Business Book

BUSINESS STUDIES
in ACTION4TH EDITION
PRELIMINARY COURSE
Stephen CHAPMAN
Rosalinda GALLINA
Natalie DEVENISH
Fourth edition published 2014 by
John Wiley & Sons Australia, Ltd
42 McDougall Street, Milton, Qld 4064
Third edition published 2011 © S. Chapman

Second edition published 2006 © S. Chapman, N. Devenish, M. Dhall
First edition published 2000 © S. Chapman, N. Devenish, M. Dhall
Typeset in 10.5/12.5 pt ITC Berkeley Oldstyle Std
© John Wiley & Sons Australia, Ltd 2014
The moral rights of the authors have been asserted.
National Library of Australia

Cataloguing-in-publication data
Author: Chapman, Stephen (Stephen John), author

Title: Business studies in action: preliminary course/
Stephen Chapman, Rosalinda Gallina, Natalie Devenish.
Edition: 4th edition.
ISBN: 978 0 7303 0900 0 (pbk.)
978 0 7303 0898 0 (eBook)
Target audience: For secondary school age.
Subjects: Business.
Business — Textbooks.
Other Authors/
Contributors: Gallina, Rosalinda, author.
Devenish, Natalie, author.
Dewey Number: 650
Reproduction and communication for educational purposes

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10 9 8 7 6 5 4 3
CONTENTS
To the student vi
About the authors vii
How to use this book viii
About eBookPLUS x
ICT activities xi
Acknowledgements xii
TOPIC 1: NATURE OF BUSINESS 2
Chapter 1 Role of business 4

1.1 Introduction 4
1.2 The nature of a business 6
1.3 Other functions of business 8
Chapter 2 Types of businesses 22

2.1 Introduction 22
2.2 Classification by size 22
2.3 Classification by geographical spread 25
2.4 Classification by industry sector 30
2.5 Classification by legal structure 35
2.6 Types of companies 39
2.7 Factors influencing choice of legal structure 46
Chapter 3 Influences in the business environment 50

3.1 Introduction 50
3.2 Business environment 50
3.3 External influences 51
3.4 Internal influences on business 70
3.5 Stakeholders 80
Chapter 4 Business growth and decline 86

4.1 Introduction 86
4.2 Business life cycle — stages and responding to challenges 90
4.3 Factors that can contribute to business decline 104
4.4 Voluntary and involuntary cessation 105
TOPIC 1 Suggested assessment tasks 111
TOPIC 2: BUSINESS MANAGEMENT 116
Chapter 5 Nature of management 118

5.1 Introduction 118
5.2 The features of effective management 121
5.3 Skills of management 123
Chapter 6 Achieving business goals 144

6.1 Introduction: What are goals? 144
6.2 Business goals 147
6.3 Achieving a mix of business goals 153
6.4 Staff involvement 156
Chapter 7 Management approaches 164
7.2 Classical approach to management 165
7.3 Behavioural approach to management 178
7.4 Contingency approach to management 190
7.5 Comparing management approaches 192
Chapter 8 Management process 194

8.2 Different ways of coordinating key business
functions and resources 196
8.3 Operations 198
8.4 Marketing 212
8.5 Finance 228
8.6 Human resources 247
8.7 Ethical business behaviour 272
Chapter 9 Management and change 282

9.2 What is organisational change? 282
9.3 Responding to internal and external influences 285
9.4 Managing change effectively 290
TOPIC 3: BUSINESS PLANNING 310
Chapter 10 Small to medium enterprises

(SMEs) 312


10.2 Definition of SMEs 312

10.3 The role of SMEs 315

10.4 Economic contribution of SMEs 317

10.5 Success and/or failure of SMEs 322
Chapter 11 Influences in establishing a small

to medium enterprise 328
11.2 Personal qualities 328
11.3 Sources of information 340
11.4 The business idea 343
11.5 Establishment options 347
11.6 Market considerations 354
11.7 Finance 360
11.8 Legal considerations and influence of government
on SMEs 365
11.9 Human resources 370
11.10 Taxation 374
iv CONTENTS
Chapter 12 The business planning process 380
12.2 Business planning process 385
12.3 Sources of planning ideas 389
12.4 Vision, goals and/or objectives 391
12.5 Organising resources 396
12.6 Forecasting 401
12.7 Monitoring and evaluating 404
12.8 Taking corrective action — modification 410
Chapter 13 Critical issues in business success

and failure 414
13.2 Importance of a business plan 414
13.3 Management — staffing and teams 416
13.4 Trend analysis 420
13.5 Identifying and sustaining competitive advantage 422
13.6 Avoiding overextension of financing and
other resources 426
13.7 Using technology 427
13.8 Economic conditions 430
ICT activities 438

Appendix 441
Glossary 444
Index 452
CONTENTS v
TO THE STUDENT
Welcome to the world of business! It is an exciting, challenging and rewarding
world. It is also a world in which you have been involved — by buying goods
and services to satisfy your many needs and wants, or working for an employer
with the purpose of gaining income. Perhaps you have even operated your own
business, such as a stall at a local market.
Whether as a consumer or employee, you rely daily on a diverse range of
businesses — small, medium and large — for your economic survival. These
businesses shape how people live, work and play. Life without them would be
radically different. It is therefore important to understand how businesses function
and to appreciate the crucial role they play in contemporary society.
Some of you will eventually decide to commence and operate your own business.
The skills, knowledge and attitudes you bring to your business enterprise will
largely determine the venture’s success. Operating your own business will provide
you with personal satisfaction and financial rewards. The business will also play
a crucial role in the Australian economy and contribute to the nation’s wellbeing.
In the past few years, we have seen an unprecedented number of changes in
the social, technological, political and economic makeup of the business world.
Businesses that survive and prosper in today’s rapidly changing world will be
owned and managed by people who not only respond positively to change, but
also initiate it. Such business owners will thrive on the opportunities these changes
present.
During this Business Studies course, you will learn about the different areas
that together form today’s business world, including management, finance and
accounting, human resources, marketing, and operations. You’ll explore the types
of tasks these different functions require and the many and varied jobs that are
available. This knowledge will allow you to consider what kinds of jobs in business
will interest you most.
Finally, as you progress through your Business Studies course, stop and reflect
on what you have learned. Explore further the issues raised during the lessons. In
this way, you will gain a deeper understanding of what is required for a business
to succeed.
vi TO THE STUDENT

ABOUT THE AUTHORS
Stephen Chapman is an active teacher, author, HSC marker and consultant, with
28 years’ experience as a classroom teacher and Head Teacher. He has authored/
co-authored 24 textbooks in the areas of Commerce, Business Studies and
Economics. He has won awards for teaching excellence and pedagogical writings as
well as a Commonwealth Parliamentary Teaching Fellowship. As a consultant, he
works with schools to develop teaching programs and educational resources.
Rosalinda Gallina is a teacher of Business Studies, Legal Studies, Commerce
and Business Services, with over 10 years’ teaching experience. She is a Business
Studies HSC marker and has been the co-convenor of the Business Studies Trial
HSC Examination paper for the Catholic Secondary Schools Association NSW for
three years. She also lectures and presents at student workshops on HSC Business
Studies.
Natalie Devenish is a teacher of Business Studies, Economics, Legal Studies and
Commerce, with over 15 years’ teaching experience. She has been a HSC marker
for seven years and has completed a Masters in Education. She has co-authored
three textbooks in the areas of Business Studies and Commerce. Natalie has a
specific interest in the development and implementation of literacy strategies to
support student learning.
ABOUT THE AUTHORS vii

HOW TO USE THIS BOOK
The following examples highlight the structure and main features of Business Studies in
Action — Preliminary Course 4th Edition. An electronic version of the textbook and a
complementary set of targeted digital resources — the eBookPLUS — are also available
online at the JacarandaPLUS website (www.jacplus.com.au).
TOPIC 1
NATURE OF BUSINESS
FOCUS AREA
Each of the three topics The focus of this topic is the role and nature of business in a changing business
environment.
has an opening double OUTCOMES
page that presents the Students should be able to:
• discuss the nature of business, its role in society and the types of business
structures
focus area of the topic • explain the internal and external influences on businesses
• analyse the responsibilities of business to internal and external stakeholders
and lists the syllabus • plan and conduct investigations into contemporary business issues
• evaluate information for actual and hypothetical business situations.
The role of business
outcomes. A concept Role of Businesses play a crucial role in our lives and actively contribute to progress in society.
map allows students to business
Some of these roles include:
• employment and income — for example, BHP Billiton has more than 125 000 ❛ The world of
business is most
visualise the key concepts
employees and contractors. They are a global producer of major commodities and
the largest company in Australia. BHP Billiton typically pays their employees 11 per
cent above the market. definitely an exciting
in the topic. An engaging Business growth Types of
• profit — for example, in 2013, Woolworths’s profit increased by 24 per cent to
$2.3 billion due to the expansion of their food, liquor and gambling businesses.
• innovation — for example, Nike was named the Most Innovative Company in
and interesting one.❜
NATURE OF BUSINESS
photograph and case
and decline business
businesses 2013 by Fast Company for creating Nike trainers with embedded sensors that
measure people’s athletic ability. The Sports Sensor is made from four different
sensors embedded inside dedicated trainers, with an internal accelerometer that
study shows business in measures movement. The data collected is then fed wirelessly to an iPhone, where
people can check their progress directly.
action.
• entrepreneurship and risk — for example, the co-founder of Microsoft
Corporation, Bill Gates, is one of the most successful entrepreneurs of the late
Influences in the twentieth and early twenty-first centuries. Gates was only a teenager when he
business environment took the risk of establishing his own business. In just 25 years, he built his
business into a multi-million dollar corporation and became one of the world’s
wealthiest individuals.
• wealth — for example, Macquarie Group recently generated wealth for its
shareholders. In 2013, their share price had increased by 106 per cent since
2011. Many investors have been drawn to their growth and attractive dividend
payments. Macquarie Group has also generated substantial wealth for their
employees: in addition to their competitive salaries and performance-based
pay structure, many employees at the bank have been given an opportunity to
receive a share of the company’s profits by participating in the group’s share
purchase plan.
These are just a few of the many roles played by businesses in our society. The world
of business is most definitely an exciting and interesting one.
2 TOPIC 1 • Nature of business TOPIC 1 • Nature of business 3
CHAPTER 9
All Preliminary syllabus
readjust to accommodate another. Some managers are fearful of change, seeing it
as a destructive force. Others perceive change as an opportunity for creativity and
outcomes are covered in
BizWORD
depth to provide a sound
openly embrace it.
Change is any alteration in the internal or external environments; for example, Change is any alteration in the
Management and change change in consumer tastes, change in production methods, change in markets or internal or external environments.
products sold, or change in how employees perform their tasks. It could also be
a change to the way things are perceived, or new ways of dealing with problems.
basis of knowledge to
In response to these changes, many organisations have undergone organisational
change: the adoption of a new idea or behaviour resulting in a difference in the form prepare students for the
9.1 Introduction or operation of an organisation over time. The organisation may have modified its
‘Nothing is permanent except change.’ Although these words were written around
corporate culture, implemented new organisational structures, recruited employees
with new skills or developed different work practices.
HSC course.
2500 years ago by the Greek philosopher Heraclitus, they are as true today as they
were then, especially in the world of business. For example, imagine the type of
motor vehicle you will be driving in 20 years. It might look like the futuristic car
The rapidly increasing pace of change threatens to overwhelm many businesses.
Adapting to change forced by the external environment is never easy for a business. BizWords, highlighted
in the margin for easy
While change may be the most daunting challenge confronting management, the
shown below. You might even be able to take to the sky if there is a traffic jam.
rewards are great for those who are prepared to accept the challenge and not only
The motor vehicle industry has to effectively manage change due to dwindling
react to change but also initiate and manage it (see the following Snapshot).
reference, provide
BizFACT oil supplies, stricter pollution controls, greater safety requirements and broader
Google is developing and testing a recycling legislation. Businesses only survive in today’s highly unpredictable
driverless car using software called business environment if they effectively manage change. Businesses that embrace
Steve Polosak — change management
Google Chauffeur. The car has no
steering wheel or pedals and uses a
change will profit; businesses that resist change will be left behind. definitions of the bolded
system of sensors to avoid collisions.
words in the text to build
One of the most challenging aspects of my role as an Information Technology (IT)
The car has a maximum speed of manager for a large organisation is to initiate and implement change. For bad or
40 kph. worse, change keeps coming in business and in life. Change is not made without
some inconvenience. Therein lies the challenge.
Previously, organisations faced one change at a time, and when it was over, people
SNAPSHOT a comprehensive glossary.
could rest a while until the next change came along. In today’s business environment,
the problem is that most organisations have a number of major change projects
occurring simultaneously. BizFacts present
A manager will ignore these changes at his or her own, and the organisation’s
peril. Well-managed changes can become the foundation of future growth and
success. For example, the organisation recently decided to implement a new data
interesting and topical
snippets of supplementary
FIGURE 9.1 Could this be the type
transfer system that would alter employee work practices. To create an environment
of motor vehicle you will be driving in that would accept the change, I began by explaining the four ‘Ws’ to the affected
the future? Technology is constantly employees — What the change is, Why the change is needed, Whom the change
changing. So too is the world of business.
Responding positively to these changes
is often a recipe for long-term survival,
will affect, and When and how the change will take place. Fear of the unknown is a
major barrier to change.
Then, I involved employees in the change process. It is only natural for employees
information to engage
because well managed changes can
become the foundation for future
growth and success.
to go along with changes that they have helped bring about. From my experience,
people will resist poorly implemented changes or changes that are suddenly imposed and extend students.
on them without any warning.
The changes did cause some initial resistance. However, six months later,
productivity has improved by 18 per cent and the majority of employees adapted so
‘Snapshot’ case studies
present profiles of a
well that morale has improved.
9.2 What is organisational change? ❛Fear of the
Snapshot questions
unknown is a major
In Australia, over the past decade, there has been extensive and unprecedented
change in the business environment. There is every indication that the pace of
1. Recall why change can be difficult to manage.
2. Explain what Steve Polosak does to effectively manage change. barrier to change.❜ wide range of businesses
change will intensify during this decade. The prevailing attitude in business today
can be summed up as follows: ‘There is only one constant in business and that is
change.’
and individuals, and the
Managing change
To help guarantee the long-term survival of the business, managers must respond
to these changes. Hoping that the changes will either go away or have no impact As profitable opportunities can arise from change, it must be considered a contemporary business
on their business is a recipe for disaster. Managers also find it frustrating to learn fundamental aspect of a business’s strategic planning. The ability to manage and, in
that as soon as they adjust to one change in the business environment, they must many cases, embrace and adapt to change will increasingly determine a business’s issues they face.
282 TOPIC 2 • Business management Management and change • CHAPTER 9 283
viii HOW TO USE THIS BOOK

Revision EXERCISE
Australia Post — the oldest surviving 1 Explain the legal steps required to incorporate a business.
2.4
government enterprise in Australia 2 Outline why you think companies need to have perpetual succession.
The Australian Postal service began in 1809. The 3 Explain why the Limited Liability Act of 1855 was important for company
Postal Act 1825 allowed the NSW Governor to fix expansion.
SNAPSHOT postage rates and appoint postmasters outside of
Sydney, enabling the first organised postal service.
4 Recall under what circumstances a director might be personally responsible for debts
incurred by a company. HSC ‘key process verbs’
Gradually, postmasters were appointed and post
are used consistently in

offices were established in the different colonies of 5 Clarify why new legislation was introduced to penalise company directors who made
❛ they are required to Australia. The Commonwealth Post and Telegraph misleading statements about the business’s ability to repay its debts.
Act was passed in 1902 when the six colonial
pay a large share of 6 Examine figure 2.17 (page 40). Identify what you believe to be the three main
this profit . . . to the

and telegraphic departments merged to form the
Postmaster General (PMG). The PMG was responsible
advantages and the three main disadvantages of a company form of business
ownership. Explain why you chose each one.
all questions to prepare
for the nation’s communication network, including
Federal Government ❜ all postal, telegraphic and telephone services across
Australia.
7 Construct a concept map highlighting the main features of a proprietary company
form of business structure. students for HSC study.
In 1975, after the government launched a
Questions are graded
8 Construct another concept map highlighting the main features of a public company
commission of inquiry, the PMG was split into form of business structure.
statutory bodies: the Australian Postal Commission
9 Outline the ways a private company is ‘private’ and a public company is ‘public’.
according to low-, middle- or
(Australia Post) and the Australian Telecommunications Commission (formerly
Telecom, now Telstra). 10 Recall the main role of government enterprises.
In 1989 the Australian Postal Commission changed its name to the Australian 11 You are planning to establish the following types of businesses. Justify what form of
Postal Corporation (although it still trades as Australia Post). Australia Post is a
government business enterprise (GBE) owned by the Commonwealth of Australia.
The company was established under the Australian Postal Corporations Act 1989
business ownership you would prefer.
(a) a bicycle shop that will offer professional and personal advice
high-order thinking skills.
The ‘key process verbs’
(Cwlth), which corporatised the company and meant that it would be subject to the (b) a cattle stud specialising in a large-scale breeding program
same taxation and regulatory requirements of other private sector businesses. As a (c) a national retailer that would require $467 million to establish.
GBE, it is subject to the requirements of this Act. 12 Identify the most appropriate terms from the list to complete the following
Even though it is a government enterprise, Australia Post is a fully self-funding
business and is independent of government funding. Australia Post achieves substantial
sentences.
public minimum stock exchange
are listed and defined in
profits each year ($312m in 2013). However, it is required to pay a large share of this
profit ($244m in 2013) as a dividend to its sole shareholder, the Federal Government.
In recent years, Australia Post has been transforming its business under a Future
sole trader
formal
share
Ltd
liability
Proprietary Limited
twenty
limited
private
an appendix for ready
Ready strategy to take advantage of the digital economy. While its traditional
revenue sources are declining — for example, letters — its package and express post
services are growing. Acquisitions such as StarTrack are part of this strategy, making
unlimited
Pty Ltd
personal
shares reference. Weblinks are
provided to key business
Australia Post predominantly a parcels business. A business entity with one owner is called a . This person faces
liability, which means the owner can be forced to sell his or her
Snapshot questions assets to pay for the debts of the business.
1. Discuss the legal structure of Australia Post.
2. Explain how Australia Post is adjusting to the digital economy.
Partnerships normally consist of between two and
Partners
partners.
the profits and losses and usually operate under a
bodies, updated data
and statistics, and further
agreement. Partnerships have unlimited .
There are two types of companies, private and .A
Summary company usually has between two and 50 private
• All companies are incorporated enterprises.
• In limited liability companies, the most money a shareholder can lose is the
shareholders. A private company has the words
to
, abbreviated
, after its name. Public companies are listed on the resources.
Weblink and the general public may buy and sell
amount they paid for their shares.
Use the Australia Post in them. These companies must have a number of one
weblink in your eBookPLUS
• A proprietary (private) company usually has fewer than 50 shareholders and shareholder and have the abbreviation in their names.
to find out more about must have the words ‘proprietary limited’ (Pty Ltd) after its name. Companies have liability.
Australia Post. • The shares for a public company are listed on the Australian Securities Exchange. 13 In your notebook, draw up a table with four columns. At the top of each
• A public company must have the word ‘limited’ or ‘Ltd’ in its name. column put the headings Sole Trader, Partnership, Private Company and Public
• Government enterprises are government-owned and operated and provide Company. From the list of businesses shown on the next page, determine the
essential community services. correct column for its particular legal structure/entity. The first one has been
• Due to privatisation some government enterprises have become public companies. completed for you.
Role of marketing 3 Identify some types of marketing activities you have been involved in.
4 Discuss how the ‘marketing’ definition provided in this chapter differs from your
BizFACT Marketing is much more than placing an advertisement in the local media. It is a previous understanding
44 TOPIC 1 • Nature of business Types of businesses • CHAPTER of 2 the45
term.
All businesses should focus on way of thinking. Everything a business does should be directed towards putting
5 Distinguish between selling and marketing.
satisfying the needs of their the customer at the centre of its thinking. To do this successfully requires adopting
6 Recall why all businesses, regardless of size, need to undertake some form of
customers. All the activities of the a customer-oriented approach to marketing. Business owners need to view their
business should be directed to the marketing.
business in terms of the needs and wants of their customers (see figure 8.19). As
marketing of the good or service.
competition intensifies, it will be their marketing philosophy that will help their 7 Justify why a business should adopt a customer-oriented approach to
marketing.
business face the competition and succeed.
8 Refer to figure 8.19 on page 216. Identify which of the ‘seven tips’ you
think is the most important. Justify your answer and share it with other class
1. Place your customers, 2. Talk to your customers.
members.
not your products, at the Ask them what could be
centre of all you do. improved, what they like 9 Recall the correct response to complete the following sentences.
and dislike. (a) The main emphasis in marketing today is the __________ -oriented approach.
(b) This means the business wants to __________ customers’ needs and wants rather
than merely produce products.
7. Always deliver
Straightforward
what you promise.
Extension
1 Construct a PowerPoint presentation containing 10 dot points that reflect key
explanations of complex 3. Think about ways
to build loyalty with
your customers.
features of your new understanding of marketing.
2 ‘Marketing is not the sole responsibility of the marketing manager, but all managers.’
6. Develop a unique and
concepts are reinforced recognisable brand or image

that reflects the special
Determine the accuracy of this statement.
3 Predict what will happen to a business that neglects the importance of
qualities of your business. marketing.
by numerous up-to-date
Identification of the target market
statistics and easy-to-read 5. Regularly communicate
with your present and
potential customers.
4. Differentiate your
product in ways that
will make it special in
Very few businesses can afford to market their products to all consumers or
all businesses in Australia. At the same time, few businesses would want to
graphic organisers. the eyes of your
customers.
because it is a very rare product that is suitable to all consumers. Until the
end of the 1950s, Coca-Cola was such a product. But today Coca-Cola offers
Summaries throughout FIGURE 8.19 Seven tips to becoming a marketing driven customer-oriented business
For businesses that adopt a customer-oriented approach, the customer

consumers a range of carbonated soft drinks based on its original cola formula
including Coca-Cola Zero, Diet Coke and Vanilla Coke, as well as non-cola drinks
such as Pump still water, PowerAde Isotonic and Goulburn Valley juices. Most
each chapter encourage relationship does not end with the sale; it begins there. These businesses will
continuously strive to not simply meet but exceed customer expectations. This
businesses must select specific groups of customers on which to concentrate their
marketing efforts: their target markets. A target market is a group of customers
BizWORD
A target markett is a group of
means that, at every level of the business, employees should work towards
a progressive revision of with similar characteristics who presently, or who may in the future, purchase customers with similar
imilar characteristics
customer satisfaction by establishing positive relationships with customers. To do the product. who presently, or who may in the
this successfully a business should adopt the marketing concept approach. Three broad approaches can be adopted when selecting a target market: the
future, purchase the product.
concepts. Summary
mass marketing approach, the market segmentation approach or the niche market
approach (see figure 8.20).
• For a business to make a profit, it needs to create and market products that
consumers will purchase.
• Marketing is a total system of interacting activities designed to plan, price,
promote and distribute products to present and potential customers.
Segment Segment Segment Segment
• Successful marketing involves bringing the buyer and seller together and making 1 2 1 2
a sale. Total market
• Businesses should continuously strive to not simply meet but exceed customer
expectations. Segment Segment
3 3
EXERCISE Revision
8.5
1 Outline the importance of marketing to a business. Mass marketing approach Market segmentation approach Niche marketing approach
2 Recall why most new products fail shortly after they are launched. FIGURE 8.20 Selecting a market to be the target market
216 TOPIC 2 • Business management Management process • CHAPTER 8 217

(c) Competition and Consumer Act 8 (a) ‘Wouldn’t every small business owner like his or her business to grow into a large
(d) Broadcasting and Television Act firm?’ Discuss. 6 marks
10 Georgia has a hairdressing salon that employs 18 staff. Which of the following is an (b) Determine whether the advantages of small business really are
accurate classification of the business? advantages. 12 marks
(a) A small business in the tertiary sector 9 The business life cycle consists of four main stages.
(b) A small business in the quinary sector (a) Identify the four stages. 2 marks
(c) A medium business in the secondary sector (b) Propose some strategies a business can implement to undergo
(d) A medium business in the quaternary sector renewal. 6 marks
TOPIC 1 SUGGESTED ASSESSMENT TASKS (c) Assess the importance of the business owner having an understanding of the
Short response questions business life cycle. 10 marks
Sample HSC-style assessment
10 Your brother is thinking about starting a family business. He has invited you to be a
In the HSC examination you will be asked a number of short response questions based on
the HSC course. Nature of business
A short response question generally contains a number of sections, starting with a low
member of the business and has asked you for your advice.
(a) Clarify two legal types of business structure that may be tasks are provided for each
appropriate. 2 marks
determined by how many marks it is worth. For example,
Multiple choice questions
order activity and increasing in difficulty. How much you should write
a question
In the
for each section
that has ayou
HSC examination value
is
(b) Discuss the legal requirements for setting up each type of
willofbe required to complete 20 multiple choicebusiness.
questions. 6 marks
topic, comprising multiple
two marks will require double the amount of time andTherefore,
of one mark.
information than
it is one with
important a value
that you become familiar with answering this (c)
For each question choose the best alternative:
typeAssess
of question.
the advantages and disadvantages of each type of
business. 12 marks
choice, short response and
1 (a) State the main function of business. 2 marks
1 Which of the following statements about profit is false?
(b) Demonstrate the contribution businesses play within the Australian
(a) Profi economy
ts encourage in
risk taking. extended response questions
11 Ezzra and Jacinta are considering forming a partnership. They have worked for an
architect for some time and now feel that they could do much better on their own.
terms of:
with appropriate marks
(b) Profit refers to the reward that employees receive for producingImagine
products. that Jacinta has approached you for advice.
(i) employment 4 marks (c) Profit is the reward business owners receive for assuming the risks
(a) of ownership.
Defi ne the term ‘partnership’. 2 marks
(ii) incomes 4 marks (d) Profit is what remains after all business expenses have been deducted from the legal requirements for the formation of a partnership.
(b) Discuss 4 marks
(iii) choice. 4 marks sales revenue. (c) Determine the legal rights and responsibilities of each partner in a
2 What is the person who risks his or her time, energy and money to startpartnership.
a 10 marks
allocated.
2 (a) Define the term ‘entrepreneur’. 2 marks
(b) Evaluate the role entrepreneurship plays in determining business called?
business 12 (a) Identify the key to determining whether or not a business’s actions are socially
success. (c) 10 marks
Competition and Consumer Act (a) A financier responsible. 2 marks every small business owner like his or her business to grow into a large
8 (a) ‘Wouldn’t
(b) An employer (b) Outline the main
firm?’ benefi ts to a 6business
Discuss. marks of conducting a sustainability
3 (a) Recall two(d)quantitative
Broadcasting and Television
measures and twoAct qualitative measures used to determine
(c) An innovator report. 3(b) marks
Determine whether the advantages of small business really are
the size10ofGeorgia
a business. has a 2hairdressing
marks salon that employs
(d) An18 staff. Which of the following is an
entrepreneur 13 (a) Define the term ‘stakeholder’.
advantages. 2 marks
12 marks
(b) Distinguish between
accurate a small
classifi and
cation ofathe
large business. 5 marks
business?
(c) Determine 3 Which of theorfollowing wouldare be an example of a business in the secondary
(b) Explainindustry?
9why
Thesome of these responsibilities
consists of are
fourincompatible
main stages.whereas others
(a)why smallbusiness
A small businesses, such
in the as thesector
tertiary local hairdresser restaurant, business life cycle
able to compete with business
large, transnational (a) Zenon
corporations. Mining
10 marks are compatible.
(a) Identify5 marksthe four stages. 2 marks
(b) A small in the quinary sector
(b) Heritage Motel (c) ‘Shareholders’
(b) expectations
Propose some should take precedence
strategies a business can overimplement
the desires to
of undergo
other
(c) A medium business in
4 (a) Identify two advantages and two disadvantages of the secondary sector
(c)each of the Legal
Canberra following types of
Centre Evaluate. 6 marks
stakeholders’.renewal. 8 marks
(d) A
business ownership: medium business in the quaternary sector
(d) Plastics Manufacturing Ltd (d) Determine (c)the responsibilities
Assess the importance a business
of thehas to eachowner
business of its having an understanding of the
(i) sole trader 3 marks
4 Which business entity is owned and operated by more than two peoplestakeholders. and has 12 marks
business life cycle. 10 marks
Short response
(ii) partnership 3 marks questions unlimited liability? 14 (a) State 10 whyYour
it is sometimes difficult about
for a business
(iii) company. brother is thinking starting atofamily
satisfybusiness.
the expectations of all you to be a
He has invited
In the HSC3 examination
marks you will be asked a number(a) Sole of short response questions based on
trader its stakeholders.
(b) Distinguish member 3ofmarks the business and has asked you for your advice.
the HSCbetween
course. an incorporated and an unincorporated (b) Partnershipbusiness (b) Propose a(a) number of two
strategies a business can usestructure
to reconcile
entity. 6Amarks Clarify legal types of business thatthe confl
may beicting
short response question generally contains a number
(c) Public company of sections, starting with a low interests of itsappropriate.
stakeholders. 25marks marks
5 (a) Define the term
order activity‘business environment’.
and increasing in difficulty. How(d)much
2 marks youcompany
Private should write for each section is (c) Evaluate (b)the Discuss
effectiveness of each of these strategies.
the legal requirements for setting10up marks
each type of
(b) Distinguish between
determined by howthe many
internal environment
marks it is worth.and
5 Inthe
For external
example,
which phasea question that haslife
of the business a value of complacency amongst
cycle does 15 (a)management
Define the term ‘undercapitalisation’.
business. 6 marks 2 marks
environment. will require double the amount ofnormally
two marks6 marks time andoccur?
information than one with a value (b) Distinguish (c) between
Assess the voluntary administration
advantages and liquidation.
and disadvantages of each6 type
marksof
(c) Factors ofwithin
one mark the. internal and external environments can pressure
(a) Growth (c) Demonstratebusiness.
the main problems
12 marksthat arise for stakeholders when companies
businesses to change thepractices, policies or products. Referring to a
(b)2 Maturity go into
1 (a) State main function of business. marks 11liquidation. 10 marks
Ezzra and Jacinta are considering forming a partnership. They have worked for an
business that you are familiar
(b) Demonstrate thewith, evaluate
contribution the(c)accuracy
businesses of this the Australian economy in
Establishment
play within architect for some time and now feel that they could do much better on their own.
statement. 12 termsmarks
of: (d) Post-maturity ExtendedImagine response that Jacintaquestions
has approached you for advice.
6 (a) Identify four external influences4that
(i) employment can affect6a What
marks business.
does 2themarks
business environment refer to? (a) Defi newill
thebe term ‘partnership’.
In the HSC examination you asked a number of2extended
marks response questions based
(b) Demonstrate (ii) what impact the
incomes following internal infl
4 marks (a) uences can have on
The surrounding a
conditions in which the business operates on the HSC course. (b) Discuss the legal requirements for the formation of a partnership. 4 marks
business. (iii) choice. 4 marks (b) Those factors over which the business has very little control One of the extended (c) Determine
response the legal rights
questions and responsibilities
will require a report style of each partner
format, in a
a style of
(i) Product influences 4 marks (c) Those factors over which the business has some degree of control writing used extensively partnership.
in business. 10 markswriting will require you to disregard much of
Report
(ii) Management influences 4 marks (d) A group who has an interest in or is affected by the activities of the
what youbusiness
have12previously beenthe taught when writing traditional essay
(b) Evaluate the role entrepreneurship plays in determining business (a) Identify key to determining whether or notstyle answers.actions
a business’s Reportare socially
(c) Assess the impact of technological influences on 7 retail
Whatbusinesses.
type of business10 marks
would National Foods Limited most likelyanswers
be? use: responsible. 2 marks
success. 10 marks
7 (a) Define the term ‘profit’. 2 marks (a) A partnership • short statements (b) Outline the main benefits to a business of conducting a sustainability
3 (a) Recall two quantitative measures and two qualitative measures used to determine
(b) Explain the relationship between sales revenue and (b)profi
A public company
t. 6 marks • lists of main pointsreport.
followed3 with marks explanations when appropriate
the size of a business. 2 marks
(c) Determine the role profit plays within our economic (c) system.
A private company
11 marks • short paragraphs
13 (a) Define the term ‘stakeholder’. 2 marks
(b) Distinguish between a small and a large (d) Abusiness.
government 5 marks
business enterprise
(c) Determine why small businesses, such as the local hairdresser or restaurant, are (b) Explain why some of these responsibilities are incompatible whereas others
able to compete with large, transnational 8 Whichcorporations.
of the following is false in relation to why businesses are important to the
10 marks are compatible. 5 marks
112 TOPIC 1 • Nature of business Australian economy? (c) ‘Shareholders’ expectations should take precedence over the desires of TOPIC other 1 • Nature of business 113
4 (a) Identify two advantages and two disadvantages (a) They provide of each of the following
employment typesofofpeople.
for millions stakeholders’. Evaluate. 8 marks
business ownership: (b) They contribute to Australia’s gross domestic product. (d) Determine the responsibilities a business has to each of its
(i) sole trader 3 marks (c) They provide goods and services to satisfy consumers’ wants. stakeholders. 12 marks
(ii) partnership 3 marks (d) They import products, which generates income for Australians. 14 (a) State why it is sometimes difficult for a business to satisfy the expectations of all
(iii) company. 3 marks 9 Which piece of legislation is designed to protect the interests of both consumers its stakeholders. 3 marks
(b) Distinguish between an incorporated
entity. 6 marks
and an unincorporated business
and business?
(a) Small Business Act
HOW TO USE THIS BOOK ix
(b) Propose a number of strategies a business can use to reconcile the conflicting
interests of its stakeholders. 5 marks
5 (a) Define the term ‘business environment’. (b) Consumer
2 marks Affairs Act (c) Evaluate the effectiveness of each of these strategies. 10 marks
(b) Distinguish between the internal environment and the external 15 (a) Define the term ‘undercapitalisation’. 2 marks
environment. 6 marks (b) Distinguish between voluntary administration and liquidation. 6 marks
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ICT ACTIVITIES xi
ACKNOWLEDGEMENTS
The authors would like to thank those people who have played a key role in
the production of this text. Their families and friends were always patient and
supportive, especially when deadlines were imminent. Stephen Chapman wishes
to acknowledge his father, Jack, late mother, Lorna, mother-in-law, Thelo, and late
father-in-law, Rae, who have encouraged him as a student, educator and writer for
many years — and special thanks to Wendy and Max. Rosalinda Gallina would like
to express her very great appreciation to her husband Michael, as well as to her
parents, her sister Isabella and her brother-in-law John for their constant support
and encouragement. Natalie Devenish would like to acknowledge the support of
her husband Mark and children James, Georgia and William and would like to
dedicate this to her late father Graham Kennedy.
Mention also needs to be made of those businesspeople who gave of their time
and expertise for this new edition: Michael Cavallaro, Trudy Croad, Michelle
Angeloni and Anthony Turri. Thanks also to Steven Takchi and Sam Dimartino for
their assistance.
The authors and publisher would like to thank the following copyright holders,
organisations and individuals for their permission to reproduce copyright material
in this book.
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xii ACKNOWLEDGEMENTS
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Text
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Standards NSW for and on behalf of the Crown in right of the State of New South Wales, 2010
• Change Factory: 186–7/Dwyer, Kevin. ‘What Is a Team?’ Web. 11 April 2014 • Copyright
Agency Limited: 41–2/‘Structure your business for success’ by Alexandra Economou,
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Bita, www.news.com.au, 10 May 2013; 58/‘Too many ring in the holidays with their work
phones and laptops’ by Paul Bibby, The Age, 29 December 2010; 64/‘DVDs dying a death as
internet takes over’ by Greg Thom, Herald Sun, 28 July 2011; 137–8/‘Wave of change as leading
surf brand gets to the bottom of the deep, green sea’ by Cassandra Murnieks, The Australian,
ACKNOWLEDGEMENTS xiii
28 September 2010; 357/’The net still has its share of catches’ by Keeli Cambourne, The Age,
1 December 2010; 367/‘NSW Food Authority names and shames 13 NSW eateries’ by
Rosemarie Lentini, The Daily Telegraph, 27 February 2012 • Creative Commons:
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of a manager, soul of a leader, John Wiley & Sons, New York, p. 127 • People + Culture
Strategies: 270–1 • Rachel Wagner: 273–4/‘Australia’s unethical rag trade’, taken from
http://www.upstart.net.au, 8 April 2013 • Small Business Development Corporation: 336
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xiv ACKNOWLEDGEMENTS
TOPICS
TOPIC 1: NATURE OF BUSINESS 2
TOPIC 2: BUSINESS MANAGEMENT 116
TOPIC 3: BUSINESS PLANNING 310

TOPIC 1
NATURE OF BUSINESS
FOCUS AREA
The focus of this topic is the role and nature of business in a changing business
environment.
OUTCOMES
Students should be able to:
structures
• explain the internal and external influences on businesses
• plan and conduct investigations into contemporary business issues
• evaluate information for actual and hypothetical business situations.
Role of
business
Business growth Types of

NATURE OF BUSINESS
and decline business
businesses
Influences in the
business environment
2 TOPIC 1 • Nature of business

The role of business
Businesses play a crucial role in our lives and actively contribute to progress in society.
Some of these roles include:
• employment and income — for example, BHP Billiton has more than 125 000 ❛ The world of
employees and contractors. They are a global producer of major commodities and business is most
the largest company in Australia. BHP Billiton typically pays their employees 11 per
cent above the market. definitely an exciting
• profit — for example, in 2013, Woolworths’s profit increased by 24 per cent to
$2.3 billion due to the expansion of their food, liquor and gambling businesses.
and interesting one. ❜
• innovation — for example, Nike was named the Most Innovative Company in
2013 by Fast Company for creating Nike trainers with embedded sensors that
measure people’s athletic ability. The Sports Sensor is made from four different
sensors embedded inside dedicated trainers, with an internal accelerometer that
measures movement. The data collected is then fed wirelessly to an iPhone, where
people can check their progress directly.
• entrepreneurship and risk — for example, the co-founder of Microsoft
Corporation, Bill Gates, is one of the most successful entrepreneurs of the late
twentieth and early twenty-first centuries. Gates was only a teenager when he
took the risk of establishing his own business. In just 25 years, he built his
business into a multi-million dollar corporation and became one of the world’s
wealthiest individuals.
• wealth — for example, Macquarie Group recently generated wealth for its
shareholders. In 2013, their share price had increased by 106 per cent since
2011. Many investors have been drawn to their growth and attractive dividend
payments. Macquarie Group has also generated substantial wealth for their
employees: in addition to their competitive salaries and performance-based
pay structure, many employees at the bank have been given an opportunity to
receive a share of the company’s profits by participating in the group’s share
purchase plan.
These are just a few of the many roles played by businesses in our society. The world
of business is most definitely an exciting and interesting one.
TOPIC 1 • Nature of business 3

CHAPTER 1
Role of business
1.1 Introduction
Think of all the different businesses that operate in your local neighbourhood. Now
imagine what the world would be like if they did not exist. Ultimately we would
have to become self-sufficient: providing for our own needs and wants. Fortunately,
in our society, businesses of all sizes play a crucial role in providing us with a vast
array of goods and services. Businesses are at the very core of our economy and our
future wealth depends upon them.
Most people associate the word ‘business’ with large, transnational corporations,
such as BHP Billiton, McDonalds, Apple and Westfield, operating in many
countries, employing thousands of people and earning millions of dollars in profit.
Although these types of businesses are well known, they are few in number. Small
to medium enterprises (SMEs) make up about 98 per cent of all businesses in
Australia. Take a look around your local area and you will see plenty of examples
of businesses that are considered small or medium based on the number of people
they employ.
FIGURE 1.1 As consumers, we rely on a

large number of businesses to satisfy our
needs and wants.
The one common feature shared by both the largest and the smallest business
is that they produce a product — goods or service — which is sold in a market
where buyers and sellers meet. The Australian business world has approximately
2.14 million actively trading businesses that respond to the needs and wants of
around 23 million Australian customers and millions of overseas customers.

Why learn about business?
Business Studies is a very important subject. It is concerned with activities that
affect us on a day-to-day basis. You only have to listen to the news or read
the newspaper to find stories about business activity. Some of these stories will
make you feel optimistic — for example, the developments of new products that
have helped improve our standard of living. At other times, business activity may
make us feel dejected and cynical — for example, when businesses have misled the
public about safety standards or when companies have exploited weaker members
of society. Therefore, when studying business, it is essential that you carefully
examine business issues in order to make a balanced judgement.
Learning about business is both interesting and useful. It is also challenging and
requires imagination.
In learning about business you will need to be creative and have a questioning
mind. Business decisions are often open ended; there may be more than one way of
going about things. Therefore, you will need to ask lots of questions and weigh up
alternative ideas and proposals.
FIGURE 1.2 Many Business Studies

students have experienced first-hand the
challenges and rewards of establishing
and operating their own business by
operating a stall at a local community
market.
Business Studies is not a totally new subject to you. In one sense you have been
‘studying’ business ever since you made your first purchase many years ago —
perhaps an ice-cream or lollies. That simple transaction launched you on life’s
journey as a customer — and as an integral part of the business world. As a high
school student, perhaps you have even operated your own ‘business’, mowing
neighbours’ lawns, washing windows or setting up a stall at a local community
market. You may be employed on a part-time basis and work in a local store or
fast-food outlet — both examples of business enterprises.
Importance of business to you

Undertaking this Business Studies course will give you a better understanding of
how businesses are established, organised and operated. As well, it will give you an
insight into the different roles you will play throughout your life — as consumer,
employee, business owner and/or investor. Each of these roles centres around a
business as shown in figure 1.3.
Role of business • CHAPTER 1 5

Successful business owner Informed consumer
The technical skills and knowledge You will be able to make better informed
required to own and operate a successful decisions and use your money wisely.
business can be gained through learning During your life you will make thousands of
about business. commercial transactions with hundreds of
businesses.
BUSINESS STUDIES
It helps you throughout your
life to perform these important
roles better.
Productive employee
Employers today require people to have a Informed investor
number of skills. These include technical You may want to invest some money and
skills, and the ability to cooperate with become a shareholder in a company. To
people and to have a working knowledge do this wisely requires an understanding of
of business operations. business operations and terminology.
FIGURE 1.3 Developing an understanding of the world of business will help you in so many ways.
Businesses, through the many products (goods and services) they make and sell, have
an enormous impact on our lives every day. They influence how we live, work and play.
Summary
• Businesses play a crucial role in our society, largely determining our standard of
living.
• Small to medium enterprises (SMEs) make up about 98 per cent of all businesses
in Australia.
• The one common feature shared by both the largest and the smallest business
is that they produce a product — goods or service — which is sold in a market
BizWORD where buyers and sellers meet.
A business can be defined as the • Businesses have an enormous impact on our lives every day.
organised effort of individuals to
produce and sell, for a profit, the
products that satisfy individuals’ 1.2 The nature of a business
needs and wants.
There is one thing people have in common — they all have needs and wants.
A product is a good or service that
can be bought or sold. They need food to eat, clothes to wear and houses to live in. Most of us also want
Goods are items that can be seen or
Blu-ray players, tablets, smart phones and cars — if only for the pleasure they give
touched. to us. To satisfy these never-ending wants is the role of business. A business can be
Services are things done for you by defined as the organised effort of individuals to produce and sell, for a profit, the
others. products (goods and services) that satisfy individuals’ needs and wants.
To satisfy the needs and wants of its customers, the business has to produce
the products the customers demand. By producing these products for sale on
the market, the business hopes to achieve a number of goals. Making a profit is
perhaps the most basic of these.
Producing goods and services

BizWORD
When we go shopping we are choosing from a range of finished products —
A finished product is one that is
ready for customers to buy and use.
products that are ready for customers to buy and use. Rarely do we stop to think
about all the operations that have occurred to transform raw materials into finished
Production refers to those activities
undertaken by the business that products ready for consumption. Business enterprises undertake many activities to
combine the resources to create provide the products demanded by customers, as shown in figure 1.5. However,
products that satisfy customers’ by far the most important of all these activities is production. Production refers to
needs and wants. those activities undertaken by the business that combine the resources to create
products that satisfy customers’ needs and wants.

FIGURE 1.4 Do you have oniomania?
That means you are what might be
referred to as a shopaholic or compulsive
shopper. Some people are ‘born to shop’
it seems. Australians usually spend over
$14 billion during the Boxing Day–New
Year period. Such a large market depends
on a huge range of businesses to supply
the goods and services based on the
needs and wants of so many customers.
Management — coordinating
the business’s limited resources
to achieve specific goals (e.g.
the owner buys a new machine
that makes coffee faster and
saves on labour)
Organising natural,
Production — capital and human
creating products resources (e.g. separate
(e.g. new reproduction rosters are drawn up for
furniture line is created the employees who work
featuring chairs with a in the ‘Eats’ café and the
‘well worn’ look) antiques section) BizFACT
It is possible to calculate the value
of production within an economy.
The money value of all the finished
products produced in Australia during
Marketing products
Distributing goods and one year is called the gross domestic
(e.g. online
services (products) (e.g. product (GDP). This measurement
store established
the owner employs a is used as an indicator of Australia’s
to show full range of
delivery business to economic growth. Investigate the
antiques available)
transport antiques to trend in Australia’s GDP over the
various customers past decade.
at a cost)
Controlling production
— quantity and quality
(e.g. café manager
Planning finances,
seeks feedback from
production and business
customers)
needs (e.g. permission
sought from local council to
have tables on footpath)
Forecasting sales, expenses
and profit (e.g. café changes
to a supplier providing
cheaper coffee)
FIGURE 1.5 The main activities undertaken by this business, an antiques dealer with an
on-site café, include more than selling furniture and serving coffee.

Summary
• The main role of a business is to produce and sell, for a profit, the products that
satisfy individuals’ needs and wants.
• Business enterprises undertake many activities to provide the products demanded
by customers, with production being one of the most important.
• Production occurs when the business combines the resources to create products.
EXERCISE Revision
1.1
1 Identify the one common feature shared by all businesses.
2 Summarise how Business Studies can help you better perform the roles of consumer,
employee, business owner and investor.
3 Outline the role of business.
4 Define the term ‘business’.
5 Identify two goods and two services you recently purchased to satisfy a need or a want.
Next to each one write the name of the business from which you bought the product.
6 Define the term ‘finished products’.
7 Explain why production is regarded as the most important business activity.
8 Gordon Su is the owner of a jewellery store specialising in handmade necklaces and
bracelets. Read about his daily business activities (in the first column of the table below)
then complete the table to demonstrate each business activity Gordon undertakes to
operate his business successfully. The first example has been completed for you.
Activity undertaken by business Example
Production — creating products Making necklaces and bracelets
Organising natural, capital and human resources
Marketing products
Controlling production — quantity and quality
Forecasting sales, expenses and profit
Distributing goods
9 Reflect on what you have learned so far. State how this information would influence
you if you were intending to start a business.
Extension
1 As a class, discuss the statement: ‘The one thing I’ve learnt about surviving in
business is that it’s important to learn from past mistakes — and the more mistakes
you make the more you learn.’ (Richard Branson, British entrepreneur, founder and
CEO of Virgin Group)
2 Construct a clippings file of magazine and newspaper articles dealing with various
aspects of business and its importance to the Australian economy. Select five articles
and paste them onto a sheet of paper. Underneath each article prepare a 12–15 line
summary.
3 Construct a series of flowcharts to show the interrelationship between producers and
consumers.
1.3 Other functions of business

Businesses play an important role in our society. Some of the important functions
of business are outlined in figure 1.6.

Profit
This is the return, or
reward, that business
Quality of life owners receive for
Businesses offer a vast producing products Employment
array of products that that consumers need Businesses provide
improve our standard and want. about 80 per cent of
of living. all private sector jobs.
Wealth Incomes
Business activity results Businesses provide
in higher levels of income to business
economic growth owners/shareholders
and wealth. and employees.
Entrepreneurship Choice
and risk Consumers have
Businesses provide freedom of choice
individuals with the and the opportunity
Innovation
opportunity to turn to purchase products
Through research and
their ideas and at competitive prices.
development, existing
passions into a
products are improved
livelihood.
and new products
are created.
FIGURE 1.6 The economic and social importance of business
Profit
The main activity of a business is to sell products to its customers. A business
receives money (sales revenue) from its customers in exchange for products. It
must also pay out money to cover the numerous expenses involved in operating BizWORD
the business. If the business’s sales revenue is greater than its operating expenses, Revenue is the money a business
it has earned a profit. More specifically, profit is what remains after all business receives as payment for its products.
expenses have been deducted from the business’s sales revenue (see figure 1.7). Operating expenses are all the costs
of running the business except the
Sales revenue cost of goods sold.
Profit is what remains after all
business expenses have been deducted
from sales revenue.
FIGURE 1.7 The relationship

Operating expenses Profit between sales revenue and profit

The business’s profit becomes the property of its owners. For this reason, profit
can be regarded as the return, or reward, that business owners receive for producing
products that consumers want.
BizFACT
A negative profit, which results when
a business’s expenses are greater than
its sales revenue, is called a loss.
FIGURE 1.8 A business must earn a

profit to survive. Profit is the reward to
business owners who have taken the
risks involved in starting and operating a
business.
Employment
BizFACT Businesses have another important role to play. To be able to purchase products,
Many small business owners aim consumers need money. They usually earn that money by working at jobs provided
to continue their business so as by businesses.
to provide employment for family The number of employees hired by a business at any time will largely depend on
members. Do you think this trend will the nature of the products and the number of customers who wish to purchase the
continue? Explain why.
products. Generally, the more that is sold the more employees a business will hire.
Large businesses employ thousands of people within their organisations.
However, the SME sector is a major source of employment in Australia,
accounting for about 70 per cent of all private (non-government) sector employment
— approximately 8 million people. In fact, the SME sector has been the major
generator of new jobs since the mid 1980s. People are employed in many different
businesses, as can be seen in table 1.1.
BizWORD
Income is money received by a
person for providing his or her labour, Incomes
or a business from a return on its
Another important function of business is to provide income. For an individual, income
investments.
is the amount of money received for providing his or her labour. A business’s income is
A wage is money received by workers,
usually on a weekly basis, for services
the amount it earns after covering all of its expenses: a return on its investments.
they provide to an employer. Many businesses require staff to conduct their operations. These employees
A salary is a fixed amount of money provide their labour and in return receive either a:
paid on a regular basis, usually • wage: money received by workers, usually on a weekly basis, for services they
fortnightly or monthly, to a permanent provide to an employer
employee of a business. • salary: a fixed amount of money paid on a regular basis, usually fortnightly or
monthly, to a permanent employee of a business.

TABLE 1.1 Employment in Australia by industry sector (2011)
Industry sector Number %
Agriculture, forestry and fishing 249 825 2.5
Mining 176 429 1.8
Manufacturing 902 818 9.0
Electricity, gas, water and waste services 115 579 1.1
Construction 828 838 8.2
Retail trade 1 057 230 10.5
Wholesale trade 403 789 4.0
Accommodation and food services 650 356 6.5
Transport, postal and warehousing 479 115 4.8
Information media and telecommunications 178 187 1.8
Financial and insurance services 377 346 3.8
Rental, hiring and real estate services 158 847 1.6
Professional, scientific and technical services 730 021 7.3
Administrative and support services 323 720 3.2
Public administration and safety 689 555 6.9
Education and training 804 306 8.0
Health care and social assistance 1 167 573 11.6
Arts and recreation services 151 548 1.5
Other services 378 196 3.8
Inadequately described or not stated 233 865 2.3
Total employed persons aged 15+ 10 057 143 100.0
Source: Australian Bureau of Statistics, Census of population and housing 2011.
This means that part of the money received from the sale of the business’s
products is divided among the workers who contributed to their production.
A business receives money from the sale of its products. As previously outlined, BizWORD
this is called sales revenue. From this revenue, all the expenses incurred in operating Shareholders are people who are
the business must be deducted. The amount that remains is the business’s profit. part owners of a company because
This becomes the business owner’s property and consequently their income. they own a number of shares.
If the business is a private or public company, it will have many owners referred A dividend is part of a business’s
to as shareholders. (A share is a part ownership of a company.) Usually, some or profit that is divided among
all of a company’s profit is divided among shareholders. This type of income is shareholders.
called a dividend.

FIGURE 1.9 Businesses generate
income for employees and business
owners.
The amount of income a business can generate as wages and salaries, profits or
dividends, depends largely on how successful it is in selling its products. A business
that is aware of what consumers desire and attempts to satisfy this demand will
experience increasing sales. This provides the business with the opportunity to
offer higher income payments to employees, business owners and shareholders.
BizWORD Choice
Choice is the act of selecting among Choice is the act of selecting among alternatives. For instance, you decide to
alternatives. purchase a new toothbrush. At the local supermarket you find a bewildering array
of brands, designs, colours, shapes, textures, packaging, bristle arrangements, sizes
and prices. A vast assortment of options — and all for the simple task of brushing
your teeth.
In our society, consumers have freedom of choice and the opportunity to purchase
a variety of products at competitive prices. An average supermarket will have on
display approximately 20 000 product lines, with some hypermarkets carrying in
BizFACT excess of 40 000 lines. Freedom of choice exists when consumers can ‘shop around’
Most businesses usually offer a range and select from a range of competitors’ products. The more competition there is, the
of products as this will increase profits greater the choice available to consumers. Businesses competing with one another
in the long term. are responsible for the wide range of products in the shops. Every day thousands of
businesses are producing products for specific sections of the overall market.

Summary
• Profit is what remains after all business expenses have been deducted from sales
revenue.
• Profit is the reward that business owners receive for assuming the considerable
risks of ownership.
• SMEs provide employment for about 70 per cent of Australia’s private sector.
• Businesses generate income for:
–– employees — wages and salaries
–– business owners — profits
–– shareholders — dividends.
• The amount of income a business can generate as wages, salaries, profits or
dividends depends largely on how successful it is in selling its products.
• In our society, consumers have freedom of choice and the opportunity to
purchase a variety of products at competitive prices.
Innovation
The definition of innovation may vary, but it generally refers to the process of
creating a new or significantly improved product, service or process (way of doing
something). Invention refers to the development of something that is totally new,
but innovation and invention both result in something unique being created. You BizWORD
might have seen the television program New inventors, where Australian inventors Innovation is either creating a
are given the opportunity to showcase their invention and receive feedback from new product, service or process, or
a panel of judges. In 2010, the invention of the year was EVestG, which is a new significantly improving an existing one.
technique that measures the patterns of electrical activity in the brain, allowing
doctors to detect mental and neurological illnesses more quickly than ever before.
Correctly diagnosing mental illness is a worldwide problem, so this new invention
is a medical breakthrough.
Ideas for new products, or development of and improvements to existing
products, will often provide the opportunity for the establishment of a new BizFACT
business. Many small business concepts are an innovation on an existing product. Vegemite is an example of a
Blu-ray players and tablet computers, for example, came into existence in the great Australian invention. Food
same way as light bulbs and car tyres — that is, through people making technical entrepreneur Fred Walker hired a
food chemist to create an edible
advances with established products. Sometimes, a person has an idea for a totally
substance out of brewer’s yeast.
new product, an invention, which will satisfy a need that is not presently being Vegemite wasn’t an instant success
satisfied. Patents are legal protection for the exclusive right to commercially exploit though, and Fred tried a number of
an invention. tactics to convince the consumer of
The way we listen to music has been the subject of innovation over the last the value of his product. By the late
1930s, Vegemite was accepted as an
century or more. Prior to the invention of the first phonograph by Thomas Edison
Australian product that was a valuable
in 1877, the only way people had been able to listen to music was through live source of vitamins.
performance. Edison’s invention involved playing music that had been recorded on
cylinders, but these were eventually superseded by discs in the 1920s. Tape recording
was developed in the 1930s and 1940s, with the cassette tape appearing in 1964.
Compact discs came onto the market in 1982. Since the 1990s digital recording
techniques have allowed for music to be downloaded from the internet, stored on
computer hard drives and on solid-state devices such as iPods and USB flash drives.
New technological developments soon lead to new products, new markets and new BizWORD
business opportunities. In the same way, many SMEs undertaking research and Research and development (R&D)
development (R&D) have produced many new products that we take for granted. is a set of activities undertaken to
SMEs generally display a consistently positive attitude towards innovation. They improve existing products, create new
products and improve production.
constantly research, develop and test new ideas and products. Many SMEs are built
on product innovation.

Finding new and better ways of doing things has resulted in improved efficiency
and increased productivity. Studies confirm that the level of innovation among
SMEs employees is much higher than among employees of larger businesses. This
is perhaps because Australians have traditionally been a very innovative people,
constantly recording the most number of new products per head of population (see
the following Snapshot).
Great Aussie products — innovation

How would you describe a country that has invented the Victa lawnmower, Esky, Hills
Hoist, Speedo swimwear, StumpCam (a small camera hidden in a cricket stump to
provide action replays), wine cask, surf life-saving reel and insect repellent? You might
SNAPSHOT describe it as a sports-loving nation that enjoys an outdoor lifestyle. Of course, the
country is Australia! However, if we examine another list of inventions — penicillin, IVF
freezing technique, cochlear implant (hearing implant), ultrasound technology, black box
flight recorder, flu vaccine — then Australia could also be seen as a nation of scientists.
What these two lists reveal is that Australians are very innovative. According to the
Australian Innovation System Report 2013, Australia ranks from seventh to twentieth
of 141 OECD countries on most indicators of innovation activities, including business
expenditure on research and development (R&D), generosity of tax treatment for
business R&D, patenting, and non-technological innovation.
Innovation and invention can lead to the establishment of a business based on the
development of new or improved products or services. Converting an innovative idea
into a business concept often requires the creativity and risk taking of an entrepreneur.
Success is something the following Australian small business owners achieved.
• Entrepreneur John Parselle developed a system called Fingerscan, which allows
people to make electronic transactions or gain access to high security areas
by pressing a finger on a flat piece of glass. Everyone has a unique set of
fingerprints, and Fingerscan can identify individual customers or employees.
• Greenspan Technology on Queensland’s Darling Downs has grown to rapidly
become one of the world’s leading water quality monitoring instrumentation
companies. It makes a wide range of sensors and water quality analysers for
the water and wastewater markets. Patrick Harmon established Greenspan in
1991. Over the past years, Greenspan has established strong relationships with
Australian universities and research institutes to access leading-edge technological
innovations in water quality monitoring.
• About 15 years ago, Gary Leech started toying with the idea of producing handcooked
❛ Australians are very potato chips. Using a domestic deep fryer, he experimented with varieties of potatoes,
different oil temperatures and different slice thickness. From this humble beginning
innovative.❜ sprang the enormously successful Kettle Chips. When Gary Leech and his partners sold
the business to Arnott’s Biscuits, Kettle Chips had a turnover of $18 million.
Snapshot questions
1. Identify some Australian inventions.
2. Outline what is required to convert an innovative idea into a business
concept.
3. Select an Australian innovation and explain the benefits of that innovation to
both the business and society.
Entrepreneurship and risk

Most of us have seen something advertised and thought, ‘That is just what I need’.
Someone, somewhere, had the idea to provide this product. Not all inventors or
innovators will seek to use their idea as the basis for a business. In many cases they will
be happy to sell their idea to an existing business and let someone else manufacture and

market that product. To be willing to take the risk of starting up and operating a business
and then working to build that business requires qualities of entrepreneurship.
People who transform their ideas into a new business are called entrepreneurs.
They are prepared to take the risk of starting and operating a business venture;
of turning their dreams and passions into a livelihood. Entrepreneurs have to BizWORD
take risks because usually they explore untapped markets with no track record Entrepreneurship is the ability and
of proven consumer demand or guaranteed returns. They cannot be certain that willingness to start, operate and
anyone will buy what they plan to sell. But for those whose ideas translate into a assume the risk of a business venture
successful business venture, the profits are often huge. in the hope of making a profit.
If a business fails, its owner may lose all or part of the money he or she has put An entrepreneur is someone who
into it. If people are to take this risk, they must be encouraged by the hope of some starts, operates and assumes the risk
of a business venture in the hope of
reward for success. In our economic system, profit is the return (reward) or payment making a profit.
that business owners receive for assuming the considerable risks of ownership. One Risk refers to the possibility of loss.
of these risks is the risk of not being paid. Everyone else — employees, suppliers
and lenders — must be paid before the owners. And if there is no profit, there can
be no payment to owners. A second risk is that if the business fails, its owner may
lose all or part of the money he or she has put into it.
Bill Gates, co-founder of Microsoft Corporation — the world’s most successful
computer software company — is a classic example of an entrepreneur (see figure 1.10).
While he was a teenager, he decided to take the risk of establishing his own business BizFACT
to market a computer operating system that he and a friend had developed. Today Every new business starts with an
he is one of the world’s wealthiest individuals. Entrepreneurs often display flair and idea. Describe a business idea that
you could provide and that is, to your
creativity. They will frequently find new and innovative ways of promoting their knowledge, not already available.
products or services. They will regularly upgrade and adapt their business objectives
and recognise new opportunities to expand or diversify their business operations.
BizFACT
Bill Gates topped the Forbes list of the
world's richest billionaires again in
2014 with a net worth of $76 billion.
He has held the top spot for 15 of the
last 20 years.
FIGURE 1.10 Entrepreneur, Bill Gates
On a smaller scale, but just as successful, is soft tissue therapist Andrew Curry,
owner of Miracle Massage, which operates in the country town of Goulburn. Andrew
established the business in April 2001 when he was only 22 years of age. He operated
the business while concurrently working part-time at the Australian Institute of Sport
(AIS). Andrew’s experience of soft tissue therapy in private practice and in this elite
sports environment, laid the foundation for the clinic’s unique treatment methods.

When Andrew started the business he had no idea that it would eventually:
• employ seven people
• undertake clinical research in spine, breathing and pelvic dysfunction
Weblink • offer Pilates and injury prevention training programs.
Use the Miracle Massage The principal reason for Miracle Massage’s success is Andrew’s passion, drive and
commitment: his entrepreneurial skills (see the following Snapshot).
to visit the website of
this remedial, sports and
relaxation soft tissue therapy
company.
FIGURE 1.11 Andrew Curry, owner and

operator of Miracle Massage, and Kira
Slater, office administrator
Andrew Curry — Miracle Massage: remedial,

sports and relaxation soft tissue therapy
Interviewer: What would you consider to be your main entrepreneurial skills?
Andrew: Being able to plan; confidence in my own ability, not because I’m arrogant
SNAPSHOT but because I put a lot of time into developing my professional and business skills;
highly motivated; honest and fair in all business dealings; work well with people; a
competent communicator; a lateral thinker; prepared to take responsibility, especially
for my employees; and highly organised.
Interviewer: Please outline the factors that prompted you to establish your own
business.
Andrew: After completing my Associate Diploma course I approached a number
of Canberra businesses for a position. I wanted to work for a business whose
employees were all highly trained and that matched my level of training. At that time
there was no standardisation for soft tissue training and consequently there was
a wide variety of different skills sets across the businesses. Frustratingly, I was not
able to find a business that matched my level of training or one that supported their
treatment with sound theoretical knowledge. That may sound a bit pretentious, but
it was the main factor that prompted me to start my own business. Two other factors
that further prompted me included the identification of a business opportunity and a
potential customer base.

Interviewer: How did you identify a business opportunity?
Andrew: During the job interviews I asked a lot of questions — in a sense, I
undertook some market research — to identify the markets being serviced, the range
of therapies they offered, their price structure and what strategies they used to
achieve their business goals. The only business within Goulburn that offered a level of
therapies and training that I desired was operating to maximum capacity. Therefore, I
could see an opening for me to establish a business to satisfy unmet demand.
Interviewer: How did you identify a potential target market?
Andrew: While undertaking my course in Canberra, I worked part-time at the
Goulburn Aquatic Centre as a lifeguard, and swimming and fitness instructor. I
therefore had a good following: a market of active, health conscious people that I
thought I could tap into.
Interviewer: Did you have a passion for establishing a business?
Andrew: It was more a strong desire to pursue my goals by meeting the needs of
people. And the only way to achieve this was by setting up my own business.
Interviewer: As part of your course you were required to complete a business plan.
How was this beneficial?
Andrew: It provided the basis on which I was able to develop my business. Without
it I would not have been aware of all the requirements of establishing a business. It
forced me to undertake research, evaluate different business ideas and identify some
long-term goals. But most importantly, I discovered that the single main cause for
small business failure is inadequate cash flow.
Interviewer: How did this influence the way in which you operated your business?
Andrew: I was determined to keep my cash flow positive. I did this by continuing
with my work at the AIS, which provided an external source of funds. This minimised
❛ All businesses
the risk of early failure. involve some degree
Interviewer: You once said that as a businessperson/entrepreneur, you only take
moderate risks rather than high risks. Please elaborate. of risk; and I enjoy
Andrew: All businesses involve some degree of risk; and I enjoy such challenges.
A great quote I came across recently sums up my approach: ‘Growth demands
such challenges. ❜
a temporary surrender of security’. However, the more calculated you make the
decision and the more you take emotion out of the decision-making process, the
more moderate the risk becomes. You minimise a high-risk strategy by approaching
it objectively and gathering as much information as possible. I don’t like to take high
risks but I like to take high-risk situations and minimise the risks as much as possible.
If this can’t be achieved then it is not worth following the idea. It is a ‘no-brainer’ to
take a high risk with low benefit!
Interviewer: What must you do to be an ethical entrepreneur?
Andrew: Simply act honestly and fairly in all business dealings. For example, I have
fantastic employees who are one of the main strengths of my business. I have a
responsibility for their welfare at work, as well as their future development. All my
employment processes, therefore, must meet rigorous criteria. This has the added benefit
of treating fairly any employee who turns out to be unsuitable. Constantly monitoring
and evaluating how I operate the business helps maintain my good reputation. One of
my main business goals is for Miracle Massage to have a good reputation within the
wider community; something I feel very proud about. Being a reputable business is good
business. It results in a large number of repeat, loyal clients. Ultimately, I gain a great deal
of satisfaction from seeing my clients recover from chronic pain.
Snapshot questions
1. Identify the main entrepreneurial characteristics exhibited by Andrew Curry.
2. Recall the factors that prompted Andrew to establish his own business.
3. Outline whether you agree with Andrew when he says that an entrepreneur
should take only moderate risks rather than high risks.
4. Account for the success of Miracle Massage.
5. Discuss why it is important for Andrew to maintain an ethical business.
6. Predict what may happen to Andrew’s business over the next five years.

Entrepreneurial qualities, however, are not confined to adults. For example, at
a recent swimming carnival, Yolanda Zurack, a Year 8 student, arranged to take
along an Esky filled with cold drinks. To keep her costs down Yolanda bought the
drinks through a local wholesaler. During the very hot day she sold all the drinks
BizFACT and made a reasonable profit.
An entrepreneur’s drive and Yolanda Zurack, Bill Gates and Andrew Curry are all entrepreneurs. They
motivation to establish and operate a organised their business, undertook the necessary arrangements for it to operate
business lies at the heart of our private and were prepared to take a risk. The size of the profits may differ but they possess
enterprise economic system. identical entrepreneurial qualities: courage, motivation, determination and energy.
Without such entrepreneurs and their activities, many of the products we purchase
would not exist.
Wealth
The more that is produced the more wealth is generated within the Australian
economy. The thousands of individual businesses operating every day act as the
‘engine room’ of society, helping drive the economy forward to achieve greater
levels of economic growth and wealth.
During normal operations, a business receives money from its customers in
exchange for products. At the same time it must also pay out money to other
businesses to cover operating expenses. Operating expenses are the costs involved
in the day-to-day operation of the business. The difference between the two
amounts, the value added, represents the wealth (profit) created by the business.
This wealth is then redistributed to employees, governments, lenders, owners/
shareholders and the business itself (see figure 1.12).
Governments
Taxes such as income
tax, payroll tax, fringe
benefits tax and goods
and services tax
Employees Business owners/

Salaries, wages and shareholders
other employment Dividends
benefits HOW THE WEALTH
CREATED BY BUSINESSES
IS REDISTRIBUTED
Lenders The business itself

Loan repayments Depreciation,
retained profits
FIGURE 1.12 The distribution of the wealth created by a business
As previously outlined, businesses need to employ people to assist in the

production process. These employees receive an income (wage or salary) that
can be spent to satisfy their needs and wants. Both the money received and the
products purchased add to the wealth of individuals and households. Imagine if all

the businesses within your local community were to close down overnight. People
would lose their jobs and source of income, fewer products would be available for
purchase, and the flow of money would quickly contract. The end result would be
an increase in the levels of poverty, the opposite of wealth creation.
The total output of the country’s diverse collection of businesses, ranging from
large transnationals to the family-owned local corner store, makes a significant
contribution to the wealth of the national economy.
Quality of life
In our society most people want more than the bare necessities; they want to
achieve the highest standard of living possible. Overall, we have high expectations
about what our economy should provide for us. However, we often want more
than simply to have our material wants satisfied. We also desire a high degree of BizWORD
quality in our lives. Quality of life refers to the overall wellbeing of an individual, Quality of life refers to the overall
and is a combination of both material and non-material benefits. wellbeing of an individual, and is a
For example, we desire to have leisure time for hobbies and recreation. Our combination of both material and
non-material benefits.
quality of life is improved by having access to a number of non-material products
such as fresh air and clean water, unpolluted earth, conservation of wildlife
and protection from toxic sources. Consumers have become increasingly
concerned about waste disposal, the greenhouse effect and the destruction of
unique habitats.
Many businesses have responded to quality-of-life issues and are implementing
environmentally friendly procedures, for example recycled materials, cleaner cars,
less energy-consuming production and ‘green’ food products. Because business
activities play a vital role in our lives, businesses have a responsibility to help
provide what consumers want and to minimise what they do not want.
Summary
• Research and development (R&D) leads to innovation (the creation of new
products, services or processes, or the improvement of existing ones).
• People who transform their ideas into a new business are called entrepreneurs.
They are prepared to take the risk of starting and operating a business venture in
the hope of making a profit.
• An entrepreneur’s drive and motivation to establish and operate a business lie at
the heart of our private economic system.
• Business is a major creator of wealth within the Australian economy.
• Businesses produce a vast range of products that enable us to satisfy many and
varied wants, which results in a higher standard of living.
• Quality of life refers to the wellbeing of an individual, and is a combination of
material and non-material benefits.
Revision EXERCISE
1.2
1 Recall the main activity of a business.
2 Describe the relationship between revenue, operating expenses and profit.
3 Calculate which of the following businesses has made a profit.
(a) Sally’s Pet Shop has expenses of $2000 per week and revenue earned is $3500 per
week.
(b) Ben’s Gardening Supplies takes revenue of $6000 each week for a month, but has
weekly expenses of $7000 the first week, $8000 the second and third week, and
$3000 for the fourth week.

4 Evaluate the significance of the SME sector’s contribution to total employment
within the Australian economy.
5 Outline the three ways in which businesses provide income.
6 Recall the correct term and complete the table below.
Term Meaning
A. Income
B. Wage
C. A fixed amount of money paid on a regular basis to a

permanent employee of a business.
D. Shareholder
E. Part of a business’s profit that is divided among shareholders.
7 Define the term ‘choice’. Explain how businesses encourage freedom of choice.
8 Outline the role innovation plays within our economy.
9 Outline the role of the entrepreneur in our economic system.
10 Explain why people take risks.
11 Describe the two main risks associated with operating a business.
12 Identify the entrepreneurial characteristics that Yolanda Zurack, Bill Gates and
Andrew Curry have in common.
13 Assess your own entrepreneurial ability by completing the following questionnaire.
Question Yes No
(a) Are you willing to take moderate risks?
(b) Are you easily motivated?
(c) Do you get on well with people?
(d) Is your health excellent?
(e) Do you set realistic goals?

Digital doc
Use the Chapter summary (f) Are you prepared to accept responsibility?
document in your
eBookPLUS to compile your (g) Can you tolerate failure?
own notes for this chapter.
Searchlight: DOC-14110 (h) Do you have a positive self-image?
(i) Are you well organised?
(j) Are you a hard worker?
Someone with an entrepreneurial personality would answer ‘Yes’ to most of the

Digital doc questions. Write a self-evaluation report based on your answers. Compare your
Test your knowledge of key response in class.
terms by completing the 14 Clarify how businesses create wealth within the economy.
Chapter crossword in your
eBookPLUS. 15 Identify the ways in which the wealth created by a business is redistributed.
Searchlight: DOC-1195 16 Justify which is a more important contributor to a person’s quality of life — material
or non-material benefits. Provide reasons for your answer.

Extension
1 A profitable business is one that returns to its owners more than they could earn by
working for someone else. According to this definition, many businesses operating
today would not be considered profitable. Determine why their owners continue to
run them. Share your answer with the rest of the class.
2 Construct a three-minute presentation titled ‘How businesses contribute to our
economic and social wellbeing’. Prepare some multimedia materials to supplement the
oral presentation.
3 ‘The mother of invention/innovation is necessity.’ Justify this statement.
4 In small groups, predict the social consequences of an economy that is experiencing a
large number of business failures. Compare your answer with other groups.
5 In small groups, identify someone who successfully runs a small business. Critically
analyse the personal qualities this person possesses that contribute to the success of
the business.
6 The Entrepreneur Network for Young Australians Ltd (ENYA) is a not-for-profit public
company that ‘promotes the active participation of young people in enterprise, in Weblink
an ethical and sustainable manner’. Use the ENYA weblink in your eBookPLUS and ENYA
examine the main functions of this organisation.

CHAPTER 2
Types of businesses
2.1 Introduction
As explained in chapter 1, any organisation that sells goods and services to
consumers in order to make a profit is a business.
Businesses may be organised in a variety of ways. Although no two businesses are
identical, some common features that allow similar business types to be classified
and grouped together. Figure 2.1 illustrates the four methods commonly used to
classify businesses.
Micro-business
Partnership
Sole trader
Small
Private
Legal structure Size
company
Government
enterprise Medium
Public
Large
company
WAYS IN WHICH A BUSINESS

CAN BE CLASSIFIED
Quinary Local
Geographical
Industry sector
spread
Quaternary Primary National
Tertiary Secondary Global
FIGURE 2.1 The four methods commonly used to classify businesses
2.2 Classification by size

Like soft drinks, businesses come in three different sizes: small, medium and large.
Most people usually associate the term ‘business’ with large companies such as
Woolworths, Commonwealth Bank and Westfield, which employ thousands of
people across hundreds of locations. However, small to medium enterprises (SMEs)

play an especially important role within the Australian economy. As consumers, we
rely on a large number of SMEs to satisfy our wants and needs. These businesses
also provide employment for about 7.3 million people.
In recent years, SMEs in Australia have performed better than other sectors of
the economy. They have created many new jobs, have become more innovative and
are increasingly entering overseas markets (see chapter 10).
Although no universally accepted definition exists for a small, medium or
large business, a number of measurements can be used to determine the size of a
business, including:
• the number of employees — those who are hired to do work for the business
• the number of owners (of the business) — for example, a sole trader is a type of
business that has one owner BizWORD
• market share — the proportion of total market sales the business has compared Market share refers to the business’s
to competitors share of the total industry sales for a
particular product.
• the legal structure — for example, the business is set up as a sole trader,
partnership or company.
Apart from quantitative measures, such as the number of employees, qualitative
descriptions also help us to determine the size of a business. These qualitative measures
are based on personal observation about the business. From a qualitative viewpoint, a
business may be classified as small or medium-sized if:
• the owner makes most management decisions, such as who to hire, what to
produce and how to advertise a product
• the owner provides most of the capital (finance)
• the business has little control within the market. Smaller businesses do not
usually have a large share of the total market sales and therefore have less
control over such things as price.
• it is independently owned and operated (for example, the local hamburger
shop is run by the owner, who does not answer to a larger organisation such as
McDonald’s)
• the business is locally based. (This does not mean that it doesn’t export, because
many SMEs do export. It just means that many SMEs are based in the one BizWORD
location and, unlike a transnational (multinational) corporation or company, A transnational (multinational)
do not have offices around the world.) corporation is a company that has
branches in many different countries.
A comprehensive definition of small, medium and large business usually relies
on a combination of both quantitative measurements and qualitative descriptions,
as shown in table 2.1. This table also outlines the features of, and distinctions
between, the different sized businesses.
TABLE 2.1 Quantitative measurements and qualitative descriptions of small, medium and
large businesses
Characteristics Small Medium Large
Business type Corner store Services club Woolworths

Local mechanic Motel/hotel Qantas
Hairdressing salon Engineering factory National Australia Bank
Number of employees Fewer than 20 employees 20−199 employees 200 or more employees
according to the
Australian Bureau of
Statistics (ABS) business
register definition
(continued)
Types of businesses • CHAPTER 2 23

TABLE 2.1 (continued)
Characteristics Small Medium Large
Type of ownership Independently owned and Owned and operated by a Owned usually by thousands
operated by usually one or two few people and/or private of public shareholders
people shareholders
Most common legal Sole trader Partnership Public company

structure Partnership Private company (numerous)
Decision making Owner responsible for majority Owner basically responsible Complex decision making, due
of decisions; simple and quick for majority of decisions; more to division of responsibilities
implementation of decisions complicated decision making among directors, senior and
with slower implementation, middle management; possibly
due to influence of directors slow implementation of
decisions, due to the layers of
management
Sources of finance Owner (usually from own savings Owners’/partners’ own Many sources, including
or a loan); difficulty in accessing savings or a loan and/or cash reserves, retained
loans private shareholders; easier profit, sale of shares, and
accessibility to larger loans loans from domestic and
overseas institutions
Market share Small, usually local area; not Medium, due to dominance Large, especially for
dominant in the industry within a geographic region; multinational corporations
some market dominance that dominate the markets
of many countries
There is an additional category of business size called small to medium

enterprises (SMEs). An enterprise is just another name for a business. SMEs are
defined by the Australian Bureau of Statistics as firms with less than 200 full-time
equivalent employees and/or less than $10 million turnover (this usually refers to
BizWORD
the business’s total sales).
Small to medium enterprises are
defined by the Australian Bureau of Recent research undertaken by the Australian Bureau of Statistics (ABS) revealed
Statistics as firms with fewer than that the majority of small businesses are not those that employ 10 to 20 people, but
200 full-time equivalent employees those that employ fewer than five people (including the owner). These businesses
and/or less than $10 million turnover.
FIGURE 2.2 The number of SOHO

(small office home office) micro
businesses has expanded rapidly
over the past decade.

are referred to as micro businesses. Usually working from home (SOHO — small
office home office), this group of businesses represents about 88 per cent of the
entire small-business population. BizWORD
A micro business employs fewer than
2.3 Classification by geographical five people (including the owner).
spread
Consider the suburb or town in which you live. This area can be classified as your
local community or neighbourhood — that is, a group of people living and working
in the same locality. The consolidation of all these local communities is what forms
the nation of Australia. Now, broaden your scope even further. Australia is just one BizWORD
of the 195 independent nations that are part of the global network. Geographical spread is the presence
Businesses, too, can be classified as local, national or global according to their of a business and the range of its
products across a suburb, city, state or
geographical spread: the presence of a business and the range of its products
country or the globe.
across a suburb, city, state, country or the globe.
Local
A local business, such as a newsagent, corner store, hairdresser, mechanic or
pharmacy, has a very restricted geographical spread. It serves the surrounding area
and is in no position to offer a range of products to another suburb or town. Local
BizWORD
businesses such as these will frequently be used by consumers who live nearby.
A local business has a very restricted
The majority of local businesses tend to be small to medium in size. geographical spread; it serves the
surrounding area.
FIGURE 2.3 Consumers rely on a wide

range of local businesses (usually small)
that serve their surrounding area.
National
As a business grows, it increases its range of products and the area it serves. As it
does this, it develops into a national business — one that operates within just one
country. Coles, for example, commenced trading in 1914 as G.J. Coles variety store BizWORD
in Collingwood, Victoria. Started by George Coles and his brother Jim, it employed A national business is one that
six people. Today, Coles is a leader in Australian food retailing, with more than operates within just one country.
99 000 employees and over 19 million customer transactions a week.

Other well-known Australian businesses that serve the national market include:
• Australian Geographic — stores that specialise in Australiana, children’s
games, gadgets, telescopes, travel and outdoor products. The Australian
BizFACT Geographic magazine was started in 1985 by Australian entrepreneur and
adventurer Dick Smith. Today the magazine operates more than 70 stores
David Jones is not only Australia’s
oldest department store, but also the
across Australia.
oldest department store in the world • Sportsgirl — the boutique that became a major Australian fashion brand.
still trading under its original name. The company offers a wide range of fashion and accessories, and has over
For the 2013 financial year, its sales 110 stores across Australia. Founded in Melbourne in 1948, Sportsgirl today
revenue was $1.85 billion, down holds a dominant place in Australia’s retail fashion market.
1.2 per cent from $1.87 billion in the
• David Jones — one of Australia’s oldest department stores. In 1838, just 50 years
previous year.
after the First Fleet arrived in Sydney Cove, Mr David Jones opened ‘large and
commodious premises’ on the corner of George and Barrack streets, Sydney (see
figure 2.4).
• McGrath Estate Agents — one of the most successful residential real estate
groups. John McGrath began the business in 1988 from a small office in
Woollahra. Today, the company has expanded to more than 50 offices across the
east coast of Australia.
FIGURE 2.4 David Jones originally

began with one store in Sydney in 1838.
They gradually expanded over the years
and now operate 39 stores around
Australia.
As a national business expands and increases its sales, it will eventually run out
of new customers to sell to; that is, the domestic market becomes saturated. If the
business wishes to keep expanding, it can decide to export and sell its products in
BizWORD other countries. This allows the business to tap into new markets.
A global business, commonly
referred to as a multinational
corporation, is a large company
Global
that has branches in many different A global business, commonly referred to as a multinational corporation, is a
countries. large company that has branches in many different countries. The multinational
corporation represents the highest level of involvement in global business.

For such companies, national borders do not represent barriers to trade — they are
merely lines on a map. Consequently, multinationals corporation conduct a large
percentage of their business outside their home country. BizFACT
Multinational corporation come in many different forms and sizes. Coca-Cola, Some multinational corporations
LG, McDonald’s, CSR, News Corporation, BHP Billiton, Toyota, Unilever, Westfield have grown so large that their annual
and Exxon are just a few of the well-known foreign and Australian multinational revenues from worldwide sales exceed
corporations. However, all multinational corporations have a number of features the GDP of many nations. (GDP, or gross
in common. In a fully developed multinational corporation, finance, assets, domestic product, is the total value of
all goods and services produced in an
technology, information, employees and goods and services all flow freely from one economy in a given year.)
country to another (see the following Snapshot).
Westfield Group — global expansion

When Frank Lowy and John Saunders first came to Australia in the 1950s, there
wasn’t one shopping centre in the entire country. At the time, most shopping was
done in large department stores in major cities. In 1959 the pair became business
partners and opened their first shopping centre in Blacktown. They have both
since grown to become one of the world’s largest shopping centre owners and
SNAPSHOT
managers. The company they began, Westfield, is now a market leader in Australia,
New Zealand, the United States and the United Kingdom. Throughout its history,
Westfield has played a significant role in changing the way the world shops.
Westfield began as a public company listed on the Sydney Stock Exchange in
1960. In that same year, they built their second shopping centre in Hornsby with the
money they raised from the float.
After opening new shopping centres throughout Sydney in the 1960s, Westfield
expanded interstate in 1967 with the opening of Toombul in Brisbane, followed by
Doncaster in Melbourne in 1969. They continued to expand nationally and currently
have centres in all major metropolitan cities as well as some regional centres
throughout Australia.
Since the 1950s Saunders and Lowy have made regular trips to the United States
to learn more about shopping centres. By the 1970s they had become concerned
that Australia could only accommodate a finite number of centres due to its limited
population. This concern led them to begin thinking about expanding into overseas
❛ Westfield has played
markets. In 1980 Westfield expanded globally by acquiring their first shopping centre a significant role in
overseas in Connecticut in the United States. Within three years, they owned another
three centres in that market. Since entering the United States market, they have changing the way
continued to expand. Today, Westfield has a portfolio of 47 centres in the United States.
Westfield entered the New Zealand market in 1998 when they acquired St Luke’s
the world shops. ❜
Group Ltd, which owned 10 centres. Upon taking over this company, they branded
those centres Westfield. Their expansion into New Zealand has mainly been through
buying existing shopping centres. They currently have an interest in nine centres in
New Zealand.
Also in 2000, Westfield entered the United Kingdom with the acquisition of a
centre in Nottingham. This was followed by the establishment of a joint venture
interest in other centres in major cities. Today, Westfield has a portfolio of five
shopping centres in this market.
In 2011, Westfield entered two new markets, Italy and Brazil. Their entrance
into Italy was through a joint venture with Gruppo Stilo. The project involved the
development of a world class iconic regional shopping centre in Milan. While they
also entered into a joint venture project with Brazilian company Almeida Junior,
Westfield sold their 50 per cent share in this venture back to the original partner in
2013. They are, however, still planning a re-entry into Brazil soon.
(continued)

Westfield Group continues to expand their portfolio by either acquiring sites with
development opportunities in new markets or by redeveloping existing malls.
Weblink Snapshot questions

Use the Westfield weblink 1. Outline how Westfield enters new markets overseas.
in your eBookPLUS to listen 2. Explain why Westfield decided to expand globally.
to the story of Westfield 3. Construct a timeline of Westfield’s global expansion.
Group. 4. Explain how Westfield has changed the way the world shops.
Summary
• Businesses can be classified as small, medium or large.
• Their classification will depend on such things as number of employees, market
share, ownership and who makes the decisions.
• A micro business (usually a SOHO) employs fewer than five people (including
the owner).
• Businesses can also be classified as local, national or global according to their
geographical spread.
• A local business has a very restricted geographical spread; it serves its surrounding
area.
• A national business operates in just one country.
• A global business — a transnational corporation (TNC) — is a large business
with a home base in one country that operates partially owned or wholly owned
businesses in other countries.
EXERCISE Revision
2.1
1 Deduce whether the following businesses are small, medium or large, and explain
the reason for your decision.
(a) Qantas employs approximately 37 000 people.
(b) National Australia Bank is an international financial services organisation that
has customers in Australia, New Zealand, Asia, the United Kingdom and the
United States.
(c) Brookfarm is owned by Carolyn and Martin Brook. It produces gourmet macadamia
nuts for domestic and export markets, and employs more than 20 staff.
(d) Ripe Maternity Wear was started by two friends in 1996 to manufacture
contemporary maternity clothes. It supplies clothes worldwide, employing no
more than 20 staff.
2 Determine whether the following statements are true or false.
(a) A micro business is a business that sells only miniature products.
(b) SME stands for small to medium enterprise.
(c) Small businesses do not usually have a large share of a particular market.
(d) According to the Australian Bureau of Statistics, large businesses employ fewer
than 200 people.
(e) SMEs do not play an especially important role within the Australian economy.
(f) An enterprise is just another name for a business.
3 Complete the following statements by determining the correct word from the
choices given. Write the sentences in your notebook.
(a) According to the ABS, a business with fewer than 200/300 employees is classified
as a medium-sized business.
(b) A common feature of all small businesses is that they are independently/
interdependently owned and operated.
(c) Small businesses have a complex/simple management structure with few/many
rules and regulations.

(d) The number of employees in a business is a quantitative/qualitative measure.
(e) A small business has a large/small market share and usually serves the Australian/
local market.
(f) An example of a small business is Westfield Limited/Blue Hills Convenience Store.
(g) Most small businesses are sole traders/public companies.
4 Compare a micro business with a small business.
5 Define the term ‘geographical spread’.
6 Distinguish between a local and national business. Provide two examples of each.
7 Recall another name for a global business.
8 Identify three examples of multinational corporations.
9 State what features all multinational corporations have in common.
Extension
1 Construct a database of seven businesses that you have dealt with over the last few
months. Copy and then complete the following table. The first one has been done
for you.
Size: small,
Business name Business activity medium, large
1. Redback Café Food and drink Small
2.
3.
4.
5.
6.
7.
8.
(a) Calculate what percentage of the businesses are small.

(b) Outline the criteria you used to classify the size of each business.
(c) Compare the percentage with the figures for Australia.
(d) Account for the similarity/difference between the two figures.
2 Critically analyse the following statement: ‘multinational corporations play a crucial
role in our society. Without them, consumers would not have such a wide range of
products to select from.’
3 Look for five internet or newspaper articles about SMEs that interest you. Start a file
of news clippings or printouts and write an information page to attach to each article.
On the information page: Weblinks
(a) summarise what the article is about • Adidas
(b) examine some background information about the business.
• Levi Strauss
4 Adidas and Levi Strauss are two multinational corporations that place a great
deal of importance on their corporate social responsibilities. Both companies
have taken action against overseas suppliers over human rights issues and
environmental codes of conduct. Use the Adidas and Levi Strauss weblinks
in your eBookPLUS and investigate their commitment to their social and
environmental obligations. Create either an oral or written report and present
Weblinks
it to the rest of the class.
Multinational
5 Arrange to inspect an annual report for one of Australia’s large multinational corporations
corporations. Investigate the company’s operations. To help you, use the
Multinational corporations weblinks in your eBookPLUS.

2.4 Classification by industry sector
Another useful method used to classify businesses is based on the type of activity
they undertake. When businesses are involved in similar types of production, they
BizWORD are grouped together in what is referred to as an industry. Australian companies like
An industry consists of businesses Woolworths, Wesfarmers, JB Hi-Fi and Officeworks belong to the retail industry.
that are involved in similar types of There are five main types of industry groupings or sectors: primary, secondary,
production. tertiary, quaternary and quinary (see figure 2.5).
INDUSTRY SECTOR
Primary Secondary Tertiary Quaternary Quinary
FIGURE 2.5 The five main industry sectors
The relative size of each industry sector is shown in table 2.2. This table shows both
the percentage of private sector firms and the employment in each industry sector.
TABLE 2.2 Industry size — percentage of firms and employment by industry sector, 2010
Private sector percentage Percentage of total

Industry sector of all firms by industry employment
Primary 9% 4%
Secondary 21% 19%
Tertiary 70% 77%
BizWORD Primary industry

Primary industry includes those Primary industry includes those businesses involved in the collection of natural
businesses involved in the collection of resources. Examples of these businesses include all types of farming, mining,
natural resources.
fishing, grazing and forestry. Even though this sector employs only 4 per cent of the
FIGURE 2.6 Mining — primary industry

labour force, its role is essential because it provides all of our food requirements.
As well, approximately 60 per cent of all our exports come from these industries.
Secondary industry BizWORD

Secondary industry includes all those businesses that take the output of firms in Secondary industry involves taking
the primary sector (raw materials) and process it into a finished or semi-finished a raw material and making it into a
product. For example, iron ore, coal and limestone are turned into steel — a semi- finished or semi-finished product.
finished product that is then used to manufacture cars. Steel and car manufacturers
are both examples of secondary industry businesses.
FIGURE 2.7 Manufacturing cars —

secondary industry
Tertiary industry
Businesses in the tertiary industry provide a service. Tertiary industry involves
people performing a vast range of services for other people. Examples include
retailers, dentists, solicitors, banks, museums and health workers.
BizWORD
Tertiary industry involves performing
a service for other people.
Weblink
Use the Primary, secondary
and tertiary industries
to discover more about
these industries in the past
compared to what they
are today.
FIGURE 2.8 Health — tertiary industry

Quaternary industry
Quaternary industry includes services that involve the transfer and processing
of information and knowledge. Examples include telecommunication, property,
BizWORD computing, finance and education.
Quaternary industry includes
services that involve the transfer
and processing of information and
knowledge.
FIGURE 2.9 Teaching — quaternary

industry
Quinary industry
Quinary industry includes all services that have traditionally been performed in the
home. Examples include hospitality, tourism, craft-based activities and childcare. It
BizWORD includes both paid and unpaid work.
Quinary industry includes all services
that have traditionally been performed
in the home.
FIGURE 2.10 Hospitality — quinary

industry

Changes in external influences and the growth
of Australian industry
Changes in external influences have altered the proportion of employees working
in Australia’s historical industry sectors and contributed to the growth of tertiary,
quaternary and quinary industries. In 1900, about one in three employees worked in
primary industries, mainly mining and farming. Currently, the proportion of employees
working in the primary industry has decreased significantly because of improved
methods of farming and mining, as well as the increased use of mechanical equipment.
Today, fewer workers are required to produce our food supply and minerals.
For a while, many workers who left the farms and mines moved to jobs within
the secondary industries. Recently, however, the proportion of the labour force
needed to do factory work has also decreased because many jobs have been
eliminated by technology, especially automation. In addition, increased overseas
competition, increased trade and changes in government policies have also led to a
decline in employment in this industry.
In the past there were only three industry sectors: primary, secondary and tertiary.
Since opportunities for employment in the primary and secondary industries have
decreased over the past 50 years, the number of businesses and people employed
in the tertiary industry sector has grown rapidly, to a point where today, about three
out of every four employees and two out of every three businesses are classified as
tertiary. Due to this increase in numbers, the tertiary sector has been subdivided
into two other sectors: quaternary and quinary. BizFACT
The quaternary sector is expected to undergo dramatic change over the The value of e-commerce in Australia
next 20 years due to the rapid advances in telecommunications. Expansion in in terms of goods and services
e-commerce and internet-based business activity will see an increase in the number purchased was in excess of
$160 billion in 2014.
of people employed in information processing and analysis.
Due to social and lifestyle changes, as well as an increase in the number of two-
income households, the demand for quinary-type services is also estimated to
expand rapidly during the next two decades. Many small businesses in particular
have recently begun providing these services, filling a niche in the market.
This growth in employment in the service industries is expected to continue
increasing rapidly due to technological and social changes.
Summary
• An industry consists of businesses that are involved in similar types of production.
• Primary industry — businesses involved in collection of natural resources.
• Secondary industry — production of finished or semi-finished goods.
• Tertiary industry — performing a service.
• Quaternary industry — services that involve the transfer and processing of
information and knowledge.
• Quinary industry — services that have traditionally been performed in the
home.
Revision EXERCISE
2.2
1 Distinguish between a business and an industry.
2 Refer to table 2.2. Propose reasons why the primary sector accounts for only 4 per
cent of total employment whereas the tertiary sector accounts for 77 per cent of total
employment. Discuss what this tells you about future employment prospects within
the two sectors.
3 Construct a mind map summarising the five industry sectors. Provide examples for
each sector. The concept map has already been started for you.

Secondary
Primary Tertiary
• Providing something
that has been
provided by nature
• Examples – farming,
mining.
BUSINESS
CLASSIFICATION ACCORDING
TO INDUSTRY SECTOR
Quinary Quaternary
4 In your notebook construct a table with five columns. At the top of the columns put
the headings Primary, Secondary, Tertiary, Quaternary and Quinary. From the list of
businesses, determine the correct column for its particular industry group and write
in its name. The first one has been done for you.
Primary Secondary Tertiary Quaternary Quinary

Tallong
Orchards
Tallong Orchards Data Transfer Computing

S. & W. Legal Centre National Australia Bank
Bowral Bricks Tiggy Wiggles Child Care Centre
Clancy’s Restaurant Hi Plains Merino Stud
Pollards Removalists Southern Tablelands Towing
Moo Moo Pastures Dairy Centretown Motel
Bald Hill Quarry B. S. Plastics Manufacturers
Crookwell Real Estate Country Furniture Constructions
Finlay’s Fine Furniture Pioneer Water Tanks
Creative Hands Craft School Access TV Productions
5 Outline reasons for the growth in the tertiary sector over the past 50 years.
Extension
1 (a) Construct a flowchart showing the industry sectors involved in the production of
a car.
(b) Analyse the relationship between the various sectors.
2 (a) Construct a list of tertiary jobs that are essential for the production of a:
(i) television game show
(ii) local newspaper
(iii) hi-fi system, bought at an electronics store.
(b) Place the letters ‘Qt’ next to those jobs that would be classified as quaternary and
the letters ‘Qn’ for those jobs in the quinary sector.
(c) Deduce what your list reveals.
3 Investigate why the quinary sector has included in it unpaid, voluntary jobs.

2.5 Classification by legal structure
There are a number of different legal structures to choose from when deciding how
a business is to be owned and operated. The four main legal structures of privately
owned businesses are shown in figure 2.11.
CLASSIFICATION BY
LEGAL STRUCTURE
Private Public
Sole trader Partnership
company company
Unincorporated Incorporated
FIGURE 2.11 The four main legal structures of privately owned businesses
Incorporated and unincorporated business

structures
As figure 2.11 shows, the four main legal structures of privately owned businesses
can be further divided into:
• unincorporated businesses, in the case of sole traders and partnerships
• incorporated businesses, in the case of privately and publicly owned companies. BizWORD
The term incorporated refers to the process companies go through to become a Incorporated refers to the process
separate legal entity from the owner/s. This means the business exists in its own right, its companies go through to become a
own legal entity. Regardless of what happens to individual owners (shareholders) of the separate legal entity from the owner/s.
company, the business continues to operate. The business has taken on a life of its own.
An unincorporated business has no separate legal existence from its owner(s) and will
be either a sole trader or partnership. This means the business entity and the owner(s)
are one and the same. When the owner dies then so too does the business entity.
The most common legal structure for small businesses in Australia is the
unincorporated business entity (see figure 2.12), because this structure is the
easiest and cheapest to establish.
Unincorporated enterprise
(sole trader, partnership)
Incorporated enterprise
(privately or publicly owned
42.5% companies and cooperatives)
57.5%
FIGURE 2.12 Business structure for
small businesses in Australia
Source: Data derived from ABS, Counts of
Australian business operators 2011−12,
cat. no. 8175.0, table 2.2.

Selecting the appropriate business structure is one of the most important
decisions a business owner has to make. Each of the different legal structures is
covered by different government regulations that must be followed and, as such,
have an enormous effect on the overall running of the business.
FIGURE 2.13 Some businesses, such as

Myer, start off small, either as sole traders
or partnerships; but because they are
limited in size and growth potential they
later decide to incorporate and become
a company.
Sole trader businesses

A sole trader is a business that is owned and operated by one person. The owner
may employ other people to work in the business, but the owner or sole trader is
BizWORD the person who provides all the finance, makes all the decisions and takes all the
responsibility for the operation of the business.
A sole trader is a business that is
owned and operated by only one This type of business is easy to establish in terms of legal requirements. The
person. only legal requirement specific to a sole trader is that the name of the business
be registered if the name is different from that of the owner. For example, if Paul
Jones operates a lawn-mowing service under the name of P. Jones or Paul Jones,
then the name of his business does not need to be registered. If, however, he
calls his business ‘Paul’s Lawn and Garden Service’, he would have to register the
name. The name must be registered with the Australian Securities and Investment
Commission (ASIC).
A sole trader is not regarded as a separate legal entity; that is, the owner and the
business are regarded as the same. This means that if the business is sued then the
owner is sued, or if the business enters into a legal contract then the owner enters
BizWORD
into the contract. If the business runs into financial difficulties, it is the owner or
Unlimited liability occurs when
the business owner is personally sole trader who has the financial problem and is solely responsible for the finances
responsible for all the debts of his or of the business. This responsibility may include selling personal assets, such as
her business. property or motor vehicles, to pay for the liabilities of the business. This is referred
to as unlimited liability.

