For example, a situation where a quick decision is needed may require an autocratic approach, while a team approach may suit a situation where commitment from a group of employees is needed. This is a major point in favour of this approach. Another is that any organisation is capable of adopting this approach. On the other hand, this approach could lead to confusion among employees. Another problem stems from the fact that the manager must be flexible as circumstances change and this may not always be the case. [2.2.3]

2.3 1. C is the correct answer. Operations management is about organising the production process. A is a desirable goal of operations but it is not the overall management process and B is also only part of the management process. C refers to operations itself but not operations management. [2.3.2] 2. C is the correct answer. A penetration pricing strategy is used to encourage people to buy a product that has just been introduced. The price is set below competitors’ prices to help the product penetrate the market. A is not correct as people would expect to pay a high price for quality. B is the definition of price skimming when a product is introduced to the market. D is not correct as any pricing strategy would allow this to happen. [2.3.3] 3. B is the correct answer. The main purpose of the income statement is to indicate the amount of gross and net profit a business makes. A, C and D are all items that would be found on the balance sheet of a business. [2.3.4] 4. C is the correct answer. The separation has been offered rather than the employee being told that there is no longer a job. There is also the offer of a full pension. This means that D (involuntary redundancy) is not correct. A (retirement) is not correct as the employer has made an offer, not the employee choosing to terminate employment. For the same reason B (resignation) is not correct. [2.3.5] 5. a EM In this part of the question you have to determine the complete cash flow statement for Ben and Lucy and recognise and name the months where they have a cash flow problem.

The complete cash flow statement for Ben and Lucy’s Bookstore appears below.

Cash flow statement Ben and Lucy’s Bookstore

Sept

Oct

Nov

Dec


20

30

–30

0

Receipts

40

20

50

100

Payments

30

80

20

40


30

–30

0

60

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c

EM In this part of the question you have to provide reasons why cash flow is important to a business.

EM In this part of the question you have to make the relationship between management strategies and effective cash flow clear.

One strategy that Ben and Lucy could use is distribution of payments. This will even out the outflows of cash. Payments are not always due on an even basis. Wherever possible it is desirable to spread these evenly throughout the year. Budgeting needs to be made for regular payments such as insurance and provisions made for unexpected calls on cash. Using credit facilities such as overdraft and avoiding yearly one-off payments are strategies used when inflows of cash do not match outflows. Ben and Lucy could negotiate with service or utility providers to pay annual bills in monthly instalments.

A second strategy that Ben and Lucy could use will help to improve the inflows of cash to the business. This strategy is to offer discounts to their customers and debtors for early payment of their accounts. Businesses can offer discounts for cash payments and early payments to encourage prompt payment and improve cash flows. These discounts are usually made on a sliding scale. It is also possible for businesses to incorporate an interest penalty on customers who do not pay their accounts on time. [2.3.4]

2.4 1. A is the correct answer. An internal influence is one that is developed by the business itself. External influences come from outside and may require a business to react to the change. In this question only one alternative (A) is something developed by a business. B is an external social influence. C is a geographical influence and D is a legal influence and both are external. [2.4.1] 2. B is the correct answer. The first step in managing change effectively is to identify whether there is a need for change. If there is a need, management needs to establish goals which are achievable. Once this planning has occurred it is important for management to create a culture of change within the organisation so that resistance to change will be less likely. Finally, the change should be implemented. This sequence corresponds with alternative B. A, C and D are different combinations of this sequence. [2.4.2]

September to December 2011 Amounts in $’000 Item

The months where Ben and Lucy have a cash flow problem are October ($30 000) and November ($0). [2.3.4]

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3. D is the correct answer. One of the driving forces for any change will be reduced operating costs. A, B and C are all resisting forces against change. [2.4.2] 4. D is the correct answer. This would be one of the main functions of management consultants. A, B and C are all associated with resistance to change. [2.4.2] 5. a

EM In this part of the question you have to ‘describe’, which means you must provide the characteristics and features of one external and one internal influence on change. You could start by defining ‘external influences’, giving an example and providing its characteristics. Next do the same for internal influences.

An external influence is an influence outside the business which the business has little ability to control. An example is the changing nature of markets. Changes in technology have put sales of recorded music under threat with the introduction of MP3 players. Internal sources of change are changes which occur from within the organisation. An example is e-commerce, a growing area of business operations and marketing. An increasing number of businesses and consumers are using the internet to buy and sell products, undertake comparison shopping and transfer funds. [2.4.1] b

In this part of the question you have to ‘explain’, which means that you must make the relationship between the reason and resistance to change clear in each case. EM

One reason for resistance to change is the inertia of managers and owners. Inertia means the tendency for things to remain in their existing state of rest. Business owners and managers may resist change as they may be cautious or slow in their decision making. If a business is operating successfully with reasonable profits and few problems managers may feel that change is unnecessary. Sometimes they may be comfortable with the existing situation and reluctant to take what they see as unnecessary risk. A second reason for resistance to change is cultural incompatibility in mergers or takeovers. Some employees and managers will have difficulty adjusting after a merger or takeover. Originally the individual business would have developed its own culture and procedures. Following the merger or takeover, the new entity may need some redundancies and some managers may feel a loss of status. It may be necessary to establish new teams and procedures to develop a new culture. [2.4.2]

c EM This part of the question requires you to ‘examine’, which means you must inquire into the way that a manager can create a culture of change in a business.

Overcoming resistance to change means first creating a culture of change. A key feature of this is the use of change agents and a team approach.

Change agents are key personnel who by their actions and attitudes can lead others in the organisation to see the need for change and what is required to achieve this. There is a need for these agents to identify resistance to change and explore ways to overcome it. Managers need to anticipate the emotional and psychological demands of the changes and provide support and encouragement.

It is essential that members of the organisation be involved and committed to the strategies being used. Change imposed externally will have a limited chance of success. [2.4.3]


• indicate the main features of a management approach that this business could use to improve the management of the business • identify changes which need to be made and provide points for and against the implementation of these changes • show how a new management approach will be instrumental in the successful implementation of changes • present a sustained, logical and cohesive response in the form of a business report and clearly communicate using relevant business terminology and concepts.

Executive summary This report investigates the management style of Michael and Albert. The business is experiencing problems after many years of success in the retail trade. • The business appears to be using a classical approach to management. • Changing to behavioural approaches to management will help this business embrace the changes it must make. • Workplace training and customer service should be major changes implemented in this business. • The behavioural management approach will assist in creating a culture of change and implementing change effectively.

Current management style There are a number of different management theories that businesses can adopt in order to manage the business more effectively. In today’s world the classical theories may not always be appropriate for businesses that have existed for a long time. • Michael and Albert (M&A) have been established for some time and appear to be in the post-maturity stage of the business life cycle. • The business appears to be implementing a classical approach with management. Indicators of this are the hierarchical structure and the authoritarian approach to management. The lack of consultation with sales staff is indicative of a classical approach to management.

Possible management approaches that the business could implement M&A need to implement changes to move from the decline phase of the post-maturity stage to the renewal phase of this stage. Implementing change is not easy with entrenched attitudes. Moving to embrace behavioural management approaches could have the advantage of engaging the workforce and helping to introduce change. • The behavioural management approach would be an appropriate style for M&A to implement. Flatter management structure, a more democratic workplace where the views of all employees are valued and the institution of workplace teams could help the business revitalise. • This management style would also help to implement changes that are necessary for the business to enter renewal. • One standing workplace team that could be started is a customer service team which could address the problem of customers complaining about rude and poorly trained staff.

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Changes that need to be made to improve the business The introduction of change needs to be managed well. Some entrenched practices need to be completely overhauled if the business is going to go through renewal. • A key area where change is needed is customer service. This needs to be a major focus and there should be a workplace team that has improved customer service as its goal. The team needs to focus on what areas of customer service are important. • This team could implement training programs that focus on customer service for all employees. • Part of this program could involve employee familiarisation with the products that are being sold in the areas in which they work. • There should also be a focus on how to improve workplace morale. The implementation of the team approach would be one way of achieving this goal. • One way of achieving the previous points would be to implement a performance appraisal scheme where all employees had their performance reviewed in an ongoing process. The aim here would be to encourage improved performance. The scheme could involve mentoring from successful sales staff. • The restructure should involve greater autonomy and independence for branch management and staff—show how the new management approach will assist in implementing the changes.

Introducing change effectively Key decision makers in the organisation must recognise the need for change. Managers must be careful not to adopt change for the sake of it. Clearly communicating the reasons behind the change will encourage the support of the employees and other stakeholders, such as customers. This will be made easier by the gradual change from a classical to a behavioural management approach. The important focus will be for the business to remain productive and competitive. Essential aspects of managing change effectively include: • identifying the need for change • setting achievable goals • creating a culture of change. When implementing change the business needs to develop SMART goals. That is, goals that are Specific, Measurable, Achievable, Realistic and Timed. The teamwork approach favoured by the behavioural approach to management will facilitate creating a culture of change.

Conclusion This business needs to make significant changes to move from the decline phase to the renewal phase of the post-maturity stage. A major change is the shift from a classical management approach to a behavioural management approach. This would facilitate the introduction of workplace teams which could assist in improving customer service. These teams could also pave the way for managing change effectively throughout the business.

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EM In order to access the top band of marks in your answer to this question, you should:

• indicate the main features of the skills of management • make the relationships between the skills of management and managing change effectively evident • clearly support your response with reference to relevant case study/studies • present a sustained, logical and cohesive response and clearly communicate using relevant business terminology and concepts. A possible response to the question is outlined below. Successful managers have a range of skills. These skills are critical as the major cause of business failure is poor management skills. No manager will be exceptional at all these skills all the time but effective managers will be able to identify the areas where their strengths lie and when they need to seek advice from those skilled in other areas. Using these skills is essential if a business situation involves managing change. Good managers should have the following skills.

Interpersonal Interpersonal skills are people skills. Interpersonal skills involve managing and motivating people. Strong interpersonal skills allow a manager to build effective relationships with staff.

Communication Managers need to ensure that their communication with other stakeholders is efficient and effective. There are three factors that managers need to consider to achieve this. • They need to communicate using language that ensures the message is understood. • They must ensure that they receive and understand communications that have been sent to them and that ambiguity is avoided. • They need to impose control over the flow of information.

Strategic thinking Strategic thinking involves developing a big picture understanding of the future direction of the business. Good strategic thinking is ongoing in nature and involves a manager articulating the vision, goals and objectives of the business, usually through a strategic plan.

Vision Vision is the picture of the future for the business. A vision gives a long-term focus for planning and organising business activities. Managers who are able to communicate a vision for the business have the ability to simplify decisions around the business’s future direction. They are able to motivate people to action towards the vision.

Problem solving The traditional approach to problem solving involves managers recognising problems, analysing their causes, identifying alternative solutions and assessing the consequences of each alternative.

Decision making Decision making is the outcome of problem solving. Good decision making requires a mixture of skills: creative development and identification of options, clarity of judgement, firmness of decision and effective implementation.

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Flexibility

on the organisation from the top down. It involved all levels of employees and achieved the following results.

Flexibility means that managers must be able to adjust their behaviour to new information or changing circumstances. Managers must always be open and experimental when it comes to new ways of doing things.

• It built trust between all levels in the organisation from the CEO down. • There was a significant improvement in employee satisfaction—measured at 50% in 1997, it had risen to 85% in 2004, according to employee surveys (interpersonal and communication).

