Unit 2Chapter 6

The Business OrganisationExpanding a BusinessMethods of Expansion

Conflict Between StakeholdersChoosing the right legal structure

Changing business aims and objectives

Social costs and benefitsLocation / Going Global

Learning ObjectivesUnit 2 is all about how and why businesses grow and the main issues that expansion raises. Chapter 6 looks at how businesses grow and how their objectives may change as they growAt the end of this chapter you will be able to

Understand why a business owner may want to expand the businessUnderstand the different ways a business can growUnderstand how business growth can affect stakeholdersUnderstand the differences between private and public limited companiesUnderstand the objectives that an expanding business might haveUnderstand the social costs and social benefits of a businessUnderstand the factors that should be considered when relocating a growing business

What you should already knowThe objectives that the owners of a newly formed business might haveThe different legal forms of small businessesThe importance of the location decision for a new business

What do you know about growing a businessHow different ways do you think a business could growThink about a manufacturer of beer – how could it grow?Think about a business with one or two retail shops – how could it grow?You have 5 minutes to discuss this in pairs and then we will discuss as a class

6.1 Expanding a BusinessBusiness expansion means that the output (how much you make) and sales will increase over a period of timeIf this is happening it may indicate that the business owner is running a successful firmSurvival may be the main aim when a firm is first set up but as time goes on objectives will changeOne of these objectives may be to expandThere are benefits to expanding but there are also risks

6.1 Expanding a Business – Benefits and RisksOne reason to grow the business is to increase salesWhy would a firm want to do this?It should lead to an increase in profitsWhat are the risks?If costs increase more than sales, profit will not increaseIf the firm reduces its prices too much to get more sales there will not be an increase in profitAnother reason to grow the business is to increase market shareHow can a business increase it’s market share?It can take customers from other competitorsIf the sales of the business grow faster than total sales in the market its share of the market will increaseWhat are the benefits of growing market share?Customers may like to buy from the most popular companyRetailers might be more prepared to stock products from this businessThe risk is that other firms will also increase their sales at an even faster rate and the firm will lose market share

6.1 Expanding a Business – Benefits and RisksA third reason for growing the business is to gain economies of scaleThe more the firm produces the lower its average costsThe more the firm buys to make its products the better discount it may getThe risk is that it is much more difficult to manage a large business and a badly managed business can increase costsThe last reason for growing a business is that customers may view your business as more securepeople often feel more comfortable dealing with larger businesses because they think they will be around for the lifespan of the products they are buyingThis may increase salesAnother risk of growing at that the business may grow too quickly and end up making losses that will force them out of business

Economies of scale occur when the cost per unit falls as a business expands

Body Shop case studyIn 2006, Body Shop (the high street cosmetics retailer) agreed to be taken over by the huge French cosmetics firm, L’Oreal, for £652m. L’Oreal makes a wide range of cosmetics, including Ambre Solaire sun cream and Lancôme lipsticks. Body Shop is known for its ethical products and has over 2,000 stores in 53 countries. L’Oreal’s chairman said,‘We have always had great respect for the Body Shop’s success and for the strong identity and values created by its outstanding founder, Dame Anita Roddick. A partnership between our companies makes perfect sense.’

Why might L’Oreal have wanted to buy the Body Shop?

Answers might include:to gain its profitsto have access to its shops where it might sell its productsto benefit from its expertise and supplies and brand nameto grow its business in a fast-growing business area

6.1 Reasons for not expandingRapid growth can end in tears…why?Rapid growth is one of Starbuck’s main objectives In an economic recession Starbucks might find it has too many branches that are not making a profit

6.1 Reasons for not expandingSome business owners do not aim for the growth of their firm for several reasonsTo keep control

The larger the business the owner will have to recruit managers and the business may have to be divided into divisionsDecisions making authority will need to be given to these managers

To offer a personal service to customersPersonal service is often lost as a firm grows and the owners don’t know customers individually

To avoid too much riskExpansion means putting more money into the business

To avoid increased worry and workload Complete both activities on P93

Homework

• Activities 1 to 4• Research activity 1• Bullet points if you have not completed

them

• To be handed in next lesson (period 1 Sunday)