The advantages and disadvantages of being a sole trader are shown below.
• Personal (unlimited)
Advantages liability for business
debts
• End of business when
• Low cost of entry owner dies
• Simplest form • Difficult to operate if sick
• Complete control • Need to carry all losses
• Less costly to operate • Burden of management Weblink
• No partner disputes • Need to perform wide Use the Sole trader weblink
• Owner’s right to keep variety of tasks in your eBookPLUS to find
all profits • Difficulty in raising out more about sole trader
• Less government finance for expansion
business.
regulation
• No tax on profits, only
on personal income
Disadvantages
FIGURE 2.14 The advantages and disadvantages of being a sole trader
Summary
• The four main legal structures of privately owned businesses are sole traders,
partnerships, private companies and public companies.
• Privately owned business structures can be either unincorporated or incorporated.
• A business that is incorporated becomes a separate legal entity from the owner/s.
• A sole trader — an unincorporated business entity — is a business that is owned
and operated by one person and has unlimited liability.
Partnerships
A partnership is a legal business structure that is owned and operated by between BizWORD
two and 20 people. There are exceptions to this number, including medical A partnership is a legal business
practitioners and stockbrokers (allowed up to 50 partners); veterinarians, architects structure that is owned and operated
by between two and 20 people with
the aim of making a profit.
FIGURE 2.15 Partnerships are a common

form of small business operation.

and chemists (allowed up to 100 partners); and solicitors and accountants (allowed
up to 400 partners). A partnership is similar to a sole trader in that the owner and
the business are regarded as the same; that is, there is no legal entity. Consequently,
the partners in a business are also subject to unlimited liability and so may be
personally responsible for the debts of the business.
A partnership can be made verbally or in writing or by implication; that is, if two
people set up a business together without a legally binding partnership agreement.
A written partnership agreement is not compulsory, but it is certainly worthwhile
in case disputes arise.
BizFACT A partnership agreement usually has a standard set of contents (see the BizFact at
A partnership agreement contains left). The size and operations of the partnership are subject to specific requirements
many points, including: under the Partnership Act 1982 (NSW).
• names and addresses of partners Limited partnerships were introduced to allow one or more partners to contribute
• how long the partnership will exist
• the amount of money that each financially to the business but take no part in the running of the partnership. In
partner contributes this case, the partner is referred to as a silent or sleeping partner. The main reason
• how the profits and losses will be for their investment is to add more capital or finance to an existing partnership.
shared There are a number of advantages and disadvantages of a partnership (see figure 2.16).
• the duties of each partner
• limitations on the authority of the
partners
• how the partnership may be • Personal unlimited
Advantages liability
dissolved
• arrangements regarding a partner • Liability for all debts,
• Low start-up costs including partner’s
wanting to leave and start up a
• Less costly to operate debts, even before the
business in competition
than a company partnership has begun
• methods of resolving disputes
• Shared responsibility • Possibility of disputes
and workload • Difficulty in finding a
• Pooled funds and talent suitable partner
• Minimal government • Divided loyalty and
regulation authority
• No taxes on business
profits, only on
personal income
• On death of one Disadvantages
partner, business can
keep going
Weblink
Use the Partnership weblink
FIGURE 2.16 The advantages and disadvantages of a partnership
in your eBookPLUS to find
out more about partnership
businesses. Summary
• A partnership — an unincorporated business entity — is a business that is
owned and operated by between two and 20 people and has unlimited liability.
• The partnership can be made verbally or in writing or by implication.
EXERCISE Revision
2.3
1 Identify the four main legal structures of privately owned businesses.
2 Distinguish between an incorporated and unincorporated business.
3 Clarify why unincorporated businesses are the most common form of legal business
structure.
4 (a) Identify three examples of businesses that might suitably operate as sole traders.
(b) Explain why for each case.
5 Using a telephone directory, identify five examples of:
(a) sole traders that would not have to register their name
(b) businesses that would have to register their name.

6 Define the term ‘unlimited liability’.
7 ‘The advantages of being a sole trader outweigh the disadvantages’. Assess the
accuracy of this statement.
8 Distinguish between a partnership and a sole trader.
9 Identify what you consider to be the two main advantages for a partnership. Justify
your selection.
10 Outline the main purpose of a partnership agreement.
11 In pairs, imagine that you and your friend have decided to go into business together.
Your business will specialise in designing home pages on the internet. Decide on a
business name and then create a brief partnership agreement. Refer to the BizFact
(page 38) for ideas.
12 The Australian Securities and Investments Commission (ASIC) provides a range of
regularly updated information about the legal requirements of business names. Weblink
Use the Australian Securities and Investments Commission (ASIC) weblink Australian Securities and
in your eBookPLUS and answer the following questions. Investments Commission
(a) Outline the purpose of a business name. (ASIC)
(b) Clarify whether registering a business name gives you ownership of that name.
(c) Describe the process involved in selecting a business name.
Extension
1 (a) Explain why limited partnerships were introduced into some states of Australia.
(b) Examine the regulations that apply to limited partnerships.
2 Suppose you are a part-time employee working for a sole trader. The owner
has offered you a 35 per cent partnership and you are going to accept. Create
a list of questions you should ask the owner before you sign the partnership
agreement.
3 Arrange to interview a partner of a local business. Investigate the following topics.
(a) The number of people in the partnership
(b) The advantages of the partnership
(c) Contents of the partnership agreement
(d) A brief history of the business.
4 ‘An effective partnership is one in which the partners always agree on all matters
related to the business.’ Assess the accuracy of this statement.
2.6 Types of companies

All companies are incorporated enterprises or have gone through the process of
incorporation. This means that the company has become a separate legal entity BizWORD
from its owners (shareholders). The idea of a separate legal entity is referred to as Incorporation is the process that
the ‘veil of incorporation’. This separate legal entity means that the company can companies go through to become
sue and be sued; it can lease, sell or own property; and it has perpetual succession incorporated, i.e. to become a
registered company and a separate
(this means it will continue to exist even when the owners change). legal entity.
The process of incorporation is governed by the Commonwealth Corporations
Act 2001, and is administered by the Australian Securities and Investments
Commission (ASIC). For a business to become incorporated, a company name
must be registered with ASIC, who will issue a certificate of incorporation and
an Australian Company Number (ACN). Directors must be appointed to run
the company on behalf of the owners. Once incorporated, the company has a
separate legal entity to its owners, who are known as shareholders (referred to in
the Corporations Act as ‘members’). Incorporation also brings to the shareholders
the benefits of limited liability.

Limited liability
The Limited Liability Act was passed by the British Parliament in 1855. This
Act was necessary for the expansion of companies because it offered a degree of
BizWORD protection to shareholders.
Limited liability is a feature of In limited liability companies, the most money a shareholder can lose is the
corporate ownership that limits amount they paid for their shares. Therefore, if the company goes into liquidation,
each owner’s financial liability to the
the shareholders cannot be forced to sell their personal assets to pay for the debts of
amount of money he or she has paid
for the business’s shares. the business. This same protection does not extend to the directors of a company,
as they have an obligation to ensure the company obeys the law and acts in the
interests of the shareholders (see BizFact at left).
As well, financial institutions often ask directors to give personal guarantees for
some business loans. Under some circumstances, therefore, directors can be forced
to sell their personal assets to help pay for the debts of the business. To offset this
risk, companies can insure against such an event.
The letters ‘Ltd’ signify that the business is a company that offers limited liability.
BizFACT A company can be organised as either a proprietary (private) or public company.
If directors make false and misleading There are a number of advantages and disadvantages to the company form of
statements or omissions in a prospectus, business ownership as outlined in figure 2.17.
if they fail to appoint a company
secretary or if they recklessly borrow
money knowing that the debts probably
will not be repaid, then the protection Advantages
offered by the company in being a
• Cost of formation
separate legal entity will not cover the
• Double taxation —
directors. Directors accused of such
• Easier to attract public company and personal
unlawful behaviour may face common • Personal liability for
law suits and criminal charges. finance
• Limited liability — business debts if
separate legal entity directors knew at the
• Can transfer ownership time that the business
easily was unable to pay loans
• Enjoys a long life — • Must publish a yearly
perpetual succession annual report of audited
• Experienced accounts
management — board • Public disclosure —
of directors reporting of certain
• Greater spread of risk information
• Company tax rate lower • Becomes too large
than personal income resulting in
tax rate inefficiencies
• Growth potential
• Recent legislation allows
a company to have only
one shareholder and one
director
Disadvantages
FIGURE 2.17 The advantages and disadvantages of a company
BizWORD
Proprietary (private) companies
A proprietary (private) company is
A proprietary (private) company is the most common type of company structure
an incorporated business and usually in Australia, and usually has between two and 50 private shareholders. Private
has between two and 50 private companies often tend to be small to medium-sized, family-owned businesses.
shareholders. Shares in a proprietary company are only offered to those people the business
wishes to have as part-owners. Shareholders can only sell their shares to people

approved of by the other directors. This is why such a company is called a ‘private’
company. It is not listed on, and its shares are not sold through a stock exchange.
A private company must have the words ‘proprietary limited’, abbreviated to ‘Pty
Ltd’, after its name. The main advantage of a private company is that shareholders
have limited liability protection.
Sometimes, the decision is taken to close a business. However, closing a proprietary
company is much more complex than closing a sole trader business or partnership.
All shareholders of the company must agree to the company being wound up. A
liquidator will manage the process of selling the company’s assets, paying its debts
and distributing funds from the asset sales among the shareholders.
FIGURE 2.18 A proprietary (private)

company has an identity of its own —
separate from its owners’ identity.
SMEs — choosing a structure

Many businesses start small and stay small. For some, the opportunity to take
the next step and give a business its own identity, as a company, is a tempting
proposition.
Taking the leap and transforming a company into an incorporated entity requires
thought and careful planning. There are several tax and legal implications to consider.
SNAPSHOT
Commercial law firm Kelly & Co says personal asset protection and tax savings
are often the triggers for sole traders to change the structures of their growing
businesses.
Kelly & Co taxation partner Marc Romaldi says many SMEs outgrow their original
individual structure.
‘Once a sole trader business gets to a certain size, the argument to move into a
company structure becomes more compelling for the owner’, Romaldi says.
‘However, it’s important to fully understand the taxation and legal implications
before making the change.’
Protection of assets is high on the priority list.
‘Sole traders generally own all the business assets and are personally responsible
for the business’s liabilities’, Romaldi says. ’We find that often business owners
also have significant personal assets which they no longer want to expose to the
potentially unlimited liability of the enterprise as a sole trader.’
‘By moving to a company structure where they become a director, they are, for the
❛ . . . a company
most part, absolved of that personal liability. The liability is limited to the company structure is just
and its assets.’
Romaldi says the directors can only be held personally liable in limited one way to move a
circumstances, such as if they breach the Corporations Act.
Tax issues can be complex and vary between different organisations, so it is
business forward. ❜
important to seek specialist advice.
But, Romaldi adds, a company structure is just one way to move a business forward.
‘Partnerships, trusts and joint ventures also have their advantages and
disadvantages’, he says. ‘Ultimately, the structure that best suits your business
will come down to how you want to position it for the future, involve others in its
management, spread risk and manage the related tax implications.’
(continued)

KPMG national managing partner Peter Siebels says the decision to move to a
company structure is in most cases largely tax driven. ’Obviously when you become
reasonably successful and profitable as a sole trader you are subject to tax rates that
can be 47.5 per cent’, he says.
‘The same profit in a company structure is taxable at 30 in the dollar. With the mining
tax, that will be reduced even further and by 2013–14 it will be as low as 29 per cent.’
A key issue to be considered is income tax and stamp duty implications. ’If you just
go and change off your own bat, you can get (charged) capital gains tax’, Siebels says.
Another reason why company structures can prove to be beneficial for the
business is succession planning.
‘If you have got an eye to transferring the business to the next generation, it is
easy to transfer shares.’
Construction firm McMahon Services has chosen to stay privately owned so it can make
decisions for the long term rather than satisfy the immediate desires of shareholders.
The business, owned by brothers David and Andrew McMahon, now employs
400 people in five states.
‘We enjoy the freedom and flexibility of being a private company’, managing
director David McMahon says.
‘It enables us to be quick on our feet and our decision-making is quick. The type of
work we do means that you need that flexibility.’
‘A lot of the opportunities . . . we have been able to take advantage of are
because we have responded very quickly.’
McMahon says remaining private is also cost effective because the business does
not incur costs that the large companies do, such as stock exchange fees.
Source: Alexandra Economou, www.news.com.au, 15 April 2012.
Snapshot questions
1. Outline the factors that compel some sole traders to change to a company
structure.
2. Describe the advantages of a company structure.
Public companies
The shares for public companies are listed on the Australian Securities Exchange,
and the general public may buy and sell shares in those companies.
FIGURE 2.19 Most of Australia’s best known

large businesses are public companies.

Whereas private companies tend to be small or medium-sized businesses, most
public companies are large in size and market a large range of products — for
example, Woolworths, Telstra, BHP Billiton and Westfield.
A public company has: BizFACT
• at least one shareholder, with no maximum number More than 2000 public companies
• no restrictions on the transfer of shares or raising money from the public by are listed on the Australian Securities
offering shares Exchange. The share price for each
• to issue a prospectus when selling its shares for the first time company changes according to
• a minimum requirement of three directors (two must live in Australia) demand and supply. If a company is
considered a ’good buy’, its share
• the word ‘Limited’ or ‘Ltd’ in its name price is likely to rise.
• to publish its audited financial accounts each year, its annual report.
Government enterprises
Government enterprises are government-owned and operated. (They are also
known as government business enterprises — GBEs.) Although only small in Weblink
number — approximately 5000 — they are typically large, and include some of the Use the Australian
largest employers of people in Australia. GBEs are owned and operated by all levels Securities Exchange
of government: federal, state and local. Examples include NSW Trains, Country weblink in your eBookPLUS
to browse the public
Energy, Medibank Private and Australia Post (see the following Snapshot). They companies listed on the ASX.
are often referred to as public sector businesses and provide essential community
services such as health, education, roads and welfare.
Government business enterprises are established by an Act of Parliament to carry
out a function specified in detail in that Act. The Act defines the GBE’s powers and
functions. The government either wholly or partially owns GBEs.
Beginning in the early 1980s, a wave of privatisation — the selling of
government controlled businesses to private investors — began to take place in BizWORD
most industrialised economies. Australia followed this trend. During the 1990s, Government enterprises are
the federal government privatised a number of public sector businesses including: government-owned and operated
businesses.
• AUSSAT — domestic satellite operator (now called Optus)
Privatisation is the process of
• Qantas — international airline carrier transferring the ownership of
• Commonwealth Bank — financial services a government business to the
• Telstra — telecommunications. private sector.
Due to the process of privatisation, these organisations changed their legal
structure from GBE to public company. The rationale behind this practice is
that economic efficiency is increased by transferring enterprises away from
the public sector to the private sector. It is argued by some that privately
owned and organised business enterprises will be more efficient and profitable
than GBEs.
FIGURE 2.20 Over the past 20 years, there

has been a worldwide trend to privatise GBEs.
Telstra, Qantas and the Commonwealth Bank
were all privatised during the 1990s.

Australia Post— the oldest surviving
government enterprise in Australia
The Australian Postal service began in 1809. The
Postal Act 1825 allowed the NSW Governor to fix
SNAPSHOT postage rates and appoint postmasters outside of
Sydney, enabling the first organised postal service.
Gradually, postmasters were appointed and post
offices were established in the different colonies of
❛ they are required to Australia. The Commonwealth Post and Telegraph
Act was passed in 1902 when the six colonial
pay a large share of and telegraphic departments merged to form the
this profit . . . to the Postmaster General (PMG). The PMG was responsible
for the nation’s communication network, including
Federal Government ❜ all postal, telegraphic and telephone services across
Australia.
In 1975, after the government launched a
commission of inquiry, the PMG was split into
statutory bodies: the Australian Postal Commission
(Australia Post) and the Australian Telecommunications Commission (formerly
Telecom, now Telstra).
In 1989 the Australian Postal Commission changed its name to the Australian
Postal Corporation (although it still trades as Australia Post). Australia Post is a
government business enterprise (GBE) owned by the Commonwealth of Australia.
The company was established under the Australian Postal Corporations Act 1989
(Cwlth), which corporatised the company and meant that it would be subject to the
same taxation and regulatory requirements of other private sector businesses. As a
GBE, it is subject to the requirements of this Act.
Even though it is a government enterprise, Australia Post is a fully self-funding
business and is independent of government funding. Australia Post achieves substantial
profits each year ($312m in 2013). However, it is required to pay a large share of this
profit ($244m in 2013) as a dividend to its sole shareholder, the Federal Government.
In recent years, Australia Post has been transforming its business under a Future
Ready strategy to take advantage of the digital economy. While its traditional
revenue sources are declining — for example, letters — its package and express post
services are growing. Acquisitions such as StarTrack are part of this strategy, making
Australia Post predominantly a parcels business.
Snapshot questions
1. Discuss the legal structure of Australia Post.
2. Explain how Australia Post is adjusting to the digital economy.
Summary
• All companies are incorporated enterprises.
• In limited liability companies, the most money a shareholder can lose is the
Weblink
amount they paid for their shares.
Use the Australia Post
• A proprietary (private) company usually has fewer than 50 shareholders and
to find out more about must have the words ‘proprietary limited’ (Pty Ltd) after its name.
Australia Post. • The shares for a public company are listed on the Australian Securities Exchange.
• A public company must have the word ‘limited’ or ‘Ltd’ in its name.
• Government enterprises are government-owned and operated and provide
essential community services.
• Due to privatisation some government enterprises have become public companies.

Revision EXERCISE
2.4
1 Explain the legal steps required to incorporate a business.
2 Outline why you think companies need to have perpetual succession.
3 Explain why the Limited Liability Act of 1855 was important for company
expansion.
4 Recall under what circumstances a director might be personally responsible for debts
incurred by a company.
5 Clarify why new legislation was introduced to penalise company directors who made
misleading statements about the business’s ability to repay its debts.
6 Examine figure 2.17 (page 40). Identify what you believe to be the three main
advantages and the three main disadvantages of a company form of business
ownership. Explain why you chose each one.
7 Construct a concept map highlighting the main features of a proprietary company
form of business structure.
8 Construct another concept map highlighting the main features of a public company
form of business structure.
9 Outline the ways a private company is ‘private’ and a public company is ‘public’.
10 Recall the main role of government enterprises.
11 You are planning to establish the following types of businesses. Justify what form of
business ownership you would prefer.
(a) a bicycle shop that will offer professional and personal advice
(b) a cattle stud specialising in a large-scale breeding program
(c) a national retailer that would require $467 million to establish.
12 Identify the most appropriate terms from the list to complete the following
sentences.
public minimum stock exchange
sole trader Ltd twenty
formal liability limited
share Proprietary Limited private
unlimited personal
Pty Ltd shares
A business entity with one owner is called a . This person faces
liability, which means the owner can be forced to sell his or her
assets to pay for the debts of the business.
Partnerships normally consist of between two and partners.
Partners the profits and losses and usually operate under a
agreement. Partnerships have unlimited .
There are two types of companies, private and .A
company usually has between two and 50 private
shareholders. A private company has the words , abbreviated
to , after its name. Public companies are listed on the
and the general public may buy and sell
in them. These companies must have a number of one
shareholder and have the abbreviation in their names.
Companies have liability.
13 In your notebook, draw up a table with four columns. At the top of each
column put the headings Sole Trader, Partnership, Private Company and Public
Company. From the list of businesses shown on the next page, determine the
correct column for its particular legal structure/entity. The first one has been
completed for you.

Private Public
Sole trader Partnership company company
Jacinta’s
Newsagency
Fairfax Limited Ozemail Limited Jacinta’s Newsagency

M & M Communications David Tyler and Sons Newcrest Mining Ltd
Tip Top Bakeries Pty Ltd Con Chipprio Plumber Southcorp Ltd
Paul Banwell Motors Tynan Motors Pty Ltd R & R Cook Antiques Pty Ltd
Extension
1 Select a public company from the share page of a newspaper or the internet. Purchase
a ‘virtual’ parcel of 5000 shares in this company and plot the price movements over a
two-month period. Evaluate the performance of your share parcel over this period.
2 Arrange to interview the owner of a local private company. Create a report outlining
the information listed below.
(a) The full name of the business
(b) A brief history of the business
(c) The business’s main activity
(d) Why the owner decided to incorporate
(e) The expenses involved in setting up and operating a private company
(f) The main problems involved in operating the business
(g) The long-term plans the owner has for the business
(h) What changes the owner would like to make to the organisation and operation of
the business.
3 A friend has decided to establish a new restaurant. She asks you to advise her on the
most appropriate legal structure.
(a) Construct a list of questions that you would ask her.
(b) Recommend the most appropriate legal structure suitable to your friend’s situation
and justify your recommendation.
4 In small groups, investigate the arguments for and against privatisation. Present your
arguments to the rest of the class. Compare the group’s answers.
2.7 Factors influencing choice

of legal structure
BizFACT One of the most difficult decisions a business owner must make is what type of
The legal structure finally
legal structure to select. This will depend on a number of particular circumstances
selected is, however, just the influencing the business at certain times. These factors will change as the business
beginning. The structure should be expands. Therefore, the legal structure may need to be altered to reflect these
reviewed as the business expands and
develops, as the business environment changing circumstances.
evolves and as new laws are passed. Of all the factors that influence the business owner when deciding upon the
most appropriate legal structure, the three most important are the:
1. size of the business
2. ownership
3. finances.
In reality, these three factors will all be interrelated and act together in influencing
the choice made by the business owner.

Size of the business
As sales increase and the business operations grow to meet this higher level of
customer demand, the business owner may need to select a more appropriate
legal structure. Therefore, some broad generalisations can be made concerning
the relationship between the size of a business and the most appropriate legal
structure.
Most businesses begin their life as small or micro business enterprises. Therefore,
the legal structure that is most suitable at this stage would be either a sole trader
or partnership. If sales continue to increase, and the business keeps on growing,
then further expansion will be needed and the business becomes a medium-sized
one. The business will need to purchase new plant and equipment, which requires
the injection of more money. Therefore, a partnership or private company may be
formed with the new partners or private shareholders bringing with them extra
finance, skills and expertise. If expansion is rapid, then the owners may wish to
seek the protection of limited liability, in which case the private company legal
structure will be chosen.
As the business continues to grow, it now becomes a large national or multinational
corporation. BizWORD
To finance this level of expansion, it will be necessary to draw from a large pool A float is the raising of capital in a
of available finances. The business will now decide to raise this money from a company through the sale of shares to
sharemarket float. A float is the raising of capital in a company through the sale of the public.
shares to the public. A prospectus is a document giving
details of a company and inviting the
A prospectus is issued (see figure 2.21), the business is listed on the Stock public to buy shares in it.
Exchange and shares are offered for sale. Also, an established public company can
raise additional money from existing shareholders.
Of course, there is no rigid formula as to what legal structure best suits
a particular size of business. Some businesses may establish themselves
as public companies from the beginning, while others remain a private
company even when the business has reached an international level.
Each business owner will make a personal decision that best suits the
conditions at the time, his or her own personal preferences and the overall
business environment.
Ownership
If a business owner wishes to have complete control and ownership of a
business, then becoming a sole trader is the only realistic option. On the
other hand, if the owner wishes to share the ownership with other people,
then a partnership is the ideal legal structure. Of course, a private company
would also allow the owner to maintain a high degree of control and it
would also offer the protection of limited liability. This is because a private
company structure provides the owner with a large degree of control over
who can become a shareholder of the business. As well, in most cases the
maximum number of shareholders is restricted to 50.
Once a company floats and sells shares to the public, ownership will
be divided among thousands of small, individual shareholders and a few
institutional shareholders. The degree of ownership, then, is directly related
to the number of shares owned: more shares, more ownership. Therefore, if FIGURE 2.21 Myer, Australia’s largest
department store, floated in November 2009.
the original owner/s wished to retain ownership and control of the business, The prospectus provided details about the
they would need to hold more than 50 per cent of all the shares sold. company to existing investors.

Finance
As mentioned earlier, when a business expands it will require injections of finance.
This money will be used to purchase new equipment, undertake research and
development, hire more staff, exploit new markets and open new outlets.
Sole traders and partnerships, because of their exposure to risk (unlimited
liability) with few business assets, can sometimes find it difficult to obtain adequate
finance, especially for research and development (R&D). Traditional sources of
finance, especially banks, perceive this type of finance request as high risk. One
possible source of finance for R&D is venture capital. Venture capital is money that
is invested in small and sometimes struggling businesses that have the potential to
become very successful. The investors take an equity position in the business (own
part of it) and provide supplementary finance.
FIGURE 2.22 When Jonathon To overcome the difficulty of raising finance from banks or financial institutions,
Sciola of Jonno’s Car Wash wanted to the business owner may decide to sell shares in the business. Therefore, the
expand, he was able to find a venture business will be incorporated and either a proprietary or public company formed.
capitalist to invest in his business.
Of course, this legal structure does not guarantee the necessary finance will be
obtained. Some floats fail to generate interest and are undersubscribed; that is,
not all the shares are sold. However, because of the protection of limited liability
offered through incorporation, individuals are more often prepared to invest in this
business structure.
BizWORD
Venture capital is money that is
invested in small and sometimes
Summary
struggling businesses that have the • The most appropriate legal structure to select will depend on many variables
potential to become very successful. including size, ownership and finance.
• As a business expands, it normally moves from an unincorporated structure to
an incorporated structure.
EXERCISE Revision
2.5
1 Explain the general relationship between the size of a business and its legal structure.
2 Recall the purpose of a sharemarket float.
3 Define the term ‘prospectus’.
4 Outline the reasons a sole trader would be motivated to alter the legal structure to
become either a partnership or public company.
Digital doc
5 Assume you wish to establish a landscaping business. Determine which legal
Test your knowledge of key
structure/s you would choose if you wanted to:
terms by completing the
Chapter crossword in your (a) retain complete control
eBookPLUS. (b) share ownership with no more than 20 people
Searchlight: DOC-14305
(c) share ownership with no more than 50 people.
Give reasons for your answers.
6 Recall the percentage of all the shares sold that a person needs to hold in order to
own and control a company.
7 Outline how the legal structure will change as the business requires greater injections
of finance.
Digital doc
8 Investigate the possible advantages and disadvantages of venture capital as a source
Use the Chapter summary of finance. Share your answer with the rest of the class.
document in your
eBookPLUS to compile your 9 Explain why the legal structure a business starts out with may not suit its needs as it
own notes for this chapter. grows.
Searchlight: DOC-14111 10 Create a diagram showing the life cycle of a hypothetical business that expands from
small to large.

Extension
1 ‘The majority of small individual shareholders have virtually no say in the running
of a public company. The institutional shareholders have the game to themselves.’
Evaluate the accuracy of this statement.
2 Construct a list of 20 businesses that opened around two or three years ago in your
local area.
(a) Place a cross next to the name of each business that is no longer in operation.
(b) In your opinion, propose some reasons these businesses failed.
(c) Propose some reasons for the success of the other businesses.
(d) Arrange to interview a person whose business succeeded. Have them explain to
you the reasons for the business success.
(e) Compare the reasons you gave with those provided by the business owner.
3 Use the ASX weblink in your eBookPLUS to find a new company floating on the ASX. Weblink
Follow the link to the company’s website. Investigate the history of the company and
ASX
write a brief report that examines the likely reasons for its decision to change its
legal structure and become a public company.

CHAPTER 3
Influences in the business

environment
3.1 Introduction
Your school is part of your learning environment: the surrounding conditions in
which you learn. You have some degree of control over the factors that make up
part of your learning environment, such as the subjects you choose to study, extra-
curricular activities you participate in, and your interactions with teachers and
other students. There are many other factors within your learning environment,
however, over which you have little control but that have a direct influence on your
learning. This includes such factors as the syllabus subject matter, the introduction
of new technology and the changes in government education policies. As a student,
you are part of an ever-changing and complex learning environment within which
you must manage your education.
FIGURE 3.1 Your learning environment

is made up of factors over which you
have some control and other factors over
which you have little control.
3.2 Business environment

No business — similar to students — operates in isolation. Businesses also have
to deal with an ever-changing environment in which they operate. What happens
in the larger business environment may have a direct influence on many other
firms. If interest rates increase, for example, then some businesses may not be able
to afford to purchase new equipment. Alternatively, reduced competition in the
market may result in some businesses increasing their individual market share and
profitability. All business decisions about how and what to produce are affected by
the environment in which the business operates.
Successful business managers have a good understanding of the environment
in which the business operates. This allows them to respond positively to changes
that take place and prepare for the impact such changes will have on their business
operations.

The business environment refers to the surrounding conditions in which the
business operates, and can be divided into two broad categories: external and
internal (see figure 3.2). BizWORD
• The external environment includes those factors over which the business has The business environment refers
little control, such as government policy, technology, economic conditions and to the surrounding conditions in
social attitudes. which the business operates. It can
be divided into two broad categories:
• The internal environment includes those factors over which the business has
external and internal.
some degree of control, such as products, location, resources, management and
The external environment includes
business culture. those factors over which the business
has very little control.
INFLUENCES IN THE BUSINESS ENVIRONMENT The internal environment includes
those factors over which the business
has some degree of control.
External Internal
influences influences
If the business can respond

positively to these influences,
it can achieve profit.
FIGURE 3.2 Influences on business
The factors that make up the business environment are not constant and certain.
They are continually undergoing change, and a business must keep ‘in tune’ with
the changes and adapt its operations accordingly.
3.3 External influences eLesson

Dinte Group
Changes in the external environment make it necessary for managers to make
Michael and Anthony Dinte
adjustments to business operations. This may include the introduction of new inherited the family’s foundry
government regulations that require the business to make adjustments; for example, business, but when their
all businesses will need to respond to some type of carbon reduction scheme that father passed away there
will result in organisations paying for the carbon pollution they generate in order was no real plan as to how
the company would develop.
to reduce carbon pollution and eventually create a more sustainable economy.
Searchlight: ELES-0834
Figure 3.3 outlines the main external influences on a business.
Economic Financial
Markets Geographic
Competitive situation EXTERNAL INFLUENCES Social

ON BUSINESS
Technological Legal
Institutional Political
FIGURE 3.3 External influences on business
Influences in the business environment • CHAPTER 3 51

Economic influences
Imagine your local shopping centre to be a small-scale representation of the
Australian economy. Now, imagine what would happen to the businesses within
BizWORD the shopping centre if all their customers decided to shop at another centre
Economic cycles (or business cycles) for a day. Economic disaster! If this situation continued for a month then the
are the periods of growth (‘boom’) centre’s businesses would close, employees would be laid off, and landlords and
and recession (‘bust’) that occur as a suppliers would not be paid. Eventually, as the ‘economy’ plunged into a recession,
result of fluctuations in the general business owners would lose confidence in the economy’s future. However, at the
level of economic activity.
rival shopping centre, new businesses would open, many new jobs would be
created, landlords and suppliers would gain new customers, and the confidence of
the local business owners would soar. The ‘economy’ of this shopping centre
would boom.
Although such an extreme situation would not happen in reality, the Australian
economy does experience economic cycles of ‘booms’ and ‘busts’. These periods
of high and low economic activity are referred to as the business cycle. After
a period of prosperity, business activity gradually slows until a recession or
depression is reached. Eventually, business picks up again until prosperity is
BizFACT
restored. This completes the cycle. These cycles are a basic feature of our economic
Recently the Australian Bureau of
Statistics survey of bankrupt businesses
system.
found that 33.8 per cent of owners Economic forces have an enormous impact on both business and customers.
blame ‘economic conditions’ as the They influence a business’s capacity to compete and customer’s willingness and
reason for failure. Twenty-five years ability to spend. The following figure shows the impact of each phase of the
ago, the main reason for business economic cycle on a business’s performance.
failure was lack of business ability.
Today only 9.6 per cent of businesses
Information on economic growth, inflation trends, average weekly earnings,
fail for this reason. consumer confidence, interest rates, consumer spending and unemployment
provide businesses with insight into economic trends. This information on the
level of economic activity allows businesses to predict possible threats to, and
opportunities for, business activity.
Recovery — key features Recession — key features Peaks — key features

• Increasing consumer spending • Decreasing consumer spending • Wages and salaries at high levels
• Business expectations • Business expectations • Business operating at
increasingly optimistic increasingly pessimistic full capacity
• Increasing business investment • Decreasing business investment • Sales and profits at highest levels
• Sales and profits rising • Sales and profits falling • Low level of unemployment
• Unemployment falling • Unemployment rising • Inflation may increase
Peak Troughs — key features

• Wages and salaries at low levels
Sales / output ($)
• Business operating at below

Recovery full capacity
Recession • Sales and profits at lowest levels
Peak
• Consumer spending at lowest
levels
• High level of unemployment
• Inflation may remain stable
or fall
Trough Trough
Time
FIGURE 3.4 The economic or business cycle

No economic system works perfectly all the time under all conditions, and the
Australian economy is no exception. The level of economic activity does not remain
at a constant level; it fluctuates (moves up and down) over time. In other words,
total production, incomes, spending and employment rise and fall.
The state of the economy has a great impact on business. The policies
implemented by the government are aimed at keeping the economy growing
steadily, without putting pressure on inflation (prices) and wages. The economy
is also affected by overseas trends — changes in trade, investment and currency
levels all affect Australia’s level of economic activity. The continued growth and
development of China’s economy has benefited Australian businesses in relation
to exports. Many businesses are supplying not just raw materials such as coal, but
finished products and, to a greater extent, quaternary services such as education
and training.
When economic problems start to appear, we as consumers become more
cautious with the way we spend our money and our overall confidence begins
to fall (see figure 3.5). The reduced spending has an impact on business
owners — they find profits falling and cost cutting must occur if they are to
survive. Unfortunately, this cost cutting can be in the form of retrenching workers;
therefore, the economy falls further into recession. Alternatively, when there is
evidence of a growing economy, confidence returns. The consumer is more willing
to purchase consumer or luxury goods, which in turn sees spending levels rise
and business profits improve.
RECESSIONARY CYCLE ‘BOOM’ CYCLE
Evidence of a Evidence of an
contracting economy expanding economy
is seen with rising unemployment, is seen with falling unemployment,
decreased economic growth and increased economic growth
stabilising or falling inflation. and rising inflation.
Cost cutting must

Consumers become Business can
occur. Workers may be Consumer confidence
more cautious. increase production
retrenched, adding returns and
Spending and consumer and will require
to the economic spending increases.
confidence fall. workers.
problems.
Reduced spending by Increased spending

consumers affects will increase
business as profits fall. business profits.
FIGURE 3.5 The recessionary and ‘boom’ cycles. The government uses its economic policies to
stabilise the economy and reduce the fluctuations in the business cycle. It can do this by using
monetary and fiscal policies.
One important factor to consider in terms of economic cycles is that not all
businesses experience a downturn in revenue and sales during a recession; nor
do they necessarily experience an upswing in trade during a ‘boom’ period. The
businesses most susceptible to the ‘swings’ are those selling consumer or luxury
goods, as consumers will cut back on these when they reduce overall spending.
Some businesses fare very well during a recession, for example ‘bargain shops’ or
other clearance outlets.

Publisher Textiles — business survivor
It may seem contradictory, but the businesses most likely to survive an economic
downturn are those that take a back-to-basics approach and those who differentiate
themselves from competitors through innovation and creativity. Both approaches,
SNAPSHOT however, have the same starting point: deliver a product or service of exceptional
quality. This means having the customer front and centre in a comprehensive
business plan that is sufficiently flexible to adjust to customers’ expectations and
enable fast implementation of innovation.
According to the annual Telstra Australian Business Awards, successful business
leaders are those with a passion for their product or service and who differentiate
themselves from competitors through the service provided to their customers. This
applies irrespective of economic conditions and small businesses can use these
qualities to their advantage.
Finding a niche is where innovation and creativity comes in. Publisher Textiles,
which won the 2009 NSW Telstra Business Award, found a niche in the market
and thrived in spite of poor economic conditions that were affecting larger
companies. At the time of winning the award, the judges were impressed with
the diversity in the company’s unique product range and the creativity of the
designers. Specialising in hand-screen printed wall coverings and fabrics, the
❛ . . . successful business began in a rented corner of a factory and sold its designs at Sydney
market stalls.
business leaders are ‘Because of our extensive experience and knowledge of the production,
together with a desire to create, it became obvious to us that we would
those with a passion someday start our own textile and wallpaper print studio’, said co-owner
for their product or Rhynie Cawood.
‘No one could understand why we would get into something so obscure and
service . . . ❜ niche, but if we wanted to have our designs sustainably produced to a high quality
we knew we would have to do it ourselves.’
The business is now more than a decade old and remains wholly Australian
owned, with a small and dedicated team who keep an eye firmly fixed on the basics.
It uses its website, blog and social media to market its product.
Sources: www.telstrabusinessawards.com/news/sydney-textile-company-named-nsw-business-of-the-
year-170.aspx; www.publishertextiles.com.au
Snapshot questions
1. Outline what types of business are most likely to survive an economic
downturn.
2. List the qualities of a successful business leader.
3. Explain the need for a flexible business plan during a downturn.
4. Analyse why niche businesses might be more successful during a downturn.
Financial influences
BizWORD There have been enormous changes in global financial markets over the past 30 years.
Deregulation is the removal of Deregulation of Australia’s financial system began in 1983 and it continues to
government regulation from industry, undergo change. This has resulted in a more flexible, market-oriented approach
with the aim of increasing efficiency
across the financial sector. A substantial number of new banking products have
and improving competition.
emerged, aimed at the business sector. The process of financial deregulation has
resulted in the opening up of the financial industry to greater competition.
A main source of finance for business is debt finance. Debt finance is significantly
influenced by the level of interest rates. As interest rates increase, businesses will
become more cautious in relation to taking on extra debt. On the other hand, as
interest rates drop, then businesses will take on more debt.

Due to globalisation of the world’s financial markets, it is no longer necessary
for many large Australian businesses to use only domestic financial institutions for
the raising of finance. For example, News Limited, the global media company, can
access finance from worldwide sources.
Global financial markets themselves have undergone rapid change over the
last decade. Developments in communications technology have enabled the
phenomenon of global financial transactions. Global financial speculators may now
easily make transactions spread across the globe.
Geographical influences
Two major factors that have an enormous impact on business activity are Australia’s
geographic location within the Asia–Pacific region and the economic growth in a BizFACT
number of Asian nations, especially China. They provide challenging opportunities Financial deregulation followed the
for business expansion, sales and profit. Campbell Inquiry in the early 1980s.
It led to a reduction in government
Further changes that are likely to have a profound effect on business activity intervention in the financial system,
in Australia originate from changing demographic factors. Demography is the and an end to credit, interest rate and
study of particular features of the population, including the size of the population, exchange rate controls. The result
age, sex, income, cultural background and family size. Changes in any of these was increased competition within the
factors can lead to changes in demand levels and the nature of products and banking sector. The Wallis Report in
the mid 1990s recommended that the
services. process of deregulation be extended
A major demographic issue that has a considerable impact on businesses even further, and resulted in the
is changes in the age structure of our population. Commonly referred to as the opening up of the financial industry
‘greying’ of the Australian population, baby-boomers — people born between to greater competition.
1946 and 1964 — are now reaching retirement age, meaning that there are more
elderly people living in the community than ever before. This will cause some
skill shortages in the workforce as well as an increase in demand for age-related
services such as health and aged-care. Any change in population growth will also
have major implications for Australian businesses, as research shows there is a clear
link between population levels and economic growth (see the Snapshot on the
following page).
FIGURE 3.6 Australia’s ageing

population will have a significant
impact on businesses and the economy.
For example, once people retire, their
spending patterns change. Consequently,
businesses need to market products to
suit the changing preferences of their
customers.

The ‘greying’ of Australia — future challenges
The retirement age may have to be raised to 70 to slow the rate of baby boomers
leaving the workforce before they put too much strain on the economy, a Federal
Government agency warns.
SNAPSHOT The National Sustainability Council’s first report predicts a near-doubling in the
number of retirees over the next 20 years, straining taxpayer spending on pensions,
health and aged care.
Council chairman John Thwaites suggested raising the retirement age as a way to
make baby boomers work longer.
Otherwise, Australia might not have enough workers to support all the retirees,
students and people on welfare.
‘The decisions and actions we take over the next 10 years will determine whether
or not the next generation of Australians will become the first in recent history to be
worse off than their parents and grandparents’, he said.
Professor Thwaites called for an ‘intergenerational discussion’ about the baby
boomers sharing their wealth with their children and grandkids.
‘The Gen X and Gen Ys will be largely the ones working and raising the money for
the baby boomers, who are the ones holding the wealth’, he said.
❛ . . . fewer Australians ‘If we have a lot of conflict, you’ll end up seeing the Gen Xs and Gen Ys saying,
will be working “We won’t pay taxes to help your health system and aged care”.’
‘People are sitting on valuable houses and their kids’ generation can’t afford it.
and paying taxes to How are they going to resolve that?’
The Sustainability Council report predicts fewer Australians will be working and
support a greying paying taxes to support a greying population.
population. ❜ The number of Australians over retirement age has been growing three times
faster than the general population over the past 30 years — and is predicted to
nearly double to 5.7 million in 20 years’ time.
‘A big challenge will be how to pay for all their health costs with a smaller
proportion of the population in the workforce’, Professor Thwaites said.
BizFACT ‘We will need to increase the participation of older workers in the workforce and
In the May 2009 Federal Budget, the
one way to do that is raising the retirement age.’
Australian government announced ‘Or you could support more flexible working conditions and encouragement or
that the age pension age would incentives for older workers.’
increase to 67 years of age from The proportion of over-65s in the workforce has nearly doubled in a decade, to
2023. It will remain at 65 for anyone one in four men and one in eight women.
born before July 1952. The first shift The report says that increasing the pension age to 70 would boost workforce
upwards in Age Pension age will participation rates by 1.4 per cent and increase economic growth by $25bn a year …
occur in 2017 when the eligibility age Source: Natasha Bita, ‘Why Australia needs you to keep working’, www.news.com.au, 10 May 2013.
increases to 65.5 years, and then in
six-month increments every two years, Snapshot questions
until it reaches the age of 67 in 2023. 1. Identify some of the challenges Australia will face due to the increasing
number of baby boomers leaving the workforce.
2. Explain the solution put forward by the National Sustainability Council to
deal with this problem.
3. Recommend strategies that could be implemented to help deal with
Australia’s ageing population.
BizFACT Another important geographical influence is that of globalisation. We live in a

Globalisation has not been welcomed global world, rather than a world limited by national borders. Consider the news
by everyone. Critics argue that the
and entertainment we receive from around the planet, the clothing and footwear
process results in a ‘race to the bottom’
in wages and conditions. This inevitably brands being sold worldwide, the rapid telecommunications access to all parts
leads to exploitation of workers, of the globe, and the large number of products Australia buys and sells on the
especially in developing countries, and world market. The Earth is a global community whose individual members are
the loss of jobs in developed countries. linked through the mechanism of international trade: the buying and selling of
goods and services between nations.

FIGURE 3.7 The current process of
globalisation is remarkable for its phenomenal
speed and reach, especially in relation to
flows of finance and information. Figuratively
speaking, the world is shrinking in many ways,
with nations more closely linked than ever
before. The world is becoming a very small
place!
BizWORD
This process has been strengthened by the impact of globalisation: a process Globalisation is the process that
that sees people, goods, money and ideas moving around the world faster and sees people, goods, money and ideas
more cheaply than before. Globalisation, assisted by the technological revolution in moving around the world faster and
communications and computers, is radically altering the shape of world markets, more cheaply than before.
as well as the nature of business and everyday life.
Social influences
Rapid identification and response to changes in tastes, fashions and culture can
lead to sales and profit opportunities, and business growth. Failure to respond to
FIGURE 3.8 There is increasing social
social changes can threaten business stability and viability. pressure for businesses to provide
Three social issues are leading to significant change or have the potential to family friendly policies that allow
influence major change in business practices. The first concerns a growing employees to balance work and family
awareness of our vulnerable environment. Over the past decade, Australians have responsibilities more effectively.
become aware of a number of practices that lead
to deterioration in the environment. The second
social issue that is leading to significant change is
a growing desire for businesses to provide family
friendly workplaces. There is a growing belief
that businesses must support families, and the
provision of better childcare options and more
flexible hours are increasingly being considered
by businesses. Conflict between work and family
responsibilities is a key factor causing women
to leave businesses and this high turnover is
expensive for business. Consequently, businesses
have been under pressure to implement family
friendly workplace practices that assist employees
and, at the same time, reduce the associated costs
to employers.

Work–life balance — role of technology
It is a sound that can drag any holiday-maker to earth just as they begin to float
away from the stress and chaos of work: the ping of a BlackBerry or another mobile
device.
SNAPSHOT With the growing prevalence of laptops and smartphones, work is creeping ever
further into our private lives. And Unions NSW says it is time to pull the plug.
It is calling on companies to introduce rules requiring staff to ignore emails and
leave their work phones and computers in the office when they go on leave, to stop
the invasion of work into holiday time.
The secretary of Unions NSW, Mark Lennon, said: ‘There’s a responsibility on
employers to set clear guidelines about using BlackBerrys and email and internet
during the holidays. The company’s policy should be, “When you’re on leave, you’re
on leave.”’
Mr Lennon said he also encouraged employees to break their email addiction.
‘It’s getting harder and harder to unwind and spend quality time with family
and friends, given the ever-increasing creep of email, SMS and work calls into our
personal time. If you’re taking a break … do yourself a favour: when you’re at home,
leave the iPhone alone.’
A workplace expert, Alison Barnes of Macquarie University, said the constant use
of electronic devices was ‘an insidious form of work intensification’.
❛ With the growing ‘There used to be an argument that technology was going to generate all of this
prevalence of laptops leisure time, but in fact the opposite is true — it means work never ends. There’s no
distinction between work and family life.’
and smartphones, Source: P Bibby, The Age, 29 December 2010.
work is creeping Snapshot questions

even further into our 1. Recall how work is creeping into people’s private lives.
private lives. ❜ 2. Outline strategies businesses should adopt to ensure their employees are
able to maintain a work–life balance.
The third social issue that is

leading to significant change is
the growing belief that businesses
must cater for workplace diversity.
Employees will have different
issues that may be related to
gender, age, language, ethnicity,
cultural background, disability,
sexual orientation and religious
belief. Businesses are required to
effectively manage a diverse range
of employees and cater for their
specific needs.
FIGURE 3.9 Businesses need to

effectively manage workplace diversity,
including employees from a range of
backgrounds.

Summary
• Business environment is influenced by both internal and external factors.
–– The external environment includes those factors over which the business has
very little control.
–– The internal environment includes those factors over which the business has
some degree of control.
• External influences on business include: economic, financial, social, legal,
political, institutional, technological, competitive situation and changes in the
market.
• Economic influences on a business relate directly to their economic
environment, which is dependent on changes in economic growth. These
changes are characterised by boom and recessionary periods in the economic
cycle.
• Changes in the global and domestic financial markets will influence the cost
of borrowing money and therefore directly affect the level of investment by a
business.
• Three major geographical factors that affect business activity are:
–– Australia’s geographic location within the Asia–Pacific region
–– changing demographic factors
–– the process of globalisation.
• Social influences, such as changes to fashion and culture, have the capacity to
affect business sales and profits.
Legal influences BizFACT

Too much government interference! Too much red tape! Too many regulations! All businesses have quite specific legal
These are familiar cries from many business owners who face an increasing responsibilities to their customers and
number of legal obligations in every aspect of their businesses. Today, small competitors in the way in which they
provide goods and services.
to medium businesses face levels of regulation similar to those facing large
businesses. While most business owners are willing to comply with regulations,
compliance is often time consuming and costly, and regulations can be confusing
and contradictory.
Society expects business owners to abide by the laws of a country. Consequently,
it is essential that they have a sound working knowledge of the laws that will affect
their operations (so that they avoid penalties), and that they understand and accept
the legal responsibilities they owe to all stakeholders. All levels of government
impose legal responsibilities on businesses and these laws govern every aspect of a
business’s life.
In the past two decades, a large number of new statutes were introduced,
which will have a major impact on business conduct. This legislation includes
laws on taxation, industrial relations, work health and safety, equal employment
opportunity, anti-discrimination and protection of the environment.
An area of law that has significantly altered business conduct is the Competition
and Consumer Act 2010 (Cwlth), which applies to virtually all businesses in Weblink
Australia. It is administered by the Australian Competition and Consumer Visit the website of the
Commission (ACCC), which is an independent statutory authority. The ACCC Australian Competition
operates nationally for the enforcement and administration of competition and and Consumer Commission
to learn more about the
consumer protection laws. A breach of any of the consumer protection provisions Competition and Consumer
of the Competition and Consumer Act can result in the ACCC taking criminal Act 2010 and its impact on
proceedings against the business concerned. The Act allows the courts to impose businesses.
penalties of up to $1.1 million for companies, and $220 000 for individuals who
breach the Act.

FIGURE 3.10 ACCC officers may seize
documents from businesses suspected
of breaching the Competition and
Consumer Act.
Political influences
Government policies have a considerable impact on the business environment
(see figure 3.11). Major political change can lead to business uncertainty or business
confidence. As governments at all levels in Australia regularly face elections, there
is an element of politics in most major issues that affect the business environment.
A political influence that is having an enormous impact on Australian business
operations is the policy of free trade. Free trade policies mean that barriers to trade
are removed. One such barrier to free trade is a tariff: a tax levied on imported
goods. In recent years tariff rates have generally been lowered, meaning that some
businesses have been unable to compete with the cheaper imported item and have
gone out of business. Other firms have survived the removal of tariffs and compete
well with similar imported products that are sold in the Australian marketplace.
Labour market reforms

• Decentralisation of wage
determination
• Free trade policies
Taxation DOMINANT POLITICAL

ISSUES AFFECTING Social reforms
• Goods and services
BUSINESS • Paid parental leave
tax (GST)
Environmental management
• Emissions Trading Scheme (ETS)
FIGURE 3.11 Dominant political issues affecting businesses
Another significant political thrust that has led to widespread changes is

the process of deregulation and privatisation. Deregulation is the removal of
government regulation from industry, with the aim of increasing efficiency and
improving competition. Privatisation is the process of transferring the ownership of
a government business to the private sector. Examples of privatisation involve the
sale or partial sale of the Commonwealth Bank, Telstra and Qantas.

Institutional influences
There are three main institutional influences on business, including government,
regulatory bodies and other groups such as trade unions and employer associations.
INSTITUTIONAL INFLUENCES
REGULATORY
GOVERNMENT OTHER
BODIES
• Federal • EPA • Employer

• State • NSW Fair associations
• Local Trading • Trade and
• ASIC industry
• ACCC associations
• ASX
FIGURE 3.12 Institutional influences on business
Government BizWORD
Australia has three levels of government: federal, state and local. Each level of Regulations are rules, laws or orders
government imposes a range of regulations on businesses to standardise and that businesses must follow.
protect their dealings with consumers and competitors.
Federal government State government Local government

Federal government obligations State government obligations include: Local governments (city, municipal and
include: • provision of employee entitlements, shire councils) have control over the
• payment of taxes for employees including workers compensation, following business activities:
(earning above the minimum taxable work health and safety (WHS) • approving new development and
income level) and for businesses with requirements, award rates of pay and alteration (to an existing building)
company tax and GST entitlements applications
• provision of employee • payment of payroll taxes • fire regulations
superannuation • abiding by relevant state legislation • parking regulations (e.g. provision of
• observance of customs regulations (e.g. health, trade practices, parking by new businesses)
• abiding by relevant legislation that employment) • size, location and shape of business
would affect business operations. • abiding by pollution controls. signs.
FIGURE 3.13 Some business laws relating to the levels of government
Regulatory bodies
A regulatory body is one that is set up to monitor and review the actions of
businesses and consumers in relation to certain issues (such as advertising) and the
appropriate legislation. This is to ensure that businesses conduct themselves fairly Weblinks
in relation to the consumer, the community and other businesses. A number of Use the NSW Environment
regulatory bodies operate in New South Wales and Australia. They include: Protection Authority,
• the NSW Environment Protection Authority NSW Fair Trading, ASIC
and ACCC weblinks in
• NSW Fair Trading your eBookPLUS to visit the
• the Australian Securities and Investments Commission websites of these regulatory
• the Australian Competition and Consumer Commission. bodies.
The roles of these regulatory bodies are summarised in table 3.1.

TABLE 3.1 Major regulatory bodies in New South Wales and Australia
Regulatory agency Role
NSW Environment Protection Authority • Primary environmental regulator for NSW

(EPA) • Aims to improve environmental performance
and waste management for NSW through a
wide range of programs and initiatives.
• Offers advice and incentives to help businesses
improve their environmental performance.
• Governed by the Protection of the Environment
Administration Act 1991
NSW Fair Trading • Is the NSW consumer protection agency

• Provides information and assistance to all
consumers and business owners on areas such
as fair and ethical practices
• Services to business include:
– business licence information, e.g. real estate
agents, builders, car dealers
– information for builders and tradespeople
that covers their responsibilities and offers
assistance in relation to disputes between
themselves and clients/contractors
– product safety standards
– trade measurements relating to scales/
scanners used to weigh and measure
products.
Australian Securities and Investments • Monitors market integrity and provides

Commission (ASIC) (federal) consumer protection in areas such as payment
systems and financial services such as
investment advice.
• Aims to ensure all businesses comply with the
industry standards and codes of practice.
• Operates the Business Names Register that
allows people to register, renew and search
business names nationally
Australian Competition and Consumer • Is an independent statutory authority that

Commission (ACCC) (federal) administers the Competition and Consumer Act
2010. This includes monitoring of:
– anti-competitive and unfair market practices
such as the misuse of market power (e.g.
blocking competitors from entering the
market), exclusive dealing and resale price
maintenance
– mergers and acquisitions that could decrease
the level of competition
– product safety and liability
– misleading and deceptive advertising.
• It operates nationally for the enforcement and
administration of competition and consumer
protection laws.
Other institutional influences

In addition to government bodies, other institutions affect how businesses operate
in Australia. Some of these are shown in table 3.2.

TABLE 3.2 Other institutional influences on businesses in Australia
Employer • Developed in response to the growth of trade unions

associations • Represent the interest of employers
• Assist employers in the following ways:
– formulating policies in line with union activities
– acting on behalf of employers in negotiating enterprise or collective
agreements
– promoting industry, trade and commerce
– providing submissions, advice and information to governments.
Trade and • National bodies that represent larger groups of employers (e.g. lobbying
industry government on certain issues)
associations • Examples include:
– Australian Chamber of Commerce and Industry (ACCI)
– National Farmers’ Federation
– Australian Industry Group.
Trade unions • Main aim was to improve working conditions and pay rates.
• Union membership declined substantially in the past 20 years because of:
– new legislation that outlaws compulsory unionism
– changes to work patterns (increased part-time and casual work)
– workplace agreements
– privatisation and restructuring of union-dominated industries.
Australian • Operates a sharemarket where companies can raise funds by issuing shares
Securities in the company.
Exchange • A business lists itself with the Australian Securities Exchange to become a
public company. The main reason for this is to raise extra capital, usually FIGURE 3.14 The Australian
for expansion and development. manufacturer, Electrolux, recently
implemented an innovative custom
designed automation system to
Technological influences create their oven doors. This new
system utilises seven robots that each
Global technological innovation has increased at a remarkable pace, revolutionising perform different tasks and work
the workplace and every aspect of daily life. With appropriate technology, together to assemble the doors.
Electrolux produces 1300 cookers
businesses can increase efficiency and productivity, create new products and per day. As a result, Electrolux has
improve the quality and range of products and services. The use of hi-tech robotics reduced their cycle time to 14 seconds,
in many manufacturing industries is improving productivity, reducing operating which helps to reduce their overall
costs and eliminating many boring and repetitious tasks (see figure 3.14). Rapid costs and increase productivity.
advances in information technology (IT) have reduced
communications delays and allow suppliers and
customers to interact over great distances.
New communications technologies allow information
to be rapidly transmitted to an ever-increasing number of
customers with a speed that now makes communication
almost instantaneous. Since the introduction of fibre-
optic cables and digital information transmission in
the mid 1980s, the speed and capability of transferring
communications data has allowed businesses to
reorganise their structure and has fundamentally changed
workplace practices.
A business that wants to be locally, nationally and/
or globally competitive must adopt the appropriate
technology. If slow to use and exploit technology, a
business is likely to fail: the competition will strive to
capture greater market share and develop a sustainable
competitive advantage.

CD and DVD stores — the internet challenge
DVD rental stores could be headed for the scrap heap as householders turn to the
internet for their movie fix.
Research by industry analysts predicts music retailers selling CDs and DVDs could
SNAPSHOT also be endangered species.

‘If on-demand movie and music download services continue to pick up pace in
Australia, CD and DVD stores may soon face the grim prospect of extinction’, an
analysis by IBISWorld has found.
Experts predicted rental outlets such as Blockbuster and Video Ezy were in trouble,
with movie piracy, download services and pay TV eating into revenue.
The report said Blockbuster had slashed the number of stores in Australia from
900 in 2007 to 630.
‘That’s not the behaviour of an industry buoyant about its future’, IBISWorld
analyst Ed Butler said.
Mr Butler predicted the video rental industry would be one of the worst-
performing in 2011, with revenue expected to fall an average 2.7 per cent a year
over the next five years.
Video rental companies had tried to adapt by introducing DVD rental kiosks in areas
such as shopping centres. ‘Blockbuster are really starting to dive into this and they’ll be
successful for a while, I think, but eventually discs will become passé’, Mr Butler said.
‘The only real way for rental companies to survive is to be entirely online.’
❛ . . . CD and DVD A recent poll of men’s attitudes to technology by AskMen.com revealed 46 per
cent of Australian males preferred watching downloaded episodes of TV shows
stores may soon face rather than DVDs.
More than 29 per cent also admit to illegally downloading movies.
the grim prospect of The arrival of the $36 billion national broadband network with its higher network
extinction . . . ❜ capacity and fast download speeds, would only exacerbate the trend.
Network Video managing director Keran Wicks, however, denied rental stores
were close to oblivion.
Ms Wicks said while revenue was down about 5 per cent, this was more about
consumers tightening belts.
But she said there was no doubt consumers would one day prefer downloading a
movie to hiring it.
‘Certainly there will be a point where Network Video will get into the (movie)
streaming business, because consumers will be demanding it’, she said.
‘The technology is there, but the demand isn’t.’
Source: Greg Thom, ‘DVDs dying a slow death as internet takes over’, Herald Sun, 28 July 2011.
Snapshot questions
1. Identify the technological influences that have had an impact on CD and
DVD stores.
2. Outline how these stores have tried to respond to these influences.
3. Identify other external factors that have influenced CD and DVD stores.
4. Recommend strategies stores like Blockbuster could implement to help
respond to these challenges.
Competitive situation influences

Competition between firms to be the ‘market leader’ or to win customer loyalty
BizWORD
can benefit the consumer and the business. It can provide the consumer with more
A sustainable competitive
advantage refers to the ability of a
choices, a range of qualities and a variety of prices. From the business point of view,
business to develop strategies that competition can stimulate greater efficiency in production and usually results in a
will ensure it has an ‘edge’ over its better quality product or service at the lowest cost to the business. Each business
competitors for a long period of time. aims to achieve a sustainable competitive advantage over its competition in
order to capture a larger portion of the market.

Ease of entry
into a market
for a new business
Number of FACTORS INFLUENCING A Local and foreign

competitors BUSINESS’S COMPETITIVENESS competition
Marketing
strategies employed
by competitors
FIGURE 3.15 A business’s competitiveness is influenced by a range of factors.
Number of competitors
The number of competitors refers to the size and number of firms that exist within BizWORD
an industry; it is also known as market concentration. There are four main types Market concentration refers to the
of market concentration (see table 3.3). number of competitors in a particular
market. There are four main types of
TABLE 3.3 Types of market concentration market concentration:
• a monopoly — is complete
Types of market concentration by one firm in the
concentration Features/characteristics Example industry, e.g. Australia Post
Monopoly • Complete concentration by one firm in the industry Australia Post • an oligopoly — where a small
• Firm has the ability to decide the price of the NSW Trains number of larger firms have a
good or service because there are no competitors greater control over a market,
(i.e. the firm is the price maker) e.g. car manufacturers
• Customer has no influence over the price • monopolistic competition —
charged. i.e. the customer is the price taker. where there is a large number of
buyers and sellers in a particular
Oligopoly • Consists of a small number of larger firms that Banks market, e.g. local retailing shops
dominate the market Oil companies • perfect competition — where
• Are able to stay in control of the market Car there is a large number of small
because they spend large amounts of money on manufacturers firms that sell similar products. They
advertising and this enables them to restrict the are unable to differentiate products
entry of new competitors to the market. from each other and so can only use
Monopolistic • Most common type of market in Australia Clothing price as a way of achieving market
competition • Large number of buyers and sellers manufacturers share, e.g. fruit and vegetable
• The goods and services sold are differentiated Local retailing growers.
from competitors using methods such as
packaging, advertising, brand names and quality.
Perfect • Large number of small businesses that sell Fruit and
competition products that are the same or similar vegetable
• Very little advertising is used to increase market growers
share
• The only way to achieve market share is through
price competition.
Ease of entry
Ease of entry refers to the ability of a person (or persons) to establish a business
within a particular industry. The ease of entry will be determined by the type of
market concentration. When there are many small firms (perfect competition and

monopolistic competition), entry is not difficult as businesses are small and it is
more affordable for the business owner to gain some part of the market. When a
few firms dominate an industry (oligopolies), entry is difficult because the firms
are larger and often more established. Potential competitors must have enough
resources to gain some control in the market.
When only one firm (monopoly) dominates an industry, no competitors are able
to enter the market because the one firm has control over all resources that are
being sold.
Local and foreign competitors

A business will be influenced by both local as well as foreign competitors. Local
competitors are those who produce or sell a good or service in the same market.
Local competitors must deal with the same variables as each other. These variables
include:
• labour costs
• transport costs
• the economy
• cost of stock/raw materials.
Foreign competitors are those businesses located overseas or offshore. They
sell their goods or services in Australia and compete with local businesses. One
such global company that has seen opportunities in expanding into the Australian
market is the fashion retailer Zara.
Zara — expansion of a global business

Zara launched in Australia in 2011, shaking up the local fashion sector. Since Zara
was listed on the Spanish stock market in 2001, they have used expansion to
increase their net profit. This global expansion led them to become Spain’s largest
SNAPSHOT company as well as the world’s largest clothing retailer by sales.

Even though Australia is a much smaller market than other parts of the world, Zara
made the decision to expand into Australia because they perceived it as a valuable
market of fashion-savvy consumers who desire the latest fashion and international
brands. Zara already had an enthusiastic following among many Australians who
travelled overseas and desired their high-quality fashion and low prices. For its Australian
debut, Zara opened a massive three level store in Sydney. Since then, Zara has continued
to expand throughout Australia and currently has seven stores across the nation.
Zara does not simply rely on its recognisable brand name to aid its expansion into
Australia and other countries. The company works hard to research and understand
the different local markets, then tailors its retail strategies to suit those different needs.
Zara adapted its European style to suit Australian taste and weather, creating custom
weather-appropriate collections to complement the climate for its Australian stores.
So, how did Zara’s entry into Australia affect other Australian retailers? Other
brands such as Witchery and Sportsgirl have seen their sales affected by Zara’s
entrance into Australia, especially because they share a similar target market. In
order to survive, these retailers have been forced to differentiate themselves and
re-evaluate their product range, pricing and promotional strategies.
Zara has maintained its tight adherence to its strategy even as it pursues its
aggressive global expansion. They have successfully expanded into 86 countries and
❛ Zara launched in have over 1770 stores worldwide.
Australia in 2011,
Snapshot questions
shaking up the local 1. Outline why Zara decided to expand into Australia.
fashion sector. ❜ 2. Discuss the effect Zara has had on the Australian fashion industry.

Marketing strategies
A business will be influenced by the type of marketing measures taken by a
competitor. For example, the business that uses television advertising extensively
will have greater exposure to the market than a business that relies on flyers or
word of mouth. Of course, the type and extent of marketing will depend on:
• the size of the market — the number of existing and potential customers
• the size of the business — the larger the business the more likely it is to invest in a
range of marketing activities, especially more expensive forms of marketing such
as television and newspapers. Smaller businesses may rely on simple marketing
methods such as pamphlets, local paper advertisements and word of mouth.
• number of competitors — usually the more competitors that there are in a market,
the greater the need for marketing. This is necessary to maintain or increase
market share.
• the nature of the product — this refers to the type of product and whether it
requires extensive marketing. Some products, such as postage stamps, don’t
need to be advertised in order to make sales.
FIGURE 3.16 Harvey Norman spends

a lot of money on marketing. In fact, in
2013 they spent $341 million. Smaller
furniture stores would find it difficult to
compete as they would not have as much
money to spend on marketing and would
mainly rely on much simpler marketing
methods.
Markets
Changes in financial/capital markets
Finance (capital) is now more mobile and flows relatively easily between countries,
especially since the 1970s when many countries phased out their controls on BizFACT
foreign exchange trading. As a result, international financial flows have expanded The following stock market index
very rapidly over the last three decades. Consequently, the world capital market is measurements have become familiar
now more integrated than ever before. segments in our news programs — a
Capital flows to those countries where the investment opportunities and returns reflection of the free flow of capital:
are favourable. It is now much easier for individuals and businesses to access the Japanese Nikkei Index, Hong
Kong Hang Seng Index, English FTSE
overseas share markets and purchase equity in foreign companies. (Financial Times Stock Exchange) Index
and United States NASDAQ (National
Changes in labour markets Association of Securities Dealers
The labour market has not been ‘freed up’ to the same degree as other markets. Automated Quotation System).
If anything, the labour market has become less global in the last 60 years.

Due to political barriers, the flow of people between countries is now more
restricted than it was from 1850 to 1900, when waves of migration occurred. This
trend seems likely to continue, especially the restrictions placed on the movement
of low or unskilled labour. For example, even within the European Union, which
gives citizens of any member nation the right to work and live in any other, only a
small proportion of workers travel across national borders.
FIGURE 3.17 Skilled migrants on

temporary work visas help to meet the
demands for labour in Australia.
However, two trends in the labour market have resulted in the movement of
workers. First, the movement of large numbers of temporary skilled migrant
workers has been very important in Australia, Europe and Asia. For example, large
numbers of unskilled Turkish and Filipino workers work in numerous countries.
Second, the growing demand for highly trained employees means that such people
are increasingly mobile.
Changes in consumer markets

There has been phenomenal growth in the amount and value of world trade,
especially since the end of World War II. For example, during the period from
1995 to 2005, global trade in goods and services increased by approximately
150 per cent. In 2008–09, however, the global financial crisis saw a fall in global
output and trade, which was the first of its kind since the Great Depression during
the 1920s and 1930s. After the sharpest decline in more than 70 years, global trade
is set to rebound over the next few years and grow at 9.5 per cent. Countries are
achieving cost savings by specialising in products they can produce efficiently. This
results in cheaper prices on the world market and, in turn, generates increased sales
in existing markets. New consumer markets also emerge, particularly in developing
countries, like China and India.
Improved technologies and communications have also changed consumer
markets. With the advent of the internet, innovative and visionary Australian
businesses may reach much larger markets and take advantage of economies of
scale. Consumers around the world will just as readily browse an online store as
examine a catalogue delivered to their private letterboxes.

Summary
• Legal influences are the regulation (legal framework) within which a business
must operate.
• Political influences are derived from state and federal government policies and
include free trade policies and the process of deregulation.
• Institutions that influence business include government, regulatory bodies and
other groups such as trade unions and employer associations.
• Technological influences can increase business productivity and communication.
• Each business is influenced by their competitors and should aim to achieve a
sustainable competitive advantage.
• Factors influencing a business’s competitiveness include the ease of entry into a
market for a new business, local and foreign competition, the marketing strategies
employed by competitors and the number of competitors.
• Other external influences include changes in financial, labour and consumer
markets.
Revision EXERCISE
3.1
1 Define the term ‘business environment’.
2 Distinguish between internal and external business environments.
3 In small groups, use the brainstorm technique to identify the elements that
determine the environment of your Business Studies class. Choose a spokesperson to
share the group’s comments with the rest of the class.
4 State what you understand by the ‘economic cycle’.
5 Clarify why the level of economic activity fluctuates over time.
6 Outline the impact of globalisation.
7 Justify why businesses should offer family friendly workplace practices.
8 Account for why the ACCC is so important to business in Australia.
9 Explain why it is important for a small business owner to comply with the consumer
protection provisions of the Competition and Consumer Act.
10 Recall the legal penalties or remedies that might apply after a successful prosecution
for breaches of the Act’s restrictive trade practices provisions.
11 Use the NSW Environment Protection Authority, NSW Fair Trading, Australian
Securities and Investments Commission (ASIC) and Australian Competition Weblinks
and Consumer Commission (ACCC) weblinks in your eBookPLUS to investigate • NSW Environment
these government agencies and then complete the following questions. Protection Authority
(a) State their role. • NSW Fair Trading
(b) Briefly outline their importance to Australian businesses. • ASIC
12 Outline how information communication technology, especially the internet, has • ACCC
changed existing consumer shopping practices.
13 Define the term ‘sustainable competitive advantage’.
14 Describe what is meant by the term ‘market concentration’. Give examples.
15 Identify four types of market concentration.
16 Explain why the marketing strategies of a competitor will impact on a business’s
competitive situation.
17 List five different products you use regularly, such as your computer, DVD player,
shoes etc. and:
(a) identify the brand name of the product
(b) identify the company that made it
(c) identify in which country it was made
(d) determine why it was made there.
Compare your list with other class members, noting similarities and differences.
Propose a conclusion you can derive from this investigation about global consumerism.

18 Identify which external influence is affecting the small business in each of the
following cases:
(a) Julie runs a small busy restaurant. She recently introduced technology that allows
waiting staff to electronically send orders to the kitchen. This means better service
for the customer because the order is taken more efficiently and more time can be
devoted to other tasks such as the prompt delivery of food and drinks.
(b) John is the manager of a function centre that hosts large weddings and
conferences. He makes sure to include an acknowledgement of the traditional
owners of the land, the Wurundjeri people and their elders, in his opening remarks.
(c) Mia has to design and print new labels for the foods sold in her deli. This is because
changes to the food labelling laws require that all foods list the ingredients by
particular portion size. This allows customers to more easily compare different food
items. She thinks that this may affect which foods customers choose.
(d) Michael, the owner of a local bottle shop, is no longer allowed to sell imported
premixed alcoholic drinks because of a government ban on food and beverage
imports from particular countries.
Extension
1 Explain the impact each of the external influences has on a business and how the
business’s management responds. The first factor has been completed for you.
Factor influencing the

internal environment Brief explanation Management response
Political influences Elected governments at all Must comply with the laws
levels in Australia regulate and regulations introduced
markets and have the by governments
power to make or change
laws.
2 Using an example, determine how the development of global consumers encouraged

the process of globalisation.
3 (a) Demonstrate how technology has affected the way consumers can purchase
goods and services.
(b) Predict what will happen if an Australian business does not provide the
opportunity for consumers to purchase online.
4 In small groups, examine and report on a social issue confronting businesses in your
local area. You may wish to either prepare a PowerPoint presentation or use a word-
processing package for your report.
(a) Outline the issue.
(b) State how the local businesses have reacted to the situation.
(c) Determine what indicators you would use to decide the success or failure of a
business’s response to the situation.
3.4 Internal influences on business

Internal influences relate to the specific factors within the business that will affect
its operations. These factors can be identified and adjusted via feedback and
evaluation processes that provide the business with information for change.

INTERNAL INFLUENCES ON BUSINESS
Business
Products Location Management Resources
culture
FIGURE 3.18 Internal influences on business
Product influences
Product influences affect a range of internal structures and operations within the
business. The main product influences on a business are as follows.
1. The type of goods and services produced will affect the internal operations of a
business. If the goods are physically large or require many raw material inputs,
there will need to be structures in place to organise and monitor the processes
involved in production. In contrast, a service may be delivered by a home-based
business or a franchise business, such as Jim’s Mowing, and will influence the
internal structures or processes differently.
The range of goods and services refers to the number produced by the business.
The larger the number, the more internal impact it will have on the business as
it will need to expand operations and internal structures to accommodate the
changes. Companies such as Coca-Cola have continually expanded their product
range over the last 20 years, and this has meant that internal changes to operations
and management have been necessary to allow this expansion to occur.
2. Product influence will be reflected in the type of business (service, manufacturer
or retailer). Internally, a service provider will be structured differently to a
manufacturer or retailer, and the influences will vary. Some goods or services
require extensive preparation, while others are merely deliverers. Consider the
difference between the product influences of a clothing manufacturer and that of
a clothing retailer.
3. The size of the business, as previously mentioned, will be based on the range
and type of goods and services produced, the level of technology utilised, and
the volume of goods and services produced. The larger the business the more
goods and services being produced, which will in turn influence the internal
FIGURE 3.19 Location must
structures and operations of the business. A café will operate at a different scale be considered carefully when
to a club bistro and therefore the influence on business functions will be relative. commencing a business.
Location influences
Location can make the difference between success and failure. A good location is
an asset and will lead to high levels of sales and profits. A bad location is a liability
that adversely affects sales and profits.
The choice of location is therefore important. This is particularly true for retail
and service-oriented businesses, which need a constant flow of people walking past BizWORD
the store — the passing trade — and thus need to be located in a shopping centre, A complementary business is one
mall or main street. Locating next to complementary businesses may be beneficial that sells a similar range of goods and
because more customers may be attracted to a single site, as demonstrated by the services.
clustering of retail outlets.

BizFACT
To assist in selecting the best site,
market research companies can be
hired to prepare traffic and pedestrian
flow measurements, an analysis of
demographic data and an investigation
of future trends. When selecting a
suitable site to locate a new small
business, it is crucial to remember real
estate agents’ three important words:
‘location, location, location’.
FIGURE 3.20 Location is extremely

important in business. When selling ice-
cream, sales are likely to increase if you
are in close proximity to a beach.
Each individual small business must satisfy its own criteria when deciding on
the ‘best’ location. Figure 3.21 outlines the factors to consider when choosing a
location.
Visibility
Proximity to Cost
support services
LOCATION FACTORS
Proximity to Proximity to
customers suppliers
FIGURE 3.21 Factors to consider when choosing a location
The factors in figure 3.21 vary in importance from business to business, and
depend on a business’s main activity. To understand each factor, it is necessary
to consider the differences in a location decision for a retail business (such as a
clothing store or café) and for a non-retail business (such as manufacturing or
wholesaling).
For a retail business, location is extremely important to its overall success. The
location must be convenient for potential customers and central to customers’ own
location — that is, the business must have passing customer traffic.

Location for non-retail businesses such as manufacturers is about position
and convenience. This means being close to transport facilities, which allow for
shipping goods to customers and receiving supplies necessary for production.
Many wholesalers and manufacturers locate in industrial estates or parks, which
have been set up by local councils (see figure 3.22).
FIGURE 3.22 Many wholesalers and

manufacturers locate in industrial estates.
Visibility
If a business is not visible, customers may not make the effort to find the business
and optimum customer flow will not be achieved. A business wanting high
visibility would locate in a prime shopping area such as a shopping centre or main
street. Companies concerned with manufacturing would not consider this to be
a crucial consideration, so may choose a low-visibility location ‘out of town’ and
then advertise their location to appropriate customers.
Cost
Cost is another factor to consider when determining the location of a business.
Leasing or purchasing a central location in a busy shopping centre will be far more
expensive than in a location with lower levels of passing customer traffic. If the
business relies on passing customer traffic and maximum exposure, then the cost
factor is unavoidable. These types of businesses include coffee shops or cafés, fast
food outlets and retail shops. The business owner will need to be confident of
generating sufficient business to justify the higher cost.
On the other hand, location may not be a key consideration if the business
does not rely on passing customer traffic. Such businesses search for a low-cost
site, especially if they are related to manufacturing and require large premises.
These types of businesses include mechanics, car yards, equipment hire, and even
solicitors and doctors.
Given the rapid changes in technology, many businesses do not consider their
location as important at all. They are able to communicate with their customer
base through computers, especially with the internet (which has become the
fastest growing avenue for consumer sales). These types of businesses include
telemarketers or businesses that wish to sell their products via the Web.
Proximity to suppliers
Proximity to suppliers is an important consideration for some businesses but not
others. The main issue is the size and quantity of the raw materials needed for

production, or the size of the finished goods to be supplied. A business that relies
on bulky raw materials or finished goods — such as a logging company or steel
manufacturer — has significant transport costs and will locate closer to the supplier
in an attempt to reduce costs. However, for a business that does not transport
bulky goods, proximity to suppliers is not a major consideration. These businesses
include florists, bakeries and video hire shops.
Proximity to customers
The importance of proximity to customers depends on the type of business being
established. A retail business must be convenient for their customers and locate
close to their customer base, so shopping centres or a shopping strip with off-street
parking will be the primary choice. A manufacturing or wholesaling business may
decide it is more cost effective to transport the product to the customer, particularly
if bulky raw materials are needed. Other location cost factors could include leasing
costs in ‘prime shopping areas’, incentives offered by local councils and general
overheads such as rates or utilities.
BizWORD Proximity to support services

Support services are the activities Support services are the activities needed to assist the core operations or prime
needed to assist the core operations or function of a business. They include accountants, solicitors and government
prime function of a business. agencies such as Austrade and the Business Enterprise Centre. Small businesses
traditionally tend to use external services (mainly as a result of limited finance)
whereas medium-sized and larger businesses often provide their own support
services internally. But this trend is changing, with businesses now preferring to
downsize their work force (in an attempt to reduce costs) and outsource many
activities.
Today, proximity to support services is not the most important location factor,
because advancements in technology have enabled all businesses (large or small) to
access a range of support services through the use of computers (the internet and
email), faxes, mobile phones, and phone and video conferences.
Resource influences
BizWORD The four main resources available to a business are:
Human resources are the employees • Human resources. These are the employees of the business and are generally its
of the business and are generally its most important asset.
most important asset. • Information resources. These resources include the knowledge and data
Information resources include the required by the business such as market research, sales reports, economic
knowledge and data required by the
forecasts, technical material and legal advice.
business, such as market research,
sales reports, economic forecasts, • Physical resources include equipment, machinery, buildings and raw materials.
technical material and legal advice. • Financial resources are the funds the business uses to meet its obligations to
Physical resources include various creditors.
equipment, machinery, buildings and Although the quantity and quality of these resources varies amongst businesses, it
raw materials. is by combining them that all the goods and services demanded by consumers are
Financial resources are the funds the produced.
business uses to meet its obligations It is important to realise that these are only general categories of resource.
to various creditors.
Within each category there may be hundreds of more specific resources from
which the manager must choose. Gathering, selecting and coordinating the
appropriate resources from a complex array requires knowledgeable and efficient
managers. The skills and expertise of the management team in coordinating the
business’s resources will largely determine whether the objectives of the business
are achieved.

BUSINESS RESOURCES
HUMAN INFORMATIONAL PHYSICAL FINANCIAL

RESOURCES RESOURCES RESOURCES RESOURCES
• Players • Musical scores • Musical • Budget from BizFACT

• Equipment • Orchestra and instruments the school If a business adopts a traditional
managers cast selection • Sound • Grant from hierarchical approach, management
• Cleaners reports equipment local business may allocate supervisors who have
• Comperes • Musician and • Lighting direct control and authority to
• Ushers cast reports equipment ensure work processes are carried
• Ticket sales • Costumes out. However, if a business adopts
reports • Props and sets a flat management structure, it
will emphasise teamwork and
FIGURE 3.23 Resources required to produce a school musical shared responsibility for achieving
business goals. In today’s global
environment, there is an ongoing
Management influences emphasis on ‘virtual teams’. Such
teams work without time, space or
Rapid advances in technology, coupled with the significant pressures on businesses organisational boundaries by making
from increased competition due to forces of globalisation, have resulted in businesses use of sophisticated communications
flattening their structures. This means that there are fewer levels of management. technology.
Such businesses can adapt quickly to meet changing consumer needs and market
conditions because there are fewer managers who need to approve decisions.
Businesses that adopt a flatter organisational structure reduce the number of
levels of management, giving greater responsibility to individuals in the business.
The trends and changes in organisational structures are summarised in
figure 3.24. The characteristics listed on the left-hand side apply to the traditional
structures, whereas those on the right apply to the most modern structures. Many
businesses are in transition — they have adopted the traditional design and taken
on elements of the newest designs.
Traditional organisational structures New and emerging organisational structures

Less fluid More fluid
• Centralised • Power not shared (exclusive) • Decentralised • Equal power-sharing (inclusive)

• Task/activity centred • Narrow span: workers • People centred • Wide span: workers
• Division of labour: controlled: dependent • Multi-task, multi-skilled autonomous: independent
labour specialisation • Communication: top–down • Flexible structure: flat, • Communication: by consensus
• Rigid structure: hierarchical • Delegation: top–down mono-layered • Delegation: by agreement
highly layered/multi-layered • Approach to employment • Democratic and laissez-faire • Approach to employment
• Autocratic, didactic relations: pluralist management styles relations: unitary
management style • Traditional, conservative • Performance management: • Modern, forward thinking,
• Performance appraisal: ‘do it the best way’ contemporary
‘do it our way’
FIGURE 3.24 Pouring water on the sandcastle

FIGURE 3.25 A ‘flatter’ management structure encourages a sense of ownership and
innovation by managers. This emphasises teamwork and responsibility.
The characteristics of the two organisational structures (see page 75) reflect the
important influence management has on business. Collaborative workplaces allow
for a more cohesive and inclusive business culture. The management style that the
business adopts will depend on its size and main activity — for example, retail,
manufacturing or service (see the following Snapshot).
Morgan Stanley — internal environment

The internal business environment
refers to the factors inside the
organisation that impact on its
SNAPSHOT performance. It consists of the

structure of the organisation, the
policies, corporate culture, the
role management plays, and the
❛ Morgan Stanley has way in which management and
employees perform their tasks.
developed a strong Businesses such as Morgan Stanley
culture . . . ❜ manage their internal environment
to achieve their objectives.
Morgan Stanley is a global company that provides financial services to other
corporations, governments, financial institutions and individual customers. The
financial services that the company provides are numerous, but to give just one
example, Morgan Stanley provides a financial advisory service regarding corporate
lending. The company has its headquarters in New York City, but it started
operations in Australia more than 50 years ago. It currently has more than 300
employees located in its offices in Sydney and Melbourne. Morgan Stanley operates
in 42 countries around the world, with over 1300 offices and more than 60 000
employees globally. It has a relatively flat management structure (few levels of
management) and a positive corporate culture.

Morgan Stanley has developed a strong culture based on diversity (recognising
individual differences) and inclusion. The company creates a culture of inclusion by
bringing together and valuing staff with diverse backgrounds, talents, perspectives,
cultural identities and experiences.
One of Morgan Stanley’s basic business principles is ‘keep your balance’.
The company encourages staff to enjoy a life outside of work, and realises the
importance of personal events in its employees’ lives. In 2010, Morgan Stanley
Australia was listed as one of BRW magazine’s top 50 places to work in Australia.
The annual Best Companies list recognises the achievements of companies that have
implemented creative approaches to developing trust, pride and camaraderie within
their workplaces.
Snapshot questions
1. Describe Morgan Stanley’s internal environment.
2. Assess the impact this management style would have on employees.
Business culture BizWORD

All businesses have their own business (corporate) culture — the values, ideas, Business (corporate) culture refers
expectations and beliefs shared by the staff and managers of the business. Each to the values, ideas, expectations and
business develops its own particular way of doing things. The style or character of beliefs shared by members of the
organisation.
a business is consequently reflected in its culture.
Business culture can be revealed officially in the policies, goals or slogans of a
business. It can also be seen in the unwritten or informal rules that guide how
people in the business behave, such as the way staff dress, the language staff use
and the way that staff treat each other and customers.
BizFACT
Job seekers are increasingly concerned
about the corporate culture of a
potential employer. It is difficult to
determine corporate culture — or
‘the way things get done’ — at an
interview. Things to look out for
are the way people dress, how they
address each other and even the office
facilities. Some offices have gyms and
cafés to encourage work–life balance.
BizFACT
At The Body Shop, Anita Roddick, the
business’s founder, wanted people
in her shops ‘who care, who are
enthusiastic, who like trading, enjoy
FIGURE 3.26 The corporate culture of Domino’s is based on the idea of having fun at work,
rapping and don’t mind wrapping’.
which leads to great things happening.
Every shop is encouraged to become
involved in a local community project,
A manager must understand and assess all facets of a business’s unique culture voluntary organisation or charity,
as this is a powerful tool for achieving goals. Knowing and appreciating a business’s reflecting their social obligations.
culture makes it easier to get things done faster or to initiate a change to routine

or procedures. Competent, effective managers will use the business’s culture as
BizFACT a force for positive change. Research has shown that businesses with a healthy,
well-developed and strong culture are more likely to be successful, because such
A business may express its core values
with statements such as: ‘We show a workplace is perceived by the employees to be more positive and personalised.
respect for the law and perform Employees who have clear expectations feel better about their work — they develop
our roles accordingly’, ‘We conduct a sense of belonging. A manager who does not understand a business’s culture may
ourselves with integrity and act in a experience failure or disappointment.
fair and honest manner’, ‘We value
people and show them respect’,
‘We use the funds and assets of the Elements of a business culture
company responsibly and in its best A business culture normally consists of four essential elements:
interests’ or ‘We are accountable
1. Values. These are the business’s basic beliefs, shared among its employees.
for our own actions and their
consequences’. Business values can include honesty, hard work, teamwork, quality customer
service, employee participation and innovation.
2. Symbols. These consist of events or objects that are used to represent something
the business believes to be important. It is a case of ‘actions speaking louder
than words’. For some businesses, competitive sports are a key feature of the
business’s culture. Other businesses have encouraged employee development
BizFACT and loyalty through the use of training and development programs.
Origin Energy Australia is an energy 3. Rituals, rites and celebrations. These are the routine behaviour patterns in a
company. Its over 6000 employees business’s everyday life. Regular social gatherings can be held to help develop
are expected to reflect the company a sense of belonging among employees who normally work in small teams
values, which include caring, listening, during the week.
learning and delivering.
4. Heroes. Heroes are the business’s successful employees who reflect its values and,
therefore, act as an example for others.
Culture and organisational structures

The culture of a business is often evident in its organisational structure. Formal
businesses with an emphasis on bureaucracy, line authority, hierarchical
BizFACT
management structures, and defined job titles and areas of responsibility often have
Management consultants Terrence
Deal and Allan Kennedy wrote that
prevailing cultures that emphasise accountability, communication and cooperation.
having a positive business culture They also tend to conform to a culture of loyalty and respect for superiors (or, if
is essential for a business’s survival not for superiors, at least for the positions they may hold). A culture that values
given: and expects defined career pathways may be evident in formal organisations.
• the rapid rate of social, Less formal businesses with flatter management structures, less departmentalisation
technological and environmental
and fewer defined spans of control often exhibit highly flexible, innovative and
change
• an increasingly competitive macro risk-taking cultures. Apple Inc. is an example of a company that values innovation.
environment Steve Jobs, the company’s co-founder, created the atmosphere of innovation that
• intensified global competition. allowed the company to successfully introduce new products such as the Apple
Mac, iPod, iPhone and iPad.
Management’s role in developing a business culture

Once a positive business culture is established, it needs to be kept alive. This is
where management comes in. Management must ensure that staff members are
given sufficient training to reflect the values of the business. For example, if treating
customers respectfully is important in the business, then this might become part of
customer service training.
For a change in business culture to be successful and sustainable, it is vital that
senior management be role models for staff in those important values. Management
must continually reinforce what the values are by communicating with staff,
rewarding employees who display the appropriate values, and recruiting staff who
already fit in with the values of the business.

Google — unique business culture
Google has a unique culture and is one of the most sought-after employers
worldwide. They were ranked number one in Fortune’s annual list of 100 best
companies to work for in 2012 and 2013. Wondering why? It’s because of their
unique corporate culture.
The Googleplex is Google’s corporate headquarters. Just by looking at pictures
SNAPSHOT
inside the Googleplex, you can see that the workplace looks more like an adult
playground as opposed to a place of work. Some of the amenities you can find there
include:
• snack rooms stocked with lots of goodies
• several cafés where Googlers (employees) can gather to eat free food and talk
• exercise rooms
• swimming pools
• game rooms
• a childcare centre.
In addition to these amenities, Googlers receive a wide range of benefits such
as free medical and dental benefits, an on-site doctor, valet parking, free haircuts,
oil change and bike repair, subsidised massages, tuition reimbursement, free meals
and nap pods (where employees who put in long hours are allowed to nap in sleep
stations to recharge themselves).
Googlers come from a wide variety of backgrounds and speak dozens of
❛ The Googleplex is
languages. The Googleplex is designed to be fun and inspiring and has a very casual designed to be fun
and relaxed work environment. Google provides bicycles for employees to ride
around the campus and employees are even encouraged to bring their pets to work. and inspiring . . . ❜
Google maintains an open culture in which everyone is made to feel comfortable
to share their ideas and opinions. They have a very flat management structure with
no middle managers. In their weekly meetings, as well as over email, Googlers can
ask questions directly to Larry Page and Sergey Brin (Google’s co-founders) and
other managers about any company issues. The physical layout of the company and Weblink
the cafés are designed to encourage interactions between Googlers. No one has a Use the Googleplex weblink
private office except for the executive chairman. in your eBookPLUS and view
a photo gallery to discover
more about working at
Snapshot questions Google’s Sydney office.
1. Identify the features that make this workplace unique.
2. Assess the effect this workplace culture would have on Googlers.
Summary
• The internal influences on a business include product, location, resources,
management and business culture.
• Product influences affect a range of internal structures and operations within the
business.
• Location will have a direct impact on the sales and profits of some businesses.
• Factors to consider when choosing a location are:
–– visibility
–– cost
–– proximity to suppliers
–– proximity to customers
–– proximity to support services.
• The four main resources that influence a business are human, information,
physical and financial.
• Businesses can adopt a traditional hierarchical structure or a flat organisational
structure.

• Business culture can be seen in the unwritten or informal rules that guide how
people in the organisation behave.
• There are four essential elements of a business culture: values, symbols, rituals
and heroes.
EXERCISE Revision
3.2
1 Summarise one way in which product influences affect a business.
2 Identify and outline three factors a business must consider when choosing a location.
3 Describe the four main resources available to a business. Choose one of these
resources and explain how it will influence a business.
4 Distinguish between a traditional and flat organisational structure.
5 Define the term ‘business culture’.
6 Describe the culture of your school.
7 Explain how business culture can influence the success of a business.
8 Briefly explain how a manager can influence a business’s culture.
9 Summarise the four elements of a business culture.
Extension
1 Analyse the relationship between a business’s structure and its culture.
2 Determine how the choice of a good or service that a business sells will influence the
business’s legal structure, size and operations.
3.5 Stakeholders
Businesses have many stakeholders: the people and groups that interact in some
BizWORD way with the business and have a vested interest in its activities. In this sense you
A stakeholder is any group or are a stakeholder of your school.
individual who has an interest in or is Businesses are expected to be enterprising, to comply with the law, and be socially
affected by the activities of a business. just and ecologically sustainable in their operations. They are expected to practise
ethical management and do the ‘right’ thing in the interests of all stakeholders.
Society/general public
Employees
Managers
STAKEHOLDERS IN
BUSINESS
Shareholders
Environment
Customers
FIGURE 3.27 The main stakeholders

of a business

Many businesses are now extremely sensitive to public opinion and strive to be
recognised as being good corporate citizens. Businesses recognise that they increase
their chances of success when they pursue goals that align with the interests and
expectations of their main stakeholders. Every business must be aware of and take
into account the needs of the stakeholders.
Shareholders
Shareholders purchase shares in a company, so they are partial owners. Shareholders
have a direct influence on a business because they have voting rights on major
business decisions. In addition, companies have a duty to hold an annual general BizFACT
meeting where shareholders are able to voice their concerns and are given an Presently, over 6 million Australians,
or 38 per cent of the population,
opportunity to ask questions of the Board of Directors. Major shareholders can
own shares. These shareholders have
therefore impact on major decisions. instant access to vast amounts of
Companies with shareholders also have to ensure that they maximise the return information about companies and
on the shareholders’ investment in a sustainable way. Shareholders want the the market. The result has been the
organisation they have invested in to be profitable as they receive a proportion development of new shareholder
of the profits (called dividends). They also make a capital gain if the value of an groups, many of which focus their
attention on environmental and
organsation’s shares increases. ethical issues.
Since shareholders desire immediate returns and profits, managers of public
companies usually feel greater pressure to generate revenue quickly. Shareholders
will therefore influence managers’ decisions and can affect the growth or long-term
expansion plans of a company.
Managers
Managers obviously have a major influence on the business. Management has the
responsibility of running a profitable or successful organisation. Most managers
today understand that ethical and socially responsible activities should lead
to increased sales. There are many complex legal issues that managers must
understand and contend with today and it is their responsibility to introduce the
policies and procedures that will affect the workplace.
A manager’s approach or leadership style can have a major influence on
employees and their productivity. This will affect the culture of the business and
can impact on employee morale.
Employees
Employees are vital to an organisation as they manufacture
or produce the product the organisation sells. Employees
will influence businesses since the quality of the product
depends on their skill and committment to the process.
When employees are valued, paid fairly, trained properly
and treated ethically, they will be become more valuable to
the organisation. If organisations can provide for their needs,
employees will be more inclined to put effort into work tasks
and will be motivated to meet customer expectations.
FIGURE 3.28 Employees need to feel valued and know that their job
is secure in the long term. Employees need a safe and psychologically
rewarding work environment. Such an environment would respect
individual differences and be concerned for employees’ goals, aspirations
and welfare. In this sense it is more than just providing a ‘pay packet’.

Southern Cross Austereo — employees’
influence on revenue
Southern Cross Austereo (SCA), part of the publicly listed company the Southern
Cross Media Group Limited, is a prime example of a company where ratings and
SNAPSHOT advertising earnings have been influenced by their employees.
SCA is a national owner and operator of radio, television and internet media
outlets. One of their most popular radio brands is the Today Network, which is
currently Australia’s number 1 FM radio network and one of SCA’s leading brands.
However, over the past few years, some of their high profile employees have been
involved in scandals that have affected their ratings as well as the company’s profits.
In December 2012, a nurse from a London hospital committed suicide after
2Day FM radio presenters Mel Grieg and Michael Christian broadcast a prank call
pretending to be the Queen and Prince of Wales. The nurse was taken in by the
call and transferred the call to another person, who revealed private medical details
about the Duchess of Cambridge who was being treated at the hospital. The hoax
was widely publicised and SCA suspended all advertising on 2Day FM for some time
after the scandal. This affected their market share and advertising revenues, and led
some in the media to estimate that this could have cost the company $2.8 million in
lost profit (part of this loss was because Austereo responded by donating advertising
❛ . . . the network revenue from 2Day FM to a charity related to the nurse).
Kyle Sandilands, who was another host of 2Day FM, has also been involved
may lose big ratings in numerous scandals over the years, causing SCA many problems. Many of his
comments on air have been described as derogatory, offensive and sexist by media
and millions of commentators and some of his behaviour has led to major brands pledging not to
dollars’ worth of advertise on his programs.
At the end of 2013, Kyle and Jackie O announced their resignation from 2Day FM
advertising. ❜ where they had held the number one spot for over six years in a row. Despite
Sandilands’s contentious on-air behaviour, this has led media sources to conclude
that it has the potential to have an impact on the company since their successful
show generated millions of dollars in advertising revenue. Without Kyle and Jackie O,
it has been argued that the network may lose big ratings and millions of dollars’
worth of advertising.
Snapshot questions
1. Discuss the impact SCA’s employees have had on the company.
2. Deduce how other stakeholders have also been affected by SCA’s employees.
Customers
Successful businesses know that the consumer is a powerful stakeholder in the
external operating environment. Today’s consumers are astute, better educated
and informed. They are increasingly prepared to seek compensation if they believe
they have either been unfairly treated or purchased a product that did not perform
as promised. Consumer groups are also prepared to mount publicity campaigns
aimed at embarrassing those businesses that do not act ethically or responsibly.
One recent example was the consumer backlash against a manufacturer of sports
shoes that was perceived to be exploiting cheap labour in a developing country.
Consumers are increasingly putting pressure on businesses (through their spending
decisions) to be environmentally aware, demanding products that are ‘clean, green
and safe’. Examples include recycling, environmentally friendly packaging, reduced
packaging and lower factory emissions. An example of consumer power was the
pressure put on supermarkets to change their plastic bags to reusable bags.

To ensure its future viability and profitability, a business needs to recognise and
assess changes in consumer tastes so it can constantly satisfy the consumers’ needs
and wants.
FIGURE 3.29 Vocal interest groups

can force businesses to change their
operations. The protesters are concerned
about live animal exports and animal
cruelty.
Society
Members of the community increasingly expect organisations to show concern
for the environment. Some might be worried about organisations using valuable BizFACT
land resources or showing disregard for carbon emissions. They may be concerned In the 2014 Global 100 list,
about waste disposal or pollution. Others may be concerned about their future five Australian companies featured.
welfare through their own employment within organisations. Westpac was top of the list, with ANZ
Therefore, socially responsible businesses will participate in a range of 19th, CBA 25th, Stockland Real
Estate 32nd and Wesfarmers 92nd.
community projects and activities. For example, The Body Shop organises for its
employees to assist with a local charity of their choice. AGL Limited supports a
range of educational, fundraising and social welfare programs.
FIGURE 3.30 Dexus is a property trust

that manages and invests in a portfolio
of diversified properties, including office
and industrial properties, retail shopping
centres and car parks. Dexus was listed
on the 2010 Corporate Knights Global
100 Most Sustainable Corporations in
the World. One of the ways in which
Dexus engages in the community is by
helping the charity Barnardos Australia
pack Christmas gifts for disadvantaged
families.

Environment
There is growing pressure for businesses to adopt ecologically sustainable
operating practices. This is in response to concerns about climate change and the
destruction of the natural environment. Concern for our environment operates at
both the local level as well as on a global scale.
BizWORD Over the last two decades, the business community has undertaken many
Ecological sustainability occurs initiatives to put the principle of sustainable development into practice. For
when economic growth meets the
needs of the present population
example, the jeans manufacturer Levi Strauss and Co. has developed its own
without endangering the ability of environmental philosophy and guiding principles. Levi Strauss will conduct
future generations to meet their business only with partners who share its commitment to the environment.
needs. Businesses that have been successful in their environmental management have
learned that new processes, procedures and strategies are often needed. For example,
one particular organisational element that many proactive ‘green’ companies share
is the development and implementation of an environmental policy.
Through communication and training, responsible businesses can ensure that all
employees and contractors are environmentally aware.
Summary
• Businesses have many stakeholders that will influence their operations.
• Shareholders have a direct influence on a business because they have voting
rights on major business decisions.
• Companies need to ensure that they maximise returns on their shareholders’
investments.
• Managers will influence organisational policies and procedures as well as
employees’ productivity.
• Employees will influence the quality of an organisation’s products.
• To ensure its future viability, a business should consider the needs of their
customers.
• Members of the community increasingly expect organisations to show concern
for the environment and to be socially responsible.
• There is growing pressure for businesses to adopt ecologically sustainable
operating practices.
EXERCISE Revision
3.3
1 Define the term ‘stakeholders’.
2 Identify the stakeholders of your school. Compare your answer with other class
members.
3 Identify the stakeholders of your school. Summarise the influence each of these
stakeholders has on the school.
4 Are a shareholder and a stakeholder the same thing? Explain your answer.
Digital doc 5 Outline the influence managers have on a business.
Use the Chapter summary 6 ‘Employees are the most valuable resource of any business.’ Discuss the accuracy of
document in your this statement.
eBookPLUS to compile your
own notes for this chapter. 7 ‘Businesses that respect and satisfy their customers have a much greater chance of
success.’ Explain why this is so.
8 Define the term ‘ecological sustainability’.
9 In small groups, use the brainstorm technique to identify reasons businesses should
adopt ecologically sustainable operating practices. Share your answer with the rest of
the class.