Adaptability to change Adaptability to change involves a number of considerations. A manager must be open-minded and be able to consider a broad range of ideas and opinions. Managers need to be able to lead their workforces, analyse their observations and organise ideas so that they can be translated into action.

A major problem with introducing change from the management point of view was to overcome the inertia or unwillingness to act on the part of managers. ANZ Group General Manager, Shane Freeman, acknowledged that the ANZ should have focused much earlier on having better employment relations management information. For example, making information about the bank readily available to managers is very important for improving effectiveness, efficiency and workplace culture issues (communication).

Reconciling the conflicting interests of stakeholders Managers need to be skilled in settling conflicts of interest among stakeholders. Most conflicts are avoided if managers comply with the law, follow the industry codes of practice and utilise their management skills.

Conclusion

Implementing change at ANZ Bank

This case study of cultural change management at the ANZ indicates effective change management by the CEO and the management team and the effective use of management skills. This effective change management came from:

The management skills of John McFarlane and Shane Freeman at ANZ bank illustrate how the range of skills outlined above are important for an organisation wishing to implement change.

• recognising that change needed to occur

During the 1990s the ANZ Bank had several years of poor performance. John McFarlane was appointed CEO of the bank in the late 1990s. Mr McFarlane realised that the public image of the bank was not good and to maintain service for customers the bank needed to change the internal culture (vision). The process began in 2000 with a three-pronged strategy called ‘Perform, Grow and Breakout’ which, if successful, would lead to improved financial performance, strengthening of the brand and improved, sustainable leadership and long-term success.

• establishing the goals that the business needed to achieve (improve public image and financial performance) • using the skills of management to facilitate the process of change • developing the strategies to achieve these goals (‘Perform, Grow and Breakout’) • implementing a performance management strategy with clear key result areas which applied to all employees and recognised and rewarded outstanding performance

Competitive advantage The major focus of this process was on the employees. In the Australian banking industry the last area of real competition and competitive advantage are its people. McFarlane felt that if the ANZ wanted superior performance then it would need to transform its people at every level into happy and productive employees (adaptability to change). If this happened, value for shareholders and improved service for customers would follow (reconciling conflicting interests of shareholders).

• linking financial remuneration to employee productivity • involving and engaging employees in developing the change and monitoring progress through surveys such as employee satisfaction.

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Changing culture The top management decided that in order to successfully change the culture of the bank there was a need to implement performance management as a strategy to motivate employees and encourage them to embrace and drive the cultural change (decision making). The performance management strategy was based on very clear key result areas (KRAs) across financial, customer, people and community measures. All staff had to undergo performance management with a system of rewards linked to performance. This became a way that the bank could recognise the successful achievements of all employees, monitor their progress in the business and reward outstanding achievement. This became an important motivational tool for the bank.


1. • Very small (1–9): have up to nine full-time equivalent employees. Businesses with less than five employees are often described as microbusinesses. • Small (10–49): have ten to 49 full-time equivalent employees. • Medium (50–149): have 50 to 149 full-time equivalent employees. • Large (150+): have 150 or more full-time equivalent employees. 2. The ABS has calculated that as at June 2014: • most Australian businesses are SMEs (97% or 2 037 157 businesses).

Engaging employees in the change process

• of those SMEs that employ people, the ABS calculated that at 30 June 2011 small businesses provided almost 46% of total private sector industry employment out of a total labour force of 11 355 700

A major success of the strategy occurred through ‘building employee engagement’ at all levels rather than pushing change

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3. According to the OECD economic contribution estimates for 2007–2008, Australian small business contributed around 39% of private industry value added or 31.8% of total value added to the Australian economy. This indicates that SMEs are vital to the economy in stimulating almost one-third of economic growth. 4. Ways include: • the achievement of non-financial goals, such as personal satisfaction and achievement, pride in the job and a flexible lifestyle • the achievement by the owners and the business of corporate social responsibility and environmental sustainability goals • the achievement of financial goals, such as providing an income for the owners and business growth. 5. Reasons include: • lack of appropriate management skills and inexperience of owners • inadequate capital which in turn leads to inadequate cash flow and solvency problems • lack of adequate planning • businesses that failed were more likely to use outdated business systems or had not embraced up-to-date technology • unwillingness to access and accept appropriate advice from accountants, legal professional and banks • the business has problems meeting or satisfying customer demand because of poor service, a drop in dependability or problems with the operations key business function • the business finds that there is no longer a need for its goods or services. 6. An entrepreneur is a person who is willing to undertake risk in business. The most risky type of entrepreneurship is to start a new business, because the failure rate is high. In Australia, 30% of businesses fail within the first 12 months of operation. Therefore, entrepreneurship is a most important personal quality in establishing a SME. It requires courage and foresight to bear risk to achieve potential success and profit. 7. The reasons for the relatively low proportion of Indigenous people operating small businesses include cultural reasons, such as placing the welfare and interests of the community before an individual growing wealthy. There are also issues involving lack of access to finance and lower levels of education. 8. A classification of sources of information available for starting a SME is online, financial, professional, institutional, educational and governmental. 9. The business idea is a concept that is developed by an individual or a group of people which has the possibility of being translated into the establishment of a profitable enterprise.

If a business has competitive advantage over its rivals then it will be profitable while competitive advantage is maintained. Competitive advantage may be a new product or come from product differentiation. Product differentiation is the differences between products of competing businesses as perceived by consumers. The production of differentiated

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goods or services is a major way for a business to continue being competitive. 10. The business was using analog technology which had been superseded by digital technology. It was making prints from film. 11. The business regenerated by reinventing itself as a global digital photo printer, selling $20 Facebook photo books to customers in over 80 countries.

Winkiwoo is the first Facebook application in the world to allow people to easily design a photobook using their Facebook photos and those of their friends. Winkiwoo will deliver photobooks anywhere in the world.

12. The factors that give Winkiwoo a competitive advantage are speed, robustness—as a global application Winkiwoo is designed from ground-up to withstand enormous spikes of traffic—and usability, as it is especially usable in what could be the complex process of finding, sorting, laying out and organising Facebook photos. Other factors that add to the business’s competitive advantage include a unique business idea, superior customer service, use of innovation as part of the differentiation process and using leading-edge technology to streamline the product and reduce costs. 13. Buying a franchise business represents a compromise between the decision to start a new business or buy an existing one. Buying a franchise is really buying a successful business idea and model and implementing that idea in a new location with new premises, equipment and staff.

Buying a new business is also buying a successful business idea or at least an established one that has been translated into a functioning business. This is usually the least risky way to enter into the world of running a business.

Establishing a new business means that the entrepreneur must develop a new business idea. The owner must research the market, acquire premises and staff and develop and promote the products of the business. Unlike a franchise or buying an existing business it may be some time before the new business breaks even.

14. The total market comprises all of the people that want to buy a particular product. Therefore, it is possible to speak of the total market for milk as being all the consumers who want to buy milk.

Market segmentation is the way in which a business divides its potential market into different groups, or segments. Consumers can be grouped according to demographics, sociocultural factors, geographics and psychographics.

Continuing with the example of milk, there is a total mass market for milk and a psychographic segment of that market could be people with low calcium levels who are watching their weight and prefer to buy high calcium, low-fat milk.

15. Every product is a combination of tangible and intangible benefits. The tangible benefits of a computer are its physical appearance, operating system and memory size, while the intangible benefits are the feelings such as belonging, status and opportunities associated with having the product, including after-sales service. To the consumer, products represent a bundle of benefits that satisfy their needs. In marketing those products, businesses need to think in terms of the tangible and intangible benefits to ensure effective positioning, branding and packaging strategies.

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16. There are a number of ways to regard price. To the customer, price represents the value of the product and enables comparisons to be made between it and competitors. To the manufacturer, the price of the product represents the cost of production as well as any mark-up for profit margin. To the government, price represents the value of the product to which the goods and services tax will be added (if applicable). To businesses buying the product as an intermediate good or service for use in their own production, the price represents a cost of production. 17. A business will need to be visible to its potential market. This will involve selecting an appropriate site that will attract passing customers. This location will also need to be suitable for appropriate on-site signage and advertising to draw customers’ attention to the business. 18. A business can finance its operations in two ways: debt funding, which involves borrowing from sources outside the business and equity funding, which involves using the owners’ funds from within the business (internal) or selling equity to new owners who are from outside the business (external). Businesses usually use a combination of debt and equity. 19. An overdraft is a short-term source of finance that a business can draw against to meet short-term cash flow shortages. The business pays interest on the amount of overdraft used as well as a service fee that is paid while the account is overdrawn.

A mortgage is a long-term source of finance over a period of, say, 25 years. It is used to purchase land, real estate or equipment. Interest is charged on the loan balance that is outstanding.

20. In February 2012, the SVR was 7.3% while the interest imposed on a small business loan was 8.8%. The reason for the increased interest on small business loans stems from the claims of the banks that small business is much riskier, even with a loan secured against the home. The experience in the banking sector is that the chances of the loan going bad are much greater than for a non business borrower and when it does go bad, the ability of banks to recover the loan is less. 21. In NSW local councils implement and exercise planning powers in conjunction with the state government. Small businesses in the establishment stage are influenced by zoning of land within the Local Government Area (LGA). Zoning policy ensures that the structures that businesses erect in the LGA comply with that policy and also with state and local government environmental planning policies. Zoning is also important to ensure that the business that is carried out in a particular planning zone is appropriate. For example, it would be unsuitable for a waste disposal business to build a toxic waste incinerator next to a hospital and a school.

wage rewards include personal satisfaction, job enrichment and a positive work environment with effective management. 24. Federal government

State government

Local government

Fringe benefits tax

Payroll tax

Rates

Income tax

Stamp duty

Parking levies

Company tax GST Capital gains tax 25. A situational analysis is a current snapshot of up-to-date information and facts that impact on a business. This involves analysing the internal and external factors that affect the business. Situational analysis will include consideration of the product life cycle and SWOT, market and competitor analysis. 26. a The difference between mission and vision is the mission of a business is what the business does best every day. It defines the purpose and main objectives of a business. The vision is what the future looks like because the business achieves its mission successfully. The vision encompasses the values of the business.

b A goal is a subjective, general description of what the owner would like the business to achieve. When formulating goals there is no need to be specific. On the other hand, an objective is a specific description of what is required to be achieved. An objective is usually expressed in objective terms without using emotive language. The objective is also precise in terms of what is to be achieved.

27. Business goals should aim to meet most of the SMART criteria as below. • While goals do not have to be specific they need to be easily understood, clear and concise. • Goals should be measurable, so it can be tracked and judged whether they have been achieved. • Goals should be formulated to achieve the vision and mission of the business within the context of being realistic and achievable in terms of resources. • Goals should be set with a time frame for achievement in mind. 28. Growth provides a business with the opportunity to expand, produce a wider product range, access additional resources, including a more extensive variety of specialist skills and innovations, and help consolidate its position in the market in terms of its competitors and market share. The main purpose of growth is to increase profits and return on capital.

22. Specific skills are skills that are required (often by law) to perform a particular job. General skills are skills that are transferable from one workplace to another.

29. Nanotek has used the franchise business model to expand into Russia. The business looks for entrepreneurs that are willing to use the Nanotek business model and licences them to operate a franchise in Russia.

23. Wage costs include the actual amount of remuneration paid to each employee. Another cost component involves employee benefits. These may be part of legislation, enterprise agreements or awards or offered as an incentive by the employer.

30. Jim Cornish, Nanotek’s chief executive, viewed Russia as an opportunity because ‘Russia is a developing market so it’s very entrepreneurial—it’s all about networking, relationships and who you know’. It is also a large, untapped market with enormous potential.

