Hello, this is a summary of IGCSE Business Studies to help you understand the its core concepts more easily. As a student, I would like to share with you my experience since I am studying this subject right now. I am not a professional so please feel free to add comments and suggestions on how I should improve.
In general, a firm has a competitive advantage when it is able to create more economic value than rival firms. Economic value is simply the difference between the perceived benefits gained by a customer that purchases a firm's products or services and the full economic cost of these products or services. (Barney and Hester, Page 11)
How a firm can create competitive advantage?
A firm can keep its cost same as the competitor, but can increase the benefits gained by a customer by enhancing the product benefits.
The other alternative is to keep the product benefit similar to the competitors, but reduce the cost of production and distribution operations.
Porter says, a company has to make a strategic choice between the two, he means that to be successful with any of these choices, the company has to spend significant amount of time in identifying and developing innovative solutions that support the strategic choice and both can't be pursued by a single business unit.
Who are the cost leaders in various industries.
Ryanair, Southwest Airlines
Walmart in retail sales
Timex and Casino in watches
BIC in disposable pen and razor market
Hyundai in automobile
Tata Steel in steel industry
Many cement plants
RBC Bearings http://www.rbcbearings.com/aerospace/index-intro.htm
Sources of Cost Advantage
1. Size and economies of scale
2. Size and diseconomies of scale
3. Experience difference and learning-economies
4. Access to low-cost resources
5. Technological advantages independent of scale
6. Policy choices
Management controls in implementing cost leadership
Management controls imply plans, measurements and control actions.
Cost leadership firms are characterized by very tight cost-control systems. It means, there is detailed planning, frequent measurement of actual costs, and control actions to come out with more detailed plans to achieve cost targets or replanning the higher level plans to reach the still higher level plans. Control action could imply, more experienced managers take over the responsibility of an activity that is behind target.
Target achievement is provided incentives. Failure to achieve plans and targets is noticed and disincentives are in place to minimize them. Managers who fail to achieve targets can't have a long career.
The economics problem: needs and wants.
“Opportunity cost: the next best alternative given up by choosing another item.“
Here is a diagram showing the whole economic problem:
“Division of Labour/Specialisation is when the production process is split up into different tasks and each specialized worker/ machine performs one of these tasks.“
- Specialized workers are good at one task and increases efficiency and output.
- Less time is wasted switching jobs by the individual.
- Machinery also helps all jobs and can be operated 24/7.
- Boredom from doing the same job lowers efficiency.
- No flexibility because workers can only do one job and cannot do others well if needed.
- If one worker is absent and no-one can replace him, the production process stops.
Why is business activity needed? (summary)
- Combine factors of production to create goods and services.
- Goods and services satisfy peoples wants.
- Employs people and pays them wages so they can consume other products.
- Profit: Profit is what keeps a company going and is the main aim of most businesses. Normally a business will try to obtain a satisfactory level of profits so they do not have to work long hours or pay too much tax.
- Increase added value: Value added is the difference between the price and material costs of a product. E.g. If the price when selling a pen is $3 and it costs $1 in material, the value added would be $2. However, this does not take into account overheads and taxes. Added value could be increased by working on products so that they become more expensive finished products. One easy example of this is a mobile phone with a camera would sell for much more than one without it. Of course, you will need to pay for the extra camera but as long as prices rise more than costs, you get more profit.
- Growth: Growth can only be achieved when customers are satisfied with a business. When businesses grow they create more jobs and make them more secure when a business is larger. The status and salary of managers are increased. Growth also means that a business is able to spread risks by moving to other markets, or it is gaining a larger market share. Bigger businesses also gain cost advantages, called economies of scale.
- Survival: If a business do not survive, its owners lose everything. Therefore, businesses need to focus on this objective the most when they are: starting up, competing with other businesses, or in an economic recession.
- Service to the community: This is the primary goal for most government owned businesses. They plan to produce essential products to everybody who need them.
These business objectives can conflict because different people in a business want different things at different times.
- Profit, return on capital.
- Growth, increase in value of business.
- High salaries.
- Job security.
- Job satisfaction.
- High salaries.
- Job security.
- Growth of business so they get more power, status, and salary.
Group 2: Value
- Safe products.
- High quality.
- Value for money.
- Reliability of service and maintenance.
- National output/GDP increase.
- Business does not pollute the environment.
- Safe products that are socially responsible.