10 Use a table like the one below to summarise a business’s main stakeholders and their
influence.
Stakeholder Influence
Digital doc
eBookPLUS.
Extension
1 ‘The shareholder should take precedence over all the other stakeholders. They are the
ones who have invested their money; they take the risks. Therefore, they should be
rewarded with as high a return as possible.’ Evaluate this statement. Compare your
answers with other members of the class.
2 Recently, consumer groups, some church organisations and trade unions have
publicised the harsh conditions of outworkers in the clothing industry. Outworkers
are usually women who work from home sewing garments on a contract basis. These
workers have little or no protection regarding their working conditions. Evaluate Weblink
the impact of such campaigns. To help you, use the Fair Wear weblink in your
Fair Wear
eBookPLUS.
3 What do you think motivates a business to engage in socially responsible business
programs? Is it:
(a) altruism — an unselfish concern for others?
(b) enlightened self-interest?
(c) avoidance of government regulation?
(d) fear of being sued?
Justify why you chose the one you did. Share your answer with other class members.

CHAPTER 4
Business growth and decline

4.1 Introduction
Businesses are similar to people in that:
• no two are identical
• each has its own identity
• they are referred to by name or brand
• they possess individual personalities and physical appearances
• they are confronted by life’s challenges
• they sometimes succeed and at other times fail
• they rely on each other for survival.
However, the most striking similarity is that, like people, a business will
BizWORD pass through a number of distinct stages as it develops. This is referred to as
The business life cycle refers to the the business life cycle. The business life cycle is a model; that is, a simplified
stages of growth and development a version of ‘real-life’ situations. Using a model makes it easier to understand the
business can experience. complexities of the business world. The four main stages in the life cycle of a
business are shown in figure 4.1.
Sales Renewal
$
Steady
(size)
state
Decline
Stage 1 Stage 2 Stage 3 Stage 4

Establishment Growth Maturity Post-maturity
Life cycle stages
Shelsie
SHELSIE’S
SHELSIE’S International
DOG WASH DOG DEVELOPMENT
SHELSIE’S or
PRODUCTS LTD.
DOG WASH
SHELSIE’S
For
SHELSIE’S
DOG WASH AND DOG WASH Shelsie
TRAINING Sale products
FIGURE 4.1 The four stages of the business life cycle. The graph shows a smooth line with
sales increasing up to the post-maturity stage. In reality, the growth in sales will usually
show minor increases and decreases within each stage. The line we have drawn represents
the average sales changes.

In each stage of the cycle a business is confronted with new challenges —
as well as being presented with different opportunities. The nature, operation
and organisation of the business changes as the business progresses from one
stage to the next. As this occurs, the business owners need to constantly develop BizFACT
strategies to deal with its expansion. To do this successfully, owners must Using a life cycle model helps in
continually assess the business’s position on the life cycle. This is important, understanding how the business
otherwise inappropriate strategies will be put in place and jeopardise the ‘life’ changes over time.
of the business. However, the reality is that it can often be difficult for owners
to determine their position on the life cycle because they fail to recognise the
changes taking place.
There is one very important difference between the human and business life
cycles — with the business life cycle, there is no set time limit for each of
the stages. For example, some businesses can reach maturity in a short period
of time, whereas another business may take decades to move beyond the
establishment stage.
Some businesses are able to constantly renew themselves over a long period of
time. As they do so, they continually grow and expand, often becoming dominant
within their specific market.
Some Australian businesses have also expanded to become global businesses.
Often these businesses are forced to compete with foreign suppliers as well as
attempting to sell their products overseas. The Australian company PaperlinX
Limited, the world’s leading global fine paper seller and retailer of the Reflex
brand, is an example of how one business has responded to these influences.
Its diverse range of businesses distribute paper, sign and display materials, and
provide graphics solutions and industrial packaging to a wide range of customers
in Australia, New Zealand and Asia, Europe and North America. PaperlinX, with
its corporate headquarters in Melbourne, also operates regional management teams
in Amsterdam and Los Angeles. Cardboard and paper products are bought in bulk
FIGURE 4.2 Owners’ personal
from paper mills around the world and sold in smaller quantities and custom preferences can have an effect on
sizes to customers. It has operations spanning four continents and 20 countries, the business life cycle. Many small
and employs approximately 4000 people. PaperlinX is now truly ‘global’ in the business owners are often satisfied to
distribution of its operations, and derives approximately 75 per cent of its sales keep their businesses the same from
year to year, while others look for
revenue from foreign transactions. opportunities to grow and expand.
For example, the fashion label Jordan
Taylah, an online sleepwear business,
was begun in 2008 by Taylah Golden
and Ellie Jordan when they were
only 12 years of age. They began
operating from home, making hand-
made pyjamas and selling them at
local markets. Determined to expand,
they made the decision to begin
selling online and their business has
continued to grow ever since. Their
business motto is ‘Dream big’.
FIGURE 4.3 PaperlinX, through its

Reflex brand, is the largest supplier
of office paper requirements used in
printers, photocopiers and plain paper
faxes in households and businesses
throughout Australia and New Zealand.
Business growth and decline • CHAPTER 4 87

Occasionally businesses run into financial difficulty and are forced to restructure.
Some of Australia’s large businesses, such as Coles, have followed this pattern (see
The life of Coles — a constantly renewed

business
Consider the variety of stores located in your local shopping complex. There will
probably be a Coles, a Kmart or Target variety store, and perhaps a Liquorland
SNAPSHOT outlet or Officeworks shop. All of these businesses were once part of the
Coles Group.
Coles: early beginnings

For almost one hundred years, Coles has had a rich history in Australia. Coles, one of
Australia’s largest retailers, traces its origins back to a small business retailer.
The first G. J. Coles variety store was opened in Collingwood, Victoria, in 1914 by
Mr GJ Coles and his brother Mr JS Coles. It employed six staff. A particular feature
of the store’s pricing policy was that no item on sale would cost more than one
shilling (equivalent to ten cents). Over the ensuing years both businesses expanded
and prospered.
By the mid 1920s Coles had opened its Bourke Street, Melbourne, store. The
business developed successful marketing strategies and offered a wide range of
products that satisfied the tastes and preferences of their customers.
During the Great Depression of the 1930s Coles continued to grow. Sales
increased as their products were offered at affordable prices to a large range of
customers. Its success reflected the philosophy of its managing director of the time,
Sir AW Coles, who wrote, ‘A store has no right to succeed just because it is open
for business and has a bright display. The goods must reflect the wishes of the
community in which the store is located.’
Post–World War II growth

After World War II, Coles consolidated its position within the Australian retail
industry by acquiring a number of department, chain and grocery stores in
other states.
• In 1960 Coles opened Australia’s first supermarket.
• In 1969 Coles established Australia’s first discount store, Kmart.
• By 1975 Coles, with 559 stores and 36 000 staff, became the first Australian
retailer to achieve more than $1 billion of sales in a single year.
• In 1978 Coles became the second largest private employer of labour in Australia,
with more than 50 000 employees.
• In 1982 Coles developed the discount store concept further: it opened its first
Super Kmart store.
Coles–Myer merger
In 1985 Coles and Myer — a major retailer that had started in Melbourne in 1900 —
merged to form one company — Coles Myer Limited. After the merger the business
continued to grow, introducing new retailing strategies such as EFTPOS and Fly Buys,
and developing a number of concept stores such as Officeworks and Harris Technology.
At its peak, Coles Myer Limited was Australia’s biggest retailer with 1900 stores
throughout Australia and New Zealand, and was Australia’ largest single employer
with 165 000 employees.
During the late 1990s and early 2000s, Coles Myer Limited encountered trading
difficulties and was underperforming due to senior management difficulties, IT and
supply problems, and too much of an overlap between each division, resulting in

them competing for the same market share. For example, Target and Kmart attracted
a similar type of customer, as did Myers and Grace Bros. (Myer bought Grace Bros
Holding Limited in 1983.)
Wesfarmers takeover
In 2006 the Coles Myer Limited board finally accepted that the mega-merger had
failed and sold the Myer chain to a consortium led by private equity firm Texas Pacific
Group Capital, with Blum Capital and the Myer Family Company Pty Ltd.
Following the de-merger, the Coles group continued to struggle against its main
rival, Woolworths Limited. Its financial performance deteriorated with a resultant
fall in profits. It was ripe for a takeover (acquisition), which occurred in late 2007
when the Perth-based conglomerate Wesfarmers — one of Australia’s largest public
companies — paid $22 billion to buy the Coles retail empire. At the time, this was
the largest takeover in Australian history.
❛ Today, Coles is a
Over the past few years, Wesfarmers has been successful in turning around leader in Australian
the performance of the Coles division, largely due to improvements in the
performance of Target and the Coles supermarket chain. It has streamlined the food retailing,
supermarket division by selling 45 Coles stores and eight Liquorland outlets to the
independent grocer FoodWorks for $35 million. The sale was part of Wesfarmer’s
with more than
five-year plan to improve its network of over 700 supermarkets and more than 99 000 employees
600 Liquorland stores.
Today, Coles is a leader in Australian food retailing, with more than and over 19 million
99 000 employees and over 19 million customer transactions a week. customer transactions
Snapshot questions a week. ❜
1. Identify the main reasons for the success of Coles up to the 1920s.
2. Many businesses failed during the 1930s Great Depression. Clarify why Coles
was able to not only survive but prosper.
3. Describe the term ‘merger’.
4. (a) Outline what new Weblinks
(i) retail strategies and
Use the Coles and
(ii) concept stores were introduced after the merger with Myer. Wesfarmers weblinks in your
(b) Propose the reasons for the introduction of these changes. eBookPLUS to discover more
5. State the main reasons for the merged company’s underperformance. about the history of Coles and
6. Describe the term ‘takeover’ (acquisition). the structure of Wesfarmers.
7. Outline the strategies Wesfarmers used to improve the performance of Coles.
8. Use the Wesfarmers weblink in your eBookPLUS and access the Wesfarmers
group structure. Explain the benefit for Wesfarmers in having such a
diversified range of business operations.
Summary
• The business life cycle refers to the stages of growth and development a business
can experience.
• The stages are: establishment, growth, maturity and post-maturity.
• In each stage of the cycle, a business is confronted with new challenges and
presented with different opportunities.
Revision EXERCISE
4.1
1 Examine figure 4.1 (page 86) and then answer the following questions.
(a) Identify the four stages of the business life cycle.
(b) Propose why the size of a business is directly related to the amount of sales.
2 Figure 4.1 is referred to as a model. Explain how using models can help our
understanding of the real world.

3 State why it is important for business owners to assess the business’s position on the
life cycle.
4 Explain why PaperlinX is considered a ‘global’ business.
Extension
1 There are daily examples of businesses that have suffered because they failed to
manage their growth satisfactorily.
(a) Identify two businesses you are aware of that have suffered because they failed to
manage their growth.
(b) Investigate the main reasons for both their rise and decline.
2 According to Edward De Bono, ‘Success in business would seem to depend much less
on natural talent and a lot more on thinking and personality factors. Certainly success
in business often seems spurred by a desire to make things happen.’
(a) Justify this statement.
(b) Investigate the ‘thinking and personality factors’ a successful businessperson
would possess.
4.2 Business life cycle — stages and

responding to challenges
Each stage of the business life cycle has its own special features and challenges.
This section will examine the main features of each stage before considering the
challenges experienced at each stage. This information will be presented in a table
format to help you to compare and contrast the different stages. We will also
identify actual businesses at different stages in the business life cycle and observe
how they respond to the different challenges of each stage.
Establishment stage
The first stage in the life of a business is its birth — or establishment. Like human
babies, recently established businesses are also vulnerable as their hold on ‘life’ is
quite precarious. The overriding concern is to get the business on a solid foundation.
This requires enough sales to be generated to bring in the much needed income,
BizWORD which will be used to pay expenses and to generate a positive cash flow.
Cash flow is simply the money The main features and associated challenges of the establishment stage are
coming into the business in the form outlined in table 4.1.
of cash receipts, and the money
leaving the business as cash payments.
Establishing a business is not always easy. A number of challenges need to be
responded to at the establishment stage. To overcome these challenges, the aspiring
business owner needs to become involved in some basic planning. Detailed
planning undertaken when establishing the business can help greatly reduce
the risk of failing and becoming just another business failure statistic. (Business
planning will be examined in detail in later chapters.)
TABLE 4.1 Establishment stage: main features and associated challenges
Feature Challenges
Alternative names Start-up, birth, beginning, commencement
Goals Survival, and setting a firm foundation for future growth
Sales Normally begin slowly and are somewhat erratic
Marketing Highlight product advantages by accentuating the product’s

strengths. Undertake inexpensive promotion strategies

Feature Challenges
Profit Usually slow to begin with, occasionally a loss. Sometimes all the
profits are put back into the business to ensure its survival.
Financial management Greatest source of start-up capital is from the owner’s personal
savings. This can be supplemented with a loan from a financial
institution, although such finance is often difficult to obtain
because of the high risks involved.
Cash flow Sometimes erratic, with a period of constant cash outflow in the
early stages
Costs Very high fixed costs. Major cost items include premises,
equipment, raw materials and insurance.
Customers Establishing a customer base large enough to sustain future

viability is important. Need to develop a positive relationship with
customers. Attempt to accurately forecast customers’ needs.
Management Informal, with all decisions being made by just one or two
people. Decisions are often made ‘on the run’.
Employees Normally only a few. Owner establishing work routines and

building up relationships
Failure rate Very high, up to 33 per cent within the first year of trading
Main problems Lack of money with possible cash flow shortages
Risk level Extremely high, especially within the first few months. High
degree of uncertainty
Business entity Usually sole trader or partnership
Cavalicious — establishment stage

The Cavallaro brothers had a good understanding of what
was required to own and operate a patisserie café. With
over 15 years’ experience as a pastry chef from the eldest
brother Andrew, and more than 15 years’ hospitality and
customer service experience from the other two brothers,
Michael and Matthew, the boys decided to combine these
SNAPSHOT
skills to start a business together.
After completing some market research and preparing
a comprehensive business plan, the Cavallaro brothers ❛Their skills,
organised a bank loan to help fund their venture. They
used the funds obtained from the loan to purchase a
experiences and
rundown pizzeria in the heart of Gladesville. With the delicious produce
carpentry skills of Michael, the shop was revamped into
a modern-looking patisserie. have put the
The boys decided to form a private company as opposed to a partnership
so that they would benefit from the protection given by limited liability. The
business on a firm
brothers did not want to be personally liable for the financial obligations of foundation.❜
the business and put their personal assets at risk. While all the owners play an
equal role in management decisions, they each contribute their own specialist
(continued)

skills, knowledge and talents and have their own unique role to play within
the business.
The first few months were very hard. They opened the doors in January and found
it quite slow because many people and businesses in the local area were on holidays.
It took a few months for sales to pick up and for the business to generate a positive
cash flow. Their biggest challenge, however, was getting to know the needs of their
target market, determining what pastries and foods were popular and forecasting
the correct quantity of each food item they should supply, since everything is made
fresh on the premises daily.
The owners didn’t have a lot of funds to spend on marketing, so they
organised letter box pamphlet drops in the local area, as well as a write-up
about their business in the local newspaper to attract interest. They also
undertook other inexpensive forms of promotion, such as daily specials, to
draw customers in.
After those initial months, their sales and profits steadily increased and the
business soon began to acquire a reputation for excellent cakes, pastries and light
meals. Just a few years on, their cake orders continue to increase and they have
almost outgrown their small premises. Their skills, experiences and delicious produce
have put the business on a firm foundation.
Snapshot questions
1. Outline why the Cavallaro brothers decided to form a private company.
2. Summarise the challenges faced by the owners during the
establishment phase.
3. Deduce the factors that have contributed to the business’s success.
Summary
• The main challenge at the establishment stage is to get the business on a solid
foundation by generating enough sales to create a positive cash flow.
• Detailed planning can help greatly reduce the risk of failing.
• Small businesses, such as a sole trader or partnership, have unlimited liability:
that is, the business owner is personally responsible for all the debts of his or
her business.
Growth stage
The second stage is a time of accelerating growth. Sales increase and the cash
flow is normally positive. A customer base has been established with regular
BizFACT
clients accounting for a large percentage of total sales. The business undertakes
During the growth phase it becomes
essential for the business owner to the development of new products to satisfy different market segments. More
develop long-term plans. emphasis is placed on marketing and the use of complex computerised
accounting procedures. In family owned businesses, other members of the family
usually take up specialised supervisory and management roles. The business has
somewhere between 10 and 15 employees. Loyalty to the business is strong,
with many of these businesses taking on the culture of an extended family. The
business has a good reputation in the community, and owners develop a sense of
pride in the products and personal service on which the business has built and
flourished. However, with growth comes complexity, responsibility and the need
for long-term planning.
The main features and associated challenges of the growth stage are outlined in
table 4.2.

TABLE 4.2 Growth stage: main features and associated challenges
Feature Challenges
Alternative names Take-off, growth spurt
Goals To constantly increase the average level of sales; to continue

growing through mergers and takeovers; to diversify business
activities
Sales Rapid increase, especially in the early stages of the growth phase.
New products introduced and some slow-selling products deleted
Marketing Development of new products to satisfy market niches. Price

discounts due to lower production costs. Extensive promotional
activities and a widening distribution network. Desire to increase
market share by using mass-marketing techniques
Profit Should increase due to rising sales and falling production costs.
As well, profits of other businesses acquired through acquisition
(takeover) or merger are available for use.
Financial management Use of sophisticated, computerised accounting procedures and

systems. Raising of finance tends to be easier. Main sources of
finances are from financial institutions, the selling of shares or
taking on more partners. eLesson
Cash flow Difficulties can be experienced if the growth is too rapid. Adequate Wildbreads
cash flow must be maintained to continue expansion. A credit Kim Carrigan of Wildbreads
policy needs to be organised. Forecasting of sales and expenditures explains how the business is
becomes more crucial. expanding as a supplier of
artisan, organic and specialist
Costs Production costs tend to decrease due to economies of scale — breads throughout the
that is, cheaper unit costs due to larger production runs. Business Asia–Pacific region.
becomes more efficient in areas of administration, finance and Searchlight: ELES-2307
production.
Customers Concentration on satisfying existing customer base while at the

same time tapping into new market, both domestic and overseas.
Mass markets become a possibility.
Management Delegation of some responsibilities. Development of a formalised

organisational structure. Introduction of line managers
(supervisors). Clear lines of communication become essential. eLesson
Specialist departments are established. Some functions may be Stuck on You
outsourced. Carrie Felton’s home-based
business has become so big
Employees Increased specialisation of workforce requiring formal and informal she shares it with her family
training. Human resource strategies need to be implemented, and 17 employees — and it
especially in compiling job analyses and descriptions. shows no signs of slowing.
Failure rate Lessened, especially after successful mergers or takeovers, which Searchlight: ELES-0835
result in increased diversification and reduced competition
Main problems Expanding too rapidly and therefore losing control of the business’s
direction. Moving away from the core business activities — that
is, what the business originally produced. Business may not have
enough experience in the new areas. The need for finance to
continue with the growth
Risk level Reduced, due to diversification and less competition. However,

if borrowings increased too rapidly the business may leave itself
exposed — that is, with liabilities far greater than its assets.
Business entity Usually some form of incorporated entity; private or public

company

Lovebird Weddings — growth stage
Trudy Croad decided to enter the wedding industry after working in events
most of her life, including as the marketing director of Australia’s leading bridal
magazine Bride to Be. Her previous experience, strong marketing background
SNAPSHOT and her sister’s wedding provided the inspiration to set up a business in 2007,
Events by Design, which offers brides-to-be wedding planning, styling and
fashion advice.
Keen to grow, Trudy purchased another business called Maleny Weddings in 2010
and ran the two brands side-by-side. This acquisition allowed Trudy to expand her
business from Noosa into the Hinterland of the Sunshine Coast. In that same year,
another business launched in Sydney also called Events by Design. This led to some
confusion as many customers thought they were the same business. Trudy was
also finding it difficult to run two businesses simultaneously. She considered these
problems carefully and decided to merge her two businesses together and create a
new brand, Lovebird Weddings.
Even though the business has been faced with increasing competition and
has been operating in a tough economic environment, Lovebird Weddings has
experienced increasing sales and profits each year. As a result, Trudy has hired more
employees to help her keep up with the increasing demand.
Trudy believes that that the following factors are integral to sustaining growth and
achieving business success:
• Business planning and budget analysis: Trudy updates her business plan
each January. This provides her with a crucial analysis of the business’s
❛ Lovebird Weddings performance and allows her to set goals for the year ahead. ‘Without this,
we travel blindly.’
has continued on its • Relationship management: Lovebird Weddings places a strong emphasis on
growth path through managing and improving relationships with their venues and suppliers.
• Media and marketing: Trudy employs a social media expert to update and
diversifying . . . ❜ manage this aspect of her business on a regular basis.
• Product development: Trudy always ensures Lovebird Weddings are leaders in new
trends in styling.
• Systems management: Trudy is always finetuning the business’s internal systems
to ensure smoother and more efficient client management.
Lovebird Weddings has continued on its growth path through diversifying its
business activities. Trudy initially started out as a wedding planner, but she recently
spotted a gap in the market for high-end furniture for weddings. She therefore
decided to branch out into reception décor and launched her own Lovebird
Weddings signature furniture range, which has doubled her annual revenue.
This diversification has proved to be fruitful and now equates to 75 per cent of
her total revenue.
While Trudy Croad has been successful so far, she is still keen to keep growing her
business through increasing sales as well as through diversification. She is planning
on launching a book in 2014 and is always looking into other revenue generating
opportunities.
Snapshot questions
1. Identify the characteristics that indicate that Lovebird Weddings is in the
growth stage of the business life cycle.
2. Outline the challenges that Trudy Croad has faced while in the
growth stage.
3. Summarise the factors Trudy Croad believes have been integral to achieving
growth.
4. Propose some strategies you think the business should adopt to guarantee
future growth and success.

During the growth stage the business must continually improve its competitive
edge. Failure to do so will see competitors take away customers and the growth
will stall. Owners tread a fine line in attempting to do this — a desire not to
radically alter a successful formula while at the same time restructuring sufficiently
to match what the competitors are doing.
Business growth and expansion can occur in a number of ways. One method
frequently used is to integrate with other businesses through a merger or an
acquisitions (takeover) (see figure 4.4).
BUSINESS GROWTH
AND EXPANSION
Merger Acquisition
Rudd Ltd Kohler Ltd McCulloch Winston

+
Electronics Engineering Feedlots Ltd Haulage Pty Ltd
Rudd Kohler Ltd McCulloch Feedlots Ltd
McCulloch Haulage Pty Ltd
FIGURE 4.4 Methods of business expansion: merger and acquisition (takeover)

BizWORD
A merger occurs when the owners
of two separate businesses agree to
A merger occurs when the owners of two separate businesses agree to combine
combine their resources and form a
their resources and form a new organisation. An acquisition (takeover) occurs new organisation.
when one business takes control of another business by purchasing a controlling An acquisition (takeover) occurs
interest in it. when one business takes control of
Sometimes a merger or acquisition is motivated by the desire for a business to another business by purchasing a
continually expand its range of products. No product will last forever; eventually, it controlling interest in it.
will become obsolete. A merger or acquisition is often an effective way a company
can quickly increase its range of products. At other times, a merger or acquisition
is undertaken to eliminate competition in the marketplace.
There are several different types of mergers or acquisitions. Three types are
described below.
• Vertical integration occurs when a business expands at different but related
levels in the production and marketing of a product. BizWORD
When a business integrates with one of its suppliers this is referred to as Vertical integration occurs when
backward vertical integration; for example, if a bakery acquires a wheat farm. a business expands at different but
Forward vertical integration is when a business integrates with a firm it sells to. related levels in the production and
For example, the bakery could merge with a supermarket chain that sells its bread marketing of a product.
(see figure 4.5). Horizontal integration occurs when
• Horizontal integration occurs when a business acquires or merges with another a business acquires or merges with
another firm that makes and sells
firm that makes and sells similar products; for example, if a bakery merges with similar products.
or is acquired by another bakery (see figure 4.5). Diversification (or conglomerate
• Diversification (or conglomerate integration) occurs when a business acquires integration) occurs when a business
or merges with a business in a completely unrelated industry. For example, acquires or merges with a business in
diversification occurs if a bakery merges with a furniture manufacturer a completely unrelated industry.
(see figure 4.5).

Fine Furniture Factory Golden Wheat Farm
Diversification Backward vertical integration

or conglomerate
integration
Horizontal Horizontal
Slice of Golden Crust
TOP LINE BAKERY
Life Bakery Bakery
integration integration
Forward vertical integration
Buy-Rite Supermarket
Buy-Rite
FIGURE 4.5 Types of integration: backward and forward vertical integration, horizontal
integration and diversification
Summary
• During the growth stage the business has increased sales, a regular customer
base, develops new products and improves its cash flow.
• With growth comes complexity and responsibility, which creates the need for
long-term planning.
• Growth and expansion can occur either through a merger or acquisition (takeover).
• A merger occurs when the owners of two separate businesses agree to combine
their resources and form a new organisation.
• An acquisition (takeover) occurs when one business takes control of another
business by purchasing a controlling interest in it.
• Vertical integration occurs when a business expands at different but related
levels in the production and marketing of a product.
• Horizontal integration occurs when a business acquires or merges with another
firm that makes and sells similar products.
• Diversification (or conglomerate integration) occurs when a business acquires or
merges with a business in a completely unrelated industry.
EXERCISE Revision
4.2
1 Explain why generating a positive cash flow is crucial for the survival of a business at
the establishment stage.
2 Examine table 4.1 (pages 90–1). Construct a mind map to show the main features
of a business at the establishment stage.

3 One-third of all small businesses fail within the first year of operation. Propose why
the failure rate is so high.
4 Outline three challenges that you believe to be the most serious for a business to
confront while at the establishment stage. Justify your selection.
5 Clarify why the growth stage can be a difficult stage to manage effectively.
6 Examine table 4.2 (page 93). Construct a concept map to show the main features of
a business at the growth stage.
confront at the growth stage. Justify your selection.
8 State what often motivates businesses to merge or make acquisitions.
9 You are the owner of Elite Furniture, a business that makes specialty furniture.
Construct a diagram to show how your business could expand using:
(a) vertical (backward) integration
(b) vertical (forward) integration
(c) horizontal integration
(d) diversification/conglomerate integration.
Extension
1 Arrange an interview with a local business owner. Create a two-page written
or five-minute oral report. You might wish to develop your report under the
following headings:
(i) reasons for establishing the business
(ii) brief history of the business
(iii) success and failure along the way
(iv) financial record keeping.
2 Are the advantages of small business really advantages? Wouldn’t every small business
owner like his or her business to grow into a large firm? Discuss.
3 Investigate a recent merger or acquisition. Outline the main objectives for the
merger or acquisition.
4 ‘Mergers and acquisitions reduce competition in the marketplace. They may be a
successful business tactic, but they leave the consumer worse off.’ Evaluate the
Maturity stage
This third stage of the business life cycle presents unique challenges to the
owner. It requires a great deal of rethinking about how the business should
be operated to guarantee survival. At this time, the owner realises that the
business could easily lose the energy, enthusiasm and vitality of its earlier
times. A sense of complacency often envelops the business, affecting both
management and staff. What is now required is a more formal, professional
approach to planning.
With such a realisation may come the need to completely restructure and
reorganise the business, which can sometimes be quite a painful experience.
The business might lose its ‘family’ atmosphere and be replaced with a
more clinical, professional culture. The size of the business dictates a more
formal organisational structure. The difficulty is to introduce these changes
without destroying the entrepreneurial spirit that laid the foundation for the
business’s success.
However, as figure 4.1 reveals (page 86), sales are still increasing but at a slower
rate. The growth stage has slowed. This is an early warning signal of imminent

danger — possible decline. The main features and associated challenges of the
maturity stage are outlined in table 4.3.
TABLE 4.3 Maturity stage: main features and associated challenges
Feature Challenges
Alternative names Market saturation, market hardening
Goals To maintain profits at pre-existing levels
Sales Rate of growth slows and eventually flattens out; plateauing.
Marketing Maintain customer and brand loyalty through

extensive advertising. Due to increased competition,
relative market share may decline. Need to improve
quality of products
Profit Rate of growth slows, eventually flattening out. Reflects what

is happening to the level of sales
Financial management All the correct procedures are in place, but their efficiency
needs to be improved to protect the profit margin. Finances
should be devoted to advertising and development of
new products.
Cash flow If costs are not able to be controlled, then the cash flow
position starts to deteriorate.
Costs Keeping costs under control is now essential. Need to

improve efficiency to keep costs down, otherwise profits
will start to fall even further
Customers Due to the size of the business, customers may sense a

degree of impersonality. Business is in danger of losing
the personalised service that gave the business success in
previous stages.
Management Leadership is crucial. Need to redefine the business’s

objectives and vision. The organisation’s hierarchy becomes
too entrenched and unable to quickly adapt to new
conditions. Many new regulations and ‘red tape’ that will
strangle any initiative
Employees Introduce a work team approach, devolving responsibility

to employees to avoid complacency. Introduce quality
programs such as total quality management or quality
circles.
Failure rate Will increase the longer the business takes to react and
reverse plateauing sales
Main problems Rate of increase in sales begins to falter, sometimes flattening

out. Loss of initial enthusiasm. Air of complacency starts
to dominate.
Risk level If costs are not controlled and management becomes slow to
respond to market demand, then cash flow falls and the level
of risk increases.
Business entity Normally, no change in the beginning although, if the

situation deteriorates, parts of the business may be sold
off. Program of downsizing and selling off non-core
business activities

David Jones — maturity stage
The iconic department store, David Jones, began in 1838. The company is the oldest
department store in Australia as well as one of the oldest in the world. One hundred
and seventy-five years later, David Jones has pioneered many advances in retail and
currently has 38 stores across Australia.
After years of continued growth, a disturbing trend has been noticeable for the
SNAPSHOT
past few years. The rate of increase in profits has begun to plateau. Their underlying
profit for the 12 months to the end of July 2013 was $101.6 million, almost
unchanged from $101.1 million the previous year. David Jones has been affected
by the ongoing weakness in the retail sector characterised by consumer uncertainty,
intense price competition, heavy discounting and a warmer winter. They’ve also been
affected by changes in consumer shopping habits, such as the increase in online
shopping, as well as the new competitors that have entered the Australian market.
In response, David Jones has decided to focus on managing those parts of the business
they can control such as costs, inventory and gross profit margins. They have established
a cross-functional ‘innovation’ team and have created a new role dedicated to customer
innovation in an attempt to innovate in line with changing consumer shopping habits.
They’ve rolled out new technology in an attempt to transform themselves from a bricks
and mortar retail model. David Jones is focusing on lifting online sales, and improving
margins and customer service by increasing staff hours and improving the visibility of
staff on the shop floor. The company is also investigating the possibility of developing a
high rise apartment building, hotel or office block above their Sydney store.
David Jones has changed over the years and is in a crucial stage of its development.
In an attempt to renew themselves the company has refreshed their future strategic
direction and sought the assistance of an international consulting firm.
Snapshot questions
1. Recall why David Jones’s rate of growth has slowed.
2. Outline the strategies David Jones has proposed to help respond to the
❛ The rate of increase
challenges it faces. in profits has begun
3. Propose other strategies David Jones could implement to help increase sales.
to plateau. ❜
Summary
• The maturity stage requires a more professional approach to planning.
• In the maturity stage, the rate of growth slows and eventually flattens out; an
early warning sign of possible decline.
• A sense of complacency often envelops the business.
• Managers may need to restructure or reorganise the business.
Post-maturity stage
Once a business reaches this, the final stage, it is faced with three possible
outcomes, these being:
1. Steady state — the business continues to operate at the level it has been during
the maturity phase
2. Decline — falling sales and profits ultimately resulting in business failure
3. Renewal — increasing sales and profits due to new growth areas.
The post-maturity stage represents many opportunities but also many threats.
The decisions made by the owner will be crucial for the future survival of the
business. By constantly monitoring the business environment, the business owner
should be able to select the most appropriate path for the business to take.

Steady state
A business in a steady state is neither declining nor expanding. It is much like
an aeroplane flying in a holding pattern. Such a business is satisfying customer
demand and maintaining profit levels. It displays some of the characteristics of a
business in the maturity stage. One significant difference, however, is that it does
not continue expenditure on research and development. The owner is more content
to produce what it has in the past and rely on marketing replacement products.
However, just as an aeroplane cannot maintain this position forever, neither
can a business. Eventually the business environment will change and the
business will be adversely affected. Perhaps customers’ tastes change or new
competitors enter the market with superior products, or more efficient methods
of production and cheaper products. Ultimately, this steady state becomes very
unstable and the business stagnates. It eventually loses sales and its competitive
edge. When this occurs, the business enters another stage of the business life
cycle — decline.
Decline
As customers stop buying the business’s products the cash flow will be seriously
affected. Eventually profits will also decline. This process of decline becomes difficult
to reverse for the following reasons:
1. It becomes difficult to borrow money because financial institutions are reluctant
to lend money to high-risk businesses.
2. Suppliers will restrict their credit facilities and may insist on cash payments.
3. Products become obsolete, leaving the business with unsold stock.
4. Well-qualified employees may begin to leave and seek better opportunities.
The longer the business attempts to ‘stagger on’, lurching from one crisis to the
next, the greater the risk of failing and ceasing operations — cessation. We will
examine the procedures involved in voluntary and involuntary cessation at the end
of this chapter.
FIGURE 4.6 To reverse a decline in sales, a business may offer discount prices to attract more
customers. This strategy rarely succeeds in saving the business from further decline.

Renewal
Business decline can be avoided by carefully planned strategies that result in new
markets being tapped and satisfying previously unmet demand. The business
undergoes a revival. Sales, cash flow and profits all begin to increase once again.
Even a business in decline can be turned around and placed on a path of renewal.
It is very difficult to accomplish and takes an enormous effort by both owners and
employees, but it is possible.
The key to achieving a long-term, sustainable recovery in sales is to focus BizFACT
production on what the customers are presently demanding — even if this means An Australian Industry Group survey
abandoning once-successful products. As well, an extensive market research program in late 2013 showed the following
needs to be undertaken to assist in the forecasting of future consumer trends. The strategies for growth among declining
more successful the forecasting, the more able the business is to be proactive; that is, manufacturing businesses: introducing
it can anticipate and plan for future changes. Businesses that tend to be reactive; that new products, downsizing or reducing
operational costs and developing both
is, respond to changes after they have occurred, usually respond too late and lose new domestic and overseas markets.
valuable market share. Renewal is as much about planning and timing as it is about
successful marketing strategies.
The main features and associated challenges of the post-maturity stage of renewal
are outlined in table 4.4.
TABLE 4.4 Post-maturity stage — renewal. Main features and associated challenges
Feature Challenges
Alternative names Regeneration, revival
Goals To increase sales, cash flow and profits. Seek out and exploit
previously unmet demand in new markets. Undertake further
diversification and integration. Sell off any unprofitable
non–corerelated activities or assets.
Sales Increase over time, especially as newer products are brought onto
the market and new markets exploited
Marketing Conduct market research analysis to determine customers’ wants

and identify any changes. Advertise in new market areas. Identify
new market niches.
Profit Will improve over the long term, reaching higher levels than
previously achieved
Financial May need to issue new shares to raise finance to assist with
management research and development
Cash flow May decline in the short term as money is spent on research and
development of new products and markets
Costs Research and development, marketing, integration and

restructuring costs will be high in the short term.
Customers New markets exploited; explore possibility of exporting
Management Implement an organisational development program to realign the

objectives, vision statement and organisational structure so it fits in
with the new environment.
Employees Open and honest communication is essential. Employees need to be

fully aware of where the business is headed, how the new goals are
to be achieved and how individual jobs may be affected. Need to
overcome possible resistance to change
(continued)

TABLE 4.4 (continued)
Feature Challenges
Failure rate Has been lessened compared to the maintaining or steady state phase
Main problems Anticipated sales may not eventuate due to inaccurate forecasts,
poor timing or inappropriate marketing strategies. Initial costs are
high, with cash flow shortfalls in the short term. Employees may
become disenchanted with the restructuring and having to adapt
to constant change.
Risk level Undertaking any new strategy involves some degree of risk.
Risk minimisation techniques can help reduce the exposure
to risk.
Fairfax Media Ltd — post-maturity

stage: renewal
Fairfax Media Ltd is a leading multi-platform media company in Australasia. More
than a decade ago, 80 per cent of its revenue came from two newspapers — the
SNAPSHOT Sydney Morning Herald and The Age. A few years ago, the company realised that
print media was declining and digital viewership was growing. The company had to
work out how to adapt from print to digital.
Fairfax made the decision to diversify around 2009, after reporting its first net loss
since the company was floated on the Australian stock market in the 1990s. There
was a general agreement that the business needed to begin planning for renewal
if profits were to increase in the future. As a result, Fairfax restructured its business
model and began investing in digital media as well as radio brands.
Fairfax recognised both the technology trends as well as its customers’ preferences
for news content and adapted its business to match. Fairfax didn’t ignore these changes
in the external environment which could have destroyed the business. It was proactive:
Fairfax recognised the need for change and renewed the business by developing strategies
to deal with the changes. Fairfax now has a portfolio of tablet and smartphone apps as
well as leading websites, including news sites and classified and transaction websites.
While the audience for its print media has declined, Fairfax’s total audience
❛ . . .the business numbers have actually increased due to its rapidly expanding digital channels. Fairfax
now captures its audience via print, web and mobile platforms. Today, revenue from
needed to begin its two main newspapers makes up only 15 per cent of the company’s total revenue,
while more than 20 per cent of its revenue comes from digital channels.
planning for renewal
if profits were to Snapshot questions
increase in the future. ❜ 1. Outline the external factors that prompted Fairfax Media Ltd to implement
changes.
2. Recall Fairfax Media Ltd’s strategies for renewal.
3. Predict what could happen to the business over the next five years.
Summary
• There are three possible outcomes at the post-maturity stage: steady state, decline
or renewal.
• Steady state: the business is neither declining nor expanding.
• Decline: fall in sales, cash flow and eventual business failure.
• Renewal: new products are developed and new markets are created, leading to
increased sales and a positive cash flow.

Revision EXERCISE
4.3
1 Clarify why you think business owners and staff may become complacent in the
maturity stage of the business life cycle.
2 Construct a concept map to show the main features of a business that is in the
maturity stage.
confront at the maturity stage. Justify your selection.
4 Explain why a business might need to restructure in the maturity stage.
5 Demonstrate how you could tell whether a business is in the:
(a) steady state stage of the maturity stage
(b) decline stage of the maturity stage.
6 Construct a concept map showing the main features of a business that is undergoing
renewal.
confront at the renewal stage. Justify your selection.
8 Recall the key to achieving a long-term, sustainable recovery in sales in the renewal stage.
9 Calculate at which stage of the business life cycle you think the business has to
undergo the most radical change. Provide reasons to support your answer. Compare
your answer with other members of the class. Weblink
10 Use the NSW Small Business Commissioner weblink in your eBookPLUS to answer NSW Small Business
the following questions. Commissioner
(a) Clarify why you think the government provides this information.
(b) Select an area of the website and evaluate the range of information presented.
11 Complete this exercise by placing the appropriate letter in the space provided. Choose
from the letters: A = Establishment, B = Growth, C = Maturity and D = Post-maturity.
The first question has been done for you.
(a) A Selecting a suitable location to commence trading
(b) Sales increase, but at a decreasing rate.
(c) Establishing a customer base
(d) Renewal may involve a merger or takeover.
(e) It is sometimes difficult to keep up with the demand for the product.
(f) If there is no improvement in sales then voluntary cessation is an option.
(g) The business owner may become complacent.
(h) It is in this stage that many businesses fail.
(i) A cash flow crisis is most likely to occur.
(j) Specialised managers are appointed and tasks delegated.
(k) Product development is important.
(l) The business owner is content to keep the business just the way it is.
Extension
1 Visit your local shopping centre and identify any businesses that appear to be
in the establishment stage of the business life cycle. Arrange to interview one of
these owners and investigate what challenges he or she experienced in starting
the business.
2 Arrange to visit a local business that is in the post-maturity stage. Interview the owner
and create a report outlining the:
(a) history of the business
(b) business organisation and structure
(c) strengths and weaknesses of the business
(d) future developments.
3 Investigate and create a report on the business renewal strategies undertaken by
organisations such as KFC, McDonald’s and Subway.

4.3 Factors that can contribute to
business decline
Business decline (and possible) failure is not usually caused by just one single
factor but rather a combination of several. Figure 4.7 outlines several factors that
could contribute to business decline.
Ill-conceived Failure to meet Lack of demand for

Failure to plan
business idea customer’s needs the product
Ignorance of Increased
existing competition competition
FACTORS THAT
Unfavourable CAN CONTRIBUTE TO Lack of adequate
economic conditions BUSINESS DECLINE cash flow
Failure to price
Poor location
product correctly
Failure to adapt to changes Uncontrolled Lack of

in external environment growth management skills
FIGURE 4.7 Factors that can contribute to business decline
However, two main causes of business decline, particularly of SMEs, are:

1. Lack of management expertise. When a business either fails to prepare a business
plan or fails to keep on modifying an existing plan as the environment changes,
the stage is set for imminent failure. It is this situation that gives rise to the
BizWORD often-quoted saying: ‘Businesses don’t plan to fail, they fail to plan.’
Undercapitalisation occurs when 2. Lack of sufficient money — undercapitalisation. Many small businesses start out
there is a lack of sufficient funds to on a ‘shoestring’ budget. Without sufficient capital and a positive cash flow the
operate a business normally.
business will not be able to purchase stock and materials. This inevitably results
in lost sales and falling profits.
Billabong — factors leading to its decline

Billabong is a publicly traded surfwear maker. It is engaged in the marketing,
distribution, wholesaling and retailing of apparel, accessories, eyewear, wetsuits and
equipment in the outdoor boardsports sector.
SNAPSHOT Billabong was founded in 1973 by Gordon Merchant with his then wife Rena.
Gordon, a keen surfer, was eager to create functional clothes that made surfing
more enjoyable. As the clothes grew in popularity, the business diversified and
expanded through licensees into global markets.
Billabong became a global brand appealing to the young, trendy, outdoor ‘cool’
market involved in outdoor activities. In 2009 Interbrand rated Billabong eighth in
the highest ranked Australian brands, with a brand value of A$2.2 billion.
After years of continued growth, Billabong’s profits plummeted as competitors such
as Quicksilver and Roxy stole market share and Billabong took on too much debt to fund
its expansion. As a result, the company reported a net loss of more than A$800 million
in 2013, its worst financial results ever. Billabong closed 158 stores and cut jobs.

Social factors have also contributed to Billabong’s decline. It isn’t ‘cool’ any
more for today’s youth to wear Billabong and as a consequence the company has
experienced weak demand for its products and a deterioration of its brand value.
Consumers have ditched expensive surf brands for sportswear and are increasingly
purchasing online. Broader economic conditions as well as weak retail conditions
have also affected the company. This has had an impact on consumer confidence
and spending patterns.
Billabong has recently appointed a new CEO and accepted a refinancing proposal
in order to revitalise the company. As it continues to restructure its global operations,
only time will tell if Billabong has what it takes to survive.
❛ After years of
Snapshot questions continued growth,
1. Outline the internal and external factors that have contributed to Billabong’s
decline.
[their] profits
2. Propose strategies Billabong could adopt in order to avoid failure. plummeted . . . ❜
4.4 Voluntary and involuntary

cessation FIGURE 4.8 Business failure
is not only limited to small
As mentioned in chapter 1, the world of business is one of activity, challenges, businesses. For example, Ed
excitement, change and rewards. Many people are attracted to such a world. They Hardy Pty Ltd, the company that
have dreams, make plans, and are enthusiastic and optimistic. Because the majority ran the Ed Hardy fashion retail
chain in Australia, was placed
of businesses are classified as small, they often reflect the character, skills and
into liquidation in 2010 after
personalities of their individual owners. defaulting on their bank loan.
A business may cease operating, either voluntarily or Creditors were owed in excess
involuntarily. The difference between the two depends on who of $15 million.
instigates the process (see figure 4.9 below).
CESSATION OF
A BUSINESS
Voluntary Involuntary
(of own accord) (forced by others)
FIGURE 4.9 Cessation of business — voluntary or involuntary
Voluntary cessation
A business may cease operations and voluntarily wind up
its affairs. Any assets owned by the business are sold. The
business stops operating because the owner may wish to
retire, wants a change of lifestyle or, in the case of a sole
trader, has died.
However, most businesses cease to trade due to business
failure. With debts increasing and a negative cash flow, a business
owner will soon realise if their business is underperforming.

To prevent this accumulation of debt, the owner will need to cease operating the
business of their own accord; that is, undergo voluntary cessation.
BizWORD Involuntary cessation

Voluntary cessation occurs when the Many businesses, however, finish involuntarily. The owner is forced to cease trading
owner ceases to operate the business by the creditors of the business; that is, undergo involuntary cessation. Creditors
of their own accord. are those people or businesses who are owed money.
Even though a business appears to be in financial difficulty, many owners
continue operating in the hope that ‘things will get better’. In many cases they
do not. As the business continues its decline, creditors become worried about the
money they are owed and force the business owner into winding up the business.
Figure 4.10 displays the different methods available to wind up a business.
BizWORD
Involuntary cessation occurs when SOLE TRADER PRIVATE COMPANY
the owner is forced to cease trading OR OR
by the creditors of the business. PARTNERSHIP PUBLIC COMPANY
Creditors are those people or
businesses who are owed money.
Bankruptcy Voluntary
administration
Voluntary Involuntary Liquidation
FIGURE 4.10 Different methods available for a business to cease trading
Bankruptcy
Sole traders (businesses owned and operated by one person) and partnerships
(businesses owned and operated by two to 20 people) may end up being declared
bankrupt. Bankruptcy is a declaration that a business, or person, is unable to pay
his or her debts.
BizWORD
Bankruptcy can be either voluntary or involuntary, with either the business
Bankruptcy is a declaration that a
owner or a creditor applying to a court for a bankruptcy order to be made. The
business or person is unable to pay his
or her debts. court then appoints a representative to collect any money owed to the business.
Realisation is the process of This money, along with money raised from the sale of any assets of the business
converting the assets of a business (as well as some personal assets of the owner), is then divided between
into cash. the creditors. The process of converting the assets of a business into cash is
called realisation.

FIGURE 4.11 Up to 33 per cent of all
small businesses fail within the first year
of being established; this rises to an
alarming 75 per cent after five years.
Voluntary administration
When a company is experiencing financial difficulties, it can be placed in voluntary
administration. BizWORD
Voluntary administration occurs when an independent administrator is Voluntary administration occurs
appointed to operate the business in the hope of trading out of the present when an independent administrator is
financial problems. The administrator usually has the combined experiences of appointed to operate the business in
the hope of trading out of the present
a receiver, chartered accountant and investigator. The administrator’s main tasks financial problems.
are to bring the business and its creditors together, and examine the financial
affairs of the business.
Appointing a voluntary administrator is becoming an increasingly attractive
alternative, especially to small business owners. If successful, the business may
resume normal trading. If unsuccessful, the business goes into liquidation.
Liquidation
If a company is in financial difficulty, its shareholders, creditors or the court can
put the company into liquidation. Liquidation, commonly referred to as winding
BizWORD
Liquidation occurs when an
up a company, occurs when an independent and suitably qualified person – the
independent and suitably qualified
liquidator – is appointed to take control of the business with the intention of person – the liquidator – is appointed
selling all the company’s assets in an orderly and fair way in order to pay the to take control of the business
creditors. Once the creditors have been paid, any surplus cash is paid to the with the intention of selling all the
owners of the company. company’s assets in an orderly and fair
A company in liquidation can also be in receivership. Receivership is way in order to pay the creditors.
where a business has a receiver appointed by creditors or the Courts to take charge Receivership is where a business has
a receiver take charge of the affairs
of the affairs of the business. Unlike liquidation, though, the business may not
of the business. Unlike liquidation,
necessarily be wound up. the business may not necessarily be
The main features of liquidation are that it: wound up.
• can be regarded as the equivalent of bankruptcy for a company (corporation) Being insolvent occurs when a
• results in the life of a company coming to an end company is not able to pay its debts as
• normally occurs because the company is unable to pay its debts as and when and when they fall due.
they fall due – it has become insolvent.

There are two types of insolvent liquidation:
1. Creditors’ (voluntary) liquidation. This is the most common type of liquidation
process and can come about in one of two ways. The first method involves
creditors voting for liquidation following a voluntary administration. The second
method involves the company’s shareholders agreeing to liquidate the company
and appoint a liquidator.
2. Court (involuntary) liquidation. In this situation a court appoints a liquidator to
wind up the company, usually after an application has been made from either
a creditor, a shareholder, a company director or, in some circumstances, the
Australian Securities and Investments Commission (ASIC).
When a company is being liquidated because it is insolvent, the liquidator’s
prime responsibility is to the company’s creditors. The liquidator’s main functions
are to:
• take possession of and realise – convert into cash – the company’s assets
• investigate and report to creditors about the company’s financial and related
business affairs
• determine debts owed by the company and pay the company’s creditors
• scrutinise the reasons for the company failure
• report possible offences by people involved with the company to ASIC
• finally, to deregister or dissolve the company.
A liquidator is not required to do any work unless there are enough assets to pay
their costs.
Problems for stakeholders due to liquidation

Every year hundreds of Australian companies are placed into liquidation,
creating a number of problems for the various stakeholders of the business.
The full effect of a company being liquidated can be likened to the ripples on
a pond; they radiate out, impacting on the wider community. Eventually the
full impact of the liquidation is multiplied, involving many stakeholders. It is
estimated, for example, that an average of 30 to 40 people are personally affected
by one company insolvency. The main problems that arise for stakeholders are
shown in table 4.5.
TABLE 4.5 Main problems arising for stakeholders from company liquidation
Stakeholder Main problems arising from company liquidation
Company directors • Possible loss of directorship position and/or disqualified as a

BizFACT director
• Could lose personal assets to pay for the company’s debts
Generally, the order in which surplus • Possibility of a fine and/or imprisonment
funds are distributed is:
1. Liquidator’s fees Creditors (unsecured) • May not recover any of the money owed
2. Employee wages and • If there are funds left over after the payment of the costs
superannuation of the liquidation and payments to other priority creditors
3. Employee leave entitlements such as employees, it may be possible to receive part
4. Employee retrenchment pay payment for the money owed; for example, 5 cents for
5. Unsecured creditors. every dollar owed.
Each category is paid in full before the
next category is paid. Payment may be Employees • Loss of jobs
on a pro rata basis (proportion of) if • Have the right, if there are funds left over after payment of
there are insufficient funds. the liquidator’s fee, to be paid their outstanding wages and
superannuation.

Stakeholder Main problems arising from company liquidation
Shareholders • Rank behind the creditors and unlikely to receive

any payment
• The liquidator can request that holders of unpaid or partly
paid shares in the company pay the outstanding amount on
those shares.
Society/economy • Loss of production from the liquidated companies

• Social and personal difficulties associated with job losses
• Loss of economic confidence
Summary
• The two main causes of business decline (and possible failure) are lack of
management expertise or undercapitalisation.
• Voluntary cessation occurs when the owner ceases to operate the business of
their own accord.
• Involuntary cessation occurs when the owner is forced to cease trading by the
creditors of the business.
• Sole traders and partnerships may voluntarily or involuntarily go into bankruptcy:
a declaration that a business, or person, is unable to pay his or her debts.
• A company has two options when facing financial difficulties:
(a) voluntary administration occurs when an independent administrator is
appointed to operate the business in the hope of trading out of the present
financial problems.
(b) voluntary or involuntary liquidation is the process of an appointed liquidator
converting the business’s assets into cash.
• Liquidation normally occurs because the company is insolvent.
• It is estimated that an average 30 to 40 people are personally affected by one
company insolvency.
Revision EXERCISE
4.4
1 Define the term ‘undercapitalisation’.
2 Apart from undercapitalisation and lack of management expertise, state three other
causes of business failure.
3 As a class, using the brainstorm technique, propose the reasons why so many small
businesses are undercapitalised.
4 Distinguish between voluntary and involuntary business cessation. Digital doc
Use the Chapter summary
5 Construct a flowchart showing what happens when a business is declared bankrupt. document in your
6 Discuss whether, in your opinion, there is a social stigma attached to bankruptcy eBookPLUS to compile your
today. Should there be? Share your answer with the rest of the class. own notes for this chapter.
7 Outline the role of an administrator. Searchlight: DOC-14113
8 State the outcome if the process of voluntary administration is:

(a) successful
(b) unsuccessful.
9 (a) Define the term ‘liquidation’.
(b) Recall the common term for liquidation.
10 Identify those who can put a company into liquidation.
11 Distinguish between ‘liquidation’ and ‘receivership’.
12 Summarise the two different types of liquidation.

13 Complete the statements in your notebook by recalling the correct word from the
list below.
dissolve realise debts financial
possession failure report ASIC
pay offences deregister cash
The liquidator’s main functions are to:

• take of and – convert into – the
Digital doc company’s assets
Test your knowledge of key • investigate and to creditors about the company’s and
terms by completing the related business affairs
Chapter crossword in your • determine owed by the company and the company’s
eBookPLUS. creditors
Searchlight: DOC-1201 • scrutinise the reasons for the company
• report possible by people involved with the company to
• finally, to or the company.
14 Demonstrate the problems that arise for stakeholders when companies go into
liquidation.
15 Use the Australian Securities and Investments Commission (ASIC) website in
your eBoookPLUS to:
(a) Identify some of the signs that may indicate that a company is in financial difficulty.
Weblink
(b) Outline what managers should do if their company is experiencing financial difficulty.
Australian Securities and
Investments Commission
(ASIC)
Extension
1 In small groups, create a list of success strategies for a business that:
(a) has just been established
(b) is in the growth phase
(c) is experiencing a decline of its sales.
2 Assume the Minister for Small Business has established a committee to investigate the
granting of business licences. Propose the recommendations you would make to the
committee regarding the criteria to be used.
3 Most people who start a small business know of the high failure rate.
(a) Explain why, in spite of this, they do not take steps to protect their business
from failure.
(b) Determine the steps you would recommend they take.

TOPIC 1 SUGGESTED ASSESSMENT TASKS
Nature of business
In the HSC examination you will be required to complete 20 multiple choice questions.
Therefore, it is important that you become familiar with answering this type of question.
For each question choose the best alternative:
1 Which of the following statements about profit is false?
(a) Profits encourage risk taking.
(b) Profit refers to the reward that employees receive for producing products.
(c) Profit is the reward business owners receive for assuming the risks of ownership.
(d) Profit is what remains after all business expenses have been deducted from
sales revenue.
2 What is the person who risks his or her time, energy and money to start a
business called?
(a) A financier
(b) An employer
(c) An innovator
(d) An entrepreneur
3 Which of the following would be an example of a business in the secondary industry?
(a) Zenon Mining
(b) Heritage Motel
(c) Canberra Legal Centre
(d) Plastics Manufacturing Ltd
4 Which business entity is owned and operated by more than two people and has
unlimited liability?
(a) Sole trader
(b) Partnership
(c) Public company
(d) Private company
5 In which phase of the business life cycle does complacency amongst management
normally occur?
(a) Growth
(b) Maturity
(c) Establishment
(d) Post-maturity
6 What does the business environment refer to?
(a) The surrounding conditions in which the business operates
(b) Those factors over which the business has very little control
(c) Those factors over which the business has some degree of control
(d) A group who has an interest in or is affected by the activities of the business
7 What type of business would National Foods Limited most likely be?
(a) A partnership
(b) A public company
(c) A private company
(d) A government business enterprise
8 Which of the following is false in relation to why businesses are important to the
Australian economy?
(a) They provide employment for millions of people.
(b) They contribute to Australia’s gross domestic product.
(c) They provide goods and services to satisfy consumers’ wants.
(d) They import products, which generates income for Australians.
9 Which piece of legislation is designed to protect the interests of both consumers
and business?
(a) Small Business Act
(b) Consumer Affairs Act

(c) Competition and Consumer Act
(d) Broadcasting and Television Act
10 Georgia has a hairdressing salon that employs 18 staff. Which of the following is an
accurate classification of the business?
(a) A small business in the tertiary sector
(b) A small business in the quinary sector
(c) A medium business in the secondary sector
(d) A medium business in the quaternary sector
Short response questions

In the HSC examination you will be asked a number of short response questions based on
the HSC course.
A short response question generally contains a number of sections, starting with a low
order activity and increasing in difficulty. How much you should write for each section is
determined by how many marks it is worth. For example, a question that has a value of
two marks will require double the amount of time and information than one with a value
of one mark.
1 (a) State the main function of business. 2 marks
(b) Demonstrate the contribution businesses play within the Australian economy in
terms of:
(i) employment 4 marks
(ii) incomes 4 marks
(iii) choice. 4 marks
(b) Evaluate the role entrepreneurship plays in determining business
success. 10 marks
3 (a) Recall two quantitative measures and two qualitative measures used to determine
the size of a business. 2 marks
(b) Distinguish between a small and a large business. 5 marks
(c) Determine why small businesses, such as the local hairdresser or restaurant, are
able to compete with large, transnational corporations. 10 marks
4 (a) Identify two advantages and two disadvantages of each of the following types of
business ownership:
(i) sole trader 3 marks
(ii) partnership 3 marks
(iii) company. 3 marks
(b) Distinguish between an incorporated and an unincorporated business
entity. 6 marks
5 (a) Define the term ‘business environment’. 2 marks
(b) Distinguish between the internal environment and the external
environment. 6 marks
(c) Factors within the internal and external environments can pressure
businesses to change practices, policies or products. Referring to a
business that you are familiar with, evaluate the accuracy of this
statement. 12 marks
6 (a) Identify four external influences that can affect a business. 2 marks
(b) Demonstrate what impact the following internal influences can have on a
business.
(i) Product influences 4 marks
(ii) Management influences 4 marks
(c) Assess the impact of technological influences on retail businesses. 10 marks
7 (a) Define the term ‘profit’. 2 marks
(b) Explain the relationship between sales revenue and profit. 6 marks
(c) Determine the role profit plays within our economic system. 11 marks

8 (a) ‘Wouldn’t every small business owner like his or her business to grow into a large
firm?’ Discuss. 6 marks
(b) Determine whether the advantages of small business really are
advantages. 12 marks
9 The business life cycle consists of four main stages.
(a) Identify the four stages. 2 marks
(b) Propose some strategies a business can implement to undergo
renewal. 6 marks
(c) Assess the importance of the business owner having an understanding of the
business life cycle. 10 marks
10 Your brother is thinking about starting a family business. He has invited you to be a
member of the business and has asked you for your advice.
(a) Clarify two legal types of business structure that may be
appropriate. 2 marks
(b) Discuss the legal requirements for setting up each type of
business. 6 marks
(c) Assess the advantages and disadvantages of each type of
business. 12 marks
11 Ezzra and Jacinta are considering forming a partnership. They have worked for an
architect for some time and now feel that they could do much better on their own.
Imagine that Jacinta has approached you for advice.
(a) Define the term ‘partnership’. 2 marks
(b) Discuss the legal requirements for the formation of a partnership. 4 marks
(c) Determine the legal rights and responsibilities of each partner in a
partnership. 10 marks
12 (a) Identify the key to determining whether or not a business’s actions are socially
responsible. 2 marks
(b) Outline the main benefits to a business of conducting a sustainability
report. 3 marks
13 (a) Define the term ‘stakeholder’. 2 marks
(b) Explain why some of these responsibilities are incompatible whereas others
are compatible. 5 marks
(c) ‘Shareholders’ expectations should take precedence over the desires of other
stakeholders’. Evaluate. 8 marks
(d) Determine the responsibilities a business has to each of its
stakeholders. 12 marks
14 (a) State why it is sometimes difficult for a business to satisfy the expectations of all
its stakeholders. 3 marks
(b) Propose a number of strategies a business can use to reconcile the conflicting
interests of its stakeholders. 5 marks
(c) Evaluate the effectiveness of each of these strategies. 10 marks
15 (a) Define the term ‘undercapitalisation’. 2 marks
(b) Distinguish between voluntary administration and liquidation. 6 marks
(c) Demonstrate the main problems that arise for stakeholders when companies
go into liquidation. 10 marks
Extended response questions

In the HSC examination you will be asked a number of extended response questions based
on the HSC course.
One of the extended response questions will require a report style format, a style of
writing used extensively in business. Report writing will require you to disregard much of
what you have previously been taught when writing traditional essay style answers. Report
answers use:
• short statements
• lists of main points followed with explanations when appropriate
• short paragraphs

• headings and subheadings
• diagrams, tables and graphs
• condensed conclusions and/or recommendations when required.
Newspaper articles adopt a report writing style. Each paragraph is brief and to the
point with short sentences. It is important that you become familiar with answering this
type of question.
Your answer will be assessed on how well you:
• demonstrate knowledge and understanding relevant to the question
• communicate using relevant business terminology and concepts
• present a sustained, logical and cohesive response
1 Discuss the importance of business to the Australian economy. In your answer
refer to:
(a) creating value
(b) social and economic roles
(c) relevant stakeholders.
2 The internal environment refers to influences that come from within the business itself
and can affect business performance. Discuss.
3 Demonstrate how businesses contribute to our social and economic wellbeing.
4 ‘Small business should not be taken for granted.’ Evaluate the accuracy of this
statement. In your answer use some statistics to support your arguments.
5 ‘To be effective, business strategy must take into account the interests, needs, and
expectations of all the business’s stakeholders. Companies should have a strategy that
combines business goals and broad social interests’. Discuss, using examples, the
6 Natureland Organics is a public company located 280 kilometres from Sydney. It
relies on fresh, organically certified farm produce to supply its three Sydney outlets
and employs 238 people from the local area. The business has a strong reputation
for nutritional value, reliability and support for the environment. The business has
recently started exporting to Singapore and Hong Kong. This will require a new
production facility to be built. The CEO has identified two areas of concern for
future growth:
• Local residents are complaining that a new plant will cause environmental damage,
especially pollution of a nearby river.
• Shareholders are complaining about the cost of the new plant needed for the extra
production.
(a) Prepare a report that could be given to Natureland Organic’s management team. In
your report, you should:
(i) Identify Natureland Organic’s stakeholders.
(ii) Outline three pressures affecting Natureland Organics.
(b) Natureland Organics contributes in many ways to the Australian economy.
Demonstrate two economic contributions that would be lost if Natureland
Organics was forced to close.
7 Discuss three challenges that you believe to be the most significant in each of the four
stages of the business life cycle.
8 Outline the main reasons for business failure. Distinguish between bankruptcy,
voluntary administration and liquidation.
9 Both the quaternary (information processing) and quinary (household services) industry
sectors are becoming major contributors to Australia’s gross domestic product.
Determine why you believe these two sectors are thriving.
10 Annika Schute and Gordon Wong, partners in Omega Home Renovations, have
been operating their thriving business for five years. They now wish to expand, but
cannot decide whether to become a private or public company. They have come to
you for advice. Annika and Gordon wish to maintain some degree of control of their
business, but they like the idea of gaining access to more funds to allow them to
expand more quickly.

As a business consultant, prepare a report that could be given to Annika and
Gordon. In your report, you should:
(a) Describe the main advantages and disadvantages of a private and a public
company.
(b) Recommend which of the two options is best suited to their long term goal.
11 You have been employed as a business reporter with the local newspaper. You are
asked to create an article that examines the external environmental factors that affect
business. A major focus within your article should be an analysis of the impact of each
factor on specific businesses.
12 ‘Improving a business’s ethical performance depends on the values of its managers and
employees, and the business culture’. Discuss.
13 Contrast the stages of establishment, growth and maturity in the business life cycle.
14 When a business is wound up, there are usually negative consequences for the many
stakeholders. Determine the main problems arising from a company liquidation.

TOPIC 2
BUSINESS
MANAGEMENT
FOCUS AREA
The focus of this topic is the nature and responsibilities of management in the
business environment.
OUTCOMES
• explain the internal and external influences on businesses
• assess the processes and interdependence of key business functions
• examine the application of management theories and strategies
• evaluate information for actual and hypothetical business situations
• communicate business information and issues in appropriate formats
• apply mathematical concepts appropriately in business situations.
Achieving business
goals
Nature of Management
management approaches
BUSINESS MANAGEMENT
Management Management
and change process
116 TOPIC 2 • Business management

Naomi Milgrom — a successful business
manager
Naomi Milgrom (pictured) is one of Australia’s most successful CEOs. She has
steered the privately owned Sussan Corporation, widely known as the Sussan
Group, through good times and bad. Under her leadership, the company has grown
to become Australia’s largest privately held specialty fashion retailer, employing
over 4500 staff and selling a wide range of clothing to women of all ages in over
550 stores. You may have heard of the retail chains Sportsgirl, Sussan and Suzanne
Grae; they are all part of the Sussan Group.
❛ . . . the secret to
Thankfully, Milgrom has experience steering her businesses from bad times into running a successful
good times. In 1999, she bought the then ailing retail chain Sportsgirl, which had
been losing money for five years, and transformed it into a profitable business by business is the
2000, and then to the lucrative business it is today.
Milgrom believes the secret to running a successful business is the people within
people . . . ❜
the business — the employees. She has been quoted as saying, ‘talented people in
the right culture, with the right coaching and development, can provide a competitive
edge that an organisation is looking for’. She also believes that an authoritarian
leadership style is no longer appropriate today and managers who are focused on,
and exclusively concerned with, cost and profit (the bottom line) are ineffective.
Employees are important to Milgrom’s business, as is adapting to changes in the
economy and consumer trends to keep the business flourishing. She feels hierarchies
and authoritarian approaches stifle innovation and are totally inappropriate for the
fashion industry, which is constantly changing.
Milgrom talks regularly with her staff, and encourages them to say what they think
and try new ideas. She recognises that she doesn’t have all the answers and that the
most effective way of problem-solving is to develop teams who are encouraged to
work together to arrive at solutions. Milgrom has shown a strong commitment to
flexibility in the workplace. She believes that long hours and inflexible work practices
are major obstacles to the careers of women. Providing increased flexibility enables
her employees to get their jobs done and increases workplace satisfaction.
TOPIC 2 • Business management 117

CHAPTER 5
Nature of management
5.1 Introduction
Have you ever been shopping and spent all your money on the first few things you
saw, only to later be disappointed when you came across something you would
have liked more? What about the assessable task you left until the last minute
only to find all the information resources you needed had been borrowed from
the library? Or the dental appointment for which you were half an hour late? In
these cases you did not manage either your money, assessment requirements or
time very well. These cases reveal that you have actually been practising the art
of management for a number of years. Sometimes you have managed your affairs
successfully; at other times you may have mismanaged them.
Managing is an essential skill that all people need to develop. How well you
perform the task of management will often determine whether you achieve the
goals you have set for yourself. In the world of business, just as in your personal
life, management is a fundamental activity. It is what makes the business function.
The CEO featured in the opening story of this topic highlights a number of
important characteristics of management, including:
1. having the ability to analyse information, attend meetings and communicate
with a wide range of people both inside and outside the business
2. possessing the skills to manage change effectively
3. having the vision to see how things could be, rather than just accepting things
the way they are
4. providing leadership through the desire to encourage, motivate and guide employees
5. understanding your roles and responsibilities in order to achieve the goals of
the business.
FIGURE 5.1 FedEx’s Australian
managing director, Rhicke Jennings,
has gained a reputation as a good
people manager. According to
Jennings, one important aspect of
good management and leadership
is knowing and caring about your
employees. Jennings says, ‘Since
inception, we’ve lived by the principle
that, if we take care of our people,
they will take care of our customers.
And if we have satisfied customers,
BizWORD they will take care of our profits.’
The traditional definition of The traditional definition of management is the process of coordinating a
management is the process of
business’s resources to achieve its goals.
coordinating a business’s resources
to achieve its goals.
As outlined in chapter 3 the four main resources available to a business are:
• Human resources. These are the employees of the business and are generally its
most important asset.
• Information resources. These include the knowledge and data required by the
business, such as market research, sales reports, economic forecasts, technical
material and legal advice.

• Physical resources. These include equipment, machinery, buildings and raw materials.
• Financial resources. These are the funds the business uses to meet its obligations BizWORD
to various creditors. A manager is someone who
A manager, therefore, is someone who coordinates the business’s limited coordinates the business’s limited
resources in order to achieve
resources in order to achieve specific goals. specific goals.
FIGURE 5.2 A skilful and experienced

management team is an essential
ingredient for achieving business success.
Contemporary definition
The past few years have seen a subtle, but significant, modification of the meaning
of the term ‘management’. More contemporary definitions emphasise that
management is the process of working with and through other people to achieve BizWORD
the goals of the business in a rapidly changing environment, as shown in figure 5.3. A more contemporary definition of
Crucial to this process is the effective and efficient use of limited resources. management views management
as the process of working with and
through other people to achieve
business goals in a changing
Working with and
environment. Crucial to this process
through others
is the effective and efficient use of
limited resources.
Achieving the goals Getting the most

of the business from limited
(effectiveness) resources (efficiency)
Weblink
Use The changing role of
today’s manager weblink in
your eBookPLUS to read an
article about how the role of
a manager has changed in
modern business.
Coping with a
Balancing efficiency
rapidly changing
and effectiveness
environment FIGURE 5.3 Key aspects of the
management process
Nature of management • CHAPTER 5 119

According to this definition, management requires:
BizWORD • Working with and through others. Management is, above all else, a social process.
Effectiveness measures the degree Those managers who do not interact and communicate well with employees fail
to which a goal has been achieved. to achieve high levels of commitment from staff.
Efficiency compares the resources • Achieving the goals of the business. Without goals, the business would quickly
needed to achieve a goal (the costs) lose direction. Employees would not understand the ultimate purpose of their
against what was actually achieved work and managers would not be able to measure performance. Effectiveness
(the benefits).
measures the degree to which a goal has been achieved.
• Getting the most from the limited resources. All businesses face the
problem of limited resources or scarcity. Consequently, managers
need to coordinate the resources efficiently. Efficiency compares
the resources needed to achieve a goal (the costs) against what was
actually achieved (the benefits). The most efficient coordination of
resources occurs when the benefits are greater than the costs.
• Balancing efficiency and effectiveness. Managers must usually
balance both the efficiency and effectiveness of their decisions. A
correct balance between efficiency and effectiveness is the key to
achieving a competitive position in today’s challenging business
environment.
• Coping with a rapidly changing environment. This is one of the most
important tasks of all managers. Successful managers are those who
anticipate and adjust to changing circumstances.
Management within the business

Management is a complex task. It is an exciting, challenging, sometimes
frustrating but usually rewarding experience. All businesses must be
managed; they do not operate automatically. For example, without
managers how could 20 000 airline flights a day be achieved without
an accident, tens of thousands of motor vehicles be manufactured,
hundreds of thousands of students be educated, and hundreds of films
and downloads be made available for our entertainment.
FIGURE 5.4 A business manager
shares many similar features with an
orchestra conductor. Like conductors,
business managers bring together all of
the varying resources needed to make
the business successful and when it is
effective, beautiful music is the result.
FIGURE 5.5 Managers can sometimes

feel as if they are caught in a never-
ending cycle of meetings, interruptions,
paperwork, emails and trivialities.

The manager’s role is similar to that of a musical conductor. It is the conductor
who has to coordinate all the members of the orchestra so they stay in time,
inspire and lead, encourage superior playing, develop the correct interpretation
of the score, and have the orchestra playing as a whole rather than as a group of
individuals just playing notes.
Observations made of modern managers’ work patterns suggest that management
is a difficult and demanding job and that there is a gap between how people view
the role of a manager and reality. The myths and realities of management are
outlined in table 5.1.
TABLE 5.1 The myths and realities of a manager’s job according to management researcher
Henry Mintzberg
Myth Reality
1. The effective manager is a methodical The typical manager is constantly

planner, reflects on what has been interrupted, with no more than
achieved, with time to systematically approximately 10 minutes spent on any one
work through problems encountered activity. The manager takes on a great deal
throughout the day. and has little time for reflection.
2. The effective manager has no regular Although managers’ days are constantly
activities to carry out. It is all a matter of interrupted by both trivialities and crises,
coordinating other people’s responsibilities they still have regular duties to perform.
and then sitting back to watch others do They must interpret and analyse information,
the work. attend meetings and communicate regularly
with other parts of the business.
3. Management is a science and, as such, can be The manager’s job is more art than
reduced to a formula and set of ‘laws’ that, if science. Managers rely heavily on judgement,
followed, result in goals being achieved. past experience, perception and intuition.
5.2 The features of effective

management
Every business — whether it be profit or not-for-profit, small, medium or large —
needs effective management to succeed. Managers are necessary because society could
not function without businesses, and businesses cannot function without managers.
An effective manager needs to be good at: BizWORD
• Planning: the preparation of a predetermined course of action for a business. Planning is the preparation of a
It refers to the process of setting objectives and deciding on the methods to predetermined course of action for a
achieve them. business.
• Organising: the structuring of the organisation to translate plans and goals Organising is the structuring of the
organisation to translate plans and
into action.
goals into action.
• Leading: the process of influencing or motivating people to work towards the
Leading is the process of influencing
achievement of the organisation’s objectives. or motivating people to work towards
• Controlling: compares what was intended to happen with what has actually the achievement of the organisation’s
occurred. objectives.
The important role of effective management is to make sure the joint efforts Controlling compares what was
of employees are directed towards achieving the goals of the business. Producing intended to happen with what has
all the goods and services demanded by consumers involves the combined efforts actually occurred.
of many people. This combined effort must be effectively coordinated so that the
greatest amount of goods and services can be produced for the least cost — that
is, efficiently. This coordination needs to be managed on many different levels; for
example, within businesses, between businesses and on a national and international

level. Businesses must do more than meet the needs of individuals; they must also
meet the needs of all the stakeholders in general.
BizFACT
Above all else, what is important to any business is not the number of managers
Managers’ expectations have a
direct impact on their employees’
it employs, or the prestigious titles it gives them, but the ability of these managers
productivity. Managers with high to achieve the business’s goals. To do this effectively, a manager must possess a
expectations lead a more highly range of skills.
motivated and productive staff.
Summary
• Management is a fundamental activity that makes the business function.
• Management is the process of:
(i) coordinating a business’s resources to achieve its goals
(ii)
working with and through other people to achieve business goals in a
changing environment.
• Whether the goals of the business are achieved largely depends on the skills and
expertise of the management team in coordinating the business’s resources.
• Every business needs effective management to succeed.
• An effective manager needs to be good at planning, organising, leading and
controlling.
• The role of effective management is to make sure the joint efforts of employees
are directed towards achieving the business’s goals.
• Effective management is usually the major factor influencing the success or
failure of a business.
EXERCISE Revision
5.1
1 Read the story about Naomi Milgrom at the beginning of this topic.
(a) Outline the features of effective management that Naomi Milgrom displays.
(b) Assess the effect her management style would have on both employees and
the business.
2 State the main function of management according to the traditional definition.
3 Describe the four main resources available to a business.
4 Distinguish between the contemporary definition of management and the
traditional definition.
5 Construct a concept map summarising the five key aspects of the management process
according to the contemporary definition. The first one has been started for you.
6 Distinguish between efficiency and effectiveness.
CONTEMPORARY
DEFINITION OF MANAGEMENT
— KEY ASPECTS
• Working with and through

others
• A social process
• Communication essential
7 ‘The performance of managers is often evaluated according to two criteria: efficiency

and effectiveness. Of the two, effectiveness is the most important.’ Discuss.
8 According to observations, contrast the ‘realities’ of a manager’s job with the ‘myths’.

9 Interview either a head teacher, deputy principal or principal at your school
and create a list of managerial activities they undertake in the course of a day.
Calculate to what extent their experiences mirror the realities and myths of a
manager’s job.
10 Recall the important role of effective management.
11 Explain why effective management is so important in our society.
12 ‘How well you perform the task of management will often determine whether you
achieve the goals you have set for yourself.’ Discuss.
Extension
1 Consider the following statement: ‘Management is often demanding, complex,
stressful and exacting. Contributing to the complexity are globalisation, focus
on quality, increasing competition, technological developments, and the rising
demand for the ethical conduct of people and organisations. But at the same time,
it can be personally rewarding.’ Examine the positive and negative aspects of
being a manager.
2 Some people argue that middle-level managers have a more difficult job than top/
senior or lower/frontline managers. This is because the work of a middle-level
manager is more varied in managerial and non-managerial duties. Evaluate.
3 Determine which you think is the more difficult management task: getting
employees to work in teams rather than independently, or getting employees to
accept change in the workplace. Provide reasons for your answer.
4 ‘The main difference between employees and managers is that employees work and
managers think.’ Assess to what extent this statement reflects conditions in today’s
workplace. Compare your answers with other class members
5.3 Skills of management

In every occupation, certain skills are needed for success. If you have a skill, it BizWORD
means that you have the ability to complete a task effectively. A surgeon must Skill is the ability that comes from the
be decisive and have the technical abilities to perform complicated operations. A knowledge, practice and talent to do
champion swimmer must have the combination of natural talent and skills that something well.
enable him or her to swim better than almost anyone else.
Not surprisingly, managers also need certain skills. The more successful managers
appear to have more of these skills than the less successful managers. Not every
manager requires the same amount of each skill; however, some skills are more
important for some job types or workplaces than are others.
In general, effective managers are those who:
• possess a range of specific management skills (see figure 5.6)
• are able to use these skills in a number of different situations.
Normally, a manager is not required to use all these skills constantly. What is
important is that these skills and abilities must be available when they are needed so
that managers can organise and motivate staff to work effectively towards objectives.
These skills take on added significance, given the two fundamental changes that
have taken place in the structure of many businesses over the past decade:
1. the movement away from the ‘tall’ hierarchical structures of many traditional
businesses, with their multiple layers of management, towards ‘flatter’ business
structures
Weblink
2. the development of self-managing work teams.
Use the 2020 Vision Report
In 2006, Innovation & Business Skills Australia (IBSA) commissioned the Boston weblink in your eBookPLUS
Consulting Group (BCG) to undertake a study into how the role of Australia’s senior to explore the full IBSA
managers is likely to change between then and 2020. Their report, 2020 vision: The report.
manager of the 21st century, reinforces the skills that will be needed to respond to these

changes. The report says that the trend away from traditional ‘command and control’
forms of management towards team-based, consultative management styles will continue.
Managers require a range of skills to operate effectively now and into the future.
These skills include:
• interpersonal (people)
• communication
• strategic thinking
• vision
• problem-solving
• decision-making
• flexibility
• adaptability to change
• reconciling the conflicting interests of stakeholders.
FIGURE 5.6 Managers are required
to possess a range of specific ENVIRONMENT GROUP MANAGER — $185k pkg neg
management skills, as shown by this
job advertisement. • Well-respected international operation
• Engineering, resources focus
• Lead a culture of ‘zero harm’ and sustainability
As the leader in their market, Alliance & Hudson offers a genuine career opportunity to join
a growing success story. Alliance & Hudson is a dynamic, result-oriented environment
to work in.
The main responsibility of this position is to develop and implement sustainable production
practices across all divisions of the organisation.
As the Environment Group Manager, you will streamline processes, and provide timely and
insightful leadership and engagement.
The successful candidate for this position will possess:
• outstanding interpersonal and communication skills
• the ability to effectively convey technical information
• experience in leading high-performance teams
• superior problem-solving and decision-making abilities
• initiative and the ability to work to deadlines
• successful management of stakeholder relations
• the professional ethics needed to meet the high standards of confidentiality
and discretion required.
Remuneration will consist of a market competitive salary (negotiable), superannuation
and leased vehicle. Relevant tertiary qualifications are essential.
To be considered, applicants must apply directly to this advertisement.
Visit www.all&hud.com.au/careers, quoting ref no 45930 or phone
Maryke Nagy on (03) 8964 2407.
SYDNEY MELBOURNE TOKYO NEW YORK LONDON
BizFACT
In 2009, the Department of
Innovation, Industry, Science and Summary
Research commissioned a new study, • In general, effective managers are those who:
Management matters in Australia: just –– possess a range of specific management skills
how productive are we? Australian
managers ranked as average against
–– are able to use these skills in a number of different situations.
all the countries surveyed, but were • All managers use their skills to achieve the business’s goals.
relatively poor in people management. • Managers require a wide range of technical, conceptual (thinking) and people skills.
The study recommended that to
improve, Australian managers must
give more attention to building people
Interpersonal (people) skills
management skills and relationships Do you know anyone who lacks interpersonal skills? These are the people who are
within their organisations. insensitive to the needs and feelings of others; people who speak before thinking
and consequently ‘put both feet in’; people who say the wrong thing at the wrong

time or to the wrong person; people who rub others up the wrong way. Such
people generally make very poor managers.
Managers get their work done with and through other people; therefore, BizWORD
interpersonal (people) skills are extremely important. Such skills mean Interpersonal (people) skills are
a manager can work and communicate with other people and understand those skills needed to work and
communicate with other people and
their needs. to understand their needs.
Interpersonal skills centre on the ability to relate to people, being aware of
and appreciating their needs, and showing genuine understanding. People skills
include the ability to communicate, motivate, lead and inspire (see the following
Snapshot).
City Health — healthy management

City Health is a public healthcare provider serving a population of 500 000 people
and operating with a budget of $500 million. It employs 3000 staff and has grown
steadily over the last five years due to the merging of several major city hospitals.
The chief executive of City Health, Dr Jan Dvorak, recently called a meeting of
the executive team to discuss a strategic plan. These discussions explored the
SNAPSHOT
objectives of:
• developing a culture of quality and innovation
• working in partnership with all stakeholders to enhance the health of the
community
• providing an environment that values and supports staff
• achieving a financially sustainable health service.
Up until now, Dr Dvorak has managed and guided City Health through its
period of high growth. She has led the organisation to where it is today by
listening to her employees, the hospital’s patients and the community. She
includes staff unconditionally in the decision-making process of the organisation.
She has earned the respect of her staff because she displays an empathetic
personality. One of her key interpersonal strengths is that she accepts that
everyone is different, with different attitudes, values and ideas. This helps her
understand and sympathise with ideas and attitudes different from her own. In
turn, this helps her communicate effectively with others. She is considered to be a
❛ She is considered to
great leader by her staff. be a great leader by
Dr Dvorak considers that the change to a new corporate culture will be her
greatest challenge so far, but believes that the hospital is well on its way to achieving her staff. ❜
this goal.
Snapshot questions
1. Identify and describe the interpersonal skills that Jan Dvorak possesses.
2. Explain why it is important for a manager to display good interpersonal
skills if he or she wants to provide a workplace environment that ‘values and
supports staff’.
3. Determine whether you would like to work for a manager similar to
Dr Dvorak. Give a reason for your answer and share it with other class
members.
Weblink
A manager who lacks empathy, is arrogant, opinionated, unable to communicate Use the Developing
or who has difficulty relating to people will not be able to develop positive interpersonal skills weblink
in your eBookPLUS to
relationships with employees. Employees may actually work more efficiently explore how interpersonal
when such a manager is absent because the fear of intimidation or victimisation is skills can be improved.
reduced (see the following Snapshot).

Nars Chocolates — interpersonal skills
Jack has been the general manager of Nars Chocolates for only six months. He had
previously worked for a company with serious financial and staffing problems. From
that experience he concluded that it is best to be very firm with staff in order to get
SNAPSHOT results.
Jack’s recent behaviour has prompted staff to consider leaving. He shows very
little interest in the needs of individuals, or their concerns. He severely criticised
the work of the marketing manager at a planning meeting last week. ‘Carly, I
just don’t think you have all the facts here,’ Jack said. ‘Firstly, from what I can
see, you’ve done a poor job. And secondly, the rest of you people will need
some clear guidelines or you will all be producing the sort of rubbish that Carly
has presented.’
Some time later, two managers were discussing the deteriorating workplace
conditions over a cup of coffee. ‘Can you believe the way that Jack treated
Carly in the meeting last week?’ complained Josh. ‘Carly is a great manager,
she listens to her staff and encourages her team to work with her to make
❛ . . . he’s treating us decisions.’
‘And she was totally embarrassed by Jack’s comments because the new
like we’re kids. ❜ chocolate bar project her team is working on is still in its developmental stages,’
said Mai.
‘I heard him telling off Khalid last week for expressing an idea,’ said Josh. ‘He
told him that he’s the boss, and if he wanted opinions, he certainly wouldn’t ask a
subordinate for them. Mai, he’s treating us like we’re kids. But we’re experienced
professionals.’
‘I agree,’ said Mai. ‘It won’t be long before I’m out of this place!’
Snapshot questions
1. Identify the negative interpersonal skills displayed by Jack.
2. Explain why Jack’s behaviour has prompted staff to consider leaving.
3. Assess whether you agree or disagree with Jack’s attitude ‘that it is best to
be firm with staff in order to get results’. Give a reason for your answer and
share it with other class members.
Communication skills
BizWORD Communication is as vital as the air we breathe. As babies we learn to cry in order
Communication is the exchange to satisfy our needs; it is a baby’s first attempt at communication. Communication
of information between people; the becomes more complex, however, particularly in a modern global business
sending and receiving of messages. environment. It’s not just about what you say, it’s about how you say it and what
medium you choose to get your message across.
One of the most difficult challenges for managers is getting employees to
understand and want to achieve the business’s goals. Effective communication is
at the heart of meeting this challenge. Without effective communication the most
carefully detailed plans and brilliant strategies will most probably fail.
BizFACT Communication is one of the easiest and, at the same time, most difficult of
There is no simple recipe for great management skills. This is because of the complex nature of communication.
communication, but the Chinese Whether communicating with employees within the business or customers in the
philosopher Confucius once said:
‘Tell me and I’ll forget. Show me
marketplace, effective communication is essential for the long-term survival of the
and I’ll remember. Involve me and business. Well-written letters, an inviting telephone manner, pleasant conversation,
I’ll understand.’ concise emails, and friendly smiles and gestures reinforce carefully planned
business strategies and client networking.

Weblink
Use the Business
communication weblink in
your eBookPLUS to discover
more about the importance
of effective communication
in business.
FIGURE 5.7 Paul and Andrew Bassat

are joint CEOs and co-founders of
Australia’s number one jobs site. SEEK has
developed a culture of working in teams
and strong management skills, such as
communication and negotiation, which
are an important part of this approach.
Managers who are effective communicators and who are able to share their
thoughts and plans will find it easy to influence others (see the following Snapshot).
Steve Jobs — a great communicator

What is the secret to great communication? Brilliant communicators are often found
at the head of highly successful and profitable businesses across the globe. Yet
perceptions of what makes a great communicator are, like beauty, often in the eye
of the beholder. Steve Jobs, the inspirational, charismatic Apple founder and former
CEO who passed away in 2011, believed CEOs should exude a passion and a vision of
SNAPSHOT
the business’s future. Observers studied Steve’s amazing success as a communicator
and emphasised some of the strategies that he advised other business leaders and
presenters to consider. Let us examine some of Steve’s communication techniques.
Firstly, when Steve prepared, he rehearsed over and over, carefully taking into
account the nature of the audience, the message and the ideas he wanted people to
take ‘onboard’. He used his natural speaking voice in a friendly way — as if he was
engaged in a normal conversation.
Steve’s presentations became events he wanted the world to watch. He believed in
creating a drama. For example, when introducing the new iPhone, he had fun with his
audience while he acted on stage, pulling the new phone from the smallest pocket in his
jeans. Visual ideas were important to Steve. He thought audiences remembered more of
what they saw than the words they heard. He always used simple, dramatic, high-quality
pictures, but did not overuse the visuals. What do you think great communication is?
Steve Jobs, a self-made millionaire, portrayed himself as an individualistic,
unconventional entrepreneur. He started Apple in 1976 in California, making the
first computer in his garage. Later he created the iPod and started Pixar animations.
Today, the company operates more than 400 retail stores in 14 countries and
employs over 40 000 people worldwide.
Snapshot questions ❛Steve’s presentations

1. Define the terms ‘inspirational’ and ‘charismatic’.
2. Outline Steve Jobs’ communication techniques. became events he
3. Propose why speaking in a friendly way — ‘as if he was engaged in a normal
conversation’ — is a smart communication strategy.
wanted the world
4. Determine what you think great communication is. Share your answer with to watch. ❜
other class members.

Miscommunication
BizFACT Owing to the complex nature of achieving effective communication, mistakes,
Research shows that about 70 per cent misunderstandings and unforeseen barriers sometimes lead to false messages or no
of workplace mistakes are the result of message being received. Miscommunication can have disastrous consequences in a
inefficient (poor) communication. It is business (see the following Snapshot).
also the most quoted cause of employee
frustration and business failure.
Miscommunication — the dangers

Patients who visited a New South Wales clinic to be scanned for cancer detection
must wait three months before they find out whether they have been mistakenly
infected with HIV. This is a case where misunderstanding may have the most severe
repercussions.
A nurse who was newly employed at the clinic used the same needle on
53 patients erroneously over the course of two months. The nurse put patients
SNAPSHOT at risk when she mistakenly believed that the device used to check blood-sugar
levels, called the Accu-Chek Multiclix, automatically changed needles. In fact,
the nurse had to change the needles manually after each patient, but this did
not occur.
The New South Wales clinic has since switched to using single-use devices to
avoid the same error in future. A staff member with diabetes discovered the nurse’s
error when she asked the nurse to administer the test on her. Once the error was
discovered, all patients were sent a letter of apology and were advised to have a
blood test for HIV and hepatitis B and C.
Dr Michael Jones, chairman of the private radiology company PRP Diagnostic
Imaging that runs the clinic where the error occurred, said that he had been advised
by an infectious disease specialist that the risk of infection through using the same
needle on many patients was ‘low or very low’.
According to Dr Jones, the mistake occurred because of ‘misunderstanding at
multiple levels’ regarding the use of the Accu-Chek Multiclix device. Nursing staff
and patients have been offered counselling.
❛. . . misunderstanding
may have the most Snapshot questions
severe repercussions.❜ 1. Recall the miscommunication that occurred at PRP Diagnostic.
2. Outline the steps that were taken to attempt to repair the damage caused by
the error.
3. Explain the potential consequences of this miscommunication.
The importance of nonverbal communication

Communication is all about sending a message to another person. A message might
be verbal, meaning words either written or spoken are used to convey the message.
Alternatively, you may choose to convey a message using nonverbal methods as
simple as a smile or an image to get your message across.
BizWORD Nonverbal communication is any message that is not written or spoken.
Nonverbal communication is any
Nonverbal communication mainly consists of body language (posture, facial
message that is not written or spoken. expressions, placement of limbs and proximity to others).
Body language is the use of gestures, If you have ever gone to a party, then you are likely to be aware of how effective
facial expressions and posture to body language can be. A smile, a glance, a stare, the angle of a person’s head, a
communicate. frown, a body movement or the invasion of someone’s personal space — they all
communicate a message.

It is important for managers to be aware of the power of body language and
the messages that can be secretly conveyed. Usually, body language conveys a
more powerful message than spoken or written communication. This can result
in contradictory messages being intentionally or unintentionally given. A manager BizFACT
who says she is free to talk to an employee about a work problem but then Extreme care should be taken with
constantly glances at her watch is giving a message that it is not a convenient body language communication
time to talk. Another example is a manager who expresses one emotion orally, because gestures can have different
such as confidence, but then has body language reading ‘I don’t trust you’. Such meanings in different cultures. For
example, making a circle with the
a contradiction often suggests that actions ‘speak louder’ (and more accurately) thumb and forefinger is a friendly
than words. gesture in Australia, but it means ‘you
are worth nothing’ in France.
happy anxious angry sad regretful
FIGURE 5.8 Facial expressions

and body postures can be used to
defiant aggressive welcoming volunteering authoritarian communicate messages.
Strategic thinking skills

Consider the following quotes:
‘Who in the hell wants to hear actors talk?’
Harry Warner, founder of Warner Bros Studios, 1927
‘I think there is a world market for about five computers.’
Thomas J. Watson, chairman IBM, 1943
‘There is no reason for any individual to have a computer in their home.’
Ken Olsen, president, Digital Equipment, 1977
‘Nothing has come along that can beat the horse and buggy.’
Chauncey De Pew, president of the New York Central Railroad, warning his
nephew against investing in Henry Ford’s new company circa 1911
‘Everything that could be invented has now been invented.’
U.S. Patent Office circa 1900
With hindsight we laugh at these quotes. And yet, at the time, most people
would have agreed with the speakers. It could be argued that their shortsightedness
inhibited strategic thinking. Therefore, they were not able to perceive meaningful

patterns in complex circumstances. Strategic thinking allows a manager to see the
business as a whole — as a complex of parts that depend on and interact with each
BizWORD other, like the gears in a machine and to take the broad, long-term view.
Strategic thinking allows a manager The ability to think strategically lets the manager see the ‘big picture’. The manager
to see the business as a whole and to may then:
take the broad, long-term view. • visualise how work teams and individuals interrelate
• understand the effect of any action on the business
• gain insights into an uncertain future
• see the business in the context of events and trends, and identify opportunities
or threats.
Strategic thinking therefore involves thinking about a business’s future
direction and what future goals the business wants to achieve. As a student, for
example, you were thinking strategically when you made your senior course
subject selections in Year 10. You had to imagine what the future job or study
requirements would be when you left school, how the workplace may change
over time, what future goals you wanted to achieve, and what would interest and
motivate you in the future.
Many people assume that strategic thinking skills are the exclusive field of senior
management, but that is simply not true. Managers at all levels need to exercise this
skill. It will help the business maintain its competitive position within a constantly
changing business environment. Although some people seem to have a special gift
for being able to predict and comprehend the future, strategic thinking can be
learned through practice.
Summary
• Interpersonal (people) skills are those skills needed to work and communicate
with other people and to understand their needs.
• Interpersonal skills include the ability to communicate, motivate, lead and
inspire.
• Effective communication of business goals and the strategies to achieve them are
crucial to achieving business success.
• Managers who are effective communicators and who are able to share their
thoughts and plans will find it easy to influence others.
• Miscommunication is to be avoided because it can lead to serious harm to
the business.
• It is important for managers to be aware of the power of nonverbal communication,
especially body language.
• Strategic management allows the manager to see the business as a whole and to
take a broad, long-term view.
• Strategic thinking involves thinking about a business’s future direction and what
future goals the business wants to achieve.
EXERCISE Revision
5.2
1 Define the term ‘skill’.
2 Recall two changes that have taken place in the structure of many businesses
over the past decade that have resulted in the skills taking on added
significance.
3 Examine figure 5.6 on page 124.
(a) Identify some of the desired skills needed to perform this management
position.
(b) Clarify which skill you consider to be the most important. Justify your answer.

4 Define the term ‘interpersonal skills’.
5 Explain why it is important for a manager to possess good interpersonal skills.
6 ‘Interpersonal skills include the ability to communicate, motivate, lead and inspire.’
Describe a situation, from personal experience, that demonstrates where two of
these abilities were used effectively.
7 Discuss why managers should strive to improve their ability to communicate.
8 Not everyone is a great communicator, but we can all learn. Identify a poor
communication habit you have and propose what you might do to improve your
communication skills.
9 Investigate how well you communicate as a class. Ask your teacher to make
up a statement and then conduct your own game of ‘Silent whispers’, where
each member must pass the message on to another person. At the end of the
activity, have your teacher read out the original statement and compare it with
the final verbal statement from the class member in the group who was told the
statement last.
10 Describe how you might improve your own nonverbal communication skills with
casual acquaintances. Refer to your use of eye contact, facial expression, gesture and
voice-tone skills.
11 Define the term ‘strategic thinking’.
12 Explain why managers at all levels need to exercise strategic thinking skills.
13 Draw a table similar to the one following to summarise details of the management
skills in this section. The first entry has been completed for you.
Application to
Skill Definition Characteristics the workplace
Interpersonal It is the ability to work Managers get their Managers use

skills and communicate with work done through interpersonal
other people and to other people. They need skills to
understand their needs. to display empathy. communicate,
motivate, lead
and inspire.
Extension
1 In small groups, imagine you are board members of a medium-sized private company.
The company manufactures electronic items for the domestic market. It has
284 employees and its current turnover is approximately $115 million. The company
is well established in domestic markets but, due to increasing competition, sales and
profits have been decreasing over the past few years.
The board is preparing to hire a new chief executive officer to lead the company.
In your group, create a profile of the business leader that you are seeking. Consider
qualifications, experience, skills and personality factors.
Conduct a class discussion on the similarities and differences of each group’s
profile. Propose reasons for any differences.
2 From your knowledge of Steve Jobs, Apple founder and former CEO and his notions
of great business leadership, determine four communication skills good managers
should practise.
3 Use the Communication skills test weblink in your eBookPLUS to take the test.
(a) Analyse your results. Weblink
(b) Deduce whether you think this is accurate. Communication skills test
(c) Propose how you could improve your communication.

4 ‘Being able to communicate effectively is the most important skill a manager can
possess. Without this fundamental skill, all other attributes a manager may possess
become less useful.’ Evaluate the accuracy of this statement.
5 Construct a communication pie graph to illustrate the following information:
Weblink spoken word = 7 per cent, nonverbal communication = 55 per cent and tone of
Nonverbal communication voice = 38 per cent. Determine the important observation that can be made from
these data.
6 Create a PowerPoint presentation lasting no more than five minutes on one
aspect of nonverbal communication that is of interest to you. Use the Nonverbal
communication weblink in your eBookPLUS to gather more information on
this subject.
Vision skills
BizWORD In his book Management: tasks, responsibilities, practices, Peter Drucker explains that
Vision is the clear, shared sense of it is ‘the first response of the manager . . . to give others vision and the ability to
direction that allows people to attain perform’. By vision, Drucker means the clear, shared sense of direction that allows
a common goal. people to attain a common goal.
Drucker argues that vision is the essential contribution of management, for without
it there can be no sense of cooperation and commitment, which makes achieving
goals impossible. Drucker explains that the most effective way for managers to share
their vision for the business is through the organisation’s goals. Knowing where
the business is headed and what it is trying to achieve helps employees understand
BizFACT where the manager wishes to take the business. A manager without a clear vision for
Having to develop a vision for the the business is like a person who attempts to lead a bushwalk without any idea of
business is very important during times where the group wants to go, without a compass or even a map. The walk would
of constant change. Without a vision, become aimless. The same thing happens in a business whose manager has not
any business will ultimately fail. communicated clearly its vision. The business is without guidance.
FIGURE 5.9 Managers must share their

vision with others so employees know
where the business is heading.
To share their vision and inspire others, managers will have to display effective
BizWORD leadership qualities. Leadership is the ability to influence people to set and achieve
Leadership is the ability to influence specific goals. A manager will use his or her leadership abilities to act as a bridge
people to set and achieve specific goals. on which to support team members as they cross from the existing ideas into new
and unfamiliar territory.