Non-wage costs are rewards that meet the intrinsic needs, values and beliefs a person has regarding their job. Non-

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31. The business has had a successful entry into the Middle Eastern market and exports already contribute to 60% of the company’s operations. 32. In order to implement plans to achieve business goals as well as implementing strategies for long-term growth a business needs to organise its resources. These resources are the core components of the key business functions of the business. Whether the business decides to outsource non-core functions or to produce them itself, the business will need to develop an organisation which includes operations, marketing, finance and human resources. 33. Costs are easier to forecast than revenue because they are more predictable. Before the business starts selling any output, it will know what its fixed costs are: those that have to be met before production occurs. Variable costs can be predicted by assessing the cost of inputs for a small output then multiplying that cost as output increases. These costs per unit may fall as output increases. Revenues are more difficult to predict. Revenue forecasts for a new business involve studying the industry in which the business operates, compiling a consumer profile and getting a sense of the sales of competitors to gather enough information to do some sales projections. 34. A business reaches its break-even point at the point of output or sales volume where sales revenue equals the total costs of the business. At that point the business neither makes a profit or a loss. The break-even point lets the business know what it is going to take in terms of sales volume just to survive. It provides a good indication of the viability of a business. At the break-even point the business is covering all costs. Increased sales from the break-even point will result in profit. Decreases in sales result in costs exceeding revenue and the business will be making a loss. 35. The cash flow is a 12-month projection that forecasts the receipts and payments for a business and is probably the most important financial tool available. The cash flow shows the owner if, and when, it will run out of cash. Adequate cash flow is essential to run a business. A cash flow projection allows the business to take action before problems occur and even do ‘what if’ calculations before taking on new projects. 36. Businesses need to continually monitor the implementation of the business plan to determine whether it is working effectively. To assist in the monitoring process, businesses put in place a number of controls that will indicate whether or not the implementation of the plan is meeting with success. Information provided by these controls will be evaluated to see if corrective action needs to be taken. 37. Coco accessed the following sources of information to assist him in determining his business plan. • Online—from a website that had a Café Bistro Coffeehouse business plan and also the small business website of the NSW Government. • Institutional—Coco visited the local business enterprise centre. • Financial—Coco visited his accountant for advice on financial forecasting. • Professional—Coco visited a solicitor on the advice of his accountant. 38. Having collected the information that he needed and settled on a template Coco put together a team of people

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who would work in the business. The team meetings helped to fill in the many pieces of information that were needed to complete the plan. The team came up with the idea of visiting competitors to formulate a plan to develop competitive advantage. This also helped Coco and his team complete the competitor analysis section of the plan. The final responsibility for drawing up the plan was Coco’s. 39. If actual performance is ‘on track’ and minor deviations from the plan occur there is no need for owners and managers to interfere. A ten per cent deviation in the cost of morning tea may not be as important as a three per cent increase in on-costs of employing staff. 40. A business plan will help a business to be successful by: • giving a strategic or long-term direction to the business which can be translated into day-to-day operational plans • identifying the roles of employees so that each will operate efficiently, contributing to the success of the business • allocating the resources of the business so that they are used efficiently and the business operates at the lowest possible cost • developing standards or benchmarks for performance so that the business, its owner and employees will know if they are meeting their targets. 41. One advantage of the team strategy is that it reduces the need for layers of middle management. There is a more direct link between the workers at the lowest level and top management. Teamwork also requires people to work together in a collaborative and coordinated manner for a common purpose. Benefits include flexibility and increased efficiency, motivation and involvement in decision making. Teams also allow for greater responsiveness to consumer needs and adaptability to the external environment. Many workers recognise that being a team player is one of the most important skills in the workplace. 42. Trend analysis is a tool used by management to gauge past economic history and prepare for future events. There are two ways in which trend analysis may be employed, as below. • From within the business to look at what has occurred with the operations of the business over a period of time—this can be useful to determine the strength of certain products in the market and whether the market will continue to show sufficient demand for the product. • From outside the business to observe economic and other trends—this can be useful in protecting the business against problems such as rising interest rates, high exchange rates (if the business has a large export market) and a fall in overall demand in the economy. Trend analysis can also be useful in identifying trends which may lead to market segmentation and the establishment of niche markets. 43. Competitive advantage can be gained by offering consumers greater value, either by means of lower prices, improved quality or by providing greater benefits and service. Developing and sustaining a competitive advantage is critical because this is what distinguishes a business from its competitors. Many businesses attempt to develop a competitive advantage by being innovative in terms of introducing new products or variations on existing products to the market.

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44. Gearing or leverage is the ratio of debt funding to equity funding in a business. The gearing ratio or leverage is critical to long-term stability. A highly geared business is one with greater levels of debt to equity finance. A high level of gearing would be 80%. This means that for every 80 cents worth of total liabilities (debt) there is $1 of owners’ equity. A high gearing ratio indicates a high risk for the business because the amount of owners’ funds available to cover liabilities is low, increasing the risk of the business not meeting its liabilities and not remaining solvent. 45. One risk of using leading-edge technology is that it can create unforeseen problems such as choosing the wrong product or application. Other risks include: • the technology may not be developed enough for what the business wants compared to established technology

new machinery and equipment. However, if the tax cut only applies to incorporated businesses, many SMEs will be unaffected and would be taxed as individual income earners meaning that many would still pay a higher rate of tax. 50. Tax cuts would be of great benefit to the SME sector of the economy. It would assist in reducing business costs which would encourage businesses to retain staff, invest in training programs and undertake investment in the business. At the least, a tax cut would improve business confidence.

Sample Preliminary questions (pages 202–206) Note:

• software applications may be released before they are ready to be pressed into widespread use and contain costly ‘bugs’ • there is the potential loss of substantial amounts of money in lost employee time, both in training and development in using the technology and also in lost production due to problems with the new software • there may be problems and costs in receiving technical support from suppliers. 46. Changes to economic conditions place businesses and entrepreneurs at economic risk. If the change is not managed, the business can fail. Examples that particularly affect businesses are changes in consumer demand and rising or falling unemployment, changes in the interest or exchange rates, the introduction of new taxes, charges and levies by governments or the abolition of subsidies or grants. 47. The federal government’s Renewable Energy Bonus Scheme that provided rebates of $1000 to install a solar hot water system or $600 to install a heat pump terminated on 30 June 2012. This greatly reduces the incentive to consumers to install a solar hot water system. This reduced incentive means that by removing this generous program the government has effectively reduced demand for this clean energy. The government probably needs to do this to reduce the impact of the scheme on the expenditure side of the budget.

However, solar hot water systems and heat pumps will still be eligible for small-scale technology certificates (STCs), which are usually exchanged for a point-of-sale discount on systems. Depending on the state where the systems will be installed, government incentives may also apply. The rebate situation for rooftop solar panel systems currently remains unchanged.

48. The industry assessment of this change to the business environment was bleak. The Clean Energy Council’s (CEC) Acting Chief Executive Kane Thornton said the sudden end to the rebate would put more than 1200 manufacturing jobs and 6000 installation, sales and administrative jobs at risk.

Businesses in this industry will need to revise their business plans and make adjustments because of the axing of the program. They will also need to find ways to redevelop a competitive advantage. Unfortunately, some businesses will fail and others will definitely reduce staff numbers.

49. Many small businesses see the reduction of company tax by one per cent as something that will offset the slowdown that many are experiencing. A tax cut would enable many SMEs to retain staff and even invest in staff training and

EM


3.1 1. A is the correct answer. This is the ABS definition of a small business. B is the definition of a medium-sized business and C is the definition of a large business. D is not correct as the Treasury definition of a small business is one with a turnover of less than $2 million. [3.1.1] 2. C is the correct answer. SMEs make a substantial contribution to Australia’s Gross Domestic Product (GDP). A is not correct as many SMEs are located in regional cities and small towns and this alternative does not describe a role, just a location. B is not correct as SMEs are most likely to complement large businesses by supplying inputs as part of the supply chain as well as being customers of large businesses. D is not correct as although many SMEs provide opportunities for investment, most small businesses are labour-intensive. [3.1.2, 3.1.3] 3. D is the correct answer. According OECD estimates for 2007–2008, SMEs contributed 31.8% of total value added to the Australian economy. A is not correct as although competition among SMEs is intense, it is usually in terms of improved products or processes. B is not correct as SMEs are not major players in the education sector in Australia. Their major contributions are to agriculture, forestry and fishing, construction, property and business services and the manufacturing industry. C is not correct as large businesses contributed 69% to R&D in Australia in 2008– 2009. [3.1.3] 4. D is the correct answer. Most small business owners ranked non-financial goals as more important than financial goals. B and C are financial goals. A is not a goal. Voluntary cessation is a choice that is made by the owner to stop operating the business. [3.1.4] 5 a EM In this part of the question you have to outline or indicate the main features of the contribution of the SME sector to employment in Australia.

The contribution of the SME sector to employment is significant. Of those SMEs that employ people, the ABS calculated that at 30 June 2011 small businesses provided almost 46% of total private sector industry employment out of a total labour force of 11 355 700. [3.1.3]

b EM In this part of the question you have to provide reasons why TWO criteria are measures of success for SMEs.

One measure of success is financial. Owners of small businesses usually establish these enterprises as an alternative

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to being employed and earning a wage or salary. A major goal is for the business to generate enough revenue to enable the owners to survive financially. Another financial goal of the owners is for the business to grow.

Another measure of success is non-financial. Many small business owners consider personal satisfaction and achievement, pride in the job and a flexible lifestyle to be their main measure of success. Non-financial measures include the achievement of corporate social responsibility and environmental sustainability. [3.1.4]

c EM In this part of the question you have to identify issues and provide points for and against the idea that some business failures may have beneficial outcomes.

5. a

There are a number of points in favour of operating a business from home. There are cost savings involved because the business does not need to have its own premises. Because Raoul is operating a mobile dog wash, he does not really need to have a separate business location. He can also avoid paying higher council rates by operating the business from home. Business rates are usually higher than residential council rates.

However, he may need to offer his home as security against any business loans and that could attract higher interest rates. There is also the potential problem about whether the council will allow him to do this. Neighbours may also complain if he parks his washing facility in the street or stores harmful chemicals at home. [3.2.7, 3.2.9]

• costs to government of organising and regulating orderly exits because of involuntary cessation (such as administration of the Bankruptcy Act)

However, some business failures can have a beneficial impact on the economy. In 2000 the Productivity Commission found that in some cases there were benefits from businesses failing. These included: • inefficient and unprofitable businesses cease trading and are replaced by efficient and profitable concerns • OECD research indicates that some amount of the growth of productivity is due to the exit of failed businesses where productivity is poor

c EM In this part of the question you have to make a judgement about two possible sources of debt finance for Raoul’s business.

