Business studies

4: Types of business organisation Private limited company Public limited company TOP TIP Owners Usually a very small number of Usually a very large number of Do not confuse public limited shareholders. Often members of shareholders. companies with public sector the same family or friends. organisations. Public limited companies are in the private Size Usually fairly small. Most common form of sector. organisation for very large companies. KEY TERM Collateral: non-current assets Sale of shares by Can only be sold privately, often Can be offered for sale to offered as security against the general public and other borrowing. the company to family members, friends or organisations. TOP TIP employees. Make sure you understand the difference between unlimited Sale of shares by Often difficult to sell as Quick and easy to sell as they and limited liability, and what shareholders must be sold privately and can be offered for sale to the that means for the owners of a with the agreement of other public. business. shareholders. Control Only a few shareholders. One Often thousands of shareholder may own 51% of the shareholders. The Board shares in the company and so of Directors appointed by has control over major decisions. shareholders at the Annual Ownership is not separated from General Meeting control major control. decisions. Ownership and control are separated. Raising Even if successful it may be If successful then can often 49 additional difficult to raise additional raise very large sums quite capital through capital as shares cannot be sold easily through the sale of share issue to the general public. additional shares. Borrowing Often find it difficult to raise Can often raise very large finance finance as unincorporated sums at good rates of interest businesses because they are because of their reputation usually small businesses with low and valuable collateral. value assets to offer as security – known as collateral. Table 4.1 The main differences between private and public limited companies Public limited companies also have disadvantages which are not shared by private limited companies. These include: ■ The legal formalities of setting up a public limited company are very costly. ■ Directors’ decision-making is sometimes influenced by major investors who seek to satisfy their own objectives. For example, major investors might demand the directors pay higher dividends than they had planned. This reduces the profit available for reinvestment into the company. ■ The company is always at risk of a takeover by another company, because its shares can be freely bought and sold. Any other business needs only to buy 51% of the shares in a company to become the new owner. ■ The legal requirements for the publication of information about the company is much stricter than it is for private limited companies.

Cambridge IGCSE Business Studies Section 1 Understanding business activity ACTIVITY 4.2 Chata and Juma – their story continues! After considering the advantages and disadvantages of entering into partnership with Juma, Chata decided it was the only way he was going to be able to expand his bakery business. Juma not only brought much needed capital to the partnership, but also brought many ideas too. The business, which they now call Chaju Bakery and Confectionery Products (CBCP), has been very successful, so successful that the partners are considering further expansion. They plan to open their own retail outlets for the products they currently produce and new ones which they hope to manufacture when they move to larger premises. Chata and Juma realise that they need to raise additional finance for the expansion. Chata’s father and Juma’s sister are both keen to invest in CBCP. However, the two potential investors are worried about the unlimited liability they will have if CBCP remains a partnership. Chata and Juma do not want to risk losing the capital their family members are prepared to invest in the business, so are considering becoming a private limited company. 1 Identify and explain the main advantage to Chata’s father and Juma’s sister of CBCP becoming a private limited company. 2 Identify and explain three possible advantages and three possible disadvantages to Chata and Juma of CBCP becoming a private limited company KEY TERM Franchises Franchise: a business system 50 where entrepreneurs buy the A franchise is a form of business organisation in which a firm which already right to use the name, logo and has a successful product or service – called the franchisor – agrees to allow product of an existing business. another business – called the franchisee – to use the franchisor’s trade name, logo and products in exchange for a fee. This is a popular way for multinational A franchise businesses to expand across many countries. For example, there are very few countries in the world that do not have a McDonald’s! Most of these are franchised outlets. The franchisee makes the decision about whether to operate as a sole trader, partnership or incorporated business organisation. Business entrepreneurs may decide to enter into a franchise agreement rather than setting up their own business because of the benefits of this type of organisation. These benefits include the following: ■ There is less chance of business failure because the product and brand are already well established, for example Chicken Licken, The Natural Source and Hilton Hotel franchises. ■ The franchisor often provides advice and training to the franchisee as part of the franchise agreement. ■ The franchisor will finance the promotion of the brand through national advertising. ■ The franchisor will already have checked the quality of suppliers, so the franchisee is guaranteed quality supplies. However, there are some limitations of franchising. These include: ■ The initial cost of buying into a franchise can be very expensive. ■ The franchisor will take a percentage of the revenue or profits made by the franchisee each year. ■ There are very strict controls over what the franchisee is allowed to do with the product, pricing and store layout. For example, if you go to different

4: Types of business organisation McDonald’s restaurants you will see that they all look very similar and sell identical products. ■ The franchisee will still have to pay for any local promotions they decide to do. ACTIVITY 4.3 Read the following franchise opportunities. Advert 100% Natural Frozen Yogurt Totaihnhwlsecisnoludisisdentilocaniclrguiseodu.suepYtsrsoeamruwfbrreubconietupurssrpmywtoo,hormbtioculuethnherisitbfeeyewsatrotiwrlulysir,ltoeehkvslilewaahnsie,neaaparmlivttnhuipneyrlgaa,eplntcfpharhoetleuozmreiacasnneledfylrovoomfezgfsearuennwrstgiyhtsoohe.fgrlteuruecirtatttitoiosnnpfy.prooIitnumgr s Affordable House Cleaning TiCtnuhdurenusthsoctormrueieeassetr,esccslweleaaaannmnitniantgnogaicnisgodedmuaosbentlreehyospismcrihlmeifeeafd-rrfouirlimyleenwfwoditrlohyry.inkoUutnno.olikarmecarleel asbntuasluivirnianengstssohproarecuteras,i.lwhich in Fabulous Mobile Accessories Otfhauesrhirpiomrnooadsbutlcevtissaicbacnleedsasscoecrreivesicss,eosarysa–lwloetwhlleapirsepophproolenvietdo.inWegxepsorpefesfecsriatahlteyvmassestrevslvieceleesscttlhiiokrneouopgfhhone 51 repair at mall-based kiosks. In pairs, discuss how successful you think each of these franchise businesses might be in your local area. Choose the one which you think has the best chance of success – it does not have to be the same one as the person you are working with. Write a short report identifying and explaining three reasons for your choice. KEY TERM Joint ventures Joint ventures: two or more Sometimes it benefits two or more businesses to work closely together on a business businesses agree to work together opportunity. The main reasons for a joint venture are: on a project and set up a separate business for this purpose. ■ It reduces the risk for each business and cuts costs. ■ Each business brings different expertise to the joint venture. ■ Market and product knowledge can be shared to the benefit of the businesses in the joint venture. However, joint ventures have limitations, such as: ■ Any mistakes made may damage the reputation of all firms in the joint venture, even if they were not the cause of the mistake. ■ The businesses may have different business cultures or styles of leadership, making decision-making difficult.

Cambridge IGCSE Business Studies Section 1 Understanding business activity Over the years there have been many examples of joint venture agreements. ■ One of the best known was between the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. The joint venture brought together Sony’s consumer electronics expertise with Ericsson’s technological leadership in the communications sector. ■ In 2007 Virgin Group announced a joint venture with Tata Group in India. The 50-50 joint venture combined the large network and customer base of Tata TeleServices with Virgin Mobile. This enabled Virgin to enter a very profitable mobile phone market, which was the fastest growing in the world at the time. As part of the deal, Virgin committed to use its marketing expertise to target the youth of India, using the slogan ‘Hop to the Hatke Service’ – Hatke is the Hindi for ‘different’, ‘off beat’ or ‘not mainstream’. Jaguar Land Rover agrees joint venture with Chery in ChinaCASE STUDY Jaguar Land Rover (JLR) and Chery Automobile have agreed a joint venture. This agreement will lead to the production of Jaguar and Land Rover cars in China. A new, jointly owned company will be formed to: ■ create a research and development facility ■ develop and manufacture new models ■ set up engine manufacturing operations 52 ■ create a sales network in China. ‘Demand for Jaguar and Land Rover vehicles continues to increase significantly in China,’ JLR’s chief executive Ralf Speth and Chery’s chief executive Yin Tongyao said in a joint statement. ‘We believe that JLR and Chery can jointly realise the potential of these iconic brands in the world’s largest car market.’ Chery makes smaller, less luxurious cars than JLR, but has good knowledge of the Chinese market. You can watch a news report of this joint venture at www.youtube.com/watch?NR=1&feature=endscreen&v=5Odz sehYBGI. The report starts 3 minutes 22 seconds into the video. TASK a What is meant by ‘joint venture’? b Identify two benefits to Chery of a joint venture with JLR c Do you think JLR has made the right decision to enter a joint venture with Chery? Justify your answer. Differences between unincorporated businesses and limited companies An unincorporated business is one which does not have a separate legal identity from its owners. This means that the owners are legally responsible for the activities of the business. Also, the owners have unlimited liability for the debts of the business. Sole traders and partnerships are the best examples of unincorporated businesses. An incorporated business, such as a limited company, has a separate legal identity from its owners. The company and not the owners (shareholders) is legally responsible for the activities of the business. The owners of an incorporated business have limited liability for the debts of the business.

4: Types of business organisation Risk, ownership and limited liability 53 Unincorporated business ownership has greater legal and financial risks for owners than incorporated businesses. This is because: ■ Owners and the business have the same legal identity. If, for example, a customer is injured as a result of using a faulty product made by the business, then the owners of the business are legally responsible and may be sued for damages. ■ Owners have unlimited liability for business debts. If the business fails and has unpaid debts, then the owners may have to use their personal wealth to pay these debts. These risks are removed for the owners of incorporated businesses such as private and public limited companies because: ■ Owners and the company have separate legal identities. If a customer is injured by a product made by an incorporated business then they sue the company for damages and not the owners. ■ Owners have limited liability for business debts. This means that if the company fails, the owners do not have to use their personal wealth to pay any debts. The only financial risk that owners of incorporated businesses have is that they can lose all of the money they paid for their shares. Choosing the type of business organisation You have already learned, earlier in this chapter, that it is much easier to set up an unincorporated business than an incorporated business. This explains why sole traders and partnerships are the most popular form of business organisation in most countries. Private limited companies, and especially public limited companies, are more complex to set up. They have many more legal controls than unincorporated busi- nesses; for example they must produce more detailed financial statements every year. Most businesses start small and often as a sole trader or partnership. However, as a business grows, the original owners may decide to incorporate – become a private or public limited company. They may decide to do this for a number of reasons, such as: ■ To reduce the legal and financial risk to owners. Incorporation has the benefit of separating legal identity between the business and the owners, and providing owners with limited liability. ■ Separate legal identity also has the benefit of business continuity. If one or more owner leaves, then the business is still able to continue. ■ The business may want to raise additional capital to invest in growth plans. This may be easier to achieve by becoming a limited company and selling shares in the business. When setting up a new business, the choice of which form of business organisation to use will depend on several factors. ■ The number of owners. A sole trader can only have one owner. If there is more than one owner then the choice will usually be between a partnership and an incorporated business. The larger the number of owners the more likely it is that owners will choose an incorporated business organisation.