Recap

RecapWhat does business expansion mean?output (how much you make) and sales will increase over a period of timeWhy would a business want to expand?to increase sales in order to increase profitsto increase market shareHow can they do that?take customers from other competitorsWhat are the benefits of growing market share?Customers may like to buy from the most popular companyRetailers might be more prepared to stock products from this business

RecapWhat other reason might a business want to grow a business? to gain economies of scaleThe more the firm produces the lower its average costsThe more the firm buys to make its products the better discount it may getFor example McDonalds has to buy beef to make its burgersThe more beef it can buy the more discount it will getThe more discount it gets the lower its costs will beIf it can lower its costs it can maybe pass some of this saving onto the customer – it can give them a burger at a lower priceSo as McDonalds grows and opens more stores

it gets more customersIt sells more burgersIt buys more beefIt gets more discountCosts reduceIt can reduce its priceIt will get more customersAnd so on…….

Economies of scale occur when the cost per unit falls as a business expands

RecapSay for example McDonalds had a large factory that cost £1 million per year to runIf it made 1 million burgers then each of these burgers would cost what?£1McDonalds would have to charge its customer more than £1 for the burger to make a profitIf McDonalds made 2 million burgers how much would each one cost?£0.50McDonalds can now charge the customer less than a £1 to make a profitThis is benefitting from economies of scale

Recap£984,000 for six bikes! Diseconomies of scale

Tesco mistakenly paid Universal Cycles, who are owned by Sports Direct, £984,000 for six bicycles when they were meant to pay £984. They are still to get their money back with sports direct holding on to more than £120,000. This is a great example of Tesco suffering from diseconomies of scale as they have now become so big that no one noticed almost a million pounds being paid for 6 bikes until 10 days too late!

RecapAnother reason for growing?customers may view your business as more securepeople often feel more comfortable dealing with larger businesses because they think they will be around for the lifespan of the products they are buyingThis may increase sales

RecapWhat are the risks of expanding?If costs increase more than sales, profit will not increaseIf the firm tries to get more sales by reducing prices and it reduces its prices too much to get there will not be an increase in profit more difficult to manage a large business and a badly managed business can increase costs business may grow too quickly and end up making losses that will force them out of business

Starbucks could open too many branches and find there is not enough customers to make a profit

RecapWhy might an owner of a business decide not to grow?To keep control

Won’t need to recruit more managers and divide business into divisionsWon’t need to give decision making authority to other managers

Wants to keep offering a personal service to customersTo avoid too much risk

Expansion means putting more money into the business

To avoid increased worry and workload

6.2 Methods of Expansion – organic growthHow do you think a business could grow?There are two ways in which any business can grow

Organic or internal growthInorganic or external growth

Organic growth can be achieved in a number of ways

Open a new branch, office or factory in another locationSell franchisesExpand through internet selling

6.2 Methods of Expansion – organic growthWhy would opening branches be a good way of growing?Opening branches is good because

It is slow and steady – it is less risky and managers can manage this form of growth more easilyIt is often paid for from profits (does not need loans or the sale of shares to pay for it)

Don’t have to pay interest or lose control by selling shares

Easier to manage and controlslower growth means management will have time to consider all the risks and benefitsManagers will have experience in the market

6.2 Methods of Expansion – organic growthWhat might be the disadvantages of growing by opening branches?There are some disadvantages

It is too slow for some owners – it can take several years to significantly increase the size of the businessIf other businesses are expanding quickly the firm may lose market shareDon’t get the gains that you would from integrating with another business (inorganic)

Activity P94 and P95

6.2 growth through the internetWhat do you think the advantages of growing using the internet are?

No high costs of setting up new branchesRelatively low cost to set up Less risk – if it doesn’t work it is not so expensive to close down

Complete activity P95

Learning ObjectivesComplete our understanding of organic growthUnderstand the advantages and disadvantages of inorganic growthApply our knowledge to some real life examplesBe able to judge which type of growth is best

Recall!!• What do we know about growth so far?• Write down as many things as you can

possibly think of• See who can get the most (don’t cheat!!)