• entrepreneurs involved in business failure learn from the experience and become better entrepreneurs as a result and are open to experimenting with new production processes. [3.1.4]

3.2 1. A is the correct answer. Businesses run by women are usually better planned and managed compared to those run by men. Women also have a tendency to be averse to running up debts and have superior communication skills. B (motivation) is the driving force that inspires a person to work through seemingly impossible to solve problems to achieve a satisfactory result. C (entrepreneurship) refers to the willingness to undertake risk. D is not correct as there is nothing in the scenario to suggest that cultural background is the personal quality referred to. [3.2.1] 2. C is the correct answer. Product differentiation is the ability of a business to make its products seem either physically different or perceived as different to the products of competitors. A (customer service) is one method of product differentiation that businesses can choose. B (sorting-out process) refers to the steps along the way from the business idea to taking the big step of entry into business. D (product differentiation) may give a business a competitive advantage. [3.2.3] 3. D is the correct answer. Initially, there may be cost savings in the critical establishment stage if the business can be operated from home. A and B are advantages of buying a franchise as an establishment option. C is an advantage of buying an established business. [3.2.4] 4. B is the correct answer. Payroll tax is levied by the NSW Government. A, C and D are all federal government taxes. [3.2.9] 238



Raoul has segmented his target market on the basis of psychographics. This refers to lifestyle and buyer behaviour. People in his locality are wealthy and own pets but have little time to groom them. Their lifestyle means that they would rather purchase this service than perform it themselves. [3.3.3]

b EM In this part of the question you have to provide points for and/or against operating a business from home.

Business failures involve costs. These may include:

• losses to creditors • personal costs to employees and owners.

EM In this part of the question you have to ‘describe’, which means that you have to provide characteristics and features of the basis on which Raoul has segmented his target market.

It appears that the only real expense that Raoul has to make is the purchase or lease of his mobile dog wash unit. If possible, he could finance most of this by injecting some of his own funds into the business. Two sources of debt finance he could consider are an overdraft and a mortgage. In both cases he would need to offer his house as security against the borrowing. If he can avoid it, he should try to do without the mortgage. It is a longer term to pay off and requires a monthly repayment. An overdraft may be better, especially if he can use his own funds to buy equipment. He would have to pay an overdraft service fee, but is only charged interest when and if he is overdrawn. It has the advantage of providing him with a backstop if he runs into a short-term cash flow problem. [3.2.6]

3.3 1. C is the correct answer. Strategic plans deal with the longterm vision of the business. A (action plan) is a sequence of steps that must be taken, or activities that must be performed, for a strategy to succeed. B (tactical plan) is more detailed and translates the goals and objectives from the strategic plan into actions and tasks for the short to medium term. D (operational plan) is ongoing and deals with the day-to-day functions necessary to achieve the goals and objectives. [3.3] 2. B is the correct answer. A SWOT analysis is undertaken by a business to examine the influences in its internal environment (when it is analysing its strengths and weaknesses) and its external environment (when it is analysing its opportunities and threats). A (market analysis) is involved in making estimates on the size of the total market. C (customer analysis) is an analysis of the customers in the potential market of the business and the types of products they are likely to buy. D (consideration

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of the product life cycle) involves the four stages that a product goes through from its launch on the market to its removal, and its associated levels of sales, volume and market share. [3.3.1] 3. D is the correct answer. An objective is a specific description of what is required to be achieved. A is not correct as objectives are derived from goals which are defined as a subjective, general description of what the owner would like the business to achieve. B (vision) outlines what a business wants to be, or how it wants the world in which it operates to be. It is a long-term view. C (mission) is what the business does best every day. It defines the purpose and main objectives of a business. [3.3.2] 4. C is the correct answer. Concurrent controls involve the use of corrective action as operations are taking place. A (feedback controls) take place after the situation or problem has occurred. B (budgetary controls) are usually feedback controls where corrective action will take place when a financial limit has been exceeded. D (feedforward controls) aim at preventing anticipated problems in advance of operations taking place. [3.3.5] 5 a EM In this part of the question you have to calculate the break-even point, which means that you have to determine the break-even point from the given figures.

3.4 1. D is the correct answer. The team approach increases flexibility. Workers benefit by being involved in decisionmaking. A is not correct as one benefit of the team approach is that many levels of middle management are no longer required. B is not correct as with the team approach there is little room for autocratic management style. C is not correct as there needs to be increased communication between team members and top management. [3.4.2] 2. C is the correct answer. The first thing to do with a question like this is to work out what the gearing ratio is and then work out what it means. The gearing ratio is a measure of debt funding to equity funding which can be expressed as:

At the break-even point, sales revenue = total cost.

Sales revenue = selling price  quantity sold (Q) = $85  Q

Total cost

Break even occurs when sales revenue = total cost 85Q = 15000 + 70Q

Subtract 70Q from both sides (85Q – 70Q) = 15 000 15Q = 15 000

Divide both sides by 15

The break-even sales volume of shoes is 1000 pairs. [3.3.4]

= fixed costs + variable costs = $15000 + $70  Q

b EM In this part of the question you have to provide reasons why the break-even point is significant for a business

costs include wages and raw material and power costs. It is more difficult to predict variable costs. If output or sales increases, variable costs will rise but there may be discounts for purchasing greater volumes of inputs. [3.3.4]

The break-even point lets the business know what it is going to take in terms of sales volume just to survive. It provides a good indication of the viability of a business. At the break-even point the business is covering all costs. Increased sales from the break-even point will result in profit. Decreases in sales result in costs exceeding revenue and the business will be making a loss. Break-even analysis can be used to determine the level of sales needed to generate a level of profit. It is often used in strategic planning. [3.3.4]

c EM In this part of the question you have to inquire into why fixed costs are easier to predict than variable costs

Fixed costs refer to the costs of inputs that do not vary as production or output increases. Examples of these costs include rent, insurance, utility connection costs (such as telephone and electricity) and council rates. The business can easily determine the value of fixed costs.

Variable costs refer to the costs of inputs that vary as output varies. As output increases, for example, the business may use more power and it will need more inputs of raw material and possibly more labour. Examples of variable

Gearing ratio = debt funds (total liabilities)  $8000 = 0.8 equity funds $10 000

This means that for every dollar of equity in the business there is 80 cents of debt. What does this mean? It means that the business is highly geared. The finance of the business is over-extended and the business is in danger of not being able to pay its debts. Checking the alternatives to see if there is one that matches it can be seen that C is the correct answer. The other answer with high gearing ratio is D which also says that it is in no danger of overextending its finance. A and B are not correct because they both say that the business has a low gearing ratio. [3.4.5]

3. A is the correct answer. To answer this question you have to make an assessment about the technology the business is using as well as an assessment about whether the business has been successful or not with its use of technology. The technology that the business is using has been around for some time so it is established technology. This means that either A or B are correct. C and D are both incorrect because they say that the business is using leading-edge technology. Therefore it remains to make an assessment about whether the business is successful in its use of technology. Even though there has only been a slight increase in sales, a 70% reduction in overdue payments and bad debts is a good indicator of success. This means the correct answer is A, not B. [3.4.6] 4. D is the correct answer. Always be wary about alternatives in objective-response questions that contain the words ‘all’ or ‘only’. With an alternative with ‘all’ you only have to find one exception and it will be incorrect. The same applies to alternatives with ‘only’. With these economic conditions businesses that have borrowed money and produce manufactured items will be the worst affected. This means the correct answer is D. A is not correct because at least the output of farming businesses in this nation is not affected by the tax. B is not correct as businesses that do not have any borrowings will not be impacted by the increase in interest rates. In fact if they have any idle funds in the bank they will be receiving greater returns because of the increased interest rates. C is not correct as businesses that do not produce manufactured items will be impacted by the tax when they purchase

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manufactured goods and find that there has been a price increase. [3.4.7] 5. a EM In this part of the question you have to recognise and name TWO critical issues in business success and failure from the scenario.

Two critical issues in business success and failure from the scenario are the importance of having a business plan and over-extending resources. [3.4.1, 3.4.5]

b EM In this part of the question you have to provide reasons why having a business plan is important.

Business planning focuses on plotting and sequencing the actions that a business will take along the path to success and sustainability. Successful businesses use their business plans to assess the effectiveness of their operational, marketing, financial and human resources strategies.

Business planning provides a framework for identifying and examining the elements of financial sustainability. Financial sustainability is critical to the success of the business. Once these financial elements have been identified and examined, the business can implement procedures to maximise their effectiveness. A business plan makes sure that the right things get done, in the right way and in the right sequence. [3.4.1]

c EM In this part of the question you have to provide points for and/or against ways that Victor could improve his business situation.

Executive summary This report will include information on the following factors. • Government influence, through spending, taxation and policy changes, can impact on the success or failure of SMEs. • Changes in the business environment can have an impact on SMEs. If the changes are in the external environment SMEs have to respond to them. • First Steps was adversely affected by a change in government policy and a change in the competitive situation. • First Steps faced foreclosure in 60 days. • First Steps has to address three critical issues when it revises its business plan: raise finance to pay off the loan, raise finance to expand rooms and regain competitive advantage. • Sue and Lisa should consider purchasing a mini-bus to collect children at the start of each session. The bus could also be used for excursions. This would return an advantage in the child-care market.

Government influence Governments have an enormous impact on business when they make changes to taxation, spending or even changes to regulations as outlined below. • Governments, through their budgets (either spending or taxation) can impact on the success or failure of SMEs.

The first thing Victor must do is to develop a business plan. This is a critical element in business success. He must research the business that he entered hastily and develop a sustainable competitive advantage. He can get information about this from the internet or a business enterprise centre.

• Government policies can impact favourably or adversely on the success or failure of SMEs.

Victor obviously has more work than he can handle. He needs to employ someone to help him. He will also need more mowers and vehicles. To do this he will need more funding. If he develops a business plan he will be better placed to approach a lending institution to borrow money.

• Changes in government regulations over room sizes posed a threat to First Steps continuing in business.

He should invest in technology in the form of a mobile phone to receive jobs, and perhaps he should develop a web presence. If he does not know how to do this he could hire a specialist. Victor must take on an employee. At first it could be a part-time position. He needs to find out about his responsibilities as an employer such as workers’ compensation, rates of pay, superannuation and annual leave. [3.4.1, 3.4.5]


• identify and provide points for/against the influence of government on SMEs, specifically First Steps • identify and provide points for/against the effects of changes in the business environment on SMEs, specifically First Steps • identify and provide points for/against the changes to First Steps’ business plan to help the centre survive • identify and provide points for/against the strategies to ensure business success • present a sustained, logical and cohesive response in the form of a business report and clearly communicate using relevant business terminology and concepts.

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• A generous tax concession to encourage stay-at-home mums to return to the workforce encouraged Sue and Lisa to start First Steps as a child-care business.

Changes in the business environment The business environment refers to all of the factors that ‘surround’ a business and have an impact on it. This environment can be divided into two main parts. • External influences have an indirect impact on a business and it has very little control over them. • Internal influences have a direct impact and the business has some control over them. Changes in external influences had an adverse impact on First Steps as below. • The economic influence of the recession meant that many clients became unemployed and withdrew their children. • Changes in the competitive situation had an adverse affect on First Steps. Their competitive advantage of providing excellent care and a stimulating learning environment was competed away by rival child-care centres which came up with creative ideas which appealed to parents. • These two changes in the business environment caused a drop in demand for the product of First Steps, putting pressure on the business’s financial situation. • First Steps’ bank advised the centre to pay out its loan in 60 days.

Changes to First Steps’ business plan • There are three critical issues that First Steps must consider when revising its business plan.