Cambridge IGCSE Business Studies Section 1 Understanding business activity Sources of finance: see ■ The owners’ role in the management of the business. Some owners may only want Chapter 19, page 246. to invest in a business and have nothing to do with the running of it. If this is the case then an incorporated business organisation may be a better choice. 54 ■ The attitude towards financial risk. If owners do not want to risk their personal wealth, then they are more likely to set up an incorporated business. ■ How quickly the owners want to start operating their business. Unincorporated business organisations such as sole traders and partnerships are much quicker to set up than incorporated ones. This is because they do not have any complex legal requirements. ■ The potential size of the business. Most businesses start small and many will remain so because of factors such as the size of the market, or owners’ choice. These businesses are more likely to be set up and remain as sole traders or partnerships. What is the Number of Does the size of the owners? owner want to business? Which type manage of business the business organisation to choose? directly? How quickly Is the does the business to be unincorporated or business need incorporated? to be set up? Figure 4.4 Factors affecting the type of business organisation chosen In addition to the legal structure of a business, entrepreneurs may consider the benefits of a franchise (see page 50). Business organisations in the public sector Public corporations A public corporation

4: Types of business organisation KEY TERM You have already learned that public corporations are in the public sector of the Public corporation: a business economy. The main features of public corporations are: organisation that is owned and controlled by the state. ■ They are owned and controlled by the state. ■ They are financed mainly through taxation. Public sector: see Chapter 2, ■ In many countries they have social objectives rather than profit objectives. For page 25. example, to provide a service to the public and meet the needs of the less well-off in the population. In some countries the public sector organisations still have social objectives, but they might also have a profit objective too. ■ The services of public corporations are often provided free or at a low price to the population. Most countries throughout the world have public corporations or public sector enterprises, for example Pakistan International Airlines (PIA), Brunei National Petroleum Company and South African Post Office. EXPLORE! 55 Use library resources or the internet to research one public sector organisation in your country. ■ What is the name of the organisation? ■ What goods or services does it offer to the people of your country? ■ How are the activities of the organisation financed? ■ Does it charge consumers for the goods or services it produces? Are all consumers charged the same price? ■ Do you think the organisation you have researched should be controlled by the government? Justify your answer. TEST YOURSELF 1 Identify three features of a sole trader. 2 What is meant by ‘unlimited liability’? 3 Identify and explain two advantages of a partnership. 4 State the main difference between an unincorporated business and an incorporated business. 5 Identify and explain three differences between a private sector business organisation and a public corporation. 6 State two disadvantages of a private limited company. 7 State two legal documents that must be completed when setting up a limited company. 8 Outline the main difference between a private limited company and a public limited company. 9 Identify three advantages to an entrepreneur of setting up a business through a franchise agreement. 10 Explain the benefits to the businesses in a joint venture.

Cambridge IGCSE Business Studies Section 1 Understanding business activity Revision checklist Exam practice questions ● The main forms of business 1 An and Bo are in partnership together. They buy and renovate properties organisations found in which they then rent out or sell to other people. the private sector are sole traders, partnerships, The business has been going for six years and is a profitable business. limited companies, franchises They want to expand the business to offer a maintenance and repairs and joint ventures. service to both the private sector and public sector. ● There are advantages However, the partners do not have the capital needed for this expansion. and disadvantages to each form of business Bo’s sister, Jiao, has said that she is prepared to invest in the business in organisation. One of the most return for a share in the profits. important disadvantages of unincorporated businesses An and Bo are also considering changing the legal structure to a private is that the owners have limited company. unlimited liability for any debts of the business. a Identify two features of private sector organisations. [2] [2] ● Most countries will have b What is meant by ‘public sector’? [4] both a private and public [6] sector. Unlike organisations c Identify and explain two disadvantages to An and Bo of being a [6] in the private sector, public partnership. sector organisations are more concerned with d Identify and explain two benefits to An and Bo of expanding their social objectives than business. 56 profit objectives. e Do you think the partners should become a private limited company? Justify your answer. 2 Mactar is a public limited company based in Country X. They specialise in the construction of motorways and other major road networks. KC Diggers is an incorporated business in Country Y. They manufacture large earth-moving equipment which they sell or hire to the construction industry. The government of Country Y has recently announced plans to extend the country’s motorway network. It is planning a new motorway which will run 120km from the north to the south of the country. To speed up the completion of the motorway, the government is offering the work to private sector businesses. Mactar has asked KC Diggers to join it in a joint venture so that it can bid for the contract to construct the new motorway. a Identify two features of an incorporated business. [2] b What is meant by ‘private sector’? [2] c Identify and explain two advantages to Mactar of [4] being a public limited company. d Identify and explain two possible reasons why Mactar might want to expand into Country Y. [6] e Do you think it is good idea for Mactar to enter into a joint venture with KC Diggers? Justify your answer. [6] Total available marks 40

5 Business objectives and stakeholder objectives Objectives Introduction In this chapter you will learn about: The things you want to do and achieve are your personal objectives. They provide you with a target – something to aim for. How you achieve your personal objectives ■ business objectives and how will not happen by accident. They require careful planning. Even careful planning the importance of these may will not guarantee that you will be successful. The future is uncertain and unforeseen change events may cause you to change your plans. ■ the role of stakeholders in Just as you have things that you want to do and achieve in the short term, medium business term and long term, so do businesses. They have their own objectives. These are statements of what a business wants to achieve through its activities. However, ■ the differences between these activities may affect individuals or groups who are internal and external to private sector and public the business. These individuals or groups are known as business stakeholders, for sector aims and objectives. example owners and suppliers – they also have objectives. In this chapter you will learn about the objectives of businesses and how these may conflict with the objectives of stakeholder groups. ACTIVITY 5.1 57 Think about the things that you want to do in the next year, five years and ten years. How are you going to achieve them? KEY TERM Business objectives and how their importance can change Objective: a statement of a specific target to be achieved. Need for business objectives They should be SMART. Every aspect of a business needs objectives. From these objectives the business can produce a plan, or strategy, which sets out how the objectives will be achieved. The plan needs to be reviewed regularly to make sure that the business is on target to achieve its objectives. If the business looks as if it will not achieve its objectives then it might need to change its plan, or even change the objectives themselves. Objectives need to be SMART Businesses need to set clear and effective objectives. They often use SMART criteria to help them do this. Objectives must be: ■ Specific – for example, an airline may set an objective about the level of seat occupancy on its planes. ■ Measurable – the airline may set an objective of achieving an average 85% seat occupancy across all of its flights.

Cambridge IGCSE Business Studies Section 1 Understanding business activity ■ Achievable and Agreed – the airline seat occupancy objective needs to be discussed with the Marketing Department as it will need to decide on promotional activities to see that the objective is met. ■ Realistic and Relevant – the airline seat occupancy objective will need financial resources, perhaps for an advertising campaign. The objective is relevant to the marketing manager, but less relevant to the human resources manager. ■ Time-specific – the airline may set an objective to achieve average seat occupancy of 85% within the next 18 months. 58 Business plan: see Figure 5.1 SMART objectives Chapter 3, page 29. Setting objectives helps managers to develop a plan for the business. The plan will also list the resources needed in order to achieve the objectives. Different business objectives How do businesses decide on their objectives? New businesses, for example, are likely to have a different set of objectives from established businesses. The most common business objectives are concerned with survival, profit, growth, market share and corporate social responsibility.

5: Business objectives and stakeholder objectives Be socially, Stay in business Make a profit ethically and beyond the environmentally responsible in first two years its business Business activities objectives Increase Expand the market share size of the business Profit: see Chapter 21, Figure 5.2 Business objectives 59 page 268. Survival Economies of scale: see Many new businesses fail in their first or second year of trading, so survival is a Chapter 16, page 219. very important short-term objective for these businesses. Once they are established they can focus on long-term objectives such as profit and growth. KEY TERM Market share: the revenue Profit of a business expressed as a For many businesses, profit is an important objective. They aim to produce and percentage of total market sell the level of output where there is the greatest difference between revenue and revenue. total costs. Growth A business that decides to expand the size of the business in order to increase output may benefit from economies of scale. This will reduce the cost of producing each item and help to increase the firm’s competitiveness, revenue and profits. Market share As a business grows it may achieve a larger share of the market. Increased market share often benefits a business in that it helps develop a strong brand image which makes it easier to sell the product to consumers. Corporate Social Responsibility (CSR) Nowadays, many businesses take an interest in social, ethical and environmental issues and the impact that their decisions and activities may have on employees, customers, the community and the environment. Businesses that ignore their social responsibility run the risk of bad publicity and possible legal action. Both can affect the reputation, sales, revenue and profits of a business.

Cambridge IGCSE Business Studies Section 1 Understanding business activity KEY TERMS Corporate social responsibility has become an important objective for businesses as a result of: Corporate social responsibility (CSR): businesses taking ■ the activity of pressure groups responsibility for the impact their ■ the media, which has created a greater awareness of social, ethical and activities might have on society and the environment. environmental issues among consumers ■ the role of trade unions and other worker representative groups Pressure group: organisations ■ the role of governments and the laws they pass at local, national and international of like-minded people who put pressure on businesses and level. government to change their policies to reach a predetermined ACTIVITY 5.2 objective. Pressure groups: see Peter and Petra are celebrating their third year in business together. They Chapter 25, page 320. are qualified accountants who decided to go into partnership in 2010. They Trade unions: see rented offices in the country’s largest city and, starting with just two clients, PP Chapter 7, page 103. Accountancy Services (PPAS) was born. 60 In the early days their main objective was survival. The market for accountancy services in the city was very competitive. They knew that it would take time to build up a list of clients and they were prepared to work long hours with little pay. However, they hoped that once PPAS was established it would be a success. After three years of hard work and providing a quality service to clients, PPAS was a very successful business. Peter and Petra employ five other qualified and partly qualified accountants as well as secretarial support staff. Peter and Petra are considering opening a new office in the country’s second largest city. Growth has always been a long-term objective of the partners and they are both excited about the expansion to their business which will be financed by a $20,000 bank loan. In pairs or as a class, discuss: TOP TIP 1 Why was survival the main objective for PPAS in its early years? Don’t just learn a list of business 2 Other than survival, identify three objectives that Peter and Petra set objectives. You must make sure for PPAS. you know why an objective is important to a business. 3 How and why have the objectives for PPAS changed over its first three years? 4 Why do some businesses not have growth as one of their objectives? KEY TERM Objectives of social enterprises Social enterprise: a business Social enterprises are businesses mainly concerned with social objectives. with social objectives that Their activities relate to the needs of the community and the environment. reinvests most of its profits They have profit as an objective, but unlike other private sector businesses you back into the business or into have studied so far, the profit is reinvested in the business. This allows social benefiting society at large. enterprises to expand their activities or benefit the local community, rather than earning high profits for owners or shareholders. Social enterprises still need to choose a legal structure for their business and many choose to operate as a limited company or cooperative. You will find social enterprise organisations in many countries throughout the world. They are sometimes small locally based businesses, but others can be very large as shown in the case study below.