McDonald’s franchiseePaul Crocker ran a number of successful petrol station businesses before taking on a McDonald’s franchise in 1995. He now operates five restaurants in Kent with the help of his wife.

Would you buy a franchise or would you prefer to set up on your own? Why?

Answers might include:buying a franchise means you are buying into an existing businessyou can look at its track recordthe franchisor provides advice, products and expertise, which can reduce the risk of starting up

But:you have to pay a fee for the franchise and a percentage of your turnover so this may mean less profit than if it was your own businessyou may not agree with all the franchisor’s policies and want more freedom

6.2 Inorganic growthThis is also called external growthIt can be achieved with a merger or a takeoverWe use the word integration to describe the joining of two businessesYou need to know about 4 types of integration

Diversification where a business buys another business that is in a different industry

If one industry sees a fall in demand the other business may not suffer – this spreads risk

Merger – an agreement between 2 businesses to combine and operate as one business

Takeover – purchasing another business from its owners

6.2 Inorganic growthThe other 3 types of integration are

Horizontal integration where 2 businesses in the same industry and at the same stage of production join together e.g. 2 shopsVertical integration – where 2 businesses in the same industry but at different stages of production join together

Vertical forward integration (closer to the customer)Vertical backward integration (closer to the supplier)

6.2 supply chain Farm growing hops

Brewer – factory that creates the beer

customer

Pub buys the beer and sells it to the customer

Vertical Backward integration (if the pub were to buy the brewer or the hop farm

Vertical forward integration (if the brewer were to buy the pub or the farm were to buy the brewer and the pub

Think of a business and think of a supply chain for it. Then think of examples of vertical backward integration and vertical forward integration

horizontal integration (if the brewer were to buy another brewer)

BrewerBrewer Brewer

Jack Welch Case Study – example of diversificationJack Welch was a very successful boss of General Electric, a conglomerate whose businesses include electrical goods, finance and engines. Under Jack Welch the company made many takeovers and became one of the largest companies in the world.

Why do you think Jack Welch made so many takeovers?

Answers might include:enabled the business to grow quicklymeant General Electric could enter new markets quicklyhis pay and bonuses may have been linked to the size of the businessby making the business bigger it may have been safer from takeover itselfcould gain control of suppliers or increase its market share depending on the type of takeover

Football billionaires - takeoversIn 2003 Roman Abramovich, a Russian billionaire, bought Chelsea football club for around £140m. Abramovich is the main shareholder in Sibneft, a major Russian oil company. Within two years he had spent another £250m on players, a new manager and new facilities, all of which brought Chelsea great success.

Malcolm Glazer owns Tampa Bay Buccaneers, a big American football club. In 2005 Glazer bought Manchester United in a £790m takeover bid. The takeover was opposed by many United fans who were worried it would lead to an increase in ticket prices.

Why might someone want to take over a football club?

Answers might include:for interest e.g. if they like footballto diversify their business interests so they are operating in many different markets to spread riskbecause they think they can earn attractive profits from tickets and merchandising

YouTubeChad Hurley, Steve Chen and Jawed Karim set up YouTube in February 2005. Eighteen months later the business had grown so rapidly that they were able to sell it for £880m to Google.

Why do you think Google was willing to pay so much for such a new business?

Answers might include:because it was growing so fast and enabled Google to access the market quicklyenabled Google to gain access to a well-established brand without having to build it up itself over timemay have expected high future earnings e.g. through advertising revenues

6.2 Benefits/Disadvantages of Inorganic growthIt is much quicker than organic growthHorizontal integration

Can lead to a larger market shareReduces competitionEconomies of scale

Vertical backward integrationReliable supplies

Vertical forward integrationReliable outletsProtects the brand

DiversificationIf one business does not do well the other may compensate (demand may be different in different industries)

Examiner’s Tip – Questions will often ask you to identify whether a merger or takeover is horizontal or vertical

Examiner’s Tip – if you are asked about the advantages or disadvantages of inorganic growth remember to think about what type of inorganic growth it is. They are not all the same