Visionary leadership
Visionary leaders inspire others to act in ways
that transform a vision into reality. History
shows that visionary leaders like Boudica,
Emmeline Pankhurst, Mahatma Gandhi,
Martin Luther King and John F. Kennedy
SNAPSHOT
carried vast numbers of people with them
as they articulated a vision for change and
a new and different future. Although these
❛ Today . . . a leader can
people were not involved in business, the reach every employee
principles remain the same.
Leadership with vision in a business around the world
context means beginning with a clear
vision, communicating that vision to those
to communicate a
concerned, then motivating and inspiring vision. ❜
those people to actively pursue that
vision. This is particularly important when
a business is undergoing change, either
from within or forced upon it by external
circumstances. Today with the help of
technology such as videoconferencing, a BizWORD
leader can reach every employee around the Problem solving is a broad set of
world to communicate a vision. activities involved in searching for,
Some important principles of visionary leadership can be summarised as follows. identifying and then implementing
• Challenge: Interrogate the status quo and think creatively about innovation. a course of action to correct an
• Enthusiasm: Commit to the vision and show open enthusiasm and passion. unworkable situation.
• Facilitation: Join with the team and support others to share the vision.
• Participation: Set an example and provide a consistent role model.
• Celebration: Acknowledge and reward key achievements and milestones as they
occur.
Identify the problem and causes
Snapshot questions
1. Outline why communicating a vision is important within a business.
2. Construct a concept map summarising the important principles of visionary
leadership. Gather relevant information
Problem-solving skills
Develop alternative solutions
When confronted with a problem, many of us search for an answer, jump at the
first workable solution and move on. Management requires a more systematic
problem-solving process when confronted with difficult and unfamiliar
situations.
Analyse the alternatives
Problem solving means finding and then implementing a course of action
to correct an unworkable situation. Although managers have to deal with many
problems in the course of a day, not all problems require such a systematic, formal
process. One of the most important skills a manager can develop is the ability to Choose one alternative
decide which problem they should give their full attention. and implement it
There are six steps in a typical problem-solving process (see figure 5.10). The
first step is to clearly identify what the problem is and what has caused it. The
problem might be an industrial dispute or a need to develop a more socially
Evaluate the solution
responsible organisation. All of the facts and information that are relevant to the
problem must be gathered. Some methods to use might be simply talking to people FIGURE 5.10 A problem-solving
or completing questionnaires or surveys. process

FIGURE 5.11 A common problem managers have to deal with is workplace conflict. Russell
Scott, the Southeast Asia Divisional Manager for Geoline Services, knows that sometimes,
what may seem like a trivial issue can quickly become a serious conflict if not dealt with
sympathetically and speedily. He believes successful conflict resolution requires skilled
negotiation based on compromise, collaboration and possibly some forcing of an issue.
Management will need to develop alternative solutions so that the

problem can be solved with an open mind. A list of possible solutions should
be made, including the seemingly ridiculous ones. After analysing each of the
alternatives for their advantages and disadvantages, the best option should
be chosen. The solution to the problem will then be implemented and
subsequently evaluated. If the solution does not work, the process would have
to start again.
Decision-making skills
BizWORD The task of solving problems will obviously require making some decisions.
Decision making is the process of Decision making is the process of identifying the options available and then
identifying the options available and choosing a specific course of action to solve a specific problem.
then choosing a specific course of
Effective decision making involves being able to make decisions within a
action to solve a specific problem.
particular time frame. It also requires a manager to adequately assess the risk
involved if the decision is implemented.
Decision making can sometimes be dangerous. Not all management decisions
are effective, as NASA discovered tragically in 1986, providing a case study of
management decision making that shows dramatically the importance of the
decision-making process (see the BizFact opposite).
Managers today are often confronted with complex, challenging and stressful
decision-making demands. Accelerating change often makes it difficult to
accurately predict the full effect of any decision. Therefore, managers need to
develop an effective decision-making environment within the business. This can be
accomplished by tapping into the creative potential of employees.

Flexibility and adaptability to change skills
Not since the Industrial Revolution over 200 years ago has business experienced so
much change. Over the next 10 to 20 years, the Australian business environment
will dramatically change. How managers perceive and react to these changes will
have dramatic consequences for their businesses.
Regardless of their level of management, successful managers are those who BizWORD
anticipate and adjust to changing circumstances. They must be flexible, adaptable Flexible refers to being responsive to
and proactive rather than reactive. Those who are unprepared or passive in the change and able to adjust to changing
face of change will not succeed. circumstances.
Businesses today are recruiting and selecting managers who can cope with Proactive refers to a management
style that incorporates dynamic action
unfamiliar and unexpected circumstances. For example, Arthur Hancock, former and forward planning to achieve
Senior Human Resources Manager for Global Equities Limited, said: particular objectives.
We are seeking managers who have learned how to learn and can adapt
to changing situations. We do not want managers who are dogmatic and
inflexible. Such a style of management may have been appropriate 50 years
ago, but not for today’s markets which are highly competitive, technologically
driven and rapidly changing. We want to hire people who like surprises!
The topic of management and change will be examined in more detail in
chapter 9.
Summary BizFACT
• Managers must be able to provide a vision as to where the business is headed and In 1986, NASA management had to
what it is trying to achieve. decide whether to launch the space
shuttle Challenger even though
• To share their vision with others and inspire them, managers will have to display temperatures at the launch site had
effective leadership qualities. fallen below the levels normally
• Leadership is the ability to influence people to set and achieve specific goals. required for a safe launch. Lower-level
• Managers must be able to solve problems — finding and then implementing a engineers expressed their concerns.
course of action to correct an unworkable situation. However, top-level NASA managers
decided to go ahead with the launch,
• Managers must be able to make decisions — identifying the options available a decision that resulted in the deaths
and then choosing a specific course of action to solve the specific problem. of all the astronauts on board.
• Managers must be flexible, adaptable and proactive rather than reactive.
Reconciling the conflicting interests

of stakeholders
As outlined in chapter 3, there are a number of stakeholders in business.
Stakeholders are groups and individuals who interact with the business and
thus have a vested interest in its activities. Over the last four decades, there
has been a significant philosophical shift in business conduct to meet society’s
expectations.
Society increasingly expects businesses to accept responsibility and accountability
toward all stakeholders for the promotion and management of change. Businesses
are expected to be enterprising, to comply with the law, and be socially just and
ecologically sustainable in their operations.
Most businesses are now extremely sensitive to public opinion and strive to be
recognised as ‘good corporate citizens’. Businesses recognise that they increase
their chances of success when they pursue goals that align with the interests and
expectations of all stakeholders.
All the stakeholders who interact with a business require something different;
all place competing demands upon the business. Some of these expectations are

compatible. For example, customers want quality products at reasonable prices.
If the business meets this expectation then sales should increase, leading to
greater profits. This in turn satisfies the business owners who are rewarded with
higher dividends.
However, some expectations are incompatible; that is, they oppose each
other. In this case, satisfying one set of stakeholders will most probably result
in other stakeholders being dissatisfied. For example, employees and their
unions require safe working conditions and reasonable wages while customers
want reasonably priced products. Providing safer working conditions or a wage
rise is ethically and socially responsible, but it will cost the business money
in the short term. If the business wished to retain a high dividend to satisfy
the shareholders’ expectations, then it may be forced to raise the prices of its
products. This action will upset customers. On the other hand, the business
may retain prices at the original level, reducing its profit. Doing this could cause
disquiet among shareholders.
FIGURE 5.12 The 1998 Longford gas disaster killed two workers and cut Victoria’s gas supply
for two weeks. Esso was later found guilty of solely contributing to the explosion by failing to
provide adequate workplace safety and employee training.
To maintain its profit, the management of a business may choose to cut costs,
for example, and ignore some of its responsibilities. These types of decisions can
endanger employees or society, or damage the environment through pollution,
raising serious ethical and social responsibility considerations. Management
might choose to reduce costs by sacking employees or by compromising on
product quality or safety, which also raises other ethical and social responsibility
considerations.
Reconciling these conflicting interests is not always easy. Senior management
must assess constantly the actions of the business and attempt to satisfy as
many stakeholder expectations as possible, while at the same time acting in a
responsible manner.

Strategies to reconcile the conflicting interests of
stakeholders
Individuals and corporations purchase shares in companies for a variety of reasons,
not least of which is to make a profit. Shares are sometimes purchased and held BizFACT
for only a short time. Such speculation is carried out with the intention of making Corporate social responsibility
challenges each business to be
a quick financial gain. Speculators are not normally concerned with the business’s
accountable for the consequences
long-term strategies, philosophies or business practices. They are motivated by a of its actions. This means
quick return on their investment. businesses must consider effects
However, other buyers purchase shares with the intention of holding onto them for on all stakeholders while pursuing
a reasonable period of time. These non-speculative shareholders are more concerned traditional economic goals.
with the long-term investment strategies of their companies. While these shareholders
are still motivated by the desire to make a profit, they are able to adopt a long-term
view. They appreciate the responsibility of a business to act as a responsible corporate
citizen. They take into account the long-term impact of business decisions with
particular regard to the environment and future generations.
The interests of society and future generations are very much reliant on the
many decisions taken by businesses. Decisions concerning production processes,
workplace practices, employment programs, product development and design, and
business expansion will all have an impact on both present and future generations.
Businesses have a responsibility to take into account the long-term effects of their
current decisions.
One particular strategy that has been adopted by more enlightened businesses is
to place greater emphasis on environmental practices. Adopting such a policy has
benefits for both shareholders and society (see the following Snapshot).
Rip Curl — good environmental practices

‘Keep it simple’ is the message from surf company Rip Curl in its bid to create
environmental awareness.
The Australian company has employed a full-time environment officer to initiate
and implement environmental solutions.
‘Our approach when we started the environmental policy in Europe was quite
SNAPSHOT
broad actually’, environment officer Eric Dargent explains.
‘We first looked at the main issues that we needed to address, and after some
discussions, it was obvious what we had to start doing.’
‘The best way we approached this was to start within our own crew and by taking
steps in our offices first, before asking designers to choose organic fabrics.’
‘Rip Curl has worked on all aspects of environmental management in
our buildings, and started paper recycling and conserving energy which has since
dropped by 10 per cent. Some of our showrooms had airconditioning on for
24 hours a day, 365 days a year, so just little things like that have been a big
step.’
Rip Curl has offices, stores and showrooms throughout the world, so its secondary
aim was to look at the way its products could be shipped in an environmentally
friendly way.
‘The company was shipping by air quite frequently, as it was quicker to do so. But ❛ Rip Curl has worked
we are now looking at shipping more of our product by sea which has been a viable
alternative.’ on all aspects of
Rail shipping was another option to move products from the ports to warehouses
which have risen from 33 per cent to 74 per cent.
environmental
management ❜
(continued)

‘It is more difficult to use rail [as opposed to] road, but it emits less greenhouse
gases, and it’s good to think we’re not adding more trucks on our roads’, Rip Curl
Europe transport manager Cyril Dupouy says.
BizFACT Regions have adopted their own practices in green logistics. Rip Curl Brazil uses
Rip Curl remains a privately owned paper tape instead of plastic tape when shipping goods, and Rip Curl Indonesia has
business with an annual turnover in started using plastic pallets instead of the wooden variety.
excess of $400 million. Based in the south of France, Dargent has investigated a way to make clothes
more eco-friendly.
Having previously worked for an eco-friendly street label and maintaining
a general interest in the environment, Dargent has played a big role in the
development of the label Rip Curl Planet.
The range was launched five years ago in Europe and is now available
worldwide.
The products are made with at least 55 per cent eco-friendly fabrics, including
organic cotton, linen, hemp or recycled fibres.
‘The main message with the label was to keep it simple’, Dargent says. ‘We ensure
that developers and designers keep within the guidelines of what we instigated with
the range.’
World champion surfer Mick Fanning trialled a ‘green wetsuit’ last year while on
tour, a first within the industry.
Wetsuits are one of the biggest sellers for the brand, with most made from
Yomomoto rubber. Solvents are one of the biggest polluters with approximately
800 tonnes evaporating into the air due to neoprene laminating processes. The
green wetsuit, which is still in a prototype stage features a new neoprene that uses
non-solvent glues in the lamination process.
The company also has a wetsuit recycling program known as Project Resurrection
where consumers can donate their old wetsuits which are then turned into
shoe outsoles.
Rip Curl holds a number of surf events across the world. The Rip Curl Pro, held at
Bells Beach in Victoria, was turned into a carbon-neutral event in 2008. The company
also ran the first solar-powered webcast in the US and used hydrogen fuel cells to
power a third of an event site in Europe.
The surf company works closely with WWF and has started the Rip Curl Planet
Foundation which assists in preserving surf spots as well as funding educational and
eco-design projects.
The foundation has handed out more than $342 000 to environmental groups.
Source: Cassandra Murnieks, The Australian, 7 October 2010.
Snapshot questions
1. Outline strategies Rip Curl has implemented in its bid to create environmental
awareness.
2. Explain the impact these strategies could have on the company.
BizWORD
The triple bottom line refers to the Many business analysts are now starting to refer to the ‘triple bottom line’ —
economic, social and environmental economic, social and environmental performance — where shareholder value
performance of a business.
increases through the careful management of stakeholder value. More businesses
are realising that reconciling conflicting interests and increasing stakeholder value
ensures long-term growth and survival.
To reconcile the conflicting interests between shareholders and employees,
businesses can look into employee share acquisition schemes. Such schemes
provide the opportunity for eligible employees to purchase shares in a business,
often at a reduced price. This aligns the interests of both groups as a number of
employees become shareholders.

Another widely used strategy is to offer training and professional development
to employees. An educated and skilled workforce works more efficiently, reducing
production costs. This results in rising profits, which pleases shareholders. Also,
better trained staff produce a higher quality product, thus satisfying customer
expectations.
FIGURE 5.13 Training provides benefits

for both the employee and the employer.
The more successfully a management team achieves the business’s goals, the more
it will be able to satisfy a greater number of stakeholders. Therefore, to succeed in
reconciling the conflicting interests of stakeholders a business needs competent,
informed, ethical and socially responsible managers.
In a desire to reconcile the conflicting interests of the various stakeholders, BizWORD
some businesses use a process of stakeholder engagement (see the following Stakeholder engagement refers to
Snapshot). Stakeholder engagement refers to businesses sharing information businesses sharing information with
with and seeking input from stakeholders, and involving them in decision making. and seeking input from stakeholders,
and involving them in decision
Businesses anticipate that by engaging stakeholders they are more likely to act in
making.
an ethical or socially responsible manner.
Businesses also anticipate that a positive image of the business will be maintained
if all stakeholders have their expectations satisfied, leading to increased sales as
well as an improved reputation for corporate social responsibility.
BHP Billiton — stakeholder engagement

With 125 000 employees and contractors working in 26 countries, BHP Billiton is the
world’s largest mining company. It was formed in 2001, following a merger between
BHP and Billiton. BHP Billiton’s major businesses include aluminium, coal, copper,
manganese, iron ore, uranium, nickel, silver and titanium minerals, and it also has
substantial interests in oil, gas, liquefied natural gas and diamonds. The headquarters
SNAPSHOT
for BHP Billiton Limited is located in Melbourne. BHP Billiton identifies its
stakeholders on its web page, as well as explaining how it engages them.
(continued)

❛ BHP Billiton says
that individual sites
work with their own
host communities,
using community
consultation and
engagement
groups. ❜
Stakeholder engagement at BHP Billiton

BHP Billiton claims that it regularly consults employees and contractors, local and
indigenous communities, shareholders and customers. It realises that other groups,
such as the investment community, business partners, community organisations,
unions, non-government organisations, suppliers, governments, media and industry
associations have an influence on the business. Some of BHP Billiton’s stakeholder
engagement methods are described under the following headings.
Community organisations
Community organisations often represent local and indigenous communities near
BHP Billiton’s operations. Community organisations need to be assured that any
potential environmental and social impacts associated with BHP Billiton’s operations
are kept to a minimum, and that opportunities arising from the operations
are maximised. BHP Billiton says that individual sites work with their own host
communities, using community consultation and engagement groups.
Customers
BHP Billiton’s customers are mostly other large organisations. BHP Billiton
says that they are usually interested in product quality, cost and delivery. The
marketing area regularly communicates with customers. Technical support assists
in the use and handling of products. Customers receive information about
products and have the opportunity to visit BHP Billiton operations sites to learn
more about its products.
Employees and contractors

Employees and contractors are very much concerned with their own health and
safety as well as working conditions in general. Members of staff need to be
provided with career and training opportunities to maintain employee satisfaction.
BHP Billiton realises that an operation’s employees and contractors, who live
locally, will also be concerned about such things as local employment, business
creation and social infrastructure, schooling and health care. Quality of housing
is also important to staff who live in remote communities. Processes need to
be in place to enable employees and contractors to participate in performance
improvement initiative, and to take part in performance reviews and employee
surveys. Communication is vital.

Government
BHP Billiton respects the authority of government at country, state (or regional) and
local levels. It attempts to work openly and constructively with the government of
the country where it is operating.
Shareholders
BHP Billiton has shareholders in Australia, Europe and North America. Shareholders
are interested in seeing suitable organisational performance and governance leading
to profit, BHP Billiton communicates with shareholders at annual general meetings,
through regular print and electronic communications, and through its website.
Suppliers
BHP Billiton’s suppliers include local businesses close to its operation as well as large
international suppliers. Its suppliers are interested in supply agreements and payment
processes as well as the standards that BHP Billiton requires of them. A single point of
contact at BHP Billiton ensures that regular reporting and communications are maintained
between the company and its suppliers. BHP Billiton attempts to use local suppliers and
supports these suppliers in enhancing community development opportunities.
Snapshot questions
1. Describe the term ‘stakeholder engagement’.
2. Identify BHP Billiton’s stakeholders.
3. Complete the following table to demonstrate how BHP Billiton engages with
its stakeholders. The first one has been completed for you. Weblink
Use the BHP Billiton 1
Engagement
Stakeholder Explanation Interests method
to find out about the
Community They often They need to be assured Individual sites work company’s work with
organisations represent local that environmental with communities, stakeholders in the
and indigenous and social impacts using community communities in which it
communities near will be minimised and consultation and operates.
BHP Billiton’s that opportunities are engagement groups
operations maximised
4. Outline some of the benefits of stakeholder engagement.

5. Explain how the management of conflicting stakeholder interests can lead to
a business being viewed as socially responsible.
Summary
• Stakeholders are groups and individuals who interact with the business and thus
have a vested interest in its activities.
• Society increasingly expects businesses to accept responsibility and accountability
towards all stakeholders.
• Stakeholder expectations can be compatible or incompatible.
• Managers need to reconcile the conflicting interests of various stakeholders.
• Senior managers must attempt to satisfy as many stakeholder expectations
as possible.

• Economic development must be accomplished sustainably.
• The triple bottom line refers to the economic, social and environmental
• Reconciling the conflicting interests of stakeholders requires competent, informed,
ethical and socially responsible managers.
• Stakeholder engagement is a process that assists in reconciling the conflicting
interests of stakeholders.
EXERCISE Revision
5.3
1 Draw a table similar to the one below and summarise details of the management
skills discussed in this section.
Skill Definition Characteristics Application to the workplace
2 Clarify why Peter Drucker argues that ‘vision is the essential contribution
of management’.
Digital doc 3 Outline the relationship between ‘vision’ and ‘leadership’.
Use the Chapter summary 4 (a) Identify two or three people who you consider to be effective leaders.
document in your (b) Against each name, outline the personal qualities each person displays.
eBookPLUS to compile your (c) Determine what leadership qualities the individuals have in common.
(d) Compare your answer with other class members.
5 Recall the six steps in a typical problem-solving process.
6 Explain the relationship between problem solving and decision making.
7 Discuss why it is important for managers to be proactive rather than reactive.
8 Define the term ‘stakeholder’.
Digital doc 9 Recall information to complete the following table. The first one has been completed
for you.
Chapter crossword in your Major stakeholders Influence
eBookPLUS.
Customers Put pressure on business to satisfy their needs, act
ethically and be socially responsible
Employees
Shareholders/owners
Society/physical environment
10 Demonstrate the ways in which the interests of stakeholders’ conflict.

11 Distinguish between compatible and incompatible expectations of stakeholders.
Provide examples.
12 In small groups, recommend methods a business could use to reconcile the following
conflicting interests.
(a) Consumers demanding cheaper products and employees wanting higher wages
(b) Shareholders desiring a higher return on their investment and society wanting a
cleaner environment
(c) Managers being required to keep costs of production down and the government
demanding improvements in occupational health and safety practices.
13 Demonstrate ways a business can show that it is acting in an ecologically sustainable
manner.
14 Explain how stakeholder engagement can assist in reconciling the conflicting
interests of stakeholders.

Extension
1 You have been asked to make a three-minute oral presentation at the local
chamber of commerce meeting. The topic you have selected is ‘The essential
skills of management’. Investigate the topic and present your report to the class.
For each skill, include a definition of the skill, its characteristics and application
to the workplace. You might like to use PowerPoint to present your
lecture.
2 (a) Identify the major stakeholder groups often mentioned in relation to social
responsibility.
(b) Analyse to what extent these groups apply to your school.
(c) Determine what other stakeholders you might add.
3 ‘To be effective, corporate strategy must take into account the interests, needs,
and expectations of all the business’s stakeholders. Companies should have a
strategy that combines business goals and broad social interests.’ Evaluate this
statement.
4 Complete the following table. Propose any skills that you think could be used to
achieve the business goals, and explain how they could be used. The first entry has
been started for you.
Business goals Skills How

Improve the culture of a Communication Explain to staff the changes that will
business take place.
Problem solving Use the problem-solving steps
to work out what problems are
preventing the culture from
improving.
Successfully merge with
another company
Improve social responsibility
Improve staff satisfaction
5 Use the BHP Billiton 2 weblink in your eBookPLUS to investigate the company’s Weblink
Matched Giving program. Evaluate how this program would enhance the company’s BHP Billiton 2
reputation for corporate social responsibility with its stakeholders.

CHAPTER 6
Achieving business goals

6.1 Introduction: What are goals?
People start up a business because they want to achieve something; they have goals
they want to attain. From an early age, you have been setting goals. A goal is a
BizWORD desired outcome (target) that an individual or business intends to achieve within a
A goal is a desired outcome (target)
certain time frame. For example, when you were in primary school some goals you
that an individual or business intends may have wanted to achieve could have included:
to achieve within a certain time frame. • learning to play a musical instrument
• becoming a member of a sporting team.
• In secondary school, the goals will have changed and may now include:
• acquiring a part-time job
• improving your debating skills
• achieving the best possible results in Business Studies.
Success in achieving your goals is often determined by the amount of planning
BizFACT you undertake. Detailed planning increases the likelihood of successfully achieving
Although some people distinguish your goals.
between goals and objectives, most
managers typically use the terms
interchangeably.
FIGURE 6.1 Just like a gold medal is

the goal for an Olympic athlete, goals
are the targets that a business and its
employees work towards.
As with individuals, businesses:

• need to establish goals
• are required to undertake planning to successfully achieve specific goals.

The importance of goals
Carefully prepared goals — begin with the end in mind — benefit managers by:
1. Serving as targets. With goals, managers at all levels would find it easier to make
coordinated decisions because they understand what the business is trying to achieve. BizWORD
2. Measuring sticks. Specific goals act as a benchmark against which the business
A benchmark is a standard by which
can measure its performance — that is, the actual outcome is compared with something can be measured or
the planned goal. judged.
3. Motivation. Good quality goals represent a challenge — something to aim for.
They act as a motivating force. Employees will gain satisfaction when they
successfully achieve a challenging goal. Goals also provide managers with a basis
for rewarding performance, which in turn acts as a motivator.
4. Commitment. Getting an employee to agree to achieve a goal — or better
still, having the employee participate in the goal-setting process — gives that
employee a personal stake in the success of the business.
FIGURE 6.2 The goals of a business

should be shared with employees so they
know what to aim for.
BizFACT
A business’s goals will alter over time
To be most effective, business goals should be S.M.A.R.T (see the following due to changes in the internal and
snapshot). For example in 2012 one of David Jones’s objectives was to have three external business environment.
women on their board by 2015.
S.M.A.R.T. goals
Using the S.M.A.R.T. technique — a common acronym in goal setting — is the best
method for writing effective goals. Using this technique will help the business owner
to define the goals more easily, and the details involved in achieving them. S.M.A.R.T.
goals should be:
1. Specific. Goals should be straightforward and emphasise what the business wants SNAPSHOT
to happen.
2. Measurable. Decide on goals whose progress can be measured so the business
owner can see the change occur. This helps the business stay on track.
3. Achievable. Goals need to be challenging but not be too far out of the business’s
reach, otherwise the business owner and employees will become unmotivated
due to the lack of success.
(continued)
Achieving business goals • CHAPTER 6 145

4. Realistic. The goals must represent something that the business owner and
employees are both willing and able to work towards.
5. Timebound. The goals must have deadlines and sub-deadlines attached to them,
otherwise the commitment is too vague.
As Nina Dravik, owner of Transcend Interiors says, ‘The first step in planning is
to set goals. With easily understood and sensible goals, the business has direction
and purpose. However, goal setting is a two-edged sword. If done correctly, goal
setting results in a remarkable improvement in the business’s performance. If done
badly, it results in poor performance results. Consequently, when setting goals for my
business I use the S.M.A.R.T. technique because it produces clearly defined goals that
provide employees with direction, focus and understanding.’
Snapshot questions
1. State what the acronym S.M.A.R.T. represents.
2. Explain what Nina Dravik means when she says that ‘The first step in
planning is to set goals’.
3. Recall why Nina Dravik uses the S.M.A.R.T. technique.
❛ I use the S.M.A.R.T.
technique because
it produces clearly Summary
• People start a business because they want to achieve something: they have goals
defined goals . . . ❜ they want to attain.
• A goal is a desired outcome (target) that an individual or business intends to
achieve within a certain time frame.
• Success in achieving your goals is often determined by the amount of planning
Weblink you undertake.
Use the SMART weblink • Carefully prepared goals benefit managers by:
discover more about setting
–– serving as targets
goals using the S.M.A.R.T. –– measuring sticks
technique. –– motivation
–– commitment.
• The best method of writing effective goals is by using the S.M.A.R.T. technique.
EXERCISE Revision
6.1
1 Define the term ‘goal’.
2 Recall what often determines the success in achieving goals.
3 (a) Describe two personal goals.
(b) Identify when you want to achieve them.
(c) Outline what planning will be required to achieve these goals.
4 Discuss what is meant by the statement ‘begin with the end in mind’.
5 Summarise how carefully prepared goals will benefit managers.
6 Identify a benchmark you use to assess your achievement in Business Studies.
7 Read the following two statements. Decide and justify which one is a goal and which
one is not.
(a) ‘To improve customer service.’
(b) ‘To respond to every customer enquiry courteously and completely within
three hours.’
Extension
1 ‘We plan to expand our market into Asia, increasing worldwide market share by 2 per
cent over the next three years.’ Determine whether this goal is more likely to belong
to a large or small business. Give reasons for your answer.

2 Reflect on a goal you have recently achieved. Analyse the reasons why you were
successful in achieving this goal.
3 Using the S.M.A.R.T. technique, create a suitable goal for the following businesses:
(a) Blue Hills Corner Store
(b) Evergreen Nursery
(c) Banthai Restaurant.
6.2 Business goals

In most cases a driver of a car knows his or her final destination and has a plan of
how to get there. All organisations should set goals. This increases their chances of
success. Figure 6.3 illustrates six common business goals.
BUSINESS GOALS
Market Share
Profits Growth Social Environmental
share price
FIGURE 6.3 Common business goals
Profits BizFACT
Have you ever saved enough money to purchase an expensive item? If so, you All businesses have financial goals as
probably kept a record of all the money you received (revenue), the money you spent well as a system of financial record
(expenses) and the resulting balance. These records provided you with information keeping. Financial records are also
about your cash flow position. As you saved more and the balance increased, you used to determine the business’s level
were able to determine how close you were to achieving your financial goal. One of of success.
the most basic financial goals for businesses is to maximise profits.
As explained in chapter 1, profit is what is left after the costs of producing and
supplying the product (expenses) have been deducted from money earned from
sales (revenue). If the business is unable to consistently make a profit, it will fail.
Only profitable businesses survive in the marketplace.
A major indicator of a business’s success is the size of its profit, so many
BizWORD
businesses not only want to make a profit, they want to maximise their profit.
Profit maximisation occurs when
Profit maximisation occurs when there is a maximum difference between the total
there is a maximum difference
revenue (that is, the number of sales made multiplied by the price) coming into between the total revenue (that is,
the business and total costs being paid out (see figure 6.4). The goal of seeking the number of sales made multiplied
to make as much profit as possible is probably pursued by a larger number of by the price) coming into the business
businesses than any other goal. and total costs being paid out.
Total sales × price = Total revenue (TR)

Total expenses incurred in operating the business = Total costs (TC)
Profit = TR – TC
Maximum profit = TR at maximum difference from TC
FIGURE 6.4 Profit maximisation BizFACT

Not all businesses aim for profit
One way of maximising profits is to increase sales. This may be done by
maximisation. Some, especially small
lowering the price so consumers purchase more. Alternatively, the business may businesses, aim for only satisfactory
seek to increase sales through a well-targeted marketing campaign or creating more profits. They prefer returns that ensure
innovative products or delivering better services. the business’s survival and provide a
The profit maximisation goal is likely to be more beneficial to a business if comfortable lifestyle.
adopted over the long term. Ironically, this may require a business to accept either

FIGURE 6.5 There are many ways
businesses can increase profit. Price may
be lowered to increase the volume of
sales or clever advertising may convince
the consumer to buy a product.
lower profits or losses in the short term. A business entering a new market or
introducing a new product, for example, usually performs best by initially setting
low prices to build a large customer base. This is a strategy that Virgin Airlines
adopted when it entered the Australian market. It offered cut-price airfares to
BizWORD tempt passengers away from the established carriers. Virgin has as its long-term
Market share refers to the business’s
goal ‘the desire to maximise profits’, but they realised it would take a number of
share of the total industry sales for a years to achieve.
particular product.
Market share
Market share refers to the business’s share of the total industry sales for a
particular product. This is easy to visualise using a pie chart that shows the
percentage of sales the business has in relation to all its competitors. In most
BizFACT industries, market share is usually a goal for only large businesses. Such
German global magazine group, businesses often develop an extensive product range, using many different brand
Bauer Media, took over ACP in 2012.
It publishes more than 70 magazines
names to gain an extra few percentage points of market share. Small market share
in Australia, with 40 titles selling gains often translate into large profits for these businesses. Bauer Media Group,
70 million copies each year. They which now owns ACP, is Australia’s leading magazine publisher. It dominates
include the country’s biggest-selling the celebrity weeklies category with 46.2 per cent market share; the motoring
monthly magazine, Australian Women’s
Weekly, Australia’s number one weekly category with 88.5 per cent; the health category with 57.1 per cent; and in the
magazine, Woman’s Day, Dolly, NW, TV women’s lifestyle category 55.8 per cent, with titles including Elle, Cosmopolitan
Week, Cleo, Cosmopolitan, Australian and CLEO. Overall, Bauer Media Group captures about 50.6 per cent of total
Gourmet Traveller, Australian House &
Australian magazine market share.
Garden and Wheels. Bauer Media
currently produces digital editions for Increasing market share is an important goal for businesses that dominate
47 of its Australian titles. the market, because small market gains often translate into large profits (see the
following Snapshot).

FIGURE 6.6 Bauer Media publishes more than 70 magazines in Australia, with 40 titles selling
in excess of 70 million copies each year.
Coles v Woolworths — market share battle

The Australian grocery market is dominated by two large supermarket chains: Coles
(owned by Wesfarmers) and Woolworths.
According to most estimates, Coles and Woolworths account for approximately
80 per cent share of the packaged grocery market with 37 per cent and 43 per
cent market share respectively. For fresh produce, their market share is somewhat SNAPSHOT
lower. Combined they have about 47.2 per cent share of the fresh meat market and
45.5 per cent of the fruit and vegetable market. Between the two, they account for
more than 70 cents out of every $1 spent on groceries in Australia.
While some consumers may prefer one supermarket over the other, in reality,
the experiences offered by both supermarkets are incredibly similar. So, what is
that makes customers choose one over the other? In the end, it all comes down
to marketing.
In an attempt to close the gap on Woolworths, Coles kicked off a price war. The
battle started in 2011 when Coles cut their homebrand milk to $1 a litre as part
of their ‘down, down, prices are down’ campaign. In an attempt to grab market
share, Coles has focused on delivering value for its customers. They believe that the
perception of price leadership will be invaluable in attracting more shoppers to their
store. In response, Woolworths also began reducing the cost of other staples such as
bread, toilet paper and tea. The two supermarkets are now locked in an intense price
war and are in a constant battle to lower prices in order to attract customers from
each other.
Snapshot questions ❛ . . . in a constant

1. Recall the market share of Coles and Woolworths. battle to lower prices
2. Explain why the two supermarket chains are constantly battling to increase
their share of the total market. in order to attract
3. Predict whether the changes introduced by Coles will be successful. Give
reasons for your answer.
customers from
each other. ❜

The market share of SMEs is usually restricted to the size of the business. A local
corner store’s market share, for example, is limited to the number of customers
living within its immediate area.
One of the most successful strategies used to increase market share is promotion.
BizWORD Promotion describes the methods used by a business to inform, persuade and
Promotion describes the methods remind a market about its products. Promotion can be used to convince new
used by a business to inform, customers to try a product, while maintaining established customers’ product
persuade and remind a market about loyalty. Advertising that emphasises the product’s features also assures those who do
its products.
use the product that they are making the right decision.
Growth
Most businesses want to grow. They can achieve growth internally (organically) or
externally. Internal growth could involve employing more people, increasing sales,
introducing innovative products, purchasing new equipment or establishing more
outlets. McDonald’s has pursued an ambitious growth program by selecting a large
number of sites for future expansion.
External growth is achieved by merging with or acquiring other businesses. A
merger occurs when two businesses join together to become one — for example,
when the airline company Qantas joined with Jetset Travel. Expansion can also
take place through acquisition. This means that one business purchases another
business — for example, when Coca-Cola Amatil purchased Neverfail Springwater
and Mount Franklin bottled water suppliers; SPC Ardmona, IXL and Taylor’s food
products; and Goulburn Valley packaged ready-to-eat fruit merchandise.
FIGURE 6.7 Coca-Cola Amatil has

attempted to maximise its growth
through the acquisition of a diverse range
of sparkling, still and alcoholic beverages,
and food products.
Maximising growth is not a goal that only large businesses can achieve. Many
successful SMEs have followed similar strategies and in the process expanded to
become large businesses. However, some small business owners are content to
maintain the existing size of their business to:
• avoid the added pressures of expansion in a desire for a quiet life or a particular
lifestyle
• keep control over the business’s operations
• maintain personal contact with the customers.

Share price
A share is a part ownership of a public company. Shareholders therefore are the real
owners of companies. There are two reasons why a person will buy shares. Firstly,
they may purchase shares in the hope of selling them for a higher price. Secondly, BizWORD
owning shares in a company entitles an investor to a part of the company’s profits, A share is a part ownership of a
which is distributed in the form of dividends. public company.
For companies that wish to be successful, they need to maximise the returns
of their shareholders. This is achieved by keeping the share price rising —
constantly improving the share price — and paying back healthy dividends.
This is a goal that Woolworths has been trying to achieve over the past decade
(see figure 6.8).
35
30
Stock price ($)
25
20
15
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
FIGURE 6.8 The Woolworths share price increased from around $5 in early 2000 to a peak
of $34.85 in 2007. During the global financial crisis, the share price fell, as did most companies’
during this period. Since then, their share price has remained relatively stable, mostly within the
$25 to $30 band.
Of course, businesses must be aware that they operate within a wider community BizFACT
that expects corporations to act ethically. Unethical activities may temporarily Through its numerous values
improve a company’s share price but ultimately end up being detrimental to and campaigns, The Body Shop
a business. expresses its commitment to social
and environmental justice on a local
and global level. Recent campaigns
Social goals include ‘Walk in her shoes’, ‘Stop
sex trafficking of children and young
All businesses operate within a community and, like individuals, have certain people’, ‘Climate friendly’, ‘Rethink
social responsibilities. Many businesses develop social goals and adopt strategies refugees’ and ‘Stop violence in the
that will benefit the community, while achieving financial goals. Among the main home’. The Body Shop prides itself on
being a retail activist.
social goals are:
1. Community service. Business sponsorship of a wide range of community
events, promotions and programs rapidly increased during the past decade.
Many businesses financially support educational, cultural, sporting and
welfare activities.
2. Provision of employment. Most large businesses do not regard employment
of people as a main goal. Many small business owners, however, look at the BizWORD
continuity of their business, sometimes employing family members who Social justice in business is about
otherwise might be unemployed. adopting a set of policies to ensure
3. Social justice. Everyone has the right to be treated fairly. A business may be that employees or other community
concerned for social justice — that is, it adopts a set of policies to ensure members are treated equally and fairly.
employees and/or other community members are treated equally and fairly.

Environmental goals
Imagine that the world is like a business. As owners of this business you would be
concerned about its future prospects. Every year, more output is demanded and
BizFACT consequently its production lines work faster and faster. However, the raw materials
Australia exports about $1.6 billion used to produce the vast array of goods and services are shrinking at a frightening
worth of environmental products and
services each year.
rate. In the effort to increase output, essential maintenance is sometimes ignored.
The business’s water and power supplies are under increasing threat. To continue
this way will be unsustainable and the business will eventually fail.
Does this sound unbelievable? Possibly. But in many ways this is what is
happening to the world we live in. For quite a while people have treated
the Earth just as they like, without giving much thought to the long-term
consequences. However, the past is catching up with us. It is obvious that we
cannot continue as we have; things will have to change. And the good news
is that these changes are already occurring. There are signs that people and
businesses are becoming more environmentally aware. Enlightened businesses
are adopting practices of ‘recycle, renew and regenerate’, as well as adopting
a ‘green’ attitude, and developing products and creating ideas that are
environmentally friendly (see figure 6.10). These business practices reduce the
impact on the planet’s health so that future generations are not disadvantaged.
Sustainable development
So far we have painted a somewhat bleak picture of the possible future.
Fortunately, however, the world is moving away from many of its past
practices. Economic growth must be achieved sustainably. Many in society
now argue that economic growth should not occur at the expense of polluting
and degrading the air, water and forests that are essential to support life on
this planet. There needs to be a balance between economic and environmental
concerns — in other words, sustainable development.
FIGURE 6.9 Delta Goodrem is the
national patron of Ronald McDonald
House Charities, which provides
programs and accommodation
for seriously ill children and their
families. McDonald’s Australia is a
large business that provides financial
assistance to cover all administration
and management costs of the Ronald
McDonald House Charity, which is
an independent charity. Individual
McDonald’s stores, which are owned
by franchisees, also provide invaluable
time and assistance to the charity.
BizWORD
Sustainable development occurs
when the needs of the present
FIGURE 6.10 Johnson & Johnson aspire to be the most environmentally and socially
population are met without
responsible company in the world. More than 20 years ago, they developed their first
endangering the ability of future
environmental goal aimed at reducing toxic emissions. Since then, they have set a series of
generation to meet their own needs.
long-term goals that address a wide range of environmental impacts. In 2011, they unveiled
Healthy Future 2015, which outlines their goals for the next five years.

Businesses are starting to play their part in achieving sustainable development.
Pressure to change has come from society’s increasing awareness of environmental
issues. As well, governments are imposing stricter environmental regulations
on business practices. This will provide many new business opportunities for
environmental services and products (see the following Snapshot).
Australian businesses — sustainability

The Australian Business Award for Environmental Sustainability, conducted
annually, recognises businesses that implement policies that exhibit leadership and
commitment to the preservation and protection of the environment.
Some of the 2013 winners included:
• Club Assist. Club Assist is an organisation that provides Royal Automobile Club of
SNAPSHOT
Victoria members with a battery replacement service. They were recognised for their
efforts in reducing their carbon footprint in many ways. For example, Club Assist
branded batteries are made using recycled lead and plastic, and the company has
developed battery recycling programs designed to maximise collection rates for batteries.
• Kimberly-Clark Australia. Kimberly-Clark is a global health and hygiene
company. The company was recognised for their ongoing commitment to
driving environmental and social sustainability practices. They have made great
progress in reducing their environmental footprint since they implemented a new
sustainability strategy called Our Essential World in 2012.
• Lush Fresh Handmade Cosmetics. LUSH specialises in selling fresh, handmade
bath and beauty products made from the finest natural ingredients. They take
environmental sustainability very seriously through a range of initiatives. Some
of their initiatives include campaigning in support of protecting the environment
and humanitarian causes, not conducting animal testing, ethical sourcing of
ingredients, responsible packaging and encouraging community recycling.
❛ SITA has developed
• SITA Australia. SITA is a business that provides integrated waste management strategies to help
and resource recovery solutions. They offer best practice environmental solutions
for the collection, recycling and disposal of materials. SITA has developed solve one of the
strategies to help solve one of the major environmental problems — the
sustainable and ethical management of waste.
major environmental
problems. ❜
Snapshot questions
Select one of the above businesses and use the Sustainable businesses weblinks in
your eBookPLUS to answer the following questions.
1. Briefly outline the business’s operations.
Weblinks
2. Summarise the business’s commitment to the environment.
Sustainable businesses
3. Determine the benefits of their environmental initiatives.
6.3 Achieving a mix of business goals

The preceding sections outlined some of the financial goals of a business, as well as
social and environmental goals. Businesses do not generally have only one specific
goal; they have a range of goals because they have different stakeholders who
each have different needs. Managers therefore have a mix of goals that they try to
achieve simultaneously.
Most business goals are interdependent, that is, they all help the business
achieve its prime function. Some goals are compatible in the sense that certain
strategies implemented by the business in pursuit of a particular goal will actually
assist in achieving multiple goals. For example, strategies employed by a business
to achieve the goal of maximising growth may simultaneously help that business
achieve the goals of maximising profits and increasing market share.

Sometimes it can be difficult for a business to achieve all of its goals simultaneously
because the links between the goals make some of them incompatible; that is, they
conflict with each other. Such a situation will force a business owner into deciding to
adopt a compromised position; a trade off between conflicting goals. A business owner
may face the dilemma of having to choose whether to maximise profits or increase
market share. It is sometimes a difficult decision. You have probably faced a similar
dilemma: for example, should you go to the movies or prepare for an exam? The two
‘goals’ are conflicting and, just like a business owner, you must make a decision.
FIGURE 6.11 Coca-Cola Amatil

attempts to achieve a mix of business
goals. Their current strategic objectives
are to continue to provide sustainable
returns that are superior to those of their
competition; to invest in their capacity
and encourage business growth; and to
conduct business and operate within the
community as a good corporate citizen.
Summary
• A business attempts to achieve a variety of goals. These goals relate to:
–– profits
–– market share
–– growth
–– share price
–– social
–– environmental.
• Profit maximisation occurs when there is a maximum difference between total
revenue (TR) and total costs (TC).
• Market share refers to the business’s share of the total industry sales for a
particular product.
• A small change in a business’s market share can result in a large change to its profit.
• A business can maximise growth either internally (organically) or externally.
• Companies need to satisfy their shareholders by improving the share price and
paying healthy dividends.
• Many businesses develop social and environmental goals and adopt strategies
that will benefit the community.
• There are three main social goals a business attempts to achieve:
–– community service
–– provision of employment
–– social justice.
• Enlightened businesses are adopting sustainable development practices.
• Managers should attempt to achieve a mix of the above goals.
• Managers often have to make a trade-off between conflicting goals.

Revision EXERCISE
6.2
1 Construct a concept map (started below) summarising the main goals of business.
Profits Market share

• Occurs when there is a
maximum difference between
total revenue and total costs
• Is more beneficial if it’s a
long-term goal
• Is the main goal for most
businesses
Environmental Social
MAIN GOALS
OF BUSINESS
Growth Share price
2 In the following examples, identify which goal the business is trying to achieve.
(a) The business owner wishes to increase revenue so they conduct a large sale.
(b) A board of directors announces that the company’s profits are forecast at
23 per cent over the next 12 months and the dividend will rise by 28 cents
per share.
(c) A manager decides to undertake an extensive promotional campaign in an attempt
to attract new customers.
(d) Senior executives knew there was only one way to expand the business and that
was by buying the opposition.
3 ‘The main goal of a business is to maximise profits’.
(a) Define the term ‘profit maximisation’.
(b) Recount under what circumstances a manager may be prepared to accept reduced
profits in the short term.
(c) In your opinion, discuss whether maximising profits should be the only goal of a
business.
4 Describe two strategies a manager can use to maximise profits.
5 Explain why profit maximisation is more suitable as a long-term goal. Weblink
6 Use the Coca-Cola Amatil weblink in your eBookPLUS to access the latest Fact Book to: Coca-Cola Amatil
(a) identify the five products that have the greatest market share
(b) discuss why Coca-Cola Amatil wants to increase its market share for each of its
products.
7 Recommend three strategies either Coles or Woolworths could use to increase their
market share. Share your answer with other class members.
8 Distinguish between internal and external growth.

9 Recall why some small businesses are content to maintain their existing size.
10 Outline the relationship between a shareholder and a public company.
11 Define the term ‘share’.
12 Explain why some companies may not be able to constantly improve their
share price.
13 Examine figure 6.8 on page 151 and then answer the following questions.
(a) State what this graph measures.
(b) Explain why a shareholder who purchased Woolworths shares in 2004 would most
probably be satisfied.
(c) During 2008 the world suffered a global financial crisis. Deduce what impact this
had on the Woolworths share price.
14 Summarise the three main social goals of a business.
15 Identify three examples that demonstrate businesses are becoming more
environmentally aware.
16 Justify why businesses should adopt sustainable development practices.
17 Using an example, demonstrate how business goals can be compatible.
Extension
1 Set up a class debate to critically analyse the following topic: ‘All businesses care
about is making as much money as possible’. Share roles so that those not debating
are involved either in assisting with research, or in running the debate and keeping
notes on both sides’ arguments.
2 In small groups, arrange to interview a local small business owner to determine his
or her main business goals. Compare and contrast them with what you have learnt
from this topic. Present your findings to the rest of the class.
3 ‘A business’s financial goals sometimes conflict with each other’. Evaluate this statement.
6.4 Staff involvement

One important goal that all businesses should give a high priority to achieving
is that of staff involvement. Sometimes referred to as employee empowerment
BizWORD or employee participation, staff involvement means involving employees in the
Staff involvement means involving decision-making process and giving them the necessary skills and rewards.
employees in the decision-making Employees are a business’s most important resource. It is important to recruit
process and giving them the necessary and select appropriate employees. It is then vital to provide a work environment
skills and rewards. that maximises employee involvement and satisfaction because this results in high
Labour productivity measures how levels of output. Therefore, managers should pursue workplace practices that
much an employee can produce in a increase labour productivity. Policies that recognise the involvement, knowledge,
set period of time.
skills and creativity of the employees will lead to increased productivity and long-
term business success.
Staff involvement is a type of decentralisation that involves allowing employees
some authority to make decisions. Employees are encouraged to accept responsibility
for their work. In businesses where true staff involvement occurs, employees
gain confidence in their ability to perform their jobs and influence the business’s
overall performance. One of the most influential results of staff involvement is that
employees exhibit more determination and initiative in pursuing the business’s
goals. Overall, staff involvement provides two advantages: increased employee
motivation and solutions to organisational problems. However, staff involvement
will only be fully successful if a business provides employees with the necessary
expertise as well as recognising the importance of:
• innovation • mentoring
• motivation • training.

FIGURE 6.12 It is in the interest of
the business, as well as the employees,
for the business to have high levels of
employee involvement.
Innovation
As we outlined in chapter 1, innovation occurs when a new idea is applied to
improving an existing product or idea. With markets and competition becoming
more global, Australian businesses are being forced to become more innovative.
eLesson
Often, a business can gain a competitive advantage if it innovates successfully.
Travel With Kidz
Therefore, all businesses should encourage an innovative business culture by
Wendy from Travel With Kidz
recognising and encouraging one of the most important sources of innovative ideas: meets with Graham ‘Skroo’
employees. For example, in 1968 Spencer Silver, a 3M technician, developed a Turner, co-founder of Flight
‘low-tack’ adhesive that would not stick — a glue that 3M considered a failure. The Centre, so we can share in
their trade secrets.
product was abandoned. However in 1973, another innovative 3M technician, Art
Fry, in a moment of insight, realised the full potential of a reusable bookmark and
went on to invent the Post-it Note. It was through the innovative potential of these
two employees that the humble Post-It Note has become an absolute necessity in
the office. As the basic product evolved into an entire product line, Post-It Notes
are to be found in most schools, laboratories, libraries and in homes.
The innovative activities of staff are often referred to as the entrepreneurship
within the business. More recently, employees who take on the entrepreneurial
roles within businesses are called intrapreneurs. In some businesses, these creative
people present some managers with a dilemma. Highly creative, innovative thinkers
can be nonconformist in their behaviour and dress. Attempts to get creative BizWORD
employees to be conventional and follow the rules and regulations may actually An intrapreneur is an individual who
suppress their creativity. However, if a business is to grow and to maintain its takes on the entrepreneurial roles
competitive advantage, then staff must be encouraged and given the opportunity within a business.
to be innovative. The most important thing a business can do to achieve this
successfully is to demonstrate that it values new ideas and solutions and it does
this by taking them seriously. If a business just pays lip service to creativity then
the employees quickly ‘get the message’ and stop coming up with original ideas.
Other practices would include:
• rewards given to employees with innovative ideas that become profitable
• a trustful management that does not excessively control — micromanage — people
• sufficient financial, management, human and time resources to achieve goals
• not fearing the consequences of making a mistake
• use techniques such as brainstorming to encourage ideas.

Motivation
Why do some employees work harder than others? Why can an employee with
average skills regularly outperform someone with outstanding abilities? The
difference between the two employees is most probably their level of motivation.
Motivating employees is one of the most important management functions
BizWORD because high levels of motivation result in increasing rates of productivity.
Motivation refers to the individual, Motivation refers to the individual, internal process that directs, energises and
internal process that directs, energises sustains a person’s behaviour.
and sustains a person’s behaviour. Put another way, motivation is what drives a person to behave in a certain way,
or to achieve a certain goal. For example, what motivated you to:
• return to Year 11 after completing Year 10?
• complete the latest Business Studies homework exercises?
• watch television instead of reading your English novel?
In a work setting, motivation makes people want to work, but what precisely
is it that motivates people? This is a topic which is widely discussed, but often
neglected in the workplace. This is mainly because it is an area of human
behaviour which is difficult to understand given the conflicting answers provided
by research.
BizFACT For many years, managers have relied on the use of either rewards or
Naomi Fraser, a well-respected punishments to motivate employees. An analogy is often used to try to explain
management consultant, has what motivates people. It concerns a donkey and what is most likely to motivate it
concluded that ‘What motivates to move forward — that is, change its behaviour. According to the ‘story’ either a
people is similar to how Winston carrot can be dangled in front of the donkey (a reward) or it can be hit with a stick
Churchill viewed Russia . . . a riddle,
wrapped in a mystery, inside an
(a punishment). Either method may motivate the donkey. In the work environment,
enigma’. ‘rewards’ refer to increased pay and improved conditions, ‘punishment’ refers to
fear of a reprimand, demotion or dismissal.
FIGURE 6.13 Motivation — carrot or stick approach
BizFACT
However, research over the last 70 years has revealed that motivation is much
Research reveals that intrinsic motivation
more complicated than just these two variables. Different theories have been
— motivation that comes from inside
an individual — is a more long-term formulated which lead to the conclusion that individual employees respond
and powerful motivating force than differently to various motivational techniques. Figure 6.14 outlines a number
any external or outside rewards such as of motivational techniques that can be used. What they have in common
money, grades or promotions. is the need to develop a business culture that fosters employee welfare and
involvement.

Encourage Implement
suggestions conflict-resolution
Lead by example
strategies
Delegate
responsibility
Communicate
regularly
with staff TIPS FOR MOTIVATING
(AND KEEPING) STAFF
Take an interest
in employees’
Make clear development
expectations
Establish joint Provide a safe
objectives through work environment
negotiations
FIGURE 6.14 Motivational techniques that consider the emotional and physical wellbeing of
employees means high morale which in turn improves employee and business effectiveness.
Is money the best motivator?

For generations managers have believed that money is the most powerful motivating
force. However, recent research tends to suggest that employee motivation depends
on a wide range of factors besides money (see the following Snapshot). For example,
imagine you are offered $100 for each assessable task you complete satisfactorily.
You would almost certainly be motivated to complete all your tasks. However, after
a while your level of motivation would decrease as the stimulus from the financial
incentive diminished. Eventually, you would desire a larger incentive to remain highly
motivated. It could be argued, from this simple analogy, that money can be a powerful
motivator but only in the short term. As the writer Neil Simon expressed it, ‘Money
brings some happiness. But, after a certain point, it just brings more money.’
Motivating people — getting beyond money

Offering economic rewards is often seen as the best way to motivate staff; however,
many studies have shown that non-financial incentives are important tools for retaining
and motivating employees. Non-economic incentives can not only be cost-effective,
they are crucial to making employees feel valued as well as increasing productivity.
Motivated staff are also more likely to stay, reducing separation, recruitment and hiring
SNAPSHOT
costs. So what are the best incentives to motivate and retain your staff?
1. Provide interesting work, including assignments that are challenging and
rewarding. Employees will find their jobs more enjoyable if they are more
challenging and interesting. Offer opportunities for employees to work on
projects in their own way and without unnecessary supervision.
2. Train your staff. Provide in-house or off-site courses that improve employees’ skills.
3. Offer opportunities for employees to advance. Remember to meet your
employees’ needs as well as expecting them to meet the requirements of the
business. If you can’t offer promotion, a sideways move to a different position can
also provide motivation.
4. Show respect and courtesy. This shows your employees that they are valued and
improves morale, making for a better and more productive workplace.
5. Listen to your staff to find out what motivates them. What are their interests and
aspirations? Time off to spend with family or greater autonomy and decision-making ❛ Motivated staff are
responsibilities may be more effective and meaningful incentives than a pay increase.
more likely to stay . . . ❜
(continued)

6. Recognise achievements. Send a note or an email recognising an employee’s extra
effort, or congratulate a staff member during a meeting for doing a great job.
Provide regular rewards events to acknowledge staff who have consistently excelled.
Include awards for staff nominated by their colleagues for their extra efforts.
7. Provide a family-friendly workplace. Offering flexible work hours that cater for the
needs of families allows employees to have a positive work–life balance.
Rewards show your staff that you appreciate their efforts and input. Recognising and
rewarding hard work increases morale and productivity, and makes your workplace a
place where employees want to stay and contribute.
Snapshot questions
1. Summarise the incentives that the article found effective in motivating staff.
2. Propose arguments that could deter managers from using non-financial
rewards.
3. Conduct a survey amongst friends and family about what best motivates
them in their workplace, then compare and contrast your findings with the
list in the article above.
The reality is that people want to be involved in their working lives. The successful
businesses today will need to give close attention to involving employees in
the decision-making process. Good managers should, therefore, also be good
motivators, encouraging employees and using positive reinforcement to influence
behaviour. The overall success of the business largely depends on motivated and
skilled employees who are committed to its goals — that is, everyone working
towards a common purpose.
Mentoring
When talking with school students or employees about their school or work
BizWORD experiences, it is common to hear them refer to individuals who influenced them.
Mentoring is the process of Many schools and businesses have introduced formalised mentoring programs,
developing another individual by especially for new students or employees, with the aim of providing advice,
offering tutoring, coaching and guidance and to help with their socialisation.
modelling acceptable behaviour.
Mentoring is normally done by tutoring, coaching and modelling of acceptable
Socialisation is the process a new
behaviour. Most importantly, though, a mentor acts as a role model. A mentor is
employee undergoes in the first few
weeks of employment through which someone — usually a more experienced employee — who helps develop a less
he or she learns how to cope and experienced employee (the protégé). They act as a guide, teacher, counsellor, and
succeed. coach. Such a practice is commonly referred to as taking someone under his or
A mentor is someone — usually a her ‘wing’. Ultimately, the protégé learns acceptable attitudes and behaviours. For
more experienced employee — who example, CompuServe, a computer wholesaler, encourages its experienced sales
helps develop a less experienced representatives to take new employees on sales calls to the company’s largest
employee (the protégé).
customers. Teaching new employees what the business expects of them helps
strengthen their dedication and commitment to the firm. It also helps to make sure
that all employees are exposed to the values the business believes are important.
A formalised mentoring program is enormously beneficial because:
• it ensures access to mentors for all employees, regardless of levels of experience,
backgrounds, gender or ethnicity.
• the participants in the mentoring relationship know what is expected of them.
This is especially beneficial for new employees as it assists with their transition
into the workplace.
• it assists with the training and development of all employees and passes on the
skills and abilities of the more experienced staff members.

• it provides career and psychological support — a friend and counsellor —
for inexperienced employees as well as allowing mentors to develop their
interpersonal skills and provide a sense of satisfaction.
• it increases the possibility of skill transfer.
Mentoring in action
Some mentor programs fail because no clear goals and guidelines are established
at the outset of the mentor/mentoree relationship. Ideally, programs need to be
structured and overseen by Human Resource departments and work best when
both participants are committed to the goals established. At the conclusion of
a mentoring relationship, it is vital that an evaluation of the process takes place.
SNAPSHOT
Mentoring programs are one way in which companies can both retain and recruit
staff.
Macy had been employed with Waratah Press for only a year since completing a
communications degree. She was enjoying her role with the company as a junior
editorial assistant within a small editorial team. For over 25 years, Waratah Press had
offered custom printing and self-publishing services for clients with local printing or
publishing needs. She really hoped that she could have a future there, honing her
skills in copy editing and project management.
She particularly admired Judith Carew, who headed the managerial team and
seemed to know everything about the business. Macy didn’t report to Judith but
knew if she had the opportunity, she could learn a lot under her guidance. So
she was very excited when an internal email arrived in her inbox one morning
announcing a mentoring program being introduced within the company. As soon
as she could, she approached her supervisor, Curtis, to inquire whether she could
apply to be a mentoree and whether Judith might be her mentor. He was supportive
❛ Judith would . . . act
and suggested she fill in the expression of interest form and forward it to HR and as a “sounding
Judith for consideration. Judith was agreeable and the company’s first mentoring
partnership began to take shape.
board” for Macy’s
It took some time to establish the guidelines for the mentorship so that both questions and ideas. ❜
Macy and Judith had a clear idea of the goals and the process for their achievement.
They decided on a mentorship period of four months with fortnightly formal
meetings as well as more informal contact on a weekly basis. The informal meetings
would involve a brief ‘catch-up’ over coffee in the local café. During both types of
meetings, Judith would aim to support Macy with her current projects, help her learn
the ‘ins and outs’ of the industry and act as a ‘sounding board’ for Macy’s questions
and ideas.
In their debriefing with HR at the end of the mentorship, Macy felt she had
increased her knowledge about the industry, confirmed her career directions
and become a much more productive employee as a result. Judith indicated that
being a mentor had also given her valuable insights into her own role with the
opportunity to share information and resources in a positive way to contribute to
the career development of a new employee. For the company overall, it seemed a
way to retain staff who promised to be valuable to the company’s future, as well
as being able to promote the mentorship program as a way of recruiting new
staff.
Snapshot questions
1. Outline the guidelines Judith and Macy established for their mentoring
relationship.
2. Identify why some mentoring programs might fail.
3. Assess the benefits to (a) the mentoree, (b) the mentor and (c) the company
of a successful mentoring program.

Training
As the nature of the workplace changes, especially due to the introduction of
BizWORD technology, existing employees must be trained and retrained. New employees also
Employee training generally refers need some training, depending on their level of experience. Employee training
to the process of teaching staff how generally refers to the process of teaching staff how to perform their job more
to perform their job more efficiently efficiently and effectively by boosting their knowledge and skills. It may involve
and effectively by boosting their
knowledge and skills.
teaching them specific skills, and allows existing employees to continually upgrade
their skills with the aim of developing multiskilled employees.
Multiskilling allows employees to
develop skills in a wide range of tasks Mutiskilled employees are better able to:
through ongoing training. • adapt to a rapidly changing technological environment
• provide better customer service
• participate effectively in work teams — as outlined previously, increased
participation improves the range of ideas available to businesses keen to innovate
to maintain their competitive advantage
• gain promotion and therefore their commitment to the business is greater.
BizFACT The goal of training is to improve employee productivity. Informal on-the-job
training is one of the most common training methods used. Formal off-the-job training,
Current research in Australia by
Johnson Consulting Group revealed consisting of classroom teaching and lectures, is often used for highly skilled, technical
that for every dollar a business spends employees. Conferences and seminars have become an important format for training in
on computer hardware and software, recent years. Businesses should view training as an investment in the human capital of
eight dollars should be spent on the the business, rather than just another expense. Training is necessary for both personal
training of employees.
and business growth, as will be examined in more detail in chapter 8.
Summary
• Staff involvement means involving employees in the decision-making process
and giving them the necessary skills and rewards.
• A work environment that maximises employee involvement and satisfaction has
high levels of labour productivity.
• Businesses should encourage an innovative business culture by recognising
and encouraging one of the most important sources of innovative ideas:
employees.
• An intrapreneur is an innovative employee who takes on the entrepreneurial
Digital doc
roles within a business.
document in your
• Motivation refers to the individual, internal process that directs, energises and
eBookPLUS to compile your sustains a person’s behaviour.
own notes for this chapter. • Individual employees respond differently to various motivational techniques.
Searchlight: DOC-14115 • Good managers should also be good motivators, encouraging employees and
using positive reinforcement to influence behaviour.
• Mentoring is the process of developing another individual by offering tutoring,
coaching and modelling acceptable behaviour.
• Teaching new employees what the business expects of them helps strengthen
their dedication and commitment to the business.
• Employee training generally refers to the process of teaching staff how to perform
their job more efficiently and effectively by boosting their knowledge and skills.
• The goal of training is to improve employee productivity.
EXERCISE Revision
6.3
1 Define the term ‘staff involvement’.
2 Think of a situation where you were involved in the decision-making process.
(a) State the decision that needed to be made.
(b) Describe the decision-making process used.

(c) Outline whether you were more committed to the final decision because of your
involvement.
(d) Discuss what implications this would have for you if you were a manager.
3 Account for the relationship between staff involvement and labour productivity.
4 Recall why businesses should encourage an innovative business culture.
5 Discuss the role an intrapreneur can play to assist a business maintain its competitive Digital doc
advantage. Test your knowledge of key
6 Determine answers for the three questions on page 158 which analysed what Chapter crossword in your
motivated you to behave in a certain way. eBookPLUS.
7 Calculate which you believe to be the more powerful motivating force – rewards or Searchlight: DOC-1205
punishment. Justify your answer.
8 Outline why it is important for businesses to mentor their employees.
9 Explain why spending on training should be considered as an investment and not just
a business expense.
Extension
1 Suppose that you are the owner of a music store and you employ ten staff members.
Demonstrate what staff involvement techniques you would use with these employees.
2 Recall a mentoring program you are familiar with.
(a) Investigate the aim of the program.
(b) Evaluate the effectiveness of the program.
(c) Recommend changes you would make to improve the effectiveness of the program.
3 Analyse the system that is used in your school to motivate students. Propose how it
could be improved.
4 Investigate the theories of motivation put forward by Abraham Maslow, Frederick
Herzberg and Douglas McGregor. Create a written or oral report and present
your findings.

CHAPTER 7
Management approaches
7.1 Introduction
Management has been practised for thousands of years. The great pyramids of Giza in
Egypt, for example, represent the combined efforts of more than 100 000 individuals
BizFACT
who worked on the project over a 20-year period. This remarkable achievement was
Like today’s managers, the ancient
the result of well-coordinated management practices.
Egyptian managers needed to:
• develop plans
• acquire human and physical
resources
• arrange finance
• analyse information
• keep records and prepare progress
reports
• monitor performance and
coordinate activities
• take corrective action whenever
required.
FIGURE 7.1 Effective management practices were applied to building the pyramids of Egypt.
The development of management as a body of knowledge and a subject in its

own right is much more recent. The Industrial Revolution of the late 1700s, which
encouraged the growth of factories, acted as a catalyst for developing management
approaches (theories). As the number of factories increased, there was a need to
coordinate the efforts of many people in the continual production of goods and
services.
A number of people began thinking and writing about ways of running
factories more efficiently. These individuals were the first to develop approaches to
management and paved the way for the many management theorists who followed.

These approaches, or theories, outline the main functions of management
including planning, organising, leading, motivating, communicating, negotiating
and controlling a group of individuals in an attempt to achieve specific goals.
To a large extent, management approaches have tended to reflect the customs
and traditions of the society at the time. Consequently, as social and economic
conditions changed new approaches were developed. However, no single approach
to management is universally accepted today. Rather, each approach offers BizFACT
something of value for today’s managers. The factory system radically altered
how goods were made. Previously,
The management approach adopted by a business will have an enormous impact
most production was on a small-
on all aspects of the business’s operation. scale basis that was carried out in
In particular, management approaches influence: the home. The Industrial Revolution
• the organisation and allocation of tasks to staff resulted in large groups of semi-skilled
• the organisational structure workers using machines located in big
factories.
• levels of management
• management styles.
Summary
• Knowledge about management today is the result of a long and continuing
innovative process as ideas evolved over time.
• The business’s management approach will have an enormous impact on all
aspects of the business’s operations.
7.2 Classical approach to
management
The Industrial Revolution began with the invention of reliable steam-powered BizWORD
machines. For the first time, businesses could mass-produce goods in factories Mass production is the process of
that operated year-round. This posed challenges that earlier businesses had not manufacturing standardised goods on
previously faced. Problems arose in training employees, organising the managerial a huge scale by automation.
structure, scheduling complex manufacturing processes and dealing with worker
dissatisfaction. Business owners now had to plan, organise, direct, control and staff
many different types of operation.
In response to these many complex problems, managers developed and tested
solutions with the focus on finding ‘one best way’ to perform and manage tasks.
The evolution of modern management, called the classical approach, had begun. BizWORD
As the Industrial Revolution continued, this approach generated two perspectives, The classical approach to
each with a slightly different emphasis. First came the classical scientific approach, management stresses how best to
which focused on how best to organise workers and production methods on the manage and organise workers so as
to improve productivity (output).
factory floor. Then came the classical bureaucratic approach, which emphasised
how businesses should be organised or structured.
Classical–scientific approach
One significant management approach that emerged during the nineteenth century
was that of Frederick W Taylor (1856–1915). Taylor (figure 7.2) was an advocate
of the production line method of manufacturing, which he viewed as the most BizWORD
efficient form of production. This production system was used in the industrialised Scientific management is an
countries of the world until the early 1970s and was based mainly on Taylor’s approach that studies a job in great
scientific management ideas. detail to discover the best way to
Taylor, to assist his analysis, developed the principles of scientific management: perform it.
an approach that studies a job in great detail to discover the best way to perform it.
Management approaches • CHAPTER 7 165

Taylor’s four principles of scientific management are as follows:
1. Scientifically examine each part of a task to determine the most efficient method
for performing the task.
2. Select suitable workers and train them to use the scientifically developed work
methods.
3. Cooperate with workers to guarantee they use the scientific methods.
4. Divide work and responsibility so that management is responsible for planning,
organising and controlling the scientific work methods, and workers are
responsible for carrying out the work as planned.
FIGURE 7.2 Frederick W. Taylor

(1856–1915) argued that productivity
would be improved by preparing plans
based on what needed to be done,
designing each task scientifically and
providing training and incentives for the
workers. Some observers criticised Taylor
for exploiting workers to get them to
produce more.
To improve efficiency, Taylor attempted to systematise the way a job was

done. He believed that a poorly skilled workforce could be trained to perform
simple repetitive tasks effectively. He used time and motion studies to analyse
the performance of a particular task, with the objective of reducing a task to an
BizWORD effective minimum standard. As well as reducing routine tasks into their most
A time and motion study is a simple format, Taylor advocated the division of labour into function-related units;
process of examining each of the steps that is, tasks were divided into small, specialised activities.
in a production procedure and the Taylor also believed that employees follow their own self-interest and display
time taken to perform them.
a natural desire to avoid work. Such a situation, he argued, required tight
control by supervisors and managers. He believed in the need for management to
control workers and ensure they followed instructions by rigid rules and regulations
based on a hierarchy of authority.
One notable student of classical–scientific theory was Henry Ford. Being familiar
with Taylor’s work, Ford became an enthusiastic believer in scientific management
and the use of machines. By combining these ideas, Ford developed his famous
mechanised assembly line in 1913.
This approach to car assembly involved a chassis moving down an assembly
line on a conveyor belt. A small team of workers would move with the car, fitting
the various components that had been carefully set out along the production
line. The end result was to reduce the hours spent on the assembly of a car from
728 hours to just 1.5!

FIGURE 7.3 Taylor believed that
dividing the task into smaller, specific
activities would improve productivity.
McDonald’s is another business that uses Taylor’s scientific management approach

in the preparation of its food. For example, a Big Mac is produced according
to a set number of steps. The burger takes a predetermined number of seconds
to cook, fixed amounts of lettuce, cheese and other ingredients are added precisely
at the correct time and in exactly the same way. However, McDonald’s adopts BizWORD
other management approaches when dealing with its employees; approaches that Bureaucracy is the set of rules and
emphasise the ‘human relations’ aspect. regulations that control a business.
Of course, the initial ideas of the classical–scientific theorists have been
modified over time. However, modern managers realise that without motivated
and committed employees, empowered to analyse their own work habits and take
responsibility for what they do, productivity will not improve.
BizFACT
Classical–bureaucratic approach The term ‘bureaucracy’ was used by
The classical–bureaucratic approach was pioneered by Max Weber and Henri Fayol. Max Weber to describe hierarchical
According to Weber, a bureaucracy is the most efficient form of organisation and organisations. The word is sometimes
should have: associated with controversy. People
• a strict hierarchical organisational structure talk about bureaucracy as if it is self-
serving and uncaring, but Weber
• clear lines of communication and responsibility
described it positively. He believed
• jobs broken down into simple tasks; specialisation that it contributed to a rational and
• rules and procedures more efficient organisation, because
• impersonal evaluation of employee performance to avoid favouritism and bias. everyone knew their status and
Today, the term ‘bureaucracy’ is sometimes associated with controversy. People position in the organisation.
talk about bureaucracy as if it is self-serving and uncaring, but Weber described
it positively. He believed that it contributed to a rational and more efficient
organisation, because everyone knew their status and position in the organisation.
Fayol identified a number of management functions, including planning,
organising and controlling (figure 7.4). His explanation of the functional approach
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to management provided a type of ‘job description’ for managers.
Use the Henri Fayol weblink
Fayol’s explanation of the functions of management was so concise and easy in your eBookPLUS to
to understand that it formed the foundation of most management courses offered discover more about Fayol’s
during the twentieth century. His explanation was often used as a definition of theory of management.
management itself.

Management
Definition Operation
function
The process of setting goals and WORK SCHEDULE ROSTER

Planning the tasks that need to be Julian 12/3
1. Planning deciding on the methods to achieve
performed Angie 13/3
them Tai 14/3
The process of arranging the Organising the work and

2. Organising resources of the business to workplace in such a way as to
achieve the goals maximise productivity and efficiency
PRO
DUC
TION
The process of evaluating and
Changing production procedures if
3. Controlling modifying tasks to ensure that the set
goals are not being achieved
goals are being achieved
FIGURE 7.4 The main functions of management, according to Henri Fayol
Fayol also developed a number of principles to assist managers, including:

• discipline as a feature of leadership
• the organisation’s goals should take precedence over an employee’s individual
interests
• rewards for effort should be fair
• security of employment is essential
• teamwork should be encouraged.
In the nineteenth century, management models were based on a hierarchical
system of authority similar to the layered and some what rigid organisational
structure of the major churches, educa tional institutions and the army. Such
techniques were viewed as appropriate for the production line because they
ensured effective control of the workforce.
Summary
• A classical–scientific approach to management, pioneered by Frederick Taylor,
studies a job in great detail to discover the best way to perform it.
• The classical–scientific approach led to the development of assembly line, mass-
production techniques.
• A classical–bureaucratic approach to management, pioneered by Max Weber and
Henri Fayol, advocated:
–– that a bureaucracy is the most efficient form of organisation
–– the main function of management is planning, organising and controlling.
• The main features of classical–scientific and classical–bureaucratic management
approaches include:
–– time and motion studies used to reduce inefficiencies
–– production line methods
–– hierarchical organisational structure (bureaucracy)
–– clear lines of authority (chain of command)
–– discipline as a feature of leadership
–– autocratic leadership style
–– rules and procedures.

Revision EXERCISE
7.1
1 Clarify why the practice of management is not considered a recent invention.
2 State how the Industrial Revolution acted as a catalyst for developing management
approaches.
3 Recall two challenges the Industrial Revolution posed for businesses.
4 Outline the impact the Industrial Revolution had on the development of management
approaches.
5 Define the term ‘classical approach’ to management.
6 Identify the two perspectives of the classical approach to management.
7 Summarise Taylor’s principles of scientific management.
8 State the main purpose of time and motion studies.
9 Demonstrate the link between Ford cars and McDonald’s hamburgers.
10 Identify the main bureaucratic features Max Weber believed needed to exist in a
business for it to operate efficiently.
11 Apply the correct definition to the terms underneath the grid.
1. The process of evaluating and modifying tasks to ensure that the set goals are
being achieved
2. The process of arranging the resources of the business to achieve the goals
3. The process of setting goals and deciding on the methods to achieve them
planning organising controlling
12 Compare and contrast Frederick Taylor’s ideas on how to improve productivity with
the ideas of Henri Fayol. You might like to present your information in the form of a
Venn diagram, as shown in figure 7.5.
FIGURE 7.5 A Venn diagram is used to compare and contrast information. Points of
difference are recorded in the outer parts of the circle and similarities are placed in the area
where the two circles intersect.
Extension
1 In small groups, create a list of advantages and disadvantages of a modern business
adopting a purely classical–scientific management approach. Share your research with
the class as either a written or oral presentation.
2 Examine how the classical approach to management helped Henry Ford build the Ford
Motor Company. Evaluate the criticisms that have been made of automated production
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line methods of manufacturing. Use the bio.true story weblink in your eBookPLUS to
access a biography of Henry Ford and the working conditions in the early Ford factories. bio.true story
3 Determine why supporters of the scientific management approach established

bureaucracies within their businesses.
4 ‘Classical management thinkers looked for the best way to do everything. Their
tools were time and motion study, and a scientific approach to studying work and
workflow.’ Discuss.

Management as planning
Planning is often referred to as the primary management function. It provides the
key to both the short-term and long-term success of a business. Effective planning
provides a vision and goals for a business, strategies to achieve the vision and
goals, and anticipation of future directions for change.
The ability of a manager to develop, implement and monitor plans will directly
BizWORD affect a business’s success.
Planning is the preparation of a Planning is the preparation of a predetermined course of action for a business.
predetermined course of action for a It involves showing how the business will achieve its stated mission and business
business. goals.
Levels of planning — strategic, tactical and

operational planning
Once the business goals have been determined, decisions have to be made about
how they will be achieved. This requires detailed plans for activities at all levels of
BizWORD the business. There are three different types of plans.
Strategic planning is planning for 1. Strategic (long-term) planning is planning for the following three to five
the following three to five years. years. This level of planning will assist in determining where in the market the
This level of planning will assist in business wants to be, and what the business wants to achieve in relation to its
determining where in the market the
business wants to be, and what the
competitors.
business wants to achieve in relation 2. Tactical (medium-term) planning is flexible, adaptable planning, usually
to its competitors. over one to two years, that assists in implementing the strategic plan. Tactical
Tactical planning is flexible, planning allows the business to respond quickly to changes. The emphasis is on
adaptable planning, usually over how the goals will be achieved through the allocation of resources.
one to two years, that assists in 3. Operational (short-term) planning provides specific details about the way in
implementing the strategic plan.
which the business will operate in the short term. Management controls the
Operational planning provides day-to-day operations that contribute to achieving short-term actions and goals.
specific details about the way in which
the business will operate in the short
Examples of operational plans are daily and weekly production schedules.
term.
FIGURE 7.6 It is often said that ‘failing

to plan is planning to fail’.

Management as organising
Organising is the next part of the process when management puts into practice the
goals that were determined in the planning stage. Organising is determining what BizWORD
is to be done, who is to do it and how it is to be done. It is organising the financial, Organising is the structuring of the
human and material resources to achieve the goals of the business. organisation to translate plans and
Management has to coordinate activities to translate plans into reality — that goals into action.
is, to ensure that the goals of the strategic, tactical and operational plans are The organisation process is the
achieved. range of activities that translate the
goals of a business into reality.
The organisation process

The organisation process is the range of activities that translate the goals of a
business into reality. These activities include the following three steps:
1. Determining the work activities. The work activities required to achieve
management objectives must be determined. Work activities are then usually
broken down into smaller steps.
2. Classifying and grouping activities. Once the work activities of a business BizFACT
have been broken down into smaller steps, similar activities can be grouped
The way that management views its
together. This improves efficiency by enabling the most appropriate alloca employees will determine the level
tion of resources. For example, it is common practice to group activities into of responsibility and authority given
departments or sections and allocate employees and supervisors to each section to individuals for the purpose of
or department. achieving business goals.
3. Assigning work and delegating authority. The next step in the organisation
process is to determine who is to carry out the work, and who has the
responsibility to ensure that the work is carried out. Delegation also involves
ensuring that the person who has been given responsibility does carry out the
processes.
Management as controlling BizWORD

Controlling is the process management goes through when it attempts to evaluate Controlling is the process of
performance and take corrective action to ensure that objectives are being achieved. evaluating performance and taking
Controlling compares what was intended to happen with what has actually corrective action to ensure that the set
objectives are being achieved.
occurred. If there is a discrepancy between performance and goals, changes and
The control process involves
improvements can be made.
establishing standards in line with the
goals of the business, measuring the
Control processes performance of the business against
those standards or benchmarks, and
There are three steps in the control process (see figure 7.7). making changes where necessary to
ensure that the goals of the business
have been met.
THE CONTROL PROCESS
1. Establish standards in 2. Measure performance 3. Take corrective action

line with the firm’s and determine how — changing activities,
goals and influences comparisons will be processes and personnel
from employees, made against standards to ensure that the goals
management, industry or benchmarks. of the business have
and government. been met.
FIGURE 7.7 The three steps in the control process

FIGURE 7.8 To ensure perfect
buns, Tip Top Bakery uses two control
methods: quality control (this involves
the use of inspections at various points
in the production process to check for
problems) and quality assurance (this
involves the use of a system to ensure
that set standards are achieved in
production).
Hierarchical organisational structure

The organisational structure of a business is the way in which its parts have been
organised, so that the business can achieve its objectives. An organisation’s structure
is usually represented diagrammatically in an organisational chart. The chart shows
BizWORD the key positions of responsibility and accountability, and lines of communication.
Management hierarchy is the Think of a business as a three-storey pyramid (figure 7.9). This type of
arrangement that provides increasing management structure is found in many businesses and is based on the traditional
authority at higher levels of the
managerial hierarchy. Management hierarchy is the arrangement that provides
hierarchy.
increasing authority at higher levels of the hierarchy. This means that senior
managers have greater accountability, responsibility and power compared to those
at lower levels of the pyramid. They can be visualised as a pyramid, as shown in
figure 7.9.
More
Vision statement
Top/ Board of directors
senior/ Chief executive officer (CEO)
executive Managing director (MD) Strategic (long-term)
management planning
Accountability team
Responsibility
Authority Department head Departmental/divisional
Divisional head objectives
Middle management team
Plant manager Tactical (medium-term)
Store manager planning
Team manager Sectional/sub-

Supervisor departmental planning
Frontline/supervisory management team Team leader
Frontline Operational (short-term)
manager planning
Less
FIGURE 7.9 A management hierarchy. The coordinated effort of all three levels of management is required to achieve the goals
of the business.

The primary characteristic of traditional hierarchical organisational structures has
been the grouping of people according to the specialised functions they perform (see
figure 7.10). These may include marketing, finance, human resources and operations.
Even within each of these functional areas, tasks are further subdivided into
specialised jobs. People within the operations division, for example, have specialised
tasks to perform, such as warehouse manager, clerks, packers, process employees and
storeperson. The same principle applies to sporting teams. For example, a hockey
team has members who specialise in certain positions, such as coach, captain, winger,
goalie or centre. The team is organised in this way to offer the best combination of
people’s talents to achieve productivity. In this case, the team is performing its best.
Characteristics of the pyramid-shaped organisational structure include:
BizWORD
• rigid lines of communication
Specialisation of labour refers to the
• numerous levels of management, from managing director to supervisors degree to which tasks are divided into
• clearly distinguishable organisational positions, roles and responsibilities separate jobs.
• hierarchical, linear flows of information and direction, with a large amount of A chain of command is a system that
information directed downwards determines responsibility, supervision
• specialisation of labour resulting in tasks being divided into separate jobs and accountability of members of the
• a chain of command that shows who is responsible to whom organisation.
• centralised control with all strategic decisions made by senior management.
BOARD OF DIRECTORS
General manager
Operations Marketing Financial Human resource

manager manager manager manager
QC Assembly Toolroom Warehouse Sales Senior Payroll

supervisor supervisor supervisor manager rep clerk supervisor
Process Sales Debtors Clerk

Clerks Storeperson Packers clerks clerks typists
employees
FIGURE 7.10 Typical pyramid-shaped, hierarchical organisational model
Summary
• Management functions include:
–– planning: a predetermined course of action. This involves strategic, tactical and
operational planning.
–– organising: a range of activities that translate goals into reality.
–– controlling: compares what was intended to happen with what has actually
occurred.
• Management hierarchy is the arrangement that provides increasing authority at
higher levels of the hierarchy.
• Senior managers have greater accountability, responsibility and power compared
to lower-level managers of the organisation.
• The traditional hierarchical organisational structure has people grouped
according to the specialised functions they perform.
Leadership styles
The important task faced by all managers is how best to achieve their business’s
goals. This task can be accomplished only by working with and through other

people, so managers must select a leadership style appropriate to the environment
BizWORD in which they operate.
A manager’s leadership style is A manager’s leadership style is essentially their way of doing things — their
essentially their way of doing things — behaviour and attitude. Leadership styles can be placed on a continuum (see
their behaviour and attitude. figure 7.11) with the autocratic manager at one end through to the participative/
democratic manager at the other.
An autocratic or authoritarian manager would be one who makes the decisions
and tells employees what tasks to do and how to do them. A participative or
democratic management style presents problems, asks for suggestions and works
together to make a decision. The assumption is that all types of leaders would
appear somewhere on that continuum.
Recent theories indicate that managers bring a range of styles to their leadership
position that may change according to the situation. Most managers typically have
a dominant style that they frequently adopt, and one or two ‘backup’ styles.
Autocratic or
Participative
authoritarian
or democratic
(high task/low process)
Management Management Management Management

makes makes presents presents
decision decision problem, problem
and tells staff. and invites asks for and staff and
questions. suggestions management
and makes work together
decision. to make decision.
FIGURE 7.11 One theory of leadership style — the continuum
The two main types of leadership approaches and their characteristics are shown
in table 7.1.
TABLE 7.1 Characteristics of the two main leadership styles
Autocratic or Participative or
Key feature authoritarian manager democratic manager
Decision making Makes all decisions and Consults with employees, asks for
informs employees suggestions then decides
Control Centralised — controls all Shares decision making with
activities employees
Staff participation Expects employees to follow High level of employee
orders empowerment
Communication Top–down Two-way
Motivation methods External — rewards (carrot) Internal — sense of fulfilment,
and sanctions (stick) satisfaction
Workplace example Military officer during Professional organisations —
wartime; time of crisis intellectual abilities of employees
are similar or complementary

Autocratic leadership style
Managers who adopt a strict classical–scientific approach usually display an BizWORD
autocratic leadership style. A manager using an autocratic leadership style
A manager using an autocratic
tends to make all the decisions, dictates work methods, limits worker knowledge leadership style tends to make all
about what needs to be done to the next step to be performed, frequently checks the decisions, dictates work methods,
limits worker knowledge about what
employee performance and sometimes gives punitive feedback. needs to be done to the next step
The autocratic manager generally provides clear directives by telling employees to be performed, frequently checks
what to do, without listening to or permitting any employee input. This style of employee performance and sometimes
manager controls the people in the business closely and motivates through threats gives feedback that is punitive.
and disciplinary action. Autocratic managers expect compliance and obedience,
they are controlling, and they give more negative and personalised feedback.
FIGURE 7.12 Gordon Ramsay displays

many of the characteristics of an
autocratic manager. He is tough and
communicates exactly what he expects
from staff.
The autocratic style of leading can be effective in a time of crisis when immediate
compliance with rules or procedure is needed, or in meeting an unexpected
deadline when speed is important. An army officer, for example, would adopt this
management style during military exercises. This approach is also effective when
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individuals lack skills and knowledge. A McDonald’s crew trainer, for example,
Use the Autocratic
may adopt this style when supervising new employees. It is generally accepted, leadership weblink in your
however, that this style does not encourage the best performance from employees. eBookPLUS to learn more
The main advantages of the autocratic leadership style include the following. about autocratic leadership
styles and examples.
• Directions and procedures are clearly defined and there is less chance of
uncertainty.
• Employees’ roles and expectations are set out plainly, so management can
monitor their performance.
• A hierarchical structure provides a stable and consistent environment in which
the outcomes almost always match management objectives.
• Control is centralised at top-level management, so time is used efficiently and
problems are dealt with quickly because there is no discussion or consultation.

The main disadvantages include the following.
• No employee input allowed, so ideas are not encouraged or shared. This means
employees do not get the chance to develop their skills or to feel valued in the
organisation.
• It ignores the importance of employee morale and motivation. When no
responsibility is given to lower level staff, job satisfaction decreases, which
ultimately affects issues such as absenteeism and staff turnover.
• Conflict, or potential for conflict, increases. Often workers are competing for the
approval of managers, which can lead to tension between employees.
• An ‘us and them’ mentality may develop in the workplace as a result of the lack
of employee input.
Summary
• The two main types of leadership style are:
–– autocratic or authoritarian — strong, centralised control
–– participative or democratic — authority and power are decentralised.
• A manager using an autocratic leadership style tends to make all the decisions
and frequently checks employee performance.
• Managers should bring a range of leadership styles to their positions that can
change according to the situation.
• Most managers typically have a dominant style.
EXERCISE Revision
7.2
1 Define the term ‘planning’.
2 Explain why planning is considered to be the primary management function.
3 Complete the following table by identifying whether the planning activities are
strategic, tactical or operational. The first one has been completed for you.
Planning activity Type of planning

1. An organisation plans to build a new warehouse. Tactical
2. A supervisor wants to have regular weekly production
meetings.
3. A marketing department is to relocate to a new site in
another city.
4. A government department decides to undertake planning to
fully privatise during the next four years.
5. A stocktake needs to be completed tomorrow.
6. A team leader decides to monitor the team’s performance over
a two-month period.
7. A new computer system is to be installed.
8. A large-scale business operating in five countries decides to
undertake an extensive restructure of its entire organisation.
9. A department sales manager requires the sales team to
increase sales by 10 per cent over the next six months.
10. An engineering business wants to develop new production
facilities in three countries.
4 Explain why the organising function is important to a business.

5 Summarise the three steps involved in the organisation process.
6 Define the term ‘controlling’.

7 Examine figure 7.7 on page 171. Identify the correct terms to complete the following
steps in the control process.
Step 1 Establish s_ _ _ _ _ _ _ _
Step 2 Measure p _ _ _ _ _ _ _ _ _ _
Step 3 Take corrective a _ _ _ _ _
8 Discuss why the controlling function is important.

9 Define the term ‘management hierarchy’.
10 Identify the three main levels of management.
11 (a) Construct an organisational chart of your school.
(b) Classify, by highlighting in a different colour, the senior, middle and frontline
management divisions.
(c) Deduce why the school’s organisational chart is hierarchical.
12 Contrast an autocratic leadership style with a participative one.
13 Identify the leadership style of each of the following managers.
(a) The manager sets high standards of performance and has little sympathy for those
who do not meet the standards.
(b) The manager takes care to explain why something must be done in a certain way.
(c) The manager expects his or her orders to be unquestionably followed.
(d) The manager believes that developing close personal relationships with staff is the
mark of a good manager.
(e) The manager persuades the employees to do their best.
14 Describe a situation when an autocratic management style would be appropriate.
15 Justify whether you believe the advantages of the autocratic leadership style
outweigh the disadvantages.
Extension
1 ‘The three levels of planning — strategic, tactical and operational — correspond to
the three levels of management — top, middle and frontline.’ Explain the relationship
between the level of planning and the level of management.
2 Account for the relationship between an organisational chart and an organisation’s
chain of command. If you were new to a business, explain how an organisational
chart would help you become oriented.
3 ‘Managers who adopt a strict autocratic management style normally organise their
business along traditional hierarchical lines.’ Evaluate.
4 Determine how autocratic managers motivate their staff to get things done. Assess
whether their style is successful.
5 Ask your teacher for permission to complete the following activity in class time. The
aim of this activity is to put your theoretical understanding of Business Studies into
practical use as you solve problems, plan and make management decisions.
Materials required: paper, tape measure, markers (such as flags or witches hats)
Paper plane business — instructions

You are about to embark on your latest venture . . . running a rather large paper plane
business. Your team’s task is to construct the ultimate paper plane.
1 Arrange your class into groups of three or four. Each of these teams will become a
business. Organise for some of the students in the class to be observers.
2 Your business has 30 minutes in which to produce the paper plane that travels the
longest distance (you could also have a competition for the best looking plane or
most innovative design).
3 As a team, determine what the goals for your business will be. Write down an action
plan for your business (your strategies). List the key performance indicators (KPIs) that
will show whether or not you have met your goals.

4 Establish your management structure (who is going to complete the various activities
that need to occur for your business to achieve its objectives). Your teacher will
explain the responsibility of each position. You would definitely need a managing
director. Make sure each team member’s task is clear. Each team member should
probably take responsibility for a particular goal.
5 Discuss a design for your plane and then produce it, making sure that you do your
very best to meet all of your goals.
6 Find a safe place to test your planes. Use the tape measure to determine distance.
Make sure you record these measurements.
7 The winner will be the group whose paper plane travelled furthest. Alternatively,
the winner could also be the team with the best looking plane, the most innovative
design etc.
8 The observers should next report to the class. What did they see happening as
groups were planning, organising and controlling? Did any leaders emerge during
the activity?
9 After finishing the paper plane activity, list your group’s goals. Assess how well you
planned to achieve these goals. Identify the KPIs you planned to use to measure
whether or not you met the goals.
10 Outline the role that you played in your business. For example, if you were the
production manager, outline how you were involved in planning, organising and
controlling your business.
11 Using the information from the observers, discuss whether anyone emerged as a
leader in your group.
12 Evaluate how your group performed in terms of meeting its KPIs.
13 After finishing the paper plane activity, complete the following table to
summarise the role of each member of your business. The first entry has
been started for you.
Manager Planning Organising Controlling
CEO Determined Delegated responsibilities Compared planned

BizWORD objectives for group to members of group performance with actual
The behavioural approach to performance
management stresses that people
(employees) should be the main focus GM
of the way in which the business is
organised.
14 Benchmark your performance against other groups in your class (that is, compare the
results to the other results). Recommend how you could improve.
7.3 Behavioural approach
to management
Scientific management principles did not always lead to increased productivity due
to the repetitive and boring nature of many jobs and the dehumanising structure
of the workplace. Approximately 50 years after the emergence of scientific man
agement ideas, behavioural, or ‘human relations’, approaches surfaced. The
behavioural school recognised that to make substantial productivity gains, worker
participation in the production process was required. It acknowledged the workers’
contribution to output.
Advocates of the behavioural approach to management stress that people
(employees) should be the main focus of the way the business is organised. They
believe that successful management depends largely on the manager’s ability to
understand and work with people who have a variety of diverse backgrounds,

hopes, desires and expectations. The development of this humanistic approach has
greatly influenced management theory and practice.
One major contributor to behavioural management theories was Elton Mayo
(1880–1949). Mayo (see figure 7.13), is considered the founder of industrial
psychology. Through his revolutionary experiments, conducted at the Western
Electric Hawthorne Company in Chicago, he discovered what became known as
the ‘Hawthorne effect’, which demonstrates that meeting people’s social needs has
a significant impact on productivity (see the following Snapshot). Two significant
results from the research were that:
• worker satisfaction to a large extent is non-economic; that is, workers have
social needs in addition to economic needs FIGURE 7.13 Harvard professor Elton
• being made to feel part of a team increases job satisfaction and output. Mayo (1880–1949), founder of the
behavioural approach to management
Elton Mayo — the Hawthorne studies

(1927–1932)
The Western Electric Company’s Hawthorne factory manufactured a range of
SNAPSHOT
electrical components such as relay assemblies. Mayo wanted to find out what
effect fatigue and monotony had on employee productivity. He selected six
female employees from the assembly line, segregated them from the rest of
the factory and placed them under the control of a supportive supervisor. The
team was involved in assembling telephone relays. Mayo made frequent changes
to their working conditions, always discussing and explaining the changes in
advance.
To his amazement, Mayo realised that productivity had increased completely
independent of any of the changes he made. The six individual employees had
become a team and together eagerly participated in the experiment. They were
happy knowing that they were working without coercion from senior managers or
limitations from the workplace structure. They felt they were working under less
pressure, not being pushed or bossed around by anyone. Under these conditions,
they developed an increased sense of responsibility, with discipline coming from
within the team.
Mayo’s findings were at odds with F W Taylor’s theory, which stated that
workers are only motivated by self-interest. If Taylor was correct, the women’s ❛ . . . workplaces are
productivity should have decreased when Mayo returned them to longer
working hours. However, Mayo realised that the women had formed a social environments
harmonious team and felt happier at work, which raised their self-esteem. The
women talked, joked and began to meet socially outside of work. Mayo had
and employees are
discovered an elementary concept that seems obvious today: workplaces are often motivated by
social environments and employees are often motivated by much more than
self-interest. much more than
The section of the Hawthorne studies that examined the beneficial effects of self-interest. ❜
positive and supportive supervision, and the impact of teamwork became known as
the Hawthorne effect.
Snapshot questions
1. According to Elton Mayo’s research, explain why productivity increased even
after the original working conditions were reintroduced.
2. Outline what is meant by the Hawthorne effect. Weblink
3. Imagine you are a manager for a small business. Discuss what impact Mayo’s Use the Hawthorne studies
research would have on: weblink in your eBookPLUS
(a) how you organise your workplace to discover more about the
(b) the management practices you would use. history of these studies.

Many large businesses recognise the importance of being socially responsible, not
just to their external customers but to their internal customers — their employees.
It is in the business’s best interests to provide for and look after their employees.
Some businesses do this by providing extra facilities for their workers such as good
canteen facilities, child-minding facilities, access to counselling and so on. Others
provide flexible working conditions.
FIGURE 7.14 It is in the business’s best

interests to provide for and look after
their employees, such as by providing
access to exercise equipment.
A different value system emerged from the contributions of the behavioural

theorists. Managers were now required to meet the social needs of their employees
in addition to production efficiency. Skills in communication, social motivation
and democratic leadership were quickly acquired.
Summary
• The behavioural approach to management, pioneered by Elton Mayo, stresses
that people (employees) should be the main focus of the way in which the
business is organised.
• The main features of behavioural management approach include:
–– humanistic approach: employees are the most important resource
–– economic and social needs of employees should be satisfied
–– employee participation in decision making
–– team-based structure
–– managers need good interpersonal skills
–– democratic leadership style emerging.
BizWORD
Leading is the process of influencing
Management as leading
or motivating people to work towards Leading occurs when managers endeavour to influence or motivate people in the
the achievement of the business’s business to work to achieve the business’s objectives. The type of leadership in
objectives. a business depends on the attitudes and assumptions that managers have about
people in the business.

To act as a leader, a manager should display empathy and possess good BizFACT
listening skills. A leader will have high expectations of employees’ abilities ‘You don’t manage people, you
to initiate and implement ideas. He or she will concentrate on the needs of manage things. You lead people.’
their employees, building high-performance teams that attain their objectives. Grace Hopper, Admiral, United States Navy.
Less effective managers tend to focus on tasks and are more concerned with
meeting deadlines — that is, they display the natural characteristics of a
manager, not a leader. A leader, however, wants to empower (see the following
Snapshot).
Management — control or empowerment?

Managers generally think in terms of controlling the elements of an organisation’s
culture, strategy and all the other variables that fall within their domain. To control,
they assume, is to maximise. When it comes to people, the manager assumes that
people also need to be controlled. Control, managers feel, will help people attain
the cooperation that the organisation requires. In the manager’s mind, if you can’t
SNAPSHOT
control it, you can’t manage it.
Leaders, in sharp contrast, would rather empower organisations and people. To
their way of thinking, empowerment can unleash the energy necessary to take the ❛ If you can’t
organisation beyond its current position. Only by giving people the freedom and
resources to act can you expect them to go above and beyond the call of duty.
empower, you
Leaders empower people, systems, structures, strategies, and other variables by can’t lead. ❜
opening the way for their expansion, enhancement and evolution. The leader’s soul
says, ‘If you can’t empower, you can’t lead’.
Source: C R Hickman 1992, Mind of a manager, soul of a leader, John Wiley & Sons, New York, p.127.
Snapshot questions BizFACT

1. According to Hickman, identify one of the main differences between a One contemporary, and somewhat
manager and a leader. controversial, viewpoint on the much-
2. Propose reasons why a manager would want to ‘control’, whereas a leader debated topic of effective leadership
wishes to ‘empower’. Share your answer with the rest of the class. is that of Robert K. Greenleaf. In
the Reflections on leadership and
Insights on leadership series, he
argues that a truly effective leader is
Added to these qualities, a successful leader is someone who: a manager who serves. He outlines
• keeps an open mind, seeks out new ideas and freely shares information a practical philosophy of ‘servant
• shows confidence in people, shares credit and recognition leadership’, which holds that people
who choose to first serve, and then
• builds and communicates a clear vision
to lead, make the most effective
• sets an example and earns the respect of employees leaders, because they expand services
• delegates tasks to suitable employees to others. Servant-leaders encourage
• conveys the goals of the business to workers and motivates them cooperation, trust, listening, foresight
• demonstrates flexibility in dealing with situations and ethical use of power.
• understands the technical aspects of the industry or business.
Being an effective leader is not an easy task. There may be temporary setbacks,
particularly during periods of negotiation. In the end, leadership may still fail.
However, not displaying leadership is inviting a greater possibility of failure.
Numerous books have been written about what makes a good leader. Some
people believe that good leaders are ‘born’ rather than ‘made’. They argue that BizWORD
the characteristics needed to be a good leader are part of an individual’s unique Delegation is the handing over of
personality and cannot be learnt from textbooks. Other people, however, argue certain tasks or responsibilities to an
that with appropriate training and coaching, the skills of leadership can be learned. employee who is suitably capable and
Whichever the case, managers who display ‘daring leadership’ are best able to qualified to carry them out.
inspire their employees.

BizFACT
Management is:
• coping with complexity
• planning and budgeting
FIGURE 7.15 Catriona Noble, Managing Director/CEO of McDonald’s Australia, and Dick Smith,
• organising and controlling.
founder of Dick Smith Electronics and Dick Smith Foods, are both leaders. They set an example,
Leadership is: earn the respect of employees, and clearly communicate a vision in order to achieve objectives.
• coping with change
• determining direction
• motivating people. Management as motivating
As explained in chapter 6, motivation is the individual, internal process that
energises, directs and sustains an individual’s behaviour. It is the personal force that
causes a person to behave in a particular way.
Some people work harder than others. An employee with outstanding abilities
may constantly be outperformed by someone with average skills. The difference
between the two employees is their level of motivation. Motivated workers will
BizFACT always perform at a higher level than unmotivated workers. To some extent, a high
‘Sometimes the most effective level of employee motivation is determined by management practices. Efficient
motivation is just to say “thank you”.’ managers need to put in place work practices that motivate their employees; they
Zig Ziglar, motivator and trainer must be aware of the human factor involved in the business organisation.
Elton Mayo’s Hawthorne studies (see page 179) highlighted the importance of
the human factor in employee performance. Merely asking employees to participate
in the research gave them a sense of involvement in their jobs. These employees —
perhaps for the first time — felt as though they were of value and importance to
the business. It was this sense of importance that acted as the motivating force that
improved employee productivity.
BizFACT
With a shortage of skilled staff
looming in Australia, organisations will
need to work harder to motivate and
retain staff to reduce termination rates
or ‘employee churn’.
FIGURE 7.16 Leadership recognition is

fundamental to increasing staff morale
and motivation. Recognition might just
be a pat on the back for a job well done.
Some businesses, however, have formal
recognition programs so that employees
who perform well are rewarded and
encouraged to continue the good work.