5: Business objectives and stakeholder objectives 61 Figure 5.3 Social enterprise objectives CASE STUDY Social enterprise in China Canyou Group is a Chinese software company. Formed in 1997 by Zheng Weining, it is now the largest social enterprise in China with more than 3,700 employees, most of whom are people with disabilities. Zheng started the social enterprise with a gift of $47,000 from his mother who wanted to give him an incentive to do something productive with his life. It was at this point that he had the idea of helping not just himself but other people who had chronic diseases, or were ‘handicapped’ in some way or another. He thought a computer and internet company would be ideal. The group’s business activities include software development, computerised cartoons and animation, e-commerce and other ventures. The profits earned by Canyou Group are used to benefit employees and people with disabilities in the wider community. It not only takes care of its employees during working hours, but also provides meals, sleeping accommodation and medical help – all for free and at a cost of $426 per employee. If an employee’s parents visit, the company management hosts a meal and provides a car so they can tour the city. Adapted from China Daily, 6 September 2012, www.chinadailyasia.com/life/2012-09/06/content_116476.html TASK a Identify two reasons why Zheng Weining could be described as an entrepreneur. b Identify and explain two reasons why Canyou Group is a social enterprise.

Cambridge IGCSE Business Studies Section 1 Understanding business activity TEST YOURSELF 1 What is meant by ‘objective’? 2 Explain why a business needs objectives. 3 Identify and explain three business objectives. 4 Identify the main objectives of a social enterprise. KEY TERM The role of stakeholder groups Stakeholder: an individual Stakeholders are any individual or group who may be affected by the decisions or group which has an interest and activities of a business. Figure 5.4 shows the main stakeholders of a business. in a business because they You are a stakeholder in all the businesses you buy goods and services from. are affected by its activities Members of your family are a stakeholder in the business they work for, or and decisions. businesses they own. There are two types of stakeholder: ■ internal stakeholders ■ external stakeholders. Internal stakeholders Internal stakeholders have an interest in the decisions and activities of a business. 62 Internal Stakeholders owners and shareholders, managers, employees Dividend: see Chapter 4, Business page 48. Stakeholders External Stakeholders lenders, suppliers, customers, government, local community Figure 5.4 The main stakeholders of a business Owners and shareholders Owners and shareholders are interested in the performance of the business. They will want to know if it has earned a profit. Profit belongs to the owners and is their reward for risking their investment in the business. Shareholders are the owners of a limited company and the higher the profits earned then the higher the dividend they will receive. Also, the market value of shares is usually affected by the

5: Business objectives and stakeholder objectives Profit-sharing schemes: see profitability of a business. If profits rise then the market value of the shares is likely Chapter 6, page 82. to rise. Shareholders in public limited companies may gain from selling their shares for a higher price than they paid for them. 63 Managers Managers are responsible for the performance of a business. If the business does well, for example achieves its objectives, then the managers may receive bonuses, or a salary increase. They may also gain promotion. Employees Employees are also interested in the performance of the business. If the business is profitable, it can mean better job security and the chance of pay rises. Some businesses have profit-sharing schemes for employees. Profitable businesses might use some of their profits to expand. This can provide employees with more job security and perhaps opportunities for promotion. External stakeholders Like internal stakeholders, external stakeholders also have an interest in the decisions and activities of a business. Lenders Lenders such as banks will want to know if they will be paid the interest on any loans given to the business. They will also want to check that the business can repay the amount borrowed. Existing lenders will want to know that the business is making enough profit and has enough cash to make these payments. Potential lenders will want to know about the long-term profitability of the business as well as the amount of borrowing the business has already. They may also want to know the value of any non-current assets that can be used as collateral (security) against any lending. This information will be used by the lender when deciding on whether or not to make loans to the business. Suppliers Suppliers have an interest in the activities of a business for two main reasons. First, they want to know if they will get paid on time for any goods they have supplied to the business on credit. They will want to know that the business has enough cash to pay its short-term debts. Second, the success of suppliers depends a lot on the success of the businesses they supply. If a business is expanding then this means it will be producing more goods and will need more inventories. This will increase the sales and potential profits of the supplier. However, a possible disadvantage for suppliers is that as a business expands and buys greater quantities of inventories from its suppliers, then it may expect to pay lower prices. This can reduce the profit margins of suppliers.

Cambridge IGCSE Business Studies Section 1 Understanding business activity Profit: see Chapter 21, Customers page 268. Customers have an interest in the activities of a business because they want Liquidity: see Chapter 23, to be sure that the business is going to continue to exist in the future. This is page 288. particularly important for goods that may need spare parts. Also, if a business is earning good profits then they may reinvest some of the profit into product Non-current asset: see development and expansion. Customers may then receive a better quality and Chapter 22, page 278. better variety of products. Economies of scale: see As a business expands it may benefit from economies of scale. These advantages Chapter 16, page 219. as the level of production rises reduce the cost of making each unit of output. The business might decide to reduce the price of its products which will benefit customers. Inventories: see Chapter 15, Government page 205. The government receives taxes on the profits of businesses. The higher the profits, the higher the tax revenues paid to government. Tax revenues are an important source of finance for government spending on such things as education, health, roads and defence. Many governments pay benefits to unemployed workers. If businesses are expanding, this will reduce the level of unemployment and so reduce TOP TIP government spending on these benefits. Do not confuse stakeholders Local community with shareholders. Shareholders The business may offer local people employment opportunities. Other are only one group of possible businesses in the area may benefit as a result because the employees will spend stakeholders in a business. some of their money locally. This will increase the revenue and profits of local businesses such as retailers, restaurants and entertainment outlets. A business 64 may also provide financial support or other benefits to the local community. For example, it may sponsor a local sports team or provide leisure facilities for use by local residents. However, the business may have a negative impact on the local community, for example through noise or air pollution resulting from the production process, or traffic problems as businesses receive deliveries and send out orders to customers. Roads may also become congested during particular times of the day when workers are starting or finishing work. ACTIVITY 5.3 The statements below have been taken from the objectives of a leading clothing manufacturer. We are committed to: ■ offering our customers quality products at the most competitive prices ■ providing shareholders with good returns on their investment ■ developing the talents of our employees through excellent training and development programmes ■ building long-term, positive relationships with our suppliers ■ protecting the environment and supporting the well-being of the community. 1 Identify the different stakeholder groups mentioned in the above statements. 2 Identify stakeholder(s) not mentioned in any of the above statements. 3 Select any three stakeholders you have identified in question 1. Explain the benefits to the company of having objectives specifically aimed at each of the stakeholder groups you have identified.

5: Business objectives and stakeholder objectives Objectives of stakeholder groups Table 5.1 identifies the main objectives of internal and external stakeholders. Stakeholder Objectives 65 Internal Owners/stakeholders To receive high returns/dividends as reward for risking their investment in the business. Managers To benefit from an increase in share value. Employees External To have job satisfaction and status. Lenders To receive salary increase and bonuses. Suppliers To have job security. Customers To receive a fair wage that reflects their contribution to the business’s success. Government Local community To receive interest payments when due. To have borrowing repaid by the due date. To receive prompt payment for goods supplied on credit. To be treated fairly and not be forced to reduce their prices by businesses with strong buying power. To receive quality goods and after sales service. To be charged a fair price which gives value for money. To be paid the correct amount of taxes on time. To have minimal spending on unemployment benefits. To receive benefits for the local economy such as employment and subsidising community facilities. To avoid the negative impact of business activities such as noise, air and traffic pollution. Table 5.1 Main objectives of business stakeholders As you have already seen, the decisions and activities of a business may have positive and negative effects on stakeholders. Stakeholders too have their own objectives that they will want to achieve through their relationship with the business in which they have an interest. You will not, therefore, be surprised to learn that there is often conflict between two or more business stakeholders. This is because it is often not possible for a business decision or activity to satisfy the differing objectives of different groups of stakeholders. Sometimes a single business decision or activity will have both positive and negative effects for the same stakeholder. ACTIVITY 5.4 Look at each of the following statements about the decisions and activities of different businesses. Statement A Statement B A local supermarket has decided to expand A company decides to invest $5 million in the size of its store. It will now be able to add new technology. The investment will be an in-store bakery. The expansion will be funded from profits. The new technology financed through a long-term bank loan. will mean it needs 30 fewer workers.

Cambridge IGCSE Business Studies Section 1 Understanding business activity Statement C Statement D A manufacturer of fizzy drinks has been The owners of a clothing manufacturing granted planning permission to build business have decided to have some of its a new factory on land close to a local items produced in another country where housing estate and primary school. When labour costs are much lower. This will increase fully operational, the factory will provide profit margins and help to keep the price of employment for 260 workers. their garments below that of competitors. 1 For each of the above statements identify the key stakeholders who will be affected by the action taken by each business. 2 For each statement identify the positive and/or negative effect of the business activity on each of the stakeholders you have identified in question 1. 3 For each statement identify and explain how there might be a conflict between any two groups of stakeholders. TEST YOURSELF 1 What is meant by the term ‘business stakeholder’? 2 Identify five business stakeholders. 3 Identify and explain the objectives of any three business stakeholders. 66 Objectives of private sector and public sector enterprises Figure 5.5 Public sector organisations Earlier in this chapter you studied the main objectives of private sector organisations (see page 58). Public sector organisations have very different aims and objectives from those in the private sector. The services and facilities they provide must be: ■ Accessible – they can be used by everyone regardless of their location or income. ■ Affordable – they must be cheaper than if the service was provided by the private sector. The service may even be free at the point of use. ■ Open to all – they must be available to everyone regardless of their income, class, ethnicity, culture, religion, and so on. Public sector organisations: TEST YOURSELF Identify and explain two objectives of a public sector see Chapter 4, page 55. organisation.