Levels of economic activity
- Primary sector: The natural resources extraction sector. E.g. farming, forestry, mining… (earns the least money)
- Secondary sector: The manufacturing sector. E.g. construction, car manufacturing, baking… (earns a medium amount of money)
- Tertiary sector: The service sector. E.g banks, transport, insurance… (earns the most money)
Importance of a sector in a country:
- no. of workers employed.
- value of output and sales.
Industrialisation: a country is moving from the primary sector to the secondary sector.
- Consumers have a lot of choice
- High motivation for workers
- Competition keeps prices low
- Incentive for other businesses to set up and make profits
- Not all products will be available for everybody, especially the poor
- No government intervention means uncontrollable economic booms or recessions
- Monopolies could be set up limiting consumer choice and exploiting them
- Eliminates any waste from competition between businesses (e.g. advertising the same product)
- Employment for everybody
- All needs are met (although no luxury goods)
- Little motivation for workers
- The government might produce things people don't want to buy
- Low incentive for firms (no profit) leads to low efficiency
- public transport
- water & electricity
- New incentive (profit) encourages the business to be more efficient
- Competition lowers prices
- Individuals have more capital than the government
- Business decisions are for efficiency, not government popularity
- Privatisation raises money for the government
- Essential businesses making losses will be closed
- Workers could be made redundant for the sake of profit
- Businesses could become monopolies, leading to higher price
- Investors – how safe it is to invest in businesses
- Government – tax
- Competitors – compare their firm with other firms
- Workers – job security, how many people they will be working with
- Banks – can they get a loan back from a business.
- Number of employees. Does not work on capital intensive firms that use machinery.
- Value of output. Does not take into account people employed. Does not take into account sales revenue.
- Value of sales. Does not take into account people employed.
- Capital employed. Does not work on labour intensive firms. High capital but low output means low effiency.
- Higher profits
- More status, power and salary for managers
- Low average costs (economies of scale)
- Higher market share
- Internal Growth: Organic growth. Growth paid for by owners capital or retained profits.
- External Growth: Growth by taking over or merging with another business.
- Reduces no. of competitors in industry
- Economies of scale
- Increase market share
- Assured outlet for products
- Profit made by retailer is absorbed by manufacturer
- Prevent retailer from selling products of other businesses
- Market research on customers transfered directly to the manufacturer
- Constant supply of raw materials
- Profit from primary sector business is absorbed by manufacturer
- Prevent supplier from supplying other businesses
- Controlled cost of raw materials
- Spreads risks
- Transfer of new ideas from one section of the business to another
- Type of industry the business is in: Industries offering personal service or specialized products. They cannot grow bigger because they will lose the personal service demanded by customers. E.g. hairdressers, cleaning, convenience store, etc.
- Market size: If the size of the market a business is selling to is too small, the business cannot expand. E.g. luxury cars (Lamborghini), expensive fashion clothing, etc.
- Owners objectives: Owners might want to keep a personal touch with staff and customers. They do not want the increased stress and worry of running a bigger business.
Almost every country consists of two business sectors, the private sector and the public sector. Private sector businesses are operated and run by individuals, while public sector businesses are operated by the government. The types of businesses present in a sector can vary, so lets take a look at them.
- The owner must register with and send annual accounts to the government Tax Office.
- They must register their business names with the Registrar of Business Names.
- They must obey all basic laws for trading and commerce.
There are advantages and disadvantages to everything, and here are ones for sold traders:
- There are so few legal formalities are required to operate the business.
- The owner is his own boss, and has total control over the business.
- The owner gets 100% of profits.
- Motivation because he gets all the profits.
- The owner has freedom to change working hours or whom to employ, etc.
- He has personal contact with customers.
- He does not have to share information with anyone but the tax office, thus he enjoys complete secrecy.
- Nobody to discuss problems with.
- Unlimited liability.
- Limited finance/capital, business will remain small.
- The owner normally spends long hours working.
- Some parts of the business can be inefficient because of lack of specialists.
- Does not benefit from economies of scale.
- No continuity, no legal identity.
- Are setting up a new business.
- Do not require a lot of capital for their business.
- Require direct contact for customer service.
- More capital than a sole trader.
- Responsibilities are split.
- Any losses are shared between partners.
- Unlimited liability.
- No continuity, no legal identity.
- Partners can disagree on decisions, slowing down decision making.
- If one partner is inefficient or dishonest, everybody loses.
- Limited capital, there is a limit of 20 people for any partnership.
- Want to make a bigger business but does not want legal complications.
- Professionals, such as doctors or lawyers, cannot form a company, and can only form a partnership.