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i. Finance must be raised to pay off the loan or the business will cease in 60 days. ii. The business needs finance to expand the rooms to comply with government policy. iii. First Steps must regain competitive advantage. • To raise finance, Sue and Lisa should consider selling equity. They could incorporate or take in partners. They must raise the outstanding loan repayment and enough finance to pay for expanding the rooms. • The business needs to regain its competitive advantage. If Sue and Lisa do a SWOT analysis as part of revamping the business plan they will see they already have as a strength the fact that they provide excellent care and a stimulating learning environment. They may consider purchasing a mini-bus to collect children at the start of each session. The bus could also be used to take children on excursions. This would return an advantage in the child-care market.

must continually monitor and investigate the environment to maintain competitive advantage. Competing businesses will reduce competitive advantage if other businesses ‘rest on their laurels’. Coco’s Coastal Café is an imaginary business. It has several competitive advantages, including a great location that attracts locals and tourists. Coco has good management skills and promotes teamwork among his employees. He involves them in making planning decisions and is a fair negotiator when establishing workplace agreements. When the business was being planned Coco decided to use a variety of sources of planning ideas as below. • Online—from a website that had a Café Bistro Coffeehouse business plan and also the small business website of the NSW Government. • Institutional—Coco visited the local business enterprise centre. • Financial—Coco visited his accountant for advice on financial forecasting.

Recommendations Sue and Lisa need to consider whether it is worthwhile remaining in business. The loan will have to be paid off regardless of their decision. I would recommend that they try to secure the finance needed and continue in business with the changes to the business plan that I have recommended.

Extended-response question In order to access the top band of marks in your answer to this question, you should: • indicate the main features of competitive advantage • sketch the ways that SMEs can gain a competitive advantage • provide the reasons for how one SME determines its business plan • clearly support your response with reference to relevant business case study/studies

• Professional—Coco visited a solicitor on the advice of his accountant. Once Coco had collected the information that he needed and had settled on a template, he put together a team of people who would work in the business. The team meetings helped to fill in the many pieces of information that were needed to complete the plan. The team even came up with the idea of visiting competitors to formulate a plan to develop competitive advantage. This also helped Coco and his team complete the competitor analysis section of the plan. The final responsibility for drawing up the plan was Coco’s.

Sample Preliminary examination Note:

• present a sustained, logical and cohesive response and clearly communicate using relevant business terminology and concepts. Competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices, improved quality or by providing greater benefits and service. Developing and sustaining a competitive advantage is critical because this is what distinguishes a business from its competitors. Many businesses attempt to develop a competitive advantage by being innovative in terms of introducing new products or variations on existing products to the market. Businesses can also be innovative by developing and introducing new techniques which may make the production process less costly or time-consuming or the efficiency of input use may improve. An example of innovative practice can be found by observing the business Australian Solar Timbers (AST). The competitive advantage of AST stems from maximising the use of timber as an input by introducing veneer production. This means that the business is efficient in the use of resources and can offer products at lower prices. At the same time, AST also has solar-powered drying kilns which, apart from being environmentally friendly, help the business reduce its power costs which in turn give it a competitive edge. Developing and sustaining competitive advantage is critical in the highly competitive markets in today’s world. Businesses

EM


SECTION I 1. A is the correct answer. With voluntary cessation the owner or owners of a business make a decision to cease operations. There is no external force causing the business to cease. In this case retirement of the owner is the cause of voluntary cessation. B is not correct as if a business is placed into receivership it is in a state of involuntary cessation. C is not correct as although an unincorporated business owner may apply for voluntary bankruptcy this means that an individual has insufficient assets to pay his or her debts. The business has ceased involuntarily. D is not correct as liquidation indicates that a company has ceased involuntarily. 2. C is the correct answer. The business is obviously in the maturity stage and is facing post-maturity. The only option that is post-maturity is C. A is not correct as growth is the stage preceding maturity and in the growth stage sales would be increasing. B is not correct because the business is already at the maturity stage. D is not correct as in the establishment stage sales would be increasing. 3. D is the correct answer. Quinary industry involves not-forprofit activities or activities that you would usually find taking place in someone’s home. A is not correct as secondary industry involves making a physical product. B is not correct as while Roberto produces a service, the

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only have to find one exception and it will be incorrect. The same applies to alternatives with ‘only’. With these economic conditions, businesses that have borrowed money and produce services that were previously untaxed will be the worst affected. This means the correct answer is D. A is not correct because at least the output of most farming businesses in this nation is not affected by the tax. B is not correct as businesses that produce fresh food and do not have any borrowings will not be impacted by the increase in interest rates or the tax. In fact, if they have any idle funds in the bank they will be receiving greater returns because of the increased interest rates. C is not correct. Businesses that produce services will be impacted by the tax.

service is specialised and classified into the sub-group, quinary. C is not correct as quaternary industry involves intellectual activities and providing information services. 4. C is the correct answer. The behavioural approach invites participation in workplace decision making from workers and also encourages workplace teams. A is not correct as the political approach is one where coalitions of influence develop and the use of power can shift depending on how the coalitions change. B is not correct as the classical approach is structured on hierarchical structures and autocratic management style. D is not correct as the contingency approach is one where the management style changes depending on the situation. That is not the case here. 5. D is the correct answer. Management is obviously involved and by taking this decision, the short-term outlook for dividends is not good. As well, the ownership of the existing shareholders could be diluted with a new share issue. A is not correct as there would be no conflict between employees and customers. Both groups would seem to benefit from this course of action. B is not correct as management is trying to develop a product that will save customers a lot of money. C is not correct as the environment will probably benefit if customers take up the developed product. 6. A is the correct answer. The ability to get the best from one’s staff and motivate them to work in groups to improve productivity is an interpersonal skill of management. The ability to formulate long-term goals which are not necessarily apparent in the business at the time is the management skill of vision. Strategic thinking is defined as being able to articulate the goals of the business and implement actions and resources necessary to achieve these goals. Interpersonal skills are being able to motivate and improve the productivity of employees as well as providing feedback on performance. Delegation of tasks and appropriate supervision is also part of people skills. Note that the incorrect alternatives B, C and D are combinations of two of these four management skills. 7. A is the correct answer. An internal influence or source of change is one that is developed by the business itself. External sources of change come from outside the business and may require a reaction to the change. In this question only one alternative is something developed by a business. B is a social influence, C is a geographical influence and D is a legal influence. All these options are external influences. 8. A is the correct answer. Skimming involves setting a high price while demand for the product is great and before competitors enter the market. This will occur when a new product is introduced to the market. B is not correct as penetration pricing involves setting the price of a new product lower than the prices of competing products. C is not correct as price points are psychological pricing strategies that are based on customers’ perception of value for their money. D is not correct as loss leaders are products that are priced well below cost in order to attract customers. 9. D is the correct answer. Always be wary about alternatives in objective-response questions that have the words ‘all’ or ‘only’. There is a good chance that these alternatives will be incorrect. With an alternative with ‘all’ in it you

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10. A is the correct answer. When businesses fail, people displaced from employment may receive welfare payments. The fact that they are not earning an income is also a cost to the economy and society. B, C and D are all incorrect and they are unintended beneficial outcomes of business failure. 11. B is the correct answer. Businesses with more than 200 employees have a much higher survival rate than SMEs. A is not correct because as businesses increase in size, survival rates improve. C is not correct as survival rates for all employment size ranges decrease over time. D is not correct as the business survival rate is much lower if the business does not employ anyone except the owner. 12. A is the correct answer. With this type of question you have to identify which elements are present. Since there are four elements of the traditional marketing mix and each alternative only has three elements, any alternative with the element that is not mentioned in the scenario is incorrect. The three elements that are mentioned are product (gentlemen’s clothing), price (skimming strategy) and place (exclusive outlets). This means that A is the correct answer. B, C and D are incorrect because they contain the element that was not mentioned in the scenario—promotion. 13. C is the correct answer. To be really accurate with this question it is handy to draw up a complete cash flow statement for the four months and work out the answer by completing the opening and closing cash balances. Remember to subtract cash payments. This method will show that the other alternatives are obviously incorrect.

Cash flow projections for Alex and Harry’s Sports Store Item Opening cash balance Cash sales Cash payments Closing cash balance

Sept

Oct

Nov

Dec

XXXX

–1000

0

–2000

3000

4000

2000

6000

4000

3000

4000

2000

–1000

0

–2000

2000

14. A is the correct answer. Although the business has the use of the equipment during the lease, it does not own the equipment. B is actually an advantage of leasing as the lessor is responsible for maintaining the equipment. C is also an advantage of leasing—by not having to pay out large sums of money to own equipment the business will still have the use of it with cash or funds left over for other

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projects. D is not correct as lease expenses are tax deductible for a business.

c

In this part of the question you have to provide the characteristics and features of registration and incorporation.

15. B is the correct answer. This is a political influence where the government, although assisting farmers to cope with a loss of markets because of financial influence (strong Australian dollar), is taking this action hoping that farmers will remember this during a future election. The government is making a policy. It has not offered subsidies to other export industries. A is not correct as although the government has passed a law, the main impact of that law is to offer assistance to one group in society. C is not correct as the financial influence is the strong Australian dollar. D is not correct as this is not an economic influence where the government is trying to change the direction of the economy.

The Australian Securities and Investments Commission (ASIC) administers the Corporations Act and is responsible for regulating Australian companies. A company must register and incorporate with ASIC. Once a business has decided on a company structure it can choose a company name and determine structural matters that apply to the company, including liability of the shareholders, amount of share capital and the objectives of the company.

The company must develop rules about how the directors are appointed, the powers and duties of the directors, the rules on how the company is to be run and voting rights of the shareholders.

SECTION II

Question 18

Question 16

a

a

In this part of the question you have to determine the value of the cost of goods sold from the information given.

In this part of the question you have to recognise and name each of the four stages of the business life cycle.

These are A: establishment, B: growth, C: maturity and D: post-maturity.

= 1000 +600  900

b

In this part of the question you have to provide reasons which make it evident about what is happening at this phase of the business life cycle.

= 500

The Cost of goods sold is $500 000.

b

In this part of the question you have to determine the value of gross profit from the information given.

Gross profit = Sales revenue  Cost of goods sold

The point E is indicating the renewal phase of the postmaturity stage. The business will have experienced steady sales in the maturity stage but has made a decision for renewal. This process is usually driven by the need of the business to develop or maintain competitive advantage in the marketplace. New product development (NPD) will focus on satisfying the needs of customers who already consume the products of the business as well as attempting to sell to new customers. NPD is necessary to maintain market share because demand for most products will decline over time. New product development is also one way that a business can respond to new technology and changing market conditions. At the same time, management of the business has realised that there is a need for expansion. Expansion of the business means the development of key business functions, and the business will need to decide whether it develops the marketing, finance and human resources functions in-house or whether it will outsource some or all of these functions. Whatever happens, expansion will usually mean more employees and an increase in management positions.

In this part of the question you have to recognise and name the legal structure of the business.

The abbreviation (Ltd) stands for ‘Limited’. This means that the business is a company which is either a proprietary company or a public company and offers its shareholders (owners) limited liability.

b

In this part of the question you have to indicate the main features of the concept of limited liability. Limited liability means that shareholders are liable for the debts of the company only to the extent of the funds that they have invested as well as any amounts that are unpaid on the shares that they hold. Their personal assets cannot be seized to pay the debts of the company.

= 900  500 = $400 000

c

In this part of the question you have to determine the value of net profit from the information given.

Net profit = Gross profit  Operating expenses  Interest payment on loans = 400  120  70 = $210 000

d

In this part of the question you have to sketch the importance of the income statement in general terms.

An income statement is essential to understanding changes in revenues, profits and expenses during the reported period and over time, and can be compared with those of other businesses and against standards.

Question 19 a

In this part of the question you have to provide the characteristics and features of the impact of flatter management structures on a business.

A flatter management structure could mean that the chain of command is less clearly defined, especially if work teams develop in the business. The span of control would become bigger without a strict hierarchy and many levels of management.

b

In this part of the question you have to indicate the main features of TWO advantages for a business which adopts flatter management structures.