The Hawthorne studies revealed that such human factors as recognition, self-
worth and positive reinforcement are at least as important to motivation as external
factors such as pay rates and working conditions. In some cases they may be more
important. From this initial research came a flood of other behavioural management
approaches focusing on the area of motivation. Overwhelm ingly, the research
highlights the fact that management would do best to provide a work environment
that maximises employee satisfaction. Good managers, therefore, should also be
good motiva tors, encouraging employees and using positive reinforcement to
influence behaviour.
How then does a manager go about the task of motivating the business’s BizFACT
employees? This question is often asked and has resulted in a wide variety of ‘If employees feel a real attachment
to the business; it is part of their
answers. Numerous studies have identified such diverse factors as trust, respect lives, then they will be much more
for the individual, positive reinforcement, empowerment, enhancing self-esteem, motivated.’
employee participation, rewarding team performance, employee encouragement and Adam Bartlett, Strategic Facilities Manager.
so on. Managers can use a variety of techniques to improve employee motivation.
However, what the majority of these motivation techniques have in common is the
need to develop a workplace culture that fosters employee participation.
Management as communicating
As outlined in chapter 5, one of the most difficult challenges for managers is
getting employees to understand and want to achieve the business’s goals. Effective
communication is at the heart of meeting this challenge.
Communication is one of the easiest and, at the same time, most difficult of
management activities. This is because of the complex nature of communication.
Unless managers are effective communicators and able to share their thoughts and
plans, they will find it difficult to influence others.
FIGURE 7.17 Poor communication

often leads to conflict in the workplace.
Effective communication is a crucial part of every manager’s job. It encompasses

every management function and role. Without effective communication, the most
carefully detailed plans and brilliant strategies will most probably fail. Many studies
have shown that the performance of both individuals and businesses improves
when managerial communication is effective. This is especially so when open
communication is used to motivate employees by providing them with information

regarding the business’s goals, plans and overall financial results. Whenever a
manager operates on the c ommunication principle of ‘tell the employees only what
they need to know and nothing else’, then the workers will not be motivated to
achieve common goals because they do not know what the goals are.
Summary
• According to the behavioural management approach, the main management
functions are:
–– leading: having a vision of where the business should be in the long and short
term
–– motivating: energising and encouraging employees to achieve the business’s
goals
–– communicating: exchanging information between people; the sending and
receiving of messages.
EXERCISE Revision
7.3
1 Define the term ‘behavioural approach’ to management.
2 According to the behavioural management approach, identify what was required to
improve worker productivity.
3 Recall the two significant results of Elton Mayo’s Hawthorne studies.
4 Identify five characteristics a manager should display in order to be a leader.
5 Calculate whether the following statements are true or false.
True False
(a) Leading and managing are much the same thing. ____ ____
(b) Good leaders are important for businesses. ____ ____
(c) To be a good leader, you must be authoritarian. ____ ____
(d) Before you lead you must learn to follow. ____ ____
(e) Leaders should have only one concern: the task. ____ ____
(f) To be an effective leader you must be a skilled communicator. ____ ____
(g) A person’s leadership style should be fixed and unchangeable. ____ ____
(h) Leadership skills can be learned. ____ ____
6 Recall the meaning of the term ‘motivation’.
7 State what the Hawthorne studies revealed about employee motivation.
8 Identify four factors a manager can use to motivate the business’s employees.
9 When talking about motivation, the carrot (reward) and stick (punishment) approach
is sometimes mentioned. Explain why giving someone a reward or punishment might
motivate them to act.
10 ‘For a business to succeed, effective communication is vital.’ Discuss.
11 Draw a table similar to the one following to summarise details of management skills
in this section. The first one has been completed for you.
Application
Skill Definition Characteristics to the workplace
Communicating The ability Communication can Managers use it to explain

to transfer be verbal (emails, a vision, to instigate
information meetings and face- change, to answer
to-face conversations) questions and to listen.
and non-verbal (body
language, visual).
Leading
Motivating

Extension
1 Determine why employees would favour the behavioural approach to management
over the classical–scientific approach.
2 Propose why the development of behavioural management approaches would be
called a significant turning point in the evolution of management approaches.
3 ‘Leaders know the best course of action, whereas managers know only the best way
to follow it.’ Evaluate this statement.
Teams BizWORD
A not-so-quiet revolution is rapidly transforming workplace cultures, practices, Teamwork involves people who
operations and productivity levels. Many businesses are starting to realise that a interact regularly and coordinate their
team approach can be the catalyst for superior performance. Teamwork involves work towards a common goal.
people who interact regularly and coordinate their work towards a common goal.
FIGURE 7.18 When teams work well,

staff turnover and absenteeism decline,
change is more readily accommodated,
and productivity tends to rise.
Understanding how such teams function — that is, understanding the group
dynamics of teams and teamwork, is vital for managers operating in the modern
workplace. It is essential that managers foster a sense of cohesion between team
members, otherwise the team is no more than a group of individuals all working
separately. Such teams have no common purpose and therefore lack any sense
of belonging to the organisation. In such cases, it is quite common for conflict
to develop between team members. Ultimately, the team’s effectiveness will be
diminished.
These self-directed work teams alter some of the traditional roles of management.
One obvious change is that managers have to work more closely with people
over whom they have no apparent authority. They are required to adopt a team
approach, negotiating consensus decisions rather than imposing demands.
Another significant impact of a team approach is the breaking down of the
traditional pyramid-shaped hierarchical organisational structure. Hierarchical
boundaries are disappearing as people and functions mix together to create much

flatter organisational structures. Firms that adopt a flatter management structure
reduce the number of levels of management, giving greater responsibility to
individuals in the business (see figure 7.19).
BizWORD
Flatter organisational structures
have evolved due to a ‘de-layering’ MANAGER
of management structures resulting
in the elimination of one or more
management levels.
Employees or work teams
FIGURE 7.19 Flatter management structure — a typical organisation chart. The span of
control is wider and management has more direct contact with employees.
The role of managers is therefore changing from controller to facilitator.

Without being able to impose their authority, managers have to achieve their
aims by balancing the needs of the team with those of the business. This can
be accomplished by the manager attempting to understand the views of others,
handling disagreements honestly and directly, and persuading others to adopt new
BizFACT ideas. Above all else, the manager must build a sense of trust, teamwork’s key
Now that teams are becoming ingredient, and develop a common goal (see the following Snapshot). To achieve
the basic building block of many this, it requires a move away from an autocratic leadership style to one that is more
businesses, effective teamwork has
the potential to empower employees
participative or democratic.
and transform managers.
FIGURE 7.20 To give purpose and

direction to employees, managers
require a good understanding of
team/group dynamics.
Teams — finding a common goal

In 1972 a group of rugby players, their friends and families left on a flight for Chile
from Uruguay. The plane crashed into the snow-covered mountainside, killing 13 of
the 45 passengers onboard the aircraft. The outside world thought that all 45 people
SNAPSHOT onboard had disappeared.

Without any provisions, some of those left alive resorted to devouring the dead.
Those who refused to eat the human flesh died of starvation. After 70 days in the
mountains, 16 survivors were rescued and taken home. In the most gruesome
manner, a group of people banded together as a team with a singular goal of
survival.

What makes for a team when there is no sense of threat? Teams will form around
a common goal that provides them individually and collectively, a challenge that they
take responsibility for and that can give them increased self esteem. For example,
assume your goal is to increase repeat business from 10 per cent of turnover to
15 per cent of turnover in six months, as you know the selling cost to repeat
customers is one tenth the selling cost to new customers and the margin on repeat
customers is 25 per cent higher as they require fewer discounts. To have a higher
probability of success, this clear and simple goal needs to connect with all staff so
that they are motivated to achieve it.
The goals should tell a story of:
• the increased customer satisfaction that drives increased repeat sales
• the easier selling process with repeat customers
• the reduced need to deal with customer complaints, the increased security of ❛ Without any
employment, the increased ability for the organisation to grow and employ more
people, the increased opportunities for promotion and more responsibility in a provisions, some
growing organisation
• the increased ability of the organisation to contribute to the local community and
of those left alive
indirectly help the families who have people working in the company. resorted to devouring
Explained this way, each single contribution to delivering the goal is seen as doing
much more than reaching a corporate goal. Contributing as a team has a multiplier the dead. ❜
effect. The whole becomes clearly more than the sum of the parts.
Source: Key www.changefactory.com.au
Snapshot questions
1. Recall what causes teams to form.
2. Identify the common goal of the 1972 group of rugby players.
3. Explain why it is important to clearly communicate to employees the goals
the business wants to achieve.
4. ‘Contributing as a team has a multiplier effect. The whole becomes clearly
more than the sums of the parts.’ Evaluate the accuracy of this statement.
Summary
• Teamwork involves people who interact regularly and coordinate their work
towards a common goal.
• Well functioning teams can produce superior performance.
• Managers require a good understanding of team/group dynamics.
• The development of work teams has resulted in flatter organisational structures.
• The role of managers is changing from controller to facilitator.
• Businesses are adopting flatter management structures which results in:
–– ‘de-layering’ of traditional hierarchical structure
–– establishment of market-focused work teams
–– each work team responsible for a wide range of production functions.
• Reducing the levels of management gives greater responsibility to individuals in
the business.
Participative or democratic leadership style

A manager who implemented a classical–scientific approach would normally adopt
BizWORD
A participative or democratic
an autocratic leadership style; a manager who practised a behavioural approach
leadership style is one in which the
would tend to use a more participative or democratic leadership style (refer to manager consults with employees
figure 7.11 on page 174). to ask their suggestions and then
A participative or democratic leader is one who asks employees for their seriously considers those suggestions
suggestions and then seriously considers those suggestions when making decisions. when making decisions.
In this sense they share their decision-making authority with their subordinates.

The degree of sharing can range from the manager outlining a solution, with the
possibility of changes being suggested, to allowing the team to participate in the
initial decision making.
Sometimes referred to as the ‘we’ approach, participative or democratic managers
recognise the strengths and abilities of employees and actively involve them in the
Weblink decision-making process. This style is frequently practised in those businesses that
Use the Democratic have flatter management structures and work teams, and is especially effective in
leadership weblink in your
situations where there are diverse groups to be coordinated. The contribution of
eBookPLUS to learn more
about democratic leadership employees is valued, and employees assist in the decision-making process through
styles and examples. regular meetings. Employees have a commitment to the business’s goals because
of their own input into the firm. This style of leadership is most effective when
a business is operating in an environment undergoing rapid change. Individual
employees accept responsibility and can implement changes themselves, making
the business more responsive to change. Through activities such as brainstorming,
a diverse range of opinions and ideas can be generated resulting in improved
decision making.
FIGURE 7.21 The participative or

democratic management style: ‘I believe
the people have something valuable to
contribute’.
The main advantages of the participative or democratic management style

include the following:
• Communication is a two-way process.
• Employer/employee relations are positive and there is reduced likelihood of
industrial disputes because employees are more likely to accept management
decisions.
• Motivation and job satisfaction are optimal as employees feel they have played
an active role in allocating tasks and implementing actions to meet objectives.
• Employees have a greater opportunity to acquire more skills.
• Power sharing encourages the development of work teams, and employees
display high levels of commitment.
• There is a high level of trust, often resulting in improved employee performance.

The main disadvantages include the following:
• Reaching decisions and introducing tasks can be time consuming with differing
views having to be considered. The quality of decisions may also suffer because
compromises are made rather than decisive, clear directions given.
• The role of management, and the control of the manager, may be weakened and
undermined, with employees given too much power in some cases.
• Internal conflict can arise with so many views and opinions being shared. More
involvement may actually bring about disagreement.
• The importance of the organisational structure may be minimised, leading to an
informal system that could result in a complete collapse in management.
• Not all employees want to contribute.
There is no simple answer to the question: ‘What leadership style does a
good manager possess?’ Management is an art, not a science. This means that no
simple management formula can be applied to deal effectively with all workplace
situations.
Richard Branson — leadership style

Richard Branson, the founder of the Virgin Group, is widely respected as an excellent
communicator. He is not always the most fluent of speakers, and will avoid public
speaking if he has to. He constantly says ‘um’ and ‘you know’ when interviewed.
When he speaks, however, he is passionate and enthusiastic. You may have seen him
in the media, launching new Virgin businesses.
SNAPSHOT
Branson is committed to his staff and has endeavoured to create an
atmosphere that is fun and open to suggestions, gripes and innovation. He
encourages staff input and prefers them to work in teams to produce the
best ideas. Virgin does not have many layers of management and Branson
considers that all of the companies that make up Virgin are part of a family,
not a hierarchy (a structure where everyone in the business reports to someone
above them). He actively listens to staff and customers, carrying a notebook with
him everywhere and writing down what he sees and hears, and then following
it up. ‘When things start going wrong, it’s often because staff members feel
they are being ignored and good ideas are not bubbling to the top,’ Branson
says. Branson prefers to talk with people directly, and tries to keep email and
phone calls brief and to the point. He maintains a blog on the Virgin website
and responds online to questions from people. He shares Virgin’s future plans
with his staff in monthly newsletters. According to Branson, ‘the best-designed
business plan will come to nothing if it is not carried out by an enthusiastic and
❛ He actively
passionate staff.’ listens to staff and
Snapshot questions
customers . . . ❜
1. Demonstrate how Richard Branson adopts a behavioural approach to
management.
2. Predict the impact his management style would have on his employees.
Summary
• A manager who adopts a behavioural approach will tend to use a participative or
democratic leadership style.
• Participative or democratic leaders share their decision-making authority with
their subordinates.
• This style of leadership is most effective when a business is operating in an
environment undergoing rapid change.

7.4 Contingency approach to
management
While the classical and behavioural manage ment approaches continue to
provide important lessons for managers, other ideas have also emerged during
the last couple of decades (see figure 7.22). These contemporary management
approaches represent major innovations in ways of thinking about management
BizWORD and appropriate management practices. One of the most important contemporary
Contingency approach stresses the viewpoints is the contingency approach to management. It stresses the need for
need for flexibility and adaptation of flexibility and the adaptation of management practices and ideas to suit changing
management practices and ideas to
circumstances.
suit changing circumstances.
Political
Contingency
Systems
Behavioural
Classical–scientific/bureaucratic
1780 1900 1920 1940 1970 1980 2000
FIGURE 7.22 Timeline of management thought
Adapting to changing circumstances

Contingency theorists point out to managers that no two situations are absolutely
identical. Each situation, therefore, requires its own unique solution. For example,
you may have used a particular strategy to complete a task for assessment.
Although this strategy may have been quite successful for that particular task,
another assessable task may well require a completely different approach.
Contingency theorists stress that the traditional classical approach to management
was not necessarily wrong, but is no longer adequate for our needs today. They also
urge managers to borrow and blend from a wide range of management approaches
and practices.
Above all, advocates of the contingency approach believe that managers need
to be adaptable and flexible in their technique to solving problems. Because
management is a discipline that is continually evolving, it frequently produces
new ideas and theories, each with some relevance to practitioners.
The contingency approach, therefore, advocates that managers extract the most
useful ideas and practices from a wide range to best suit their business’s present
requirements. It stresses that an appropriate management response to one set of
circumstances may be quite inappropriate to another. To adopt this approach,
managers must sample all the past and present ideas on offer; some refer to this as
the ‘smorgasbord’ approach.

FIGURE 7.23 An appropriate
management theory should be
selected to suit the situation.
Managers need to be adaptable
and flexible.
A manager adopting this approach will obviously need to apply the

‘10 commandments for the modern manager’ (see figure 7.24).
THE 10 COMMANDMENTS
6. Cultivate the ability to adapt to
FOR THE MODERN MANAGER changing circumstances.
1. Share your vision with all relevant 7. Learn how to access and use
stakeholders. appropriate information and
2. Manage the relationships and manage this knowledge effectively.
the coalitions, not the employees. 8. Be aware of how developments
3. Manage your own emotions in technology can improve your
and help others in the business effectiveness and efficiency.
to maintain an emotional balance. 9. Recognise and use the experiences
4. Learn to thrive on diversity and expertise of all employees.
not conformity. 10. Encourage ethical behaviour in
5. Lead, rather than simply managing, order to promote pride and
by inspiring trust and motivation. commitment in employees.
FIGURE 7.24 The 10 commandments for the modern manager
Summary
• The contingency management approach stresses the need for flexibility and
adaptation of management practices and ideas to suit a particular situation.
• Due to the unstable business environment, managers need to be flexible and
borrow and blend from a wide range of management approaches.

7.5 Comparing management
approaches
Many managers may not have studied management in any formal way. However,
most of them will have a management approach that reflects one of the management
theories and management styles summarised in table 7.2 below.
TABLE 7.2 Summary and comparison of management approaches
Management Organisation and

theory allocation of tasks to staff Organisational structure Levels of management Management styles
Classical • Based on ‘scientific’ • Hierarchical pyramid • Many management and • Autocratic

approach analysis of work processes structure reflecting supervisory levels with
• Highly programmed strata in church, army clearly distinguishable and
staff performing simple, and school segmented organisational
repetitive tasks — single • Hierarchical, linear positions, responsibilities and
skilling, task specialisation flow of information, roles
• Time and motion with a large amount of • Course of action decided by
studies used to reduce communication directed management with little or no
inefficiencies downwards consultation with workforce
• Division of labour into • Strict channels of • Bureaucratic management
function-related units, responsibility from the of authority believed to be
employees strictly top down and grouping the most effective means of
controlled with tasks into specialised activities controlling the workforce and
rigidly divided based on function, ensuring that instructions are
• Prescribed limits on product or process followed
individual discretion with considerable • Workers believed to be
• Appraisal, reward and management and prone to laziness and self-
sanction of individuals supervisory control at interest, so tight control
based on achievement of each level and external motivation
production standards necessary to achieve required
organisational goals and
objectives
Behavioural • Recognition that workers • Hierarchical pyramid • Many management and • More participative
approach have social needs in structure supervisory levels or democratic
addition to economic • More consultation • Development of people aspects emerging
needs with workforce but still management skills,
• Teamwork and informal not full participative particularly communication
work groups important partnership and social motivation skills
for productivity
Contingency • Flexibility and adaptation • May be pyramid, • Depends on the business’s • Depends on the
approach of a variety of ideas and flat or decentralised requirements; that is, the requirements of
principles from a range organisational structure, nature of the operation and the business
of theories mean that depending on the abilities of employees
a range of options may business’s requirements
be pursued to suit the
business’s requirements
EXERCISE Revision
7.4
1 State why work teams are becoming more common in today’s businesses.
2 State what impact the development of work teams has on a business’s organisational
structure.
3 Draw a hierarchical and a flat organisational structure. Contrast the two diagrams by
listing their differences.

4 Outline in what ways self-directed work teams alter some of the traditional functions
of management.
5 You have been appointed team leader of a new work group. Describe some of the
strategies you could use to develop a sense of cohesion within the group.
6 Outline the main characteristics of the participative or democratic leadership style.
7 Describe a situation where the participative or democratic leadership style would be
appropriate.
Digital doc
8 Identify what you consider to be the most important (i) advantage and
(ii) disadvantage of the participative/democratic management style. Justify
document in your
your answer. eBookPLUS to compile your
9 Deduce the important lessons the contingency approach teaches managers. own notes for this chapter.
Extension
1 Reflect upon what you have learned from this chapter. Determine which leadership
style you would prefer to adopt if you were a senior manager. Determine what style
of leadership would best suit you as an employee. Present your answers as an oral
report to the class.
2 ‘At TechVision Limited we do not rely on lists of rules and management authority. We
believe our employees understand the link between productivity and profit, and act
on it.’ Nadall Behling, Managing Director.
(a) Identify what evidence there is that Nadall Behling adopts a participative or Digital doc
democratic leadership style. Test your knowledge of key
(b) Predict the likely outcome if either your sports coach or your school principal terms by completing the
adopted this leadership style. Chapter crossword in your
3 Discuss the meaning of ‘organisation’ within the management process. eBookPLUS.
Construct a typical organisational structure based on the classical management Searchlight: DOC-1207
approach. Construct another organisational structure, this time based on the
behavioural approach. Determine the strengths and weaknesses of the two
approaches.
4 ‘The contingency approach is centred on two basic questions: (1) What is the level of
environmental uncertainty? (2) What type of organisational structure is most suitable?’
Predict how a business should best respond to these questions.

CHAPTER 8
Management process
8.1 Introduction
So far in this topic we have discussed only the ‘what’ of management. We have
examined:
• the nature of management: its importance and what skills are needed to be an
effective manager
• achieving business goals: what the manager wants the business to achieve
• management approaches: ideas about different ways of performing the task of
management.
However, we now come to the ‘how’ of management: how the task of management
BizWORD is actually done. Once a business has established a set of specific goals, the next
Strategies are the actions that step is to determine what needs to be done to achieve the goals. Strategies outline
a business takes to achieve how the business will attempt to achieve its goals. Strategies are the series of actions
specific goals.
undertaken to achieve an end result. This requires managers to make decisions
about how best to administer and coordinate the four key business functional
areas — operations, marketing, finance and human resources. This responsibility
of management is often viewed as the ‘doing things right’ responsibility.
The focus of management’s strategies is to ensure that the key business functions
are performing efficiently and effectively in order to support and implement the
business’s overall intentions. Specialist managers in:
• operations focus on strategies to improve production processes and to create the
BizFACT ideal factory or office layout
Strategies are a number of actions
• marketing determine the appropriate markets for the business’s products, and
to be undertaken to achieve a goal. decide on pricing, product features, promotion and channels of distribution
Strategies involve: • finance are responsible for the financial requirements, budget allocation and
• what has to be done financial record keeping
• who is to do what
• human resources are concerned with the recruiting, training, employment contracts
• when it is to be done
• what resources will be needed. and separation of the employees who are required to run the business successfully.
For example, imagine if one of Toyota’s goals is to increase its market share of
hybrid motor vehicles. This would result in changes to the operations function —
how the cars are manufactured. The marketing function would need to develop plans
for pricing and promoting the new type of motor vehicles. Additional finance would
be required to fund the extra resources needed. Finally, new employees with the
necessary skills will need to be recruited and selected, or existing employees retrained.
In a small business, the key business functions are normally carried out by few
BizWORD employees. They are required to undertake numerous tasks that will often overlap
Outsourcing is the use of external (see figure 8.4 on page 197). Occasionally, a small business will decide to outsource
sources or businesses to undertake one or more key business functions and concentrate on those functions in which
business functions or activities for the it is most skilled. In large businesses, whole divisions or departments, such as the
business.
finance department or the marketing department staffed by many people, perform
one specific function.
The key business functions are at the core of all businesses regardless of the
business’s size, location, purpose or length of existence.

FIGURE 8.1 One of the strategies
Toyota can use to increase its market
share of hybrid vehicles is to produce
cars that show a strong future direction
in design development. This will require
the involvement and coordination of the
four key business functional areas.
In most businesses, the key business functions are grouped to bring closely related
tasks together. Thus, sales and marketing are grouped, finance and administration
are grouped, and operations is grouped with research and development (R&D).
Consequently, the range of functions is generally reduced to four main functions as BizFACT
is shown in figure 8.2. For a business to be successful, it is
crucial that all the goals and strategies
are linked and working harmoniously.
THE FOUR KEY BUSINESS FUNCTIONS
HUMAN
OPERATIONS MARKETING FINANCE RESOURCES
Including: Including: Including: Including:

• manufacturing • market • financial planning • acquisition
• provision of segmentation • preparing and • training and
services • positioning analysing financial development
• other value adding • product design statements • maintenance
• supply chain • setting prices • cash flow • separation
management • promotion management • employment
• inventory • distribution • profitability contracts
management management • resolving
workplace
disputes
These key functions are interdependent (i.e. they all overlap) and each
relies on the other. In many businesses, they are separate functions. This is
particularly true of large businesses. The word ‘synergy’ is often applied
to describe the benefits of interdependence. Synergy means ‘the whole
is greater than the sum of all the individual parts’.
FIGURE 8.2 The four key business functions
Management process • CHAPTER 8 195

The importance of the key functional areas is highlighted by the fact that the
High School Certificate Business Studies course is structured around — and
examines in more detail — the four key functional areas.
8.2 Different ways of coordinating

key business functions and
resources
Though a business can separate the key business functions into departments that
BizWORD perform their distinct roles, the functions are interdependent — each relies on the
Interdependence refers to the others to perform effectively. Interdependence refers to the mutual dependence
mutual dependence that the key that the key functions have on one another. This means that the various business
functions have on one another. The functions work best when they work together. A hockey team might have highly
key business functions work best
when they overlap, and employees
specialised players, for instance a brilliant left wing, a superb fullback and a
work towards common goals. For each dynamic goalkeeper. However, despite their individual brilliance, a side will
function area to perform at capacity, it usually win when all players contribute to the game, each working with the
depends on the support of the others. others in the team, passing, communicating and playing for the same victory. In
Division refers to the separation of the same way, each section of the business may perform its specialised function
key business functions into specialised extremely competently — but if they together do not work as a ‘team’ and aim for
units or departments. The business is
the same business goals, then the business is not likely to achieve its objectives.
divided into functional areas.
Interdependence occurs when each key function area is committed to the same
business goals as the other key areas, and they each work in a coordinated and
collaborative way to achieve these goals. Interdependence is always preferred
because it provides a unified approach by the business as it works to achieve its
objectives.
The coordination of key business functions depends on the broad goals of the
business as well as its size. In large businesses the key business functions are often
FIGURE 8.3 In large businesses separated into different divisions or departments headed by separate managers. This
the four key business functions are is because the key functions require quite different skills and knowledge. Also, as
headed by managers who have
responsibility for a specific, specialised
businesses grow their needs become more complicated: they require many people to
business function and supervise many carry out each key function. This would mean that each division would have its own
employees with expertise and training specialists. For example, in a large business the employment relations department
in that area. would have specialists in salaries and pay,
hiring of employees, staff training, work
health and safety (WH&S), and so on.
The word division is often used by
businesses to describe the separation
of key functions. Division of a business
along functional lines enables each part
to specialise, but when the functions are
separated, coordination between them
becomes an important issue. In fact,
the greater the divisional separation the
more coordinated a business needs to
be in order to run smoothly.
Most businesses are not in fact large
but small. In the typical small business
the work areas are not separated but
often overlap. This is shown by the
example of the hairdressing salon in
figure 8.4.

KLASSIKHAIR SALON
(DUNDAS, NSW)
Part-time workers Independent

Owner
(all hairdressers) beautician
Alain Nadine Helen Aliq Wei
• Manages her own clientele

(pays rent to Klassikhair Salon)
• Assists the reception, updates
client files and takes bookings
• Senior hairdresser and • All involved in operations (hairdressing) for Klassikhair
manager (operations) • In addition, all may manage the reception,
• All employment relations update client files, take bookings and
matters participate in stocktakes
• All finance and accounting • Main duties
(also uses an accountant) • Hair cutting
• Some administration • Hair colouring
(shared role) • Hair styling (e.g. for formals, weddings
• All stock ordering and supply and so forth)
chain management
(operations)
• All rostering and sheduling
of maintenance
• Some bookings and
reception (shared role)
Independent, but functions still
overlap with those of the
Operational and administrative functions overlap hairdressing business
FIGURE 8.4 The overlapping of key functions as occurs in small business
Summary
• Strategies are a series of actions undertaken to achieve specific goals.
• The four key business functions include:
–– operations
–– marketing
–– finance
–– human resources.
• The key business functions are interdependent — each relies on the other to
perform effectively.
• All business functions should:
–– work towards the fulfilment of the business’s goals
–– be coordinated so that they have a common purpose.
• In large businesses the key business functions are often separated into divisions
or departments.
• In small businesses the key business functions are not separated but often overlap.

EXERCISE Revision
8.1
1 Define the term ‘strategies’.
2 Recall the focus of the strategies developed by management.
3 Identify the four key business functions.
4 Examine figure 8.2 on page 195. Recall two activities involved in each of the
four key business functions.
5 Clarify why in small businesses the key business functions are sometimes
outsourced.
6 Recount what occurs when there is interdependence between the key business
functions.
7 Explain why in large businesses the key business functions are often separated into
different divisions or departments.
8 Demonstrate what is meant by the overlapping of key business functions.
9 Propose why the key business functions need to be coordinated in a business that
has separate divisions.
Extension
1 Determine why it is impractical to expect small businesses to have distinct functional
areas.
2 Predict what will happen to a business whose key business functions are not united
in trying to achieve the business’s overall intention.
BizWORD 8.3 Operations

Operations refers to the business Operations refers to the business processes that involve transformation or, more
processes that involve transformation generally, ‘production’. It is a term that applies both to the manufacturing and
or, more generally, ‘production’.
the services sector. As explained in section 8.1, all businesses establish a set
Operations management consists of goals. Next, the business implements strategies to achieve these goals. The
of all the activities in which managers
engage to produce a good or service.
core goal of all businesses is to maximise profits. This is often best achieved
through the efficient production of a good or service. Operations management
is the strategy used to achieve this goal. The HSC course investigates operations
in greater depth, so this chapter will
provide an elementary understanding
of the main concepts.
Operations management consists
of all the activities in which managers
engage to produce a good or service. It
is concerned with creating, operating
and controlling a transformational
process that takes inputs from a
variety of resources, and produces
FIGURE 8.5 Apple recently invested outputs of goods and services that are
$10.5 billion in technology, meaning needed by customers. When you buy
that even more of their manufacturing a loaf of bread from the supermarket,
processes will be accomplished
by machines and robots. The new for example, the bakery will have
technology includes equipment to polish undertaken a number of processes
the plastic cases of iPhones, laser and from buying the ingredients, to
milling machines to carve the MacBook’s mixing and blending them, baking,
aluminium body and testing gear for
their camera lenses. cooling then wrapping the finished
loaves and, finally, delivering the
loaves to the retail outlets.

Operations management, therefore, is at the heart of the success of all businesses.
Production involves the skilful bringing together of a number of resources, such as
finance, equipment, management, technology and people, to create finished goods
and services through a series of operations (see the following Snapshot).
Toyota — operations system

Operations is the part of the business that ‘gets the job done’ and at Toyota’s
manufacturing plant in Altona, Victoria that means producing over 100 000 cars each
year, more than half of which are exported. The process of producing the Camry is much
the same as producing a cake (or any other product for that matter). You need inputs
(resources used in the production process, such as labour and raw materials). The next
SNAPSHOT
step is to transform those raw materials into outputs (finished products). Many of the
components used to build an engine, such as pistons and cylinder head covers, are
produced in-house by Toyota and some parts are sourced from local suppliers. What else
is needed to make a car? Lots of steel panels that are welded and painted and undergo a
multitude of processes to then finally reach the 250-metre long assembly line.
Operations is not just about making products or producing services though. Many
businesses strive to produce the best product or service on the market. Toyota uses the
concept of continuous improvement to do this (referred to in Japanese as kaizen). This
means that all company activities — from the assembly line to customer service — are
continually scrutinised, then new and better ways of doing things are introduced if
needed. The Toyota process requires that all tasks are precisely defined and standardised
to ensure maximum quality, minimum wastage and improved efficiency. Kaizen ❛ Operations is the
emphasises quality assurance and ensures that all employees are quality conscious and
focused on continual improvement. part of the business
Just-in-time (JIT) production is also used at Toyota. This means that the right parts
and materials are manufactured and provided in the exact amount they are needed,
that “gets the job
and at the time they are needed. The number of cars produced is directly related to done”. . . ❜
customer demand. In relation to supply chain management, JIT ensures that only
the required materials for production are acquired at the right time, which minimises
excessive inventory and leads to cost reductions.
Technology is used at Toyota to advantage. For example, the welding involved to
make the shell of a car involves 250 processes and 526 parts. Robots do 105 of the BizFACT
welding jobs and the remainder are done by workers on night and day shift. Toyota Businesses can become more
says they are automated but ‘with a human touch’. competitive by looking at their
production processes. For example,
Snapshot questions the ‘better mango project’ identified
why so many mangoes were arriving at
1. Clarify why operations is referred to as that part of the business that ‘gets retail outlets bruised or overripe. Better
the job done’. handling techniques and temperature
2. Outline the process of producing the Camry at Toyota’s manufacturing plant control have resulted in more consistent
in Altona. fruit quality and better profits.
3. Define the term ‘kaizen’.
4. State how Toyota implements the concept of continuous improvement.
5. Explain the just-in-time (JIT) production method.
6. Determine the advantages Toyota gains by using the ‘kaizen’ and ‘just-in-
time’ processes.
BizFACT
The nature and type of operations vary considerably from one type of good or To be efficient, organisations need
service to another. However, how the operations management function is carried to consider the ways in which they
organise production, as well as the
out will directly affect a business’s competitive position because it will: layout of the plant and equipment.
• establish the level of quality of the good or service The judicious use and integration of
• influence the overall cost of production, given that the operations function is technology is essential to successful
responsible for the largest part of a business’s capital and human expenses operations.
• determine whether sufficient products are available to satisfy consumer demand.

FIGURE 8.6 The operations manager
is part of the senior management team
and in a large business will most likely
have many managers underneath him
or her, such as the production manager,
warehouse manager and quality
manager.
The operations management function has a considerable influence on the quality,

cost and availability of a business’s goods or services. These, in turn, have a direct
bearing on whether the business achieves its other main goals — specifically, to
maximise profits, to increase market share, to maximise growth or to provide a
reasonable return for investors.
BizWORD Goods and/or services

Tangibles are goods that can be A manufacturer will transform inputs into goods: tangible products. Tangibles
touched. are physical products that can be handled and stored before they are sold to
Intangibles include services that the consumer, such as bread, clothing or a car. The production process and
cannot be touched. consumption are not linked; that is, there is little customer involvement in
production.
A service organisation will transform inputs into services. Services are intangible,
which means that they cannot be touched. For example, if you attend a training
course, you cannot physically touch it, but you hopefully benefit from gaining
knowledge and learning new skills. Services cannot be stored and the customer
eLesson may actually need to be present when the service is being delivered. For example,
Café KitcCh and the customer must be present when receiving a haircut.
Hudsons Coffee In reality, many businesses today produce a combination of both manufactured
We search for the coffee goods and services. When you purchase a product such as a car or electronic
shop buzz when we team up equipment it often comes with a warranty and other services. When a customer
with small café owner, James
Veneris, and mentor, Mark
enters a contract with an internet provider, for example, they will receive a service
Hawthorn, founder of the (their broadband connection), plus the modem and other goods necessary to
Hudsons Coffee chain. enable the connection.
Summary
• Operations management is about producing goods and/or services based on
business goals.
• The operations management function has considerable influence on the quality,
cost and availability of a business’s goods and/or services.
• Operations management is responsible for transforming inputs into outputs.

• The characteristics of operations management differ according to whether the
business is a manufacturer of goods or a provider of services. Manufacturers
produce tangible products (physical), while service organisations produce
intangible products (services).
• Most modern businesses produce a combination of both manufactured goods
and services.
Revision EXERCISE
8.2
1 Define the terms ‘operations’ and ‘operations management’.
2 State what operations management is concerned with.
3 ‘Operations management is the part of the business that actually gets the job
done.’ Demonstrate this concept on a smaller scale by describing the materials
you would need and the process you would undertake to bake a cake (your
finished product).
4 Recall how the operations management function will directly affect a business’s
competitive advantage.
5 Distinguish between a good and a service.
6 Account for why modern large businesses combine goods and services.
Extension
1 One strategy to produce goods more quickly is to use better technology. For example,
if you used a hand beater to bake a cake it may not have been as efficient as using
an electric beater. Fill in the following table and determine some strategies that an
operations manager might use to achieve the listed business goals. The first entry has
been completed for you.
Business goal Operations management strategy
Improve the quality of service provided Introduce quality management
Improve the quality of the product
Reduce production costs
Contribute to the protection of the natural

environment
Increase profitability
Increase market share
2 Use the internet or look at the careers section of the newspaper to find a job
advertisement for an operations manager (sometimes called a factory manager).
The advertisement will most probably list responsibilities involved in the position.
Classify these into the four management roles (planning, organising, leading and
controlling).
3 Anita’s Cosmetic and Beauty therapy is a business specialising in a range of cosmetic
and beauty enhancement treatments and products. Determine the range of
operations activities offered in such a business.
4 Demonstrate how an operations manager of a manufacturing plant that produces
confectionery might use the roles of planning, organising, leading and controlling in
his or her daily job.
The production process

There are three key elements of the production process in any business: inputs,
processes and outputs.

Inputs
BizWORD Inputs are the resources used in the transformation (production) process. Some
Inputs are the resources used in the resources are already owned by the business, while others come from suppliers.
transformation (production) process. Inputs differ between manufacturing businesses and service businesses. Inputs may
Transformed resources are those be divided into those that are transformed and those that are transforming resources.
inputs that are changed or converted
Transformed resources are those inputs that are changed or converted in the
in the operations process.
operations process; they are transformed by the operations process. Transformed
Transforming resources are
those inputs that carry out the
resources include:
transformation process. • materials: the basic elements used in the production process.
• information: the knowledge gained from research, investigation and instruction,
which results in an increased understanding.
• customers: customers become transformed resources when their choices shape
inputs.
Transforming resources are those inputs that carry out the transformation
process. They enable the change and value adding to occur. The two main
transforming resources are:
• human resources: the people that are employed by the business.
• facilities: the plant (factory or office) and machinery used in the operations
process.
FIGURE 8.7 An operations system is

used to transform inputs into outputs.
In a chocolate factory, this means using
labour and raw resources, such as cocoa
beans, to make chocolate. The Cadbury
chocolate factory in Tasmania produces
around 50 000 tonnes of chocolate a year.
Cadbury sources its cocoa beans through
fair trade supply chains. Most of the process
of chocolate making is automated (done
by machines) — just picture huge vats of
melting chocolate and caramel with lots of
workers in white coats.
Transformation processes
The main concept of operations management is transformation, which is the
conversion of inputs (resources) into outputs (goods or services). Sony, for
example, takes plastic, metal, glass and electronic parts, and transforms them
BizWORD into numerous electronic products using an innovative approach and processes
Transformation is the conversion of of design, manufacturing and assembly. Figure 8.8 illustrates this transformation
inputs (resources) into outputs (goods process.
or services). The term ‘transformation’ implies physical changes, but today it also includes
the conversion of resources into services. Your school takes its main inputs —
the students, the syllabus, the teaching and ancillary staff, and the buildings and
other capital — and produces educated, employable graduates. What occurs in

this educational setting is a transformation process. It is the task of the operations
manager to create, operate and control the transformation process, and table 8.1
illustrates how this happens in a number of different businesses.
INPUTS TRANSFORMATION OUTPUTS

(operations)
Manufacturing
Services
FIGURE 8.8 The transformation process in a clothing factory and a private hospital
TABLE 8.1 The transformation process in a manufacturing and service business
Inputs supplied by existing Transformation Outputs — either

resources or external supplier process goods or services
Clothing factory Computer-based designing, Dresses, shirts, suits,
Pattern cutters, designers, drivers, dyeing, hand and machine trousers etc.
machine operators, material, cutting, machining, branding,
sewing machines, labourers manual random checking
Private hospital Consultation, diagnosis, Patient returned to
Nurses, doctors, operating theatre, assessment of alternatives, health
computers, beds, drugs, laboratory, treatment (referral to
X-ray facilities specialist or done by a general
practitioner, GP)
Owing to the vastly differing nature of business, the transformation process

varies from business to business. It is often useful to look at the transformation
process in a manufacturing business separately from the process in a service-based
business because the transformation processes in manufacturing are far more
visible and more easily quantified.
Transformation process in manufacturing businesses

The manufacturing process may involve different kinds of processing. One type
takes the most basic resources and transforms them into the final goods for the
use of consumers. Other types involve a step-like transformation across a range of
processors and businesses.

INPUTS TRANSFORMATION OUTPUT
• People • Assembly or • Tangible
• Skills/expertise manufacture via product
• Vision (a) capital intensive
• ‘Know how’ transformation
(knowledge) (mass production)
• Capital or
• Cash flow (b) labour intensive
• Enterprise transformation
• Resources/ (customised)
materials • mechanised,
automated or
uses robots/
robotics
FIGURE 8.9 Operations in the manufacturing process
INPUTS
Raw materials — water,

steel and electricity
Capital equipment —
factories, trucks, forklifts TRANSFORMATION PROCESS
and tools
Design OUTPUT
Labour — process
workers, storepersons,
Manufacturing Building product
drivers, machinery
operators, labourers
Information — the use of Quality control
advances in technology
and research
Time
Money
FIGURE 8.10 An operations system for a manufacturing company producing

building products
Transformation process in service businesses

Due to the intangible nature of services, the operations processes are less physical
or visible. They take the form of knowledge, inputs, expertise and so on (see
figure 8.11).
BizFACT
As a result of the intangible nature of
services, the operations processes are INPUTS OPERATIONS OUTPUTS
less physical or visible.
• Knowledge (Transformation, • Improved quality of
• Skills/expertise work-in-progress, life
• Information value adding) • May be tangible (e.g.
• Specialised work something made or
site (e.g. shop/clinic/ • Provision of advice/ assembled, for
boutique) or mobile labour/expertise/ instance, by a
(transferable on-site experience/time carpenter or plumber)
skills) • May be intangible
(e.g. advice from a
teacher or a
podiatrist)
FIGURE 8.11 Operations in service businesses

Transformation processes adopted by service businesses differ from those in
manufacturing businesses for two reasons:
1. Outputs of the service business cannot be physically held in stock. A bank, for
example, cannot perform transactions on behalf of customers in advance and
store these in anticipation of use at a future date.
2. Service businesses rely heavily on interaction with the customer in determining
the output. Before an output is generated, the bank, in the example, needs
the customer to indicate whether he or she requires a car loan, a deposit, a
withdrawal or any other particular service.
INPUTS
Raw materials — computer

software and paper TRANSFORMATION PROCESS
Capital equipment —
security screens, Investment advice
computers, safes and OUTPUT
office furniture Ensuring good customer
Labour — tellers, mobile service
Delivery of
lenders, managers and
Ensuring the computer financial services
lawyers
systems work to customer
Information — provided
by market research
companies to assist in Establishing banking
product design and systems and procedures
delivery
Time
Money
FIGURE 8.12 An operations system for a bank
Table 8.2 highlights the main differences between manufacturing and service
operations.
TABLE 8.2 Highlighting the difference between manufacturing and service operations
Manufacturing operations Service operations

Tangible items are produced — they may be customised, but Intangible and customised, or made to suit the individual’s
generally they are standardised and often mass produced. requirements
Generally located close to supplies of raw materials or inputs Must be close to markets — location and proximity to users of
(transport costs are of major concern) services is vital
Zoning determines actual siting. Zoning may allow for home-based flexibility.
High capital costs in operations but can achieve some economies High training/education costs but can operate with low capital
of scale costs
Employs unskilled or technically skilled people, so average cost of Focus is on skilled/experienced/semi-skilled and professional staff,
labour/workforce is low. so labour costs are relatively higher.
Quality of output is standardised and backed by warranty. Quality varies depending on the strength of industry regulations,
skill, experience, knowledge and honesty of practitioner. Backed by
public liability insurance. Customer or client relations are
‘everything’.
Uses manufacturing technology Uses office automation
Manufacturer generally makes the product and then awaits sale The server only acts once the demand for a service is identified —
(thereby risking unsold stock). hence less risk.
The goods last beyond the time over which they are paid for — Services by their nature are inherently non-durable, though the
they tend to be durable. actual work done may have lasting effects.

Outputs
BizWORD
Essentially, outputs refer to the end result of a business’s efforts — the good or
Outputs refer to the end result of
service that is delivered or provided to the consumer (see figure 8.13). So far, a
a business’s efforts — the service or
product that is delivered or provided distinction has been drawn between service and manufacturing operations, but
to the consumer. in many cases businesses carry out both types of operation. Toyota, for example,
separates its vehicle manufacturing operation from its customer service operation,
although both elements are critical to the business’s overall success. All businesses
carry out many activities that can be isolated from direct involvement with the
customer. Insurance companies employ mathematicians called actuaries who
use formulas to determine risk and probability in setting the level of insurance
premiums. Actuaries never deal directly with the public, but are instrumental in
forming parameters or boundaries in which operations will occur.
The operations manager must be able to link transformation processes to
the activities performed by other areas of the business. Output must always be
responsive to customer demands. Issues of quality, efficiency and flexibility must
be balanced against the resources and strategic plan of the business.
FIGURE 8.13 A car is an output that requires individual processes. There may be several
thousand inputs, such as nuts and bolts, supplied by hundreds of businesses.
Summary
• The three key elements of the production process include inputs, the
transformation process and outputs.
• Inputs are resources used in the production process and include raw materials,
capital equipment, labour, information, time and money.
• The transformation process is the conversion of inputs into outputs.
–– Transformation processes in manufacturing businesses are different to those of
service-based businesses.
• Outputs are the finished goods or services.

Revision EXERCISE
8.3
1 Identify the three key elements of the production process.
2 Distinguish between the two types of inputs.
3 ‘The main concept of operations management is transformation’. With reference to an
example, clarify the meaning of this statement.
4 State why the transformation processes adopted by service businesses differ from
those in manufacturing businesses.
5 Using the process of completing homework, for example, construct a diagram that
describes the operations component (that is, the transformation from no homework
done to all homework completed).
6 Identify the inputs, processes and outputs of the following businesses:
(a) Hilton Hotel
(b) Four ‘n’ Twenty pies.
Present your answer in table form, as shown in table 8.1 on page 203.
7 Distinguish between ‘input’, ‘transformation’ and ‘output’.
8 The Rio Tinto Group is an international mining company. Rio Tinto finds, mines and
processes mineral resources, which are then converted to products such as coal, copper, Weblink
gold and silver. Use the Rio Tinto weblink in your eBookPLUS to identify the inputs, Rio Tinto
transformation processes and outputs that Rio Tinto use to produce its products.
9 Discuss the main differences between the operations function in a manufacturing
business and a service-based business.
Extension
1 Use the Biz/ed weblink in your eBookPLUS to find the Virtual Factory link (click on
Virtual Worlds). Go to ‘Factory floor’ and then to ‘Production’. Complete the following Weblink
tasks. Biz/ed
(a) State the stages of production involved in the manufacturing of hot-air balloons.
(b) Identify the inputs, processes and outputs of the balloon factory.
(c) Determine what type of layout is used at the Cameron Balloons plant. Give
reasons for your answer. (Hint: Examine fixed position layout, product layout,
process layout.)
(d) Extrapolate why this type of layout would have been chosen.
(e) Propose whether the production of balloons is capital intensive or labour intensive.
Give reasons for your answer.
2 Contact a manufacturing business and survey its response to a range of questions that
you, or a small group, have written and emailed regarding the operations function in
their business. Synthesise your findings and present them to the class.
3 Contact a service-based business and survey its response to a range of questions that
you, or a small group, have written and emailed regarding the operations function in
their business. Synthesise your findings and present them to the class.
Quality management BizWORD

Quality management is the strategy which a business uses to make sure that its Quality management is the strategy
product meets customer expectations. Three quality approaches are quality control, which a business uses to make sure
quality assurance and total quality management. that its products meet customer
expectations.
Quality is very important to Tip Top Bakeries, the bakery division of George
Quality refers to the degree of
Weston Foods Limited. To Tip Top, quality means understanding and exceeding
excellence of goods or service and its
customer expectations and making sure that products comply with regulations. fitness for a stated purpose.
A quality product should have a high degree of excellence and should achieve its
stated purpose. A quality product should be reliable, easy to use, durable, well
designed, delivered on time, include after-sales services, and have an agreeable
appearance.

FIGURE 8.14 Quality is very important to Cafe2U. The Australian mobile coffee franchise
operates quality equipment and uses quality ingredients in its branded products. Cafe2U is
so passionate about coffee that it has won several national and local awards, including two
bronze medals in the 2012 CSR Golden Bean Roasting Competition. Cafe2U is accredited for
Safe Food Handling and meets the standards of the Franchise Council of Australia.
The benefits of quality management practices

The benefits of implementing quality management practices include:
BizFACT • reduced waste and defects
Tip Top Bakeries started baking • reduced variance in final output
bread some 60 years ago after • strengthened competitive position
World War II. Today, with brands that
include Sunblest, 9Grain and Burgen,
• improved reputation and customer satisfaction
the company bakes more than one • reduced costs
million products daily for distribution • increased productivity and profits.
Australia-wide. Operations managers use a variety of approaches to maintain or improve quality.
Tip Top uses quality control and quality assurance. Many businesses use an
approach called total quality management.
Quality control
Tip Top bakeries uses quality control to optimise its production process (see also
figure 7.8). Quality control reduces problems and defects in the product using
inspections at various points in the production process. Many businesses such as Tip
BizWORD Top have minimised errors and waste by ensuring that standards are met. Specifications
or benchmarks are set before the physical checks are completed. Actual performance is
Quality control involves the use
of inspections at various points in then compared to the established criteria. If the established standards are met, it is likely
the production process to check for that the business will be meeting customer expectations. Competitiveness increases as
problems and defects. the costs associated with waste and faulty products are reduced.
In a service business, an inspection of employee performance can be used as a
means of quality control. A bank might inspect teller accuracy, speed or courtesy. In
a call centre calls might be monitored for quality assurance and control purposes.

BizFACT
Northrop, a US company involved
in the production of B-2 aircraft,
required each employee to sign a
giant scroll which was then hung over
the plant assembly line. The inscription
read ‘Total quality control on the B-2
begins with me’.
FIGURE 8.15 At IKEA, every piece of furniture goes through rigorous quality control checks. For
example, all IKEA sofas and armchairs are tested to ensure they are durable. Since people might
on average sit on a sofa about 50 000 times in 10 years, IKEA created a machine that is designed to
simulate this. The machine pushes a 130 kg weight onto the seats 50 000 times over a three week
period to ensure the frames retain their stability and the cushions retain their comfort and
resilience. For this reason, IKEA is able to offer a ten year guarantee on these products.
Quality assurance BizWORD

Quality assurance involves the use of a system so that a business achieves set Quality assurance involves the use of
standards in production. This is a proactive approach to quality management that a system so that a business achieves
set standards in production.
aims to prevent defects or problems from occurring.
Quality assurance is an integral part of Tip Top’s operations. A quality system
is in place to ensure that set standards are achieved. Tip Top’s quality systems are
certified to the ISO 9002 standard. The ISO 9000 series of quality certifications is
a widely used international standard. ‘ISO’ stands for International Organization
for Standardisation. Meeting these international standards is voluntary, but many
businesses comply with their requirements to remain competitive locally and
internationally. The ISO provides guidelines on how businesses should establish
quality assurance systems by adopting specific procedures, controls, and recording
and documentation measures. Tip Top’s quality system gives assurance to customers
that it is able to provide safe and reliable products.
Total quality management BizWORD

Total quality management (TQM) is a commitment to excellence that emphasises Total quality management is an
continuous improvement in all aspects of a business’s operation by sharing ongoing, business-wide commitment
responsibility among all the members of the business. Quality becomes both a to excellence that is applied to every
aspect of the business’s operation.
commitment and the responsibility of every employee in the business. The aim
of TQM is to create a defect-free production process, and maintain a customer
focus in operations. The adoption of TQM can improve the price competitiveness
of a business, but can also improve product quality, allowing the business to attain
competitive advantage. To achieve TQM objectives a number of approaches may
be used, such as employee empowerment, continuous improvement and improved
customer focus.

Ambulance Victoria — quality first
Quality is very important to
Ambulance Victoria (AV).
As an organisation that
SNAPSHOT provides medical transport

and pre-hospital care for
patients, any mistakes or
faults in its service can be
❛ . . . any mistakes life-threatening.
AV uses quality control
or faults in its to optimise its production
service can be process. Quality control
reduces problems and
life-threatening. ❜ defects in the product,
using inspections at
various points in the
production process. As a service organisation, AV monitors quality and response
times. AV is involved in the Victorian Cardiac Arrest Registry (VACAR) — a
quality control initiative. It uses a cardiac arrest registry to collect data on cardiac
arrest patients who have used its ambulance service. This data is then used to
monitor treatment protocols, response intervals and outcomes on cardiac arrest
patients.
Quality assurance is an integral part of Ambulance Victoria’s operations. A
quality system is in place to ensure that set standards are achieved. AV’s quality
systems are certified to the ISO 9001:2000 standard. Ambulance Victoria’s quality
system gives assurance to customers that it is able to provide safe and reliable
service.
AV also has ongoing involvement in two quality assurance registries: Turning Point
Drug and Alcohol Centre — Non Fatal Overdose Registry and the Victorian State
Trauma Outcomes Registry (VSTORM). In addition, three AV Research Fellows are
involved in clinical research in three high priority areas: out-of-hospital cardiac arrest,
trauma and stroke.
AV developed an AV quality management system. A quality committee
was established in order to monitor the implementation and effectiveness of
this system and to promote the development of a business-wide culture to
achieve the management of quality improvement. This committee also has the
responsibility of developing policies and guidelines on clinical care and paramedic
training.
Snapshot questions
1. Outline the quality management strategies adopted by Ambulance
Victoria.
2. Explain how Ambulance Victoria benefits from adopting these strategies.
Employee empowerment
W. Edwards Deming was an American quality expert who was known as the
‘founder of the quality movement’ and is credited with the development of TQM.
BizWORD Deming believed that quality problems would be best solved with an emphasis on
Quality circles are groups of workers employee involvement. Many businesses use quality circles as a means of achieving
who meet to solve problems relating employee empowerment. Under this approach, teams of up to 10 workers meet
to quality. regularly to solve problems related to process, design or quality. The groups
often make presentations to management with their ideas, in order to improve
the performance of the business. Such programs have resulted in substantial cost

savings for organisations — for example, at the Northrop Aircraft division that
produces Boeing 747s, 55 individual quality circles halved the cost of parts within
two years. At Chrysler, a quality circle discovered that heating rubber seals before
installation could prevent car door leaks.
BizWORD
Continuous improvement Continuous improvement involves
Continuous improvement is a process that involves a constant evaluation of, and an ongoing commitment to achieving
improvement in, the way things are done. Higher and higher standards are set in the perfection.
continual pursuit of improvement. Kaizen (Japanese for ‘improvement’) emphasises
continuous improvement in all facets of a business, from the way the CEO manages to
the way assembly line workers perform their jobs. Although perfection is practically
impossible to achieve, it is the ‘striving’ that is important to business culture.
BizFACT
Australian Arrow Pty Ltd, a designer
and manufacturer of automotive
products, uses quality circles as a
method of problem solving. Issues
such as product quality, employee
performance and costs are discussed
by team members who meet regularly
under a circle facilitator.
FIGURE 8.16 Telstra developed a continuous improvement initiative called T{WAY} to

enable them to continually improve the way they do business. This initiative gives employees
the tools they need to assist them to identify, analyse and fix process issues that impact on
customer service. Telstra employees are encouraged to share their ideas and each suggestion is
heard and considered. Telstra is committed to continuous improvement and this has led to an
improvement in customer service.
Customer focus
Deming believed that quality should be the responsibility of every employee. The
TQM approach considers one of the most important questions a business should ask:
‘What does the customer require?’ All teams need to realise that they are serving a
customer. This is as true for the employees that deal directly with external customers
as for those that simply pass work on to other employees inside the business.
Summary
• Quality management is the strategy that a business uses to make sure that its
product meets customer expectations. Three quality approaches are quality FIGURE 8.17 Australia Post receives
control, quality assurance and total quality management. over 100 000 letters for Santa each
year. Australia Post has a strong
• Quality control involves the use of inspections at various points in the production commitment to customer service,
process to check for problems and defects. Performance is measured in relation including children, which extends
to set standards or benchmarks. throughout the business.

• Quality assurance involves the use of a system where a business achieves set
standards in production. This is a proactive approach to quality management
that aims to prevent problems from occurring.
• Total quality management (TQM) is an ongoing, business-wide commitment to
excellence that is applied to every aspect of the business’s operation. A number
of approaches may be used, such as employee empowerment, continuous
improvement and improved customer focus.
EXERCISE
8.4
Revision
1 Outline the main features of quality management.
2 Explain why quality control is important to businesses.
3 Describe the ways a business can offer quality assurance to customers.
4 Explain what is meant by total quality management.
5 Summarise the three approaches that make up total quality management.
6 Read the following definitions. If a definition is false, propose a correct definition.
(a) Quality control involves the use of inspections at various points in the production
process.
(b) Quality assurance involves the use of a system where a business achieves set
standards in production.
(c) Total quality management is a commitment to quality that is applied to the
business’s operations department.
(d) Continuous improvement involves an ongoing commitment to use of inspections.
7 Ganesh is the production manager for IBX technology, a manufacturer of internet
security software. Recently, the level of product defects has increased, although the
production process has not changed.
(a) Propose to Ganesh strategies that he should use to determine the cause(s) of the
defects.
(b) Explain to Ganesh the value of introducing a TQM approach.
8 The name ‘The Reject Shop’ suggests that it could not possibly sell quality
Weblink products. Is this true? Use the weblink for The Reject Shop in your eBookPLUS
The Reject Shop to search the company’s website and see how many references to quality you can
find. Explain how The Reject Shop ensures that it receives quality products from
suppliers.
Extension
1 Use the Standards Australia weblink in your eBookPLUS to obtain information
about Australian Standards. Assess the practical effects of such standards on
Weblink industry.
Standards Australia 2 Investigate W Edward Deming and his development of TQM. Justify whether you
think he proposed anything extraordinary or he just made businesses more aware of
their production methods.
8.4 Marketing
Marketing is vital to the existence of the business. Just because someone invents a
new product or improves an existing one does not guarantee customers will buy it.
Without some form of marketing, customers may not even be aware of a product’s
existence regardless of how ‘record breaking’, ‘new and improved’ or ‘revolutionary’
it may be (see the following Snapshot). Statistics reveal that more than 70 per cent
of new products launched on the market self-destruct in the first year of operation,
mainly because of poor marketing. Businesses make few sales if they do not market
their products successfully, eventually ending in failure.

Edward Evans’s SaferGate — the value
of marketing
Did you ever watch the ABC television show called The New Inventors? The
show presented the inventions of men and women and demonstrated how these
inventions could make someone’s life a little easier, safer or better.
Edward Evans was seriously injured in a farm gate accident on his property
SNAPSHOT
when an 1100 kg cow charged a gate as he was moving cattle, sandwiching him
between the gate and beast. To minimise the risk of further injury on his own
farm, he invented a method of gate operation. After hearing about thousands of
other injuries and tragic deaths that occur each year as a result of cattle handling
operations, Evans was inspired to improve his design and provide the opportunity for
increased safety in cattle yards around the country.
The result is SaferGate, a safer gate that has been designed to minimise the risk of
injury when livestock charge or attack a gate. The gate is rock solid and has a hinge
that allows the gate to fold in the middle if an animal charges at it, to avoid gate
operators from being hit by the full force of the impact even if they are standing
right behind it. Unlike a traditional cattle gate, it swings away from the farmer when
an animal hits it. The design was so innovative, that it won Evans the ABC New
Inventors 2011 Invention of the Year award.
As is the case for most contestants, that program was the first time Evans’ product
was exposed and critically examined, rated and promoted in the public arena.
The objective is not only to win the contest, but to gain support to manufacture,
❛A great invention . . .
promote and distribute the invention to domestic and overseas markets. Evans also is of little value
received a $45 760 grant from Commercialisation Australia which he used to ensure
the intellectual property was protected, to begin manufacturing and to develop if it has not
marketing strategies. been effectively
A great invention like Edward Evans’s SaferGate is of little value, however, if it has
not been effectively marketed — brought to the attention of the general public and marketed . . . ❜
targeted towards those who would be most interested in putting it to use.
Snapshot question
Explain why Edward Evans must quickly develop a marketing plan for his
SaferGate invention.
At the same time, many products that would seem insignificant and unimportant
have become best-selling ‘essential’ items as a result of a well-managed and
professional marketing plan. Who would have ever thought that brown, sugary,
fizzy water with addictive qualities would become the universal product it is today!
Marketing is a powerful business strategy available to all businesses. The
HSC course investigates marketing in greater depth, so this chapter will provide an
elementary understanding of the main concepts.
Marketing fundamentals
Marketing is not a new subject to you. Over the years you have probably been
involved in some type of marketing activity. Consider the following examples: BizFACT
• helping to organise a stall at a local fete Marketing does not always involve
• setting up a raffle for a local sporting team selling. Such organisations as schools,
• persuading your parents to lend you some money to buy an iPod churches and charities attempt to
• coordinating the publicity for the school musical. market certain ideas, places, causes or
Although all these activities are different, they have one thing in common: they people.
involve a number of marketing activities. Some people may think that marketing

is just a fancy name for selling, but there is much more involved than selling.
Actually, the current view of marketing is such that it does not even have to involve
the selling of a product — for example, not-for-profit organisations may want to
inform the public of the services they provide.
FIGURE 8.18 Advertising is one of the main forms of promotion used to inform, persuade
and remind. Guy Sebastian supports the Australian Red Cross. Popular public figures often
support good causes in media campaigns.
BizWORD What is marketing?

Marketing is the process of planning Many definitions are used to describe marketing. The most commonly accepted
and executing the conception, definition comes from the American Marketing Association: ‘Marketing is the
pricing, promotion and distribution
process of planning and executing the conception, pricing, promotion and
of ideas, goods and services to create
exchanges that satisfy individual and distribution of ideas, goods and services to create exchanges that satisfy individual
organisational objectives (American and organisational objectives’.
Marketing Association). A more simplified definition of marketing is a total system of interacting activities
A more simplified definition is designed to plan, price, promote and distribute products to present and potential
that marketing is a total system of customers. At the heart of these activities is the most fundamental question all
interacting activities designed to plan, businesses should continually ask: ‘What do customers want to buy — now and
price, promote and distribute products
in the future?’ This is the essence of marketing — finding out what the customers
to present and potential customers.
want then attempting to satisfy their needs.
Sometimes ‘selling’ and ‘marketing’ are used synonymously. However, the two
words have different meanings. Selling is merely getting rid of existing stock,
whereas marketing takes a much broader view. Successful marketing involves
bringing the buyer and seller together and making a sale.
Some small business owners are excellent ‘technicians’ but dislike marketing and
inadvertently turn away customers. Other small business owners are so convinced
of the value of the good or service that they assume it will sell automatically.
Unfortunately, this rarely occurs.
Many small business owners feel marketing is not for them. They happily place
advertisements in local newspapers, display the name of the business on their cars

and perhaps even advertise on a regional radio or television station. However, such
advertising is just one part of marketing a good or service.
Small business owners often view marketing campaigns as something only
large businesses do, and as too expensive, complicated or time consuming for
themselves. What they do not often appreciate is that they can run a marketing
campaign and that it can be simple and inexpensive.
All businesses, regardless of size, need to undertake some form of marketing,
otherwise customers will not be informed about the business’s products.
Quick-fire Clay — marketing a new product

Michelle Giles had never lost
faith in the idea. Three years
of hard work was about to be
rewarded. By the end of the
day, the patent application SNAPSHOT
would be finalised, giving her
sole rights to her invention,
Quick-fire Clay.
As a potter, Michelle had
❛Without customers,
always been conscious of the a product . . . is
high cost of operating the
kiln. She had tried alternative useless. ❜
energy sources, but the
best she could manage was to reduce the energy bill to 38 per cent of total costs.
She decided to think a little more creatively — if she could not further reduce the
energy costs, then perhaps she could reduce the time the clay needed to be in the
kiln. Inventing a clay that required only half as much firing time would reduce her
operating costs.
After spending three years in experimentation and mortgaging her house to help
pay for research and development, Michelle was about to make Quick-fire Clay her
exclusive product. She had managed to develop a clay-based material that required
only half the normal firing time. Another unexpected benefit was that the material
became less fragile and did not shatter when dropped. Michelle knew she had a
product that would be in great demand and make her a lot of money. Not wanting
to lose the right to her invention, she decided to apply for a patent. She left the
Patents Office feeling optimistic about the future and enjoyed a celebratory meal at a
nice restaurant. She believed her product to be a great success.
Michelle failed to realise, however, that while the first stage — developing a new
product — was complete, the second stage was just about to begin — the successful
marketing of her product. Although she had a world-first, proven product, very
few people knew about it. Michelle was about to discover that products do not
‘sell themselves’. Without customers, a product — even one that is revolutionary,
efficient, record-breaking and exciting — is useless. Many inventors like Michelle
have failed, even though they had an excellent product. They lacked customers
and no customers means no profit. Michelle had a lot to learn about successfully
marketing her product.
Snapshot questions
1. A patent is a government approved document that gives a person sole
rights to their invention and stops others from using, copying or selling it
without permission. Outline why you think Michelle was wise to patent
Quick-fire Clay.
2. Recommend marketing strategies for this business.

Role of marketing
BizFACT Marketing is much more than placing an advertisement in the local media. It is a
All businesses should focus on way of thinking. Everything a business does should be directed towards putting
satisfying the needs of their the customer at the centre of its thinking. To do this successfully requires adopting
customers. All the activities of the a customer-oriented approach to marketing. Business owners need to view their
business should be directed to the business in terms of the needs and wants of their customers (see figure 8.19). As
marketing of the good or service.
competition intensifies, it will be their marketing philosophy that will help their
business face the competition and succeed.
1. Place your customers, 2. Talk to your customers.

not your products, at the Ask them what could be
centre of all you do. improved, what they like
and dislike.
7. Always deliver
what you promise.
3. Think about ways

to build loyalty with
your customers.
6. Develop a unique and
recognisable brand or image
that reflects the special
qualities of your business.
5. Regularly communicate 4. Differentiate your

with your present and product in ways that
potential customers. will make it special in
the eyes of your
customers.
FIGURE 8.19 Seven tips to becoming a marketing driven customer-oriented business
For businesses that adopt a customer-oriented approach, the customer

relationship does not end with the sale; it begins there. These businesses will
continuously strive to not simply meet but exceed customer expectations. This
means that, at every level of the business, employees should work towards
customer satisfaction by establishing positive relationships with customers. To do
this successfully a business should adopt the marketing concept approach.
Summary
• For a business to make a profit, it needs to create and market products that
consumers will purchase.
• Marketing is a total system of interacting activities designed to plan, price,
promote and distribute products to present and potential customers.
• Successful marketing involves bringing the buyer and seller together and making
a sale.
• Businesses should continuously strive to not simply meet but exceed customer
expectations.
EXERCISE Revision
8.5
1 Outline the importance of marketing to a business.
2 Recall why most new products fail shortly after they are launched.

3 Identify some types of marketing activities you have been involved in.
4 Discuss how the ‘marketing’ definition provided in this chapter differs from your
previous understanding of the term.
5 Distinguish between selling and marketing.
6 Recall why all businesses, regardless of size, need to undertake some form of
marketing.
7 Justify why a business should adopt a customer-oriented approach to
marketing.
8 Refer to figure 8.19 on page 216. Identify which of the ‘seven tips’ you
think is the most important. Justify your answer and share it with other class
members.
9 Recall the correct response to complete the following sentences.
(a) The main emphasis in marketing today is the __________ -oriented approach.
(b) This means the business wants to __________ customers’ needs and wants rather
than merely produce products.
Extension
1 Construct a PowerPoint presentation containing 10 dot points that reflect key
features of your new understanding of marketing.
2 ‘Marketing is not the sole responsibility of the marketing manager, but all managers.’
Determine the accuracy of this statement.
3 Predict what will happen to a business that neglects the importance of
marketing.
Identification of the target market

Very few businesses can afford to market their products to all consumers or
all businesses in Australia. At the same time, few businesses would want to
because it is a very rare product that is suitable to all consumers. Until the
end of the 1950s, Coca-Cola was such a product. But today Coca-Cola offers
consumers a range of carbonated soft drinks based on its original cola formula
including Coca-Cola Zero, Diet Coke and Vanilla Coke, as well as non-cola drinks
such as Pump still water, PowerAde Isotonic and Goulburn Valley juices. Most
businesses must select specific groups of customers on which to concentrate their BizWORD
marketing efforts: their target markets. A target market is a group of customers A target market is a group of
with similar characteristics who presently, or who may in the future, purchase customers with similar characteristics
the product. who presently, or who may in the
future, purchase the product.
Three broad approaches can be adopted when selecting a target market: the
mass marketing approach, the market segmentation approach or the niche market
approach (see figure 8.20).
Segment Segment Segment Segment

1 2 1 2
Total market
Segment Segment
3 3
Mass marketing approach Market segmentation approach Niche marketing approach

FIGURE 8.20 Selecting a market to be the target market

Mass marketing approach
BizWORD Fifty years ago, marketers commonly spoke about ‘mass market’. In other words,
In mass markets the seller there was a large demand for a standard product. In a mass market, the seller
mass-produces, mass-distributes mass-produces, mass-distributes and mass-promotes one product to all buyers.
and mass-promotes one product
The Model T Ford, for example, was the first motor vehicle to be produced and
to all buyers.
sold to the mass market (see figure 8.21).
FIGURE 8.21 The mass-produced

Model T Ford — a product aimed at the
mass market
A mass marketing approach seeks a large range of customers. The business

develops a single marketing mix and directs it at the entire market for the product.
This means there is one type of product with little or no variation, one promotional
program aimed at everyone, one price, and one distribution system used to reach
all customers.
Few products today, apart from basic food items, water, gas and electricity, are
marketed to the mass market. As a result of greater choice, higher personal incomes
and customers seeking more individualised products, the mass market has been
replaced by segmented or niche markets.
Market segmentation approach

Few businesses can sell their products to the entire market — the market is
just too big. Therefore, a business will divide the market into distinct segments.
A business that is marketing motor vehicles, for example, would not direct its
marketing efforts towards every person in the total vehicle market. Some people
might want only a sports car; others might want a four-wheel drive. The business
BizWORD would thus direct its efforts towards a particular segment of the total market for
Market segmentation occurs when motor vehicles.
the total market is subdivided into Market segmentation occurs when the total market is subdivided into groups
groups of people who share one or of people who share one or more characteristics based on four elements or
more common characteristic. dimensions: demographic, geographic, psychographic and behavioural, as shown
in table 8.3.

TABLE 8.3 Common elements or dimensions for segmenting customer markets
Demographic — Psychographic — Behavioural —

population Geographic — personality loyalty to a
characteristics where people live characteristics product
• Age • Urban • Lifestyle • Purchase occasion

• Gender • Suburban • Personality • Benefits sought
• Education • Rural • Motives • Loyalty
• Family size • Regional • Socioeconomic • Use rate
• Income • City size group • Price sensitivity
• Occupation • Climate • Consumer
• Social class • Landforms opinions
• Religion • Interests
• Ethnicity
A business segments its market so it can better direct its marketing strategies
to specific groups of customers, rather than the mass market. The ultimate aim of
market segmentation is to increase sales and profits by better understanding and
responding to the desires of the target customers.
Once the market has been segmented, the business selects one of these
segments to become the target market (see figure 8.22). For example, a rural
supplies business would normally aim its promotion strategies at male, 25 to
60-year-old, rural-based farmers with middle to high incomes. An exclusive
women’s fashion boutique in central Sydney would have a target market of
customers who are female, 25 to 45-year-old, city-based professionals with high
incomes.
This approach allows the business to better satisfy the wants and needs of a
targeted group, because the business can:
• use its marketing resources more efficiently BizWORD
• better understand the consumer buying behaviour of the target market Consumer buying behaviour
refers to the decisions and actions
• collect data more effectively and make comparisons within the target market of consumers when they purchase
over time goods and services for personal
• refine marketing strategies used to influence consumer choice. household use.
Segment 1
Female, 50+, high income
Segment 2
Promotion
Total TARGET MARKET
strategies and
market Female, 30–40,
selling techniques
middle income
Segment 3
Female, 15–25, low income
FIGURE 8.22 Selecting a market segment to be the target market

Sometimes, a business may be able to identify both a primary and secondary
Weblink target market. Customer research conducted by Sportsgirl Fashion, for example,
Use the Sportsgirl weblink revealed a primary target market of 18 to 25-year-old females, as well as a secondary
in your eBookPLUS to visit
the Sportsgirl website and
target market of 26 to 40-year-old females. The ability to choose the correct target
investigate their approach to market is an important marketing function because it will influence the entire
their target markets. marketing plan (see the following Snapshot).
Beau’s Floral Studio — target market

Beau Wilkes is owner–operator of a retail florist store called Beau’s Floral Studio.
The business provides fresh and dried flowers, and associated product lines for all
occasions. The business markets to a wide cross-section of the population within the
SNAPSHOT surrounding suburbs, but particularly to females aged 15–65 years and males aged
15–25 years.
Size of target market

Potential
Beau’s potential target market consists of approximately 74 000 people who live in
the surrounding suburbs.
Actual
Beau’s primary target market consists of females aged 35–65 years who decorate
their homes with floral displays.
The two secondary markets consist of:
• females aged 15–65 years who purchase flowers for special occasions
• males aged 15–25 years who purchase flowers for their partners.
These target markets are important because they represent repeat customers who
are essential for the business’s long-term survival. The primary target market consists
of approximately 21 000 people. It can be further subdivided according to the
benefits sought by the customer, as shown by the following table.
Subdivision of target market

Benefits sought by customer Customer characteristics
BizWORD
The primary target market is the Comfort (sickness and sympathy) Male and female, aged 15 years and above
market segment at which most of the
Beauty (floral displays) Predominantly female, aged 35–65 years
marketing resources are directed.
A secondary target market is usually Happiness (weddings and parties) Predominantly female, aged 15–50 years
a smaller and less important market
segment. Affection Predominantly male, aged 15–45 years
Target market dimensions

Geographic
Beau’s Floral Studio targets the residents of the local area. Sales to customers
from outside the surrounding suburbs are only occasional, not regular, and do not
constitute an important segment for the purposes of her marketing plan.
Demographic
Customer research data collected over the past 12 months reveal that 67 per cent
of customers were female and 33 per cent were male. Females aged 35–65 years
were the most common type of customer, making up 83 per cent of the total
female customer base. Males aged 15–25 years made up 78 per cent of the total
male customer base.

Purchase decision maker
Predominantly, the purchase of fresh and dried flower arrangements is considered
❛ A positive
to be a gift purchase, for either the individual or another person. The experience experience produces
of a floral purchase should be considered within this context. A positive experience
produces return business. return business. ❜
Income level
Beau’s Floral Studio caters for the middle to high income groups. These groups
consist of individuals and households with high levels of disposable income. They
do not perceive the buying of flowers as an infrequent luxury expenditure, but as a
regular (weekly or fortnightly) purchase.
Snapshot questions
1. Identify the primary and secondary target markets for Beau’s Floral Studio.
2. Recall what four variables Beau Wilkes uses to segment the target markets.
3. Explain the importance of these target markets to Beau’s Floral Studio.
4. Analyse how segmenting the total market helps Beau Wilkes achieve her
long-term business objectives.
Niche markets BizWORD

An extension of the market segmentation approach is that of the niche market, A niche market is a narrowly selected
which is a narrowly selected target market segment. In a sense, it is a segment target market segment.
within a segment, or a ‘micro market’ (see figure 8.23). For example, in any
newsagency, you will see row upon row of magazines each appealing to a specific
niche market — male, female, young, old, high-income, low-income, urban, rural,
outdoor lifestyle, indoor lifestyle and so on.
FIGURE 8.23 A magazine for every

interest and every target market
Summary
• A target market refers to the group of customers to which a business intends to
sell its product.
• Sometimes a business may be able to identify both a primary and a secondary
target market.

• Three broad approaches can be adopted when selecting a target market: the mass
marketing approach, the market segmentation approach or the niche market
approach.
• A mass marketing approach seeks a large range of customers.
• A business segments its market so it can better direct its marketing strategies to
specific groups of customers.
• Market segmentation occurs when the total market is subdivided into groups of
people who share one or more common characteristic.
• A niche market is a narrowly selected target market segment.
EXERCISE Revision
8.6
1 Distinguish between mass, segmented and niche markets.
2 Outline the purpose of market segmentation.
3 Recall the different ways a market may be segmented.
4 State why market segmentation is the most common marketing approach used by
businesses today.
5 Explain how market segmentation and target market are linked.
6 Use an ‘M’, ‘S’ or ‘N’ to determine whether the following products are sold in a mass
market, segmented market or niche market.
(a) Electricity (b) Ferrari cars
(c) Australian Financial Review (d) Avon cosmetics
(e) Fruit and vegetables
7 Determine who is most likely to be the target market for each of the following small
businesses. (You may think of more than one market for some businesses.)
(a) Convenience store (b) Mechanic
(c) Accountant (d) Nursing home
(e) Childcare centre
Extension
1 ‘Any business that neglects the role of marketing will almost certainly experience
low levels of sales and reduced profit levels.’ Evaluate the accuracy of this
statement.
2 In small groups, conduct a survey of 30 people to investigate what type of movies
they watch at the cinema. Using a database, group the respondents by age and sex.
Present your results in the form of graphs and charts.
3 In small groups, create a customer survey form for obtaining information on a
business’s level of service, product range, business facilities and suggestions for
improvement. Compare each group’s survey.
Marketing mix
Once the business owner has established the marketing goals (a statement of what
the business expects to achieve through the marketing activities) and selected a
target market, the next step of the marketing plan is to develop marketing strategies
BizWORD to achieve the goals. Marketing strategies are actions undertaken to achieve the
Marketing strategies are actions business’s marketing goals through the marketing mix.
undertaken to achieve the business’s One of the most useful ways of understanding how to develop a marketing
marketing goals.
strategy is to examine each of the elements of the marketing mix. The marketing
Marketing mix refers to the
mix refers to the combination of the four Ps — product, price, promotion and
combination of the four elements of
marketing, the four Ps — product, place (distribution). The business has control over these elements and uses them to
price, promotion and place — that reach its target market. As well, the business has control over other organisational
make up the marketing strategy. resources — such as information, finances and employees — that may also be used
to achieve marketing goals.

Product Price
Marketing BizFACT
mix A business may vary its marketing
mix when it wants to reach different
target markets.
Promotion Place
FIGURE 8.24 The four Ps of the marketing mix
Once the four Ps have been established, the business must then determine the
emphasis it will place on each of the variables. This will largely be determined by BizWORD
where the product is positioned or its stage in the product life cycle. For example, The product life cycle describes the
a product that is being marketed with an image of exclusivity and prestige will life of a product over four stages:
introduction, growth, maturity and
require a marketing mix totally different from a no-frills, generic item. A different decline.
marketing mix will also be required for a product in its introductory stage than
when it reaches the decline stage.
Product
This element of the marketing mix involves much more than just deciding which
product (goods or service) to market. The business owner needs to determine the
product’s: Weblink
• quality • packaging Use The four Ps of
• design • labelling marketing weblink in your
• name • exclusive features eBookPLUS to discover
more about the four Ps of
• warranty and guarantee. marketing, and the strategy
The product is a combination of all these variables. Customers will buy products and implementation around
that not only satisfy their needs but also provide intangible benefits such as a these four elements.
feeling of security, prestige, satisfaction or influence.
FIGURE 8.25 Purchasers of a Jaguar

C-X75 will buy a product that not only
satisfies their needs and wants but
also provides intangible benefits such
as a feeling of prestige, importance or
influence.

One intangible benefit of utmost importance is customer service. A product may
be superior in all aspects compared with its rivals. However, if the manufacturer is
unable to deliver a high degree of customer service to complement the product, it
will soon fail in the marketplace. Some businesses spend large amounts of money
establishing a brand name, but their brand name advantage is quickly lost if they
do not also focus on their relationship with the customer. Such a relationship is
usually built around the level of customer service offered.
Businesses should also remember that customer service does not end with the
sale. Ongoing service, especially for complex and expensive products, is crucial to
maintaining strong customer relationships. A business needs to undertake much
careful planning about after-sales service when developing the product.
BizWORD Product packaging
Packaging involves the development The packaging of a product is sometimes as important as the product itself to
of a container and the graphic design assist sales. Well-designed packaging will give a positive impression of the product
for a product.
and encourage first-time customers to purchase. Tasteful packaging can create an
image of luxury, sensuality and exclusiveness, helping to promote the product. In
addition, packaging helps preserve, inform, protect and promote the product.
With increasing community awareness of environmental pollution, businesses
must also be sensitive to the problems caused by throw-away packaging.
Approximately half of all household garbage consists of discarded packaging.
Weblink
National Schools
Packaging Design
Challenge
FIGURE 8.26 It takes 2.6 seconds for a customer to choose one product instead of another,
so the packaging has to be right. A Year 11 student from Melbourne High won a prize in the
National Schools Packaging Design Challenge conducted by the Packaging Council of Australia.
His cylinder biscuit container preserves, protects, informs and promotes with its classy labelling,
including the mandatory labelling requirements. More details on this national challenge can be
found at www.pca.org.au/education.
Product branding
An important part of the product development is the brand and associated brand
BizWORD
logo. Combined, these can be a powerful marketing tool. For example, the three-
A brand is a name, term, symbol
or design that identifies a specific
pointed star of the Mercedes-Benz and Coca-Cola’s distinctive narrow-waisted
product and distinguishes it from its bottle are famous brand names and symbols. Some businesses encourage the
competitors. instant recognition of their brand symbol rather than their brand name. Perhaps
A brand logo is a graphic the most famous example of this technique is the ‘golden arches’ symbol used by
representation that identifies a McDonalds. In some advertisements the brand name does not appear at all, only
business or product. the brand symbol. This is a clever and subtle method used to reinforce the meaning
of the symbol and associate it with a brand name.

Price
Many business owners have difficulty selecting the ‘correct’ price for their product.
A price set too high could mean lost sales, unless superior customer service is
offered. A price set too low may give customers the impression of a ‘cheap and
nasty’ product. Therefore, correct pricing is important. Business owners normally
choose one of three methods for calculating price.
1. Cost-based: a pricing method derived from calculating the total cost of producing
or purchasing a product and then adding a mark-up for profit (see figure 8.27).
2. Market-based: a method of setting prices according to the interaction between
the levels of supply and demand — whatever the market is prepared to pay.
3. Competition-based: choosing a price that is either below, equal to or above that of
the competitors.
FIGURE 8.27 Cost-based pricing is commonly

used by large retail stores. The cost price is
increased by a fixed percentage to arrive at
the selling price. Assume a sporting goods
store has a mark-up of 100 per cent. A tennis
racquet is bought for $200 and, with a 100 per
cent mark-up, will have a selling price of $400.
Promotion
To sell more of its products, a business has to change customers’ behaviour
through information or persuasion. This is achieved through promotion. The role BizWORD
of promotion is to inform, persuade and remind consumers about a business’s Promotion refers to the methods
products, with the aim of: used by a business to inform,
• attracting new customers by raising awareness of a particular product persuade and remind customers about
its products.
• increasing brand loyalty by reinforcing the image of the product
• encouraging existing customers to purchase more of the product.
Many people confuse promotion with advertising because of its visibility and
frequency. However, advertising is just one of the four elements of the promotion
mix. The main forms of promotion are as follows:
1. Personal selling and relationship marketing: personal selling involves the activities
of a sales representative directed to a customer in an attempt to make a sale.
Relationship marketing refers to the development of long-term, cost-effective
and strong relationships with individual customers.
2. Sales promotion: refers to activities or materials used by the business to attract
interest and support for the good or service. Examples include free samples,
coupons and point-of-purchase displays.
BizFACT
E-commerce is a rapidly expanding
3. Publicity and public relations: Publicity refers to any free news story about a
form of promotion. Approximately
business’s products. Public relations are those activities aimed at creating and one-third of small businesses in
maintaining favourable relations between a business and its customers. New South Wales expect to use
4. Advertising: print or electronic mass media are used to communicate a message e-commerce to sell goods and services
about the product. Advertising is used to attract potential customers, create a within the next 12 months.
demand for the product and communicate essential information.

FIGURE 8.28 Businesses can select from
a wide range of media when developing
their public relations strategies. For
example, popular public figures or
celebrities are often used to support
a media campaign. Tourism Australia
contributed $3.5 million to bring Oprah
Winfrey to Australia in 2011 so that
she could promote the country on her
television show.
Changes in technology, especially advances in information and communication

technology (ICT), are having a significant impact on how businesses promote their
products. The internet, for example, has become an effective advertising tool used
by businesses to deliver specific messages to its target market. Internet newsgroups,
ezines, chat rooms, social networking websites and online publications can all be
used in an advertising campaign. The internet has also provided opportunities for
many small businesses to undertake more of their own promotional activities (see
Bartlett Precision Manufacturing —

social media marketing
There are many benefits to be gained
for those small businesses prepared
SNAPSHOT to use social networking or media
websites such as Twitter, Facebook
and YouTube, especially for marketing
their products. If, for example, their
❛ Social networking marketing is focused on brand
allows my small recognition, then social networking
provides a perfect opportunity for
business to have creating that brand recognition. This
is exactly the approach taken by Troy
wide exposure . . . ❜ Bartlett, owner of Bartlett Precision Manufacturing. Troy uses Facebook and Twitter
to provide a unique, personal view into his business, which helps him develop a close
connection with his clients. He has established a Facebook-branded page providing
details about his business that people can become ‘fans’ of. In turn, all their friends
are then introduced to his brand and range of products. He also uses LinkedIn to
communicate with other engineers. According to Troy, ‘Social networking allows my
small business to have wide exposure in the marketplace’.
Snapshot question
Explain the benefits of social media marketing.

Place BizWORD
The fourth ‘P’ of the marketing mix is ‘place’ or distribution. This refers to Place or distribution are activities
activities that make the products available to customers when and where they that make the products available to
want to purchase them. A distribution channel is a way of getting the product customers when and where they want
to purchase them.
to the customer. This process usually involves a number of intermediaries or ‘go
Distribution channels are ways of
betweens’, such as the wholesaler or retailer. Apart from the retailer, the other
getting the product to the customer.
intermediaries are often invisible; that is, the customer knows little about their role
and operation. There are three main types of distribution channels:
1. Producer to customer. This is the simplest channel and involves no intermediaries.
Virtually all services, from tax advice to car repairs, use this method.
2. Producer to retailer to customer. A retailer is an intermediary who buys from
the producer and resells to customers. This channel is often used for bulky or
perishable products such as furniture or fruit. BizFACT
3. Producer to wholesaler to retailer to customer. This is the most common method The business owner may wish to keep
used for the distribution of consumer goods. A wholesaler is an intermediary supply of the product restricted to a
who buys in bulk from a producer, then sells in smaller quantities to retailers. few specialised outlets. Alternatively,
Producers will use the services of a wholesaler when a large number of retailers distribution may be as wide as is
sell the product and the producer finds it difficult to deal with them all. practically possible.
Summary
• Marketing strategies are actions undertaken to achieve the business’s marketing
goals through the marketing mix.
• A business controls four basic marketing strategies to reach its target market:
product, price, promotion and place (the four Ps of the marketing mix).
• Products are goods or services, and consist of both tangible and intangible features.
• Packaging helps preserve, inform, protect and promote the product.
• Product branding is the brand and associated brand logo.
• A business must select the most appropriate pricing method suitable to its
product and market conditions. Business can choose one of three methods for
calculating price: cost-based, market-based and competition-based pricing.
• Promotion refers to the methods used by a business to inform, persuade and
remind customers about its products.
• Distribution channels (place) are a way of getting the product to the customer.
Revision EXERCISE
1 Recall the four Ps of the marketing mix.
8.7
2 Identify four intangible benefits that products may provide.
3 Clarify the importance of customer service.
4 Think of a product you recently purchased. Identify the intangible benefits you
gained from the product.
5 Explain why marketers prefer to use the term ‘total product concept’ rather than
simply ‘product’.
6 Predict what may happen to the level of sales if a product’s packaging does not
match its position.
7 Explain the relationship between ‘brand’ and ‘brand logo’.
8 Account for why businesses spend so much money attempting to establish a brand name.
9 Evaluate each of the following brand names. Indicate the strong points of each name.
(a) Nokia mobile phones
(b) Apple computers
(c) LG electronic products
10 Summarise the three main pricing methods.

11 As the manager of a shoe store, you have just received a delivery of new boots
that cost you $50 a pair. Your usual mark-up is 60 per cent. However, you find out
that yours is the only store in town that will be stocking this fashionable product.
Calculate what price you will set for the boots. Explain your decision.
12 Outline the role of promotion.
13 Recall what promotion aims to achieve.
14 Construct a concept map summarising the four main forms of promotion. The first
one has been started for you.
Personal selling and Sales promotion

relationship marketing
• involves sales
assistant
•
PRODUCT PROMOTION
STRATEGIES
(PROMOTION MIX)
Publicity and public Advertising

relations

15 Recommend a distribution channel for the sale of:
(a) a daily newspaper (b) a washing machine (c) an imported motor vehicle.
Extension
1 When deciding on a brand name and brand logo, investigate some of the
considerations that a marketer must take into account.
2 Determine how a business sets its price when it wants to achieve the objective of
profit maximisation.
3 ‘Some people would argue that “marketing ethics” is a contradiction in terms.’
Evaluate this statement.
4 Referring to a business you are familiar with, analyse and evaluate the promotion
methods used for one of its goods or services.
5 Using magazines, newspapers and the internet, collect and paste into your notes five
advertisements for small businesses.
(a) Identify the good or service the business is selling.
(b) State what unique features of the business are publicised.
(c) Determine whether you think the advertisement fulfils its function of reminding,
informing and persuading existing and potential customers. Give reasons for your
answer.
(d) Rank the advertisements in the order that they appeal to you, from the most
appealing to the least appealing. Explain how you determined the ranking order.
(e) Compare your ranking with other members of the class and discuss similarities and
differences.
8.5 Finance
A thorough understanding of accounting and finance is essential for business
managers. Accounting is a management tool that is concerned with providing
information on the financial affairs of a business, while finance is concerned with
where the business sources its funding.

Management of business finance is a crucial aspect of business success.
Management of finance starts with sourcing — where will the funding come from? BizWORD
Once a business has secured funding, it then needs to ensure that it is applied Contingencies are unanticipated
appropriately. All financial managers would be aware of the need to manage the events that can lead to financial
difficulty. For a business to be well
cash flow of the business. Cash flow is sometimes described as the ‘lifeblood’ of
managed, it needs to have saved
business. The management of cash flow involves anticipating cash expenditure and money for such events.
ensuring that enough of the income earned comes in the form of cash. A further
challenge is to ensure that enough money is saved in the event of unexpected
challenges. Some money for contingencies needs to be put aside. Contingencies
are unanticipated events that can lead to financial difficulty. For a business to be
well managed, it needs to have saved money for such events because they can place
the business under unexpected financial pressure.
A business that is well managed will have a good credit rating, which means that BizFACT
lenders will be prepared to lend the business money because they know that it is During a recent economic downturn,
safe for them to do so. The credit rating is determined by financial organisations many businesses experienced
that assess the capacity of the business, both to repay debt and manage finances financing difficulties. Although
the cost of finance fell, so did the
responsibly. If a business has a good credit rating, lenders will readily provide availability. Businesses that were well
funds. The business can use borrowings to its advantage. Thus, if it wants to managed financially found that the
expand operations, update technology or open offices overseas, it probably will be downturn reduced their revenues.
able to get the money to do so. The cost of their borrowed funds fell,
In short, business leaders and managers need to have a good understanding however, which meant many repaid
debt more quickly than they had
of accounting and finance, and need to draw on this knowledge and skill when originally expected.
managing all aspects of the business.
The HSC course investigates finance in greater depth, so this chapter will provide
an elementary understanding of the main concepts.
Accounting — introduction and scope

Accounting is a managerial and administrative tool that involves the recording of
financial transactions, so that a clear summary of what has happened to the money BizWORD
coming in and going out can be traced over time. Every financial transaction, from Accounting is a managerial and
the ordering of stock to the sale of an old stock item, is recorded. These records administrative tool for recording
financial transactions, so that a
(which include delivery dockets, sales receipts, invoices, cash register records and summary of what has happened to
e-payment transactions, to name a few) are entered into accounts that may be either business money can be traced.
computerised or manual (in the form of books). The information in these accounts
is then summarised into financial reports and statements that provide very valuable
information about the trading period (see
table 8.4 on page 230). The statements are
set out in a standard format so that they
are easy to read and understand. A well-
trained manager can use these statements
to get a very accurate picture of the
financial status of the business.
FIGURE 8.29 Accounting is more than ‘crunching

the numbers’. Money is the lifeblood of all
businesses. The rate at which it flows into or out
of the business determines whether the business is
expanding and successful. There is only one sure way
to measure the flow of money — develop a system of
financial records. No business, no matter how small,
can survive without a sound accounting system.

The three main accounting/financial reports or statements are shown in table 8.4.
TABLE 8.4 The main accounting financial reports or statements
Name of statement/report Description of the statement/report
• Cash flow statements • Indicate the movement of cash receipts

and cash payments resulting from
transactions over a period of time.
• Income statements (also called statement • Show the revenue earned and expenses
of financial performance, revenue incurred over the accounting period with
statement or profit and loss (P&L) the resultant profit or loss
statement)
• Balance sheets (also called statement of • Represent a business’s assets and liabilities
financial position) at a particular point in time and represent
the net worth of the business
BizFACT
The main purpose of financial A business is an economic entity — it trades within society and has responsibility
statements is to summarise both to its internal and external stakeholders (i.e. the members of society who
information in a way that is useful for
are directly and indirectly affected by the affairs of the business). Accounting
interested parties. Together the reports
show accurately how the business is provides information that is valuable to managers. It also provides information
placed financially. to employees, owners and shareholders (if it is a company), suppliers, lenders,
customers, government (including regulators), competitors and the general public.
Competitors
General public
Suppliers Government
Internal
stakeholders
Lenders
Customers
FIGURE 8.30 The stakeholders interested in the accounting information given by business
Accounting is useful, as it provides information in statements about each of the

following as it relates to the business:
• financial status/position
• cash status/position
• financing or funding information
• cash flows

• profitability and return on investment
• trends in earnings, borrowings, sales and so on that together indicate the risks
the business faces.
The main purpose of accounting then is to provide information that is useful
and accurate, and presented in a clear and concise form. This information will
encourage:
• judicious and prudent financial decision making
• planning that is purposeful
• confidence in the business’s management
• accountability, or stewardship.
Sasy n Savy — the importance of accounting

Accounting is the process that allows a
business to control basic areas such as
cash control (making sure there is enough
cash to keep the business operating day
to day) and pricing. For Samea Maakrun,
who owns Sasy n Savy, this means keeping
SNAPSHOT
a lid on costs, making sufficient profit and
reinvesting some profit into growing the
business. ❛ . . . accounting
Sasy n Savy manufactures natural and
organic bath, body and hair care products, utilising Australian plants and herbs. With is not just about
10 staff and four contractors in Australia, and agents in Hong Kong and London,
Samea sells in Australia at selected retailers, and online through her website. She is a
maintaining financial
qualified accountant and is proud to run a debt-free and cash flow positive business. records. ❜
However, accounting is not just about maintaining financial records. It also focuses
on making sure the business complies with taxation obligations, such as GST and
income tax. Determining the best price for making a profit is another important area
of accounting. Sasy n Savy does this by targeting the middle to upper end of the
market. Its prices are still affordable, however, and the business emphasises quality in
its products.
Snapshot question
Outline the role of accounting for Samea Maakrun’s business. BizWORD
Accountability occurs when a
business acts in the best and highest
interests of its owners. Full and
Finance — introduction and scope complete ‘disclosure’, which means
Finance refers to how a business funds its activities — for instance, where it gets the to be open and not hide the truth,
ensures that the books of account
money to trade, why it chooses to use certain lenders — as well as the costs, risks, are kept accurately and that the
terms and benefits of different types of borrowings. Financial knowledge requires an information reflected in them, and
understanding of a range of financial instruments. Businesses, even very small ones, which is summarised in reports,
generally borrow money at some time — usually when they first set up. is based on the true and actual
It is vital for a business to be able to manage its borrowing and to use appropriate transactions. Another term for
accountability is stewardship.
types of borrowing — namely types that match its earning stream and capital/asset
structure. Borrowing represents a useful source of finance — but it is one that Finance refers to how a business
funds its activities — for instance,
comes at a price. It is management of the cost and risk of finance that is the key to where it gets the money to trade, why
successful financial management. it chooses to use certain lenders — as
Cost management is crucial because businesses tend to try to maximise profits. well as the costs, risks and benefits of
In today’s highly competitive markets, in Australia and globally, a business succeeds different types of borrowings.
when it can minimise cost (while maintaining quality, reliability, high service levels

and so on). Risk management is crucial because businesses can be uncertain
regarding their chances of making financial losses. Astute financial management is
therefore considered indispensable to business.
An understanding of both accounting and finance is absolutely necessary
if business managers and owners are to make informed decisions. The ability to
interpret financial information helps with the leadership task — which includes
planning for future activities; choosing between alternative courses of action when
presented with business problems; organising the resources required to produce
a product or service; and then effectively researching and marketing it; and
controlling and monitoring spending in all aspects of the business.
Summary
• Businesses need to be led by managers with a good understanding of accounting
and financial management.
• Accounting is a financial management tool that is involved with the recording
and analysis of all the business’s financial transactions.
• The financial transactions are summarised into financial statements. The main
ones are:
–– cash flow statement
–– income statement
–– balance sheet.
• Finance details how a business funds its activities.
• It is vital for a business to be able to manage its borrowings and to use appropriate
types of borrowings.
EXERCISE Revision
8.8
1 Distinguish between accounting and finance.
2 Recall what the management of cash flow involves.
3 Clarify why some money for contingencies needs to be put aside.
4 State what a credit rating assesses.
5 Explain why a business would want to have a good credit rating.
6 State why accounting is necessary for business.
7 Identify the main accounting reports and statements.
8 Discuss the role of the internal and external stakeholders who would be interested in
the financial situation of the business.
9 Recall five reasons why accounting is useful for business.
10 Explain the importance of accountability.
11 Demonstrate why astute financial management is considered indispensable to business.
Weblink Extension
Australian Accounting 1 Use the Australian Accounting Standards Board (AASB) weblink in your
Standards Board (AASB) eBookPLUS to find out more about the organisation. Investigate how accounting
standards are developed and implemented.
2 ‘Shrinkage’ refers to the loss of stock from a business. White-collar crime refers to the
theft or embezzlement of money from a business. Analyse the proposition that: ‘if
employees were paid higher wages, then there would be no need to audit as there
would be no need for anyone to steal from businesses’.
Weblink 3 Use the Count weblink in your eBookPLUS to research an auditing firm. Determine
Count the range of financial services the firm offers and present an advertisement for the
business to the class.
4 Assess the effect of an economic downturn on a business’s financial management.