6.2 Benefits/Disadvantages of Inorganic growthDisadvantages of inorganic growth

Expensive – may need a loan or sell sharesProblems for managing and controlling a larger businessWith vertical integration and diversification managers may lack experience of the markets

Examiner’s Tip – Questions will often ask you to identify whether a merger or takeover is horizontal or vertical

Examiner’s Tip – if you are asked about the advantages or disadvantages of inorganic growth remember to think about what type of inorganic growth it is. They are not all the same

Complete activity P97

6.1 Quick Questions1 What is organic growth? (2 marks)2 Explain two reasons why a business might

want to take over a competitor? (4 marks)3 Explain what is meant by diseconomies of

scale (4 marks)4 What is a stakeholder? (2 marks)5 Explain two reasons for selling a franchise (4

marks)Complete for next lesson

6.1 Quick Questions1 What is organic growth? (2 marks)2 Explain two reasons why a business might

want to take over a competitor? (4 marks)3 Explain what is meant by diseconomies of

scale (4 marks)4 What is a stakeholder? (2 marks)5 Explain two reasons for selling a franchise (4

marks)Complete for next lessonGo through answers

• Lesson instructions

6.3 Conflict between stakeholdersWhat is a stakeholder?Anyone that is affected by the activities of a businessExamples of stakeholders?Owners, workers, customers suppliers, banks, governmentGrowth through takeover or merger will have a different impact on each of the stakeholders – in what ways?If you are the owner how will you feel about growth?You may benefit from an increase in sales but there is more risk involved which may cause stressIf you were a worker how would you feel about growth?you might be happy because there could be more opportunity for promotion in a larger company but you might also be worried about losing your job if the business is merging with a company that has people doing the same job as you

Examiner’s Tip – think about how the takeover or merger will affect the different stakeholders

6.3 Conflict between stakeholdersHow would you feel if you were a customer?you might benefit from lower prices (due to economies of scale) but prices might also go up with less competitionHow would growth make you feel if you were a supplier?you might get more orders from a bigger business but the bigger business might demand lower pricesIf you were a bank how would you feel?you would be lending more money but there is more risk if the expansion is not successfulIf you were government how would you feel about the firm growing?you will get more tax from this larger firm but if a monopoly is created this may not be good for the public

Examiner’s Tip – think about how the takeover or merger will affect the different stakeholders

6.3 Ways to defend stakeholder interestsEvery stakeholder will have its own objectives and will take action to defend those interests during a takeover/mergerWhat could each stakeholder do?Workers?

Try to stop any job losses (defend their own job)Use trade unions to get a good settlement for people losing their jobsNegotiate better pay Argue for internal recruitment

Customers?Use consumer groups and their websites to put pressure on large firms to give value to consumersCheck prices after expansion

6.3 Ways to defend stakeholder interestsSuppliers?

Insist on reasonable prices and prompt paymentBank?

Keep a close watch on the firm’s accountIn very large firms the bank may ask for a senior manager to sit in on board of director meetings

Government?Ask the competition commission to investigate and maybe recommend that the merger or takeover is stopped

6.3 Stakeholder activity P99 Read case study below the table and on the right hand side of pageThink about the questions and discuss in pairsClass discussionHomeworkLong questions

Microsoft Word Document

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6.3 Section AssessmentQuick questionsLong questions

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Lesson Instructions• Hand in marked assessment questions

from last lesson• Create a poster that contains all the

information you need to know about choosing the right legal structure

• Use the photocopied pages you have been given and your text book P100-101

• There will be a quick quiz at the end of the lesson

• Make a note of your homework– Research activity P101

6.4 Choosing the right legal structure - Jeopardy Here are the answers - what is the question?1. This is the market for shares2. Shareholders own it3. Because there would be no limit to the amount of money they would

lose if they didn’t have it4. It can sell shares to the public and raise more money5. It can’t control who buys its share and is more regulated so it

spends a lot of time working on information such as finances to give to shareholders

6. This is when the shareholders and managers have different objectives

7. This is when a private limited company decides to become a plc and sells shares to the public on the stock exchange

8. It has more status than a sole trader and can attract private investors

6.4 Choosing the right legal structure - Jeopardy Here are the answers - what is the question?1. This is the market for shares

1. What is the Stock Exchange2. Shareholders own it

1. Who owns a plc?3. Because there would be no limit to the amount of money they would lose

if they didn’t have it1. Why do investors want limited liability?