One advantage of flat management structures is better communication between top management and workers. As the number of levels of management are reduced the working relationship between top management and workers becomes a direct relationship.

Question 17 a

The Cost of goods sold (COGS)

= (Opening stock + Purchases)  Closing stock


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A second advantage of this structure is the increase in productivity and responsibility of workers. Instead of being directed to perform tasks, workers now have responsibility to devise and schedule them. By having ownership of this process workers then perform tasks at a greater rate than previously, thus increasing productivity.

c

In this part of the question you have to make the relationship evident between ONE factor that a business must consider when adopting the work team approach.

appearance or styling of goods, providing the customer with an adequate level of service at a minimum cost, or producing a good or service efficiently, that is, with a maximum of quality at a minimum of cost

SECTION III Question 22 The answer to this question must be written in business report format. In order to access the top band of marks in your answer to this question, you should:

If a business adopts work teams there will be an impact on employment relations. One factor that the business will need to consider is that workers will now have greater responsibility in making and implementing decisions and this could have an impact on enterprise or workplace agreements. This will make the roles of line manager and shop steward more important. There will also be an impact in the area of HR management as workers will need more training and development to assist them to implement the team approach.

• indicate the main features of the influences in the nature of business—specifically choice, innovation and competitive advantage and entrepreneurship

• provide characteristics and features of possible business goals, especially those relating to profit, social goals and environmental goals

• identify issues and provide points for and/or against establishment options by comparing establishing a new business with buying an existing one

Question 20 a

In this part of the question you have to determine the sales volume at the break-even point from the diagram.

The sales volume at the break-even point is 40 000.

b

In this part of the question you have to use the diagram to determine the amount of profit at a sales volume of 80 000 units.

At a sales volume of 80 000 units, total sales revenue is $200 000. At the same sales volume, total cost is $160 000. Profit = total revenue  total cost = $200 000  $160 000 = $40 000

c

In this part of the question you have to provide reasons why the break-even point is important.

A business reaches its break-even point at the point of output or sales volume where sales revenue equals the total costs of the business. At that point the business neither makes a profit or a loss. The break-even point lets the business know what it is going to take in terms of sales volume just to survive and thus provides a good indication of the viability of a business. At the break-even point the business is covering all costs. Increased sales from the break-even point will result in profit. Decreases in sales result in costs exceeding revenue and the business will be making a loss.

In this part of the question you have to indicate the main features of the business idea.

The business idea is a concept that is developed by an individual or group of people which has the possibility of being translated into the establishment of a profitable business.

b

In this part of the question you have to state the meaning of ‘product differentiation’.

Product differentiation is the differences between products of competing businesses as perceived by consumers.

c

In this part of the question you have to recognise and name TWO methods that a business can use to achieve product differentiation.

Any two of the following three ways of aiming for product differentiation are acceptable: satisfactory physical



Executive summary This report has been prepared for Emily, Rose and Josephine (afterwards known as ‘the partners’) who are considering establishing a dressmaking business called Elegant Threads.

• The partners have been advised about choices with regard to legal structure, raising funds, business size, products, mix of labour and capital and markets.

• The dressmaking skills of the partners will be the competitive advantage of the business.

• As entrepreneurs the partners will bear the risk but take any profits.

• The business should have a goal to make sufficient profit to provide an income to each partner equivalent to what she would earn in employment.

• The partners have social goals which they hope will encourage young women in education and sport.

• The partners have a goal and strategies to be carbon neutral. a new business compared with buying an existing business.

a

© Pascal Press ISBN 978 1 74125 390 0

of a business report and clearly communicate using relevant business terminology and concepts.

• They have an understanding of the advantages of starting

Question 21

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• present a sustained, logical and cohesive response in the form

• Buying an existing business is preferred—the partners should work with Business Advice Consultants in the preparation of a business plan.

Influences in the nature of business A business is an organisation. This means that the business has goals and is managed in a purposeful way to use inputs to produce goods and/or services.

Choice Businesses have many choices available to them. Some of these choices are outlined below.

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• What type of legal structure (sole trader, partnership,

Innovation and competitive advantage

private company, public company) to adopt?

It is the opinion of the writer that the competitive advantage of this business lies with the skill of the partners. They are accomplished seamstresses and have a good ability to teach. This will allow clients to decide whether to learn how to sew themselves or request that garments be made by appointment.

• What goals will be important to the business? • How will the business raise funds to operate? • What size of enterprise? • What products (and range of products) will the business

Entrepreneurship

produce?

The partners have been advised about entrepreneurship. It has been explained to them that an entrepreneur is a person who is willing to undertake risk in business. Risk means that there is a possibility of something adverse or ‘bad’ happening or at least the entrepreneur will be exposed to financial loss. However, entrepreneurs take the profits made by the business as compensation for taking the risk.

• What will be the mix of labour and capital (employees and machines)?

• What mix of inputs will be used in production? • What markets will the business sell to? • Will the business aim for ecological sustainability and corporate social responsibility?

Business goals

Legal structure

Profit

There is the possibility that the business could operate as a sole trader with one of the women the owner and the other two employees. However, this arrangement may not be satisfactory to all three people involved. Although they could decide to incorporate they may want to establish the business as a partnership, deciding on the shares in proportion to the capital that each woman puts into the business. A partnership agreement would need to be drawn up and the business name registered.

Profit is the difference between revenues and costs. The business should have a goal to make sufficient profit to provide an income to each partner equivalent to what she would earn in employment. Social goals Most small business owners find the achievement of social goals more rewarding than making a profit. The partners have a desire to strive for social goals. These include endowing an annual prize in textiles and design at the local high school and sponsoring a netball team in the winter competition.

In this case the recommendations are that the business should be a partnership. This means that each of the partners will contribute funds to establish the business. Borrowing may also be necessary.

Environmental goals The partners want to be carbon neutral. They will install a 3Kw solar power system which means that the system will generate more electricity than it uses.

Goals Business goals will be outlined later in the report.

Establishment options: new business or buy existing business

Size of enterprise At first, the business will be small, operating from a ‘shopfront’ in the CBD.

After I discussed the table below with the partners they have a better understanding of the advantages of starting a new business compared with buying an existing business.

Products of the business The business will sell fabrics, threads and fasteners and other merchandise used in dressmaking. The business will conduct sewing classes by appointment.

Mix of labour and capital The three proprietors will be the only initial employees. Capital will comprise sewing machines and other implements (ironing boards, irons and overlockers) as well as business equipment such as telephones, fax machine and EFTPOS facilities.

Markets The business will cater to people who want to make their own garments. It will also make garments by appointment, especially catering to the high school formal trade as well as garments for weddings and other special occasions. There will be a broad range of materials for sale.

Ecological sustainability and corporate social responsibility

Advantages of new business

Advantages of existing business

The business starts with a ‘clean sheet’ and premises can be organised the way the owners want them

The potential buyer knows the total cost of acquisition

There are no capital gains or goodwill costs when a business starts from scratch

Because the business is already established there is less risk of it failing

The owner can organise the business the way he or she wants

The target business has established performance in the market and there is historical data to observe

There are no hidden problems or issues from a previous owner

The target business has an established customer base

Establishment costs may be able to be reduced through operating from home

Because the target business is already in operation it will have an established cash flow

This will be outlined in the section on goals.


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Advantages of new business

Advantages of existing business

A new business has no commitments to suppliers or customers

Because there is an established cash flow and a history of financial records it should be easier to obtain finance

It may be possible to enter the market gradually by beginning the business part-time and expanding to full-time eventually

The business already has a network of existing suppliers, equipment exists and there is a core of staff already trained with appropriate skills There is a set of established procedures in terms of operating the business

management has little flexibility in the task design or planning. The division of labour led to a hierarchical or pyramidal management structure. This structure is outlined below.

• A limited number of senior managers dominate decision making—usually a board of directors and executive directors who are involved with strategic planning.

• A series of middle managers coordinate the supervisors through the development of tactical plans.

• Supervisors put the operational plan into action and ‘get the job done’ through managing the workers and following orders from higher management.

• The base of the hierarchical structure is formed by the workers who perform the tasks.

Recommendations

Chain of command, span of control

The partners have a working knowledge of the issues that they asked be considered in this report. They have definite ideas regarding goals and have the skills and motivation to succeed. Therefore the recommendations are:

A hierarchical organisational structure is based on a long chain of command and a short span of control. A long chain of command means that there is a well-defined, long line of authority that stretches from the top manager (usually a CEO) through middle layers of management to supervisors and workers at the bottom of the hierarchy. A short span of control means each manager or supervisor has a limited number of workers for whom they are responsible and who report to them.

• investigate the market to see if suitable businesses are for sale and, if so, they should consider buying

• if no suitable businesses are for sale the partners should consider establishing a new company

• if the above is the case they should work with Business Advice Consultants to assist in preparing a business plan that will help to guide the business and assist in securing a loan if required.

SECTION IV Question 23 In order to access the top band of marks in your answer to this question, you should: • note the differences between the classical and behavioural approaches to management • provide reasons why identifying and sustaining competitive advantage is a critical issue in business success. • apply relevant business case study/studies and contemporary business issues • present a sustained, logical and cohesive response in the form of a business report and clearly communicate using relevant business terminology and concepts.

Features of the classical approach The classical approach to management was developed in the late nineteenth century, during the industrialisation era when there was a need for an efficient approach to the mass production process.

The developers of the classical management approach believed that there was one way to do a job and complex tasks should be broken down into a series of simplified, easier tasks. This is referred to as the division of labour. A major advantage of this is that training can be quick and simple. Workers require only a basic level of education and they become specialists in their task, allowing for better resource allocation and increased efficiency and productivity. The tasks are well defined and



A major feature of the classical approach was the autocratic management style. Autocratic or authoritarian leadership is usually found in businesses that follow a hierarchical organisational structure and undertake a classical approach style of management. An autocratic leader is one who is controlling, is rigid in decision making with little or no participation allowed by staff, has limited flexibility, uses top down communication and high levels of authority, exerts power through their position and establishes defined lines of command and responsibilities. Autocratic leadership is characterised by high levels of authority and obedience up the chain of command, limited amounts of flexibility, little participation by staff in decisionmaking and strict adherence to defined lines of command.

Behavioural approach There is a considerable difference in the behavioural approach to management. Behavioural theories began to develop in the mid-twentieth century as the business environment started to become more complex, although it was still relatively stable. Workers were better educated and were recognised as individuals with needs.

Features of the behavioural approach The main features of the behavioural approach included:

Division of labour

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Autocratic leadership style

• a democratic workplace where the opinion of workers was sought by higher management

• flatter management structures involving the removal of middle management and the empowerment of employees by decision making at lower levels of the business hierarchy—with fewer levels of management and fewer managers, there is a wider span of control and a shorter chain of command.

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Many businesses have adopted the team approach as a response to a flatter structure.

Competitive advantage Competitive advantage means that a business develops an advantage over competitors by offering consumers greater value, either by means of lower prices, improved quality or by providing greater benefits and service. Developing and sustaining a competitive advantage is critical because this is what distinguishes a business from its competitors.

