National 5
Business Management
Understanding Business
Pupil Notes
Contents
Understanding Business
Section 1: Role of business in society
Types of business organisations
Section 2: Customer satisfaction
Section 3: Types of business organisations
Section 4: Objectives and finance
2
Section 1: Role of business in society
Business activity is providing goods and services to give people what they need and want. We all have items we need for survival including food, clothing and shelter however we also desire items which are not essential, for example entertainment, holidays, mobile phones etc. These items are known as wants as they are items we would like to have, rather than need. Businesses have been set up to provide us with items which satisfy both our needs and wants.
The cycle of business below shows how producing goods can lead to the satisfaction of consumer wants. This is the never-ending process of business activity:
Businesses produce goods and services which are then used by consumers. The term consumption means the “process of using consumer products and services in order to satisfy needs and wants”.
The outputs of business activity are the goods and services, which we want. Goods are tangible, which means we can see and touch these items. Services are intangible, which means they cannot be seen or touched. Goods can be either durable or non-durable:
Types of goods:
Durable goods / Items which we use again and last for a long time e.g. mobile phones, laptops and trainers /Non-durable goods / Items we normally use once or are used quickly e.g. food, drink and newspapers /
Services
Services are things that are done for us. Some of the main service industries are banking, travel and education but also include hairdressing and health.
To produce goods and services, businesses need to use a number of resources. These resources are referred to as the factors of production and include land, labour, capital and enterprise:
Factors of ProductionLand / The natural resources as
business uses such as water,
forests and the land itself. /
Labour / This refers to the human
resources required by a business
including all the people who work
for the organisation. /
Capital / The capital means the resources
a business owns such as machines,
tools and factories. /
Enterprise / A business will only be successful
if the owner is willing to take an
enterprising role. This means
they will be innovative and take
risks. /
Wealth Creation
The wealth of countries is measured by how many goods and services the country can produce. So the more business activity there is, the more goods and services that are produced, the wealthier a country is. The more we produce, the better off we can become.
Sectors of Industry
Businesses can be grouped into sectors according to the types of product they produce or service they provide. The 3 main sectors of industry:
Primary / Businesses in this sector grow products or extract resources from the ground eg farming & mining /Secondary / Businesses in this sector are involved in manufacturing and construction e.g. car manufacturing and factories. /
Tertiary/ Service Sector / In this sector, businesses do not produce products. Instead they provide services e.g. bus & train services, hairdressers, banking etc. /
In the UK we have gone through what is called de-industrialisation during the last 30 years. Many of our manufacturing industries like ship building, steel-making, and car manufacture have been greatly reduced in size, and service industries such as tourism and finance are now much more important to our economy.
The tertiary sector is now the biggest sector in the UK economy. For example, there has been considerable growth in employment in call-centre and
E-commerce firms.
Section 2: Customer satisfaction
Effective customer service is about both gaining and retaining customers. Good customer services should lead to satisfied customers. Research shows that keeping a current customer is much easier and cheaper than attracting a new one. Good customer service aims to increase customer satisfaction and therefore increase customer loyalty.
If your customer asks you a question, give an answer. If they would like something fixed, then fix it. If they have a complaint, do everything possible to turn their frown upside down!
Mission statement
A mission statement sets out the purpose of an organisation. It answers the question ‘What are we here for?’ It allows everybody in the organisation to identify with the objectives of the organisation.
A mission statement is normally no longer than a paragraph and is written in language that everyone can understand. For example, Coca Cola’s mission statement is:
“to refresh the world – in mind, body and spirit”
From the general targets established in the mission statement, specific policies such as the customer-service policy can be developed.
Methods of Customer Care
Ensuring positive customer satisfaction is essential to a business and some, or all of the following examples should be undertaken:
· Answering customer calls quickly and politely
· Responding to emails and letters quickly
· Having a customer care strategy
· Dealing with customer enquiries or complaints efficiently and effectively
· Maintaining a record of complaints carefully and learning from complaints
· Listening to the customer carefully
· Staff being friendly and helpful
· Effective after sales service
Customer Care Strategy
Many businesses will have a customer care strategy. This outlines how the business expects customers to be treated by employees and the expectations of the service which should be provided. It will also outline how complaints will be handled. The purpose of this strategy is to maximise customer satisfaction and ensure that all staff are aware of the business objectives when dealing with customers. Further, this should ensure that all customers receive the same level of service regardless of which employee deals with them.
After Sales Service
Effective customer care should not stop once the customer leaves the business. In order to ensure customer satisfaction, it is essential that there is an effective after sales service in place. Businesses may contact customers in order to find out their reactions to the service they received when buying goods or services. This may take the form of a customer questionnaire or telephone call.
After sales services will also assist customers with products they have purchased, for example, providing advice and help when setting up a new laptop or mobile telephone. Finally, after sales service will also deal with faulty goods and provide replacements. By providing an effective after sales service, customer satisfaction should be maximised which in turn will result in the business having a good reputation and gaining customers.
Customer Complaints Procedure
There may be instances when customers are not satisfied and it is important that businesses are prepared for customer complaints and know how to handle these complaints effectively.