5: Business objectives and stakeholder objectives Revision checklist Exam practice questions ● It is important for every 1 Aisha is a qualified hairdresser. She opened her own salon, as a sole business to set SMART trader, five years ago. At first business was very slow due to competition objectives. from other salons and the fact that Aisha was unknown in the area. Aisha knew that the first year was going to be about survival. ● The main objectives of private sector businesses are survival, Aisha survived her first six months and within a year she was profit, growth and market making profit. share and these objectives may change in importance Aisha wants to grow her business. She thinks that adding beauty over time. treatments to the services she offers will be a profitable option. She has a friend, Christine, who is a trained beauty therapist. She is thinking of ● A social enterprise is a private asking Christine to become a partner in the expanded business. sector business that makes profit, not for the owners or a Other than sole trader, identify two forms of business [2] 67 investors, but to benefit local organisation. [2] communities and reinvest to [4] grow the business. b What is meant by a ‘stakeholder’? [6] ● All businesses have internal c Identify and explain two benefits to Aisha of setting objectives. [6] and external stakeholders. These are individuals or d Identify and explain two advantages to Aisha of operating as groups who have an interest a sole trader. in the activities of a business. Each stakeholder group will e Aisha thinks there are more advantages than disadvantages of have their own objectives expanding her business as a partnership. Do you agree? and these might conflict Justify your answer. with the objectives of other stakeholder groups, or with 2 Company Z is a private limited company in the secondary sector of the objectives of the business. the economy. It manufactures components used in the computer industry. They employ 80 production workers and ten management ● Public sector organisations and administrative staff. The company has just made record profits. might have profit as an The shareholders are very pleased because they expect to receive high objective, but social dividends as their share of profits. The workers’ trade union thinks that objectives will be more their members should get a big pay rise. The directors of Company Z important. are considering each of these options. Over the past two years the company’s profits have increased by 15% each year. a Identify any two of Company Z’s stakeholders [2] [2] b What is meant by ‘secondary sector’? [4] c Identify and explain two features of a private limited company. [6] [6] d Identify and explain two ways the objectives of a private sector business like Company Z are different from public sector organisations. e Do you think the directors should use the profits to reward shareholders or to reward workers? Justify your answer. Total available marks 40

Cambridge IGCSE Business Studies Section 1 Understanding business activity Exam-style case study Appendix 2 Tabansi’s Drinks and Smoothies Letter from the business adviser From an early age Tabansi has displayed many of the Dear Tabansi characteristics of an entrepreneur. At 13 years old he made It was very good seeing you yesterday and soft drinks which he sold by the glass to tourists who visited I hope you found the meeting useful. I am the ancient sites near to his home. He saved all of the profit writing to confirm the main points of our from this business and two years later he bought a bicycle and discussions. These are: cooler bags (these are bags which help to keep drinks cool) so that he could take his drinks to a wider market. When he 1 You need to set clear objectives for left school he had enough money to pay for the rent of a stall your business. at his local market. He expanded his product range to include freshly squeezed fruit juices and fruit smoothies. Although he 2 You should produce a business plan was making a living as a market trader Tabansi knew that to for the business. earn the money he wanted to provide for his future and support his parents and younger brother and sister he had to be more 3 You should consider changing ambitious. your business into a private limited company. Tabansi recently bumped into, Uba, an old school friend. Uba’s father had a small business unit for sale in the town where If you need any further assistance from me or Tabansi lived. Tabansi arranged with Uba to visit the property. one of my colleagues at the small business He saw the potential for converting the premises into a small advisory service then please do not hesitate to 68 production unit for his drinks business. Tabansi agreed to buy get in touch. the business unit. He has produced some financial data for this Yours sincerely purchase. See Appendix 1. S. P. Godwin Tabansi went to see a small business adviser. Following the Appendix 3 meeting the adviser has written to Tabansi (see Appendix 2) Financial forecasts for the next three years. and told him that he should set clear objectives for his business and that a bank will want to see a business plan Revenue Profit before they will consider lending him the money he needs as $13,000 $7,000 start-up capital. Tabansi has produced financial forecasts $14,800 $9,000 for the next three years as part of his business plan. See $17,300 $12,000 Appendix 3. Appendix 1 Year 1 Financial data for purchase and equipping business unit. Year 2 Year 3 Purchase price $ Equipment needed 10,000 Personal savings Borrowing required 4,000 6,000 8,000

Exam-style case study 1 a Identify and explain two characteristics that have b The small business adviser has recommended 69 made Tabansi a successful entrepreneur. to Tabansi that he produces a business plan. Characteristic 1: Consider the importance of the following Explanation: elements of a business plan for Tabansi. Characteristic 2: The business: Explanation: The business opportunity: [8] The market: Financial forecasts: b The small business adviser told Tabansi that [12] ‘he should set clear objectives for his business’. Consider the following business objectives and 4 a Identify and explain two ways Tabansi might decide which of these is the most important to increase his business’s added value. Tabansi. Justify your answer. Way 1: Profit: Explanation: Growth: Way 2: Survival: Explanation: Recommendation: [8] [12] b There are several stakeholder groups who 2 a Identify and explain two benefits to Tabansi of will be interested in the success of Tabansi’s being a sole trader. business. Why do you think the following Benefit 1: stakeholders will be interested in Tabansi’s Explanation: business? Justify your answer. Benefit 2: Lenders: Explanation: Suppliers: [8] Customers: Government: b Do you think Tabansi should change his [12] business to a private limited company? Justify your answer. Total available marks 80 [12] 3 a New businesses such as Tabansi’s are at  greater risk of failure. Identify and explain two reasons why new businesses fail. Reason 1: Explanation: Reason 2: Explanation: [8]

70 Section 2: People in business Business of all sizes are organisations which need people. They may be owners, managers or other workers; full-time or part-time; skilled or unskilled. People are the most valuable asset of any business. The way that they work will have a direct effect on the success or failure of the business. The recruitment, selection and training of workers is an important function of human resource management. You will learn the importance of having a well-trained workforce and how managers might use theories of motivation to ensure that workers produce maximum output of the highest quality. As a business grows it will need to have a clear organisational structure with effective managers and leaders. You will learn about the functions of management and the importance of different leadership styles. In many countries workers benefit from membership of a trade union who will negotiate on their behalf with management to achieve better pay and working conditions.

6 Motivating workers Objectives Introduction In this chapter you will Why do you come to school? Do you use both your time and resources well? How hard learn about: do you work at your studies? What will make you work harder? Do you work harder in some subjects than you do in others? Why do you work harder and more efficiently ■ why people work in some subjects than in others? If you know the reasons why, then could this help ■ the meaning and importance to improve the way you work in all of your subjects? These questions are similar to questions that may be asked of people at work. Just as your teachers want you to of motivation in the workplace work hard and efficiently, so too do the managers of workers. Managers want to be ■ key motivational theories able to motivate workers so that they produce as many good quality products as they ■ financial and non-financial can during their time at work. methods of motivation. In this chapter you will study why people work and what motivates them to work. A well-motivated employee is likely to work harder and more efficiently and enjoy what they do than an employee who has no interest in their job. So you will also learn about people who have studied motivation at work and how this can help managers and businesses achieve a well-motivated workforce. The importance of a well-motivated workforce 71 Why people work and what motivation means KEY TERM People working in an office Motivation: the factors that Motivation at work results from a combination of factors such as money, job influence the behaviour of security, how interesting the work is and promotion prospects. These factors workers towards achieving set encourage workers to be interested and committed to their job so that they work business goals. harder and more efficiently. If you ask people why they work, most will answer ‘to earn money’ so they can buy what they need to live. But there are many other reasons that motivate people to work. Some of the most important factors to influence motivation at work are shown in Figure 6.1.

Cambridge IGCSE Business Studies Section 2 People in business 72 Figure 6.1 Factors that influence motivation at work EXPLORE! The questionnaire below lists some of the most important reasons why people work and factors that influence people’s motivation at work. 1 Using the questionnaire, survey five people you know who work. You might need to explain what is meant by motivation. 2 When everyone in the class has collected their results these can be combined into one results table. If your class is very large, then work in groups of 6–8 and combine results. (If you have access to computers, then use a spreadsheet as this will make it easier to complete tasks 3 and 4). 3 For each question calculate the average score. For example if five people in the survey gave the following scores 3, 4, 5, 3, 5 in response to a statement in the questionnaire, then the average score would be: (3+4+5+3+5) = 20 = 4 5 5 4 Using the average score for each question, produce a bar chart to compare the importance of each factor in influencing motivation at work. 5 Using the survey results and your analysis and presentation of these, write a short report explaining the importance of different factors on influencing motivation at work.

5: Business objectives and st6a:kMeohtoivldaetirnogbwjeocrtkiveers Questionnaire: Factors that motivate people at work Results of survey of five people ABCDE On a scale of 1 to 5, with 5 being very important and 1 being not important, how would the following factors increase your motivation at work? Increased pay Chance of promotion Recognition by managers for a job well done Option to work from home Training to help improve job prospects Longer holidays, better pensions, staff discounts Improved work environment – cleaner and safer Option to work flexible hours Bonus based on targets Increased variety of tasks KEY TERMS Benefits of a well-motivated workforce 73 Labour productivity: a measure A well-motivated workforce will help a business to achieve its objectives. Well- of the efficiency of workers by motivated workers will want to work efficiently and produce quality goods and calculating the output per worker. services for customers. Motivated workers will increase labour productivity and this Absenteeism: workers’ non- will help a business to reduce average costs and increase competitiveness. Workers attendance at work without who are motivated will enjoy going to work, are less likely to take days off – ensuring good reason. a low rate of absenteeism – or to leave the business. A lower labour turnover will Labour turnover: the rate at reduce recruitment costs. A well-motivated workforce is easier to manage and will which workers leave a business. want to work with management to help improve the business. The main benefits to a business of having a well-motivated workforce are shown in Fig 6.2. Improved productivity Recruitment costs: see Chapter 8, page 107. More Benefits of Low rate of competitive having a absenteeism well‐motivated workforce Better Low rate of quality goods labour and services turnover Figure 6.2 The benefits to business of a well-motivated workforce.