Ways of developing competitive advantage in actual businesses Many businesses attempt to develop a competitive advantage by being innovative in terms of introducing new products or variations on existing products to the market. Businesses can also be innovative by developing and introducing new techniques which may make the production process less costly, faster or more efficient in input use. One example of innovative practice is the case study of Australian Solar Timbers (AST). The competitive advantage of AST stems from maximising the use of timber as an input by introducing veneer production. This means that the business is efficient in the use of resources and can offer products at lower prices. At the same time, AST also has solar-powered drying kilns which, apart from being environmentally friendly, help the business reduce its power costs which in turn give it a competitive edge. Another business that has developed competitive advantage is Winkiwoo. Winkiwoo is the first Facebook application in the world to allow people to easily design a photobook using their Facebook photos and those of their friends. Winkiwoo will deliver photobooks anywhere in the world. Part of the competitive advantage developed by Winkiwoo stems from the fact that there has never been a way to print Facebook photos despite Facebook having the world’s largest collection of photos. This underlines how significant both the application and the launch deal will be. Another advantage of the Winkiwoo process is speed—80% of people that commence building a photobook through the traditional applications fail to complete the process. Both of these businesses have operated under the behavioural approach. However, this does not mean that businesses that operate under the classical management approach do not develop competitive advantage or that they are not successful.


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Index A accounting equation and relationships 105 advertising 98 Asia-Pacific Economic Cooperation Group (APEC) 136 Asia-Pacific region trade between Australia and 32–3 assets 3, 45 intangible 104 Australian Bureau of Statistics (ABS) 9, 10, 16, 19, 21, 23, 34, 136, 137, 140 classification of businesses 136 Australian Business Number (ABN) 19, 158, 183, 197 Australian Chamber of Commerce and Industry (ACCI) 146 Australian Competition and Consumer Commission (ACCC) 37 Australian Securities and Investments Commission (ASIC) 11, 18, 22, 37, 157 Australian Securities Exchange (ASX) 37 Australian Taxation Office (ATO) 146 awards 110

B balance sheet 104–5 key terms 105 bankruptcy 58, 60 batch production 89, 127 below-the-line promotions 98 borrowing 5, 154, 155–6 bottlenecking 197 branding 94–5 break-even analysis 174–6 calculation of break-even point 175–6, 197 budgets 178–9, 197 business cessation 57–8, 140 choice 5 decline and cessation 50 employment 4, 8 entrepreneurship and risk 7 establishment 48, 51 see also business establishment influences failure of 140 functions 2–3 goals see business goals growth and decline 47–59 idea 147–9, 197 incomes 4–5 innovation 6 life cycle 47–59, 60 liquidation 58–9, 61 management see management; managers markets 40–1 maturity 49–50, 52–4 nature of 2–8 numbers of entries and exits of 140–1 planning see business plan; planning post-maturity 50, 54–5 production of goods and services 2–3

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profit 3 quality of life contribution 8 renewal 50 role 2–8 steady state 50 structure 4 see also legal structures survival rates 141 types 8–28 wealth 7–8 business culture 46, 127 new 117–18 business enterprise centres 19, 146 business environment influences 28 business culture 46 competitive situation influences 39–40 definition of business environment 28, 60 demographic factors 34–5 economic 29–31 external 28, 29–43, 60 financial 31–2 geographic 32–3 globalisation 33–4 institutional 37–8 internal 28, 43–6, 60 legal 35–6 location 44, 153–4 management 45–6 political 37 products 43 resources 44–5 social 35 stakeholders 28, 46–7 technological 38–9 business establishment influences business idea 147 competition 148–9 cultural background 144 entrepreneurship 143–4 finance 154 gender 144 goods and/or services 153 human resources 159–61 legal issues 157–9 location 153–4 market 152–3 motivation and 143 options for establishment 149–52 price 153 qualifications for 142–3 skills needed 143 sources of finance 154 sources of information 145–7 taxation 161–2 business goals achieving 74–5 categories 167 definition 197 financial 75, 78, 167 formulating 74




growth 76, 168–9 innovation 79 key performance indicators 167–8 market share 75–6 mentoring 79, 127 mix of 78 motivation 79, 127 planning 166–8 profits 75 role of management 74–80 setting achievable goals 121–2 share price 76 SMART criteria 167 social and environmental 75, 77–8, 167 staff involvement 79 training 79 business growth and decline adequate planning, lack of 56 capital, lack of 56 cessation 57 challenges at each stage 51–5 competitive advantage, loss of 57 critical issues in business success and failure 187–96 decline and cessation 50 environmental changes 56 establishment 48, 51 factors contributing to decline 55–7 growth 49, 51–2 inertia 57 involuntary cessation 57, 58, 60 liquidation 58–9, 61 maturity 49–50, 52–4 post-maturity 50, 54–5 renewal 50 revenue and cash flow, decline in 56–7 stages of business life cycle 47–8 steady state 50 voluntary cessation 57, 58, 61 business information systems 121 business name 18–19, 157–8 company 22–3 registration 157 business plan 164, 182–7 documentation with 187 executive summary 183, 197 importance of 188–9 information in 183–7 templates 182, 200 title page 182–3 business report, writing 208–11 business value 76, 127

classification of business 9–26 industry type 15–17 large businesses 11 legal structure, by 17–26 location and scope of market 11–15 size 9–11, 26–7 small to medium enterprises (SMEs) 9–11 commercial bills 155 Commonwealth Scientific and Industrial Research Organisation (CSIRO) Small and Medium Enterprise Engagement Centre (SME-EC) 142 communication skills 72 companies 22–4 advantages and disadvantages of legal structure 24 constitution 23 features 22 incorporated by registration 22 legislation 22, 23 limited liability 22, 60 name 22–3 no liability 22–3, 61 private 23–4 proprietary 22, 23–4 public 22–3, 24 replaceable rules 23 competition 5 analysis 166 assessment of 148 competitive advantage 6, 39–40, 60, 191, 197 competitive situation influences 39–40, 57 government promotion of 40 competition-based pricing 96 computer-aided design (CAD) 38 computer-aided manufacture (CAM) 38 concurrent controls 178 conflict resolution 71 consumers 2, 153 choice 5 market research 41 continuous scanning 121, 127 contracts, employment 109, 110 corporate social responsibility (CSR) 8, 60, 127, 137, 139 corporations 17 see also companies corporatisation 25, 60 cost-based pricing 95–6 costs 174 CPA Australia 143 customer service 8

D debentures 156 debt finance/funding 31, 154, 155 debts 3 demographic factors 34–5 differentiation 40, 148, 197 discretionary spending 34, 42, 60 distribution process 99–100 distribution channel 99, 127 dividend 4, 60 division of labour 127 due diligence 150, 197

C capital gain 4, 60 capital gains tax 4 capital goods 4 cash flow 3, 102–3 calculating 176–7 decline in 55–6 projections 176–7 statement 103, 177 choice 5 CHOICE 38

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E e-commerce 116, 127 economic conditions response to 194–6 economic cycle 29–30 phases 30 economic influences 29–31, 194–6 service industry sectors 42 efficiency 3, 60, 70 employees 4, 189–90 see also recruitment awards 110 development 108–9, 127 dismissal 112, 127 enterprise agreements 110 FIERCE approach to 161 general skills 159 involuntary redundancy 112, 127 involvement 79 mentoring 79 non-wage costs 160–1 performance appraisal 108, 127 resistance to change 125–6 separation 110–12, 127 skills 159–60 specific skills 160 training 80, 108–9 voluntary separation 111 wages 160 employer associations 38 employment 4, 8 contracts 109–12 industry type, by 16 laws 37, 109 SME contribution 138 enterprise agreements 110 entrepreneurship 60, 143–4 risk and 7 environmental risk 7 environmental scanning 121, 127, 196, 197 environmental sustainability 8, 60, 77, 78, 127, 139 equity finance 31, 154 ethical business behaviour 112–14 exchange rate 31–2, 60 exclusive channel distribution 100, 127 expansion 50 expenses 3

F factoring 155–6 Fair Work Act 2009 (Cth) 136 Fair Work Australia 38 Fair Work Ombudsman 38 Fayol, Henri 80 feedback controls 178–81 budgets 178–9 profit 179 sales 178 feedforward controls 177–8 finance 2, 154–6 accounting equation and relationships 105 balance sheet 104–5 break-even analysis 174–6 cash flows 102–3

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choice of legal structure 27–8 cost of 157 cost predictions 174 external sources 155–6 income statement 103–4 internal sources 155 management 100–5 matching source to purpose 156 over-extension of, avoiding 191–2 planning 171–2 revenue, forecasting 174 sources of 154–6 financial forecasting 173–7 break-even analysis 174–6 cost 174 revenue 174 financial influences 31–2 service industry sectors 42 financial planners 146 financial risk 7 firm 20 fiscal policy 30, 31 fixed costs 174, 197 flow production 89, 127 Ford, Henry 80 franchise 197 franchise business 12, 60, 151–2 franchisees 151, 197 franchisor 151, 197

G gearing 192, 197 geographic influences 32–3 Asia-Pacific region 32–3 Australia’s location 32–3 global business 13–15 expansion case studies 14–15 global financial crisis (GFC) 29 globalisation 33–4, 40 goods 88–9, 153 definition 2, 60 differentiation 40 production of 2–3 utility 2 Goods and Services tax (GST) 9, 161–2 goodwill 45 Government Business Enterprises (GBEs) 17, 25–6 advantages and disadvantages of legal structure 26 reasons for establishing 25–6 gross domestic product (GDP) 8, 60, 197 SME contribution 137 growth 3, 27, 49, 51–2, 60, 76, 168–9, 197 long-term 168–9 purpose 168

H health regulation 158–9 human resources (HR) 44, 45 employment contracts 109, 110 external recruitment 107 internal recruitment 107 management 3, 105–12, 189–90




outsourcing 118, 173, 197 planning 172–3 recruitment 106–7 separation of employees 110–12 SMEs and 159–61 strategic role of 106–9, 127 training 80, 108–9, 127

I income statement 103–4 income tax 161 incomes 4–5 incorporated business 17, 22, 60 induction 108, 127 industry types 15–17 inertia 57, 125 innovation 6, 60, 79, 127, 137 businesses undertaking 138 inputs 2, 3, 90–1 institutional influences 37–8 intellectual property 45 intensive channel distribution 100, 127 interest 5, 60, 155

J job production 89, 127

K key performance indicators (KPIs) 167–8, 197

L labour-intensive business 4, 60, 197 large businesses 11 leadership autocratic style 83 participative/democratic style 85 leasing 156 legal influences 35–6 legal structures choice of, factors influencing 26–8 classification of business 17, 18 companies 22–4 finance 27–8 government enterprise 25–6 ownership 27 partnership 19–21 size 26–7 sole trader 18–19 leverage 192, 197 liabilities 3 liquidation 58–9, 61 liquidity 3, 61, 154 loans 5 local business 11, 61 local rates and charges 162 location 44, 153–4 zoning 158 long-term funds 156 loss leaders 97

M McGregor, Douglas 85 management 45–6 approaches 80–6 autocratic leadership style 83 behavioural approach 83–5 business goals, achieving 74–80 see also business goals business information systems 121 change and 114–26 classical approach 80–3 consultants 126, 127, 146 contingency approach 85–6 controls 82 culture of change, creating 122–3 effective change management 119–26 effective, features of 70–1 flatter management structures 85, 118 hierarchical organisational structure 82–3 identifying need for change 119–20 integrity 70 internal and external influences, response to 115–19 key functions 84–5 leadership 70, 83, 84 leading, motivating and communicating 84–5 nature of 70–80 organising 81 participative/democratic leadership style 85 planning 81 process 86–114 see also management process resistance to change from stakeholders 123–6 roles 70 setting achievable goals 121–2 situational approach 85–6 skills 71–4 sources of change 115 staffing 189–90 strategic alliances and networks 118–19 structural response to change 117–19 teams 85, 189–90 trend analysis 191, 198 management consultants 126, 127, 146 management process 86–114 coordination of key business functions and resources 87 ethical business behaviour 112–14 finance 100–5 goods and/or services 88–9 human resources 105–12 inputs 90–1 key business functions 86 marketing 92–100 operations 87–8 production process 89 quality management (QM) 91–2 managers 2, 3, 4, 189–90 adaptability to change 73, 86 business goals, achieving 74–80 see also business goals calmness 71 communication skills 72, 84–5 conflict resolution 71 customer service 71 decision making 73 dependability 71 effective and efficient, features of 70–1