All employees should be aware of the business customer complaints procedure and ensure complaints are dealt with fairly, efficiently and consistently. The customer complaints procedure is usually displayed in the business for customers to see and may also be detailed on receipts and delivery notes. This would inform customers the procedures to follow when they have a complaint and how they can expect their complaint to be dealt with. An effective customer complaints procedure will improve customer satisfaction, improve the business reputation and the business should learn from complaints in order to improve their goods and services for the future.
Impact of poor customer service
Poor customer service may include the following:
· poor communication between managers and employees
· lack of opportunity for customer feedback or
· not listening to customer feedback
· lack of suitable staff training
· a poor impression of the organisation is created
· not having a customer complaints procedure
A business cannot function without customers. If the customer is not satisfied with the organisation’s product or service, he/she will take their business elsewhere! This will result in a reduction in sales and profits and ultimately the business might fail.
Section 3: Types of business organisations
Organisations fall into three sectors:
• Private Sector – organisations owned and controlled by private individuals and investors.
• Public Sector – organisations owned and controlled by the government.
• Third Sector – organisations set up to raise money for good causes, or to provide facilities for their members.
Private sector organisations
The basic aim of most of these organisations is to make a profit. The most common types of private sector business organisations are:
• Sole Traders
• Partnerships
• Limited Companies – public and private
• Franchises
Sole Trader
A sole trader business is one which is owned and controlled by one person. Most small businesses are sole traders e.g. local independent shops, hairdressers, plumbers and joiners.
Advantages of sole trader organisations:
• This type of business is easy and cheap to set up
• The owner makes all the decisions and has complete control of the business
• The owner can choose their hours of work and holidays
• The owner keeps all the profits.
Disadvantages of sole trader organisations:
• It can be difficult to raise finance to start the business
• The sole trader has unlimited liability, – this means that if the business is not successful the owner could lose the business but also his/her home, car and personal items to pay off the business debts.
• Difficult to take time off as the owner may have no-one to delegate the running of the business
• No-one to share decision making and problems with
Partnerships
This type of business is owned and controlled by 2 or more people, but less than 20.
Accountants and lawyers often form partnerships. The partners have a partnership agreement, which is a legal document. It outlines matters such as how profits are to be shared, responsibilities and duties.
Advantages of partnerships:
• Workload can be shared.
• Decision making is shared.
• Partners can specialise in certain areas of the business e.g. finance, marketing and sales
• Easier to take time off work for holidays or if ill
• More money can be invested in the business because there are more owners.
Disadvantages of partnerships:
• Partners have unlimited liability
• There may be arguments and disagreements between the partners
• Partners can leave or new partners can be taken on, which can upset the running of the business.
Limited Companies
Many businesses set up as a limited company rather than as a sole trader or a partnership. The money required to set up the business (capital) is divided up into shares. Investors buy these shares which creates a large amount of finance for the company. The company is run by a Board of Directors, which is appointed by the shareholders.
There are two types of company:
• Private Limited Company – Ltd
• Public Limited Company – Plc
The shareholders receive dividends, which is their share of the profits, in return for investing in the business.
The main difference between the two is that Public Limited Companies (Plcs) are allowed to sell their shares to the public through the stock exchange, and private limited companies (Ltd) cannot. The majority of big firms like Nike, British Airways, and Microsoft are public limited companies. Recently Facebook also became a plc.
Private Limited Companies tend to be family businesses. Mackays Stores Ltd, Baxters Ltd and Tunnock’s Ltd are all examples of Private Limited Companies.
The main advantages and disadvantages of these organisations are summarised in the table below:
Limited Company / Advantages / DisadvantagesPrivate Limited Company (Ltd) eg Tunnock’s
/ Shareholders have limited liability. / Profits are shared between more people.
Control of the company is not lost to outsiders as only friends and family can buy shares. / Shares cannot be sold to the public. This means it is more difficult to raise finance than for a Plc.
Public Limited Company (Plc) eg Apple
/ Shareholders have limited liability. / No control over who buys shares as these are sold to the public.
Huge amounts of finance can be raised and easy to borrow money as the organisation is so large. / Set-up costs of the company may be high.
Both types of limited companies have to abide by the Companies Act and produce a Memorandum of Association and Articles of Association. These documents state the company’s details, responsibilities of directors and shareholders’ rights.
Franchises
Franchises are business arrangements where one firm pays for the right to run under the name of another, e.g. McDonalds.
The person or firm who owns and runs the business is called the franchisee. The firm that owns the name is called the franchiser. With McDonalds for example, the franchisee buys the right to have to run the business the way they are told to by McDonalds.
There are advantages and disadvantages to both the franchiser and franchisee:
Advantages to thefranchiser / Disadvantages to the franchiser
Market share is increased without high investment costs / The franchiser only receives a share of the profit.
The franchiser will receive a percentage of the sales or a set payment each year / Profits will depend on how successful and capable the franchisee is.
Risks are shared between the franchiser and franchisee / The reputation of the whole franchise is affected by performance of franchisees.
Advantages to the
franchisee / Disadvantages to the franchisee
The franchisee is helped and supported by the franchiser and will receive training. / The franchiser will control how the business is run including products sold, prices and store layout.
Business is already established and well known therefore risk of failure is reduced. / A share of profits or a set payment each year has to be made to the franchiser.
The franchisee will benefit from the franchiser’s advertising. / It can be expensive to purchase a successful franchise.
Public sector organisations
These are organisations set up and owned by the government on behalf of the people. The main aim of these organisations is to provide services to the general public.