Financial statements
Introduction to financial statements
All business owners must be able to make judgements about the direction of the
business at any given time. To help them achieve this, they need to prepare some BizWORD
financial statements — reports that summarise transactions over a period of time. Financial statements are reports that
The main accounting reports and financial statements are cash flow statements, summarise transactions over a period
of time.
income statements and balance sheets. Business owners, for example, will need to
be aware of whether the cash flow through the business is sufficient to allow the
business to pay its debts on time, whether or not the business is trading profitably,
and the financial status of the business.
Cash flow statements

A cash flow statement is a financial statement that indicates the movement of cash BizWORD
receipts and cash payments resulting from transactions over a period of time. Cash A cash flow statement is a
flow statements are vital for the business to assess whether money inflows can match financial statement that indicates the
money outflows. The term ‘liquidity’ is often used to describe whether a business has movement of cash receipts and cash
a good or adequate cash flow. Figure 8.31 summarises the typical monetary inflows payments resulting from transactions
and outflows. A business is said to be liquid (or solvent) if it has the cash available to over a period of time.
meet payments as they are due. Generally a business would prefer its sales to be in Liquidity refers to the amount of
cash a business has access to and how
cash for precisely this reason — it has a need for cash to meet its own payments. Why
readily it can convert its assets into
do businesses allow credit sales when they prefer cash? This is because they need to cash so that debt can be paid.
match their desire for cash with the customer’s ability to pay. By allowing customers to
purchase on credit, the business will obtain sales it might otherwise lose.
CASH INFLOWS CASH OUTFLOWS
Cash sales
Payments
for stock
Credit sales
when paid Payments for
expenses
(wages, insurance, etc.)
Other income
(e.g. interest from investments, Payments for
non-operating income) non-operating expenses
FIGURE 8.31 Cash flow items for a

typical business
Examine effective cash flow management
Cash flow statements are closely related to budgets, which are estimates of
anticipated future cash flows. Cash flow statements, however, are broader than
budgets because they are also used to summarise past information. Cash flow

statements are vital for the information they give on the timing of payments and
receipt of income. A business will keep information on cash movements because
this will help it predict future cash flows and hence make provision for payments.
A typical cash flow statement can be seen in figure 8.32.
Cash Flow Statement for Plant 1 (first quarter, 2015)

January February March
$ $ $
Cash at beginning of year 15 500 26 000 1 119 500
Cash inflows
Sales:
retail 20 000 23 000 54 000
public 33 000 36 500 123 000
other manufacturers
A 1 000 500 2 560 000 2 600 000
B 250 000 250 000 250 000
C 3 400 000 3 200 000 2 800 000
Total inflows 4 703 500 6 069 500 5 827 000
Cash outflows
Raw materials 3 650 000 3 760 000 4 720 000
Service costs 23 000 23 000 23 000
Leases
forklifts 11 000 11 000 11 000
equipment 125 000 125 000 125 000
Wages 850 000 990 000 980 000
Other 34 000 67 000 61 000
Total outflows 4 693 000 4 976 000 5 920 000
Cash surplus/(deficit) 10 500 1 093 500 (93 000)
Cash at end of year 26 000 1 119 500 1 026 500
FIGURE 8.32 Typical cash flow statement
A study of the cash flow statement (see figure 8.32) of a manufacturer shows that
this business made a cash surplus for two of its first three months of trading for the
year the report was made. You can see that the business made a small surplus in
January and a large surplus in February. However, in March, this business experienced
a cash deficit. It should be clear now why such statements are necessary. A business can
track its inflows and outflows over a period of time. It can then use these statements to
determine why the inflows and outflows are taking the pattern they are. For example,
in January, sales to manufacturer A were down on the usual $2.5 million average. This
may have been due to the normal business lull in January. The surplus for February is
quite high and an astute manager would have ensured that a portion of this surplus
was put aside in case it was needed in future months. As it turned out, the materials
costs for March were very high and sales to manufacturer C continued to fall.
The business can see that it needs to take some remedial action. In the short
term, if these trends continue, the business could cover cash deficits with the large
surplus it made in February. It would not, however, want the pattern of deficits to
continue, so managers need to make some decisions. For example, they might ask
where they can obtain a regular supply of cheaper raw materials. They could also
look at diversifying their sales base.
By using cash flow statements in this way, a business is able to both control
finances and plan strategies for financial benefit. Cash flow reporting can be used
to plan and predict future cash flow inflows. Outflows tend to follow trends, with
some variations over time.

Cash flow statements for larger businesses
While the cash flow statements previously shown are very detailed, they are more
suited to small to medium sized businesses. The format of cash flow statements
used by large businesses and public companies is shown in figure 8.33.
Reflections Images Ltd

Cash Flow Statement for the year ended 30 June 2010
$000
Cash flows from operating activities
Sales 600
Payments for stock (200)
Wages and salaries (150)
Net cash flow from operating activities 250
Cash flows from investing activities
Sales of non-current assets 500
Purchase of non-current fixed assets (200)
Net cash flow from investing activities 300
Cash flows from financing activities
New borrowing and currently raised debt 0
Changes in share capital 100
Net cash flows from financing activities 100
Net cash increase/(decrease) from all activities 650
Opening cash balance (340)
Closing cash balance 310
FIGURE 8.33 The format of cash flow statements for large businesses and public companies
It can be seen from figure 8.33 that there are various classifications of cash
that derived from operating, investing and financing activities. These terms are
distinguished below:
• Cash from operating activities — these are the cash inflows and outflows relating
to the main activity of the business; that is, the provision of goods and services.
• Cash from investing activities — these are the cash flows related to the purchase
and sale of non-current assets and investments.
• Cash from financing activities — these are cash flows related to the acquisition
and repayment of both debt and equity finance.
Summary
• There are three main financial statements created by accounting processes: the
cash flow statement, the income statement (also called revenue statement, profit
and loss (P&L) statement or statement of financial performance), and the balance
sheet (or statement of financial position).
• A cash flow statement shows the movement of cash receipts (inflows) and cash
payments (outflows) over a period of time.
• Liquidity is used to describe whether a business has a good or adequate cash flow.
• Cash flow reports are vital for the information they give on the timing of payments
and receipts of income.
• Cash flow statements are divided into three categories: cash flows from operating
activities, those from investing activities and those from financing activities.
Revision EXERCISE
8.9
1 Briefly outline what a cash flow statement is used for.
2 Define the term ‘liquidity’.
3 Recall why businesses allow credit sales when they prefer cash.

4 Explain the effect (short-term and long-term) of a bank loan on a business’s cash flows.
5 Classify each of the following items as either a cash inflow or cash outflow, stating
your reason for each item.
(a) Credit sales (b) Purchases of stock (c) Payments of wages
(d) Tax on income earned (e) Sales returned (f) Debtor payments
(g) Creditor payments
6 Examine why a retailer may have a variable cash inflow, depending on the time of year.
7 Explain how a cash flow statement may be used to give a detailed insight into the
financial situation facing a business.
8 Distinguish between the following cash flow items: those arising from operations,
those arising from financing, and those arising from investing activities.
9 Juanita owns a craft shop. During July the business sold $8200 of craft goods and
received $200 in bank interest. She paid her sales assistant a monthly wage of $1350.
During this month, the business spent $2800 on craft equipment, $350 on rent, $750
on insurance and $150 on electricity.
(a) Construct a cash flow statement for the month of July for Juanita’s business.
(b) Calculate the business’s closing cash balance for July if the opening cash balance
was $3500.
Extension
1 Cash is often referred to as the ‘life-blood’ of any business. Analyse the effects on
a business of carrying too little cash, and outline the problems that could arise if a
business carries too much cash.
2 Creditors, or accounts payable, are liabilities owed by the business that are due
and payable. Debtors, or accounts receivable, are monies owed to the business by
customers. Assess how delays in the receipt and payment of cash can have a large
effect on a business’s cash flow.
3 Research the terms ‘liquidity’ and ‘profitability’. Distinguish between these terms and
explain how sometimes a business will seek greater liquidity for lower profitability
(Hint: You might like to consider factoring, sale and leaseback, and inventory controls).
BizWORD Income statement

The income statement, The income statement has also been called the statement of financial
or statement of financial performance. This alternative title makes the intent and the content of the
performance, is a summary of the statement clear. It has had other names including revenue statement, and profit
income earned and the expenses
incurred over a period of trading. It
and loss (P&L) statement.
helps users of information see exactly The income statement is a summary of the income earned and the expenses
how much money has come into the incurred over a period of trading. It helps users of information see exactly how
business as revenue, how much has much money has come into the business as revenue, how much has gone out as
gone out as expenditure and how expenditure and how much has been derived as profit.
much has been derived as profit.
As outlined in chapter 1, profit refers to money earned by a business in the
course of operating that is in excess of costs; that is, money left after expenses are
covered. Mathematically, it is simply the income (or revenue) from all sources less
all costs (or expenses).
Income statement for year ended 30 June 2011
$
Revenue from sales 2 000 000
Less cost of goods sold (COGS) 1 000 000
Gross profit 1 000 000
Less expenses 500 000
Net profit 500 000
FIGURE 8.34 Typical income statement (or statement of financial performance) format (simple)

Figure 8.34 is a simple income statement that enables you to see the general
format. There are several important features to note. First, the statement must have
a heading that states the period of time over which the business was operating for
the purposes of the statement. Usually this is one year, but it may be half yearly,
quarterly, or even every month or six weeks.
Second, there are only five main categories of items:
1. revenue or income
2. cost of goods sold (COGS)
3. gross profit
4. expenses
5. net profit.
Third, the income earned (or revenue) is always stated at the top of the report.
If the business had absolutely no expenses then this would be the profit figure. BizFACT
This is not realistic. In truth, the business would have had costs that arose from Occasionally a business will receive
selling. So, we then deduct the expenses that occurred while the income was money from non-trading sources. Such
income is termed ‘non-operating’
being earned.
income and includes money from
This is done in three steps: investments that provide a return
1. List the sales for the period. whether or not the business trades.
2. Calculate cost of goods sold (COGS) and calculate the gross profit.
3. Itemise all other expenses (which may be classified into administrative, selling
and financial expenses) and calculate the net profit.
Net sales
Net sales are the amount of revenue a business has earned from sales when the
effects of sales returns are deducted.
Revenue generally means income from sales. Sometimes the business will offer
discounts to customers who pay outstanding amounts quickly. Such discounts
reduce the business income and must be deducted from the calculation of
profits. Similarly, when customers return goods, the cost of those goods must be
deducted from sales figures. This is the way to work out net sales in the revenue
statement:
$
Sales 100 000
Less discounts allowed to customers 2 000
Less returns of sold items 3 000
Net sales 95 000
Gross profit and cost of goods sold (COGS) BizWORD

Gross profit is the term given to the sales less cost of goods sold (COGS) or, Gross profit is the term given to the
mathematically: sales less cost of goods sold (COGS).
The cost of goods sold (COGS) is the
value of stock that a business has sold
Gross profit = Sales − COGS to its customers.
The gross profit calculation is important as, essentially, it tells the business
how much its mark-up is on the cost price of the goods it has sold. This varies
somewhat from business to business but is generally between 50 and 100 per cent.
If the mark-up was enormous (say 800 or 1000 per cent), then it would attract
other businesses to compete in the market.
The cost of goods sold is an expense to the business. However, it is not grouped
with other expenses. This is because the mark-up (or ‘contribution margin’) on

the cost of goods sold determines the level of overall income. In a service-based
business, there is no stock and therefore no mark-up. Therefore, income and gross
profit are the same. Cost of goods sold affects only businesses that on-sell items
they have purchased.
The calculation for COGS is determined as shown below:
COGS = Opening stock + Purchases − Closing stock

BizWORD
Opening stock is the value of stock Opening stock is the value of stock (or inventory) that the business has at the
(or inventory) that the business has at start of the financial year. Closing stock is the value of stock on hand at the end of
the start of the financial year.
the financial year. Here is an example showing how COGS is calculated:
Closing stock is the value of stock on
hand at the end of the financial year. $
Opening stock (stock at start of period) 2 500
Purchases (during the period) 10 250
Closing stock (stock at end of period) 3 400
COGS = Opening stock ($2500) + Purchases ($10 250) − Closing stock ($3400)
= $12 750 − $3400
= $9350
BizWORD Other expenses and separation of the expenses by type

Expenses are simply costs. Expenses are simply costs. Specifically, expenses are the costs incurred in the
Specifically, expenses are the costs process of acquiring or manufacturing a product or service to sell, and the costs
incurred in the process of acquiring
(direct and indirect) associated with managing all aspects of the sales of that good
or manufacturing a good or service to
sell and the costs (direct and indirect) or service. Expenses must always be subtracted from income to work out net
associated with managing all aspects profit. Although not always shown, it is very useful to separate the expenses by
of the sales of that good or service. type because this helps users of the financial information to target problem areas
quickly. In this part of the statement, all the expenses that do not form part of the
cost of goods are listed.
The expenses are broken down specifically into three types. These are shown in
figure 8.35.
Expenses*
Selling Administrative Financial
• Commission • Stationery • Interest payments

• Salaries • Office salaries • Lease payments
• Wages • Rent • Dividends
• Advertising • Rates • Insurance payments
• Delivery expenses • Telephone
• Electricity • Depreciation on buildings
• Depreciation on shop fittings • Audit fees
• Accountant’s fees
• Insurances
Selling expenses: These relate to the process of selling the good or service and can
be directly traced to the need for sales.
Administration expenses: Costs directly related to the general running of the business.
Finance expenses: Costs associated with borrowing money from outside people or
organisations and to minimising business risk.
* Costs of goods sold (COGS): this expense includes only the cost of stock sold and is shown separately in
the income statement (or statement of financial performance).
FIGURE 8.35 Income statement (or statement of financial performance) expense breakdown
by type

Net profit
The final step in the completion of the income statement is to determine the net BizWORD
profit. A net profit is the amount remaining when operating and non-operating Net profit is the difference between
expenses are deducted from gross profit. the gross profit and operating and
Net profit is shown mathematically as: non-operating expenses.
Net profit = Gross profit − Expenses
If all this information is combined, we can draw a much more realistic income
statement (see figure 8.36).
The income statement is always the first one to be compiled at the end of
the accounting period. This is because the figures from it are used in the next
statement — the balance sheet (or the statement of financial position).
When compiling the income statement, the manager should be mindful
of several things — the proportion of gross and net profit to sales and also
the level of expenses that accrue to selling, administration and finance. BizFACT
Because the reports collect and summarise a large amount of information, The word ‘net’ means all expenses
they also provide insight into how the business is both earning and spending. have been deducted.
This insight is extremely valuable, especially when analysing the statements
at the end of the accounting or operating period. The manager would also
be aware that the ‘bottom line’, or net profit, figure, provides more important
information than gross profit, which is really only a measure of the mark-up or
contribution margin.
U Win Pty Ltd income statement for year ended 30 June 2015
$ $ $
Sales 5 000 000
Less COGS 3 200 000
Gross profit 1 800 000
Less expenses
(a) Selling expenses
advertising 200 000
sales salaries 300 000
depreciation on cars 10 000
delivery 3 000
telephone 9 000 522 000
(b) Administration expenses
office salaries 400 000
depreciation on fixtures 5 500
stationery 1 500
security 12 000
rent 62 500
insurances 3 500 485 000
(c) Financial expenses

interest 125 000
insurances 6 000
leases 6 000 137 000 1 144 000
Net profit 656 000
FIGURE 8.36 Typical income statement (or statement of financial performance) format
(complex)

FIGURE 8.37 Accurate income statements are vital, even for small businesses.
Summary
• The income statement is a summary of the income earned and the expenses
incurred over a trading period.
• The main classification of items in the income statement are revenues, cost of
goods sold (COGS) and expenses.
• Gross profit = Sales − Cost of goods sold (COGS)
• COGS = Opening stock + Purchases − Closing stock
• Expenses are simply costs and can be broken down into selling, administrative
or financial.
• Net profit = Gross profit − Expenses
EXERCISE Revision
8.10
1 Identify the different names given to the income statement.
2 Define each of the following terms and, where relevant, write down the
mathematical equation that would help in calculating the figure.
• Sales
• Cost of goods sold
• Gross profit
• Net profit
3 Calculate the cost of goods sold (COGS), given the following information:
$
Sales 700 000
Stock (opening) 100 000
Purchases of stock 400 000
Closing stock 50 000

4 Using the figures from question 3, calculate gross profit.
5 Using your workings from questions 3 and 4, calculate the value of net profit (or loss)
if expenses for the period totalled $80 0 00.
6 Anita Toparis owns and operates Petal’s Florist. Last year Anita had a sales
revenue of $285 0 00. Her cost of goods sold totalled $115 0 00. Her operating
expenses were: electricity $5000, advertising $11 0 00, interest charges
$5000, salaries $62 0 00 and rent $25 0 00. Construct an income statement
(statement of financial performance) for Anita and tell her whether she has made
a net profit.
7 Distinguish between selling, administrative and financial expenses, giving examples
for each.
8 Explain how an income statement can provide useful information to a business and
its stakeholders.
Extension
1 Research each of the following items that can be found in an income statement,
define each, and determine where it would be found (under revenue, cost of goods
sold, or expenses).
(a) Cartage inwards
(b) Cartage outwards/freight
(c) Commissions
(d) Bad debts
(e) Depreciation
(f) Interest
(g) Security
2 Use the information below to construct an income statement (statement of financial
performance) for Sathya’s Skatehouse:
$ $
Revenue from cash sales 500 000 Closing stock 20 000
Purchases for the period 50 000 Telephone 15 000
Salesperson’s wages 80 000 Rates 3 500
Insurance 2 000 Revenue from credit sales 50 000
Opening stock 100 000 Depreciation 4 000
Rent 20 000 Electricity 2 100
Advertising costs 10 000 Water 3 500
Interest costs 2 500 Lease costs (machinery) 5 500
Balance sheets BizWORD

The balance sheet, sometimes called the statement of financial position, is used A balance sheet represents a
to help owners keep a watch on their debt and equity levels, compare their overall business’s assets and liabilities at a
financial position with that of previous periods, and assist with the process of particular point in time, expressed in
money terms, and represents the net
financial decision making. It is a report that shows the overall financial stability of worth of the business.
the business. A typical balance sheet is shown in figure 8.38.
There are several things to note about the balance sheet. First, its heading
denotes that it is a snapshot of the business’s financial position as at a particular
point in time. Second, if a line is drawn between the two columns of figures, the
sum of items on the left-hand side ‘assets’ is equal to, or balances, the sum of items
on the right-hand side (liabilities and owner’s equity). This format for a balance
sheet is called the ‘T-format’ because we can draw a line down the middle and
separate the report into two halves by using the letter T. An alternative format, the
narrative format, is explored in Year 12.

Note format of the heading.
Assets are
on the left. Balance sheet for Real Quest P/L as at 30 June 2015
Liabilities
Assets Liabilities
are on the
These are Current assets $ Current liabilities $
right (owed
things the Cash 4 000 Accounts payable 550
to outside
business Accounts receivable 6 000 Bank overdraft 1 200
parties).
owns. Prepaid expenses 6 000 Credit cards 6 200
Stock 10 000 Accrued expenses 550
Total current assets 26 000 Total current liabilities 8 500 These are
things the
Non-current assets Non-current liabilities
business
Land and buildings 50 000 Mortgage 65 000
owes.
Fixtures and fittings 10 000
Intangibles 44 000
Total non-current assets 105 000 Total liabilities 73 500 Owner’s
Owner’s equity equity is on
Owner’s capital 35 000 the right
Retained profits 21 500 (owed to the
owners —
Total owner’s equity 56 500 also called
net worth).
Total assets 130 000 Total liabilities and owner’s equity 130 000
FIGURE 8.38 Typical balance sheet (or statement of financial position) showing division into
main parts
Balance sheet items

You will notice that the balance sheet is divided into two parts as shown in
figure 8.38. On the left-hand side are recorded the assets — the things the business
owns. On the right-hand side are recorded the liabilities and owner’s equity — the
things the business owes.
BizWORD Assets
Assets are items of value owned Assets are items of value owned by the business that can be given a monetary
by the business that can be given a value. Assets can be divided into several different types: current and non-current,
monetary value. tangible and intangible.
Current assets are assets that a business can expect to use up, or turn over, within
12 months. Examples include cash, accounts receivable (also called debtors) and
inventories (stock).
Non-current assets are those assets that have an expected life of longer than
12 months. These include large physical items such as buildings, land, machinery,
technology, vehicles, furniture, fixtures and fittings.
Intangible items are also included here. Intangible items are things of worth that
have no physical substance. Examples include goodwill, trademarks, designs,
copyright and patents. A good name or reputation (‘goodwill’) or an easily identifiable
BizWORD
logo obviously has worth — but how do you value in dollar terms something like
Liabilities are items of debt owed to
other organisations (e.g. suppliers,
good product design, a creative staff or reputation? Nevertheless, intangible assets are
banks) and include loans, accounts to a resource that the firm owns and must be recorded in the accounts.
be paid by the business, mortgages,
credit card debt and accumulated Liabilities
expenses. Liabilities are items of debt owed to outside parties and/or other organisations (like
suppliers or the banks) and include loans, accounts due to be paid by the business,

mortgages, credit card debt and accumulated expenses. The business will divide
the liabilities into current and non-current items.
Current liabilities are those in which the debt is expected to be repaid in the short
term (12 months or less) and include bank overdrafts, credit card debts, accounts
payable (also called creditors) and accrued expenses.
Non-current liabilities are long-term debt items such as mortgages, leases,
debentures and retirement benefit funds (money owed to employees upon their
retirement from the business). Some of these non-current liabilities can last up to
30 years.
Owner’s equity
The owners give a business money for it to acquire resources and begin operating. BizWORD
This money is called owner’s equity (capital). As the business operates, Owner’s equity is the funds
it should start to earn an income to cover its costs and then later earn a profit. contributed by the owner(s) to
The business can hold or retain these profits to target money for a particular establish and build the business. It is
also called ‘capital’.
project or it may put money into ‘reserves’ for distribution later. The business
could also choose to repay the owners who invested their money in the business
at the outset.
Over time, a successful business will have its owner’s equity amount increase in
value. This means that the owner’s claim on the business will also increase. This
is the owner’s reward for risking their money — and is also the reason for people
investing in the stockmarket long term.
Owner’s equity is considered to be a liability from the point of view of the
business, because it is a type of debt the business carries. However, unlike liabilities,
owner’s equity is a debt owed to owners because of the risk they took in investing
in the business.
Weblink
Summary Use the Balance sheet
• The balance sheet shows the overall financial stability of the business. to learn more about balance
• The main items in the balance sheet are assets, liabilities and owners’ equity. sheets, including a balance
• Assets are items of value to the business and can be either current or non- sheet template.
current.
• Liabilities are debts or business borrowing and can be either current or non-
current.
• Owner’s equity items refers to the owners’ claims and is considered a liability
from the point of view of the business.
Revision EXERCISE
8.11
1 Identify the alternative title used for a balance sheet.
2 Outline the purposes of a balance sheet.
3 Identify what is meant by the term ‘T-format’ used to describe the balance sheet.
4 Account for the fact that the balance sheet is called a ‘balance’ sheet with reference
to both sides of the statement.
5 Define, with examples, what is meant by the term ‘assets’.
6 Distinguish between current and non-current assets, with examples of each.
7 Outline the intangible items of a balance sheet.
8 State what liabilities are, and distinguish between those that are current and those
that are non-current.
9 Explain how the business owes owners both their investment and also a return for
their investment.

10 The balance sheet below as at 30 September has been badly prepared. Construct the
balance sheet correctly.
Balance sheet as at 30 september
Assets $ $ Liabilities $ $
Bank 3 400 Motor vehicles 30 000
Creditors 2 500 Debtors 2 000
Capital 46 000 Stock of materials 1 600 33 600
Loan 10 000 Owner’s equity
Equipment 23 000
+ Drawings 4 000
27 000
− Net profit 5 500 21 500
61 900 55 100
Extension
1 Determine why increases in business wealth add to the owner’s equity amount and
thereby increase the wealth of those investing in business.
2 Account for the fact that the income statement will always be drawn up before the
balance sheet.
3 Intangibles are subjectively valued, whereas tangible assets are more easily objectively
valued. Extrapolate why the value of intangibles — such as goodwill, trademarks,
designs, copyright and patents — are very hard to value, while the value of buildings
and vehicles can be easier to determine.
4 In accounting, the true value of assets — such as buildings and land (which may
be revalued upwards), vehicles (which may be valued downwards) and goodwill —
is reflected in accounts as ‘depreciation’, ‘amortisation’ or ‘revaluation reserves’.
Research these terms and analyse how they are used to find a truer picture of the
value of a business’s assets.
The balance sheet equation

The balance sheet is called the balance sheet for a good reason — it should always
balance. This means that the sum of items on the left-hand side (the assets) must
total the sum of items on the right-hand side (liabilities and owner’s equity). This is
summarised in the balance sheet equation below.
A = L + OE
Assets = Liabilities + Owner’s equity
You will immediately see that the balance sheet is set out in a way that mirrors
the accounting equation, with assets on the left, and liabilities and owner’s equity
on the right.

Example 1 $
Assets 145 000
Liabilities 110 000
Owner’s equity ?
Since
A = L + OE then we can say $145 000 = $110 000 + OE.

Therefore owner’s equity must be $35 000.
Example 2
$
Accounts receivable 12 000
Cash at bank 65 000
Mortgage 250 000
Capital 230 000
Accounts payable 3 000
Visa Card debt 6 500
Land and buildings ?
Step 1: Identify all assets, liabilities and owner’s equity items and group them as shown
(into the format of the balance sheet).
Assets $ Liabilities $
A/cs Rec. 12 000 A/cs Pay. 3 000
Cash 65 000 Visa Card debt 6 500
Land and buildings ? Mortgage 250 000
259 500
77 000 $
Owner’s equity
Capital 230 000
Step 2: Apply the equation and find the unknown quantity.

A = L + OE
$77 000 + ? = $259 500 + $230 000
$77 000 + ? = $489 500
? = $489 500 − $77 000 = $412 500 (value of land and buildings)
By applying the equation we can find the missing item. In general, whenever
you see a balance sheet, it is wise to quickly do this equation to satisfy yourself that
it is correctly drawn.
Summary
• The balance sheet should always balance.
• This means the assets must equal the liabilities.
• The balance sheet equation is: Assets = Liabilities + Owner’s equity or
A = L + OE.
Revision EXERCISE
8.12
1 Calculate the missing figure for each of the following:
(a) Assets = $245 000, Liabilities = $43 000, Owner’s equity = ?
(b) Assets = $342 000, Owner’s equity = $152 000, Liabilities = ?
(c) Assets = ?, Liabilities = $63 000, Owner’s equity = $212 500

2 Using the following balance sheet, calculate the value of the mortgage.
Balance sheet for Muggers Cups P/L as at 30 June 2015

Assets Liabilities
Current assets $ Current liabilities $
Cash at bank 7 000 Creditors* 1 250
Debtors* 3 400 Bank overdraft 2 200
Stock 11 000 Credit cards 4 800
Non-current assets Non-current liabilities
Land and buildings 150 000 Mortgage ?
Fixtures and fittings 12 300
Owner’s equity
Owner’s capital 35 000
*Note: Debtors are accounts receivable; creditors are accounts payable.
3 Calculate the total value of assets, owner’s equity and liabilities from the balance sheet.
4 If retained profits and owner’s capital totalled $23 000, instead of $35 000, calculate
the new value of the mortgage.
5 An artist, Candice Wahler, has asked you to help her construct a balance sheet.
(a) Briefly explain to her how a balance sheet is set out.
(b) Construct a balance sheet for her as at today’s date from the following information:
cash at bank $1500, motor vehicle $10 000, accounts payable $6000, equipment
$8200, accounts receivable $3000, bank loan $13 500 and stock $3000.
Extension
1 Goodwill is sometimes determined by the following two methods:
• method 1 — the difference between the total value of a business’s assets and the
selling price of the business
• method 2 — a proportion (e.g. 20 per cent) of the average of the past three years’
trading profits.
Application of method 1
A business is offered for sale for $250 000, but the valuation of the assets and stock
at cost is $200 000. Thus, the goodwill is $50 000. This reflects the good trading
reputation of the business, the stable client base and stable supplier contracts.
Application of method 2
A business records the following profits in the years 2015–2017. Calculate its
goodwill if goodwill is set at 40 per cent of the average three-year trading profits.
2015 2016 2017
Net profit $45 000 $65 000 $50 000
Goodwill = ($45 000 + $65 000 + $50 000) × 0.40 = $160 000 × 0.40 = $64 000

Use the information below to determine the value of goodwill in the various
scenarios provided:
(a) Ben’s Bowling is a business that is up for sale. The selling price is $150 000. The
value of the assets totals $120 000.
(b) Leon’s Laser Toys has recorded annual profits for the last three years averaging
$100 000. The goodwill calculation rate to apply is 33 per cent.
(c) Tina’s Video and Film Corporation has assets worth $40 000 in total. Profits are
$3000 annually on average, but she has put the business up for sale at $200 000.
What should the goodwill be, assuming a goodwill calculation of 30 per cent
of average profits over three years? What goodwill is Tina asking? Analyse the
problems this raises for the valuation of intangible assets.
2 When a Qantas airline skidded off the end of the runway in Singapore, its perfect
safety record was tarnished. No longer could it claim to be the ‘world’s safest airline’.
Predict the effect this incident could have had on Qantas’s goodwill.

8.6 Human resources
Do you have a favourite ice-cream flavour? Chocolate? Vanilla? Trampoline Gelato
is a rapidly expanding business, with more than a dozen franchises now operating.
While they pride themselves on the uniqueness of their gelato, and have even won
international awards, success in business requires more than just a great product.
Each store has an ice-cream maker who makes the gelato daily to a consistently
high standard, and cheerful, helpful sales assistants who promptly scoop out
customers’ favourite flavours. Richard Furphy, CEO of Trampoline Gelato, says,
‘Great staff help get the best out of the product’. Employees can make or break
a business, so the management of staff has to be top priority for every business
owner. BizWORD
Human resource management (HRM), in its simplest terms, is defined as the Human resource management
effective management of the formal relationship between the employer and the (HRM), in its simplest terms, is defined
employees. as the effective management of the
formal relationship between the
employer and the employees.
FIGURE 8.39 Trampoline Gelato stores

have superior customer service, excellent
ice-cream, an extensive product list and
a friendly atmosphere that portrays an
image of fun.
Successful business owners recognise that they rely on the quality of their
employees to achieve their goals of improved profit, growth and increased market
share. For a business to make best use of its employees, it should:
• take care to hire the best people
• develop cooperative and effective working relationships
• motivate staff to do their best in the workplace
• provide employees with opportunities for training and development.
Also, when an employee turns out to be an excellent worker, retaining that
employee may be crucial to ongoing business success. Without dedicated, trained
and motivated employees, the best organised plans will never be achieved. The
human factor is crucial in all businesses.
Most businesses that are successful in the long term maintain a balance between
concern for success (expansion or profit) and regard for their employees. Better
work and employment relationships, therefore, begin with the business recruiting
and selecting appropriate staff members (see the following Snapshot).

Bupa Health Dialog — a top employer
Brett Comer is General Manager of Bupa Health
Dialog, located in Melbourne. Bupa Health Dialog
offers evidence-based wellness, prevention and
SNAPSHOT chronic disease management services to help meet

the health needs of Australians.
In this interview, Brett outlines the recruitment and
selection process the organisation uses.
❛ Selecting an What strategies do you use to employ the most
employee that meets suitable person?
I start with a well-defined job description, which
our expectations . . . is outlines the requirements and challenges the role will
essential. ❜ encounter, and a job specification that details the
key competencies I expect from that employee.
I then provide a detailed brief to our HR team, which
commences the recruitment process.
Do you prefer to recruit externally or internally?
Company policy is to recruit internally in order to provide employees with a career
path, as well as to maintain a good cultural fit. If no suitable internal candidate is
available, the HR team recruits externally using the internet and online recruitment
agencies, such as SEEK, or newspaper advertisements. We will use an external
recruitment agency if we need specialist support.
What is the next stage of the process?
After checking the resumes, the HR team will create a short list of candidates
to interview. The interview panel usually consists of HR team members and the
manager of the department requesting the position. The manager will be more
interested in the technical aspects while the HR people look more for an appropriate
cultural fit.
Why is assessing a candidate’s ‘cultural fit’ so important?
BUPA is a people services organisation that has strong internal teams. We deliver
an external experience for our customers. Selecting an employee that meets our
expectations, and who reflects our business culture, is essential. Our positive business
culture is one of our main competitive advantages.
Do you use any testing instruments during the interview?
We use psychometric (psychological) testing for senior management positions or people
working in specialist teams, such as our nurses. This tests factors such as intelligence,
aptitude and personality characteristics.
What attributes do you want a candidate to possess?
Firstly, the technical abilities to perform the job. Secondly, somebody who displays
the right set of values: caring, customer focused, accepts accountability, aspiration to
develop and prepared to work in a team.
How do you attempt to overcome the present skills shortage when recruiting
candidates?
One successful strategy, especially for nurse recruitment, is our Refer-a-Friend scheme,
where employees can refer friends for a position. Should the referred person be
successful, the employee receives $1000.
Snapshot questions
1. Outline what Brett Comer does prior to beginning the recruitment
process.
2. Assess Bupa Health’s recruitment and selection process.

The main functions of staffing are to attract and acquire, train and develop,
reward, maintain, and separate the people — the human resource/employment BizWORD
cycle — needed to achieve the business’s goals. It is crucial for all businesses to The human resource/employment
cycle covers all stages in the process
select employees whose business approach complements that of the business. of employing staff, from initial
How well these functions are managed will largely determine the success of any planning through to recruitment,
business. Once a person is selected for a position they must be ‘maintained’ in selection, induction, training
the workplace. Training and development, as well as ongoing feedback on work and development, performance
performance, will assist both the employer and employee. Separation (termination) management, and eventual separation
of employment.
of employment is the final phase of the human resource cycle; it must be managed
to ensure employees are treated fairly and within the law.
The dynamic nature of business means that staffing needs will change over time.
As the business expands, or existing employees resign or retire, new positions will
be created, so business owners need to constantly monitor their staffing needs.
However, at the heart of staffing is the employee. Hiring the ‘right’ person for the
‘right’ position is of crucial importance to all businesses.
The HSC course investigates human resources in greater depth, so this chapter BizFACT
will provide an elementary understanding of the main concepts. Gerry Harvey of successful retail chain
Harvey Norman said, ‘Businesses
are made by people. We’ve proven
time and again that you can have a
wonderful shop, and put a bloke in
there who’s no good, and he’ll stuff
it up. Put a good bloke in, and it just
turns around like that.’
FIGURE 8.40 It is important to hire the

‘right’ person for the ‘right’ position.
Human resource cycle — the staffing process

The human resource cycle involves a business determining its employment needs in
line with its business strategy. As the name suggests, human resource management
begins with acquisition — recruiting and selecting people to work for the business.
Next, plans and procedures need to be put into place to train and develop these
employees. As well, steps must be taken to keep — that is, maintain these valuable
resources. Finally, there are times when employees will separate from the business,
either voluntarily, through retirement or resignation, or involuntarily, through
retrenchment or dismissal.
Figure 8.41 summarises the four main elements of the human resource cycle/
staffing process: acquisition, development, maintenance and separation.

1. ACQUISITION
• Identifying staffing needs

• Recruitment
• Selection
2. DEVELOPMENT
4. SEPARATION
• Training
• Voluntary and involuntary • Development
3. MAINTENANCE
• Monetary and
non-monetary benefits
FIGURE 8.41 The four main elements of the human resource cycle/staffing process
Each of these elements consists of related activities (see table 8.5 below) that
are carried out by the human resource department. Each of the four elements
complements the other, with the desired outcome being a productive and efficient
workforce.
TABLE 8.5 Elements of the human resource/staffing process and their related activities
Element Activities
Stage one
Acquisition
• Hiring new employees • Planning: identifying staffing needs; job analysis (determining
the exact nature of the position to be filled)
• Recruitment: attracting people to apply for the position in the
business; internal and external recruitment
• Selection: choosing and hiring the most qualified; testing and
interviewing
Stage two
Development
• Improving employees’ • Induction and training: teaching employees new skills and
skills and abilities helping them learn tasks associated with their jobs
• Development: the process of improving the skills, abilities and
knowledge of staff
Stage three
Maintenance
• Motivating employees • Monetary benefits: rewarding employees’ efforts through
to remain with the financial compensation; pay rates
business • Non-monetary benefits: rewards such as conditions; fringe
benefits
Stage four
Separation
• Employees leaving the • Voluntary: employees leaving on own accord; retirement,
business resignation
• Involuntary: employees being asked to leave; retrenchment,
dismissal

If handled correctly, ‘human resources’ can provide a business with a competitive
advantage; if mishandled, this key area can generate many problems.
No longer can a business rely on a constant supply of homo geneous
employees prepared to join a company for a lifetime. Businesses today must BizFACT
accommodate working parents with daycare needs, the middle-aged employee Developing a team approach within
who has to care for an elderly parent or an increase in people from culturally the workplace can bring about many
diverse backgrounds. benefits including enhanced employee
Therefore, businesses today are taking their human resources function, especially morale, higher levels of productivity
the staffing process, more seriously than in the past. and more satisfied workers.
Summary
• Employees are the most important resources for business success.
• Human resource management is the effective management of the formal
relationship between the employer and the employee.
• Most successful businesses maintain a balance between concern for success and
regard for their employees.
• The main functions of staffing are to attract and acquire, train and develop,
reward, maintain and separate the people needed to achieve the business’s
goals.
Revision EXERCISE
1 ‘People are the business’s most valuable resource.’ Outline what is meant by this
8.13
statement.
2 Define the term ‘human resource management’.
3 Recall what a business should do to make the best use of its employees.
4 Identify the main functions of staffing.
5 Explain why good staff management is vital to a business’s success.
6 Identify the main functions of the staffing process.
7 Propose why the staffing process is referred to as a ‘human resource cycle’.
8 Construct a concept map summarising the four main elements and the related
activities of the staffing process/human resource cycle.
9 Predict what problems can arise if a business employs a person unsuited to a
particular position. Share your answer with the rest of the class. BizFACT
If a business forecasts a greater
Extension demand for employees than the
1 Demonstrate the relationship between the human resource cycle and business goals. supply available, it will adopt a
strategy of attracting new employees.
2 Traditional human resource management (HRM) practices were developed and
If, however, supply of employees is
administered by the business’s human resource department. A recent study of HRM forecast to be greater than demand,
practices revealed that line managers — people responsible for the management of it will plan for a reduction of the
staff contributing to the main function of the business — are playing a greater role in workforce.
developing and implementing human resource (HR) practices. Assess the value a line
manager can bring to developing and implementing HR practices.
3 ‘The future is unpredictable. The business environment changes so rapidly that it
is impractical to make relevant plans for future staffing requirements. HR plans are
therefore largely irrelevant.’ Evaluate the accuracy of this statement.
Acquisition of human resources BizWORD

The first stage of the human resource cycle is acquisition. Acquisition is the Acquisition is the process of
process of attracting and recruiting the right staff for roles in a business. Most attracting and recruiting the right staff
people would associate this acquisition stage with the advertisement placed in the for roles in a business.
employment section of a newspaper or, increasingly, on an e-recruitment website.

However, before any advertisement is published, a business must undertake a
number of planning activities. In a sense, the advertisement represents the end
of the first activity (identifying staff needs) and the beginning of the next activity
(recruitment).
As table 8.5 demonstrates, there are three distinct activities involved in the
acquisition stage of the human resource cycle. The first is planning; that is,
identifying staffing needs.
Identifying staffing needs — human resource planning

All businesses have to plan for the positions that inevitably become vacant in their
organisations. Employees retire, resign, or are promoted. New positions develop as
the business expands. Therefore, for most businesses, determining staffing needs is
BizWORD an ongoing process.
Human resource planning is the Human resource planning includes the development of strategies to meet the
development of strategies to meet the business’s future staffing needs, forecasting the future demand for employees and
business’s future staffing needs. estimating the supply available to meet that demand.
If a business fails to accurately identify staffing needs and rushes to place a job
advertisement in the hope of quickly hiring someone, then the stage is set for
major problems. Usually, this results in a person being hired who does not possess
the skills or attitudes required for the position. Therefore, it is crucial that all
businesses undertake some human resource planning to accurately identify future
staffing needs.
FIGURE 8.42 Employees represent a

large investment and require as much
planning as other resources.
Job analysis: specifying staffing needs

BizWORD Job analysis is the next step in forecasting a business’s staffing needs. There is no
Job analysis is a systematic study sense in hiring people unless the business is clear about what it is hiring them to
of each employee’s duties, tasks and do. In other words, the business must determine the exact nature of a job before
work environment. it can recruit the right person to do it. Job analysis is a systematic study of each
employee’s duties, tasks and work environment.

Sonic Technologies
Better services, better performance
Trainee opportunity
Sonic Technologies has created an exciting trainee position
for applicants with an interest in information communication
technology and systems analysis. The successful candidate will
be trained in the position to become a business systems analyst.
This full-time position involves:
• coordination with both technical and non-technical staff to
gather, assess and present data
description
• production of regular reports, plans and forecasts

Job
• generation of creative solutions to fix problems and improve

existing processes
• liaison with stakeholders to explore ongoing development of
the business’s ICT systems.
Ideally, you must possess:
• graduate qualifications in business computing
specification
• good administration skills

• strong analytical and problem-solving skills
Job
• knowledge of IBM Notes

• knowledge of Windows 8.1 or Vista operating environments
• good communication skills
• the ability to work as part of a team.
Remuneration will be based on experience. Applications close
Friday 19 June. Applications in writing should be addressed to:
Manager, Sonic Technologies, PO Box 15, Glebe NSW 2037
E-mail: applications@sontech.next.com.au
Phone: (02) 8096 4400
FIGURE 8.43 An example of a job description and a job specification
A job analysis examines:

• actual job activities
• equipment used on the job BizWORD
• specific job behaviours required A job description is a written
• working conditions statement describing the employee’s
• degree of supervision necessary. duties, tasks and responsibilities
associated with the job.
The job analysis for a particular position typically consists of two parts:
1. Job description: a written statement describing the employee’s duties, tasks and A job specification is a list of the
key qualifications needed to perform
responsibilities associated with the job (see figure 8.43). a particular job in terms of education,
2. Job specification: a list of the key qualifications needed to perform a particular skills and experience.
job in terms of education, skills and experience (see figure 8.43).
Recruitment and selection

Once the job description and specification have been completed, it’s on to the
process of recruitment and selection.
BizWORD
Recruitment is the process of finding
Recruitment and attracting the right quantity
Recruitment involves finding and attracting the right people to apply for a job and quality of staff to apply for
vacancy using advertisements, employment agencies and word of mouth. When an employment vacancies or anticipated
organisation decides to recruit staff, it may choose internal or external recruitment vacancies.
methods.

Weblink
Use the Best job in the
world weblink in your
eBookPLUS to read more
about the job and the
successful applicant.
FIGURE 8.44 Tourism Queensland advertised a six-month position for an island caretaker. It
was advertised as the ‘best job in the world’ and attracted 34 000 applicants. It took four months
to find the right person for the job, with the top applicants tested for a range of personal and
communication skills. The successful applicant received rent-free accommodation and a salary
package worth $150 000.
Internal recruitment occurs when a business decides to appoint someone

already within the business to a vacancy. This usually involves an opportunity for
a person to take on different duties, and can mean a promotion to take on greater
responsibilities within the business. Internal recruitment is popular and involves
BizWORD less risk, because the employer already knows the person who will be filling the
Internal recruitment involves filling vacancy. Of course, the person recruited internally may then have to be replaced by
job vacancies with present employees, external recruitment.
rather than looking outside the External recruitment is used to find suitable applicants from outside the
business.
business, because staff planning has identified the need for a new position, an
External recruitment involves filling existing employee has resigned or retired, or the person previously performing the
job vacancies with people from
outside the business.
duties has been transferred or promoted to a new position within the business.
The recruitment method chosen will depend on the size of the business, the type
of position available and the nature of the labour force in the business’s particular
area. The main sources of employees available to a business include:
• advertisements in the media
• private employment/recruitment agencies
• schools, TAFE colleges or universities
• government employment agencies — for example, Australian JobSearch
BizFACT
• internal searches
Many businesses are now using the
• online services
internet to advertise their vacant
positions — online recruitment. • temporary casual agencies
JobSearch is funded and operated • word of mouth
by the Australian Government and is • family members.
Australia’s largest online job board. It Most businesses will want to advertise as widely as possible to attract the
is a free service to assist job seekers in
greatest number of applicants, so they will often use more than one avenue. Many
finding employment. It covers jobs in
all industries in all regions of Australia. businesses use employment agencies to handle the recruitment of staff. Some
About 800 000 people visit JobSearch agencies specialise in particular industries and will handle all the advertising of
each month and around 80 000 jobs vacancies. This is an expensive, but effective, method — the agency does the
are displayed at any one time. preliminary screening of candidates and presents potential employees who fit all
the criteria of experience, education and training (see the following Snapshot).

Many jobs are advertised online. Businesses, such as Seek Limited, provide an
efficient way for job seekers to search online for jobs that meet their qualifications
and expectations. Employers and recruiters use businesses like Seek to advertise
positions online and therefore reach a wide audience, although some still choose
the traditional method of advertising in the newspaper. Advertising in the general
media means that a business has to screen applicants and then proceed with
interviews. This is often time consuming if the business receives a large number of
applications; however, it does prove effective in many cases and small to medium-
sized businesses often use this method.
Weblink
Use the SEEK weblink in
your eBookPLUS to visit
the website of online
employment agency SEEK.
FIGURE 8.45 The founders of

SEEK.com.au, Australia’s largest
online employment agency, with over
180 000 jobs advertised at any given time
Recruitment — the outsourcing trend

Many small business owners use external recruitment agencies as a way of
decreasing the time involved in searching for a new employee. They pay an agency
to interview applicants and recommend a short list of potential employees or an
employee suitable for the available position.
There are a number of reasons for this trend, including the:
• growing demands on business to comply with increasingly complex employment
SNAPSHOT
legislation. Small business owners find it beneficial to access specialist advice
rather than risk breaching employment law.
• availability of online recruiters. Recent statistics show that small business
employers have widely embraced e-recruitment agencies.
• desire by small business owners to concentrate on their core business.
• difficulty in attracting candidates due to the low level of unemployment. External
recruiters generally have ready databases of possible employees and the skill to
sort candidates.
However, the principal reason for using an e-recruitment agency is related to the
cost of a poor recruitment decision, which is generally believed to be around two or
three times the annual salary of the person recruited. A poor recruitment and selection
(continued)

❛ A poor recruitment process leads to increased costs and lower productivity by increasing (among other
things):
and selection process • training costs if poorly qualified staff are selected
• job dissatisfaction, lower performance, industrial unrest or labour turnover if the
leads to increased business or the job does not meet the expectations of candidates selected
costs and lower • the absenteeism rate if staff feel inadequate for the job or feel under excessive
work pressure
productivity. ❜ • accident or defect rates if untrained or inappropriate staff are selected.
Snapshot questions
1. Construct a concept map summarising the main reasons why businesses use
recruitment agencies.
2. Explain the impact of a poor recruitment and selection process.
Selection
BizWORD Employee selection is the means by which the employer chooses the most suitable
Employee selection involves
applicant for a vacancy. This involves identifying the skills, qualifications and
gathering information about each experience of each applicant, and relating them to the skills, qualifications and
applicant for a position, then using experience listed in the job specification, to achieve the closest possible match.
that information to choose the most Selecting the most appropriate candidate can involve all or any of the following
appropriate applicant. options:
A curriculum vitae or résumé is • Written application. Some employers make use of a printed application form to
a summary of a person’s previous
be filled in by the applicant, requiring basic personal information, details of
employment experience.
qualifications and experience, and names of referees. Alternatively, prospective
employees may be able to submit a written application in any form they wish.
This will usually include a curriculum vitae or résumé as well as any other
relevant information. Applicants will often try to indicate how their own
qualifications and experience match those included in the job specification. The
employer usually shortlists a realistic number of suitable applicants.
FIGURE 8.46 Sometimes getting the

job means showing what you can do
at the interview. At auditions for the
television program So You Think You
Can Dance, this candidate will need
to convince the judges that he has the
dancing skills to enter the competition.

• Testing. Employers may apply a number of different tests to prospective employees.
These can include psychological tests or personality tests, which attempt to measure
an applicant’s personal characteristics; or aptitude tests, which attempt to measure
the skills that might be relevant to the job description. Tests may be written, or may
require the applicant to perform a number of different tasks.
• Interviews. The interview is perhaps the most important procedure in the
selection process. Interviews should be well structured and cover a set of
common questions to ensure consistency between applicants.
• Background checks. Referees can be contacted to verify the accuracy of an
applicant’s previous experience, and to gain an assessment of their performance
in a previous position.
After the successful applicant has been notified and has accepted the position,
the other applicants are notified.
Summary
• Human resource planning involves developing strategies to meet the business’s
future staffing needs.
• A job analysis is a systematic study of each employee’s duties, tasks and work
environment. It comprises a job description and job specification.
• After the planning stage, the recruitment of staff commences to find the best
person for the job.
• Recruitment involves finding and attracting the right people to apply for a job
vacancy.
• A business can recruit from staff within the business or seek new applicants from
outside sources.
• Once job applicants are found, the process of selecting the right applicant begins.
• Employee selection is the means by which the employer chooses the most suitable
applicant for the vacancy.
Revision EXERCISE
1 Outline why determining staffing needs is an ongoing process.
8.14
2 In the following situations, explain whether staff planning has been adequate.
(a) Anya runs a small café that mainly sells cake and coffee. She decides to offer a
lunch menu. It turns out to be very popular, but many customers have to be turned
away because Anya cannot meet the demand.
(b) The restaurant is always busy over the Christmas period, so Jon decides to recruit
some casual staff to ensure he is able to maintain an efficient service.
(c) Gregory knew that his existing workers would not have the skills to operate the
new equipment he had purchased for his motor mechanic business. He employed
someone with computer skills, with the aim of training the other workers as well.
3 Explain the relationship between a job analysis, a job description and a job specification.
4 In each of the following cases, the employer did not plan appropriately. For each
example, construct a job specification that would have prevented the problem.
(a) Joanne wasn’t a qualified veterinary nurse, but the veterinary clinic employed her
anyway because she loved animals. On most days, Joanne found difficulty doing
simple bandaging and could not provide the advice expected of her.
(b) Carrie was a waiter in a restaurant. When customers came in she would ignore
them until she had finished what she was doing and always suggested that tipping
was expected.
(c) Janelle was employed as a florist but most of her bouquets fell apart when she
handed them to the customer.
5 Undertake a job analysis for the position of ‘Year 11 Business Studies student’ at your
school and identify the key elements for consideration.

6 Construct job advertisements for two of the following positions:
(a) music store sales assistant
(b) accountant
(c) motor mechanic
(d) motel receptionist.
Remember to include the job description and the job specification in your advertisement.
7 Summarise the two activities in the employment process: recruitment and selection.
8 Distinguish between internal recruiting and external recruiting.
9 In small groups, identify the advantages and disadvantages of internal and external
recruitment.
10 In small groups, prepare a table of all the recruitment methods with which you are
familiar. For each method, identify an associated strength and weakness. The first
one has been completed for you in the table below.
Recruitment method Strength Weakness

Internal advertising Quick and inexpensive Draws from existing employees only
11 Select three sources of employees available to a business and propose why each is an
effective method of recruitment.
12 Describe two options that can be used in the selection process.
13 ‘In the current business environment it is crucial that small business owners recruit
and maintain the right people for the job.’ In small groups, discuss the relationship
between good staff and business success.
Extension
1 Predict the problems that may arise if a small business does not undertake human
resource planning in some form. Give examples from small businesses with which you
are familiar or that you have studied.
2 Determine how a business’s recruiting and selection practices may be affected by
the type of position that has to be filled (i.e. a part-time sales assistant compared to a
chief executive officer for a large transnational corporation).
3 You have recently been appointed as human resource manager for a national clothing
company. The business has a history of high staff turnover and low morale. To
correct these problems you have decided to improve the recruitment and selection
procedures. Propose the steps you might take to identify capable employees.
Determine how you would screen applicants.
4 Use the Job interview weblink in your eBookPLUS to examine the tips and advice on
how to prepare for a job interview. In small groups, think of a job you are familiar with and
Weblinks construct possible interview questions. Select one person to adopt the role of a human
• Job interview resource manager. Each of the remaining people in the group will become possible
• SEEK candidates for the job. They will need to prepare for the interview and then the human
resource manager is to conduct interviews with each person. During the interviews, the
remaining members are to act as observers and provide feedback to each candidate.
5 Use the SEEK weblink in your eBookPLUS to find hints for applicants preparing for
and attending an interview. Create a poster that contains hints for applicants to assist
them to succeed at an interview.
Training and development

Training and development are aimed at improving employees’ skills and abilities —
they are necessary for both personal and business growth. New employees may
need some training and development, depending on their level of experience.
Existing employees also need training and development to continually upgrade

their skills. Training is teaching staff to perform their job more efficiently and
effectively by boosting their knowledge and skills. Development is the process
BizWORD
Training generally refers to the
of preparing employees to take on more responsibilities in the future through
process of teaching staff how to
acquiring better knowledge and skills, and gaining more experience in a particular peform their job more efficiently
area. Developing staff often involves training. It is interesting to note that many and effectively by boosting their
employees expect their business to provide them with opportunities to grow and knowledge and skills.
learn, and ultimately improve their employability. Development refers to activities
The aim of training and development is to seek long-term change in employees’ that prepare staff to take greater
skills, knowledge, attitudes and behaviour in order to improve work performance responsibility in the future.
in the business. Many businesses do not, however, spend enough on staff training.
According to the Australian Centre for Industrial Relations Research and Training,
there is little evidence of a strong training culture within Australian workforces.
This is unfortunate because a lack of training and development can have long-term
implications for a business’s ongoing competitiveness, and could lead to higher
turnover rates as staff seek development in other forms. Well-organised and well-
presented training and development provides benefits for both the employee and
the employer (see table 8.6 below).
BizFACT
Ford Australia claims that employee
training has led to halving absenteeism
and reducing labour turnover. Can you
account for this relationship?
FIGURE 8.47 Life is a continual

learning curve and it just doesn’t stop
when you’ve completed your HSC. You
may start a full-time job or you might
go to TAFE or university. In any case,
you will receive training to help you
gain knowledge and learn skills to work
productively.
TABLE 8.6 Training and development provide benefits for both the employee and the employer
Benefits for the employee Benefits for the employer
• Opportunity for promotion and self- • Higher productivity through better job
improvement performance and more efficient use of
• Improved job satisfaction through better human resources
job performance • Goals and objectives more effectively met
• A challenge — the chance to learn new • Reduced costs due to less labour turnover,
things errors, accidents, absenteeism
• Adaptability — greater ability to adapt to • A more capable, ‘mobile’ workforce
and cope with changes • Existing staff more easily retained
• Improved chances of future employability • Less disruption in the event of staff turnover
• An ‘insurance policy’ — employees are
able to cope better with business ‘crises’
(this is a benefit for employees as well)

An effective training and development program is planned and perceived as
integral to the business’s strategy, as well as to maintaining or developing a business’s
sustainable competitive advantage. Ongoing training for all employees is becoming
BizWORD critical due to rapid technological change and global competition — it is so critical
A learning organisation monitors that many businesses now promote the concept of a learning organisation. A
and interprets its environment, learning organisation is aware of its actions and its environment and tries to improve
seeking to improve its understanding its understanding of the relationship between the two. All employees are involved
of the relationship between its actions
and its environment.
in developing knowledge and insights that allow the business to continually grow
and improve.
Technology creates the need for ongoing training

It is the task of the human resource manager to plan for the effective introduction
of new technology. Training needs must be identified well in advance of any
proposed technological implementation. This will ensure change happens at a pace
consistent with the capabilities and expectations of the workforce. It also means
human resource managers must constantly consider the skills required by the
workforce in the future. The existing workforce must be trained and, if very rapid
technological change demands it, retrained within a short time. While training of
employees is often expensive, it cannot be ignored.
FIGURE 8.48 Most major hospitals are integrating advanced technology into their operations
and this has required training for all employees.
Types of training
A number of training methods are available to businesses. The most common of
these include:
• Formal off-the-job training — for example, classroom activities, simulations
• Informal on-the-job training — for example, coaching, job rotation
• Action learning: learning by experience solving real workplace problems — for
example, NAB and IBM use this form of training
• Competency-based training: identifies skill strengths and areas where further
training is required — for example, medical education uses this form of
training.

• Corporate universities: businesses can also form partnerships with academic
institutions to develop training — for example, Coles and Qantas have forged
partnerships with academic institutions.
• Training technologies — for example, computer-based training (the computer
becomes a vehicle for learning), multimedia training, web-based training
(training via the internet).
Regardless of the type of training, business owners should view training and
development as an investment in the human capital of the business, rather than
just another expense (see the following Snapshot).
Motorola — an emphasis on training

Training at the communications
company Motorola is high
on the agenda. For nearly
eight decades they have been
recognised as one of the best
employee training companies in
SNAPSHOT
the world.
Motorola placed a great
emphasis on training from ❛ Training at the
its inception in 1928. In the
beginning, training simply communications
involved teaching new
employees how to use the
company Motorola is
manufacturing equipment. After conducting various training programs over a high on the agenda. ❜
few decades, Motorola came to understand that training involves more than
implementing one particular program for a set of employees. They came to
realise that in order to keep improving performance, training should be a
continuous learning process involving everyone in the business.
In the 1980s, the company set up the Motorola Training and Education Center,
an exclusive institute dedicated to the training and development requirements
of all Motorola employees. In 1989, this institute was elevated to the status of
a university — Motorola University. The training programs provided became so
successful that employee productivity and performance improved year after year,
as did the quality of their products. The aim of having their own university was to
provide education relevant to the company, job and individual. Motorola therefore
developed their own courses designed to achieve those aims. Every Motorola
employee must complete at least 40 hours of training a year.
Ten years after they began the university, Motorola reduced costs by US$10 billion
and increased productivity by 139 per cent. Motorola calculated that in the
departments where staff underwent this intensive training, the company was getting
a return of nearly US$30 in three years for every dollar they invested on education
and training.
Snapshot question
Explain the benefits of Motorola’s training initiatives.
Summary
• Training provides employees with the right knowledge and skills to perform
their job effectively and efficiently.
• Development focuses on preparing the employee to take on more responsibilities
within the business in the future.

• Ongoing training for all employees can be promoted by the business becoming
a learning organisation.
• Training needs must be identified well in advance of any proposed technological
implementation.
• Training should be viewed as an investment in the human capital of the
business.
EXERCISE Revision
8.15
1 Identify the overall aim of training and development.
2 Distinguish between training and development
3 Propose reasons why you think ‘There is little evidence of a strong training culture
within Australian workforces’. Share you answer with the rest of the class.
4 Outline how training and development can benefit both the employee and the
employer.
5 Distinguish between informal on-the-job training and formal off-the-job training.
6 Explain why training and development expenses should be seen as an investment
and not just a business expense.
Extension
1 Propose what actions you would take, as the human resource manager, if an
experienced employee refused to undertake any training.
2 Arrange to interview your school principal or head teacher, and construct a report on
the training and development policy of the school or faculty.
3 Evaluate the following statement: ‘When people say they want reward and
recognition they really just want a pay increase and that’s all.’
4 You are the human resource manager in a large manufacturing company. You
have become concerned about the performance of two valuable employees. Peter
has worked in the business for many years and is on a high salary because of his
BizFACT experience and skill development. However, he seems to have lost some interest in
A contract does not have to be his work, especially after being recently overlooked for promotion in the business.
written. It can be a verbal (or Veronica is a single mother with young children. She is scheduled to start work at
spoken) contract. It is generally 8.00 am, but is often late to arrive. She says she is unhappy with the poor pay she
safer to have a written contract, receives and is looking for a new job. She is a very good worker, who produces good
especially if one of the parties to the results and is well liked in the business.
contract does not fulfil their side of (a) Using this information, determine what motivates each employee.
the contract. There is an old saying, (b) Propose the strategies you would adopt to motivate each employee.
‘verbal contracts are not worth the
paper they’re written on!’.
Employment contracts
When a job applicant accepts an offer from an employer, a contract is established
between the two parties. An employment contract is a legally binding, formal
agreement between an employer and an employee.
An employment contract creates obligations for both employer and employee.
All businesses operate within a legal framework of common law and statute law.
BizWORD
Common law
An employment contract is a legally
binding, formal agreement between The common law is developed by courts and tribunals. Under common law,
an employer and an employee. judges make decisions based on the facts of a case, guided by precedent (decisions
Common law refers to law developed made in the past). The body of common law is therefore developed from decisions
by courts and tribunals. made over time by judges.
Under common law, both employers and employees have basic rights and
obligations in any employment relationship. Figure 8.49 summarises the employer
and employee obligations.

To provide work Payment of income
EMPLOYER OBLIGATIONS
To provide reasonable care To meet requirements of

for the safety of employees industrial relations legislation
Obey lawful and reasonable

Use care and skill
commands
EMPLOYEE OBLIGATIONS
Weblink
Use the Fair Work
Ombudsman weblink
discover more about the
Act in good faith and in the latest National Employment
interests of the employer Standards in Australia.
FIGURE 8.49 Employer and employee obligations
Minimum employment standards

Employees are entitled to a set of minimum employment conditions, known as the
BizFACT
National Employment Standards. These were legislated by the federal government
After the Howard federal
in 2010 and apply to all full-time and part-time employees, whether permanent government’s WorkChoices legislation
or fixed-term. They generally do not apply to casual employees. The 10 standards in 2006, trade unions and other
are: critics argued that many low-income
• Hours of work — for full-time employees, this is generally set at between earners and small business employees
35 and 38 hours per week. Employees cannot be required to work longer hours were adversely affected. For example,
workers were losing conditions at
without special provision being made for penalty rates or other compensation. work, penalty rates and overtime were
• Parental leave — employees are entitled to 12 months unpaid parental leave in being taken away, and they could be
relation to the birth or adoption of a child. unfairly dismissed, with little remedial
• Flexible work for parents — an employee who is a parent of, or has caring action available.
responsibilities for, a child under school age will be entitled to request flexible It was a key factor in the defeat of
working arrangements after having worked for the same employer for more than that government in 2007 and the
incoming Labor government repealed
12 months. These could include reduced hours, different start or finish times or the legislation. The Fair Work Act in
home-working arrangements. 2010 restored a fair and equitable
• Annual leave — for most employees this is four weeks, with part-time employees safety net of minimum standards of
entitled to a pro rata amount. Casual employees have no entitlement to annual employment for all workers.
leave.

• Personal, carer’s and compassionate leave — full-time employees receive 10 days
paid personal and carer’s leave for every year of service with the organisation,
with part-time employees receiving a pro rata amount.
• Community service leave — this includes jury service and emergency service
duties, such as CFA or SES volunteer work. Employees are entitled to be absent
from work for all periods necessary to provide the community service, including
reasonable travelling time and rest time immediately after the activity. Usually
this is unpaid leave, although employees on jury service leave can claim
make-up pay.
• Public holidays — employees are not required to work on public holidays, but
will still be paid for the hours they would have worked. If the employer requests
the employee to work on a public holiday, the employee may be entitled to a
penalty rate or other compensation.
• Information in the workplace — employers are required to supply all employees
with a ‘Fair work information statement’ when they commence employment.
This is a government document which contains information about the National
Employment Standards and other employment related issues.
• Notice of termination and redundancy — most employees are entitled to minimum
periods of notice of termination of their employment (or pay in lieu of notice),
based on their period of continuous service. Fixed-term and casual employees,
and employees serving a probationary period of employment, are not included.
• Long service leave — permanent employees, whether full time or part time,
are entitled to long service leave after a qualifying period. This period varies
between different occupations and industries.
FIGURE 8.50 SES volunteers are entitled to take community service leave for emergency
work.
BizWORD
An award is a legally binding
agreement that sets out the minimum
Awards
wages and conditions for a group of An award is a legally binding agreement that sets out the minimum wages and
employees. conditions for a group of employees. Modern awards came into effect on 1 January
2010. The ten matters that can be included in modern awards are listed in table 8.7.

Some businesses will provide above-award payments, especially if they wish to
attract more workers to their firm or if they want to hold on to their existing staff.
Awards have the following advantages:
• set a minimum for pay and conditions
• cover all employees performing a similar job.
Awards have the following disadvantages:
• can be inflexible and therefore may not suit all employees or businesses
• prevent recognition of individual initiative because all employees are guaranteed
the minimum pay and conditions regardless of how productive they are.
TABLE 8.7 Matters covered by awards
The 10 matters that can be included in modern awards
1. Minimum wages, including disability and training wages

2. Types of employment, such as full-time, part-time, outworker
3. Arrangements for the hours during which work is performed
4. Overtime rates where applicable
5. Penalty rates
6. Annualised wages and salaries
7. Allowances
8. Details of leave, leave loading, etc.
9. Superannuation arrangements
10. Procedures for consultation, representation and dispute settlement
Enterprise agreements
Imagine all the students in your Business Studies class sitting down with your
teacher and negotiating a set of conditions for your class. Apart from the essential
conditions, such as completing all the work and respecting each other’s opinions,
you might negotiate a homework-free month in return for one extra assessment
task. You have just entered into an enterprise agreement. BizWORD
Enterprise agreements are collective agreements made at a workplace level Enterprise agreements are collective
between an employer and a union, acting on behalf of its employees, or between the agreements made at a workplace level
between an employer and a union,
employer and a group of employees, about terms and conditions of employment.
acting on behalf of its employees, or
In addition to the 10 National Employment Standards, enterprise agreements must between the employer and a group
include the following: of employees, about terms and
• a nominal expiry date, usually two or three years after the commencement of conditions of employment.
the agreement
• procedures for settling any disputes that might arise in the implementation of
the agreement, including the right of employees to be represented in the dispute
settlement procedure
• terms that allow for individual flexibility, so that arrangements can be made
between the employer and individual employees
• provisions for consultation with employees on major workplace change. BizFACT
Once the parties to an enterprise agreement have concluded their negotiations Modern awards are new and
the agreement needs to be submitted to the Fair Work Commission for approval streamlined and created to replace
before it can commence operation. The agreement must be signed by the employer thousands of existing awards. The new
and the bargaining representatives acting on behalf of employees, to certify that awards apply to many employees and
employers in the national workplace
the agreement has been entered into voluntarily by both sides. The Fair Work
relations system. For example, the
Commission will examine the detail of the agreement to ensure no unlawful security industry will see a reduction
content is included in the agreement and that the employees will be better off from 10 security awards to just one
overall by entering into the agreement than simply being covered by the relevant national security award.
award.

FIGURE 8.51 The Fair Work
Commission is the national workplace
relations tribunal. It has the power to
carry out a range of functions including
providing a safety net of minimum
conditions in awards, resolving workplace
disputes and facilitating good faith
bargaining and the making of enterprise
agreements.
Enterprise agreements have the following advantages:

• consultation with and involvement of employees, which, if conducted
successfully, results in greater employee involvement and empowerment
• possibility of improved pay and conditions, which can be tied to workplace
performance
• greater flexibility by agreeing on conditions that suit both the employer and
employee.
Enterprise agreements have the following disadvantages:
• more time consuming due to the need to conduct agreement meetings at the
individual workplace level
• administratively more onerous, especially as the agreement must comply with
all existing laws regarding employee rights and entitlements.
FIGURE 8.52 A more decentralised

system of employee relations means that
employers and employees negotiate on a
local level through collective or individual
agreements. This also means that wages
and work conditions are determined
through a bargaining process at the
enterprise (workplace) level.

Summary
• An employment contract is a legally binding, formal agreement between an
employer and an employee.
• Under common law, both employers and employees have basic rights and
obligations in any employment relationship.
• Employees are entitled to 10 minimum employment conditions, known as the
National Employment Standards.
• An award is a legally binding agreement that sets out the minimum wages and
conditions for a group of employees.
• Enterprise agreements are collective agreements made at a workplace level
between an employer and a union, acting on behalf of its employees, or
between the employer and a group of employees, about terms and conditions of
employment.
Revision EXERCISE
8.16
1 Define the term ‘employment contract’.
2 Examine the BizFact on page 262. Explain what is meant by the saying ‘verbal
contracts are not worth the paper they’re written on’.
3 Recall the obligations of both employers and employees.
4 Identify which categories of employees are entitled to benefit from the 10 National
Employment Standards.
5 Select what you consider to be the three most important standards from the
10 National Employment Standards. Justify your selection.
6 Define the term ‘award’.
7 Recall four of the ten matters that can be included in modern awards.
8 Distinguish between awards and enterprise agreements.
9 Select whether you would prefer to be covered by an award or an enterprise
agreement. Justify your selection.
Extension Weblink
1 Use the Fair Work Commission weblink in your eBookPLUS to find the modern Fair Work Commission
Award relevant to the retail or hospitality industry, or any other industry in which
you or your classmates have part-time employment. Outline the key matters that are
covered by this Award
2 Investigate workplace relations issues for young people by using the Young people
at work and NSW Office of Industrial Relations weblinks in your eBookPLUS.
Select a topic that interests you and create a brief report on what you learned. Weblinks
• Young people at work
• NSW Office of Industrial
Separation of human resources Relations
Gone are the days when a person would commence their full-time working life at
the age of 16 or 17, work for approximately 45 years, and then retire. Work patterns
and business operations have undergone radical change over the past two decades
and this has dramatically altered the movement of people into and out of jobs.
Due to increased international competition, many businesses — large, medium
and small — have been forced to restructure. As a result, there has been a marked
increase in the number of voluntary and involuntary redundancies being offered. BizWORD
Separation is the ending of the employment relationship. There are many Separation is the ending of the
reasons why employees separate from a business. However, it is possible to employment relationship.
classify the different types of separation into two broad categories: voluntary and
involuntary (see figure 8.53).

TYPES OF SEPARATION
Retirement Retrenchment
BizWORD
Voluntary separation occurs when
an employee chooses to leave the
business of their own free will.
Retirement occurs when an employee
decides to give up full-time or part- Resignation Dismissal
time work and no longer be part of
the labour force.
Resignation is the voluntary ending
of employment by the employee Redundancy
‘quitting’ their job.
FIGURE 8.53 Separation — voluntary and involuntary
Voluntary separation
Voluntary separation occurs when an employee chooses to leave the business
of their own free will. There are three different forms of voluntary separation:
retirement, resignation and redundancy.
Retirement
Retirement occurs when an employee decides to give up full-time or part-time
work and no longer be part of the labour force. Until the mid 1980s, it was
common for men to retire once they reached 65 years of age and women 60. Since
changes to legislation in the 1990s there is now no ‘official’ retirement age. People
now have a choice at what age they would like to retire. A trend that has started to
emerge in recent years is for people to retire ‘early’ — that is, in their mid to late
fifties. How businesses have approached employee retirement has also changed.
Today, many organisations provide advice and assistance to employees to help
them prepare for retirement.
Resignation
Resignation, or ‘quitting’, is a voluntary ending of the employment relationship.
People resign for a variety of reasons including:
• offer of a promotion with another business
• to start their own business
FIGURE 8.54 An employee may
• boredom with their present job
leave a business for many reasons. If
an employee is retrenched (laid off) • change of lifestyle.
or dismissed, it can lead to feelings of Usually the employee needs to give the employer sufficient notice of his or her
disappointment and rejection. Fear intention to resign. The length of notice varies from job to job, ranging from a few
of not getting a replacement job
and being able to pay the bills make
hours for casual employees to a month for some permanent employees.
termination difficult to bear for some Whenever a business wants to downsize, that is decrease the size of its operation,
people. it will not fill vacancies that have come about due to retirements and resignations.

Redundancy — voluntary and involuntary
Redundancy is when a particular job a person is doing is no longer required BizWORD
to be performed, usually due to technological changes, a merger or acquisition. Redundancy occurs when a
Therefore, unless the existing employee can be retrained for another job, they will person’s job no longer exists, usually
due to technological changes, an
be made redundant. Redundancy can be either voluntary or involuntary. organisational restructure or a merger
Voluntary redundancy occurs when the business wishes to reduce either the or acquisition.
size or nature of its workforce and decides how many employees should be ‘let
go’. Employees are then informed of the situation and given the opportunity to
nominate themselves for voluntary redundancy. Employees who choose voluntary
redundancy are offered a redundancy package: a payout of a sum of money. If not
enough employees volunteer, then the business may be forced to decide which
employees will be made redundant — involuntary redundancy.
Involuntary separation BizWORD

Involuntary separation occurs when an employee is asked to leave the business Involuntary separation occurs when
against his or her will. Apart from involuntary redundancy, the two different types an employee is asked to leave the
of involuntary separation are retrenchment and dismissal. business against their will.
Retrenchment is when a business
Retrenchment dismisses an employee because there
Retrenchment is sometimes called redundancy, but there is a subtle difference is not enough work to justify paying
him or her.
between the two terms. Redundancy occurs due to the permanent elimination of
some jobs, because organisational or technological change has removed the need
for those particular skills. Retrenchment is employee termination due to lack of
sufficient work to keep the employee fully occupied.
Retrenchment is a cyclical phenomenon tied closely to the level of economic
activity. The end result of both retrenchment and redundancy is that the employee
is out of a job.
FIGURE 8.55 Staff made redundant

through the introduction of new
technologies should be treated with
Would it be faster to sensitivity.
send these dismissal notices
as an audio file or an MP3?
And what about adding some
marching music?
BizWORD
A dismissal is when the behaviour
of an employee is unacceptable and
Dismissal it then becomes necessary for a
There will be occasions when the behaviour of an employee is unacceptable and it business to terminate the employee’s
then becomes necessary for a business to terminate the employment contract of an employment contract.
employee. This is called dismissal.

BizFACT The most serious form of dismissal is summary dismissal — when an employee
Many colloquialisms are used to
commits a serious breach of their employment contract. For example, an
describe involuntary termination: employee who is drunk at work or is found to have engaged in criminal activity
‘given the bullet’, ‘shown the front may be summarily dismissed. If an employee is given a summary dismissal, no
door’, ‘fired’, ‘booted out’, ‘told to notice is required. Another form of dismissal, referred to as dismissal on notice, is
pick up my pay and go’, ‘no longer when an employee is not performing the job satisfactorily. Poor performance may
required’ and ‘given an offer I couldn’t
be identified during an appraisal or performance process. The amount of notice (or
refuse’. They all have one feature in
common: the business requests that payment given in lieu of notice) will vary depending on a number of factors, such as
the employee leave the organisation. whether the employee is governed by a particular award or contract, the age of the
employee and how long they have worked for the employer on a continual basis.
Selecting staff for dismissal can be risky and requires awareness of legislation
and industrial agreements to avoid litigation and industrial action. Employees
must be given proper notice and employers must comply with procedures
established in law, including the unfair dismissal laws in the Fair Work Act 2009.
To avoid misunderstandings, written warnings and/or notice is preferable. Written
confirmation of resignation is also preferable to verbal statements made in the ‘heat
BizWORD
of the moment’. This way, a lengthy unfair dismissal case can be avoided.
Unfair dismissal occurs when an
Unfair dismissal occurs when an employer dismisses an employee for
employer dismisses an employee for
discriminatory reasons, such as firing discriminatory reasons. This is an issue that both employers and human
someone because they are pregnant. resource managers need to be aware of. Some examples of discrimination under
Commonwealth workplace relations laws include dismissal because of:
• absence from work due to illness
• either belonging or not belonging to a trade union
• race, colour, sex, sexual preference, age, disability, marital status, family
responsibilities, pregnancy, religion, political opinions held or ethnicity.
An employee who believes they have been unfairly dismissed may lodge an
BizFACT unfair dismissal claim with an industrial tribunal.
Unfair dismissal laws allow employees
to sue their employer on the grounds
that their dismissal was harsh, unjust
or unreasonable.
FIGURE 8.56 An inappropriate dismissal technique
Unfair dismissal — bullying claims not

investigated
Failure to investigate allegations of bullying was a key issue in the recent unfair
SNAPSHOT dismissal case of Adam James Harley v. Aristocrat Technologies Australia Pty Ltd
[2010] FWA 62. In this case, Mr Harley successfully argued that he was constructively
dismissed from his sales role having received a ‘show cause’ letter from the company
and being required to attend a meeting with management to respond to allegations
of alleged poor performance.

The Fair Work Commission found that Mr Harley
had been subjected to a course of harassment by ❛ The Fair Work
his manager, which culminated in the company’s
attempt to terminate his employment. Despite
Commission
Mr Harley making complaints about his manager’s found that the
constant criticisms, the company did not take the
complaints seriously and did not investigate the applicant had been
complaints. unfairly dismissed
The Fair Work Commission found that the
applicant had been unfairly dismissed and awarded and awarded
the maximum of six months’ compensation
to Mr Harley. The Fair Work Commission was
the maximum
particularly critical of the company’s human of six months’
resources department for failing to investigate the
matter, despite being a large multinational company with ample resources, including a compensation to
dedicated human resources team.
Source: Extracts from A. Wood 2010, ‘Workplace bullying and harassment:
Mr Harley. ❜
The year ahead (part 2)’, www.hrblog.com.au.
Snapshot question
Do you agree with the decision of the Fair Work Commission? Justify your answer.
Summary
• The final stage in the employment cycle is the ‘separation stage’, in which
employees leave the workplace on a voluntary or involuntary basis.
• This stage must be handled carefully and sensitively by the human resource
manager.
• Voluntary separation occurs when an employee decides to give up full-time or
part-time work and includes:
–– retirement
–– resignation
–– redundancy.
• Involuntary separation occurs when an employee is asked to leave the business
against their will and includes:
–– retrenchment
–– dismissal
–– redundancy.
• Unfair dismissal occurs when an employer dismisses an employee for
discriminatory reasons.
Revision EXERCISE
1 Distinguish between voluntary and involuntary separation, giving examples of each.
8.17
2 Construct a concept map outlining the different types of voluntary and involuntary
separation.
3 Recall some of the entitlements of employees who are made redundant.
4 Distinguish between summary dismissal and dismissal on notice.
5 Identify which of the following scenarios would most likely lead to summary dismissal.
(a) Todd bribed another employee not to tell their manager that he had been accessing
pornographic websites during office hours.
(b) Roberto arrives for work entirely drunk. He has just been out to see a client, driving
a company car. It’s the third time this week he has arrived in such a condition.
(c) Jazmin’s not very good at her job. She frequently makes mistakes and doesn’t have
the knowledge or skills to perform the job satisfactorily.

6 Recall three dismissal situations that would be classified as unfair.
7 In August 2008, workers at SPC Ardmona in the Goulburn Valley were informed
that 60 redundancies were to occur, because the strong Australian dollar had meant
a drop in exports and there was a fruit shortage due to the drought. The company
employed 450 workers in three plants in the region. SPC Ardmona’s chief executive,
Nigel Garrard, said that initially the redundancies would be voluntary and workers
would be offered deployment to different sites.
(a) Explain what Nigel Garrard meant when he said that initially redundancies would
be voluntary.
Weblink (b) Predict the possible impact on staff who volunteer for redundancy and those who
Termination of remain. Share your answer with the rest of the class.
employment 8 Use the Termination of employment weblink in your eBookPLUS to summarise the
latest employee rights and rules that apply to termination of employment.
Extension
1 Compare voluntary and involuntary departures in terms of:
(a) how difficult each is for the business
(b) effects on the business
(c) effects on staff leaving
(d) effects on staff remaining.
2 Termination management is about managing the final phase of the employment cycle,
when the employee leaves. Investigate the issues a HR manager must be aware of
when dismissing an employee.
3 Read about the following case and then answer the questions.
Natashia Frazer and Civic Printers
I had been employed by Civic Printers for 12 years. One month ago, my new
supervisor warned me that if my work did not improve I may be dismissed. Prior to
this I had only received favourable work reports.
One Friday afternoon I was told that someone else had complained about my
performance and that I was being dismissed. I was not aware of any other complaint.
I had never been given any written advice that my work was unsatisfactory. However,
the supervisor’s decision was final and I was dismissed. I think it is unfair.
(a) After reading the story have a class vote to determine whether Natashia’s dismissal
was fair or unfair.
(b) Now divide the class into small groups. Each group has to determine whether
the termination of Natashia was fair or unfair, and then report back to the class.
Discuss the different group responses.
(c) Take another vote to see if the discussion has made any difference to class
members’ views.
(d) Synthesise what you learnt from this activity.
8.7 Ethical business behaviour

Ethics are standards that define what is acceptable and unacceptable behaviour.
Ethics involves the study of moral issues and choices. It is concerned not with legal
obligations but with what is morally right or wrong — and all the shades of grey in
between. In many decisions involving ethical questions, it is sometimes difficult to
BizWORD give a definitive answer as to what is ‘right’ and what is ‘wrong’. It often depends
Business ethics is the application of upon the individual circumstances surrounding the situation. Business ethics is
moral standards to business behaviour. the application of moral standards to business behaviour.
Most businesses want to engage in ethical business practices; to act honestly and
morally. These businesses will honour commitments, not engage in misleading or
deceptive product descriptions and will provide a safe working environment for
their employees.

Not all businesses have adopted such an outlook. Some business owners still
regard ethical business practices as a waste of money, the cost outweighing any
benefits. They will often attempt to justify their behaviour as ‘smart business
practice’ or ‘everyone does it, why shouldn’t I?’ And like most questions of ethical
behaviour, not all the answers are a simple ‘black’ or ‘white’ response.
Australia’s rag trade — a question of ethics

Think twice before buying Australian made, writes Rachel Wagner. That jacket might
have been made for $5 in a backyard sweatshop.
The phrase ‘unethically produced clothing’ usually conjures images of sweatshops
in China, with workers packed shoulder-to-shoulder, labouring long hours for a
pittance.
Unfortunately, the reality on our own shores is almost as sordid.
SNAPSHOT
Australia’s rag trade is littered with the underpaid and the overworked. These
people are known as ‘outworkers’ and they are among Australia’s lowest paid
employees.
According to the Textile Clothing and Footwear Union of Australia,
approximately 50–70% of Australian made clothing is outsourced to migrant women
working from home or in backyard sweatshops . . .
Accreditation Advisor for Ethical Clothing Australia, Rebekka Carey-Smith, said it
really is a case of ‘out of sight, out of mind’.
Outworkers generally work in isolation, prevented from conferring with peers
about their absent rights. They are inundated with high volumes of clothing to sew
on tight or even unattainable deadlines.
Those who don’t speak English are even more vulnerable to exploitation.
‘Some people, unfortunately mainly migrant women, work up to 17 hours a day
earning as little as $5 an hour’, said Carey-Smith. ‘They don’t know what rights they ❛ . . . but how
are entitled to.’
Legally, in addition to award wages, outworkers are entitled to all the benefits that much pride can we
employees are afforded, such as superannuation, sick leave and insurance, yet most
receive none of these basic prerogatives. Instead, they are rewarded with a towering
bestow on unethical
pile of fabric and a back injury for all their hard work. products? ❜
It may seem like a dire situation, but it’s easy to see how it could happen.
With fashion labels contending for the market share, production costs are
routinely cut to be competitive and offer the most affordable clothing. Quality and
sustainability fall by the wayside when it comes to fast fashion.
While outsourcing to sweatshops abroad may seem like the most lucrative avenue,
locally made clothing can be both affordable and convenient. It means there are no
long trips to oversee production, and shipping costs are greatly reduced.
‘Manufacturing onshore really is a viable option because it means you are in
complete control of production’, said Carey-Smith.
With fashion houses able to produce their stock locally at such a low cost,
‘Australian Made’ is no longer synonymous with ethical clothing.
Weblink
As you move down the supply chain, it can be hard to point the finger at a culprit. Use the Ethical clothing
Production work is outsourced to companies who then delegate tasks to outworkers. weblink in your eBookPLUS
to find out more about this
Many high profile companies aren’t even aware of the transgressions at the other
issue.
end of the chain.
Until the big brands are held accountable, the ‘Australian Made’ label will continue
to lose value. Yes, it is great to support local businesses, but how much pride can we
bestow on unethical products?
The kneejerk reaction is to suggest a boycott of all brands that lack a transparent
supply chain. Alas, this only leads to redundancy for the very people it aims to
protect.
(continued)

‘It’s more important to educate the companies about what they need to do
to ensure their employees are getting paid enough and are working in ethical
conditions’, said Carey-Smith.
In the wake of the issue, the slow fashion movement is gaining momentum in
Australia. The antithesis to the sleazy world of fast fashion, it endeavours to create a
resistance to consumerism by encouraging shoppers to be more mindful about their
purchases.
If this can generate a surge of support for accredited ethical labels, the Australian
fashion industry may be able to salvage its tarnished reputation by promoting a
culture of integrity and respect.
And of course, the outworkers might even get a raise.
Source: 8 April 2013, upstart.net.au.
Snapshot questions
1. State the percentage of Australian-made clothing outsourced to ‘outworkers’.
2. Describe the conditions under which outworkers work. Analyse the ethics of
such conditions.
3. Explain why manufacturing onshore can be a viable option for Australian
clothing companies.
4. Discuss why boycotting brands that use unethical practices might be
problematic.
5. Evaluate how the ‘slow fashion movement’ might reduce the unethical
manufacturing methods of some companies.
Some businesses have become involved in lengthy and very expensive court
cases, which attempt to resolve particular situations that are often centred around a
number of ethical issues or socially responsible actions. This frequently results in a
deal of negative publicity and a deterioration in the business’s reputation.
FIGURE 8.57 In 2010, retail giant David

Jones was under the media spotlight for
all the wrong reasons. The former CEO
of the company, Mark McInnes, faced
a $37 million sexual harassment charge
when ex-employee Kristy Fraser-Kirk
accused him of making inappropriate
sexual advances towards her. The matter
was eventually settled out of court for
$850 000, and McInnes lost his job. Fraser-
Kirk was suing her employer David Jones
Limited as well as McInnes. She claimed
that the senior management of David
Jones were aware of the incidents and
did nothing. David Jones was forced
to review its complaints handling
policies and procedures, to ensure that
employees felt confident that their claims
would be handled correctly.

The majority of business owners, however, regard the cost of ethically and socially
responsible actions as a necessary expense — they make such a commitment an BizWORD
essential part of their business operation. They take a great deal of pride in the Triple bottom line refers to the
economic, environmental and social
reputation their business has established and wish to protect its good name. These
businesses want to be seen as responsible corporate citizens, conscious of the high
Fairtrade is a trading partnership
standards expected of them by their customers and society at large. that seeks greater equity (fairness)
Businesses that take their social and ethical responsibilities seriously are often in international trade. It promotes
‘rewarded’ with improved business performance. Many businesses today are very the rights of marginalised workers,
much concerned with reporting on the triple bottom line. This means that they are especially in low-income countries.
no longer simply focused on making a profit at all costs; but rather, they recognise
that environmental and social performance are also important.
A growing number of small businesses today, such as Etiko, exist purely for
socially responsible and ethical reasons. Etiko is a small business based in Ferntree
Gully, Victoria, with a strong commitment to ethics and the environment. Etiko
sources products from international suppliers who produce Fairtrade certified
items and/or are sweatshop free.
The founder of Etiko, Nick Savaidis, believes that ‘truly socially responsible
businesses should not only minimise harm but actually make a positive
contribution’. Beginning work as a secondary school teacher and then as an adult
educator specialising in enterprise development in Northern Territory Aboriginal
communities, Nick established ESP Pty Ltd (the company behind the Etiko brand)
in 1996 to market ethically and environmentally sound products. While consumers
purchase its products, Etiko is able to help fund community development, micro-
credit and healthcare programs around the world. It is no coincidence that it has
won many awards in the area of ethics and social responsibility. FIGURE 8.58 The FAIRTRADE Label
guarantees that disadvantaged
producers in the developing
world receive a fair price for their
commodities.
FIGURE 8.59 FareShare is a small, not-for-profit business that is based on social responsibility.
They give away healthy, nutritious meals to hungry and homeless people in Victoria using food
donated by businesses. FareShare ‘rescues’ food that would otherwise have ended up as waste in
landfill. Not only is this business’s work helping those in need, it is also helping the environment.

Like individuals, businesses are frequently confronted with ethical dilemmas.
What does a business do:
• with a loyal, long-serving employee who cannot adapt to new technology?
• with confidential information about a competitor’s pricing policy that a
disgruntled employee leaked?
• when it is asked for a cash payment to help hasten a decision about a tender
contract?
• when a competitor engages in unethical business tactics that allows it to offer a
cheaper product?
• when it outlines a promotion plan for an employee but later is unable to follow
through with the plan?
FIGURE 8.60 A manager’s response
to an ethical challenge will have These are just a few of the ethical challenges that confront business owners and
far-reaching consequences for the managers. How they respond to these situations will have long-lasting consequences
business. for the image and reputation of the business, as
well as the behaviour of employees. It is
important for business owners and their
managers to have high personal and ethical
standards so employees perceive the importance
of ethical considerations.
Much of the evidence that ‘good ethics
is good business’ is anecdotal. However,
when James Burke, the former head of US
company Johnson & Johnson, looked at the
performance of a select group of companies
committed to best ethical practice, he found
that their stock value had increased by
11.3 per cent over a 40-year period. Over
the same period, all other stocks increased in
value by only 6.2 per cent on average.
Socially responsible management —

everyone wins
Late one evening in 2008, Harriet
Michaels, owner of OzInteriors, a
SNAPSHOT furniture store in a large regional
town, was showing some overseas
guests around her neighbourhood. As
Harriet and her friends drove past the
❛ Harriet wanted to central park, they were stunned to see
give something back some homeless young people sleeping
at the back of the maintenance block.
to the community. ❜ Harriet was puzzled by what she
had seen: why didn’t the young
people want to go to the local welfare shelter? Over the next few days she went to
investigate. Nothing she had seen or read prepared her for what she discovered. The
welfare officer at the local hostel described how difficult it was to accommodate
all those who needed shelter. The rooms were overcrowded, the bathroom
facilities needed repairing and the dining room was basic. The hostel was severely
underfunded. Harriet soon realised that living conditions in the hostel were draining
the hope the young people may have once had.

OzInteriors was one small business that decided to practise socially responsible
management and consider the welfare of the community, not just the objective
of making a profit. Socially responsible management is sometimes referred to
as ‘corporate social responsibility’, but you don’t have to be a large corporation
in order to be socially responsible — many small businesses make a worthwhile
contribution to their communities. As a successful businessperson, Harriet wanted to
give something back to the community and so began the Welcome Home program.
Harriet contributed both time and money (a portion of her business’s profits) to help
with the refurbishment of the hostel. She also organised and funded a program that
gave the hostel residents vital living skills.
Harriet is motivated by a desire to use her business to bring about a positive
change within her community. To date, the Welcome Home program has assisted
58 homeless young people to complete their secondary education and move into
employment.
Apart from the personal feeling of satisfaction from contributing part of the
business’s profits to the community, there is overwhelming evidence that being a
good corporate citizen can actually be good for business. For example, Ira Jackson
and Jane Nelson propose in their book Profits with principle: seven strategies for
delivering value with values that businesses combining a desire to maximise profit
with a concern for the welfare of the broader community perform better than those
that focus only on profit-making.
Snapshot questions
1. Identify the factors that motivated Harriet Michaels to establish the Welcome
Home program.
2. Predict the ways that OzInteriors might benefit from funding the Welcome
Home program.
Ethical issues
Within the business world, the following ethical issues regularly occur.
Fairness and honesty BizFACT

Businesses must obviously obey all laws and regulations. As well, society Without the commitment of a
expects businesspeople to tell the truth and avoid using misleading or deceptive business’s senior managers, including
the board of directors, a program for
information. Employees expect to be dealt with honestly and fairly. If, for example, ethical responsibility will fail. If senior
a business promises a promotion to an employee, then the business should management pay only lip service to
honour this commitment to the employee (except in exceptional circumstances). the organisation’s code of conduct,
Customers and suppliers also expect to be treated honestly and fairly in all their then such behaviour ‘sets the tone’
business dealings. If, for example, a business arranges for a delivery of certain (one of noncompliance) and will serve
as a guide for other employees.
items and promises to pay within a set time, then the business should honour this
commitment to the supplier.
Respect for people

If business owners treat their staff with respect, then you would also expect
employees to act ethically.
Occasionally, a business may become aware of an unethical practice of an
employee. This can place the business in a difficult position, especially if the
employee is important to the successful operation of the business. At other times,
an employee may be placed in a difficult ethical position by other employees —
for example, when older employees decide to play a practical joke on a young
apprentice. Sometimes, these practical jokes get out of hand and may develop into
a serious harassment or negligence case. Other serious workplace ethical issues may

involve a situation where confidential information is not kept secret, obligations
are not fulfilled or subtle forms of discrimination occur.
FIGURE 8.61 Workplace bullying is an example of unethical conduct. Verbal abuse is the most
common form of workplace bullying.
Conflict of interest
Conflict of interest occurs when a person takes advantage of a situation or piece
of information for his or her own gain rather than for the employer’s interest. Such
conflicts can often occur when gifts or payments are offered. There is a fine line
BizWORD between what is regarded as a gift and what may become a bribe. Corruption
A conflict of interest occurs when a undermines the integrity of the business and, if unchecked, infiltrates the workplace
person takes advantage of a situation
or piece of information for his or
culture.
her own gain rather than for the Once a pattern of corruption takes hold and is seen to be acceptable behaviour,
employer’s interest. it quickly becomes entrenched within the business. Changing the attitudes and
practices of individuals within such a business is extremely difficult. What start off
as small incidents to which most people turn a blind eye may soon develop into
corruption on a grand scale. When such corrupt practices are eventually exposed,
the business’s image will be severely damaged.
Financial management
Businesses have ethical and legal responsibilities in relation to financial
management. In recent years, unethical practices have been highlighted and
increasingly questioned. There are growing calls for codes of behaviour to regulate
the activities of businesses in relation to financial management.
It is generally accepted that financial management decisions must reflect the
objectives of a business and the interests of shareholders. An area in which ethical
considerations are important is the valuing of assets.
In preparing budgets, a business estimates its expenditures and revenues. The
BizWORD common practice of overestimating expenditures and understating revenue to
An audit is an independent check of allow for unexpected and uncertain events is an ethical issue for an organisation.
the accuracy of financial records and All financial records should be regularly audited. Internal and external audits
accounting procedures. assist in guarding against unnecessary waste, inefficient use of resources, misuse of
funds, fraud and theft.

Truthful communication
Advertising can represent real ethical dilemmas. False or misleading advertising
is not only unethical, it is also illegal. Terms such as ‘special’, ‘sale’, ‘low fat’ or
‘light’ can be misleading. For example, what precisely does the word ‘special’ mean
when it is displayed above a product for sale? Most consumers would take this to
mean the item is for sale at a cheaper than normal price; however, this may not
necessarily be the case. The business owner may interpret the word ‘special’ to
mean that the product has a distinct or particular character, that it can perform
a particular function or it is different from what is ordinary or usual. The two
interpretations can easily be confused. If the businessperson uses this word
attempting to knowingly mislead customers, it would be classified as unethical
behaviour. If the businessperson wants to advertise the fact that the product is
available at a bargain price, then the words ‘on special’ would have a clearer
meaning.
BizWORD
A Corporate Code of Conduct is a
set of ethical standards for managers
and employees to abide by.
FIGURE 8.62 When a store advertises a closing down sale, you expect that the store will close
shortly afterwards. This is not always the case.
Encouraging ethical business behaviour

It is not always easy to maintain a consistently high degree of ethical behaviour in
the real world. Employees who want to act ethically sometimes find it difficult to
FIGURE 8.63 St James Ethics Centre
do so, especially if unethical practices are ingrained into the workplace culture. was established in Sydney to support
One strategy that can be implemented to encourage ethical behaviour is to devise businesses with the development of
a Corporate Code of Conduct. This is a set of ethical standards for managers and their policies and procedures from an
ethical perspective. Their mission is to
employees to abide by. encourage and assist individuals and
Many businesses now document and distribute their codes of conduct or organisations to include the ethical
core values in order to provide internal stakeholders with ethical guidelines for dimension in their daily lives, and
workplace behaviour and practices. thereby help to create a better world.
This fully independent, not-for-profit
Training may be given to employees to ensure they understand the values of the organisation provides ethics training,
business. Most businesses also establish formal proceedings for reporting unethical consulting, counselling and advocacy,
behaviour in the workplace. and leadership development.

Summary
• The majority of businesses want to be seen as responsible corporate citizens.
• The triple bottom line refers to the economic, environmental and social
• Ethics are standards that define what is acceptable and unacceptable behaviour.
• Business ethics is the application of moral standards to business behaviour
such as:
–– fair and honest business practices
–– decent workplace relations
–– conflict of interest situations
–– accurate financial management
–– truthful communication.
• A corporate code of conduct encourages ethical business behaviour.
EXERCISE Revision
8.18
1 State the benefits of managing a business in an ethical and socially responsible
manner.
2 Explain whether it is ethical for your school authorities to monitor student email
usage on the school’s computer resources.
3 ‘Everyone cuts corners in business. It is the only way to survive.’ Discuss this
statement.
4 Identify the three components that make up the triple bottom line.
5 Outline what Etiko does that makes it ethically and socially responsible.
6 Use the Etiko weblink in your eBookPLUS to examine Etiko’s business practices in
detail.
7 Distinguish between ethical and unethical behaviour.
8 Recall what James Burke’s research revealed.
Weblink 9 Construct a concept map outlining the five main ethical issues constantly faced by
Etiko business.
10 Discuss what you believe to be the most ethical way to behave in the following
situations and then compare your answers with other class members. Discuss any
similarities or differences.
(a) A customer is unaware that you have accidentally overcharged her. Do you inform
the customer and give back the money or keep it yourself?
(b) Your boss has told you not to record all the cash payments so as to reduce his
taxation payments. Do you comply with these instructions? As an employee,
what difficult position have you been placed in? How could you justify your
Digital doc decision?
(c) A disgruntled employee from your main competitor offers to provide you with
document in your confidential information from that business’s marketing strategy. Would you accept
eBookPLUS to compile your such information? Give reasons for your answer.
own notes for this chapter. (d) An employee is suspected of misusing the business’s internet facilities.
Searchlight: DOC-14117 However, the employee is the best salesperson in the business, generating
thousands of dollars worth of sales each year. How should the employee be
dealt with?
11 (a) Define the term ‘conflict of interest’.
(b) In small groups, propose some possible strategies a business could use to minimise
conflict of interest situations arising.
12 Explain how a code of conduct could help encourage ethical business behaviour.
Weblink 13 Identify what is required for a code of conduct to work successfully.
St James Ethics Centre 14 Use the St James Ethics Centre weblink in your eBookPLUS. Select the option ‘Get
involved’ and then click on ‘Dilemma’. In small groups, answer the ethical questions
raised with the dilemma. Discuss your answers with other groups.

Extension
1 Extrapolate how socially responsible and ethical business practices might increase a
business’s sales and profit. Digital doc
2 Create a list of five principles that could be included as part of the code of conduct Test your knowledge of key
for your school. terms by completing the
3 You have been contacted by Spencer Manufacturing Limited to assist in the eBookPLUS.
development of a Corporate Code of Conduct. Create a series of guidelines that can
be incorporated into a code of ethics for the business. Share your guidelines with
other class members.
4 ‘Improving a business’s ethical performance depends on the values of its managers
and employees, and the business’s culture.’ Analyse this statement.
5 ‘Ethical business practices do not just happen: they are carefully planned and
implemented. Such practices filter through the business. In return, employees are
more loyal, committed and proud to work at such a business.’ Assess the importance
of business owners adopting ethical business practices. Weblink
6 Use the Fair Trade weblink in your eBookPLUS to examine the ways the movement Fair Trade
is committed to ethical trade and production practices.