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flexibility 73, 127 industry knowledge 71 integrity 70 interpersonal skills 71, 127 leadership skills 70, 83, 84–5 motivation 84–5 optimism 71 problem solving 73 self-motivation 70 skills 71–4 stakeholders, reconciling interests of 74 strategic thinking 72 team player 71 vision 72 market-based pricing 96 market concentration 40, 61 market research 41 market risk 7 market segmentation 41, 127, 152, 197 market share 75 marketing 2, 87, 92–100 distribution process 99–100 internet 99 mix 94 objectives 171 organising process 170–1 place 99–100 planning 170–1, 172 promotion 97–9 service industry sectors 42 strategies 93, 171 target market identification 93, 171 markets 40–1 analysis 166 establishing business and 152–4 total 198 Maslow, Abraham 83–4 Mayo, Elton 83 mentoring 79, 127 mission statement 197 monetary policy 30 mortgages 156 multinational corporations (MNCs) 13, 61

N national business 12, 61 National Employment Standards (NES) 109 nature of business 2–8 NSW Fair Trading 37–8

O occupational health and safety 8, 158–9 laws in Australia, changes to 36 online shopping 39 operational risk 7 operations management 87–8 organising 170 Organisation for Economic Cooperation and Development (OECD) 138 organisational change, resistance to 123–6 cultural incompatibility in mergers/takeovers 125

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financial costs 124 inertia 125 purchase of new equipment 124 redundancy payouts 124 reorganising plant layout 125 retraining 124–5 staffing 125–6 outputs 2, 3, 7–8, 87 goods and/or services 88–9 outsourcing 118, 173, 197 overdraft 155 overtime payments 5, 61 ownership 4–5 choice of legal structure 27

P packaging 95 partnership 19–21, 61 advantages and disadvantages 21 agreement 19, 20 legislation governing 19, 20 liability 20–1 name 20, 22 numbers of 21 professional services 20 payroll tax 162 penetration pricing 96–7, 197 place utility 61 planning see also business plan actual performance variation 181–2 break-even analysis 174–6 business plan format and contents 182–7 cash flow projections 176 concurrent controls 178 corrective action 181–2 critical issues in business success and failure 187–96, 197 feedback controls 178–81 feedforward controls 177–8 finance 171–2 financial forecasting 173–7 goals/objectives 166–8, 197 human resources 172–3 long-term growth 168–9 marketing 170–1, 172 monitoring and evaluations 177–81 operational 81, 163, 160, 170, 197 process 162–87 product life cycle 165, 197 resources, organising 169–73 revenue and costs, forecasting 174 situational analysis 163, 164–6, 198 size 136 SMART criteria for objectives 167 sources of ideas 163–6 strategic 81, 163, 198 tactical 81, 163, 198 vision 166 writing business plan 164 political and economic risk 7 political influences 37 service industry sectors 42 positioning 94, 127




possession utility 61 price and pricing strategy 48, 95–7, 153 loss leaders 97 penetration pricing 96–7 price points 97, 197 skimming 96 price points 97 primary industry 16 private sector 17, 61 privatisation 25 production 2–3, 89 costs 3 internal influences 43 products 92, 153 distribution process 99–100 life cycle 165 marketing 94–5 price 95–7 promotion 97–9 profit 3, 75, 179 retained 31 profit and loss statement 103–4 profitability 3, 61 promotion 97–9 advertising 98 below-the-line 98 personal selling 97–8 promotional mix 97 public relations 98–9 property 5 prospectus 61, 156 public relations 98–9

Q quality assurance (QA) 92 quality control (QC) 92 quality improvement (QI) 92 quality management (QM) 91–2 quality of life 8, 61 quaternary industry 16, 42 quinary industry 17, 42

R recruitment 106–7 external 107 internal 107 redundancy 111–12 payouts 124 registration of names 157 rent 5, 61 research and development (R&D) expenditure 138 Reserve Bank of Australia (RBA) 30 resignation 111 resources 44–5 business reputation 45 financial 44–5 human 44, 45 intangible 44, 45 over-extension, avoiding 192 tangible 44 transformed 90 transforming 90–1

retirement 111 retraining 124–5 revenue 174 risk 61 entrepreneurship and 7 role of business 2–8

S Safe Work Australia (SWA) 36, 159 salary 5, 61 sales 174, 178 secondary industry 16 selective channel distribution 100, 127 services 61, 88–9, 153 definition 2 differentiation 40 external environment influences 42 industry growth 41 production of 2–3 utility 2 shareholders 4, 17 shares 4 price 76 short-term borrowing 155 situational analysis 163, 164–6, 198 market and competitor analysis 166, 171 product life cycle 165 SWOT analysis 164, 165 skimming 96, 198 Small Business NSW 147, 163 small to medium enterprises (SMEs) 9–11, 87, 136–41, 198 see also business establishment influences access to expert advice 142–3 advantages 10 business idea 147–9, 197 competition 148–9 cost of finance 157 costs of employment 160–1 cultural background and 144 definition 136 disadvantages 11 economic contribution 137–9 educational sources of information 145, 146 employee numbers 136, 137 entrepreneurship 143–4 establishment options 149–52 existing business, purchasing 150–1 failure 140–1 finance 154–7 financial sources of information 145, 146 franchise business 151–2 gender of operators 144–5 goods and/or services 153 government sources of information 145, 147 health and other regulations 158–9 human resources 159–61 influences in establishing 142–62 institutional sources of information 145, 146 legal issues 157–9 local rates and charges 162 market 152–4 motivation 143 new business 149–50


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non-wage costs 160–1 online sources of information 145 personal qualities 142–5 place of birth of operators of 144 planning process see planning professional sources of information 145, 146 qualifications 142–3 role of 137 skills 143 sources of finance for 154–5 sources of information for 145–7 statistics 9–10 success 139–41 support through legislation 139 survival rates 141 taxation 161–2 wage costs 160 SMART criteria for objectives 167 social influences 35 service industry sectors 42 sole trader 18–19 advantages and disadvantages 19 solvency 3, 61 stakeholders 28, 46–7, 61, 127 conflicting interests of 74 resistance to change 123–6 stamp duty 162 standard of living 7, 61 standard variable mortgage rate (SVR) 157 strategic alliances and networks 118–19 strategic thinking 72 SWOT analysis 164, 165 growth opportunities 168

U unincorporated business 17, 61 unions 4, 38 unlimited liability 20–1, 61 utility 2, 61

V value chain 2, 8, 61 variable costs 174, 198 vision 72, 166 vision statement 166, 198

W wages 5, 61, 160 wealth 7–8, 61 business contribution to 7–8 definition 7 Weber, Max 80 websites 200, 211 workplace health and safety 158 see also occupational health and safety

Z zoning 158

T target market 93, 153, 171, 198 taxation 4, 28 definition of SME 136 Goods and Services tax (GST) 9, 161–2 income tax 161 payroll tax 162 SMEs and 161–2 Taylor, Fredrick 80 team approach 190, 198 technological influences 38–9, 117 online shopping 39 service industry sectors 43 technological risk 7 technology 193–4 established 193 leading-edge 193–4 tertiary industry 16, 42 time utility 61 training 80, 108–9, 127 retraining 124–5 transnational corporations (TNCs) 13, 61 trend analysis 191, 198 types of businesses classification 9–26 large businesses 11 local business 11 small to medium enterprises (SMEs) 9–11 variables 8

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Notes



Notes



syllabus summary notes Have you got every single syllabus point of every chapter covered before you go into the exam? Here is a comprehensive and compact summary for you. Each point is a summarised answer to every syllabus question listed in each chapter. Each key syllabus requirement is in bold for your quick reference. If you are not sure of the syllabus point, turn to the appropriate page in the guide as listed at the end of the panels.

Chapter 1: Nature of business 1.1 Role

of business

Businesses exist to make a profit for their owners. In order to do this they produce goods or services that people, other businesses and governments need and want. Businesses sell these goods and services to these consumers. To produce goods or services, businesses must acquire and combine inputs. These inputs will be purchased by businesses, either from other businesses or from their owners. Once businesses have acquired the appropriate mix of inputs they add value to these by combining them in the productive process to produce outputs of goods and/or services. The productive process is completed when the goods or services are offered for sale. 1.1.1 The nature of a business is that as a business produces goods or services it adds value to the inputs it is using. This is known as the value chain. As the product of a business moves from one process to the next, value is added. • The central player in the process of producing goods and services is the business itself. It is an organisation run by managers. These managers develop the key business functions to assist with production. The most important key business function is operations, which deals with the actual production. Other key business functions are marketing, finance and human resources. • The owners of businesses are motivated to produce goods and services because they can make a profit from producing and selling products. The owners of a business establish goals when setting up the business. A major component of these goals will be financial goals, which provide a focus for the operations of the business. • In order to produce goods and services, businesses will need to employ people. Employees provide their skills and labour in return for incomes. The number of employees that a business has will depend on its size and whether it produces goods or services. Businesses that produce mainly services tend to be labour-intensive while businesses that produce mainly goods will tend to have fewer employees. • Businesses exist to make a profit (income) for their owners. The type of profit depends on the structure of the business. If the business is a sole trader, the owner is entitled to keep the profits after expenses and taxes have been paid. With companies, the shareholders may each receive a proportion of the net profits (dividend) of the business depending on the number of shares that they hold. The owners of resources will earn incomes from selling those resources. The owners of land receive rent. The owners of labour receive wages. The owners of capital receive interest, while the owners of enterprise receive profit. • The choices a business makes will usually be decided by the owners or they may delegate these decisions to managers. Other stakeholders of the business, such as customers,

governments, suppliers and society in general will also have input into the decision-making process. Businesses also provide product choice to customers. • Innovation refers to the creation or improvement of products, technologies or ideas. Many businesses attempt to develop a competitive advantage by being innovative in introducing new products or variations on existing products. Businesses can also be innovative by developing and introducing new techniques which may make the production process less costly, quicker or more efficient. • An entrepreneur is a person who is willing to undertake risk in business. Risk means that there is a possibility of something adverse happening or the entrepreneur being exposed to financial loss. • Businesses contribute to individuals’ wealth by growing so that the business can produce more output, providing employment so that individuals can accumulate savings and purchase assets which become wealth. • The term ‘quality of life’ is used as a standard to measure the general well-being of individuals. Businesses contribute to the quality of life of people by being part of the value chain, improving the quality of goods and services produced, having high standards of customer service, providing the opportunity for employment and training, implementing best practice occupational health and safety programs, implementing environmentally sustainable methods of production and developing and implementing programs of corporate social responsibility. Pages 2–8

1.2 Types

of businesses

1.2.1 Classification of business—businesses can be classified in the following ways: size, scope of the market, by industry type or by legal structure. • Size—the Australian Government uses a classification for businesses based on the number of full-time equivalent employees—very small (1–9), small (10–49), medium (50–149) and large (150+). Small to medium enterprises (SMEs) are made up of the first three classes of this classification. In June 2009 the ABS counted that 6349 (