Cambridge IGCSE Business Studies Section 2 People in business ACTIVITY 6.1 Zhengdong HuPeng Automobile Fittings Ltd (ZHAF) is a Chinese manufacturer of electronic components used in the car industry. It was founded by Hu Peng 15 years ago. Many of the company’s workers have worked for the company all of their working lives. Two years ago Hu Peng retired and the company is now managed by his son Bo, who has a degree in Business Management and worked for several manufacturing companies before joining ZHAF. Bo believed that ZHAF had not been working efficiently for several years and that is why it was less profitable than its competitors. First, he introduced new machinery. ZHAF now produces more car parts with fewer workers. Six workers were made redundant. Other workers were trained to use the new machinery, but they find the work boring. They liked their work when it had more variety and they used their skills. Next, Bo looked at the workers’ wages. The employees at ZHAF earned a higher wage than that offered by similar businesses. Bo felt that some employees were paid too much because they did not produce as many items as other, more hard-working employees. He introduced a new pay system. Many workers did not receive a pay rise. However, they can earn a bonus if they meet production targets set by Bo. Workers say that the targets are too high to achieve. Their pay is now lower than that of similar businesses. In the past six months many workers have left the business, and absenteeism is at an all-time high. Production levels have fallen while customer complaints about late deliveries and poor quality have risen. 1 Identify factors that suggest workers at ZHAF have become less motivated since Bo took over control of the business. 2 Discuss the possible reasons that have caused the workers at ZHAF to become less motivated. 3 What does this case study tell you about the importance of having a well-motivated workforce? 4 Do you think the new pay system introduced by Bo will motivate workers? Justify your answer. 74 The concept of human needs – Maslow’s Hierarchy Abraham Maslow identified the main needs of humans. These are shown in Maslow’s Hierarchy of Needs – see Figure 6.3. SELF‐ACTUALISATION  Reaching one’s potential  ESTEEM NEEDS Respect from others, recognition for a job well done, status SOCIAL NEEDS Friendship, accepted, belonging to a group  SAFETY NEEDS Health and safety at work, job security, free from threats  PHYSICAL NEEDS Water, food, shelter, clothing and rest  Figure 6.3 Maslow’s Hierarchy of Needs

5: Business objectives and st6a:kMeohtoivldaetirnogbwjeocrtkiveers Maslow believed that humans have five levels of need: 75 Contract of employment: ■ Physical needs – these are the basic needs we must have to be able to survive. They see Chapter 8, page 119. include water, food, shelter, clothing and rest. ■ Safety needs – we need to be safe from physical danger and individuals need to know that they have job security. ■ Social needs – most people want to be accepted by others and to feel that they are loved and trusted. It is important to have friends and belong to a group where social activities can be shared and enjoyed together. ■ Esteem needs – individuals want to be respected and to have their achievements recognised by others. For some people having a certain status is also an important need. ■ Self-actualisation – not everyone will reach their full potential, but for some individuals it is a very important need. Even the most successful people rarely achieve self-actualisation because they will always set themselves another challenge. According to Maslow, all humans start at the lowest level of need – physical needs. Once they have satisfied their physical needs, then they are motivated to try to reach the next level – safety needs – and so on, until they reach the top level of need – self-actualisation. Once a need has been satisfied it is no longer a motivator. Maslow’s Hierarchy of Needs is important to managers because it is possible for an individual to satisfy some, or all, of their needs at work. If managers want to motivate workers then they have to organise work so that individuals are able to satisfy their needs. If managers do this, and worker motivation is improved, then this will increase business efficiency. Workers will produce more, better quality, goods and services for customers. This will improve competitiveness and help to reduce business costs and improve profitability. However, there are some limitations of Maslow’s theory of motivation. These include: ■ It is often difficult to identify how much of each need has been met and which level each worker is on. ■ Money might also satisfy esteem needs as well as those lower down the hierarchy. ■ Not everyone has the same needs as those in Maslow’s Hierarchy. ■ Self-actualisation is rarely, if ever, achieved. Therefore, unless more challenging tasks are always being provided, it is unlikely that work will help to satisfy this need. There is the risk that if jobs are no longer challenging that the worker becomes demotivated. ACTIVITY 6.2 Each of the following could help an individual to achieve one of the needs identified by Maslow. Copy and complete the table below by entering each of these into your table against the correct level. 1 Pay received is high enough to buy basic needs. 2 The manager praises workers. 3 Workers are given a contract of employment setting out their pay and working conditions.

Cambridge IGCSE Business Studies Section 2 People in business 4 Workers are organised into teams or groups. 5 Workers are provided with protective clothing. 6 Work is challenging. 7 The business is very profitable. 8 Workers are given responsibility for completion of tasks. 9 Workers are given free meals at work. 10 Workers are given the opportunity to develop new skills to increase their potential. 11 Workers are given the opportunity for promotion. 12 Social activities are organised for workers. 13 Workers receive payment during periods of illness. 14 Respect from other workers. 15 Workers are trained how to use equipment correctly. Level of need How a business helps individuals to satisfy their needs Physical needs Safety needs Social needs Esteem needs Self-actualisation 76 KEY TERMS Key motivational theories: Taylor and Herzberg The theory of economic Many researchers have carried out studies to try to find out what motivates people man: the view that humans are at work. These studies have produced a number of motivational theories. Many of only motivated by money. these theories have identified that individuals are motivated by the wish to satisfy Piece-rate: paying workers for ‘needs’. You have already seen how Maslow’s research described these needs. You each unit produced. are now going to learn about the work of other motivational theorists and how their studies may help management to motivate workers. F. W. Taylor – scientific management theory Taylor’s scientific management theory aims to reduce inefficiency in the workplace by finding the quickest method of performing each task and then training all workers to use this method. The scientific management approach is still used in many countries today; for example workers involved in flow production specialise in performing one task really well. Taylor believed that workers were motivated by money alone. To get workers to increase their efforts they had to be rewarded with more money. This is sometimes known as the theory of economic man. The piece-rate method of paying production workers developed from Taylor’s research. Workers are paid a fixed amount for every unit they produce. If workers are motivated by money then they will work harder because the more units they produce the more they will be paid.

5: Business objectives and st6a:kMeohtoivldaetirnogbwjeocrtkiveers Flow production: see Chapter 15 page 209. Figure 6.4 A flow production process Fredrick Herzberg – two-factor theory 77 Herzberg wanted to find out about the factors that motivated people at work. His research identified two groups of factors which he called hygiene factors and motivators. These factors are shown in Table 6.1. KEY TERMS Hygiene factors Motivators ■ Working conditions ■ The work itself Hygiene factors: the factors that ■ Relationship with others ■ Responsibility must be present in the workplace ■ Salary or wage ■ Advancement to prevent job dissatisfaction. ■ Supervision ■ Achievement Motivators: the factors that ■ Company policy and administration ■ Recognition of achievement influence a person to increase Table 6.1 Herzberg’s two-factor theory their efforts. TOP TIP Hygiene factors Don’t assume that an increase 1 Working conditions – includes things such as how clean and safe the workplace in pay automatically motivates is and what facilities are provided for workers, for example washrooms, drinks workers to increase output. There machines and canteen for meals. may be other factors that cause an increase in output. 2 Relationships with others – this factor considers the importance to a worker of having good working relationships with other workers – the need for friendship and to belong to a group – and a good relationship with managers – to be treated fairly and with respect. 3 Salary and wage – Herzberg argued that people had to be paid enough to encourage them to do a job, but money was not enough for them to want to do the job well.

Cambridge IGCSE Business Studies Section 2 People in business KEY TERM 4 Supervision – this factor considers the importance of leadership style and how closely workers are supervised. Job dissatisfaction: how unhappy and discontent a person 5 Company policy and administration – these are the rules and procedures which is with their job. control and affect the way that workers work and their relationship with others in the workplace. According to Herzberg, hygiene factors must be present at a level which is acceptable to workers to prevent job dissatisfaction. Improving hygiene factors makes job dissatisfaction less likely, but will not motivate workers to work more efficiently. Motivators 1 The work itself – the tasks that workers do are an important influence on the motivation of workers. The work needs to be varied and challenging and Herzberg suggested that this could be achieved by introducing job enrichment. 2 Responsibility – giving workers more responsibility for the tasks they perform, for example allowing them to make decisions about their tasks. The manager is showing that they trust workers and value their contribution. 3 Advancement – workers have the opportunity for promotion. 4 Achievement – workers need to feel that they have reached challenging goals. 5 Recognition of achievement – workers need to have their achievements recognised by management and the other people they work with. TOP TIP According to Herzberg, managers can use one or more motivators in order 78 It is more important that you to increase the motivation of workers. However, these motivators will not can apply the ideas of different work unless there is an acceptable level of hygiene factors to prevent job theories to business situations dissatisfaction. than to list all the findings. The effect of hygiene factors and motivators on worker satisfaction and motivation is shown in Figure 6.5. Workers are Hygiene Workers Motivators Workers are dissatisfied factors are not satisfied and dissatisfied and but are not motivated demotivated motivated Figure 6.5 Hygiene factors and motivators

5: Business objectives and st6a:kMeohtoivldaetirnogbwjeocrtkiveers ACTIVITY 6.3 The senior managers of Farook Fashions (FF) are concerned about the fall in productivity at one of its factories – Factory A. The company’s Human Resources Director has produced the following data for last year. Average weekly productivity per worker Factory A Average for FF’s other factories Average number of days’ absence per 220 worker 19 350 Number of workers who left 8 Average weekly wage 40 18 $126 $125 Factory A employs 500 workers and is the oldest of FF’s factories. Workers in Factory A have often complained to the factory 79 manager about their poor working conditions compared to workers in FF’s other factories. In a recent meeting when this issue was raised again, the factory manager said: ‘I do not understand why you keep complaining about working conditions. You all have well-paid jobs. All factories are noisy and dirty places, this one is no different.’ This was a typical comment from a manager who was not very well liked by the workers. He never showed any interest in them. The only time he spoke to them was to give orders or to tell them off for breaking one of the many rules he had introduced when he became manager 20 years ago. 1 Identify two factors that suggest workers in Factory A are less well motivated than in FF’s other factories. 2 Calculate the percentage of workers who left Factory A in the last year. 3 Do you think that money is the cause of poor motivation at Factory A? Justify your answer. 4 How might the senior managers at FF use Herzberg’s two-factor theory to improve productivity at Factory A? TEST YOURSELF 1 List, in the correct order from bottom to top, the five levels of need as identified by Maslow. 2 Explain the difference between Herzberg’s motivators and hygiene factors. KEY TERMS Methods of motivation Financial rewards: cash and Managers can motivate workers in several ways. These can be divided into non-cash rewards paid to workers financial rewards and non-financial rewards as shown in Figure 6.6, page 80. which are often used to motivate workers to increase their efforts. Financial rewards and methods Non-financial rewards: The theorists we looked at earlier agree that money is an important reason why methods used to motivate people work. However, they do not all agree on how important money is as a workers that do not involve giving motivator. Taylor’s view of ‘economic man’, for example, argues that money is any financial reward. the most important motivator, whereas Herzberg’s theory only sees money as important for preventing job dissatisfaction, but not as a ‘motivator’.