CHAPTER 9
Management and change

9.1 Introduction
‘Nothing is permanent except change.’ Although these words were written around
2500 years ago by the Greek philosopher Heraclitus, they are as true today as they
were then, especially in the world of business. For example, imagine the type of
motor vehicle you will be driving in 20 years. It might look like the futuristic car
shown below. You might even be able to take to the sky if there is a traffic jam.
The motor vehicle industry has to effectively manage change due to dwindling
BizFACT oil supplies, stricter pollution controls, greater safety requirements and broader
Google is developing and testing a recycling legislation. Businesses only survive in today’s highly unpredictable
driverless car using software called business environment if they effectively manage change. Businesses that embrace
Google Chauffeur. The car has no change will profit; businesses that resist change will be left behind.
steering wheel or pedals and uses a
system of sensors to avoid collisions.
The car has a maximum speed of
40 kph.
FIGURE 9.1 Could this be the type

of motor vehicle you will be driving in
the future? Technology is constantly
changing. So too is the world of business.
Responding positively to these changes
is often a recipe for long-term survival,
because well managed changes can
become the foundation for future
growth and success.
9.2 What is organisational change?

In Australia, over the past decade, there has been extensive and unprecedented
change in the business environment. There is every indication that the pace of
change will intensify during this decade. The prevailing attitude in business today
can be summed up as follows: ‘There is only one constant in business and that is
change.’
To help guarantee the long-term survival of the business, managers must respond
to these changes. Hoping that the changes will either go away or have no impact
on their business is a recipe for disaster. Managers also find it frustrating to learn
that as soon as they adjust to one change in the business environment, they must

readjust to accommodate another. Some managers are fearful of change, seeing it
as a destructive force. Others perceive change as an opportunity for creativity and
openly embrace it. BizWORD
Change is any alteration in the internal or external environments; for example, Change is any alteration in the
change in consumer tastes, change in production methods, change in markets or internal or external environments.
products sold, or change in how employees perform their tasks. It could also be
a change to the way things are perceived, or new ways of dealing with problems.
In response to these changes, many organisations have undergone organisational
change: the adoption of a new idea or behaviour resulting in a difference in the form
or operation of an organisation over time. The organisation may have modified its
corporate culture, implemented new organisational structures, recruited employees
with new skills or developed different work practices.
The rapidly increasing pace of change threatens to overwhelm many businesses.
Adapting to change forced by the external environment is never easy for a business.
While change may be the most daunting challenge confronting management, the
rewards are great for those who are prepared to accept the challenge and not only
react to change but also initiate and manage it (see the following Snapshot).
Steve Polosak — change management

One of the most challenging aspects of my role as an Information Technology (IT)
manager for a large organisation is to initiate and implement change. For bad or
worse, change keeps coming in business and in life. Change is not made without
some inconvenience. Therein lies the challenge.
Previously, organisations faced one change at a time, and when it was over, people
SNAPSHOT
could rest a while until the next change came along. In today’s business environment,
the problem is that most organisations have a number of major change projects
occurring simultaneously.
A manager will ignore these changes at his or her own, and the organisation’s
peril. Well-managed changes can become the foundation of future growth and
success. For example, the organisation recently decided to implement a new data
transfer system that would alter employee work practices. To create an environment
that would accept the change, I began by explaining the four ‘Ws’ to the affected
employees — What the change is, Why the change is needed, Whom the change
will affect, and When and how the change will take place. Fear of the unknown is a
major barrier to change.
Then, I involved employees in the change process. It is only natural for employees
to go along with changes that they have helped bring about. From my experience,
people will resist poorly implemented changes or changes that are suddenly imposed
on them without any warning.
The changes did cause some initial resistance. However, six months later,
productivity has improved by 18 per cent and the majority of employees adapted so
well that morale has improved.
❛ Fear of the
Snapshot questions
1. Recall why change can be difficult to manage.
unknown is a major
2. Explain what Steve Polosak does to effectively manage change. barrier to change. ❜
Managing change
As profitable opportunities can arise from change, it must be considered a
fundamental aspect of a business’s strategic planning. The ability to manage and, in
many cases, embrace and adapt to change will increasingly determine a business’s
Management and change • CHAPTER 9 283

competitive advantage and survival. Successful managers are the ones who
BizWORD anticipate and adjust to changing circumstances rather than being passively swept
To be proactive is to initiate change along or, worse still, get caught unprepared. Such people are proactive rather than
rather than simply to react to events. reactive.
To be reactive is to wait for a change The crucial management issue is how to manage change to make it as
to occur and then respond to it. productive as possible, using it to renew and strengthen the business. However,
to be constructive, change must occur at a pace at which it can be absorbed and
integrated by the business.
Also, all changes should be thoroughly evaluated to assess their overall impact.
Poorly managed changes normally result in employee resistance, tension, anxiety, lost
productivity and, ultimately, decreased profits. Managing change is especially difficult
when the pace and nature of change is largely beyond the control of the manager.
Change entails risk and requires sound leadership skills and responsive
management structures. The long-term survival of any business depends on the
ability of its managers to scan the environment, predict future trends and exploit
change. While change may be the most daunting challenge confronting management,
the rewards are great for those who are prepared to accept the challenge.
FIGURE 9.2 The prevailing attitude in

businesses today can be summed up as
follows: ‘There is only one constant in life
and that is change’. Like ripples on water,
change spreads through all aspects of a
business’s environment.
Summary
• Organisational change is the adoption of a business’s new idea or behaviour in
response to internal or external influences.
• The ability to embrace, manage and adapt to change will increasingly determine
a business’s competitive advantage.
• Successful managers are the ones who anticipate and adjust to changing
circumstances.
EXERCISE Revision
9.1
1 Define the term ‘change’.
2 Explain the meaning of the phrase, ‘There is only one constant in business and that is
change’.
3 Account for why some managers are fearful of change, whereas others openly
embrace it.
4 Distinguish between proactive and reactive management.
5 Examine figure 9.2 above. Explain why change is compared to ripples on water.

Extension
1 Change is a continuous process, not an event. Propose an example from your own
experience to illustrate the continuous cycle of change.
2 Newspaper portfolio
(a) Select four external influences that affect businesses. Over a 5- to 6-week period,
collect four to five articles on each factor from newspapers, internet and journals.
(b) Paste the articles into a scrapbook under the four headings (influences). Ensure that
you date and acknowledge the source of each article.
Reports
(a) Create four reports of approximately 150 words on each of the external influences.
Use a business report style with subheadings, graphs and diagrams to support
your text.
(b) Your responses should synthesise the theory obtained from your teacher and
textbooks, with the information on current business conditions and influences from
your newspaper, internet and journal articles.
9.3 Responding to internal and

external influences
It is said that if you stop moving, you die! The same applies to businesses.
Businesses must keep responding to the never-ending pressure for change.
Whether the influences driving change come from outside (external) or within
(internal) the business (refer to chapter 3), changes to the business will occur. Such
changes should be viewed as opportunities to be taken advantage of as opposed to
challenges to overcome.
When a business responds to the influences of change, businesses often undergo
changes in their organisational structure, business culture, and human resource
and operations functions.
Some businesses respond to the forces of change in a major way. The result
is often a complete restructure of the business. Such a change is referred to as BizWORD
transformational change. A transformed business, after undergoing radical Transformational change often
change, will have a different (usually flatter) organisational structure, new work results in a complete restructure
systems and procedures, a changed employee structure, greater use of technology throughout the whole organisation.
and an altered corporate culture. Incremental change results in minor
changes, usually involving only a few
Other businesses may respond to forces of change in a smaller way. This may
employees.
involve only a few employees at a time, undertaking new operational procedures.
Such change is referred to as incremental change. For example, an office
employee may change from using a fax to using email when sending information
to customers.
Often, a business will implement both major and minor changes simultaneously.
However, regardless of the extent of the change, recent studies conducted in a wide
range of businesses revealed that all employees should be involved in the change
process. This is because any change ultimately has an impact on every employee.
Structural responses to change

Businesses need to continually improve and develop if they are to survive change. BizWORD
As the business environment changes, businesses undergo structural change. Structural change refers to changes
In recent years, the main structural changes introduced in Australian businesses in the business’s structure — that is,
have included: the organisation chart.
• outsourcing
• flatter organisational structures
• work teams.

The aim of these changes has been to streamline business operations (including
coordination and control), improve efficiency and empower employees to make
their own decisions.
Outsourcing
BizWORD A trend rapidly gaining support throughout the corporate world and government
Outsourcing is the contracting of establishments is outsourcing. Outsourcing has had a profound impact on
some organisational operations to businesses, particularly on the mix of employees. Many businesses have rearranged
outside suppliers.
their workforces to employ a minimum full-time staff and use as many people from
outside the business as possible — on a contract, casual or part-time rate. This
keeps costs to the lowest possible level.
Outsourcing may be necessary to help an organisation contain its costs and
survive in a global marketplace. Obviously, outsourcing has both positive and
negative effects. Outsourcing may mean that job losses occur within the organisation
and other jobs need to be created. The positive impact is that the organisation may
BizFACT be able to produce its goods, or supply its service, more efficiently than before.
Over the past few years Westpac
has outsourced its human resource
positions to GenPact in India; its
credit card and merchant processing
services to First Data Australia; its IT
and telecommunications to numerous
Indian organisations; and its mortgage
processing to the American Electronic
Data Systems (EDS) Corporation.
FIGURE 9.3 Many Australian

companies have outsourced some
of their business processes, such as
customer service, technology support,
help desk and accounts payable, to
places such as the Philippines, India and
China, where labour costs are cheaper.
Flat structures
Flatter management structures have become more common in recent times. As
middle-management positions are abolished, greater levels of accountability and
BizFACT responsibility are transferred to frontline staff. Such businesses are characterised
Many larger companies are beginning by fewer formal reporting controls, sharing of best practice methods, learning
to favour flatter management focused on the business’s needs, a supportive learning environment and a focus
structures, and this has led to on continuous improvement. In the contemporary workplace, businesses are
eliminating middle management to
allow for streamlined communications
evolving from formal, hierarchical structures with many levels to less formal, looser
between workers and top structures.
management. In 2010, 950 Telstra
employees (mainly middle managers Work teams
and top executives) lost their jobs in
Coupled closely with the emergence of the flatter organisational structure is the
what Telstra described as an effort to
adopt a simpler operating model in development of work teams. Teamwork allows businesses to be more flexible and
the business. Some commentators responsive. Teams also motivate employees to be more creative, to develop a broader
described it as a ‘middle manager view of goals, and to contribute across the entire business. The development of
bloodbath’. teams is transforming workplace cultures, practices, operations and productivity
levels.

Impact of change on business culture
For a business to survive in the long term, changes within the external or
internal environments should be reflected in its business culture. If the business
culture fits the external environment, managers and employees have the attitude
they need to compete successfully. For decades, Telstra enjoyed a monopoly
on telecommunications services within Australia. With the deregulation of the
telecommunications industry (which resulted in increased competition), as well
as the privatisation of Telstra, managers and employees were forced to adopt a
different mindset to compete in the new environment. The existing business culture
had to change because it did not fit the real-world requirements. The new external
environment required a new way of thinking — a new business culture.
Students and teachers face similar challenges whenever the educational
authorities modify the external examination requirements or implement new study
designs. Such changes will influence the structure of a school, its operations and
the school’s culture. Different attitudes, values and mindsets will eventually be
adopted within the school to satisfy the new demands. FIGURE 9.4 Many businesses
are starting to realise that a team
approach can be a catalyst for superior
Impact of change on human resource performance.
management
Organisational change will ultimately have a profound impact on employees at
all levels within a business. Consequently, adjustments to the human resource
management function are necessary to improve the effectiveness of changes made
in other business divisions, such as organisational structure and technology. Some
of the main human resource management changes are:
• Recruitment and selection must be altered to reflect the need for individuals who
possess the knowledge and skills required to handle the changing circumstances.
• If employees are to be made redundant then appropriate termination procedures
must be put in place.
• Training must be offered to existing employees in the areas of teamwork,
problem solving, decision making and change management.
• Performance appraisal and reward
systems that reinforce the new
behaviours must be put in place.
• More autonomous and
empowered employees will
require changes to the traditional
roles and communication
methods within the business.
• To attract and maintain skilled
employees, flexible working
arrangements will be needed.
• The bases of power will shift from
title, seniority and authority to
collaboration and contribution,
and this must be communicated. FIGURE 9.5 Considering that
• A clear vision of where the employees are a business’s most
business is headed and the valuable asset, it is important to manage
transformational changes sensitively and
benefits to employees will need professionally.
to be developed and clearly
communicated.

Impact of change on operations management
For many businesses, reducing production costs has become the basis for gaining
a competitive advantage in the marketplace. In response to changes in the
environment, businesses are constantly seeking ways to speed up production time,
shorten production development, streamline distribution and serve customers.
Some of the main operations management changes are:
• businesses have refitted and reorganised their factories to take advantage of
improvements in technology. They are also pursuing efficiencies in process
design and materials management.
BizWORD • New advances in production technology have been accompanied by changes in
Flexible manufacturing is the way the production process is organised, including flexible manufacturing.
production by computer controlled • Flexible manufacturing allows production plants to be smaller, more specialised,
machines that can adapt to various and closer to important markets.
versions of the same operation.
• There is an emphasis on quality management — an organisation-wide system of
procedures to ensure that the products satisfy consumers. This includes quality
assurance and quality control, coupled with total quality management.
• Human relations are being improved so that employees will approach their work
more intelligently. This includes such considerations as balancing workloads,
using ergonomics, simplifying materials handling, changing operations
sequences and training employees.
FIGURE 9.6 Changes in computer

technology have revolutionised production
and operations management.
Summary
• Changes can be major (transformational) or minor (incremental).
• When a business responds to the forces of change, the result will be a change
to its:
–– organisational structure, including outsourcing, flatter structures and work
teams
–– business culture; for a business to survive in the long term, changes should be
reflected in its culture
–– human resource management practices, including recruitment and selection,
training, performance appraisal and redundancy procedures
–– operations management, including flexible manufacturing and quality
assurance.

Revision EXERCISE
9.2
1 Distinguish between transformational change and incremental change.
2 Identify three minor and three major changes that have occurred in your school over
the last few years.
3 Define the term ‘structural change’.
4 Examine figure 9.3 and discuss the effects outsourcing would have on Australian
companies that have outsourced some of their business processes.
5 Construct a mind map to summarise the business’s three main structural responses
to the changes in the environment. The mind map has been started for you.
Outsourcing Flatter
• contracting to organisational
outside suppliers structures
• impact on
employees
BUSINESS
STRUCTURAL RESPONSE
TO CHANGE
Work teams
6 Explain why the business culture should be modified in response to changes in the
external environment.
7 Propose why alterations to the human resource management function are necessary
in response to changes in the external environment.
8 Outline what human resource management changes businesses have undertaken
in response to environmental changes. Use the following headings in your
response:
(a) Recruitment and selection
(b) Termination procedures
(c) Training and development
(d) Performance appraisal.
9 Select two operations management changes and outline how they assist the business
in achieving a competitive advantage in the marketplace.
10 Consider the following situations and determine whether the change required would
be major or minor. Give reasons for your answer.
(a) A sales representative complains that he is unable to access the latest prices on
some products quickly enough because price changes are mailed monthly to his
office.
(b) A distinct decline in the quality of manufactured items from the heavy metal
section has been traced back to the high turnover of staff in this section over the
past nine months.
(c) The development of new technology in the paper manufacturing industry will
require the chief executive officer and the board to completely reassess their
present manufacturing operations.
(d) The responsibilities of several key staff in the accounting department will need to
change as a result of the new computerised accounting system.

Extension
1 Investigate a business that is being restructured as a result of changes in its internal
environment. Business magazines, journals or the internet are an excellent source
of information and frequently report on organisational restructuring in a variety of
industries or businesses. Some recent examples of changes you may wish to explore
include:
(a) e-commerce
(b) organisational alliances
(c) work–life balance.
2 Zoe could not understand why her team members were being so difficult. Couldn’t
they see that the changes she had made to the work roster would be to everyone’s
benefit? She thought they had all agreed to the changes when they were discussed
at the last team meeting. She was not sure what to do next. Consider your own
experience of the difficulties in trying to predict how something will turn out.
Determine what managers can do to reduce these difficulties.
3 Flatter management structures often result in higher levels of responsibility and
accountability for all employees. Consequently, any organisational restructure that
involves removing a layer of management will be perceived by employees as a major
change. Assume you are the manager in charge of a restructure that will result in a
flat management structure. Determine the advantages you would put forward in
support of the restructure.
4 Arrange to interview someone who has experienced a major change in his or her
workplace. Examine and report on the impact of this change on the interviewee, his
or her colleagues and the business’s culture. Critically analyse how the change was
managed.
9.4 Managing change effectively

Constant change has made the task of management more demanding and exciting
BizFACT
than ever before. Change is the most daunting challenge confronting managers,
In 2008, IBM conducted the first
‘Making change work’ study, which
as well as the most promising opportunity. Now well entrenched and likely to
revealed that about 60 per cent of accelerate, change must be considered a fundamental aspect of a business’s strategic
business’s change programs failed to planning.
achieve their goals fully. The study
showed that the most common
goals for change programs were
cost reduction, higher customer
satisfaction and increasing revenue.
The main reasons for success were
senior management sponsorship,
employee involvement, and honest
and timely communication. The main
resistance to implementing change
centred on people’s mindsets and
attitudes, and their business culture.
FIGURE 9.7 Management researcher John Kotter

maintains that the change management process
consists of the following eight steps: 1. establish a
sense of necessity; 2. form a guiding group; 3. create
a vision; 4. communicate the vision; 5. empower
people to fulfil the vision; 6. recognise and reward
achievements; 7. consolidate improvements;
8. institutionalise the changes.

Businesses often fail to manage change well. Their record tends to be poor
because, in the upheaval of a restructuring process, employees — the most crucial
group of all — are often neglected. As well, existing communication channels
eLesson
often break down in the highly emotional climate that surrounds a change
Readings Books and Music
program. Strategies to achieve successful change rely on communication, employee
A local bookstore faces
involvement in the change process, training, support and negotiation. tough competition when
Change is inevitable. As a consequence, businesses must transform if they a mass-market competitor
want to survive in today’s environment. Nine2Three Employment Solutions is moves in across the road.
an example of a business that successfully manages the challenge of change (see Searchlight: ELES-0838
Nine2Three Employment Solutions —

managing change
Nine2Three Employment Solutions is a boutique recruitment and employment
SNAPSHOT
company specialising in flexible workplace practices and the placement of women
returning to the workforce, predominantly into accounting and office administration
roles. We pride ourselves on being highly professional.
The Global Financial Crisis (GFC) meant we needed to implement strong change
to our business model. We needed to ensure that we could navigate the economic
climate and keep our staff employed. We needed to reduce our costs and requested
staff to reduce hours of work. This was a significant change to the business, and the
management and staff had to adapt.
Asking staff to reduce hours in a difficult economy is not an easy thing. We used
clear communication to employees, both individually and as a team, to ensure they
were not left in the dark as to what was going on, and to see the reasons behind the
hard decisions. Getting our team members on board, committed and connected to
our business was, and remains, our number one priority.
New technology can be frightening for team members if they are not on
board with the total concept from the beginning. It was very important for us to
communicate to them the reasons we wished to change our processes and the
positives that would come from change.
Offering training in any new technology or work duty helped us to minimise any
negativity surrounding the changes. We keep our staff motivated in times of change
by communicating effectively with each and every employee. We make our team ❛ Communication is
members feel that their input and ideas are valued and that they are an integral part
of Nine2Three. Addressing any concerns raised and giving our employees a forum the key to . . .
to speak about any concerns was also really important. Communication is the key to
great workplaces and managing change.
managing change. ❜
Source: Extracts from 2010, ‘Real life stories: Change and keeping staff on board’, NETT, pp. 42–3.
Snapshot questions
1. Identify the internal and external influences that have had an impact on
Nine2Three Employment Solutions.
2. Outline the strategies used by Nine2Three Employment Solutions to manage
changes.
A manager can use a number of strategies to manage change effectively. Management

of the change will be more effective if the business can:
• identify the need for change
• set achievable goals
• develop strategies to overcome resistance to change
• use management consultants.

Identifying the need for change
An effective manager should always be scanning the environment, attempting to
understand factors that will have an impact on the business. In this way, he or she
BizWORD may better identify current trends and predict future changes.
A holistic approach looks at the Achieving such a vision requires a holistic view of the outside world and awareness
whole picture. of the potential impact on the business of a variety of factors. Correctly anticipating
these factors greatly assists the manager in identifying the need for change. This
strengthens the business so it may take full advantage of opportunities that favour
its long-term survival in an increasingly competitive world. Sharing the vision with
employees encourages them to better understand why the change is necessary.
To better understand what changes need to occur, a manager needs access to
accurate and up-to-date information.
Business information systems

BizFACT As a student you rely on measurements — subject marks and school grades — to
‘Employees who are not informed assess your progress. This information allows you to determine what changes, if
about why changes are necessary any, need to be made to your study pattern. Information is also crucial for any
will ultimately resist such changes’, business. Actually, much of a business’s success or failure to accurately identify
says Hannah Russell, a change
what needs to be changed depends on its ability to collect, organise, process and
management consultant. ‘When they
do not get the information they need, retrieve information quickly. For example:
they turn to the rumour mill with all • an operations manager of a manufacturing business must collect data about
its inaccuracies.’ production costs and production schedules
• a marketing manager must gather data measuring sales, product development
and customer satisfaction
• a finance manager must collect data about financial transactions and measure
cash flows
• a human resource manager must record staff absences, training requirements
and overtime payments.
BizWORD Consequently, a successful business must be able to gather, store, combine and
Data are unprocessed facts and analyse masses of data quickly and efficiently. Once processed and organised to
figures such as sales figures and be useful to an individual manager, this information becomes the raw material
customer complaints.
for decision making. Without it, a business would quickly lose its way because it
Information is processed data that could not accurately identify what needs to be changed.
have been deliberately selected and
organised to be useful to an individual
Where do managers get the information they need? In most businesses the
manager. answer lies in a business information system. A business information system
A business information system (BIS), also referred to as a management information system (MIS), gathers data,
(BIS), also referred to as a organises and summarises them, and then converts them into practical information
management information system to be used by managers who use them to make decisions.
(MIS), gathers data, organises and Managers have to plan for the future, implement their plans in the present and
summarises them, and then converts
them into practical information.
evaluate the results against what has been accomplished in the past. Therefore, they
need access to information that summarises future possibilities, the present situation
A vision statement states the
purpose of the business. and past performance. All this is part of a manager’s role in managing change effectively.
Setting achievable goals

A vision statement states the purpose of the business. It indicates what the firm
does and states its key goals. In conjunction with the vision statement, a business
establishes specific company goals that are measurable (usually set on a yearly
basis). Reassessment of the vision statement and business goals may be required
if management detects changes in the external business environment that may
have a major impact on business activities. However, for change to be managed

effectively it is essential that any new goals be achievable. This means goals that
are attainable and realistic. Unachievable goals will only cause cynicism among
employees and damage relationships between employees and supervisors.
On the other hand, achievable goals, devised after consultation with employees
and communicated clearly by management, have a much greater chance of being
realised (see the following Snapshot).
Dr Edwin Locke — a goal-setting theory

Dr Edwin Locke did research on goal setting and
motivation during the 1960s. He concluded that
employees were motivated by clear goals and
appropriate feedback regarding their achievement.
Locke maintained that working towards a goal
SNAPSHOT
provided the motivation to reach that goal and this,
therefore, improved performance. He found that
specific and difficult goals led to better performance ❛ . . . goals must be
than vague goals or goals that were too easy to
achieve. clear and specific,
That is, Locke found that in order to change people’s behaviour — to allow them and provide a
the opportunity to embrace change — goals must be clear and specific, and provide
a challenge for employees. The employee must also be committed to meet the challenge for
challenge, and it helps if each employee receives constant feedback that provides
clarification and adjustment of the goals, and recognition for their efforts. The goal
employees. ❜
or task should not become so overwhelming that a person loses motivation.
Locke’s theory is not new to us today because this approach to motivation
and managing change has been used by individuals and businesses over the last 40 to
50 years. Goal setting is something that is accepted as necessary for our success.
Snapshot questions
1. Summarise the main points of Dr Edwin Locke’s research.
2. Explain how goal setting affects a person’s ability to cope with change.
3. Propose why setting goals that are easy to achieve might be counterproductive.
Summary
• To manage change effectively requires the change to be as productive as possible;
to make it a process for revitalising and strengthening the business.
• Managers must develop strategies for managing change effectively.
• Identifying the need for change and setting achievable goals are two strategies to
manage change effectively.
Revision EXERCISE
9.3
1 Summarise the information from the BizFact on page 290 by completing the table
below. The first one has been started for you.
IBM’s ‘Making change work’ study
1. Common goals for change programs • Cost reduction
•
•
2. Main reasons for success •
•
•
3. Main resistors to change •
•

2 Recall why an effective manager should continuously scan the business environment.
3 State why it is important for a manager to share the business’s vision with employees.
4 State the purpose of a business information system.
5 Account for the importance of current and up-to-date information for a manager
attempting to manage change effectively.
6 Outline why setting achievable goals can help managers implement change effectively.
Extension
Read the scenario below. In small groups, create a plan to solve the problems and
effectively manage a potentially difficult introduction to new technology. Present your plan
to the rest of the class.
Scenario
You are a divisional manager of 30 loyal, long-serving employees. Fierce competition is
threatening the long-term viability of the business. Sales and profits are declining due
to the lower prices of your competitor. The business could compete if it introduced new
technology. (It has the finance to purchase and install the machinery.) The introduction
of the new technology is going to mean changes to your division and the current
product.
Twenty employees are required to work the new technology so 10 will become
redundant.
Even though sales have declined, you have a number of very loyal customers who have
expressed satisfaction with the format of the current product.
Problems requiring solution and action:
(a) Retrenching of 10 employees — examine some of the criteria you might consider
regarding who should stay and who should go
(b) Training the remaining employees to understand and use the new and more complex
technology (quite a radical change from the technology currently in use)
(c) Managing the change with sensitivity: maintaining positive workplace morale and
exhibiting leadership
(d) Communicating the change in the product format to the customers and convincing
them to maintain their loyalty towards your company and its brand.
Resistance to change
FIGURE 9.8 Poor timing, or lack of At the same time as managers are undertaking — driving — change for the best of
time, will result in undue resistance to
change.
reasons, there will be restraining forces working against the change, creating resistance.
Psychology has shown how difficult it is for
individuals to change their behaviour; how difficult it
is to eat less, exercise more, stop smoking or be more
patient. Resistance to change is strong because for most
people personal change is:
• achieved only with considerable effort
• often emotionally stressful.
Businesses, like individuals, also find some changes
difficult to cope with. When the pace of change is
very rapid or coming from the external environment,
then businesses may experience open resistance to the
change. For example, consider where you sit in your
Business Studies class. It is likely that you and other
students sit in the same seats for each lesson. Imagine
now that your Business Studies teacher changes the
seating arrangement and tells you where to sit. This
new seating arrangement will be permanent. No prior
warning or explanation of these changes was given.

You and your classmates may react with a mixture of annoyance, irritation,
frustration, anger or delight. Perhaps you would be angry or upset at not
being consulted or involved in the rearrangement process. You may have felt
that you had no control over what you regard as your working conditions and
organisational structure. Many of you may view the changes as a threat to the
status quo.
What does this tell us about resistance to change? This reaction is common BizFACT
among managers and employees. As individuals become accustomed to doing Ironically, some people enthusiastically
certain things and doing them in certain ways, so too do businesses. As a result, support the changes in public, but
businesses and employees sometimes vigorously resist change. then ignore the changes in private.
Management consultant Michael
The most common reasons why change may be resisted include: Hammer calls this deadly form of
1. Financial costs. A major reason for resistance to change is the financial cost of its resistance the ‘Kiss of Yes’. Why do
implementation. Even with access to finance, a business contemplating change you think people behave this way?
must weigh up the costs and benefits of the change.
2. Purchasing new equipment. The purchase cost of investing in new technology,
plant or equipment can be considerable. Although this is expensive, there can
be very significant advantages from making this investment. Prior to making
the investment in new equipment, managers will need to weigh up the cost of
purchase against the cost of leasing new equipment.
3. Redundancy payments. Employees who lose their jobs as a result of changes are
entitled to financial compensation in the form of a redundancy payment. A
redundancy payment is the money that is given to employees when they are
forced out of work because their job skills are no longer relevant. Redundancy
payments can be very high, especially if many employees are made redundant.
4. Retraining. When significant changes are introduced such as new technology,
employees must be retrained. Retraining may be performed on the job or off the job.
5. Reorganising plant layout. When new equipment is installed, the layout of the
plant may require reorganisation to improve efficiency and productivity. There BizWORD
can be high costs associated with reorganising the plant. Inertia refers to an unenthusiastic
6. Inertia. Inertia refers to an unenthusiastic response to proposed changes. Some response to proposed change.
managers and employees resist change because it requires moving outside and
away from their ‘comfort zones’. Many employees and managers of the typical
business desire a safe and predictable
status quo. Such an attitude is summed
up in the phrase, ‘But we don’t do
things that way here’. Change can have
a major impact on people. Feelings of
lack of control, fear of the unknown
and uncertainty about the future can
lead to anxiety. The situation is made
even worse if there is poor leadership
and management during times of
change.
FIGURE 9.9 Uncertainty about the future is a

powerful emotion that can inhibit employees from
embracing change. This is made worse if employees
do not understand the reason for the change, or
if they distrust the people, usually management,
behind the change.

Driving and resisting forces
BizWORD All businesses must deal with one constant reality of change: trying to balance the
Driving forces are those forces that forces driving change with the forces resisting change. Driving forces are those
support the change. forces that initiate, encourage and support the change. The main driving forces for
Restraining forces are those forces organisational change are the changes in the internal and external environments, as
that work against the change. outlined in chapter 3. Restraining forces are those that work against the change,
creating resistance. The current conditions, or status quo, result from these two
forces ‘pulling’ in opposite directions (see figure 9.10). Managers who are trying to
implement a change must analyse the situation to identify and balance the driving
and restraining forces.
Restraining forces Equilibrium Driving forces

(forces resisting (status quo) (forces for change)
change)
FIGURE 9.10 Forces for change are constantly ‘pulling’ against the forces resisting change.
Businesses often fail to manage change well. The record tends to be poor
because in the upheaval of a restructuring process the most crucial group of all, the
employees, are often neglected. As well, existing communication channels are often
inadequate when reporting progress. Such channels often break down in the highly
emotional climate that surrounds a change program.
Strategies for reducing resistance to change

The first step in reducing resistance to change is to ensure that managers
understand the main reasons why change is resisted. Once these factors have been
identified, each manager can put in place strategies to reduce the resistance.
A great deal of research has been conducted on the most appropriate methods to
reduce resistance to change. The majority of this research revealed that regardless
of where or how a change originated, the workplace culture created by the
manager and his or her leadership abilities can greatly affect employee acceptance.
Figure 9.11 outlines several strategies for creating a positive environment for change.
Two of the most effective are creating a culture of change and positive leadership.

Offer support — this Build trust
Provide constant Make sure the changes
reduces fear and anxiety among employees
feedback are reasonable
Make sure Specify the nature

communication of the change
is two way, not just
from the top down
Allow employees to
STRATEGIES FOR REDUCING
participate in the
RESISTANCE TO CHANGE
change process
Outline the
positive and
negative aspects Discuss any upcoming
of the change change — this reduces
fear of the unknown
Follow a sensible Clearly articulate

Avoid threats Support change
time frame; do not the purpose of
if possible with new learning
rush through changes the change
FIGURE 9.11 Strategies for reducing resistance to change
Creating a culture of change

Adopting changes to work procedures or organisational structures requires a degree
of risk taking by the participants. For employees and managers to be prepared
to take such risks, the business culture needs to be supportive. One method to
assist in this process is for the business to identify individuals who could act as BizWORD
supportive change agents. Such people fulfil a crucial role in helping to establish A change agent is a person or
a positive and supportive workplace culture. Change agents may include members group of people who act as catalysts,
assuming responsibility for managing
of the management team, employees of the business or outside consultants.
the change process.
Effective teams have open communication channels that assist in the transfer of
information; they also develop a strong sense of identity between team members
and offer a supportive environment that reduces fear of change. When teams work
well, staff turnover and absenteeism decline, change is more readily accommodated
and productivity tends to rise.
FIGURE 9.12 Teamwork encourages

a supportive culture, which lowers
resistance to change.

Positive leadership
BizFACT
How a manager treats his or her employees will largely determine their acceptance
In 2013, Sheryl Sandberg, the CEO of
Facebook, wrote a book entitled Lean of or resistance to change. A manager who acts as a leader and has high expectations
in: women, work and the will to lead, of employees’ abilities to initiate and implement a change process will generally be
about empowering women to assume rewarded with people who are willing to embrace the change. There may still be
leadership roles in business. She has some points of resistance, but this resistance can be productively dealt with because
said, ‘I believe that if more women
the employees believe they have the support and trust of their manager.
lean in, we can change the power
structure of our world and expand Employees are generally more prepared to accept the risks involved with change
opportunities. Shared experience if they feel their manager is concerned with their welfare. Managers who concentrate
forms the basis of empathy and, on the needs of their employees are the most effective, building high-performance
in turn, can spark the institutional teams that attain their objectives. Less effective managers tend to focus on tasks
changes we need. More female
and are more concerned with meeting deadlines — that is, they display the natural
leadership will lead to fairer treatment
for all women.’ characteristics of a manager, not a leader.
Added to these qualities, a successful leader will need to:
• market and promote the change in a manner that will achieve cooperation and
acceptance
• resolve conflicts, which often arise when change is implemented
• keep an open mind, seek out new ideas and freely share information
• cultivate a sense of stability, while at the same time push on with even more change
• show confidence in people, share credit and recognition
• build and communicate a clear vision.
Being an effective leader is not an easy task. There may be temporary setbacks,
particularly during periods of negotiation. In the end, leadership may still fail.
However, not displaying leadership is inviting a greater possibility of failure.
Research constantly reveals that traditional management is not enough for
businesses involved in continual transformation (see the following case study).
Such businesses need charismatic, enthusiastic leaders who can inspire people to
share their vision.
FIGURE 9.13 A leader who can ‘sell’

the need for change automatically
reduces one of the main resistance
points of ‘why do we need to change?’
BizFACT
A successful leader will market and
promote the change in a manner
that will achieve cooperation and
acceptance.
Management consultants
As a student, if you have difficulty understanding some information within a subject,
you will probably consult with someone who is an expert in that area. This could
be another student, teacher or family member. This is similar to when you have a

consultation with a doctor. You are seeking assistance from someone with specialised
knowledge. Businesses also seek advice from management consultants who BizWORD
specialise in a diverse range of business-related areas, including risk management, A management consultant is
brand protection, business set-up, executive recruitment and sustainability. someone who has specialised
Businesses hire the services of management consultants because they provide: knowledge and skills within an area of
business.
• a wide range of business experiences
Best practice refers to those business
• specialised knowledge and skills
practices that are regarded as the
• an objective (external) viewpoint best or of the highest standard in the
• access to the latest research industry.
• awareness of industry best practices. Change management is a
The main role of management consultants is to help businesses improve their methodical approach to dealing with
performance by investigating existing business problems and developing plans change, both from the perspective of
for improvement. Consultants can be especially helpful in providing change a business and on the individual level.
management advice: a methodical approach to dealing with change, both from the
perspective of a business and on the individual level. They can provide strategies to
smoothly manage the introduction of business changes by:
• undertaking change readiness reviews
• creating a supportive business culture
• actively involving all stakeholders in the change process
• gaining and recognising early achievements.
However, as in all aspects of life, the quality of advice from management
consultants can vary. Therefore, it is best to hire those consultants who are members
of the Institute of Management Consultants as their members have recognised
standards of character, experience and education.
Magnatech Industries — managing change

This case study of a real organisation is designed to provide insight into the management
of change and the challenges that need to be addressed for long-term survival.
Magnatech Industries is a large, private company that manufactures rigid plastic
injection mouldings for a range of whitegood manufacturers of refrigerators, freezers
and washing machines. Injection moulding is a manufacturing process which involves
SNAPSHOT
heating plastic to a fluid state and inserting it into a mould. This process means that
a variety of products once manufactured from heavier and more expensive materials
can be produced from less expensive plastic materials.
Over the last decade, significant changes in this industry have meant changes
to Magnatech’s strategic plans, resulting in operational and structural changes.
Technical innovation in the external business environment is likely to result in further,
wide-ranging change over the next five years.
Business background
Name of business Magnatech Industries
Type of ownership/legal structure Proprietary company
Shareholders 100 per cent Australian owned
International division Pro Tag International Thailand
Core business function Plastic injection moulding servicing the
whitegoods (refrigerators, freezers and washing
machines) industry
Mission statement To provide technical solutions through high
engineering standards which meet the needs of
our clients
Employees 115 in Australia, New Zealand and Thailand
(continued)

❛ Magnatech faces Brief history
The company has a history that stretches back to the 1950s, when a toolmaking
both global and business was established by the original owner. In 1972, the company began to
domestic make refrigerator, freezer and washing machine mouldings for three Australian
manufacturers. In the 1990s, tariff reductions for electronic appliances had a
competition . . . ❜ significant impact on the business. Margins on whitegoods dropped by 40 per cent
as the domestic suppliers reduced prices to compete with the cheaper imports.
While Magnatech faces both global and domestic competition, it continues to
maintain a major share of the domestic market for plastic mouldings for whitegoods.
International competition is increasing. Often, a partially loaded shipping container
destined for Australia will be topped up with plastic mouldings, which will then be
off-loaded on the domestic market at cost price.
Currently five plants manufacture refrigeration mouldings in Australia. Three
of these are multinational companies that have chosen to make Australia their
headquarters for production in the region, due to Australia’s political and economic
stability. Magnatech’s manufacturing process is fully automated, resulting in lower
per unit costs of production.
The market
Magnatech supplies mouldings to major customers in Australia (with a significant
❛ Export markets majority of the market share), with production facilities in Australia, New Zealand
are . . . a source of and Thailand. One of the characteristics of this industry is the increasing pressure to
minimise inventories, reduce manufacturing costs and reduce lead time (the time it
revenue that reduces takes to convert raw materials into a finished product) from one week to 48 hours.
the risk involved from Magnatech currently produces tinted trays and shelving for refrigerators and
freezers in 10 different colours. While Magnatech maintains a stock of white internal
domestic competitive mouldings, the coloured trays and shelves are made to order. With industry pressure
to reduce lead times, Magnatech can generally produce orders for standard colour
pressures. ❜ mouldings within 24 hours. A specialised colour may initially require a lead time of
two weeks.

Changing direction of the business
While there has been a considerable amount of external change in the industry over
the past decade, Magnatech’s core business activity remains unchanged: injection
moulding. However, the strategic plans for the organisation:
• reflect an awareness of the change in the industry
• acknowledge Magnatech’s potential vulnerability in the face of change,
particularly as its customer base for core products is a handful of major customers
• incorporate internal changes to ensure long-term survival.
Changes in the direction of the business include the following.
1 Development of new markets, especially export. Magnatech was initially
reluctant to expand internationally because of the difficulties it believed it would
face. However, the company soon learnt of the opportunities presented by such
an expansion. While still in the developmental stage, Magnatech Industries’ export
markets are increasingly becoming another reliable source of revenue that reduces
the risk involved from domestic competitive pressures.
2 Development of new products, using the skills developed within the core business.
A recent major product development includes the manufacture of a range of
security tag devices for clothing retailers. The product, ProTag, has been designed
and developed by an associate company, ProTag International (100 per cent owned
by Magnatech, including patents and trademarks). As a special releaser is required
to extract the tag, products that are displayed are safe from theft. Unlike their core
products, which are targeted towards whitegoods manufacturers, the customer base
for ProTag is retailers.
The technology utilised in the production of the ProTag security system may
also be adapted for other product areas. Security systems for aircraft luggage, for
example, are currently under evaluation.
3 Site diversification with business expansion in Asia. Site diversification, particularly
with the Thailand plant, has resulted in some significant cost savings and increased
market share for the Magnatech Group. Magnatech Asia can take advantage of:
• access to resins (an input in the production process) at competitive prices
• the benefits offered by the Australia−Thailand Free Trade Agreement which
reduced the barriers to trade between the two countries.
Management response to change — internal adjustments

1 Total quality management (TQM). All aspects of the business are continuously
reviewed to ensure value is added and to maximise efficiency for the benefit of
the customer. To achieve the TQM objectives, key performance indicators such as
industry benchmarks are used. The company has successfully developed a workplace
culture based on continuous improvement as it believes this will be the most cost
effective in the long term.
2 Rationalisation. The company continues to audit all operations and processes and
has recently decided to place some of the manual operations with subcontractors.
Any part or product that cannot be fully automated (for example, clicking the parts
together) is now outsourced. Subcontractor labour is more cost effective for labour-
intensive work.
3 Training. The majority of the organisation’s employees are multiskilled and there
are significant benefits in employee commitment to training. The company has an
excellent team and values employee ideas.
If an employee has an idea about changes or refinements to production processes,
the company is prepared to submit the idea to trial. Peter Townsend, the managing
director, commented that this can sometimes be costly, but in the process of trialling
new ideas, employees develop skills that can benefit other areas of the plant.
Over half of Magnatech’s employees have at least 15 years of service. Through
retirement, the company is likely to lose a substantial amount of experience and
(continued)

❛ The company expertise. Apprentices have been employed to gain knowledge and skills required for
a smooth transition. Magnatech is now embarking on human resource policies that
continues to audit encourage individual expertise.
all operations and

processes. ❜
4 Ecologically sustainable production. Over the last five years Magnatech has
implemented a ‘3R’ policy: reduce, reuse or recycle. This has benefited both the
company, through reduced wastage and more efficient work practices, and the
environment. Magnatech also adopted a triple bottom line approach in its financial
and non-financial reporting processes.
Snapshot questions
1. Identify the stakeholders in Magnatech Industries.
2. Identify the sources of change in the internal and external environments that
have had an impact on Magnatech Industries over the last decade.
3. Describe Magnatech Industries’ core business function.
4. (a) Define the terms ‘inventories’ and ‘lead time’.
(b) Explain why Magnatech Industries wants to minimise inventories and
reduce lead times.
5. Outline how Magnatech Industries’ strategic plan has been modified as a
result of the changes in the business environment.
6. Describe what Magnatech Industries is doing to reduce the consequence of
employee retirement.
7. Construct a mind map summarising the internal adjustments Magnatech
Industries’ management has made in response to changes within the business
environment. The first part of the mind map has been started for you.
Total quality management Ecologically sustainable

• continual review to ensure production
value is added
MANAGEMENT RESPONSE TO CHANGE

— INTERNAL ADJUSTMENTS
Training Rationalisation

8. Predict the possible impact of each of the changes in direction of Magnatech
Industries. Use the following headings to prepare your answer.
• New markets
• New products
• Diversification.
9. (a) Assess the degree of control and influence Magnatech Industries has
over factors in the external environment.
(b) Determine what are some of the circumstances that will affect the
degree of control.
10. Determine how the internal and external stakeholders are likely to
benefit by Magnatech Industries promoting socially just and ecologically
sustainable change. Summarise your ideas using a table like the
following one.
Benefits for internal Benefits for external

stakeholders stakeholders
New and better products
New technology
Employee training programs
Improved working environment
Summary
• At the same time as managers are undertaking — driving — change for the best
of reasons, there will be restraining forces working against the change, creating
resistance.
• The main reasons for resistance to change include:
–– financial costs (the cost of implementing major changes can be substantial)
–– purchasing new equipment (this can also be expensive)
–– redundancy payments (if employees lose their jobs as a result of change, they
are entitled to financial compensation)
–– retraining (when changes are introduced, some employees will require training)
–– reorganising plant layout (the layout of the plant may need to be reorganised if
new equipment or technology is introduced)
–– inertia (some managers and employees resist change due to a fear of the
unknown).
• Driving forces are those forces that initiate, encourage and support the change.
• Restraining forces are those that work against the change, creating resistance.
• Resistance to change is common among managers and employees.
• Two strategies for overcoming resistance to change include:
–– creating a culture of change (encouraging teamwork)
–– providing positive leadership (sharing the vision).
• The main role of management consultants is to help businesses improve their
performance and assist with change management.
Revision EXERCISE
9.4
1 Outline why management and employees commonly resist change.
2 Explain how you would feel if your classroom was radically changed overnight
without your knowledge.

3 Distinguish between ‘driving’ and ‘restraining’ forces.
4 Complete the sentences below by identifying the correct term from the following list:
cost common fear effectively financial
resistance analysing managers strategies retrained
When change is too rapid or when managers and employees feel they have
no control over it, then _______________ to the change is to be expected.
Resistance to change is _______________ among employees and organisations.
The resistance needs to be managed _______________. Managers can fail
to achieve change by not _______________ the situation properly. Employees
may resist change because of the _______________ of the unknown,
the _______________ costs involved and the need for some employees to
be _______________. _______________ for reducing resistance to change
need to be developed by _______________.
5 Outline how the following can be a restraining force:
(a) lack of time
(b) poor timing.
6 When the new chief executive officer for Bradley Southport Limited attempted
to make some major changes, she encountered resistance among some
senior level managers. Explain why these managers might have resisted
the changes.
7 Based on the information from this section, explain why there was so much
resistance by bank tellers when they were first required to use computers to process
customer transactions.
Digital doc 8 Examine figure 9.11 on page 297. Select the two strategies you think are the most
Use the Chapter summary important. Justify your selection.
document in your
eBookPLUS to compile your 9 Recall the role of a change agent.
own notes for this chapter. 10 Identify the features found in a team that help others overcome resistance to
Searchlight: DOC-14118 change.
11 Clarify how positive leadership can help overcome resistance to change.
12 Select a major change in your life, such as moving house, changing schools or starting
a new casual job, and complete the following:
(a) State the reasons you liked or disliked the change. Share your thoughts with other
class members.
(b) Identify the reasons that were common among the group.
(c) Interpret what this tells you about the best strategy that a manager could use to
help overcome resistance to change.
13 Identify the benefits of hiring a management consultant.
14 Use the Pacific Brands weblinks in your eBookPLUS to investigate change in this
Weblinks business over the last 5 years. Evaluate the change the company has undergone and
Pacific Brands the role of leadership and management consultants in this change process. Write a
brief report on the journey of Pacific Brands as the company reinvented itself.
Extension
1 Evaluate the accuracy of the following quotes concerning change:
(a) ‘Change for change’s sake is not progress.’
(b) ‘Change is life. Life is change.’
(c) ‘Change what you can change. Accept what you cannot change.’
(d) ‘Change is the new normal for leadership success.’
2 Think about a situation in which you would like to make a change but face some
resistance. The situations might involve improving your Business Studies results,
changing the arrangement of your timetable or having greater use of the family car.
(a) Summarise the status quo.
(b) Propose the situation as you would like it to be if you could change it.

(c) Identify the main driving forces.
(d) Identify the main restraining forces.
(e) Determine strategies for reducing the impact of the restraining forces.
Digital doc
3 Because of recent changes to the Work Health and Safety Act you must implement Test your knowledge of key
some new safety procedures. You know that some of your employees are going to terms by completing the
regard some of these changes as ridiculous. Propose what you might do to get the Chapter crossword in your
employees to accept the changes. eBookPLUS.
4 ‘. . . the innovator has for enemies all those who have done well under the old Searchlight: DOC-1211
conditions, and lukewarm defenders in those who may do well under the new.’
Machiavelli (The Prince, 1532). Evaluate the accuracy of this statement.

Business management
1 Which of the following would be classified as a social goal?
(a) To increase market share by 10 per cent
(b) To sponsor the local school football team
(c) To provide shareholders with increased returns
(d) To improve the training opportunities for employees
2 Which of the following states the process involved in planning?
(a) Setting standards and targets
(b) Reacting to daily business crises
(c) Assigning work to employees and delegating authority
(d) Measuring the performance of the business against benchmarks
3 Which of the following items are classified as current assets?
(a) Creditors and cash at bank
(b) Cash at bank and inventory
(c) Inventory and machinery
(d) Machinery and mortgage
4 Which element of the human resource cycle is concerned with preparing a job analysis?
(a) Acquisition
(b) Development
(c) Maintenance
(d) Separation
5 Which of the following best describes a balance sheet?
(a) A statement of the profit or loss of a business for a given period
(b) A statement that shows the movement of cash receipts and cash payments
(c) A statement that compares expected profit or loss with what was anticipated
(d) A statement of the assets, liabilities and owner’s equity of a business at a particular
date
6 John & Sons Construction has developed a plan to guide the business over the next five
years. What type of planning is this an example of?
(a) Operational
(b) Tactical
(c) Technical
(d) Strategic
7 What does the contingency approach to management emphasise?
(a) Management as planning, organising and controlling
(b) Management as leading, motivating and communicating
(c) The need for managers to be reactive and respond to change after it occurs
(d) The need for flexibility and adaptation of management practices to suit changing
circumstances
8 A furniture store has designed a new logo to market its products.
Which marketing strategy is being used by the company?
(a) Place
(b) Price
(c) Product
(d) Promotion
9 Calculate the value of owner’s equity given the following information: Liabilities =
$75 000 and Assets = $145 000.
(a) $70 000
(b) $75 000
(c) $220 000
(d) $240 000
10 Shimmering Jewellery relies heavily on their sales assistants to promote their goods
by outlining the benefits and features of their products to consumers. This has been

successful in persuading customers to purchase their products. Which promotion
technique is this an example of?
(a) Publicity
(b) Advertising
(c) Personal selling
(d) Sales promotion
11 Which of the following are both examples of voluntary separation?
(a) Retirement and resignation
(b) Resignation and dismissal
(c) Dismissal and retrenchment
(d) Retrenchment and retirement
12 A manager of a real estate agency always consults with employees when setting targets
and making decisions. What type of leadership style would this be an example of?
(a) Autocratic
(b) Democratic
(c) Diplomatic
(d) Hierarchical
13 Beautiful Skin Pty Ltd has decided to produce a razor for women. It has calculated the
total production costs for each razor and added a 15 per cent margin to set the final
price. What pricing method is this an example of?
(a) Cost-based pricing
(b) Break-even pricing
(c) Market-based pricing
(d) Competition-based pricing
14 Michael is able to manage change in his business by always scanning the environment
and attempting to understand the factors that will have an impact on the business.
Which of the following best describes the method of managing change effectively used
by Michael?
(a) Setting achievable goals
(b) Reducing resistance to change
(c) Identifying the need for change
(d) Utilising management consultants
15 A production manager inspects products at various points in the production process
to check for problems. Which of the following best describes his approach to quality
management?
(a) Quality control
(b) Quality assurance
(c) Continuous improvement
(d) Total quality management

1 ‘To understand management today you must look at its history. Management
approaches (theories) and schools of thought represent differing viewpoints and
strategies for managing people, making decisions, organising workplaces and solving
problems. Each offers something of value for today’s manager.’
(a) Identify three management approaches and summarise the main features of
each. 3 marks
(b) Explain how these approaches could influence contemporary management
practices. 6 marks
(c) Analyse the relationship between management approach and the types of
business structure that a business could adopt. 12 marks
2 ‘Managers need a wide range of skills. The relative importance of these skills depends
upon the manager’s level in the business.’
(a) Identify four management skills. 2 marks
(b) Explain how the quantity of the skills needed differs at each level of
management. 5 marks
(c) Determine why it is important for a manager to acquire new skills. 10 marks

3 (a) Define the term ‘stakeholders’. 2 marks
(b) Identify and describe two possible conflicts that could arise between various
stakeholders. 6 marks
(c) Propose possible strategies that managers could adopt to reconcile any likely
conflicts of interest. 6 marks
4 (a) Outline what is meant by the term ‘effective management’. 3 marks
(b) Distinguish between ‘good’ and ‘poor’ management. 5 marks
(c) Evaluate the importance of good management to the business’s overall
success. 10 marks
5 (a) Outline the role of managers when organising operations in a manufacturing-
based business. 3 marks
(b) Demonstrate how a business can ensure that quality of outputs is
maintained. 6 marks
6 (a) Define the term ‘marketing mix’. 2 marks
(b) Outline the three approaches a business can adopt when selecting a target
market. 6 marks
(c) Recommend a marketing mix for a business you are familiar with. 10 marks
7 (a) State the main role of marketing. 2 marks
(b) Define target market.
(c) Assess the importance of each of the four Ps of the marketing mix. 10 marks
8 (a) Define the term ‘goal’. 2 marks
(b) Identify four business goals. 4 marks
(c) Explain how it can be difficult for a manager to achieve a mix of business
goals. 4 marks
(d) Assess the importance of staff innovation, motivation, mentoring and
training. 10 marks
9 Construct an income statement and balance sheet in correct format using the
following information. You will be required to determine profit and to use this figure
to balance the balance sheet. 12 marks
Sales $400 000 Owner’s equity $45 000
Expenses $300 000 Debtors $12 000
COGS $50 000 Mortgage $60 000
Cash $20 000 Land and buildings $120 000
Stock $10 000 Goodwill $8 000
Creditors $15 000
10 (a) Define the term ‘human resource/cycle management’. 2 marks
(b) Demonstrate the four main elements of the human resource cycle. 6 marks
11 (a) Describe the steps to be followed by the human resource department so the most
appropriate applicant will be chosen to fill a vacancy. 3 marks
(b) Deduce what problems could arise for a business if an inappropriate candidate was
selected to fill a job vacancy. 6 marks

1 In the following situation, identify and explain the management skills that could be
used.
A dispute has arisen between the IT department and the accounting department
regarding the introduction of a new computer invoice system. The accountant wants
the new system introduced by the beginning of the new financial year, but the
IT manager believes that the staff will not be sufficiently trained by then to use it
effectively. You are the human resource manager in charge of this project and must
negotiate agreement without further delay.
2 Compare the classical, behavioural and contingency management approaches. Study
a business and account for how management theory has influenced the business’s
structure.
3 ‘The only constant in business is change. The pace of change is accelerating, with
change coming from both internal and external sources. How a business responds to

these changes will ultimately determine its future.’ Critically evaluate the strategies
used to manage change effectively in a business you have studied.
4 Choose a real-life example of a manufacturing-based business and a service-based
business. For each example, outline the inputs, processes and outputs of their
operations.
5 ‘An effective marketing mix is crucial if a business wants to increase its market share.’
Discuss.
6 ‘Marketing is a system of business activities designed to plan, price, promote and
distribute something of value for the benefit of the customer at a profit.’ With reference
to a business you have studied, discuss and expand on this statement.
7 ‘A thorough understanding of accounting and finance is essential for business
managers’. Identify the three main financial statements and discuss their importance.
8 ‘If a business wants to be appropriately flexible and responsive to market needs, then it
should train all employees to be good at everything. That is, they should be experts in all
aspects of each key business function. Generalists, not specialists, are required.’ Is this a
practical proposal? Justify this statement.
9 Imagine you are specialising in accounting services for a small business. Terry, one of
your clients, runs a home maintenance business. He admits to you that he regularly
offers a discount to customers who pay him in cash, so that he can keep his apparent
profit as low as possible to avoid tax, and not have to declare every transaction on his
BAS. Explain how you would try to convince him to maintain all his financial records in
a socially responsible and ethical manner.
10 ‘There are only two ways in which to create and maintain outstanding business
performance. First, take exceptional care of the customer and, second, develop new
products. It is that simple.’ Determine how accurate this statement is. Give reasons for
your answer.

TOPIC 3
BUSINESS PLANNING
FOCUS AREA
The processes of establishing and planning a small to medium enterprise
OUTCOMES
structure
• describe the factors contributing to the success or failure of small to medium
enterprises
• assess the processes and interdependence of key business functions
• evaluate information for actual and hypothetical business situations
• communicate business information and issues in appropriate formats
• apply mathematical concepts appropriately in business situations.
Small to medium
enterprises (SMEs)
Critical issues in Influences in

BUSINESS
business success establishing a small to
PLANNING
and failure medium enterprise
The business planning

process
310 TOPIC 3 • Business planning

Best foot forward
As the old adage goes, if the shoe fits, wear it. But Mira Smoljko knows it’s not
always that simple, especially if you stand at five foot eleven and have size 11 feet.
Since her teens, Ms Smoljko has done everything from buying shoes that ‘almost fit’
and trying to stretch them, to paying exorbitant postage and handling fees to get
shoes her size over the internet.
In May this year she took it upon herself to service the ‘big foot market’ by
opening up Glamazon, an Ascot Vale shoe store that specialises in sizes 8 to 13.
Within weeks she was getting customers travelling from the other side of Melbourne
to check out her range of heels, boots and flat shoes.
As the only shoe store on Union Road, Glamazon is attracting a lot of interest
from the locals, causing Ms Smoljko to rethink her sizing options. From spring, she
will introduce sizes 6 and 7 to cater for the local market. It’s a promising start to a
business idea that had sat dormant in Ms Smoljko’s mind for years. She worked in
the corporate sector for 13 years before taking up small business consultancy to look
after her three kids.
‘I thought it was a great business idea, and I did my research and put together a
business plan and thought if I don’t do it now, someone else is going to do it, and
then I’m going to be one of those really annoying people that goes around saying
“that’s my idea, I had that idea 10 years ago but never did anything about it.”’
The decision was followed by every shoe lover’s dream: a trip to Las Vegas for ❛ I thought it was
the biannual World Shoes and Accessories Fair, where she got a crash course in the
footwear industry. She then spent a few months trying to find the right premise that a great business
was close to her Essendon home and her kids’ school. idea, and I did my
Ms Smoljko is keen to take on employees for the Ascot Vale store and eventually
wants to open a chain of Glamazon stores across Melbourne. research . . . ❜
Source: Extracts from C. Gatt, ‘Best foot forward’, Business West Magazine, 10 August 2010.
TOPIC 3 • Business planning 311

CHAPTER 10
Small to medium
enterprises (SMEs)
10.1 Introduction
Small to medium enterprises (SMEs) are the ‘engine room’ of the Australian economy.
Governments at all levels have recognised the importance of SMEs and have
devised appropriate policies to build on the strengths and overcome the weaknesses
of these businesses. These policies focus on areas like access to finance, networking,
delivery of government programs, innovation and export programs.
The more adaptive and dynamic SMEs have responded to this environment
through increased spending on research and development (R&D), new product
developments, improved business practices and an export-oriented business culture.
In recent years the SMEs in Australia have performed better than other sectors of
the economy, even during the 2008–09 economic downturn. SMEs have created many
new jobs, become more innovative and are increasingly entering overseas markets.
FIGURE 10.1 SMEs play a crucial role in

the Australian economy. They are a major
source of employment and their total
output adds significantly to the economic
growth and wellbeing of Australia.
10.2 Definition of SMEs

As outlined in chapter 2, establishing a clear-cut definition of a SME is no easy
task. They are much easier to describe than define. Although there is no single
universally accepted definition of a SME, a number of quantitative measurements
(those based on statistical calculation) and qualitative measurements (those

based on personal observations and a description of the business) can be used to BizFACT
determine whether a business is small or medium sized: Turnover, asset values and market share
• number of employees are some of the criteria that have been
• type of ownership used to determine whether a business
• sources of finance is ‘small’.
• legal structure
• market share
• management structure.
One of the most widely accepted quantitative measurements used to determine
the size of a business is that devised by the Australian Bureau of Statistics (ABS).
This measurement uses the number of employees as its benchmark (figure 10.2).
Fewer than 5 employees

Micro (including the owner)
Between 5 and
Small 19 employees
Medium Between 20 and 199 employees
Large 200 or more employees
FIGURE 10.2 Australian Bureau of Statistics classification of business size
Common characteristics of SMEs

The definitions outlined above, and in chapter 2, have limitations. Studies have
revealed the general public’s narrow definition of the term ‘small business’. The
average person uses the term to refer to an owner-managed business that may
employ a few people. It is best then to use a checklist of characteristics (both
quantitative and qualitative) to determine the size of a business (see figure 10.3).
Local Independently Independently

owned Closely
markets operated
Personalised controlled by
service owner/operator
Non-manufacturing
companies, fewer than Not dominant in the
20 employees; manufacturing industry (that is, small share
companies, fewer than of total industry output)
100 employees
Locally based
Owner basically responsible Reliant on internal Bulk of capital
for decision making support services provided by owner
FIGURE 10.3 Common characteristics of a SME
Small to medium enterprises (SMEs) • CHAPTER 10 313

Many SME owners want to stay small to avoid the pressures and difficulties often
experienced in larger businesses. They are content with the size of their business,
especially knowing they can offer personalised service to their customers.
One such small business that has adopted this philosophy is The Wall Sticker
Company (see the following Snapshot).
The Wall Sticker Company — keeping it

personal
The Wall Sticker Company was founded by friends Fiona Gathercole and Jen
Menz while they were both on maternity leave from their nursing positions.
SNAPSHOT They began by hand painting personalised canvasses to sell to children’s
stores. When demand for their products became too much, they set up their
business in Jen’s backyard and bought a vinyl cutter from eBay for $300 so they
could make their products faster. After sticking a piece of vinyl straight onto a
wall, the idea came to them to create vinyl wall stickers, which could transform
a room for very little cost, as well as being removable, which was great for the
rental market.
Their products are currently available online as well as through more than
90 national and international stockists. The business uses social media to create a
community feel to its website and to keep regulars coming back for more. ‘An online
business just made sense to us’, said Fiona. ‘You have less overheads so your margins
are higher and there’s more flexibility with what you can offer. These days, the
majority of customers look online before going to an actual shop, so I think you need
to have an online presence.’
The business has now outgrown Jen’s shed and the team has increased from two
to five members of staff. In addition, their revenue has tripled in the three years since
they started the business. Despite this, Fiona and Jen are happy for their business
to remain small. One of the reasons they began their own business was so they
could achieve a work–life balance. Having an online store and automation of many
❛ . . . you need to processes has enabled them to achieve this.
have an online Snapshot questions

presence . . . ❜ 1. Outline the factors that prompted Fiona Gathercole and Jen Menz to establish
the Wall Sticker Company.
2. Identify the characteristics that indicate the Wall Sticker Company is a SME.
3. Clarify how the Wall Sticker Company has continued to remain a small
business despite its growth in sales.
4. Explain why Fiona and Jen prefer to keep the business small.
The number of SMEs

According to research conducted in 2012 by the then Commonwealth Department
of Industry, Innovation, Science, Research and Tertiary Education, SMEs account
BizFACT
for approximately 99.8 per cent of all private sector business. However, it
Every year in Australia about
320 000 businesses commence
is difficult to provide an accurate count of the number of SMEs in Australia
operating. 300 000 close for one for two reasons. First, as was previously explained, there is no universally
reason or another. accepted definition of a SME. Second, the SME sector is extremely dynamic
and changing daily. During a boom time in the economy, the number of SMEs
increases rapidly. During a recession, business failures far outweigh business
commencements.
According to ABS research, at June 2012 approximately 746 440 small businesses
and 82 326 medium businesses operated in the Australian economy.

FIGURE 10.4 Think of the SME business sector as a pool of water. New businesses enter
the pool and increase its size. Others have difficulty staying afloat. They sink to the bottom,
leak out and decrease the size of the pool. This means the composition and size of the pool is
constantly changing.
It is important to remember that even though medium-sized businesses represent

only about 2 per cent of all SMEs, they play an important role because of the large
number of people they employ.
10.3 The role of SMEs

By examining some of the main features of SMEs, their overall important role within
the Australian economy can be seen. Australian small to medium enterprises:
• employ about 70 per cent of all the people working in the private sector (47 per
cent in small businesses and 23 per cent in medium businesses) BizFACT
• have created 80 per cent of Australia’s employment gains during the past Eighty-four per cent of all small
ten years businesses are in the services sector.
• produce approximately 50 per cent of all the products produced each year Account for the reasons for such a high
• generate an increasing amount of our total exports (see the following Snapshot) percentage within this sector.
• account for 20 per cent of all money spent on R&D
• provide a wide range of products used by large businesses
• earn more profits and pay more taxes than do large businesses.
Although the individual efforts of each SME may appear insignificant, their total
impact is enormous.
SMEs — global customers via the internet

Over the past decade, the number of SMEs who are exporting has rapidly increased.
Today, 97 per cent of Australian exporters are SMEs, and they earn almost 50 per cent
of export revenue. The main cause of this (besides easier entry to many countries
through trade agreements) is the rapid expansion in electronic business (e-business),
which has largely been brought about by the development of the internet.
SNAPSHOT
(continued)

E-business has opened the door for many SMEs to sell direct to consumers across
national borders. For example, Vetafarm, Australia’s leading innovator in companion
animal health and welfare products, supplies its products worldwide via an extensive
network of distributors and resellers. Based in Wagga Wagga in New South Wales,
Vetafarm’s significant markets are the United States, Japan, the Middle East, the
Philippines and Indonesia. Since commencing business in 1990, Vetafarm has
designed and marketed over 450 products.
Slim Secrets, a private company owned and operated from home by Sharon
Thurin, markets and distributes a healthy snack alternative. While involved
with a health and wellness clinic, Sharon spotted a gap in the market for tasty,
healthy snack products that are wheat free, high in protein and fibre, and
have a low glycemic index (GI). With support and advice from Austrade (the
Australian Trade Commission, the Australian Government’s trade and investment
development agency), Sharon has turned this niche market product into a global
success story. Originally Sharon intended to sell the product locally but now the
business’s global markets include Singapore, New Zealand, the United States,
Canada and China.
❛ Today, 97 per Research by Austrade has identified five trends for the next generation of
exporters:
cent of Australian • many will be small in size
exporters are SMEs. ❜ • they will be knowledge based, providing goods and services that use innovation
and knowhow
• they will have been in business for only a few years
• they will be in small towns as well as capital cities
• they will use new ways of going global.
The strongest growth is likely to be among knowledge-based service exporters
who work in areas such as film and video production, accounting services and
tourism.
Snapshot questions
1. Recall the factors responsible for the rapid growth in e-business.
2. Outline the effect the internet has had on Vetafarm and Slim Secrets.
3. Use the Austrade weblink in your eBookPLUS to examine the role and
function of the Australian Trade Commission and answer the following
questions.
(a) State the role of Austrade.
(b) Identify three specific Austrade programs designed to help business.
Owning and operating a SME can be challenging, rewarding and stimulating, as

BizFACT
well as hard work. For those prepared to take the risk, and who finally make it, the
Over 99 per cent of all Australian
businesses are SMEs. Ninety-six per cent
sense of achievement and satisfaction is well worth the effort.
are small and 3 per cent are medium.
Summary
• Small to medium enterprises (SMEs) are the ‘engine room’ of the Australian
economy.
• Australian Bureau of Statistics classification of business size:
–– Micro. Fewer than five employees (including the owner)
–– Small. Between 5 and 19 employees
–– Medium. Between 20 and 199 employees
–– Large. 200 or more employees.
• A checklist of qualitative features can also be used to determine business size.
• The number of SMEs fluctuates over time according to the state of the economy.
• In recent years, SMEs have created many jobs, become more innovative and are
increasingly entering overseas markets.

Revision EXERCISE
10.1
1 Recall what the letters SME represent.
2 Distinguish between quantitative and qualitative measurements used to determine
the size of a business. Provide an example of each.
3 Examine figure 10.2 (page 313). Complete the following statements by identifying
the correct word from the choices given. Write the sentences into your notebook.
According to the ABS:
(a) a business with fewer than 5/20 employees is classified as a small business
(b) a micro business has fewer than five employees including/not including the owner
(c) a medium business has between 20 and 199/100 and 199 employees
(d) a business that has more than 100/200 employees is classified as a large business.
4 Examine figure 10.3 (page 313). Select the three characteristics you consider to be
the most important and justify why you selected each one.
5 Explain why it is best to use a checklist of both quantitative and qualitative
measurements to determine the size of a business.
6 State why many small business owners want to stay small.
7 Outline why it is difficult to provide an accurate number of SMEs operating in
Australia.
8 Discuss why it is useful to think of the SME business sector as a pool of water.
9 Explain the relationship between the level of economic activity and the number of
business commencements and failures.
10 Identify five important features that indicate the overall importance of the SME
business sector to the Australian economy.
11 ‘SMEs are the “engine room” of the Australian economy.’ Justify this statement.
Extension
1 Contrast the various definitions of ‘small business’.
2 Construct a database of five small businesses in your local area. List the following:
(a) the name of the business
(b) whether the business is a manufacturing or non-manufacturing business
(c) the number of employees
(d) the turnover
(e) the asset value.
3 Evaluate how useful these data are when attempting to define what a small or
medium business is.
10.4 Economic contribution of SMEs

Before we can discuss SMEs’ contribution to the economy, we must first gain BizWORD
an understanding of what an economy is. An economy is a system or way of An economy is a system used to
organising what goods and services are produced, how we produce these goods determine what to produce, how to
and services, and how these goods and services are distributed. It’s often easier to produce and to whom production will
be distributed.
think about this concept if we consider what would happen if a small group of
people were stranded on a deserted island. An economic system or way of doing
things would have to be devised for all members of the community to survive.
What we produce would be dependent on the resources available, such as raw
materials (for example, fish from the sea), and how we produce would depend on
our skills and available tools (for example, fishing rod and knowledge about how
to best catch fish) to make that job easier. Perhaps, given there is a small group of
people, goods and services produced (production) could be easily divided among
all members of the community, therefore solving the question of who production
will go to.

FIGURE 10.5 Castaways stranded on
a deserted island would soon have to
develop an economic system to help
them survive.
In real life, an economy must answer the three basic questions of:
• what to produce
• how to produce
• who will receive the goods and services produced.
Many different economic systems have been used, but the type of economic
system we have in Australia is called a market capitalist economy. This means that
most answers to the economic questions are provided by private buyers and sellers.
Now that we understand what an economy is, let’s consider how SMEs in
Australia actually contribute to our economy.
BizWORD Contribution to gross domestic product

Economic growth occurs when a Economic growth occurs when a nation increases the real value of goods and
nation increases the real value of services over time. One common measure to check whether economic growth has
goods and services over a period of occurred is to see whether our gross domestic product (GDP) has grown.
time.
GDP is the total money value of all goods and services produced in Australia
Gross domestic product (GDP) is
over a one-year period. The Australian Bureau of Statistics (ABS) estimates that
the total money value of all goods and
services produced in Australia over a SMEs contributed about 50 per cent of Australia’s GDP. The total output of the
one-year period. country’s diverse collection of SMEs, ranging from highly specialised professional
and technical firms to the local corner store, makes a significant contribution to the
national economy.
Contribution to employment
Employment keeps the economy healthy. Employed Australians will use the wage
they have earned to buy goods and services to satisfy their needs and wants,
supporting business and opening up further opportunities for job creation. SMEs
BizFACT employ around 8 million people, which represents about 70 per cent of total
private sector employment. (forty seven per cent are employed in small businesses
Around 61 per cent of small
businesses do not employ staff; 27 per and 23 per cent in medium businesses). During the last 20 years, the SME sector
cent employ 1–4 people and 12 per has been the major generator of new jobs in the Australian economy. During times
cent employ 5–9 people, according to of economic downturn, as was experienced between 2008 and 2009, the SMEs
Australian Bureau of Statistics figures. were more likely to try to maintain their existing employees compared with the
large businesses.

In addition to providing employment, SMEs contribute to the revenue raised
through taxation. Not only do they pay tax, their employees also pay income
tax. Taxation is used to provide goods and services that may benefit the whole
community, such as a better education system.
Contribution to the balance of payments

One of the most dynamic changes to the Australian SME business culture is the
increasing awareness of the need to service overseas markets. Evidence of this is
the fact that the number of SME Australian exporters is growing faster than large
exporters. SMEs in agribusiness, manufacturing and professional services are all
experiencing rapid export growth. However, this growth is occurring from a very
low base, as only four per cent of Australian SMEs export.
Exporting goods and services contributes to our balance of payments. The BizWORD
balance of payments (BOP) is a record of a country’s trade and financial transactions The balance of payments (BOP)
with the rest of the world over time, usually one year. One way of maintaining a is a record of a country’s trade and
financial transactions with the rest of
favourable BOP, as well as encouraging economic growth, is to export more than is
the world over time, usually one year.
imported. This is another crucial role for SMEs as they are often more successful
at exporting than large businesses (see the following Snapshot). Many agree that
the adaptability and flexibility of SMEs make them more responsive to the needs of
overseas markets. The federal government is keen to promote export growth within
the small business sector and encourages this with programs operated by Austrade.
Kelly Engineering — honoured for

export success
One example of an SME that is a skilful exporter is the South Australian company
SNAPSHOT
Kelly Engineering. Kelly Engineering began in the 1980s in Booleroo Centre, South
Australia as a family based business. The company originated from Peter Kelly’s
hobby of modifying and repairing farm machinery. The breakthrough came when
Peter Kelly created an innovative machine that provides an alternative to chemical
weed control and recycles soil nutrients. What started out as a hobby is today an
agricultural manufacturing business that employs 40 people and produces over
$11 million profit annually.
In 2006 representatives from the company attended a farm machinery expo
in California. Their big break into the US market came when they were spotted
by a marketing agent at the expo who helped them introduce their products to
distributors in Arkansas. Once they developed a strong reputation in this area, sales
quickly began spreading to other US states. They have since generated more than
$47 million from their exports to the US and currently sell almost three times as
many of their products in the US than in Australia. This opportunity to export could
not have come at a better time for the company since their domestic sales were
heavily affected by the drought that was gripping most of eastern Australia.
Prior to exporting, the company’s CEO, Peter Kelly, pursued an export market-
❛ . . . a world-class
development grant from Austrade. In 2012, the company was also awarded an manufacturer and
Enterprise Zone Fund (EZF) grant of $302 500 from the South Australian government
to assist them to expand their operations and meet increasing demand overseas. exporter of farm
Kelly Engineering has been recognised for their achievements in exporting over the equipment. ❜
years. In 2010 they won the state and national regional titles in the Telstra Business
of the Year awards. They were also named state winner of the regional category in
Business SA and Austrade’s Australian Export Awards that same year. In 2013, Kelly
Engineering was honoured for exporting excellence at the Business SA 2013 Export
Awards in the manufacturing category.
(continued)

Encouraged by their success, they recently began exporting to Canada, Central
America, South Africa, Denmark and New Zealand. The company currently has an
Weblink annual turnover of approximately $18 million and is now a world-class manufacturer
Use the Kelly Engineering and exporter of farm equipment. Despite this, the company is still family operated
weblink in your eBookPLUS and owned. The owners aim to provide a positive work environment where they
to visit the website of this treat all of their employees like family.
business.
Snapshot questions
1. Outline the support Kelly Engineering received from the government.
2. Assess how exporting has affected this business.
Contribution to invention and innovation

Small to medium enterprises are the main source of most inventions and innovations
in Australia. An invention is the development of something new. Innovation occurs
when something already established is improved upon. Many successful businesses
are built on these two forces (see figure 10.6).
Invention and innovation are at the heart of our economy. Finding new ways
to do things has resulted in improved efficiency and increased productivity. Over
the past ten years, SME spending on research and development (R&D) has almost
trebled in real terms. Research and development is a set of activities intended to
develop new ideas and improvements in production. Around 40 per cent of SMEs
are actively engaged in some form of innovation. According to the Australian
Bureau of Statistics, in 2008–09 small businesses spent approximately $2.0 billion
on R&D and medium businesses spent approximately $2.9 billion.
Studies confirm that the level of innovation among SME employees is much
higher than among employees of larger businesses. This is perhaps because
Australians have traditionally been a very innovative people, constantly recording
the highest number of inventions per head of population. This has resulted in more
than half the major technological advances of the twentieth century originating
with individual inventors and SMEs.
A persistent difficulty that SMEs face when undertaking R&D is obtaining
adequate finance. Traditional sources of finance, especially banks, perceive this
type of finance request as high risk. One possible source of finance for R&D is
venture capital. The investors take an equity position in the business (own part of
it) and provide supplementary finance.
FIGURE 10.6 Featured on the TV show

The new inventors, the interchangeable
surfboard was invented by Jared Smith
when he was 19 years old. The innovative
carbon fibre joining mechanism enables
the surfboard to be separated into two
parts for easy transportation and storage.
It also allows different tail pieces to be
slotted securely into place to suit variable
surfing conditions.

Summary
• The SME sector contributes:
–– approximately 50 per cent of gross domestic product (GDP)
–– approximately 70 per cent of total private sector employment
–– approximately 5 per cent of balance of payment, but growing rapidly
–– significantly to the level of R&D.
Revision EXERCISE
10.2
1 Define the term ‘economy’.
2 Recall the three basic questions that all economic systems must answer.
3 (a) Identify the type of economic system operating in Australia.
(b) State how the economic questions are answered in this type of economic system.
4 Explain what happens when economic growth occurs.
5 Clarify how economic growth is measured.
6 Define the term ‘balance of payments’.
7 Describe how a country can maintain a favourable balance of payments.
8 Identify the missing words to complete the following sentence. The first letter of
each word has been provided.
SMEs contribute to the economy by boosting economic growth, as measured by
g d p . SMEs also contribute to taxation revenue
because they e approximately 8 million people. The e earnings
that SMEs generate through selling goods and services overseas are also significant.
9 Distinguish between an invention and an innovation.
10 Account for the fact that SMEs often face difficulties in obtaining finance for R&D.
11 Describe the role of a venture capitalist.
12 Summarise the economic contribution of SMEs by completing the following table.
Characteristic Summary
Gross domestic product
Employment
Balance of payments
Invention and innovation
Extension
1 Use the Austrade weblink in your eBookPLUS to examine a small business that has
been successful in exporting its goods or services. Create a short report using the
following headings:
(a) Name of the business Weblink
(b) What the business does Austrade
(c) What the business exports
(d) Where the business exports its goods or services
(e) Reasons the business is successful.
2 You have been asked by the local newspaper to create an article evaluating the
importance of SMEs to the Australian economy. Your article will appear in a special
supplement dealing with small business. Prepare your article exactly as you would
like it published, using a desktop publishing program for layout if possible. Use your
imagination and choose a thought-provoking headline. After you have prepared your
first draft, confer with a partner to edit your article to publishing standard. Display the
articles around the room.
3 Determine why the level of innovation among small business employees is much
higher than among employees of larger businesses.
4 Reflect on what you have read and learned so far. Assess how this information would
influence you if you were intending to start a small business.

10.5 Success and/or failure of SMEs
Starting and operating a SME certainly is appealing, which is why so many people
dream of doing it. Many entrepreneurs are driven by the desire to be their own boss,
do what they want to do and turn passions into profit-making businesses. While
many people are successful in their business ventures, many others unfortunately
experience failure. In fact, of every ten SMEs started, about seven go out of business
within five years after opening their doors. The financial risks of running a SME are
very high, although some businesses are more risky than others.
FIGURE 10.7 Starting a business may lead to greater independence, but may also increase
workload and stress.
BizFACT In addition to psychological and financial pressures, SME owners tend to be

Many capable people’s success or victims of physical stress. Often, they must not only be the owner but also the
failure is not owing to their business accountant, marketing manager, sales representative, stock clerk and receptionist.
idea but rather to how they manage
The hours can be long and holidays are rare. SME owners also face major challenges
their business once they start.
as they attempt to juggle home and work responsibilities.
However, thousands of people each year balance the risks and potential rewards
and decide to become a business owner.
M
bu y ke
sin ys
es to Success of SMEs
ss
uc All SME owners start off optimistically, believing that their business venture will
ce
ss lead to financial success and security. They will probably have read a few of the
many books that have been written about being successful in small business. These
Flexibility books often highlight five common ‘keys’ to SME success (see figure 10.8).
1. Entrepreneurial abilities. The people in SMEs are crucial to the success of the
n
utatio he enterprise. Attitudes and personalities of owners will vary enormously. Some will
Rep nic
ket
have drive and enthusiasm, many will set targets and some will take big risks.
ity
r
ma
n
bil
atio
n
la
so Some will thrive on the challenge of a potential failure, enjoying the process of
ria
cu
form
Fo
eu
solving the problem. The majority will be highly motivated and optimistic, as
en
to in
pr
outlined in the Snapshot over the page.

tre
En
ess
2. Access to information. It is always difficult for a SME owner to choose relevant

Acc
information and to gauge the quantity of information needed. As a bare

FIGURE 10.8 Keys to SME success minimum, the SME operator must have information regarding profitability,

the quality of products and services, and the performance of employees.
Accurate and up-to-date information will allow the SME owner to make
better decisions.
3. Flexibility. The small size of the business allows the owner to adapt quickly BizFACT
to changes in the external environment. Because there are fewer levels of A common characteristic among the
management, decisions can be made quickly. In addition, the close contact majority of small business owners is
between owners and their customers allows the establishment of personal their optimism and initial hope for
success.
relationships, helping owners to respond quickly to clients’ changing tastes and
preferences.
4. Focus on market niche. Small businesses can concentrate their efforts on a few key
customers or a specific segment of the market. This provides the opportunity for
the SME to become more specialised and able to deliver a high level of service
(see the following Snapshot).
5. Reputation. Because the SME is servicing a narrow market niche, it can develop
enviable reputations for quality and service.
Yo-get-it — an ambitious SME

At just 23 and 24, former construction project managers Scott Bradley and Sean
Towner are not short of bravado. Or brains.
And after chucking in lucrative
jobs and opening their first company,
Melbourne frozen yoghurt bar
SNAPSHOT
Yo-get-it, the pair are also poster boys
for healthy ambition.
‘What we want to do is knock off ❛ Scott Bradley and
Boost,’ says Bradley, a baby-faced
company director wearing a sideways
Sean Towner are not
visor and skate shoes. short of bravado. ❜
‘We want to be right across the
country — we want to be the next
Boost Juice.’
Like Boost Juice founder Janine Allis — whose original Adelaide store multiplied into
189 franchises in the company’s first six years — Bradley and Towner had their brainwave
while travelling in America. During their six-week trip, the would-be entrepreneurs were
keeping one eye on the sights, and another on potential dollar signs.
Bradley had a large bundle of cash sitting at home, after winning $70 000 on
television game show Deal or No Deal, and Towner had long dreamt of running his
own business.
In the United States, the pair saw store after store selling takeaway frozen yoghurt,
and after a chance conversation, realised Australia hadn’t yet embraced frozen
yoghurt as a business concept.
‘I always wanted to run my own business, but no way in the world would I have
ever thought of a frozen yoghurt bar,’ Bradley says.
After further research back home, the pair was convinced they had found their
niche, and applied for a bank loan — with little success.
‘We tried to go to the bank and ask for money but they needed assets or my
parents to go guarantor, but I wanted it to be my sort of thing,’ Bradley said.
So instead Bradley bought a 41 per cent share of the company, Sean invested in
36 per cent, and friends and family invested in the remainder.
With the funds in place, and more research, including 12-hour customer-counting
stints outside Malvern yoghurt bar Igloo Zoo, the pair felt ready to leave their
construction jobs.
(continued)

‘It was a fairly risky manoeuvre to undertake,’ Towner said. ‘It’s a little bit daunting
because essentially the buck stops with us.’
Weblink The first Yo-get-it, near Glenferrie railway station in Melbourne, opened on
Use the Yo-get-it weblink in Christmas Eve.
your eBookPLUS to visit the The store has several different features that its owners believe set it apart. Customers
website for this business. pour the frozen yoghurt themselves and choose their own toppings, with the price
measured by weight, allowing school children with only small change to buy a treat.
And anyone who guesses the correct weight to the gram gets their yoghurt free.
Note: In 2014, Yo-get-it had seven stores, including one on Queensland’s Gold Coast.
Source: Extracts from L Ham, ‘Yo! Boosting the hopes of baby-faced bosses’, The Age, 15 March 2010.
Snapshot questions
1. Identify the personal qualities of Scott Bradley and Sean Towner that help
make their business a success.
2. Outline the research the pair undertook before starting their new business.
3. Explain the risks and challenges faced by Scott Bradley and Sean Towner.
Failure of SMEs
Sometimes enthusiasm and optimism cloud the owner’s vision of reality and poor
decisions are made. In the real world, success can be hard to achieve. Unfortunately,
many SMEs end in failure. Although we do not want to dwell on the negative, it is
BizFACT important to acknowledge the experiences of many SME owners.
If a business owner decides to cease In a sense, it is perhaps too easy to establish a business: there are no interviews,
operating because of ill health, the no tests to pass and no previous experience required. All that is necessary is a
loss of a partner or any other personal payment of . . . $30 to register the business name for one year . . . and even this is
reason not associated with financial not required if the business owners trade under their own name. It is not surprising
problems, then the business is not
then that many businesses end in failure.
described as a ‘failure’.
A SME is classified as a failure when it is:
(a) unincorporated and declared bankrupt — a legal process of distributing among
the creditors the property of a business or person who cannot or will not pay
their debts
(b) incorporated and either forced into liquidation or voluntarily closes down
because it cannot pay its debts and faces a cash flow problem.
SMEs failure rates

BizFACT
Accurate figures are hard to obtain because not all business failures are reported.
A federal government study in late
2012 of the survival rate of Australian However, statistics collected by the Australian Bureau of Statistics point to an
small business found that in the period alarming trend: one in four businesses will fail within the first year of being
2007 to 2011, the Northern Territory established. This means that approximately 80 000 Australian small businesses fail
reported the lowest survival rate each year — roughly 219 per day.
(54.3 per cent), followed by the
Table 10.1 shows the SME failure rates, which are calculated from various
Australian Capital Territory
(55.7 per cent) and Queensland government surveys.
(57.8 per cent). The highest survival
rates were reported by Tasmania TABLE 10.1 SME failure rates from year of establishment
(62.5 per cent), followed closely by Cumulative total of approximate
South Australia (62.4 per cent) and Period from commencement failure rate (%)
Victoria (60.7 per cent).
After 1 year 25
2 years 42
3 years 54
4 years 64
5 years 71

Within the first five years of commencement, approximately seven out of every BizFACT
ten SMEs will fail. Female-owned businesses have a higher survival rate than those Careful planning helps to minimise
operated by men, and businesses jointly operated by both men and women have small business failure: ‘Small
the highest survival rate of all. The figures in table 10.1 tell a sobering story for businesses don’t plan to fail, they fail
to plan.’
anyone contemplating establishing a SME: the chances of failure are high. Therefore,
it is absolutely essential to undertake thorough planning so as to minimise the risk
of business failure.
Reasons for SME failure

Small to medium enterprises fail for many reasons (see figure 10.9). Small to
medium enterprise failure is not usually caused by one single factor but rather a
combination of several factors:
• failure to plan • poor use of external support
• lack of information services
• leadership crisis • economic downturn
• inaccurate record keeping • new taxes
• failure to delegate • change in government policy
• complacency • insufficient capital
• incorrect marketing strategy • partnership problems
• poor location • lack of management experience
• lack of financial planning • incorrect pricing policy
• negative cash flow • failure to seek advice
• new competitors • not enough sales
• illness • staff difficulties
• supplier problems • being under-insured.
BizFACT
Most small business failures are
FIGURE 10.9 Many SMEs have a short life. caused by factors within the business
under the control of management.
The most common causes are
Many SMEs start out on a ‘shoestring’ budget. Without sufficient capital — managerial inexperience and
undercapitalisation — the business will not be able to purchase stock and materials. incompetence, undercapitalisation
This inevitably results in lost sales. A business in this position faces disaster unless and lack of planning.
alternative finance can be arranged.

When a prospective SME operator fails to develop a business plan, the stage is
set for imminent failure. Without a detailed business plan, the SME owner has no
certain goals or directions; there is no blueprint for the business’s future growth.
The most common fault with many SMEs is their lack of adequate financial
reporting and evaluation.
Summary
• While many people are successful in their business ventures, many others
unfortunately experience failure.
• The five common ‘keys’ to SME success are:
–– flexibility
–– reputation
–– focus on market niche
–– entrepreneurial abilities
–– access to information.
• A SME has failed when it is:
–– unincorporated and declared bankrupt
–– incorporated and either forced into liquidation or voluntary cessation.
• SMEs have a high failure rate.
• The most common causes of SME failure are managerial inexperience and
incompetence, undercapitalisation and lack of planning.
EXERCISE Revision
10.3
1 Explain how a SME owner can maximise his or her chances of success by using the
five ‘keys’ of business success (page 322).
2 Recall what needs to occur for a SME to be classified as a business failure.
3 Account for the high failure rate of small businesses in the first few years of
operation.
4 Outline the two main reasons for small business failure.
5 Answer the following questions by identifying and then writing out the answer
that you feel is most appropriate when considering the possible effects of small
business failure. Share your answers with the rest of the class and discuss any
differences.
(a) Effect on the owners
(i) Because most people who go into business know what they are letting
themselves in for, there will be no adverse effects on the owners.
(ii) There could possibly be some physical effects on the owners.
(b) Effects on staff
(i) Most employees do not mind being retrenched.
(ii) Being retrenched is never easy to accept and there is usually a certain amount of
Digital doc stress associated with finding new employment.
Use the Chapter summary (c) Effects on creditors
document in your (i) The high number of SME failures is bound to cause financial hardship to
eBookPLUS to compile your creditors.
own notes for this chapter. (ii) Most creditors are large companies and can therefore afford for small
Searchlight: DOC-14119 businesses to go bankrupt without it being too much of a financial drain
on them.
(d) Effects on consumers
(i) When a SME fails, consumers are not inconvenienced at all because there are
others to choose from.
(ii) Often customers find themselves not only inconvenienced by SME failures
but also feel left out in the cold when they attempt to receive some type of
compensation for their loss.

6 (a) Refer to the list of reasons for SME failure on page 325. Prepare a table and
classify each reason using the categories ‘internal business environment’ or
‘external business environment’.
(b) Deduce what this table reveals about the reasons for SME failure.
7 ‘A business without a plan is doomed to fail’. Justify this statement.
Digital doc
Extension Test your knowledge of key
1 In small groups, create a list of success strategies for SMEs. Chapter crossword in your
eBookPLUS.
2 Most people who start a SME know of the high failure rate and the reasons for
it. Explain why they do not take steps to protect their business from failure. Searchlight: DOC-1213
Recommend the steps they should take.
3 Assume the minister for small business establishes a committee to develop a poster
highlighting the rules for success in small business. Create your poster and display it
in the classroom.
4 Use the Australian Small Business weblink in your eBookPLUS to investigate Weblink
key statistics and data analysis around ‘start-ups’. Write a brief report on the data Australian Small Business
presented about ‘start-ups’ and their success and failure.

CHAPTER 11
Influences in establishing a
small to medium enterprise
11.1 Introduction
The thousands of SMEs in Australia today are owned and operated by all types of
people. These businesses all had a beginning; they all had a person or small group of
people who decided to ‘have a go’. When establishing their businesses, they needed to
consider a range of influences that combine to determine the level of success achieved.
11.2 Personal qualities

All types of people own and operate the thousands of businesses in Australia today.
Not everyone, however, is suited to the role of business owner as certain skills and
personal qualities are required to succeed.
Starting a new business requires courage, determination and energy, and it
demands a wide range of skills. It is important for people to recognise their strengths
and weaknesses, decide if they have the right personal characteristics to be a business
owner and learn the skills they don’t presently have. It is best for business owners to
select a business opportunity that suits their personality and builds on their strengths.
If people have an honest understanding of their own personal qualities, then failure
can be minimised: the ‘square peg in a round hole’ problem can be avoided.
There is no simple checklist of skills and personal characteristics that will
guarantee business success. However, many studies have shown that certain personal
characteristics are helpful in operating a business, and that the potential business
owner should be prepared to honestly answer the questions asked in figure 11.1.
Yes No Yes No
1 Am I self-motivated, with a desire 7 Do I have the ability and willingness

to succeed? ___ ___ to learn new skills? ___ ___
2 Am I self-disciplined enough to 8 Can I make decisions based on
start and follow through long-term logic rather than emotions? ___ ___
projects? ___ ___
9 Am I able to listen to others’ advice
3 Am I healthy enough to withstand as well as communicate my ideas
the extra workload and stress to others? ___ ___
involved? ___ ___
10 Am I reasonably at ease in my
4 Do I have leadership qualities to relationships with people, and sensitive
assist in managing and motivating to the needs of others, especially
others? ___ ___ employees and custormers? ___ ___
5 Do I have good organisational and 11 Am I prepared to work long hours? ___ ___
administrative skills? ___ ___
12 Am I prepared to receive lower
6 Am I willing to take managed risks? ___ ___ financial returns in the early years
than I would receive if I worked
for someone else? ___ ___
FIGURE 11.1 Some questions to ask yourself to assess your entrepreneurial ability

Qualifications
Hundreds of thousands of people start a new business every year. Would you like
to be one of them? You do not have to be an exceptional champion of legendary
dimensions. Mainly, those who decide to ‘give it a go’ are ordinary people rather
than sensational opportunists who desire adventure. Many start out with only a
small amount of money, operating informally from home, at least in the beginning
while they are getting established.
Exceptional grades and a dazzling history in business are not essential. What
does appear to be important is the eagerness to work long hours. Recent research
revealed that about 75 per cent of people who started their own SME spent at least
50 hours a week in the business; 25 per cent of them put in 65 hours or more.
Starting a SME knows no age limits. From the very young to the very old, people
are starting new businesses at a rapid rate. Particularly encouraging is the large
number of young people aged between 20 and 25 who are operating a SME. Older
people are also involved in starting new SMEs; this type of business offers the most
opportunities and flexibility to retirees.
FIGURE 11.2 Take a look around your

school or family. About half of these
people will, at some stage during their
lives, decide to own and operate their
own SME. Age, gender or experience is
no barrier.
For some types of SMEs, are few or no formal academic requirements needed to
commence operating. However, for those who want to gain academic qualifications
in small business, many tertiary courses are available. The Business Studies course
you are studying is of enormous value should you decide to become a SME owner.
Such courses give you knowledge and understanding of what is required to
successfully own and operate a SME. Knowledge and understanding can also come
from experience through working for other businesses. Your part-time job, for
example, is providing you with experience in a business’s day-to-day operations,
how to manage your time and other people, purchasing and pricing decisions, and
a variety of other business functions.
SME owners are a varied group. It is extremely difficult to categorise them or the
qualifications they possess that make their business a success. As well, a variety of
personal factors encourage individuals to go into business. However, two factors
that are often mentioned are motivation and the ‘entrepreneurial spirit’. They
combine to form a powerful desire to create a new business.
Influences in establishing a small to medium enterprise • CHAPTER 11 329

Skills
Luck has little to do with business success. Skills are essential. These skills can be
attained through experience, education and/or training.
Experience
If a person has been working the last few years as a dedicated employee, then
during that time, they will have gained valuable experience. They probably also
developed new skills as a result of training or exposure to various aspects of the
business’s operations. Consequently, apart from well-developed management skills,
a person with hands-on experience will have a greater chance of achieving business
success.
The best time for a person to gain management experience is before establishing
the business. This can be done by either completing a management training course
or by undertaking a management role within a business. The best way a person
can gain business experience is to work in the type of business in which he or she
intends to become self-employed.
These experiences provide a platform from which to work. The experienced
person will understand and be realistic about the demands, both financial and
personal, that a business will place on them. Figure 11.3 outlines possible
experiences, from working in other businesses, that could help someone establish
their own business.
Administration
Organisational and bookeeping Sales
skills presentation
Stock Time
control management
Customer
Ordering
service
Being an Computer
employee applications
Management
Independence
skills
Leadership Store
skills presentation
FIGURE 11.3 An individual’s range of experiences
Education and/or training

Education and/or training is another way to gain skills. Universities, TAFE
and business colleges offer courses in many business and industry fields. These
courses may be broad in nature, such as a degree in business management, or
specific, such as a degree or diploma in marketing, human resource management,
computing or accounting. TAFE and business colleges also offer vocational courses
and courses for establishing a SME. The main problem is that some courses are
expensive and take years to complete. For this reason they are not always an
option, especially for small business owners who may wish to gain the knowledge
quickly.
Some government agencies provide opportunities to learn about starting a
business. Business Enterprise Centres are an example. The centres are run by

business facilitators who have experience in establishing and operating a business.
They offer a range of services, such as business start-up advice and assistance,
business growth mentoring, seminars, business plan assistance and skills training.
They also facilitate networking opportunities and provide information on grants
and assistance that may be available.
All of these avenues for education allow the business owner to develop the
essential skills necessary for establishing a business. These skills may include:
• accounting
• computer skills
• staff management
• business administration, including inventory control and rosters
• marketing.
Motivation
Motivation refers to your personal drive, determination and desire to achieve a goal
or objective. The desire to be your own boss is a major reason for wanting to start
your own business. Many people start on their own because they believe they can
do better for themselves than if they remain with their present employer. Often
they desire the freedom to choose when and where they work, with whom they
work and whether to work from home. The underlying attraction is the desire to
transform an idea into a successful product by capturing the attention of potential
customers (see the following Snapshot).
PracticeManager 24/7 — Anthony Turri’s

motivation
PracticeManager247.com.au is an online business management software program
SNAPSHOT
that helps health and fitness professionals run successful practices.
How do you describe your business?
Practice Manager 24/7 has been custom designed and built by Australians, for
Australians. It’s best suited to personal trainers, massage therapists, physiotherapists,
or anyone that has an appointment-based business. Our program does all the hard
work so that health professionals can focus on doing the things they love. We strive
to give our customers the freedom they deserve and we live by our motto: It’s your
Practice, made Perfect!
Did you always want to run your own business?
Yes and no. I didn’t really dream about running my own business when I was in high
school. Although, studying Business Studies definitely piqued my interest. Once I
was at university, the urge to run my own business grew stronger and stronger. By
the time I finished university I was hooked! After that I’ve never looked back. In
that time, I have been lucky enough to own and operate multiple businesses, often
concurrently, within the fields of my expertise: health and education.
What motivated you to want to start your own business?
A belief that one day I could help change the world to make it a better place. Being
a health professional first, the biggest kick I get out of each day is being able to help
someone. That’s what makes me tick. So, through my entrepreneurial endeavours, ❛ Self-belief and
my aim is to help thousands of great health professionals achieve two things: firstly,
to help them stay in the industry; and secondly, to help them with their business self-motivation is
operations so they can focus wholeheartedly on their patients and clients. Achieving
these two goals will help the world become a happier and healthier place.
crucial. ❜
(continued)

How did the idea come about and what inspired you to get into action?
As a lecturer I have seen some fantastic graduates come through the ranks. When
catching up with them a few years later, I was shocked to find that so many of
them had given up on running a practice. Many had left the industry altogether,
which was the biggest shame, as I knew they had the potential to do great
things. I often asked them why they’d given up and the most common answer
I received was ‘it just got too hard’. On further investigation I’d discovered that
these practitioners were great at being health professionals, but not so great at
running a business. They just didn’t have the necessary business tools required.
On completing my research I discovered a gap in the marketplace. I noticed
that all the other software programs were way too complicated and created by
computer programmers, not health professionals. So I found my niche, a great
business partner and a fantastic team of developers. And after three years, Practice
Manager 24/7 was born.
What are some of the things you enjoy most about running your own business?
Freedom. The freedom to create, to make your own decisions, to enjoy every day
and to determine your own destiny.
What’s the biggest challenge you’ve had to overcome to make your ideas a reality?
Patience. There are going to be times when you can’t see the light at the end of the
tunnel. Sometimes you can’t even see the road! Running a business, just like life, is
a marathon, not a sprint. Relax, refocus, review and persevere, and you’ll get there.
Self-belief and self-motivation is crucial.
What advice can you share with other people trying to start a business?
Try to use as much of your own money as possible when first starting up. You’ll be
much more motivated when it’s your money that you’re losing. It’s surprising how
much harder you’ll work.
Do your research. Planning is the most critical stage of any business. We are lucky
enough to live in a world where we have access to a plethora of information, so
read, read and then read some more. Also, watch and listen to interviews/podcasts/
documentaries/TV shows, whatever you can. Ensure your business will work before
you embark on any business venture. Find your market, be realistic and do your
sums. If the numbers don’t add up now, they won’t add up later.
Learn from other people’s mistakes, not just your own. It’s a lot less painful.
Stop comparing yourself to others. There’s always going to be someone, bigger,
stronger, faster, smarter or prettier. Just be the best you can be!
Have fun! If it’s not fun, it’s not worth it. If you wake up in the morning and you’re
not pumped and ready to work on your business (even on 3 hours sleep sometimes)
then do something else. Not every day is going to be amazing, but if you don’t
believe it will be, then it’s not the right thing for you. You’re going to work harder
than most of the people you know so you have to love it.
And finally, be good to as many people as you can. Good people get good things
in return. Sometimes it takes a while, but it does and it will happen.
Snapshot questions
1. Identify the characteristics shown by Anthony Turri that would categorise
him as an entrepreneur.
2. Recall some of the things Anthony Turri enjoys most about running his own
business.
3. Summarise Anthony Turri’s main challenges.
4. Determine why you think Anthony Turri has been successful in business.
Most business owners are motivated by the rewards they believe can be gained
from establishing a business, including both monetary and non-monetary rewards
(see figure 11.4).