4. It can sell shares to the public and raise more money1. What is an advantage of becoming a plc?

5. It can’t control who buys its share and is more regulated so it spends a lot of time working on information such as finances to give to shareholders

1. What are two advantages of becoming a plc?6. This is when the shareholders and managers have different objectives

1. What is divorce between ownership and control?7. This is when a private limited company decides to become a plc and

sells shares to the public on the stock exchange1. What is flotation?

8. It has more status than a sole trader and can attract private investors1. What are two advantages of being a private limited company?

6.4 Choosing the right legal structure When starting a business the two most common business structures are?

Sole trader and partnershipAs a business expands other types of structure become more commonIn the UK nearly all medium and large business are limited companiesThis is because as a firm grows it needs capital (finance) which it will get from investorsinvestors don’t like to invest when there is unlimited liabilityWhat is limited liability?If the firm fails the investors will only lose the amount they have invested – they will not be forced to sell assetsComplete activity P100

6.4 Choosing the right legal structure There are two types of limited companies

Private limited companyPublic limited company

A private limited company cannot sell shares to the public but a public limited company canThis means that the plc is able to raise more finance for growthThere are advantages and disadvantages to each structureThe advantages of a private ltd company are

They have more status than a sole trader or partnership – suppliers and customers may have more confidence in dealing with the companyPrivate investors that are known by the owners can be given limited liability and can buy a share in the companyOwners often remain as directors or senior managers and run the companyLimited liability for all shareholders

6.4 Choosing the right legal structure The disadvantages of being a private ltd company

Cannot be listed on the stock exchange so can’t sell shares – difficult to raise very large sums of moneyExpansion into a very large company is limitedShare prices are not quoted daily so shareholders don’t have a good idea of value of sharesAccounts are available at Companies house so it is possible to find out how the company is performing

The advantages of being a public limited company

Can sell shares and raise large amounts of financeHigher status Shareholders always know the value of shares and can buy and sell easilyLimited liability

6.4 Choosing the right legal structure The disadvantages of being a public ltd company

Original owners lose control as a high proportion of shares are soldOwners may have different objectives to managersAll accounts published creating pressure for short term profitCompany can be taken over if shareholder buys majority of shares

Complete activity P101

Andrew Lloyd WebberSir Andrew Lloyd Webber is a highly successful producer of musicals such as Cats, The Phantom of the Opera and Joseph and His Amazing Technicolor Dreamcoat. In 1986 he floated his company, the Really Useful Group, but did not like having to discuss decisions with outside investors. In 1990 he bought back the shares and turned the business back into a private limited company.

Why do you think Andrew Lloyd Webber preferred his business to be a private limited company?

Answers might include:so that he was the main owner and therefore did not have to answer to many other investorsit enabled him to make the decisionshe could retain more of the profits

6.4 section assessment Quick questions now!Long questions for Homework (to be handed in next lesson (Wednesday)

Mark answers to long questions

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6.5 Changing business aims and objectives What were the main objectives of small businesses?

Survival, profit and growthWhat do you think the objectives of an expanding business will be?The main danger for small businesses is cash flowThat is why survival is often the main objectiveOnce they have survived they may become more secure and have a reasonable cash flowThat means that owners can start to set other objectivesFor example profit growth

Profit is always likely to be an aim unless the firm is a social enterpriseAs firm’s get larger they will look to increase the amount of profit they earnProfit can be used to pay dividends to shareholders Or it can be reinvested into the company to achieve further growth

During a recession the need to survive might become the main objective of even large businesses

Dividend – payment made to shareholders from company profits (usually annually)

6.5 Changing business aims and objectives Increasing market share is also an objective of a growing business once they have survived the first risky years. Why?