- Family, when they want a simple means of getting everybody into a business (Warning: Nepotism is usually not recommended).
- The sale of shares make raising finance a lot easier.
- Shareholders have limited liability, therefore it is safer for people to invest but creditors must be cautious because if the business fails they will not get their money back.
- Original owners are still able to keep control of the business by restricting share distribution.
- Owners need to deal with many legal formalities before forming a private limited company:
- Shares cannot be freely sold without the consent of all shareholders.
- The accounts of the company are less secret than that of sole traders and partnerships. Public information must be provided to the Registrar of Companies.
- Capital is still limited as the company cannot sell shares to the public.
- A statement in the Memorandum of Association must be made so that it says this company is a public limited company.
- All accounts must be made public.
- The company has to apply for a listing in the Stock Exchange.
- Limited liability.
- Potential to raise limitless capital.
- No restrictions on transfer of shares.
- High status will attract investors and customers.
- Many legal formalities required to form the business.
- Many rules and regulations to protect shareholders, including the publishing of annual accounts.
- Selling shares is expensive, because of the commission paid to banks to aid in selling shares and costs of printing the prospectus.
- Difficult to control since it is so large.
- Owners lose control, when the original owners hold less than 51% of shares.
- Shareholders own the company
- Directors and managers control the company
- All members have equal rights, no matter how much capital they invested.
- All workload and decision making is equally shared, a manager maybe appointed for bigger cooperatives
- Profits are shared equally.
- producer co-operatives: just like any other business, but run by workers.
- retail co-operatives: provides members with high quality goods or services for a reasonable price.
- Maximum limit of 10 people.
- You only need a simple founding statement which is sent to the Registrar of Companies to start the business.
- All members are managers (no divorce of ownership and control).
- A separate legal unit, has both limited liability and continuity.
- The size limit is not suitable for a large business.
- Members may disagree just like in a partnership.
- Shared costs are good for tackling expensive projects. (e.g aircraft)
- Pooled knowledge. (e.g foreign and local business)
- Risks are shared.
- Profits have to be shared.
- Disagreements might occur.
- The two partners might run the joint venture differently.
- The franchisee has to pay to use the brand name.
- Expansion is much faster because the franchisor does not have to finance all new outlets.
- The franchisee manages outlets
- All products sold must be bought from the franchisor.
- The failure of one franchise could lead to a bad reputation of the whole business.
- The franchisee keeps the profits.
- The chance of failure is much reduced due to the well know brand image.
- The franchisor pays for advertising.
- All supplies can be obtained from the franchisor.
- Many business decisions will be made by the franchisor (prices, store layout, products).
- Training for staff and management is provide by the franchisor.
- Banks are more willing to lend to franchisees because of lower risks.
- Less independence
- May be unable to make decisions that would suit the local area.
- Licence fee must be paid annually and a percentage of the turnover must be paid.
- to keep prices low so everybody can afford the service.
- to keep people employed.
- to offer a service to the public everywhere.
- to reduce costs, even if it means making a few people redundant.
- to increase efficiency like a private company.
- to close loss-making services, even if this mean some consumers are no longer provided with the service.
- Some businesses are considered too important to be owned by an individual. (electricity, water, airline)
- Other businesses, considered natural monopolies, are controlled by the government. (electricity, water)
- Reduces waste in an industry. (e.g. two railway lines in one city)
- Rescue important businesses when they are failing.
- Provide essential services to the people (e.g. the BBC)
- Motivation might not be as high because profit is not an objective.
- Subsidies lead to inefficiency. It is also considered unfair for private businesses.
- There is normally no competition to public corporations, so there is no incentive to improve.
- Businesses could be run for government popularity.
Usain Bolt explaining his mission success in London 2012 Olympics to IMD B-School people.
The editors of MIT Sloan Management Review are pleased to announce the winners of this year’s Richard Beckhard Memorial Prize: Rob Cross, Peter Gray, Shirley Cunningham, Mark Showers and Robert J. Thomas for their Fall 2010 article “The Collaborative Organization: How to Make Employee Networks Really Work.” In the article, the authors discussed how the most effective organizations make smart use of employee networks to reduce costs, improve efficiency and spur innovation.
Article available for free access for some days.
Social Media's Productivity Payoff
Your employees are active on Social media. Don't worry. The collaboration and communication facilitated by social media technologies help your knowledge workers to innovate and help your organization to grow
HBR Blog post by James Maryika, Michael Chui and Hugo Sarrazin, McKinsey & Co.