Cambridge IGCSE Business Studies Section 2 People in business Methods of Motivation Financial rewards Non‐financial rewards • Hourly wage rate • Job rotation • Salary • Job enlargement • Piece‐rate and commission • Job enrichment • Bonus schemes • Quality circles • Fringe benefits • Team working • Profit‐sharing • Delegation Figure 6.6 Financial and non-financial methods of motivation If money is an important motivator then managers need to consider how best to use it to achieve a well-motivated workforce. The methods of financial rewards identified in Figure 6.6 are explained below. KEY TERM Hourly wage rate Hourly wage rate: payment to An hourly wage rate means that workers are paid a fixed amount per hour worked. workers based on a fixed amount for each hour worked. The longer a worker is at work the more they get paid. For example, if a worker is paid $5 per hour and works 40 hours in a week, then they will earn a wage of 80 $5 × 40 = $200. This is the most common method of paying production workers and non- managerial staff. The main advantage of this method is that the business only pays workers for the number of hours they are at work. However, the disadvantage is that workers’ pay is not linked to how much they produce. For example one worker might produce an average of 20 units per hour and another may produce 28 units per hour, but both workers will receive exactly the same pay. KEY TERM Salary Salary: fixed annual payment to With a salary, workers are paid a fixed amount per year, which is usually paid certain grades and types of staff monthly. This method is best used for workers whose work effort is not directly not based on hours worked or linked to production, for example supervisors, managers and professional staff. output. The advantage of this payment method is that workers do not receive more pay if they have to work longer hours to complete a task. The main disadvantage is that salary is not linked to worker effort or the amount produced. KEY TERM Piece-rate Piece-rate: payment to workers Piece-rate means that pay is based on the number of units of output workers based on the number of units produce. For example if a worker is paid $0.25 for every unit they produce, and they produced. produce 600 units in a week, then their wage will be $0.25 × 600 = $150. Piece-rate systems are only used to reward production workers. The main advantage of this method is that workers are only paid for the number of items they produce. The main disadvantage is that the quality of goods produced may be poor because workers try to work too quickly to increase their output and pay.

5: Business objectives and st6a:kMeohtoivldaetirnogbwjeocrtkiveers KEY TERM Commission Commission: payment to sales staff based on the value of the With commission, pay is based on the value of sales made by staff. This method is items they sell. only ever used to reward sales staff. KEY TERMS The main advantage of this method is that pay is linked to the value of goods Bonus: an additional reward sold. The main disadvantage of this payment method to workers is that they are paid to workers for achieving never certain about how much they will earn. This may mean that they leave as targets set by managers. they cannot guarantee that they will earn enough to pay for their basic needs. Performance-related pay: This might then become a disadvantage to the business because they will have to a bonus scheme used to reward spend more time and money on recruiting and training new workers. staff for performing to the required standard. Bonus scheme A bonus scheme is a method of performance-related pay. Workers receive an additional payment for achieving a target set by managers. This method can be used to reward any individual worker or group of workers where a performance target can be set by managers. If the targets set by managers are realistic then they can motivate workers to work harder because they know they will receive a bonus. The main advantage to businesses of this method is that it is linked to performance targets. Workers are only awarded a bonus if they increase their productivity. An increase in productivity will reduce average costs. The main disadvantage is that if the targets set are unrealistic then workers could become demotivated. Also, if the target is group-based and the target is reached, all workers in the group will receive the bonus even if some have worked harder than others to achieve the target. This could lead to conflict between members of the group. 81 ACTIVITY 6.4 The table below shows how the pay and average weekly output of workers at three different companies is calculated. Hourly rate Company A Company B Company C Piece-rate $4.75 – $4.50 Bonus based on producing more – – than 1,900 units per week $5 $0.10 $15 Hours worked – Average weekly output per worker 40 40 1,850 40 1,950 2,000 1 Calculate the average weekly wage for a worker in each of the three companies. Show your workings. 2 Based on your results to question 1, which company would you choose to work for? Justify your answer. KEY TERM Fringe benefits Fringe benefits: non-cash Fringe benefits are an alternative to cash payments. They include discounts on rewards often used to recruit or company products, company cars, health insurance and pensions received by the retain workers and to recognise the workers in a business. status of certain employees. All workers could receive fringe benefits. It is more usual for different types of fringe benefits to be linked to the individual’s status within the business.

Cambridge IGCSE Business Studies Section 2 People in business KEY TERM For example all workers might receive a discount if they want to buy the firm’s Profit-sharing: an additional products, but only managers receive a company car. payment to workers based on the profits of the business. The main advantage of fringe benefits is that they can help in the recruitment and retention of workers. The main disadvantage is that fringe benefits are often TOP TIP linked to status and not performance. Focus on understanding how different rewards may motivate Profit-sharing workers not just learning what the different rewards are. Profit-sharing is an additional payment to all staff based on the profits of the business. It is usually paid once a year. It may be in the form of a cash payment, calculated as a percentage of a worker’s wage or salary, or workers may be given shares in the company. It can be used to provide additional financial reward to all workers, or just certain groups of workers. The argument for using profit-sharing to reward workers is that everyone – from senior managers to production workers – has contributed to the business earning the profit and they should all, therefore, share in the success. The main advantage is that profit-sharing is directly linked to the performance of the business. The better the performance, the higher the profit and the greater the share of profits for workers. The main disadvantage is that any profit given to employees might reduce the dividends to shareholders or reduce the amount available to be reinvested into the business. ACTIVITY 6.5 82 Read the two job adverts for vacancies at the same health and fitness company and then answer the questions that follow. Advert A Advert B Director of Communications and Marketing Receptionist We require a full-time receptionist for our new Salary package $100,000+ health and fitness club. Yaimonudpomartufarsinettnhtdhalvyaenaanfodcrmocnhafieldeqerufnuatllitfipeceleartpsioohnnosan.leitymisanmnoerre Wcasiilnrnqoenteertaumclaeaadaaotrmmtelpreemiefigreudbcsmyrlnioah.tseiiutoiocoYnpionakuonvnisitsaiucnrikos,olagwinsfnltalaiskfsimorolr,lie-lnprlherisdsearanaoaealnvatsfc.aneeonehlAdsldyaxiaspnwcmiispgnroeeetrnaprcoaqlolar-topukindhlomriegtreeinoeatavmiatmntelrteltguaahleok,pcnnpaekierctoenxafrofddoceetfiercsosfiwtloshlttnenrairisoasnderntdtsekasgel yic Wawnoehrckoauanrreloyfbwfeeartgwaeegeroanote3d7owfao$nr6dkipn4eg2rehhnoovuuirrrso. nHpmeoruewrnsteoaefnkd. senior management post. Wirinneceslaluutoredfadfeenrcbaeaoh,nnicguaohstmtebrsapa,csactinicovyemsparpeelaawnrnsyayiropdcnlsauarsp,nfpadrceekerrefaohlgoremecaaatlttonhiocne No experience necessary as full training will be expenses. provided.

5: Business objectives and st6a:kMeohtoivldaetirnogbwjeocrtkiveers 1 Identify the pay systems the businesses are using to recruit workers for these two jobs. 2 How much will the receptionist earn in a week if they work 40 hours? 3 Using Advert A, identify and explain the meaning of the term ‘fringe benefits’. 4 Why do you think the business in Advert A is offering fringe benefits, but the business in Advert B is not? 5 Choose one fringe benefit you think the company can offer to attract better quality applications for the receptionist post? Explain your choice. KEY TERMS Non-financial rewards and methods 83 Job rotation: increasing variety If Maslow and Herzberg are correct about money not being enough to motivate in the workplace by allowing workers, then managers need to consider non-financial methods of motivation. workers to switch from one task to The methods listed in Figure 6.6 are explained below. another. Job enlargement: increasing or Job rotation, enlargement and enrichment widening tasks to increase variety for workers. ■ Job rotation – instead of doing the same task, workers switch from one job to another. This makes the work more interesting and helps prevent boredom. KEY TERMS Workers become multi-skilled, which helps create a more flexible workforce. Job enrichment: organising ■ Job enlargement – workers are given a greater variety of similar-level tasks work so that workers are to do. Their jobs become more interesting and, as with job rotation, this encouraged to use their full reduces boredom. abilities. Job satisfaction: how happy ■ Job enrichment – this method was developed from Herzberg’s research. Work is and content a person is with organised so that workers are able to use more of their skills and abilities. They their job. often become more involved in decisions affecting their job. Workers feel more valued by their employer and this increases their job satisfaction, efficiency and motivation. Increasing the variety or difficulty of tasks workers do, using any of the above methods, is known as job redesign. The aim of job redesign is to make the work more interesting and more challenging for workers. It can also help them to learn new skills which may help their chances of promotion. ACTIVITY 6.6 Ever since the management of Company X increased automation and introduced new technology into the workplace, production line workers have not been happy. Many have left and those that remain are less productive than they used to be and absenteeism is much higher. Many of the workers no longer use their skills. The work is boring and does not have the same level of interest or challenge for workers. Company X has appointed a new operations manager, Eduardo. He has been told by the directors that he ‘must improve productivity and reduce absenteeism and recruitment costs’. Eduardo thinks that job redesign is the solution to these problems. 1 Identify two factors that may have caused motivation problems at Company X. 2 Identify and explain two benefits to Company X of improving worker motivation. 3 Do you think that Eduardo is right in thinking job redesign is the solution to the problems at Company X? Justify your answer.