This will increase the status of the firmIt will give them more power over retailers and suppliersIt may give them more control over the prices they can set particularly if they grow to be the main or dominant firm in the industry

A common objective of plc’s is increasing shareholder value

This means increasing the share price and increasing dividends paid to shareholdersIf directors keep shareholders happy they will keep their jobs

Exam tip – if you are asked about business objectives you should check to see if it is a newly set up business or a well-established business

6.5 Changing business aims and objectives There may be other managerial objectivesIn large plc’s there may be something call ‘divorce between ownership and control’Senior managers/directors will have different objectives to the ownersThey may have shares in the company but not a majorityThey have to keep the shareholders happy but they may want to

Increase their status by running a larger business (focus on market share)Increase their salaries and perksGain publicity such as takeovers or expansion abroad

Divorce between ownership and control – when directors control a plc and thousands of shareholders own it but the two groups have different objectives

6.5 Changing business aims and objectives Complete activities on P103 (class discussion)

Changing Objectives What are the objectives of a business that

is just starting up Survival Cash flow Break even – cover costs Maybe make small profit

What might be the objectives of a business as it matures? Make more profit Grow your market share Grow in general

What about the objectives of a plc – how might they differ Keep shareholders happy!!

Increase the value of sharesGive them dividends – this

indicates the business is doing well

6.5 Changing business aims and objectives There may be other managerial objectivesIn large plc’s there may be something call ‘divorce between ownership and control’Senior managers/directors will have different objectives to the ownersThey may have shares in the company but not a majorityThey have to keep the shareholders happy but they may want to

Increase their status by running a larger business (focus on market share)Increase their salaries and perksGain publicity such as takeovers or expansion abroad

What other objective might a large plc have?Tip – how do customers like to see companies behavingEthically!! Doing the right thing.They may have ethical objectives

Divorce between ownership and control – when directors control a plc and thousands of shareholders own it but the two groups have different objectives

6.6 Social costs and benefits Although profit is the main measure of success for most companies, many firms are starting to set other ethical and environmental objectives as well as growth and profit. Why?This could be due to the beliefs of the senior management or just that they know how important it is to the image of the firmManagers will not only make decisions based on how much profit will be made but also what impact it will have on societyThey may end up making less profit in the short term but more profit in the long term when customers stay loyal

Ethical objective – a business aim to do the right thing according to the values and beliefs of managers even though this may not be the most profitable way

Environmental objective – a business aim to protect the environment during its operations (e.g. recycle waste water) thereby reducing social costs

6.6 Social costs and benefits There are a few reasons why firms are adopting new objectives

Laws on environmental protection have become stricter

To break these laws would lead to bad publicity

There is growing support for action against dumping waste and climate change – social costs of business activity

Businesses with clear environmental objectives often gain good publicity and customer loyalty

Consumers are putting pressure on firms to be increasingly ethical

Demanding more organic foods and low polluting carsNot buying products they find unacceptable e.g. clothes made in low-wage sweat shops

Social costs – the costs a business activity plus the costs to society (e.g. pollution)

6.6 Social costs and benefits Being ethical can reduce short term profits. Why?

Rather than paying low wages in cash firms may decide to pay above the minimum wageNot paying money bribes or giving gifts to win a contract can mean lost salesNot forcing suppliers to reduce prices further will mean paying more in the short run

Being ethical can increase long term profits. Why?

Other ethical firms will want to do business with ethical companies

The co-operative bank refuses to accept any investments from companies in the tobacco or weapons industriesAs a result it attracts many more accounts

Consumers may spend more with ethical firms and boycott unethical firms

6.6 Social costs and benefits More reasons for making more profit being ethical

Workers may be more motivated if they are well treated and paid well

Microsoft attracts the best engineers in the world because it treats its employees as valued members of its organisation

Government is more likely to give contracts to ethical firms or those that offer social benefitsSuppliers will develop good relationships with firms that treat them well and give the best terms possible

People are often sceptical about firms behaving ethically – they believe that the firm is doing it more for good publicity rather than they truly want to for the right reasons

Social benefits – the benefits a business activity to the firm plus the costs to society (e.g. new jobs created by business expansion)

Ethical bankingThe Cooperative Bank wants to be an ethical bank. This means it does not want to trade with businesses that its savers consider unethical. Each year the Cooperative Bank asks its customers what they think is unethical and then makes sure it avoids lending to these businesses. Examples of its current ethical aims are:‘We will not lend to any business involved in:● the manufacture or transfer of armaments to oppressive regimes● the manufacture of torture equipment or other equipment that is used in the violation of human rightsWe will not invest in any business whose core activity contributes to:● global climate change, through the extraction or production of fossil fuels● the manufacture of chemicals which are persistent in the environment and linked to long-term health concerns● the unsustainable harvest of natural resources, including timber and fish’

Why do you think the bank needs to ask its savers what they think each year?

Answers might include:it wants to make sure it represents their views and does not do anything they would not want to be associated with e.g. lending to unethical businessesit wants to keep up to date with their thinking and their values

Ben and Jerry’sBen and Jerry’s, the US company that makes ice cream, was founded in Vermont in 1978 by Ben Cohen and Jerry Greenfield, who describe themselves as hippies. The two friends started their ice cream careers with a $5 ice cream making correspondence course from Pennsylvania State University and a $12,000 investment ($4,000 of which was borrowed). Their ice cream is now world famous but despite the growth, both Ben and Jerry have always maintained their links with their community and promoted a number of good causes. It is known as a very ethical business. One of the company’s mottos is: ‘Business has a responsibility to the community in which it operates.’ The actions the company takes include reducing waste, trying to adopt environmentally friendly methods of production and respecting their employees.

Why do you think Ben and Jerry’s tries to be ethical and environmentally friendly?

Answers might include:because their founders held these values and wanted the company to show them as well in its activitiesbecause they want to improve things (or at least not make them worse) by the way they produceit could help attract customers, employees and investors i.e. it is good for businessComplete activity on P105 – ignore today!

6.3 Quick Questions1 Explain why a business might want

to increase its market share. (3 marks)

2 Explain why a business might want to start selling its products abroad. (3 marks)

3 What is meant by ‘business ethics’? (2 marks)

4 Explain two actions that a business could take to become more environmentally friendly. (5 marks)

5 Explain why firms might want to be ethical and more environmentally friendly (4 marks)

Homework – see questions on www.econandbiz.com

Don’t forget to use examples!!

Homework1. Complete short questions2. Look online and find an example of an

ethical business. Write a couple of lines about the company and be prepared to discuss it next lesson.

Think about why they are ethical.2. Do some research on why businesses

move parts of their business abroad to places like China e.g. their call centres or their production facilities

6.6 assessment Quick questionsLong questions

Homework to be checked – if not handed in stay in at lunch time

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6.7 Location The location of any business is important as it will affect costs, revenue and imageWhy?An ideal location would be one that Minimises costs and maximises revenue – it would be as profitable as possibleThe problem is that the cheapest locations will often lead to the lowest sales unless the business sells over the internetThe factors that managers of a growing business will consider when choosing a location will be

Cost of sitethe cost of buying versus the cost of rentingFor a shop the most expensive would be a shop in the city centre but probably the most profitable

Labour costsThese can vary from region to regionIf you need high income customers there is no point in locating yourself in an area with low labour costsYou need the right skills which may cost more

6.7 Location Other things to think about are

Transport costs and proximity to suppliers

If heavy raw materials are used in production there may be high transport costs and the business will need to be near the supplierIf the business needs lots of specialist suppliers they might locate near them

IT industries tend to locate in the Thames Valley

Sales potentialEven if the land or rent costs are high the business may need to be in an expensive location e.g. high class dress retailer

Manager’s preferencesThe owners may chose an area due to personal preference e.g. schools for their children are better in a certain area

6.7 Location Choosing the lowest cost location for the Rolls-Royce factory was not a priority

They chose to locate in Goodwood – a very expensive locationWhy?It was close to a small airport where helicopters and executive jets of intending purchasers of Rolls-Royce can arrive in styleBuyers are invited to visit the factory and taken to nearby exclusive evens at the marina and horse racing courseThe area is a ‘playground for the wealthy’Customers can spend a day at the races or the marina before buying their new car