Cambridge IGCSE Business Studies Section 2 People in business KEY TERMS Quality circles Quality circles are groups of workers who meet regularly to discuss work-related Quality circles: groups of issues. Workers come up with solutions to problems or suggest how improvements workers who meet regularly to can be made. The results of quality circles are presented to managers and good discuss work-related problems. ideas and solutions are introduced into the workplace. This approach is similar to Team-working: organising Herzberg’s ‘responsibility’ motivator. production so that groups of workers complete the whole unit Team working and delegation of work. Delegation: passing ■ Team working – production workers are organised into groups or teams responsibility to perform tasks and are given the responsibility for the completion of the whole task. For to workers lower down in the example, a team of workers might be responsible for the production of a organisation. complete car engine instead of individual workers completing just one small part of it. Delegation: see Chapter 7, page 92. ■ Delegation – this involves managers passing authority for the performance of tasks to lower-level workers. It is often combined with empowerment – for example, allowing workers to make decisions about how tasks are performed. ACTIVITY 6.7 Work in pairs to discuss the method(s) you think might be the most appropriate for motivating workers in each of the following circumstances. 84 1 A shop assistant who works in a large fashion outlet. 2 Workers on a production line where the level of faulty products has increased over the past three months. 3 A pizza delivery driver. 4 A marketing manager for a shoe manufacturer. 5 Someone who works as a bank cashier. 6 A car salesman. 7 A farm labourer. 8 A young university graduate who has worked for a company for 12 months. 9 Staff who work in the Research and Development Department of a cosmetics manufacturer. 10 A teacher in your school or college. Choosing methods of motivation We have seen that managers can use different methods to motivate workers. However, there is no ‘best’ method of motivation. Managers must choose the method that they think is best to motivate different types of worker. They may consider the following factors when choosing which method to use: ■ What is the cost to the business of using a particular method? Every method we have discussed above will increase costs. Can the business afford it? Will the benefit to the business of motivating workers be greater than the increase in costs

5: Business objectives and st6a:kMeohtoivldaetirnogbwjeocrtkiveers Figure 6.7 A quality circle 85 of doing so? For example, using job redesign to improve motivation might reduce the absenteeism of workers or reduce the number leaving the business. This will improve productivity and reduce recruitment costs. If this cost-saving is greater than the costs of redesigning jobs, then it has been a success. ■ Some methods of motivation can only be used for certain types of workers; for example piece-rate system is only suitable for production workers. ■ A method of motivation which works for one worker or group of workers, may not work for other workers. For example, some workers might be motivated by higher pay for working longer hours, but others might be satisfied with lower pay and longer leisure hours. TEST YOURSELF 1 Using examples, explain the difference between financial and non-financial methods of motivation. 2 What is the difference between job rotation and job enrichment?

Cambridge IGCSE Business Studies Section 2 People in business ACTIVITY 6.8 Muzmed Footwear Company (MFC) is a manufacturer of ladies’ fashion shoes in India. The company employs 200, mainly female, workers. Each worker is skilled in one part of the production process; for example ten workers cut out the shape of the soles for shoes from sheets of leather or rubber. All workers involved in the production of shoes are paid using the piece- rate system. Recently another footwear manufacturer has opened a factory in the same area as MFC. This factory is very modern and offers workers better working conditions than those offered by MFC. They pay workers an hourly rate, plus a performance- related bonus. Some workers have already left MFC to work for this new competitor. The owner of MFC is worried that he is going to lose more of his skilled workers to this new competitor company. 1 What is meant by ‘working conditions’? 2 What is meant by ‘performance-related bonus’? 3 Identify and explain one advantage and one disadvantage to MFC of its workers being skilled in one part of the production process. 4 Identify and explain two reasons why workers might be leaving MFC to work for the new competitor? 5 The owner of MFC is considering changing the way he pays his workers. Do you think this is a good idea? Justify your answer. 86

6: Motivating workers Revision checklist Exam practice questions ● Many factors which motivate people to work 1 The diagrams below show the payment received by were identified by the research of Taylor, workers in two manufacturing companies, Company A Maslow and Herzberg. and Company B. ● Financial and non-financial motivation Company A is a manufacturer of televisions. The number of methods can be used to make sure a televisions produced by the workforce during the past four business has a well-motivated workforce. weeks were 270, 240, 280 and 250. Company B are manufacturers of pottery items. Workers do not require any special skills to complete their tasks. Many workers leave before completing one year of employment with the company. Company A pays workers based on an hourly rate. Workers work an average of 40 hours per week. In addition to their wage, Company B provides all workers with fringe benefits. Company A Company B Average weekly wage 87 Average weekly wage $200 Output per week Output per week a What is meant by ‘fringe benefits’? [2] b Calculate the hourly rate Company A pays its workers. [2] c Identify and explain the method of payment [4] Company B uses to reward its workers. TOP TIPS d Identify and explain two financial methods [6] Company A could use to improve the motivation Information in examinations of its workers. might be presented in the form of diagrams. Make sure you e The management of Company B believes that money understand what such diagrams is the only way to motivate workers. Do you agree? show. Justify your answer. [6]

Cambridge IGCSE Business Studies Section 2 People in business 2 ABC is a candy manufacturer. It employs 50 workers. Workers are paid $150 per week based on a 40-hour week. Workers also receive a bonus if they reach production targets set by management. The factory manager receives a salary of $30,000 per year plus a company car. All managers at ABC are part of a profit- sharing scheme. They also receive private health insurance. The motivation of production workers is low. They leave the company after an average of only 16 months. a What is meant by the term ‘bonus’? [2] [2] b What is meant by the term ‘motivation’? [4] c Identify and explain two benefits to ABC of offering [6] fringe benefits to its managers. [6] d Identify and explain how any two non-financial methods of motivation might be used by ABC to improve the motivation of production workers. e Do you think that the production workers should receive the same fringe benefits and share of profits as the factory manager? Justify your answer. 88 Total available marks 40

7 Organisation and management Objectives Introduction In this chapter you will learn about: All businesses, except for a sole trader, will need some form of organisational structure. Everyone in the business – even if it is just two partners – needs to know ■ simple organisation charts their roles and responsibilities and what the roles and responsibilities are of others ■ the role of management in the business. This will help the business to operate efficiently. ■ leadership styles ■ trade unions. In this chapter you will learn the important features of organisational structure and how these can be represented on a diagram. KEY TERMS You will also study the different styles of leadership and the importance of Organisational structure: the management functions. formal, internal, framework of a business that shows how it is Simple organisation charts 89 managed and organised. Functional departments: the As a business grows in size it divides into separate departments. Each main activities of business: department may specialise in the main functional areas of business such as finance, marketing, operations, marketing or finance. The functional departments of Company A are shown human resources and research in Figure 7.1. and development. This is a very simple organisation chart. Now let’s look at a more detailed example. The chart in Figure 7.2 is also of Company A, but this time it shows the structure of the company and its departments in more detail. Figure 7.1 The functional departments of business

Cambridge IGCSE Business Studies Section 2 People in business Chief Executive (CEO) Finance Human Marketing Operations Research and Director Resources Director Management Development Accountant Director Director Director Recruitment Training Sales Manager Sales Manager Factory R & D Manager Manager Manager (North) (South) Manager Credit Cashier Recruitment Training 6 Sales staff 4 Sales staff Supervisor Supervisor 3 R & D staff Controller Administrator Administrator Team A Team B 11 Production 5 Production workers workers Figure 7.2 Detailed organisation chart Simple hierarchical structures Figure 7.2 shows a simple hierarchical structure. The main features of this organisational structure are: ■ hierarchy ■ chain of command ■ delegation ■ span of control. 90 Hierarchy KEY TERM This describes the different levels in an organisational structure. In Figure 7.2, each of the five levels of the organisational structure is represented by a different colour. Hierarchy: the number of levels Production workers are at the lowest level of the hierarchy and the Chief Executive in an organisational structure. is at the top level. In larger organisations as you move from the top to the bottom of the hierarchy there are more and more people at each level. This is because it is not possible for one person or a group of senior managers to control the work of all employees. Middle managers, and perhaps supervisors below them, are needed to control employees. The tasks become simpler as you move down the hierarchy so a wider span of control is possible at the bottom than it is at the top. People who are on the same level in the organisational structure have the same status. For example, in Figure 7.2 the Accountant, Training Manager and Factory Manager are of equal status. There are many levels to an organisation’s structure

7: Organisation and management Figure 7.3 Organisation chart as a pyramid 91 ACTIVITY 7.1 Use Figure 7.2 to identify two other individuals who have the same status in the organisational structure, but who are not the same status as the Factory Manager. KEY TERM Chain of command Chain of command: the route As a business grows it will employ more and more workers. It will not be possible for through which authority is passed the person at the top to have effective control of all workers. The day-to-day control down through an organisation. of workers becomes the responsibility of managers lower down the hierarchy. The term chain of command describes the route through which authority is passed down to these managers from the top. Each person in the chain of command is directly responsible to the person immediately above them and directly responsible for the person(s) directly below them. In Figure 7.2 the Accountant is directly responsible to the Finance Director. ACTIVITY 7.2 Using Figure 7.2, which of the following statements is correct? 1 The recruitment manager is directly responsible to the recruitment administrator. 2 The recruitment manager is directly responsible for the Human Resources Director. 3 The recruitment administrator is directly responsible to the Human Resources Director. 4 The recruitment manger is directly responsible to the Human Resources Director.

Cambridge IGCSE Business Studies Section 2 People in business KEY TERM In a typical business situation, instructions are passed down the chain of command, whereas information about performance, for example monthly sales Delegation: passing authority figures, are passed up the chain of command. down through the organisational hierarchy to a subordinate. Delegation When authority is passed down the chain of command this is known as delegation. In Figure 7.2, the Marketing Director delegates authority for specific tasks to the two Sales Managers. They, in turn, delegate authority for the performance of certain tasks to the sales staff. However, it is important to know that responsibility for the successful completion of a task remains with the manager. If mistakes are made, or the task is not completed, then the manager who delegated the task will have to take the blame. The advantages and disadvantages of delegation, to both the business and employees, are discussed later in this chapter. ACTIVITY 7.3 Using Figure 7.2, are the following statements true or false? 1 The Factory Manager of Team B delegates authority to ten workers. 2 The Human Resources Director delegates authority to the Recruitment Manager. 3 The CEO delegates authority to the Cashier. 4 The Factory Manager delegates authority to two supervisors. 5 The Cashier delegates authority to the Credit Controller. 92 KEY TERM Span of control Subordinate: an employee who Each manager or supervisor is in charge of a number of employees, or subordinates. is below another employee in the The number of subordinates reporting to each supervisor or manager is called the organisation’s hierarchy. span of control. In Figure 7.2, the CEO has a span of control of five – the directors of each business function. ACTIVITY 7.4 In Figure 7.2, who has exactly the same size span of control as the CEO? KEY TERM A span of control can be described as ‘wide’ or ‘narrow’ depending on how many subordinates a person is responsible for. For example, using Figure 7.2 we could Span of control: the number of say the supervisor of Team A has a wide span of control because they are directly subordinates reporting to each responsible for eleven workers. However, the Factory Manager, who is only directly supervisor/manager. responsible for two workers, has a narrow span of control. There are a number of factors that affect the size of the span of control including: ■ The difficulty of tasks – if the work that subordinates do involves simple and repetitive tasks, then a wide span of control can be used. The more complex the task subordinates do, the more likely that a narrow span of control will be used. ■ The experience and skills of workers – highly skilled and experienced workers may require less control than those who are less skilled and less experienced. The span of control will often be wider when subordinates are more skilled and more experienced.