Complete activity 1 and 2 P106/107

• China worksheet

6.7 Location – go global Recently many well known UK owned businesses have located in other countries (sometimes closing their UK operation)One of the reasons is globalisation (increasing trend for goods to be traded internationally and companies to locate abroad)Electrolux is a typical example

Had a cooker factory in DurhamLoss of 500 jobsHad been making increasing losses even after investing £7m with some government aid (£1.6m)Exchange rates, wage costs and other increasing costs made it uncompetitiveDecided to move production to a factory in PolandIt can now make a profit making only half the machines it made in the UK

The process of moving production abroad is known as off-shoringServices can also be off-shored too e.g. call centresCompanies that have operations in more than one country are called multinational

6.7 Possible benefits of locating abroad Lower site or land prices

London is the 2nd most expensive city in the world to buy office spaceLocating in Poland, Chile or other countries is much cheaperFirms have to take into consideration transportation costs

Lower labour costsIf a business uses a lot of labour the cost savings of moving to a country where labour is cheaper will be hugeWill quality be as good?

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6.7 Possible benefits of locating abroad Avoid trade barriers

3 Japanese car makers have factories in the UKThey do this because they can then export to Europe without any tariffsThe UK factory may not be as productive

Take advantage of fast growing economies and markets

The economies in China and India are growing very quickly (more than 10% per year for the last 10 yearsThe UK economy has grown only 2.5% per yearSelling in these markets gives an opportunity to grow salesGoods and services might need to be changed to suit different tastes (expensive)

A tariff is like a tax on imported goods

6.7 Possible disadvantages of locating abroad Language differences may make communicating with workers difficultTransport costs will increaseBad publicity because UK jobs lost. Might be seen as unethicalUsing low wage countries may be seen as unethicalExam tip – when discussing a decision to locate in another country you must always weigh up the advantages and disadvantages

TescoUnder Terry Leahy, Tesco plc has become the biggest retailer in the UK with nearly 4,000 stores and 440,000 staff. He has grown the business by moving it into areas other than food e.g. insurance, electronics and clothes. He also expanded the business into 13 countries abroad.

Why do you think he wanted to expand overseas?

Answers might include:Expanding overseas gives the company access to new markets that may be growing faster than the UK.It also spreads the risk so that if demand in the UK falls other markets abroad may still be growing.

6.1 locating the businessTata NanoThe Tata Nano, which is intended to be one of the cheapest cars in the world, was going to be made in the West Bengal region of India. However, because of violent opposition (due to disputes about land ownership) this plan had to be abandoned in 2008.

What do you think Tata will consider before choosing a new place in which to produce?

Answers might include:costs of productionskills of the laboursubsidies and support from the governmenttransportation costslocation of suitable supplierspolitical stability in the region

6.8 Location go global

Overseas expansionWhy do you think Tesco chose to expand into the USA?

Answers might include:to gain access to more customersto spread the risk by being in business in different countriesto sell in a bigger and/or faster growing market

6.8 Location go globalBurberryIn 2007, the British brand Burberry decided to stop production in Rhondda Valley in Wales and relocate to China. Three hundred workers lost their jobs. The company describes itself as a ‘luxury brand with a distinctive British sensibility’. It claimed that the manufacturing cost of each individual polo shirt in Wales was £11, compared to a potential £4 in China. Each year that the factory was kept open in Wales, Burberry argued, would reduce its profits by £2 million.

Do you think Burberry was right to move production to China?

Answers might include:depends on perspective e.g. are we asking shareholders, competitors, employees, the Chinese government or the UK government?may be right for some but not others e.g. UK employees lose jobs but Chinese employees gain jobs; may help the business but the UK government may earn more tax revenue

Complete activity on P109

Location assessment Quick QuestionsLong questionsNext lesson you are going to be assessed on all the work we have done since the start of term. This will be 6 short/medium questions and 2 long questions. Homework is Revision

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Chapter 6 Assessment

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