7: Organisation and management TOP TIP ■ The size of the business – larger businesses are often able to afford to employ more managers than smaller businesses. The span of control of individual Note that many of the managers in a large business is often narrower than that for managers in small advantages of one size of span businesses. of control are the disadvantages of the other size of span of ■ Levels of hierarchy – managers in tall organisation structures will usually have control. Learn the advantages narrower spans of control than managers in flat organisation structures. and disadvantages of narrow span of control and the opposite ■ Management style – some businesses use a management style that has greater will be the disadvantages and control over the workforce than others. In this type of business, managers have a advantages of wide span of narrow span of control. control. There are a number of advantages and disadvantages of wide and narrow spans of control. These are shown in Table 7.1. Wide span of control Narrow span of control Advantages Disadvantages Advantages Disadvantages Less expensive as fewer Fewer managers/supervisors Effective communication is Communication and managers/supervisors are reduces promotion easier. decision-making is often needed. opportunities. slower. Less supervision improves Less control over Better control over workers More expensive because more worker motivation. subordinates work. and their work. managers are needed. Faster communication and Effective communication may More managers/supervisors More supervision may reduce decision-making. worker motivation. be difficult. increases promotion opportunities. 93 Table 7.1 Advantages and disadvantages of narrow and wide spans of control Tall or flat? Organisational structures may be tall or flat, depending on the number of levels in the hierarchy. Tall organisations have many levels of hierarchy. Each level in the hierarchy, except for the bottom level, is a layer of management. Because a tall organisational structure has several layers of management, and therefore more managers, the span of control for each manager will be narrow. The chain of command is long. Communication and decision-making are often slower because they must pass through several layers. An example of a tall organisational structure is shown in Figure 7.4. 1 2 2 333 3 444 4 55 5 5 Figure 7.4 A tall hierarchical structure

Cambridge IGCSE Business Studies Section 2 People in business Flat organisations have few levels of hierarchy, which means the chain of command is very short. Communication and decision-making are much quicker in a flat structure because there are very few levels for these to pass through. There are fewer managers in a flat structure so the span of control is wide. An example of a flat organisational structure is shown in Figure 7.5. 1 2222222 Figure 7.5 A flat organisational structure ACTIVITY 7.5 Produce an organisation chart for your school or college. Use your diagram to provide examples of hierarchy, chain of command, delegation and span of control. Would you describe your school’s/college’s organisational structure as tall or flat? Justify your answer. KEY TERM Delayering Delayering: reducing the size of Sometimes a business with a tall organisational structure will reduce the levels in the hierarchy by removing one or 94 its hierarchy to save costs. This is known as delayering. more levels – most often middle Delayering usually involves cutting out middle management. Middle management. management are often the managers of departments such as finance and marketing, or managers of different units within a business. Figure 7.6 illustrates the effect on an organisation of delayering. In this example, level 3 has been removed from the hierarchy to reduce the number of levels from TOP TIP five to four. The organisational structure might still be described as tall, but it is not as tall as it was before the delayering. You can see that level 3 is middle management There are a lot of technical terms because it is between the senior management in level 1 and those workers at the in this chapter. You will find bottom of the hierarchy in level 5. them easier to understand and explain if you construct a simple organisation chart. 1 21 32 44 55 Figure 7.6 The effect of delayering a hierarchical structure There are several advantages and disadvantages to a business of delayering, as showing Table 7.2.

7: Organisation and management Advantages of delayering Disadvantages of delayering Reduces costs. Increased workload for managers who remain could mean that tasks are not completed on time or the quality of decision-making is not as good. Reduces the chain of command so communication and Business may have to make redundancy payments to decision-making should be quicker and more effective. managers who lose their jobs. This is a one-off increase in costs. Wider span of control increases the opportunity for delegation. Workers who remain might fear redundancy and this reduces This helps develop workers’ skills and could motivate workers their job security. who are given more trust by managers. Senior managers are in closer touch with what is happening in Wider span of control after delayering might reduce the the business. effective management of subordinates. Table 7.2 Advantages and disadvantages of delayering KEY TERMS Centralised or decentralised? 95 Centralised organisation: one One of the most important issues a business needs to deal with is who makes where all the important decision- the decisions. Do senior managers at the centre of the organisation make all the making power is held at Head decisions? Or is some of this authority for decision-making delegated to lower level Office, or the centre. managers? This decision involves making a choice between being a centralised organisation or a decentralised organisation. Decentralised organisation: one where the decision-making A centralised organisation is one where decision-making power is held at the powers are passed down the top, by senior managers, and then passed down to lower levels in the hierarchy organisation to lower levels. through the chain of command. Many international franchise companies, such as Pizza Hut, operate a mainly centralised organisation structure. They do this to make sure that they control what each franchised outlet offers to customers. Pizza Hut needs to make sure that customers receive the same level of service and quality products in every one of their outlets. In a decentralised organisation the authority to make some decisions is delegated to lower levels in the hierarchy or, in the case of a business with several production facilities or operating in different locations, to the managers within those areas. An example of a business that may have a decentralised structure is a national hotel chain such as Avari Hotels Ltd., Pakistan. Although the company directors are based in the Head Office in Karachi, each of their hotels in Pakistan and Dubai have managers who make decisions about how best to run their hotels. Centralised and decentralised organisations have a number of advantages and disadvantages. Some of the most important of these are shown in Table 7.3. Centralised organisation Decentralised organisation Advantages Disadvantages Advantages Disadvantages ■ Decision-making is often ■ Slower communication. ■ Decisions are made ■ Decisions taken might quicker. based on local needs. not be in the interests of ■ Unable to respond quickly the whole business. ■ Decision are taken for to changes in local markets. ■ Can be used to train the benefit of the whole junior managers. ■ Poor decisions might business. ■ May reduce worker be made because motivation. ■ Delegation helps managers lack skills and ■ Greater use of specialist to improve worker experience. staff improves decision- motivation. making. Table 7.3 The advantages and disadvantages of centralised and decentralised organisations

Cambridge IGCSE Business Studies Section 2 People in business KEY TERMS Roles, responsibilities and inter-relationships Directors: appointed or elected Directors and Chief Executive Officer members of the Board of Directors Directors are the most senior level of management in any limited company. They of a company who have the may be employees of the business and be responsible for a specific function, for responsibility for determining example Marketing Director or Operations Director. Some directors are elected by and implementing the company’s the shareholders at the Annual General Meeting (AGM). The responsibilities of policy. Some directors might also directors include: have a management role, for example a Marketing Director. ■ setting strategy – the long-term plans for the business ■ making sure that the resources are available to achieve objectives Annual General Meeting (AGM): ■ reviewing the performance of managers a meeting for shareholders that ■ protecting the interests of shareholders and other stakeholders limited companies must hold ■ providing leadership to ensure the success of the business. once every year. 96 KEY TERMS An Annual General Meeting (AGM) Chief Executive Officer (CEO): The Chief Executive Officer (CEO) has overall responsibility for the day-to-day the most senior manager management of the business and implementing the decisions of the Board of Directors. responsible for the overall performance and success of a Managers company. The day-to-day running of a department is usually the responsibility of a manager. Manager: an individual who is in For example, the Human Resource Manager is responsible for making decisions charge of a certain group of tasks, about the day-to-day running of the Human Resource Department. or a certain area or department of a business, for example Factory The main responsibilities of all departmental managers include: Manager. ■ making sure that the decisions of the directors are carried out Limited company: see ■ delegating tasks to members of their department Chapter 4, page 48. ■ taking the decisions needed to achieve departmental targets ■ motivating workers in the department so that they work hard to achieve the department’s and the company’s objectives ■ solving day-to-day problems that may arise within the department.

7: Organisation and management KEY TERM Supervisors and other workers Supervisor: an individual who In a large department where there are many workers, supervisors may be checks and controls the work of responsible for giving out tasks to the workers, making sure they carry out the tasks subordinates. and checking the quality of the work. TEST YOURSELF Other workers in a business must work together and with their manager to: ■ complete their tasks efficiently and at the required quality standard set by managers ■ work towards achieving individual, group or departmental targets. 1 What is the purpose of an organisation chart? 2 Why are managers important? ACTIVITY 7.6 97 Read the following example and then answer the questions that follow. Mohinder is the owner of three restaurants. Each restaurant has a manager and employs one full-time chef and other full-time and part-time kitchen and front-of-house staff. Mohinder has produced the following organisation chart for his business. Mohinder Manager of Manager of Manager of Restaurant A Restaurant B Restaurant C 1 chef 1 chef 1 chef 4 full‐time staff 2 full‐time and 1full‐time and 3 part‐time staff 5 part‐time staff Figure 7.7 Organisation chart for Mohinder’s business The manager of each restaurant is responsible for recruiting his/her own workers, but all other decisions are made by Mohinder. Mohinder prefers to have a centralised organisation structure. Mohinder has an individual weekly meeting with each manager and a monthly meeting with all three managers together. These meetings are used to compare and discuss the performance of the restaurants. 1 What is meant by ‘manager’? 2 Use the organisation chart produced by Mohinder to explain the meaning of the following terms: a hierarchy b span of control c chain of command 3 Identify and explain one advantage to Mohinder’s employees of the organisation chart. 4 Explain two benefits to Mohinder and his business of ‘delegation’. 5 Do you think Mohinder is right in preferring a centralised organisation structure? Justify your answer.

Cambridge IGCSE Business Studies Section 2 People in business The role of management In most organisations managers are responsible for: ■ setting objectives ■ motivating workers ■ making sure workers have the resources they need to complete their tasks. Functions of management All managers perform five functions, as shown in Figure 7.8. Functions of  Management Planning Organising Commanding Coordinating Controlling Figure 7.8 Functions of management Planning Planning is about looking at where the business is now and where it wants to be in the future. Once this has been decided, management must then set clear objectives and decide on the actions needed for these to be achieved. 98 Organising This function of management is about preparing and organising the resources needed to achieve the planned goals and objectives. Management will have to decide the best way of completing important tasks at the lowest possible cost to the business. Commanding This function involves the control and supervision of subordinates. Commanding should also aim to motivate workers towards achieving the planned objectives. Coordinating Coordinating is making sure that all of the different parts of the business are working together towards achieving the business’s goals and corporate objectives. Controlling This final function of management involves checking to make sure that the plan is working. Will it be completed on time and to the required standard? If not then action must be taken to correct it. As well as these five functions, managers need to: ■ understand the people who work for them ■ set a good example ■ treat subordinates fairly ■ delegate tasks ■ communicate effectively.