Being own
Choosing boss – Making an
Overcoming location of work independence investment Choosing those
unemployment with whom
you work
Gaining more
control over Profits
own destiny
Experiencing Having
some excitement something to
leave the children
Improving
own status Security
Possible tax
Developing own
advantage
creative ideas
Gaining
Achieving a
recognition in
better lifestyle
the community
Employing
Accepting a
Increasing Contributing family members
challenge Capital gains
personal wealth to society
FIGURE 11.4 Examples of the possible rewards of business ownership
Entrepreneurship
As was outlined in chapter 1, an entrepreneur is someone who starts, operates and
assumes the risk of a business venture in the hope of making a profit. The term Weblink
can apply to any person — male or female, mature age or young — willing to Use the Top Business
Entrepreneurs weblink
establish a business in a bid for success. Not all entrepreneurs begin by setting up a in your eBookPLUS to
business premises. An increasing number of people work from home, especially as explore the website and
computers have allowed greater access and communication with business markets. find out about different
Entrepreneurship is not just an avenue to wealth, but a way of making a living and entrepreneurs.
achieving job satisfaction.

Society is constantly changing and thus creating new opportunities for innovative
products and services to be developed. The entrepreneur must have a range of
personal characteristics that enable them to take advantage of, and be successful
with, these opportunities (see figure 11.5). eLesson
First, entrepreneurs must be prepared to take a risk and incur the results of Global Kidz Oz 1
this risk, whether it is a success or a failure. They must be confident in decision J.J. Stranan talks about the
establishment of her micro
making and willing to accept all responsibility for their decisions. Sometimes a
business Global Kidz Oz.
decision requires ‘guts and determination’ and such times often lead to success.
The entrepreneur must always have a will to succeed: they may not achieve the
desired goal with the first venture, so they need drive, determination and an ability
to recover from poor decisions or mistakes.
Flair and creativity are also essential for an entrepreneur. They allow the
entrepreneur to create or seize new opportunities for business, new niche markets
or new products and/or services. Success can sometimes depend on finding a new
and more innovative way to sell a good or service. Scott Bradley and Sean Towner,
who established Yo-get-it (pages 323–4), are examples of entrepreneurs who
successfully developed a niche market. Finally, the most important quality for an

entrepreneur is the ability to set goals and have a vision for the business’s future.
Having achieved their goals, they must set new goals — continually adjusting to
changing business, economic and customer markets.
Sets realistic
goals and
attempts to Takes
Works
achieve them moderate
well with
risks
people
Keeps in
Tolerates good physical
failure health
Is a skilled Feels motivated

organiser by achievement,
not money
Has a basic
desire to control Is confident in
and direct own ability
Has strong Desires

drive responsibility
Makes decisions Has high

and carries levels of
them out Is emotionally energy
stable
FIGURE 11.5 General personal characteristics of a typical entrepreneur
Entrepreneurs — influences on success

What does it really take to be a successful entrepreneur? You often read about
entrepreneurs with no wealth or education becoming hugely successful. This can
sometimes happen, but the latest research revealed in the book The anatomy of an
SNAPSHOT entrepreneur: family background and motivation is that 90 per cent of 549 company
founders were from middle-class or upper lower-class backgrounds, and were
well‑educated. The entrepreneurs in this study gave their insight into what influences
success or failure, as shown below.
❛ What does it
Keys to success
really take to • Prior work experience in the field — knowledge
be a successful of the business
• Ability to learn from mistakes
entrepreneur? ❜ • Work with a strong team
Barriers to success
• Unwilling to take risks
• Not enough time or energy
• Difficult raising capital to finance the business
venture

Snapshot questions
1. Construct a concept map identifying the barriers to being a successful
entrepreneur.
2. Deduce why prior knowledge of a business or work experience can lead to
greater success when starting a new business venture.
The benefits of entrepreneurship

A sense of freedom and independence are perhaps the best things about being a
business owner. Often, a person will desire the freedom to choose when and where
they work, with whom they work, and whether to work from home. The great
attraction is the belief that owners will have more control over their own destiny.
Someone willing to work hard may believe that they can earn much more by
working for themselves than they would by working for someone else. They would
expect their extra effort to be rewarded through the profits from their own business.
These rewards may not come immediately — even the most successful businesses
may lose money in their early start-up phase — but the hope is that eventually the
business owner will earn more from being self-employed.
People who work for themselves also experience the satisfaction of guiding the
business’s growth. They enjoy the challenge of overcoming obstacles, setting and
meeting new targets, and gaining a larger customer base. While it can sometimes
be a hectic existence, most entrepreneurs seldom complain that running their own
business is routine and boring. Ultimately, they take pride in having made it on
their own.
The burdens of entrepreneurship

Small to medium enterprise owners must accept the responsibilities of
entrepreneurship. Being in business requires a person’s full attention. The work
hours for a business owner will invariably be longer than an employee’s work
hours. As well, self-employed people find it difficult to leave their problems at
work; they constantly ‘live and breathe’ the business’s problems. The anticipated
freedom and flexibility may be illusive.
Even if the business succeeds, the owner still might have little money to spend
apart from the salary the owner pays him or herself. Instead, the owner might
have to reinvest the profits to generate long-term growth. Alternatively, short-
term accounts may need to be paid with cash. In some cases, the owner may
not even be able to draw a salary until the business becomes more established.
As one entrepreneur claims: ‘The commitment you have to make is enormous;
entrepreneurs usually put everything on the line.’
Cultural background
A person’s cultural background can influence their reasons for establishing a business.
Cultural influence can arise from a community’s traditions and beliefs, such as the
‘work ethic’ — the willingness to work long and hard in an effort to be successful —
which is strong in many European and Asian cultures. Many migrants come to
Australia with few resources except a strong desire to improve their lives. Their
determination often translates into business success (see the following Snapshot). BizFACT
Cultural influence can also arise from centuries of experience in certain trades or Approximately 31 per cent of NSW
services, enabling a person to use this knowledge to achieve business success. A small business owners were born
person from a Thai cultural background, for example, may be able to succeed in a overseas.
restaurant business that aims to provide quality, specialist Thai food.

Golden Estate Property Development —
culture and business
Mr JinHe Xu, Director of Golden Estate Property Development, travelled around
Australia before deciding that Western Australia was the best place to be for sound
SNAPSHOT business opportunities and a great family lifestyle.
‘The Government of Western Australia is very supportive of business migration
and I felt they were more approachable than the other states’, Mr Xu said.
‘Through the Small Business Development Corporation, the government provides a
lot of assistance for business migrants like us and they were very helpful in showing
us how to comply with the requirements of our visa.’
Mr Xu and his family arrived in Australia in 2009 and are now settled in Winthrop,
a suburb south of Perth city.
‘My four children have really settled in, they love the lifestyle here and they don’t
want to go back to China.’
Mr Xu was sponsored for a 132 Visa and after arriving in Western Australia, he
wasted no time setting up his property development business. Following careful
research, he recognised a local need for medium density, affordable housing that
was suitable for first-home buyers.
After just one year in Perth, Mr Xu had completed his first development of twelve
❛ . . . seek the help of residential home units, and now has two more complexes underway.
reliable people before Mr Xu is very experienced in building projects and property development,
having worked in the industry previously in China, and he is pleased to be able
making big decisions ❜ to provide good quality homes that represent value for money, for people in
Western Australia.
‘There is great demand for low-cost, quality housing in the eastern suburbs of
Perth, with many Western Australians keen to own their own homes, and others
such as students, needing rental accommodation’, Mr Xu said.
‘I’m pleased to be able to help the government fill this gap.’
Mr Xu’s next project is a hotel/serviced apartment complex closer to the city.
‘The plans are in the process of being approved for a hotel and 100 serviced
apartments, close to the city and the casino’, Mr Xu said.
‘Visitors to Perth want good quality accommodation at a reasonable price, and this
new development will provide that.’
Mr Xu’s advice to other business migrants considering a move to Western Australia
is to research your choices and seek the help of reliable people before making big
decisions.
Source: Government of Western Australia Small Business Development Corporation,
www.smallbusiness.wa.gov.au/jinhe-xu-building-a-solid-foundation-in-western-australia.
Snapshot questions
1. Outline what motivated JinHe Xu to begin a business in Western Australia.
2. Recall the support JinHe Xu received from the government.
3. Describe the factors that have contributed to JinHe Xu’s success.
Gender
Governments of developed economies are realising that employment growth will
not come from established large businesses but from the creation or expansion
of the small business sector. Policies are being created specifically to assist small
business in contributing to the national economy. In response to these policies,
and to a general change in social attitudes, many women are setting up their own
businesses (in particular in self-employment) at three times the rate of men (see the
following Snapshot).

Crayons Childcare Centre — women
and SMEs
It takes determination, courage, persistence and a high level of motivation to achieve
SNAPSHOT
success with any business venture — qualities that Michelle Angeloni possesses.
Michelle started her own childcare centre in 1998 after working in the industry
for seven years. During those years, she spotted a gap in the market that was not
already being satisfied by other businesses in the area for centres that offered
personalised care as well as quality education.
‘I noticed that in all the childcare centres I came across, the owners weren’t
properly qualified and they didn’t work in the actual centre. I therefore felt they
didn’t understand what was important about the level of service required and what
families expected.’ After years of frustration at the way some centres were being run,
Michelle was determined to run a business exactly the way she wanted. She wanted
to run a childcare centre where the children become a family and where every family
is made to feel important. Michelle wanted her business to provide a level of service
that was not already available in the area.
It took three years of hard work and persistence to get the business started.
During that time, she encountered many obstacles and hurdles that she
needed to overcome. Her biggest challenge was getting the centre approved
by the local council. Michelle had to attend council meetings for three years
to continually address issues raised by neighbouring property owners at
her own expense. She also had to keep modifying her plans to suit council
requirements. To help her with this process, Michelle sought advice and
developed good relationships with advisors from the Department of Education
and Communities.
‘In order to succeed you need to be persistent, patient and passionate. It takes
time to create a successful business, but it’s so much easier to motivate yourself
when you’re energised by what you’re doing. In business, you are going to face
constant challenges. Success doesn’t come easy, but if you have determination and a ❛ . . . you need to be
positive mindset, you can do anything.’
Michelle’s determination has definitely paid off. In the 15 years since she opened, persistent, patient
she has never spent a cent on advertising. All her business has come from word of
mouth and recommendations, and she has always remained true to her philosophy
and passionate. ❜
and vision for starting the business in the first place.
Snapshot questions
1. Identify the personal qualities Michelle Angeloni possesses that equip her to
be a SME owner.
2. Explain the importance of Michelle’s experience in determining the business’s
success.
3. Summarise Michelle’s advice for people wanting to start their own business.
Research undertaken by both federal and state government departments has

highlighted the following points regarding women in business:
1. Women own approximately one-third of all small businesses operating in
Australia.
2. Over the past decade, there has been a rapid growth in the number of women
who chose to be self-employed, growing by a rapid 33 per cent.
3. The major industries in which women own businesses are service oriented.
4. Women own almost half of all home-based businesses.
5. Women setting up businesses from home is the fastest growing sector of the
Australian economy.

6. Women-owned businesses have less external debt, are more profitable and are
profitable much earlier than those owned by men.
7. Women starting their own business generally:
• are aged 26–45 years
• have sole financial responsibility for the business
• acquired skills used in their business from previous work experience
• borrow very little money.
8. The main reasons for women establishing a business include the following:
• desire to be their own boss
• wanting greater flexibility in terms of family needs
• personal challenge
• an avenue to utilise their skills and talents
• wanting to achieve financial security
• experience of restrictions in terms of promotion within a previous career.
Weblink
Use the Women’s Network
Australia weblink in your
eBookPLUS to visit the
website of the nation’s
leading networking
organisation for women.
FIGURE 11.6 The Women’s Network Australia is the nation’s leading networking
organisation for women offering business information, online services, business education
and networking events.
Summary
• Personal qualities, motivation, experience and entrepreneurship are the primary
influences on an individual’s decision to establish a business.
• Business qualifications and skills can be attained through experience, education
and/or training.
• These factors will affect planning decisions on issues such as the type and size of
business, the business location and the individual’s own role.
• An entrepreneur is someone who starts, operates and assumes the risk of a
business venture in the hope of making a profit.
• An entrepreneur must have a range of skills and characteristics to own and
operate a business successfully.
• Other influences are at work, including cultural background and gender.
EXERCISE Revision
11.1
1 Assess your own entrepreneurial ability by completing the questions shown in
figure 11.1 on page 328. Someone with an entrepreneurial personality would
answer ‘yes’ to most of the questions. Write a self-evaluation report based on your
answer.
2 Choose a business you would like to own. Outline the personal qualities you think
are needed to be successful in this business. Share your response with a classmate and
discuss the main differences in your answers.

3 Divide a page into three columns as shown. In the first column, identify the skills
that you presently possess and could bring to a small business. In the second column,
identify other skills that you would need to develop. In the third column, outline
how you would go about obtaining these new skills.
Skills I presently Skills I would need to How I would obtain

possess develop these new skills
4 Refer to figure 11.4 on page 333 and classify the possible rewards of business
ownership into monetary or non-monetary benefits. Interpret the results.
5 Describe the main characteristics of an entrepreneur.
6 Select the characteristic you regard as the most important and justify your choice.
7 Outline why an entrepreneur should continually set new goals.
8 Prepare a ‘T’ table format to summarise the benefits and burdens of
entrepreneurship. The ‘T’ table has been started for you.
Benefits Burdens
• Sense of freedom
and independence.
9 Determine which you consider to be more persuasive: the benefits or the

burdens. Give reasons for your answer. Share your response with the rest of
the class.
Weblink
10 Propose what you consider to be the main reasons for women starting their own
Enterprise Network for
businesses. Young Australians (ENYA)
11 In small groups, brainstorm the problems women face when they attempt to establish
and operate a SME. Outline your problems to the rest of the class.
12 Using the Enterprise Network for Young Australians (ENYA) weblink in your
eBookPLUS answer the following questions.
(a) Outline the role of ENYA.
(b) Identify the specific assistance ENYA offers potential entrepreneurs. Weblink
13 Use the Women’s Network Australia weblink in your eBookPLUS to select and read Women’s Network
two stories of WomenPreneurs — ordinary women achieving extraordinary success. Australia
Compare the main factors that made each business a success.
Extension
1 ‘The entrepreneur has an important role in the Australian economy.’ Assess the
2 Investigate how the role of women in business changed over the past decade.
Predict the importance of this role in the future.
3 Create a rap song explaining the meaning of ‘entrepreneur’ and describing the
qualities needed to be a successful SME owner.
4 Write out the 12 questions asked in figure 11.1 (page 328) in order of importance,
from most important to least important. Compare your list with the rest of the class
and be prepared to justify your rankings.

11.3 Sources of information
SME owners cannot be experts in all areas of their business. Further, they do
not normally have the funds to employ a specialist or consultant to assist with
management. They thus need to possess a variety of skills, including marketing,
personnel, finance, administration and public relations skills. Obviously, this
multifaceted role is not an easy task. However, the SME owner can receive assistance
from a large number of government and private support agencies, examples of
which are shown in figure 11.7.
Trade
associations Federal, state and
Networks
local government
departments
Chambers of Small Enterprise
commerce Association of
Australia and
New Zealand
Business
Enterprise
Centre Accountants
Australian Bureau
of Statistics SOURCES OF ADVICE Solicitors
AusIndustry Bank
managers
Community-
Australian Chamber
based services
of Commerce and
Industry
Other business TAFE
contacts colleges
Universities
FIGURE 11.7 Sources of help and advice for the SME owner
Professional advisers
It is important for the business owner to have a good relationship with an
accountant, solicitor and bank manager, and to keep in touch with them on a regular
basis. Management consultants can also be used, especially when restructuring the
BizFACT business or changing its core business activity.
Professional advisers deal with a
Business owners tend to be totally immersed in the day-to-day operations of their
large number of businesses and are businesses, so they find it difficult to remain objective. However, the professional
therefore able to adopt a much wider adviser is able to examine the business much more objectively and provide an
view of individual businesses than is independent analysis of the organisation. Professional advisers are also more aware
possible for the owner, who may have of changes within the legal, economic and financial environment. It is advisable
only limited experiences from which
to draw. The four main professional
for business owners to make use of the information and advice from the following
advisers for small business owners are advisers:
accountants, solicitors, bank managers 1. Accountants. Accountants provide valuable advice on all financial management
and management consultants. issues and taxation obligations. They have access to the latest changes to taxation
and financial reporting requirements.

2. Solicitors. Solicitors provide information concerning business formation and
structures, registration, contracts, leases, partnership agreements, patents
and legislation. Solicitors are up to date with any changes to company law
and can advise the small business owner on how best to deal with such
changes.
3. Bank managers. The bank manager is another valuable contact who can
provide information and advice on financial services, sources of finance and
basic business management. The bank manager usually has a wide range of
experience to draw on and is able to access the resources of the bank.
4. Management consultants. If a business management problem arises that the
owner cannot deal with, then the advice of a management consultant may be
necessary. Coming from outside the business, the consultant is able to be more
objective and view problems in an unbiased manner. When outsourcing to
management consultants, it is wise to check their credentials and experience.
Government agencies
State governments
All state governments have established agencies that provide support and advice
to business owners. In New South Wales, the Industry, Innovation, Hospitality
and the Arts Division of the NSW Department of Trade and Investment, Regional
Infrastructure and Services (NSW Trade & Investment) offers a number of programs
designed to assist businesses. The main programs are described below.
NSW Trade and Investment — SmallBizConnect

This NSW government department provides the following information and services
to small business:
• information and advice on starting and managing a small business
• interactive tools to assist owners to start and run their business
• programs to develop key business skills.
Business Enterprise Centres Australia (BECA) FIGURE 11.8 The BEC Australia
Business Enterprise Centres Australia (BECA) is the peak body for business website is www.becaustralia.org.au.
enterprise centres and the more than 300 000 micro and small business owners
Australia-wide.
This not-for-profit organisation assists home-based business owners, business
intenders and micro and small business owners with a variety of services. These
include business mentoring, 1:1 business advice, training, networking events and
much more. Most of these services are provided at low or no cost because they are
government subsidised, and there are over 100 BECs nationally in city, regional
and rural areas.
Federal government
The federal government operates a website, www.business.gov.au, as a service to
businesses of all sizes, offering access to all government departments, with advice
on everything from fair trading to taxation. Government departments such as the
Department of Foreign Affairs and Trade, and the Department of Industry provide
specific advice and support to businesses on issues such as exporting overseas and
research and development of new products.

FIGURE 11.9 The federal
government website, business.gov.
au, is a useful resource for someone
establishing, managing or growing a
business.
Technological advice
Establishing an online business presence, networking a number of computers
within the business premises, or making maximum use of mobile devices can
all improve business efficiency. Purchasing equipment from a dealer who offers
advice and backup support, or establishing a relationship with an ICT consultant,
is another important decision to be made by the prospective business owner. As
a technological support service for small business, the federal government has
established the digitalbusiness.gov.au website. This service provides free practical
advice on how best to take advantage of the internet.
BizFACT
ABS statistics show SMEs are still
moving slowly when it comes to
engaging online. Only 44.6 per
cent have an online presence. This
compares to 97 per cent of large
FIGURE 11.10 The digitalbusiness.gov.au website is designed for business owners and staff.
businesses.
It covers a range of topics including establishing an online presence, e-commerce, social media
and online marketing.
Local government
This level of government is becoming more involved in encouraging business
because it creates employment. Local councils offer advice on land zoning, assist
with subsidised land and consider development applications.
Other sources
Chambers of commerce
Chambers of commerce are local associations of businesspeople, usually centred
around a suburb or region. They provide legal and financial help, taxation advice,
an explanation of legislation, and industrial relations information. The chambers
also organise training seminars, arrange industry conferences and liaise with
government departments.
Small Business Association of Australia and New Zealand
This lobby group has a membership consisting of thousands of individual small
business owners. The association provides a forum for exchanging news and views

relating to small business matters. It also organises training days and promotes the
role of small business and its importance in the total economy.
Trade associations
Trade associations offer specific industry information and assistance. Examples
include:
• Australian Retailers Association
• Plastics and Chemicals Industries Association
• Australian Medical Association.
Each association is made up of organisations that are in the same line of business,
so it can provide specific details about product development and industry trends.
Libraries and reference material

Libraries are a valuable source of information because they have access to vast
amounts of reference material. Most libraries have online access to large databases
with search facilities that help locate specific material. Librarians are highly trained
and will undertake a search of the literature available. Most libraries also subscribe
to trade and industry journals.
Australian Bureau of Statistics

The Australian Bureau of Statistics provides valuable data on social, economic
and demographic trends. It also provides specialised data on business activities.
Information useful to business owners can be obtained from the following:
• Census on Population and Housing
• Demographic Trends and Statistics FIGURE 11.11 Whether starting
• Household Expenditure Surveys. up, or already operating a SME, the
Having access to such information assists the business owner in analysing and Australian Bureau of Statistics provides
information to assist making informed
understanding changes to the external environment. business decisions.
11.4 The business idea

As well as determining whether or not they have the motivation and personal
qualities to start a business, potential SME owners will have a clear idea of what
they wish to sell. Sometimes it is an original idea for a good or service that is
quite different from anything already on the market, or a distinct improvement
on something already available. Or it may be a realisation that particular goods or
services are unavailable in a particular area. All the businesses in the world must
have started from an initial idea and then grown according to their success within
the market. Coke, for example, started as a medicinal tonic sold off the back of a
travelling wagon. Now, Coca-Cola Amatil is an internationally successful business
that dominates the soft drink market throughout the world.
The source of a business idea may come from a person’s own experiences, BizFACT
interests, abilities or imagination. Inspiration for ideas can be generated by: Most new ideas are 99 per cent
• listening to people, particularly for ideas on the goods or services people want, perspiration and 1 per cent inspiration.
but that may not be readily available This means that a lot of time and
• reading magazines and books, and researching on the internet effort needs to be put into fully
developing a new business concept.
• visiting displays and exhibitions in areas such as new technology or new
products from overseas
• accessing government statistics and research information
• identifying a ‘gap’ in the market — that is, a demand not currently being satisfied
• determining improvements that could be made to an existing product.

Mocks — a successful business idea
Most of us have seen something advertised and thought, ‘that is just what I need’.
Someone, somewhere had the idea for the product. From this original idea, a
business was formed to develop, produce and market the product. All businesses
SNAPSHOT begin when a person or group of people have an idea for a new or improved
product. And so it was for Lara Solomon who, in 2004, launched the Mocks brand:
protective sock covers for mobile phones, MP3 players, cameras and other mobile
electronic gadgets.
The idea came to Lara while she was holidaying in Thailand. She came across stalls
selling unbranded, different-sized and varying quality covers for mobile phones.
With her marketing background, Lara quickly realised the potential of higher-quality
branded products with designs more appropriate for the Australian market. Lara
spent about six months researching different materials and designs while her family
provided financial support.
Due to the product’s unique characteristics, Lara initially found it difficult
convincing stores to stock her product. However, due to her persistence and
passion for the brand, Fone Zone decided to trial Mocks in seven of its stores. The
trial was so successful that the owners decided to sell Mocks in every one of their
110 stores.
Once Lara’s promotional campaign was underway, retailers started calling her to
place orders. Lara feels proud to be identified as the ‘Mocks lady’, and believes the
product’s quirkiness and usefulness are the reasons for their popularity.
Mocks products are now sold only online. Find out about Lara’s latest ventures at
www.larasolomon.com.
Snapshot questions
❛ Someone, 1. Outline the source of Lara’s business idea.
somewhere had 2. Besides the original business idea, describe other factors that contributed to
the success of LaRoo Pty Ltd.
the idea for the
product. ❜
The successful identification of a gap in the market is a key to establishing a
lucrative business. It means that the new business provides something not already
available. Breaking into a market that
is already well served means that the
new business has to do something
exceptional to draw customers away
from existing businesses. For example,
if a shopping centre currently has
three hairdressing salons, would a
hairdresser be wise in setting up a
fourth salon in the same centre? It is
unlikely that a gap in the market exists
unless the other three hairdressers are
so heavily booked that locals find it
difficult to make an appointment.
FIGURE 11.12 Visiting a business

exhibition can provide ideas for a
business concept.

Identifying business opportunities BizWORD
Identifying a business opportunity is not just about having an idea. An opportunity is A business opportunity can
something that a person can see as an avenue to success. It is often identified when a be described as something an
entrepreneur can see as an avenue
person feels they can provide goods or services in a better or different way from that
to success. It is often identified when
already in the market. There are many ways of identifying an opportunity, for example: a person believes they can provide
1. Analysing and reviewing particular parts of the market to find an opening for goods or services in a better or
particular goods or services. Sometimes, you can find the best opportunities by different way from those already on
seeking those goods or services that larger businesses are unable or unwilling to the market.
provide to their customers. Angela, for example,
may want to open a plant nursery, but she is afraid
that the larger nurseries will be able to undercut her
prices in most products simply because they can buy
in bulk. Angela could concentrate on the provision of
services — maybe plant delivery services, landscaping,
garden consultations, soil testing and more — which
the larger nurseries tend to overlook.
2. Identifying whether many other people share a
particular interest or hobby. This interest or hobby
may become the main catalyst in identifying a business
opportunity. An individual is not always driven by the
motive to make a profit, but rather by a belief in the
product itself. The most important issue is that such
interest does not always equal success. There must be
a large enough market to sustain sales of the product
or service.
Once a business opportunity is identified, a number
of areas need further investigation before the business
opportunity becomes a reality. The most important of
these is a consideration of the competition.
FIGURE 11.13 Sonia and Trish,
Competition owners of ‘Rex in the City’, a mobile
dog wash business, identified an
Competition is rivalry among businesses that seek to satisfy a market. When opportunity by seeing a ‘gap’ in the
identifying a business opportunity, the entrepreneur must decide on the type market that was not already being
of market in which their goods or services will compete. This means deciding satisfied by larger businesses. Over
the years, they have built up a highly
whether to target the goods or services at a broad market (mass market) or a more reputable business supported by a
specialised market (niche market). Once this decision is made, the business owner strong customer base.
is able to identify the level of competition and the main competitors.
The business owner must then decide how to make the business competitive
or, more simply, how to develop a customer base or gain a market share from
its competitors. Again, the type of market will influence the strategies used by
a business. If the product is aimed at a niche market, for example, then there
may be no competitors. On the other hand, a mass-market strategy will require
extensive planning to create market share. There are two main ways of achieving
competitiveness — cost of production and differentiation of the goods or services.
1. Cost will largely depend on production techniques. The business that can
produce a good or service at the lowest possible cost and thus sell at the lowest
price has the greatest ability to attract market share. BizWORD
2. Differentiation is about making a product or service different, unique or better Competition is rivalry among
than its rivals — for example, selling a computer with extra service, lessons or businesses that seek to satisfy
added software. a market.
Competitive advantage is discussed in more detail in chapter 13.

Summary
• A variety of support services exist to provide assistance to a business owner
who lacks experience. Some of them are free and some are in the form of other
businesses that charge for their services.
• A business idea describes the core activities of the business, and the specific
features and value of the goods or services it provides.
• A business opportunity is something an entrepreneur can see as an avenue to
success.
• Opportunities may arise due to either a ‘gap’ in the market, or an interest or
hobby.
• Competition is rivalry among businesses that seek to satisfy a market.
• SME owners must decide how to make a business competitive. This can be done
by either reducing the costs of production or providing something not already
available.
EXERCISE Revision
11.2
1 (a) Recall the professional advisers a business owner should have a good relationship
with.
(b) State the information each one provides.
2 Use the business.gov.au weblink in your eBookPLUS to examine the range of
information provided by this website.
Weblink
3 Jamahl wishes to set up a hot bread shop in his local shopping centre. Identify five
business.gov.au
government agencies or organisations he could approach for support.
4 Use the BEC Australia weblink in your eBookPLUS to answer the following questions
about Business Enterprise Centres (BEC) Australia.
(a) State the vision and mission of BEC Australia.
(b) Outline five different services offered by BEC Australia.
5 There are many ways of coming up with an idea for a business. The following table
Weblink
provides some examples. In small groups, propose one suggestion of your own for
BEC Australia each example given.
Source of idea Example Your suggestion
An inspiration A self-filling printer cartridge
Listening to people A skateboard facility
Noticing a gap in the market A home gardening service
Own interests and abilities A graphic design consultant
Improving an existing product A better video store
New technology A mobile HDTV screen
Developing a hobby Making ceramic pottery
Combining two existing ideas Antiques/coffee shop
Social trends Home-cooked, prepared meals
‘Crazy’ ideas A musical hair dryer
6 Define the term ‘business opportunity’.

7 Summarise two ways of identifying a business opportunity.
8 Choose a business — large, medium or small. Identify its main competitors.
9 Keeping ahead of the competition is essential for long-term business success.
Recommend five strategies a café can use to keep ‘on top’ of its competitors.

Extension
1 Arrange for a representative of the local chamber of commerce, or the local traders’
association, or the local BEC to visit your class. Before the visit, prepare a number of
questions to ask the representative on issues relevant to both informal and formal
support services provided for local business owners. If possible, video record the
session (obtain the visitor’s permission in advance). Create a 500-word report on
what you learned from the visit.
2 ‘The business idea is the starting point for any new small business.’ Explain this
statement.
3 When commencing a new small business, justify which of the following you think
might be the most important.
(a) the money required to commence the business
(b) the development of the business idea
(c) the skills of the people who will operate the business.
4 Choose a good or service you could provide/invent that is (to your knowledge) not
already available.
(a) Clarify why you chose this good/service.
(b) Predict its chance of success.
11.5 Establishment options BizFACT

Seventy per cent of all new businesses
There are three ways of establishing a new business: start from scratch, while 26 per
1. setting up a new business from scratch cent are purchasers of existing
2. purchasing an existing business businesses. The remaining 4 per cent
are businesses that have either been
3. purchasing a franchise. inherited from a family member,
Choosing between these options is sometimes quite difficult; each has advantages restarted from a previously failed
and disadvantages (see the Snapshot on pages 351–2). business, or bought by the employees
from the owners.
FIGURE 11.14 Many prospective

small business owners find it difficult
to select an establishment option. Each
option has its own advantages and
disadvantages, which must be taken into
consideration before making a decision.
A wrong choice may place the owner in a
vulnerable position.

Setting up a new business — starting from
scratch
Weblink
Sometimes conditions are more favourable for starting a new business than for
Use the SmallBizConnect
weblink in your eBookPLUS buying an existing operation, for example:
to visit the NSW Small • when a person has created something unique and starts a business to market
Business Commissioner’s their innovation or invention
guide to starting a business.
• when a person recognises a gap in the market, where it is clear that customers’
needs are not satisfied by existing businesses
• when the market has grown and existing businesses cannot supply all customers.
If these conditions do not exist, then starting from scratch could be more difficult
because existing SMEs will provide considerable competition.
FIGURE 11.15 Steve Takchi started his business Path to Health from scratch to pursue his
dream of getting people moving and enjoying a quality life without pain. He wanted to create
a business that is a one stop shop for health and osteopathy that offers personalised healthcare
and a holistic approach that considers the complete person (physical, psychological and
spiritual) in the management of the problem.

Advantages and disadvantages
Starting from scratch has advantages and disadvantages (see table 11.1).
TABLE 11.1 The advantages and disadvantages of starting a business from scratch
Advantages Disadvantages
• The owner has the freedom to set • There is a high risk and a measure of uncertainty.
up the business exactly as they wish. Without a previous business reputation, it may
• The owner is able to determine the prove difficult to secure finance.
pace of growth and change. • Time is needed to set up the business, create BizWORD
• There is no goodwill for which the procedures, develop a customer base, employ Goodwill is the monetary value
owner has to pay. and train staff, and develop lines of credit. attached to the reputation of a
• If funds are limited, it is possible to • If the start-up period is slow, then the business particular business.
begin on a smaller scale. may not generate profits for some time.
Buying an existing business

When an existing business is purchased, the business is already operating and
everything associated with the business is included in the purchase — for example:
• stock and equipment • staff
• premises • location
• existing customer base • reputation and goodwill.
When purchasing an existing business, it is essential for the potential purchaser
to know why the business is for sale. If the business has been struggling, it may not
be a very good purchase. It is also important to examine detailed accounts for at
BizFACT
least the previous three years to determine the financial health of the business. The
If you are buying an existing business,
true value of goodwill is one aspect of the financial statements that is often hard
the financial information about the
to estimate. The seller of the business may overestimate the value of the business’s profitability of that business must be
reputation; therefore, consultation with an accountant is important to confirm the fully investigated. According to the
accuracy of the value placed on goodwill by the seller. Australian Competition and Consumer
Commission, if the vendor is reluctant
to disclose the full financial details
of the business it is better not to
purchase it. Buying a business is just
like buying a house — a huge cost is
involved and the foundations of both
must be sound.
FIGURE 11.16 Sam Dimartino

purchased an existing business because
he believed it would be easier than
setting up a new business from scratch.
The existing suppliers, equipment and
customers helped Sam generate instant
income.

Buying an existing business has a number of advantages and disadvantages, as
shown in table 11.2.

TABLE 11.2 The advantages and disadvantages of buying an existing business
BizWORD Advantages Disadvantages

A franchise involves buying the rights • Sales to existing customers will • The existing image and policies of the
from another business to distribute its generate instant income. business may be difficult to change, especially
products under its name. • A good business history increases the if the business had a poor reputation.
A franchisor is an individual or likelihood of business success. • The success of the business may have been
business that grants a franchise. • A proven track record makes it easier to due to the previous owner’s personality and
obtain finance. contacts, so may be lost when the business
A franchisee is an individual or
• Stock has already been acquired and is is sold.
business that purchases a franchise.
ready for sale. • It may be difficult to assess the value of
• The seller may offer advice and training. goodwill, with the likelihood that the
• Equipment is available for immediate use. newcomer will pay more than it is worth.
• Existing employees can provide valuable • There may be hidden problems.
assistance. • Some employees may resent any change to
the business operation.
Buying a franchise
Weblink
Under a franchise agreement a person buys the rights to use the business name
Use the Franchise Business
weblink in your eBookPLUS and distribute the products or services of an existing business. The business that
to explore a database of the grants the right to others to use its name and products is known as a franchisor,
variety of franchises available while the business that buys those rights is known as a franchisee. The franchisor
for purchase in Australia.
supplies a known and advertised business name, the required training and staff
development, a method of doing business, management skills and materials. The
franchisee supplies the startup money and labour, operates the franchise business
and agrees to abide by the terms and conditions of the franchise agreement.
People choose to buy a franchise in the hope of avoiding many of the problems
of starting a new business. For a set fee, the small business owner receives the
benefits of a successful business formula, a well-recognised name and established
BizFACT trademarks. Franchising has a success rate of almost three times that of independent
Australia’s largest franchise operation
businesses, largely because it involves an established business name backed up by
is the IGA supermarket chain with managerial expertise. Franchising is the area of fastest business growth in Australia.
1393 stores, just ahead of Subway Subway® (sandwiches and salads) is an example of a franchise. Other well-known
with 1377 franchise owners. franchises include McDonald’s, Optus ‘Yes’ stores, Dymocks bookstores, 7 Eleven,
Bakers Delight, Domino’s Pizza and The Athlete’s Foot.

Buying a franchise has a number of advantages and disadvantages, as shown in
table 11.3.
TABLE 11.3 The advantages and disadvantages of buying a franchise
Advantages Disadvantages
BizFACT • Immediate benefit is derived from the • The franchisor controls the operations,
According to a report of the Franchise franchisor’s goodwill because the name is with little scope for franchisee individuality.
Council of Australia in 2012: established. • Profits must be shared with the franchisor
• annual sales turnover of the • The franchisor often provides training and through the payment of ongoing franchise
franchising sector is estimated at management backup. fees.
$131 billion • A franchisee can succeed despite having • The franchisor often charges additional
• the franchising sector comprises limited experience. service fees for advice.
over 73 000 business outlets • Equipment and premises design are usually • The franchisee is often required to
• there are approximately established and operational. purchase stock from the franchisor and
1180 franchisors in Australia • Well-planned advertising often exists. cannot shop around for cheaper supplies.
• the franchising sector employs more • Volume buying is possible, often resulting in • Contracts may be biased in favour of the
than 400 000 people across the cheaper stock. franchisor.
country. • A business plan and proven business • The franchisee must share any burden of
methods already exist. the franchisor’s business mistakes.

FIGURE 11.17 A range of franchise
business operations
Madhu’s Restaurant — a successful franchise

An interview with Madhu Gaikwad, owner of Madhu’s Restaurant
Madhu, what made you want to own a restaurant?
Ever since ninth grade at school, I wanted to be a chef and run my own restaurant.
I was 15 years old when I started working as a kitchen hand in a friend’s restaurant.
I worked on a casual basis. This experience gave me a good understanding of the
SNAPSHOT
restaurant scene and my passion for fine food.
Do you enjoy your work? Why?
Working as a chef involves hard work and long hours. You are always working quickly
and nearly always under pressure. However, the creative satisfaction in producing
great food that not only looks good, but tastes good too, makes it worthwhile.
Would you prefer to work for yourself or be a salaried employee?
I prefer working for myself. Not only does this allow me to be creative with my
dishes, but it also allows me to generate my own income.
Why did you establish a new business instead of purchasing an existing restaurant?
In the beginning I weighed up the advantages and disadvantages of each option.
The main advantages of setting up a new business are that I would have freedom of
choice to set up the business just as I wish; there is no goodwill which has to be paid
for; and importantly, because my funds were limited, I was able to begin on a smaller
scale. The main disadvantage is the high risk of failure because there is no previous
business reputation or existing customer base to draw upon. This also makes it more
difficult to obtain a loan.
Did you consider purchasing an existing business?
Yes, I almost bought a competitor’s restaurant. The asking price was low due to its
poor reputation. Although it was poorly managed, it was in a great location. The
(continued)

❛ It is immensely main advantage of purchasing this business was that it was already operating and
everything associated with the business was included in the purchase. However, the
satisfying to know main disadvantage was that the existing image of the business would have been
difficult to change. It was just too big a risk.
that I am creating Do you think you made the right decision?
something from Yes. Even though it was hard in the beginning, with plenty of minor ‘dramas’, I
would make the same decision again. It is immensely satisfying to know that I am
nothing. ❜ creating something from nothing.
Did you consider operating as a franchise?
Not really. I did not want a franchisor to control how I operate my business. Nor
did I want to share my profit or pay a fee to trade under their name. I wanted my
independence. However, if I lacked experience I would have chosen this option
because operating under a well-recognised brand and using a successful business
formula would reduce the risk of failure.
Finally, Madhu, how’s business so far?
Well, as you know, I set up Madhu’s Restaurant in 2008. Since then, I have been
pleased to see that there is a growing customer base. I am very satisfied with the
profits so far. So, eat up and bon appétit!
Snapshot questions
1. According to Madhu, outline the benefits of being self-employed compared
with being a salaried employee.
2. Recall why Madhu decided to establish a new business.
3. Identify one advantage of purchasing an existing business.
4. Explain under what circumstances Madhu would consider operating as a
franchise.
5. Create a web page for Madhu’s restaurant. Provide a facility for ordering
takeaway food online.
6. In pairs, predict what might happen to Madhu’s business over the next
two years.
Summary
• Starting a completely new business, purchasing an existing business or
purchasing a franchise are the three main ways of going into business.
• The most common reason for setting up a completely new business is the
recognition of a gap in the market.
• When purchasing an existing business, it is essential for the potential purchaser
to know why the business is for sale.
• People choose to buy a franchise in order to make use of an existing brand and
reputation.
• There are advantages and disadvantages for each option.
EXERCISE Revision
11.3
1 Recall in what circumstances someone might choose to start a business from scratch.
2 Identify and explain what you consider to be the two most significant
advantages and two most significant disadvantages of starting a business
from scratch.
3 Identify and explain what you consider to be the two most significant advantages
and two most significant disadvantages of purchasing an existing business.
4 (a) A ssume you have decided to purchase an existing small business. Select one of
the following advertisements and propose a list of questions that you should ask
before making a purchase.
(b) Justify which business offers the best prospects. Give reasons for your answer.

SOUND ESTABLISHED
ATTENTION SOUND INVESTMENT
HAIRDRESSING SALON Sack your boss.
Work from home instead. Established Convenience
Store – Beach Location
Well equipped. Phone (03) 9856 2764
Once-in-a-lifetime opportunity
Established over 10 years. www.lastchance.com.au
to be your own boss.
Sound financial position. Easily managed. Training provided.
Taking approx. $2500 p.w. Low rent only $770 per week.
No goodwill required. Current t/over exceeds $5200 per week.
Pay only for premises, Increases in summer. Price includes
fixtures and fittings, the shop
fittings and stock.
plus 4 bedroom residence.
Excellent opportunity.
ASKING PRICE $915,000

Phone 3856 2764
Phone 0421 01516 7934 AM
5 Consider a small business that you would like to start. Recommend which of
the three business options would be most appropriate. Give reasons for your
answer.
6 Investigate why people choose to purchase an established business rather than start
from scratch. Compare your answer with other class members. Weblink
7 Use the federal government’s business.gov.au weblink in your eBookPLUS to business.gov.au
summarise the advice provided for buying an established business.
8 The Red Rooster restaurant franchise mission statement is ‘Be in business for yourself,
but not by yourself’. Explain what is meant by this statement.
9 Clarify why businesses operating as a franchise have a success rate three times that
of independent businesses.
10 Identify what the franchisor receives in a franchise agreement. Identify what the
franchisee receives. Identify what each party provides.
11 Determine one main benefit of franchising for the:
(a) franchisor
(b) franchisee.
Extension
1 Read the following story and then answer the questions.
Bianca was bored working for someone else and decided to start her
own business. She lives in a small New South Wales country town with a
population of approximately 2500. The town has no major shopping centre
and no established franchises. Bianca decided to open a café in the town.
Her mother provided the funding for the business and gave her what little
advice she could.
After only six months in business, Bianca realised that the business
was not profitable. Her debts were increasing and she could see no
way out of her problems. She wanted to sell the business but could not
find a buyer.
(a) Determine whether it would have been wiser for Bianca to purchase an
established business rather than commencing from scratch. Give reasons for your
answer.
(b) If Bianca had conducted some basic market research, predict whether she would
have opened a franchise instead of an independently owned business.
(c) Propose what Bianca should do. Share your answer with other class members.
2 From the ‘Businesses for sale’ section of a newspaper, find three advertisements for
the sale of a corner store, newsagency or coffee shop. Explain all the terms used in
the advertisements.

3 Select a small business that you patronise regularly and answer the following questions:
(a) Outline why you use this particular business.
(b) Identify the strengths and weaknesses of this business.
(c) If this business were for sale, determine whether you would consider purchasing
Weblink it. Give reasons for your answer.
Franchise Council of 4 Use the Franchise Council of Australia weblink in your eBookPLUS to compare
Australia three franchise operations that interest you and then answer the following questions:
(a) Summarise the business’s concept.
(b) Identify the training provided by the franchisor.
(c) Outline the agreement terms.
(d) State the level of investment required.
(e) Describe the personal qualifications required.
(f) Assess which franchise operation you consider to be the best business proposition.
Give reasons for your answer.
5 Create an information brochure on franchises. Include useful facts, and useful
organisations and websites that will assist a potential franchise.
11.6 Market considerations

Many business owners are so enthusiastic about starting that they often overlook
these three crucial questions:
• What good and/or service will be sold?
• What is the most suitable price for the goods or service?
• What is the most appropriate location for the business?
More than anything else, the success of any business depends on the research and
planning done to answer these three fundamental questions, because sales are the
life-blood of a business and the source of its income.
FIGURE 11.18 Market analysis is

important to ensure that the good
or service provided is likely to satisfy
consumers and that the business is aware
of the threats and opportunities the
market presents. Understanding the
market will help business owners identify
many different factors that can have an
impact on their business.

Goods and/or services
One of the first decisions potential business owners need to make is to determine what
they are going to sell. When starting a business, it is very important that the owners
possess the knowledge and experience required regarding their good or service.
Many SME owners display such enthusiasm for their new goods or service that
they often fail to consider whether any customers want to purchase it. Without
customers, a good or service — even though revolutionary, efficient, record-breaking,
exciting and so on — is useless. Businesses fail without a market (customers) for
their goods or service; therefore, they must always undertake market analysis.
Market analysis involves collecting, summarising and analysing information BizWORD
about the state of the market, customers, the threats and opportunities that the Market analysis involves collecting,
market presents, and any advantages or disadvantages that the business is likely to summarising and analysing
have over its competitors. information about the state of the
Using a variety of methods, such as surveys, questionnaires and focus groups, market, customers, the threats
and opportunities that the market
market analysis can provide a wealth of information about customers’ attitudes,
presents, and any advantages or
perceptions and opinions. It presents a business owner with questions that focus disadvantages that the business is
on who will buy the product, for example: likely to have over its competitors.
• Who are our customers?
• What do we know about them?
• What is their age and gender?
• Why do they buy our product(s)?
• What do they see as our strengths and weaknesses?
• How can we gain more customers?
• Who are our competitors? How many do we have?
• What do our competitors offer that we do not?
• What are we really selling?
• To whom would we like to sell?
Price
One of the most crucial decisions that
any business owner has to make is to
determine the prices at which goods and
services are provided to customers. This
will have a major impact on the success
of the business, as prices set too high may
drive away potential customers, while
prices set too low may make it difficult to
achieve a profit.
As discussed in chapter 8, three pricing
methods can be used:
1. Cost-based: a pricing method derived
from calculating the total cost of
producing or purchasing a product and
then adding a mark-up for profit.
2. Market-based: a method of setting prices FIGURE 11.19 Keeping an eye on
according to the interaction between the current price of your competition’s
the levels of supply and demand — products can give a business the
whatever the market is prepared to pay. competitive edge in pricing. Even a
small percentage rise in pricing can be
3. Competition-based: choosing a price that very profitable as it goes straight to
is either below, equal to or above that the bottom line. However, a large rise
of the competitors. may result in lower sales.

Location
Different types of businesses will be suited to different locations, and the business
owner must consider a number of factors when determining the most appropriate
location for their particular business (refer to chapter 3). A suitable location might
be a shopping centre or retail shopping strip, or the business owner may choose an
BizWORD online presence or prefer a home-based business.
Zoning is a means by which local Local government zoning determines where some types of businesses can
councils allocate land for different operate. Zoning is designed to keep business activities separate from residential
uses, such as residential, commercial,
areas and prevent householders being disturbed by businesses operating late at
recreational and industrial.
night. The process sets aside commercial and industrial zones and it is in these
areas that most SMEs will operate.
Shopping centre complex

The suburban shopping centre complex has been in existence in Australia for less
than 50 years. Typical suburban shopping centre complexes have one or more
supermarkets and a number of small specialist stores such as hairdressers, clothing
stores, pharmacies, cafés, newsagents, and often a post office and bank branches.
Larger regional shopping centres, such as Macquarie Centre, Centro Roselands,
Westfield Bondi Junction and Warringah Mall often include major department
stores and cinemas, as well as the full range of specialist retail outlets.
A well-established business in a busy shopping centre is an excellent option for
a prospective SME owner wishing to purchase an existing business, although a new
business in an established shopping centre is most likely to be successful if there
are no existing competitors.
BizFACT
When selecting a suitable site to
locate a new small business, it is
crucial to remember real estate
agents’ three important words:
‘location, location, location’.
FIGURE 11.20 Shopping centres

provide an ideal location for a
wide variety of retail businesses.
Retail shopping strips

In metropolitan Sydney, shopping strips developed along major arterial roads
during the second half of the 19th century. The busiest shopping strips were
located near public transport, such as tram routes and suburban railway stations.
Parramatta Road is an example of a major road in Sydney with extended shopping
strips.

Many shopping strips in the metropolitan area have struggled to compete with
the growth of shopping centre complexes offering off-street parking and an air-
conditioned environment. Retail shopping strips offer the advantage of high
eLesson
visibility for passing traffic, but many shopping strips suffer from lack of parking,
Sublime Greengrocer and
particularly those located on major arterial roads that are clearways during peak Juice Bar
hours. Because many shopping centres close in the evenings, shopping strips have Steve Collins owns a small
become popular locations for restaurants and ‘after hours’ entertainment. Norton fruit, vegetable and juicing
Street in Leichardt is a good example of this. store, and is thinking of
expanding so he is introduced
to Boost Juice founder and
Online presence director, Janine Allis.
Given the rapid rise in technology, many businesses do not consider their location Searchlight: ELES-0839
as important at all. Most SME owners have the use of a computer and access to
the internet. This allows for the possibility of conducting business online, so the
business is no longer limited to dealing with people who can physically visit its
premises. Such online activities can include:
• using email to communicate with customers or suppliers
• using the internet to find information, such as prices, business contact details,
and different products and market trends
• setting up a website to provide information about available products and
services, or as a means by which customers can order goods online
• using the internet for online banking and payment of bills.
Online businesses — factors to consider

A good computer, some business acumen
and perhaps a spare room in the back of
the house are some of the key ingredients
you need to start an online business.
Many businesses are finding they
SNAPSHOT
don’t need a shopfront and have begun
operating purely online. But don’t assume
that because you’re not paying rent and ❛ Many businesses . . .
utilities that an online business is without
its costs.
have begun
‘Having a purely online business can be cheaper in terms of infrastructure in some operating purely
cases, but not in all cases,’ says the director of digitalbusinesscoach.com, Mike
Sharkey. ‘Product-based businesses still need to consider things like warehousing, online. ❜
dispatch, shipping and hi-tech software. However, service-based businesses, once
built, can be run fairly cheaply because the overheads tend to be fixed.’
Sharkey says if you have a small-scale e-commerce site selling something homemade,
it can be quite cheap initially, but you need to choose appropriate software.
‘You could spend $10 000 on a website or try to set something up yourself,’ he
says. ‘A lot of new businesses do try to create their own store online but often run
into problems, and it’s always best to talk to . . . an expert in what you want to try
and achieve. Otherwise you stand to lose a lot of money.’
Source: ‘The net still has its share of catches’, The Age, 1 December 2010.
Snapshot questions
1. Identify what a product-based online business needs to take into
consideration.
2. Outline the potential problems businesses could face when establishing an
online business.

Home-based businesses
Many tradespeople and other service providers have traditionally run their
businesses from home. Plumbers, electricians, painters and various other service
providers do not need a dedicated business location as they provide services in
the customer’s own home or business premises. Increasingly, the development of
information and communication technologies has allowed home-based businesses
to use mobile phones, the internet and computer applications. Although home-
based businesses have traditionally been service providers rather than goods
retailers, online ordering and payment has allowed for the expansion of home-
based retail businesses.
Weblink
Use the Home-based
businesses weblink in your
eBookPLUS to discover
more about home-based
businesses.
FIGURE 11.21 Almost one million people

run a business from home in Australia.
Computers and the internet have increased
the potential for home-based businesses.
Summary
• The first thing business owners need to determine is what good or service they
are going to sell.
• Businesses fail without a market (customers) for their goods or services, so they
must always undertake a market analysis.
• A market analysis involves collecting, summarising and analysing information
about the market.
• Price can be set by using the cost-based, market-based or competition-based
pricing methods.
• One of the key decisions of a prospective small business owner is concerning the
actual location of the business.
• Different types of business will be suited to different locations.
EXERCISE Revision
11.4
1 Clarify the purpose of a market analysis.
2 State the methods a SME owner could use to gather information about customers’
attitudes, perceptions and opinions.

3 From the following table, identify the appropriate number (event) and letter (price-
setting method).
Event Method of setting prices
1. A house is sold at auction. (a) Cost-based
2. A percentage is added to the cost price (b) Market-based
of the goods.
3. The butchers all copy the prices of Mighty (c) Competition-based
Meats.
4 Calculate the selling price for a computer using the mark-up supplied.
Computer cost price Mark-up Selling price
$800 50%
$1000 80%
$950 100%
5 Clarify two factors to consider when setting a selling price for the item in each of the
following cases:
(a) A small publishing business has developed an idea for a new fashion magazine for
16-year-olds.
(b) John wants to sell his car online.
(c) Troy has won a new mountain bike in a raffle but he doesn’t need it.
(d) Jemma wants to sell her handmade jewellery at markets and online.
6 Explain how local council decisions affect the location of different types of
businesses.
7 Outline the advantages shopping centres have over traditional ‘main street’ shopping
strips.
8 Summarise some of the main types of online activities SME operators undertake.
9 Demonstrate how an online presence can assist a business owner to operate from
home.
10 Identify three types of businesses that can operate as home-based businesses and
explain why they are suited to this type of operation.
11 In small groups, propose what factors need to be considered when choosing a
location for the following businesses:
(a) fast-food outlet (b) dental surgery
(c) agricultural machinery supplier (d) HSC coaching college
(e) hair salon (f) panel beater.
Choose a spokesperson to share the group’s comments with the rest of the class.
12 Angela is considering purchasing an established sandwich bar that is located on a
main street, adjacent to a large industrial estate and near a parking area.
Explain to Angela the importance of each of these factors. In terms of a favourable
location, recommend whether Angela should purchase this business.
Extension
1 Copy and complete the following table. Propose three examples of items sold under
each of the methods of setting prices. Use the internet for your research.
Market-based Competition-based
Cost-based pricing pricing pricing
Example 1
Example 2
Example 3
2 ‘Location is a crucial factor for the success of some small businesses but not for
others.’ Critically analyse this statement and provide relevant examples.

3 Visit the local shopping centre or mall. Identify the best located shops. Determine
why they have the best locations. Arrange to interview the owners of some of these
stores and question them about the reasons for their location.
4 Choose a small business that you are familiar with and explain the ways in which this
business has advantages or disadvantages in relation to:
(a) visibility
(b) cost (in terms of likely premises expenses and transport costs)
(c) proximity to suppliers
(d) proximity to customers
(e) proximity to support services.
11.7 Finance
Finance refers to the funds required to carry out the activities of a business. It is a
crucial issue when an entrepreneur is identifying a business opportunity, especially
considering that it is often difficult to raise (see the following Snapshot).
M&M Real Estate — financing challenges

Kirsty Dunphey has always been entrepreneurial. She opened her first business at
15 and, in 2002, she was named the national winner of Telstra’s Young Business
Woman of the Year Award. She started her own business, M&M Real Estate, in 2001
SNAPSHOT in Launceston, Tasmania. The business has now evolved into Harcourts Launceston
after a joint venture with the real estate giant, Harcourts.
Dunphey says that she always ‘had goals for what I wanted my eventual, fabulous
career to be. It had to be fun and exciting, it had to give me the potential to push
myself and be really successful, and it had to impact on people’s lives in a positive
way.’ It wasn’t always easy though.
No bank would give her funding to open her real estate agency. She says that,
‘originally, trying to get funding for a real estate agency at 21 and to purchase
investment properties at a similar age was challenging. I ended up financing
my share of the business on a car loan and had to start small with investment
properties.’ She began her business operating out of a two-bedroom apartment with
her fellow director and no desks, no phone and no computers.
Despite Dunphey’s success, she says that early planning was ‘haphazard’. She
doubts, however, that a business plan could have predicted the fast growth that her
business experienced, but she still advocates having a business plan. She says, ‘even
❛ I ended up financing if it is on the back of an envelope or a full document it is good to have a reference
point as you can get swept up in day-to-day stuff’.
my share of the
Snapshot questions
business on a car 1. Explain why it was initially difficult for Kirsty Dunphey to find funding for
loan and had to start her small business.
2. Outline what she did to solve this problem.
small . . . ❜ 3. Kirsty started her share of the business with a car loan. State the risks that
might be associated with doing this.
4. Recommend other financing options available to Kirsty other than using a car
loan. Share your answer with the rest of the class.
A number of preliminary factors need to be reviewed before any action can

be taken. First, the entrepreneur must consider a series of questions as shown
in figure 11.22. These questions allow the entrepreneur to consider the financial
concerns of a business opportunity. Second, the entrepreneur needs to determine
the most appropriate source of finance.

How much debt How much do I need
can the business or expect to earn from
afford? the business?
From where will How much will it

I finance capital cost to start the
requirements? business?
What funds do I have How much capital

available and what will do I need to operate
I need to acquire? the business?
What financial success

have other similar
businesses achieved?
FIGURE 11.22 Questions to consider when assessing finance for a business
Sources of finance
Finance can come from a variety of sources, but two main types of sources are
available to a business. The business owner can contribute their own funds (equity Weblink
or capital), which is an internal source of funds. The business can also obtain loans Use the Financing a
business weblink in your
(debt) from external sources (see figure 11.23). Advantages and disadvantages are eBookPLUS to find out more
associated with each source of finance. about the different avenues
for securing finance in
business.
SOURCE OF FINANCE
Debt Equity
Short-term Long-term
borrowing borrowing
• Overdraft • Mortgage
• Commercial • Debentures
bills • Unsecured
• Factoring notes
FIGURE 11.23 The two main sources of finance available to business owners

BizWORD Debt finance
Debt finance relates to the Debt finance relates to the short-term and long-term borrowing from external
short-term and long-term borrowing sources by a business. The main advantage with debt financing is that the owner
from external sources by a business.
does not have to sell any ownership in the business. Also, debt financing has certain
taxation advantages. For these two reasons, debt financing is the most popular
source of finance used by businesspeople when starting a business.
Once the type of finance has been decided, the next step is to choose the
appropriate term or length of time. The two main terms for debt financing are:
• short-term — less than one year
• long-term — greater than one year.
FIGURE 11.24 Financing a business

is a little like making a choice in a lolly
shop — there are many options from
which to choose. A small business needs
to match the source of finance with the
purpose for which the funds are needed.
BizWORD
With an overdraft, the bank allows
a business to overdraw their account
Short-term borrowing is money needed to fund the day-to-day workings of
up to an agreed limit for a specified the business. For this reason, it is commonly called working capital: current
time, to overcome a temporary cash assets (receivables, inventories) less current liabilities (overdrafts, creditors). The
shortfall. main types of short-term finance are overdrafts, commercial bills and factoring.
A mortgage is a loan secured on Long-term borrowing, for a period of more than a year, is usually used to purchase
some type of asset. buildings, land, plant and equipment. The main types of long-term finance are
mortgages, debentures or unsecured notes.
Equity finance
Equity finance, also called equity capital, refers to the funds contributed by the
business owner(s) to start and then expand the business. If the SME is a company,
then this contribution is referred to as shareholder’s equity. Equity has an advantage
over other sources of finance because it does not have to be repaid unless the
owners leave the business. It is cheaper than other sources of finance because there
are no interest payments for the business. An owner who contributes the equity
to a business retains control over how that finance is used. A disadvantage is that
BizWORD the owner may expect a good return on their investment, but the small amount of
Equity finance is the funds finance may generate only low profits and low returns.
contributed by the business owner(s) Equity finance can also be raised in other ways — for example, by taking on
to start and then expand the business. a partner, or another partner, by seeking funds from another investor (who then
becomes an owner or shareholder) or by selling off any unproductive asset.

Cost of finance
The cost of finance will depend on the following:
• the type of finance
• the source
• the term.
The type of finance used by a business will influence the cost of capital. Debt
financing requires the use of money from an external source, such as a bank, BizWORD
building society or finance company, and the cost is the interest (cost of borrowing Interest is the cost of borrowing
money) charged by the institution. money.
If capital is raised through equity finance, no interest is charged because
the entrepreneur and/or partners and shareholders have invested the money.
The cost of using this form of capital is the return paid at the end of the
financial year if the business makes a profit. This return is called a dividend if
the business is a company. The company does not pay a dividend if it does not
return a profit.
The cost of equity finance can also be measured in terms of liability. Liability
is unlimited if the business is operated as a sole trader or partnership. This
means that creditors will sell all business and personal assets to recover the debt.
However, liability of a company is limited to just the assets of the company and
all funds put in by shareholders. The cost of capital will depend on the term and
type of finance used by the business. Table 11.4 outlines examples of the types
of loans available to businesses and the cost incurred for each type.
TABLE 11.4 Some types of debt financing available to businesses
Type Description Source Cost
Trading bank Available for the purchase of land and buildings Major trading Standard interest rate cost for fixed period
loans for a period of 3–10 years banks — e.g. of time
ANZ, Westpac
Overdrafts Used for short-term finance to assist in the daily Trading banks Higher interest rate (not designed for
operations of a business in times of need long-term use)
Personal loans Secured against the borrower’s own assets Trading banks, A general rate of interest with banks and
building building societies; finance companies usually
societies, charge a higher rate of interest than banks
finance and building societies, due to the higher risk
companies involved in lending.
Leasing finance Allows use of an asset without actual purchase Trading Interest rates that are above those for
banks, finance short- or medium-term loans, but benefit of
companies tax-deductible finance repayments
Owner’s equity Money invested by owner/partner or shareholders. Owner of the No interest on the use of these funds, but
or shareholders’ Risk of loss of the funds invested if the business business or a return (dividend) on profits to be paid to
equity fails, but share of profit if the business is a company shareholders
successful shareholder
Summary
• A business cannot commence without finance to enable it to pursue its activities.
• SME owners must determine how their business will be financed throughout the
life of the business.

• Businesses can obtain funds from either internal (equity) or external (debt)
sources.
• Debt finance relates to the short-term and long-term borrowing from external
sources by a business.
• Debt finance can be short-term e.g. overdrafts and commercial bills, or long-term
e.g. debentures or a mortgage.
• Equity is the funds contributed by the owner(s) of a business to start and expand
the business.
• The business owner must consider the cost of finance. This will depend on the
type of finance, the source and the term.
EXERCISE Revision
11.5
1 Account for the importance of finance in terms of establishing and operating a
business.
2 Distinguish between equity and debt finance.
3 Prepare a table with two columns to identify the advantages and disadvantages of
using debt to finance a business.
4 Prepare a table with two columns to identify the advantages and disadvantages of
using equity to finance a business.
5 Compare the following two forms of debt finance by completing the table below.
Advantages/
Form of debt Main features disadvantages
• overdraft
• mortgage
6 Recall the three factors that will impact on the cost of finance.
Extension
1 Contact a bank’s loan manager and request a summary of:
(a) the different types of lending options for small businesses
(b) methods of repayment on money borrowed.
Assess the most suitable form of finance for a person wanting to establish a
computer repair business that is operated from home.
2 In small groups, collect five advertisements offering different types of finance funding
for small businesses. Use information from magazines, banks and websites. Compare
the offers under the headings in the following table. Display your database in the
classroom.
Source Interest rate Borrowing limit Terms Main advantage
3 Analyse why it is important to match the term of a loan to the life of the asset for
which the finance was obtained.

11.8 Legal considerations and
influence of government on SMEs
Many licences, permits, approvals and authorities must be taken into account by
SME owners. All business owners have a legal obligation to observe the statutory
regulations when commencing and operating a business. Fulfilling all legal
obligations may be frustrating at times, particularly when more than one level of
government is involved. However, businesses that do not obey the law risk losing
customers and their reputation, being fined, or losing the right to continue trading.
The three levels of government (federal, state and local) all have regulations to
which small business owners must adhere. The regulations are imposed primarily
to promote fairness, protect consumers and encourage efficiency.
Business name
The Australian Securities and Investments Commission (ASIC) is now responsible
for a national business name registration service. Businesses need to register their Weblink
business name, except when the name is that of the owner and then it is optional. Use the Registering a
But if something is added to a personal name, such as ‘Pty Ltd’, ‘Motors’, ‘and business name weblink in
your eBookPLUS to discover
Associates’ or ‘and Co.’, then the business name must be registered. This is to more about registering a
prohibit anyone else from trading under a similar name. (If two traders want to business name and the
register the same name, the first application for registration is accepted and the process of registering them
second trader must register a different name.) in Australia.
Registration of a business name does not protect or establish any specific
rights to that name. If the business name is a crucial part of the business’s operation,
then it should also be registered as a trademark with the federal agency responsible
for intellectual property (IP Australia), which administers the Trade Marks Act 1995
(Cwlth).
FIGURE 11.25 Business names such as this one must be registered.

Zoning
Local government controls zoning regulations. In other words, they have the
authority to restrict where certain businesses can locate. Zoning regulations create
areas where land can be used only for particular purposes. These regulations specify
the areas in which residential, industrial, recreational or commercial activities may
take place. This ensures that activities that do not belong together, such as those
associated with factories and residential areas, are kept separate. This function
assists the local community in terms of planning.
When establishing a business, the owner must inquire with the local council
to determine which zoning regulations will affect their business now and in the
future. A manufacturing business that uses heavy equipment and wants to operate
a 24-hour shift, for example, would need to locate where it is allowed to operate
under zoning regulations. It would not be suitable close to a residential area,
mainly because the noise is a problem.
Health regulations
Local government also imposes health regulations under the Public Health Act 2010
(NSW). Each local council supplies businesses (primarily those dealing with food,
such as cafés, restaurants, butcher shops and bakeries) with the requirements and
standards to meet in order to receive a licence to operate. Some requirements
include:
• the temperature for food storage
• kitchen layout
• employee clothing requirements
• time for which food can be kept
• correct food handling.
A health inspector will assess premises regularly and often without warning to
ensure the business owner/operator maintains standards. If problems occur, then
the business is given a period of time to rectify the situation or they will be closed
down.
FIGURE 11.26 Health inspectors check

businesses regularly to ensure that they
are meeting health standards, particularly
food businesses.

NSW Food Authority — health regulations
watchdog
Cockroaches, food past its use-by-date and filthy cooking equipment have been
SNAPSHOT
found in the kitchens of some of Sydney’s popular eateries.
The NSW Food Authority has ‘named and shamed’ 13 restaurants and food
suppliers since December 1 for putting their customers at serious risk of food
contamination.
According to the Office of State Revenue, 836 food suppliers have been fined
$601 480 for food safety breaches in the six months from July 2011.
At Na Ju Gom Tang in Strathfield, food inspectors found uncovered meat
defrosting in a bowl on the floor, cockroaches and general poor hygiene.
Manager Young Hoon, who was fined $1320 in December, said insects had been
found after taking pest control measures.
‘When you do pest control, sometimes the insects come out’, he said.
‘They (the inspectors) also had a problem with some storage — there is a toilet
near the kitchen and there was some boxes in the corridor.’
Macksville Quality Meats in Macksville was fined $2640 in December for four
safety breaches including storing raw meat with ready-to-eat meat, poor hygiene, ❛ . . . putting their
incomplete monitoring records and poor temperature control.
‘I’m a small business. I got into trouble, I’m very sorry and I’ve fixed it all up. That’s
customers at
what I’ve got to say’, manager James Wilkes said. serious risk of food
Coolabah Tree manager Sharon Eaton copped an $800 fine in December for
repeated cleanliness-related offences. contamination. ❜
‘It doesn’t matter what we’ll do, the health inspector passes something one visit
and then jumps on something else the next’, she said.
Inspectors slapped repeat offender Jeme’s Fish Market in Ashfield with a
$880 fine in January for leaving fish hanging in a yard. A manager could not
be reached.
The Liverpool Rd outlet was added to the Food Authority’s name and shame list in
2009 after crabs were found stored in the restaurant’s toilets. Then primary industries
minister Ian Macdonald said at the time it was one of the ‘most outrageous cases of
food storage’ he had ever heard about.
At Auburn’s Harkola Food Worldwide, inspectors found sucuk, a processed meat,
being sold past its use-by date and fined them $1320.
‘It was clearly marked that it was out of date and reduced’, manager Joe Isaac
said.
Jarmack Holdings was fined because the food premises of vessel The Pontoon,
weren’t clean enough.
Source: Rosemarie Lentini, The Daily Telegraph, 27 February 2012.
Snapshot questions
1. Identify the health regulations that have been breached.
2. Assess the impact the fines and negative publicity would have on the
business.
Other regulations BizWORD

Competition and Consumer Act The Competition and Consumer Act
2010 (Cwlth) is a law that protects
The Competition and Consumer Act 2010 (Cwlth) has a function to protect both both consumers and businesses. It
consumers and business, and applies to virtually all businesses in Australia, including protects consumers from deceptive or
the commercial activities of government. First, it is designed to protect consumers misleading practices, and it regulates
from deceptive practices such as misleading packaging or misrepresentation of the trade practices of businesses.
the place of production. It also deals with product safety and the conditions and

warranties associated with products. Further, the act aims to regulate certain trade
practices that may restrict competition (such as monopolistic power) because they
can affect the price and quality of goods for the consumer. Table 11.5 outlines
Weblink
some of the undesirable and misleading practices that are illegal under the Act.
Use the Australian
Consumer Law weblink
explore the Competition and
Consumer Act 2010.
FIGURE 11.27 Consumers are

protected under the Competition
and Consumer Act against misleading
advertising or false representation on
the part of the business. It is misleading
to suggest that a product has certain
characteristics when it has not.
TABLE 11.5 Undesirable and misleading practices illegal under the Competition and
Consumer Act
Illegal practices Description
Misleading or deceptive conduct Advertisements must not use words that are
deceptive or claim that a product has some specific
quality when it does not. Such actions convey a
false impression of the exact nature of the product.
Additionally, price reductions or specials must be
genuine.
Unconscionable conduct This is conduct in business transactions that is unfair

or unreasonable and goes against good conscience.
False or misleading representations A false or misleading representation is a statement

regarding goods or services of fact that is untrue, such as claiming that a motor
vehicle has a certain fuel consumption performance
when it does not.
Offering gifts and prizes in connection It is illegal for a business to offer a prize in
with the supply of goods and services connection with the supply of goods and services
and then not providing them and not provide them.
Conduct that may mislead the public For example, using a brand name similar to a well-
known brand, or using an Australian-made logo
when the product was made overseas

Illegal practices Description
Bait advertising A business attempts to attract customers by

advertising some products at lower prices.
When the advertised products quickly run out,
customers are directed (or switched) to higher
priced items.
Referral selling This occurs when a business offers a customer a

special deal or special price if the customer refers
other potential customers to the seller. This is
illegal because it may encourage consumers to
spend more money than they planned with the
expectation that they may recoup some if they
encourage others to buy.
Breaches of any of these provisions may result in penalties of up to $1.1 million

for companies and $220 000 for individuals. Other actions may include an
injunction — that is, a restraint on a person — or the awarding of damages.
Summary
• All business owners have a legal obligation to observe the statutory regulations
when commencing and operating a business.
• Of the many laws and regulations that small business owners need to comply
with, some important regulations relate to:
–– business name
–– land zoning
–– health regulations.
• The Competition and Consumer Act 2010 (Cwlth) is a federal government statute
that aims to:
–– promote fair trade and competition in the marketplace
–– protect both consumers and businesses from deceptive or misleading practices.
Revision EXERCISE
11.6
1 Recall the main objectives of imposing government regulations.
2 State when it is compulsory to register a business name.
3 Outline the purpose of land zoning.
4 Demonstrate how land zoning will influence where specific businesses can locate.
5 Identify the types of health regulations that local councils impose on businesses.
6 Read the section ‘Competition and Consumer Act’ on pages 367–8. Complete the
paragraph below by recalling the correct word from the list that follows.
deceptive safety warranties

price Consumer regulate
consumers misleading competition
The Competition and ____________ Act 2010 (Cwlth) has a function to protect
both __________ and business. First, it is designed to protect consumers from
__________ practices such as __________ packaging or misrepresentation of the
place of production. It also deals with product __________ and the conditions and
__________ associated with products. Further, the Act aims to __________ certain
trade practices that may restrict __________ (such as monopolistic power) because
they can affect the __________ and quality of goods for the consumer.

7 Refer to table 11.5 on pages 368–9. Outline two practices that are illegal under the
Competition and Consumer Act.
8 State the legal penalties or remedies that might apply after a successful prosecution
for breaches of restrictive trade practices provisions of the Act.
Extension
1 Use the Australian Business Licence and Information Service (ABLIS) weblink in
Weblink your eBookPLUS to find the NSW Business Licence Information Service’s start-up pack
Australian Business section. Record the types of licences the following businesses would need to begin
Licence and Information and operate:
Service (ABLIS) (a) beauty salon
(b) electrician
(c) tour operator.
Appreciate the importance of having a strict licence system in operation.
2 Imagine you are about to open a pizza restaurant. Investigate the government
regulations you would need to satisfy.
3 Evaluate the role of the ACCC. To help you, use the Australian Competition and
Weblink Consumer Commission weblink in your eBookPLUS.
Australian Competition
4 ‘Government regulations are needed to create a fair marketplace for businesses and
and Consumer
Commission consumers.’ Evaluate the accuracy of this statement.
11.9 Human resources

As outlined in chapter 8, employees are the most valuable resource of any business.
Hiring the ‘right’ people at the ‘right’ time, with the ‘right’ skills in the ‘right’
quantity is crucial for business success. Consequently, one of the most important
influences in establishing a SME is staffing: the people side of the business.
In the establishment phase, the SME owner must answer one crucial staffing
question: How many employees, if any, will be required to operate the business?
If a SME owner decides to hire staff, many sources are available. The source
chosen will depend on the size of the business, the type of position available and
the nature of the labour force in the business’s particular area. Figure 11.28 outlines
the main sources of employees available to a business.
Temporary/casual
services
Schools, universities
Advertisements in
or
the media
TAFE colleges
MAIN SOURCES OF
EMPLOYEES FOR A BUSINESS
Australian
JobSearch Internal searches
Private employment/
Word of mouth
recruitment agencies
FIGURE 11.28 The main sources of employees for a business

Once the business is operating and if people are employed, the SME owner must
fulfil a number of important human resource requirements that deal with:
• staffing objectives
• specific duties to be performed
• the skill base of existing staff
• a forecast of future staff requirements and skills
• methods the business will use to recruit extra staff
• a form of the organisational chart
• administrative records to be kept to manage the employees.
Of all these requirements the most important are those that deal with the skill
level of employees. Skilled employees are highly productive and result in creating
wealth for the business.
Skills
A business owner should always remember that the overriding objective of recruiting
is to attract a pool of qualified applicants — people with the most suitable skills —
from which to choose the most appropriate person for a particular job. Skilled
employees are more productive and create wealth for the business. This is the same
principle that a sports coach uses when selecting a team. To improve the chance of
winning, the coach wants those players who possess the highest level of skills.
The skill base of existing employees should also be detailed so that training
needs can be identified. If the skills level of employees is not adequate enough for
them to fulfil their jobs effectively, then the business owner has two options:
• provide training to improve the skills level of existing employees
• recruit people who have the required skills.
FIGURE 11.29 It is important to recruit

people who have the required skills since
a business’s most important asset is its
people. Having the right people with the
right skills in the right position can make
the difference between business success
and failure.
Costs — wage and non-wage

A business will only employ someone if the return is greater than the cost. The
total cost of an employee is not solely the wage or salary paid. The employer is also BizWORD
responsible for other employee expenses, referred to as on-costs, which account On-costs are payments for non-wage
for around 30–40 per cent of the total remuneration package (see the following benefits.
Snapshot).

Staffing a business — on-costs
When employing new staff, there are many other costs that are not always taken
into account. The following case study reveals that these hidden costs quickly add
up. The on-costs in the table are based on a salary of $50 000.
SNAPSHOT Cost breakdown Amount $
1. Superannuation. The employer must pay 9.5 per cent 4 750

superannuation of all employees earning more than $450 in a
calendar month.
2. Annual leave. Normally 4 weeks per year. This means that the 673
employer must pay an additional 17.5 per cent annual leave
loading for four weeks annual leave.
3. Public holidays. There are about 10 public holidays in Australia 1 953

each year. This is 3.85 per cent (2/52).
4. Sick leave. Most awards provide for 10 days each year. This is 1 953
another 3.85 per cent.
5. Workers’ compensation insurance. The rate charged varies 2 500

broadly depending on the risk of the industry. In some instances
it can be 15 per cent. For this example a rate of 5 per cent will be
used.
6. Payroll tax. This state government tax is levied once an employer’s 2 725
❛ . . . the total cost of annual payroll (including superannuation) exceeds a certain
amount. In New South Wales the threshold is $750 000 and the
employing someone rate is 5.45 per cent.
on a base salary of 7. Recruitment. The average cost of recruiting the base-grade 2 500
employee is about $5000. This includes the cost of recruiting, lost
$50 000 is $67 054. ❜ production and training of the new employee. For this example,
assume the employee stays for 2 years.
Total of on-costs 17 054
The total of the on-cost for this ‘average’ employee is $17 054. Businesses are
responsible for these costs and must budget accordingly. Therefore, based on this
case study, the total cost of employing someone on a base salary of $50 000 is
$67 054.
The above table only deals with the most common on-costs for the ‘average’
employee. For some employees, especially senior executives, other specialised on-
costs can include fringe benefit tax, car allowance, housing subsidy, travel and meal
allowance, bonus fee and association membership fees.
Snapshot questions
1. Calculate the percentage on-costs represent of the base salary.
2. Explain why on-costs are sometimes referred to as ‘hidden costs’.
The main on-costs include:

• work health and safety requirements
• long service leave
• sick leave
• superannuation
• holiday pay

• study leave
• maternity and paternity leave
• workers’ compensation
• leave loading. BizWORD
Two examples of these on-costs (non-wage costs) are superannuation and leave
Superannuation is a scheme set up
loading. by the federal government. It requires
all employers to make a financial
Superannuation contribution to a fund that employees
Under the federal Superannuation Guarantee scheme, all employers must make can access when they leave or retire
from a job. The percentage an
provision for employees’ superannuation. Superannuation (otherwise known
employer must contribute will increase
as super) requires all employers to make a financial contribution to a fund that gradually to 12 per cent by 2023.
employees can access when they retire. The main aim of superannuation is to give
employees a sum of money that can be used:
• for their retirement
• if they become an invalid
• by the beneficiaries upon a person’s death.
In some circumstances they can access the money if they leave a job, although tax
disincentives apply. Employers are not required to provide for the superannuation
of employees earning less than $450 per month or for employees aged under
18 years old and working 30 hours or fewer per week. BizFACT
The employer’s main obligation is to make a financial contribution — presently All contributions must be made to
a complying superannuation fund
9.5 per cent of an employee’s earnings for their ordinary hours of work — to their
that meets the federal government’s
employees’ superannuation account. standards, so as to protect the
employee’s superannuation. Since
2005, many employees have been
able to choose into which fund
their employer superannuation
contributions are paid.
FIGURE 11.30 Prior to July 2013,

employers were not required to provide
superannuation for workers aged over
70 years. There is now no upper age limit
for making superannuation guarantee
contributions. The removal of this limit
is to encourage people to stay in the
workforce longer.
As with taxation, employers are required to keep records of all superannuation-

related transactions, including payments contributed, payroll and employee
records, and the level of entitlement of each employee. Employees are allowed
access to all documentation, especially when leaving a workplace.
Annual leave loading BizFACT

An extra amount — presently 17.5 per cent — is added to an employees’ holiday There is pressure from employer
pay. The amount is calculated on the four weeks annual leave to which each associations to abolish leave loading.
fulltime, permanent employee is entitled. It was introduced at a time when workers’

wages were low and most worked more than a 40-hour week. Unions negotiated a
percentage loading for workers so that the average family could afford to go away
for a holiday (in addition to paying their regular rent or house repayments).
Summary
• One of the most important influences when establishing a SME is staffing.
• If a SME owner decides to hire staff, many sources are available.
• The overriding recruiting objective is to attract a pool of qualified applicants
with the most suitable skills.
• Skilled employees are more productive and create wealth for a business.
• A business will employ someone only if the return is greater than the cost.
• On-costs are payments for non-wage benefits, including long service leave,
workers’ compensation and annual leave loading.
EXERCISE Revision
11.7
1 Explain why hiring the ‘right’ employee is so important for a business.
2 Identify three sources of external employee recruitment.
3 ‘Skilled employees are more productive and create wealth for the business.’ Discuss.
4 Recall two options a business owner has if the skills level of employees is not
adequate enough for them to fulfil their jobs effectively.
5 Unscramble the following on-costs and then construct a sentence to explain their
meaning.
(a) ypa dyohlia
(b) eelav gaoldni
(c) nnuepsnrtoiaau
6 Explain why on-costs are also referred to as non-wage costs.
7 Outline what the obligation of employers is towards employees in relation to
superannuation.
8 Discuss the likely impact of abolishing leave loading from the perspective of (i) an
employer and (ii) an employee.
Weblink Extension
Job interviews 1 Use the Job interviews weblink in your eBookPLUS to construct a list of what you
consider to be the three most important do’s and three most important don’ts for
people conducting an interview. You could also enter ‘interviewing applicants’ in your
search engine to find other websites that offer hints for employers when conducting
an interview.
2 Competent employees are important for the success of any business. Imagine you need
to employ a new staff member in your boutique store. You choose an inexperienced
salesperson. Propose three strategies you could use to train the employee.
BizWORD 11.10 Taxation
Taxation is the compulsory payment Taxation is the compulsory payment of a proportion of earnings to the government.
of a proportion of earnings to the Taxation is an important issue when a person is considering all aspects of opening
government. a business.
Federal and state taxes

Many different federal and state taxes apply to different businesses, and it is
important that a person starting a business becomes familiar with all appropriate
tax requirements. The main taxes that affect a business (see table 11.6) are imposed
by the federal and state governments.

TABLE 11.6 Major taxes that apply to businesses
Tax Levied by
Income tax — pay-as-you-go (PAYG) Federal government
• Imposed on the employee
• Taken from the employee’s salary or wage directly
• Lodged with the tax department by the business
• Detailed in a group certificate that the employee receives at
the end of the financial year
• Taxed at progressive tax rates — the more you earn, the
higher your rate of tax.
Fringe benefits tax (FBT) Federal government
• Tax on the provision of a benefit to an employee — such
as cars for private use, low-interest loans, entertainment
expenses, and housing and accommodation — in place of
salary or wage
• Paid by the employer at a rate of 46.5 per cent of the value
of the benefit provided. Weblink
Goods and services tax (GST) Federal government Use the ATO weblink in
• A broad-based tax of 10 per cent on the supply of most your eBookPLUS to visit the
website of the Australian
goods and services consumed in Australia
Taxation Office.
• See page 376 for a detailed explanation
Company tax Federal government
• Paid on the earnings of a company and calculated on
the company’s taxable income (which is income left after
allowable deductions are calculated)
• Currently calculated at 30 per cent of taxable income
Capital gains tax Federal government
• Calculated on the profit made on the sale of assets acquired
after 19 September 1985, including the sale of a business
or properties bought and resold within 12 months
Stamp duty New South Wales
• A tax levied on the transfer of property (e.g. businesses, real government
estate and shares)
Land tax New South Wales
• A tax on land owned by individuals or businesses over a government
certain value (in 2013 it was $412 000 or more)
• Land used for primary production or an individual’s primary
residence are exempt from land tax
Payroll tax New South Wales
• Payable on wages paid by an employer to their employees government
on payrolls that exceed $750 000 at a rate of 5.45 per cent
(2013)
All businesses must pay their taxes if they wish to continue to operate as a
legitimate business. Small to medium enterprise owners should structure their
records and finances in such a way that they have the necessary information and
money to efficiently manage their taxation obligations. Apart from the moral and BizFACT
ethical considerations, tax avoidance normally results in an Australian Taxation The ATO is the best free resource
Office (ATO) investigation and the possibility of a fine or prison sentence. for any queries a small business
Different taxes apply to different businesses, so a person operating a SME must owner may have about his or her tax
become familiar with all appropriate tax requirements (see the following Snapshot). obligations.
Businesses pay taxes to their federal and state governments on the basis of what
they earn, what they own and even what they purchase. One of the most important
tax obligations is the goods and services tax (GST).

Operating a business — tax law
Under tax law, a person operating a business must keep records that record
and explain all transactions. These records include any documents that are
relevant for the purpose of working out the person’s income and expenditure.
SNAPSHOT The person must keep his or her records in writing in the English language
or, if not in a written form (for example, in an electronic form such as a
computer system), in a form that is readily accessible and convertible into
writing in English.
Any books of accounts, records or documents relating to the preparation of an
income tax return must be retained for a period of at least five years, either on paper
or electronically. If a business owner does not keep the right tax records, they can
incur penalties.
Business records that must be kept include:
• records of all sales transactions
• records of all business expenses
• lists of creditors or debtors
• records of depreciating assets
• capital gains tax records
• records relating to employees and contractors e.g. tax file numbers, wages or
❛ Under tax law a payments made, superannuation contributions etc.
Fringe benefit tax legislation requires records to be kept for five years.
person operating Other statutory provisions, such as corporate law, require a company to
a business must retain records for seven years after completion of the transaction to which
they relate.
keep records that
record and explain all Snapshot questions
1. Identify the records a businessperson must keep.
transactions. ❜ 2. Outline how these records must be kept.
3. State how long these records must be kept.
Goods and services tax (GST)

The goods and services tax (GST) is a broad-based tax of 10 per cent on the
supply of most goods and services consumed in Australia. One of the stated
purposes for the introduction of the GST was to make it more difficult for
businesses and individuals operating in the ‘cash economy’ to avoid tax. The GST
BizWORD
had a major impact on many aspects of business operations because businesses
The goods and services tax (GST) is
became responsible for collecting the tax on behalf of the government.
a broad-based tax of 10 per cent on
the supply of most goods and services The GST is paid at each step in the supply chain, with businesses charging GST
consumed in Australia. as part of the price of the goods and services they supply. Any business with an
An input tax credit is an allowable annual turnover of $75 000 or more operating within Australia must register for
tax deduction that a business can the GST. The business is then entitled to claim input tax credits from the ATO for
claim for any GST included in the price any GST included in the price of inputs that the business purchases. This means
of business inputs. the consumer bears the cost of the GST, not the business providing the good or
The business activity statement service. It is the responsibility of the business, however, to pay to the ATO the
(BAS) records a business’s claim for
amount of GST collected from the consumer.
input tax credits and accounts for GST
payable. The GST requires all registered businesses to prepare a set of accounts — the
business activity statement (BAS) — at regular reporting intervals, either monthly
or quarterly. The key to successfully managing GST reporting and associated
‘paperwork’, therefore, is to be organised, especially in terms of the input tax
credit. Failure to claim for these credits will result in them becoming a cost to the
business.

The GST system — how it works
Timber merchant Business activity statement
sells timber for $110 GST on sales $10
including $10 GST
less input tax credit
GST to pay
$0
$10 $10 GST paid by timber
SNAPSHOT
merchant to ATO
Furniture
manufacturer
Business activity statement ❛ The furniture
sells table for $220
GST on sales $20
manufacturer, who is
including $20 GST less input tax credit $10
GST to pay $10 $10 GST paid by
registered for GST, is
manufacturer to ATO entitled to an input
Retailer sells
table for $330
Business activity statement
tax credit . . . ❜
GST on sales $30
including $30 GST
less input tax credit $20
GST to pay $10 $10 GST paid by retailer
to ATO
Consumer pays $330 (including $30 GST to the retailer) $30 total GST paid
GST is paid at each step in the supply chain. GST-registered businesses must
include GST in the price of goods and services they supply or sell. If you’re registered
for GST, you can claim back the GST included in the price of your business purchases
as input tax credits.
Registered businesses collect GST from sales to their customers, then claim back BizFACT
the GST on business purchases as input tax credits. The cost of GST, therefore, flows While the federal government elected
along the supply chain and is finally included in the price paid by the end consumer. in 2013 has ruled out increasing the
Consumers cannot claim input tax credits, so while the liability for paying the GST GST in its first term of office, some
rests with GST-registered businesses and organisations, the economic cost is borne by economic commentators argue that
the end customer. This can be seen clearly in the example above of the manufacture expanding the base to cover more
and sale of a piece of furniture. goods such as fresh food, health
The example above shows how three businesses, each registered for GST, charge and education or increasing the
and pay the GST. The timber merchant sells timber to a furniture manufacturer for percentage may be necessary in the
$110, including $10 GST. The manufacturer uses the timber to make a table, which future to fund Australia’s federal and
he sells to a furniture retailer for $220, including $20 GST. The retailer then sells the state expenditure.
table to a consumer for $330, including $30 GST.
The timber merchant pays $10 GST to the ATO. The furniture manufacturer, who
is registered for GST, is entitled to an input tax credit for the $10 GST, which is
included in the price paid to the timber merchant. The manufacturer will offset that
$10 against the $20 collected on the sale of the table to the furniture retailer and
pay $10 GST to the ATO.
The furniture retailer, who is registered for GST, is entitled to an input tax credit
for the $20 GST included in the price paid to the furniture manufacturer. The retailer
will offset that $20 against the $30 GST collected on the sale of the table to the
consumer and pay $10 GST to the ATO.
The consumer who buys the table pays the GST, because consumers cannot
register for GST and cannot claim input tax credits.
Snapshot questions
1. State the total GST paid in this example.
2. Explain how this amount was calculated.
3. Identify who can claim an input tax credit.
4. Outline why the consumer pays the GST.

The Australian Business Number (ABN)
As part of the tax reforms and the GST in 2000, the Australian government
introduced the Australian Business Number (ABN). The ABN is a single identifying
BizWORD number that a business uses when dealing with government departments and
The Australian Business Number agencies. The ABN also allows the business to participate in the GST system,
(ABN) is a single identifying number because input tax credits can be claimed only if a supplier has an ABN. If a business
that a business uses when dealing does not have an ABN, tax at the rate of 46.5 per cent can be withheld. This is
with government departments and known as withholding tax and can be avoided by quoting an ABN on invoices for
agencies.
the supply of a good or service.
Local government rates and charges

Although they are often considered of lesser importance compared to the numerous
state and federal taxes, local government rates and charges must be considered and
budgeted for. Rates — a system of property taxation usually based on the value of
land — is the main local government charge a business will face. The three main
areas in which fees or charges are levied are:
• water and sewerage
• waste management services
• development and building approval fees
• inspectors’ fees
• parking permits
• use of public property.
The income generated from these taxes is used to provide better facilities for the
local community. Sometimes a local council will offer exemptions or reductions
in the rates and charges to encourage people to establish businesses within the
council area.
Summary
• Taxation is the compulsory payment of a proportion of earnings to the
government.
• Businesses are responsible for checking their obligations concerning income tax
(PAYG), fringe benefits tax, goods and services tax, company tax, capital gains
tax, stamp duty, land tax and payroll tax.
• Goods and services tax (GST) is a 10 per cent value added tax imposed on most
goods and services.
• The customer pays GST when buying goods and services, which is passed on to
the business that in turn passes it on to the Australian Taxation Office (ATO).
• GST collection and payments to the ATO are recorded on the business activity
statement (BAS), which is also the means by which a business can claim input
tax credits.
• The Australian Business Number (ABN) is a single identifying number that a
business uses when dealing with government departments and agencies.
• Property rates is the main local government charge a business will face.
EXERCISE Revision
11.8
1 Distinguish between income tax — pay-as-you-go (PAYG) — and company tax.
2 Recall an employer’s obligations in relation to the stamp duty tax system.
3 Distinguish between fringe benefits tax and capital gains tax.
4 State the business owner’s requirements in relation to structuring financial records for
taxation purposes.

5 Explain the operation of each of the following state taxes:
(a) payroll tax
(b) land tax.
6 Denise runs a real estate agency, which is registered as a proprietary company. She
employs eight permanent staff and three casuals and paid a total of $870 000 in
wages in the last financial year. The business provides five employees with a car each
to assist them to visit properties as well as for their own personal use. Denise regularly
uses her business contacts to buy cheap properties, renovate them and sell at a profit.
Her business owns its own premises, which are currently valued at over $1 million.
Identify and explain each of the Commonwealth and state taxation obligations of
Denise’s business.
7 State what the following acronyms represent.
(a) GST
(b) BAS
(c) ABN
8 Define the term ‘goods and services tax (GST)’.
9 Explain the importance of a BAS.
10 Describe the effect of the system of input tax credits on businesses and consumers.
11 An electrical goods manufacturer sold a dozen refrigerators to an electrical retailer for Digital doc
$880 each, which included $80 GST per refrigerator. The electrical retailer then sold Use the Chapter summary
each of the refrigerators to its customers for $1320 each, including GST. document in your
(a) Calculate the amount of GST paid by each customer. eBookPLUS to compile your
(b) Identify who, in this example, can claim input tax credits.
(c) Calculate the amount claimed as an input tax credit for each refrigerator by the Searchlight: DOC-14120
electrical retailer.
(d) Calculate how much GST the electrical manufacturer would be required to pay to
the ATO.
(e) Calculate how much GST the electrical retailer would be required to pay to the
ATO.
12 Recall why it is important for a business to apply for an ABN.
13 Identify the main local government rates and charges.
Extension
1 In small groups, critically analyse the following statement: ‘In today’s commercial
world, tax avoidance happens. The only problem is being caught.’ Choose a
spokesperson to share the group’s comments with the rest of the class. Digital doc
2 In small groups, arrange an interview with a local accountant. Create either a two- Test your knowledge of key
page written or five-minute oral report. Use a word-processing package for the terms by completing the
written report or a multimedia application for the oral report. You might wish to Chapter crossword in your
eBookPLUS
develop your report under the following headings:
(a) types and rates of tax payable by a small business Searchlight: DOC-14307
(b) electronic recording systems for tax records
(c) completion of the business activity statement
(d) penalties for non-payment or avoidance.

CHAPTER 12
The business planning process

12.1 Introduction
Businesses do not plan to fail, they fail to plan — this quotation is a sad reflection of
reality. SME owners start keen, convinced their idea will succeed. They are full
of optimism. However, while enthusiasm is an essential ingredient in the success
of a business, it is not enough by itself. If prospective business owners neglect
to undertake thorough planning, so they can put together a carefully researched
business plan, the stage is set for business failure. Optimism will turn to despair as
the small business owner faces the grim reality. All SME owners must have a good
understanding of the:
• role of the business plan
• process of business planning.
BizWORD The role of the business plan

A business plan is the ‘road map’ A business plan is similar to a road map. You would not go on a year-long
for future growth and development trip around Australia without first preparing a plan. You would need to decide
within a business. It sets out the
which roads to take, where to stay and what sights to visit. During the trip, you
desired goals and direction of the
business. would need to constantly refer to the map to make sure you were heading in the
right direction. Also, on hearing about closed roads or experiencing mechanical
problems, you would need to modify your travel plans to suit the new conditions.
FIGURE 12.1 A business plan is similar

to a road map — it plots the route the
business will travel.
BizFACT
The first task of anyone wanting to
commence a business is to undertake
thorough planning. The planning
will provide the foundation on which
the business will be built. Strong,
firm foundations will usually result in
a successful business.

It is amazing that many people put more planning into a holiday than they do
into their business. Without planning, the business owner does not know where
the business is heading. The business ‘journey’ will probably end in disaster, with
the owner asking, ‘How did I end up here?’ Therefore, the essential role of the
business plan is to act as a guide or map on which the business’s journey can be
plotted. It is one of the most useful management tools a business owner can use.
In all businesses, the best results come from effective management and detailed
planning (see the following Snapshot).
kikki.K — planning to succeed

Kristina Karlsson, founder and creative
director of kikki.K, started her business in
2001. She had a passion for stationery and
opened her first kikki.K store in Melbourne
Central. The store featured her stationery
SNAPSHOT
products as designer accessories. Karlsson
says that ‘having limited financial resources
to start and grow my business was probably ❛ I really had to do
the hardest challenge I faced in getting
kikki.K off the ground. The banks certainly
my homework
weren’t too supportive in our early years. and develop a
They needed high levels of security, which
we couldn’t give — so I ended up selling comprehensive
the house to fund business development. It
meant that I really had to do my homework
business plan. ❜
and develop a comprehensive business plan.’
A business plan should be a ‘living
document’. It needs to change as the
business changes. Kristina Karlsson believes
that business plans must be flexible so that if
something is not working, the business can
adapt accordingly.
Today, kikki.K has 83 stores in Australia and New Zealand, as well as two in
Singapore. The business has also grown its product range beyond stationery to bags and
homewares. It recently announced plans to franchise up to 10 of its Australian stores.
Snapshot questions
1. Recall how Kristina financed her business development.
2. State why the banks were not supportive in her early years of business.
3. Outline why it was important for Kristina to have a business plan.
4. Explain what Kristina means when she says that a business plan should be a
‘living document’.
However, preparing the business plan is only the first stage. Many SME owners
realise the need to prepare a business plan before establishing a business, but they
then make a fundamental mistake — they forget to constantly refer back to their
Weblink
plan. This would be similar to a student preparing a set of summary notes for a
Use the kikki.K weblink
topic and then never looking at them. in your eBookPLUS to visit
Even if a SME owner manages to avoid the mistake of not regularly consulting Kristina Karlsson’s kikki.K
the business plan, there is still another trap. An inexperienced person may not be website.
flexible enough to modify their business plan as the internal and external business
environments change. Sticking too rigidly to a plan, and not adapting it to suit the
changed conditions, can be as detrimental as not having a plan.
The business planning process • CHAPTER 12 381

The business plan must always be seen as a working document. It is not
a straitjacket restricting the business and preventing change. The unexpected can
and often does happen. Unfavourable factors, such as a customer not paying an
account or a new competitor moving into the market, will force the business owner/
manager to modify their plan. Favourable conditions such as a new marketing
opportunity will need to be seized and they will also require some modification to
the plan.
What is a business plan?

A business plan is exactly what it says — a plan for a business. It is a written
Weblink
statement of the business’s goals and the steps to be taken to achieve them. In other
Use the Business plan
resources weblink in your words, it is a summary and an evaluation of a business idea in written form. The
eBookPLUS to explore the ‘writing’ is important because ideas tend to be no more than wishful thinking until
Australian Government’s transferred to paper. Thinking about something is not planning. A few ill-conceived
business plan guides and
ideas scribbled on the back of an envelope are likely to lead to business failure.
templates.
A comprehensive business plan will assist when arranging finance for the
business. The plan provides information that lenders need to know and it also
shows that the business is being properly organised and managed.
If a business plan is so important, why do some people attempt to establish
a business without first preparing one? Figure 12.2 highlights some of the main
reasons.
Reason 1 — Let’s get on

with it straight away. Reason 2 — Planning
These people believe costs too much.
planning is a waste of time Business planning does
and effort. This attitude involve gathering and
often leads to impulsive analysing information but
actions and mistakes. it need not be expensive.
Reason 6 — I’ll do it later; Reason 3 — You have to

I don’t need it at this stage. be an academic to plan.
Just working hard is no While some of the terms
longer a guarantee of used may initially sound
business success. Planning confusing, business
and revising the plan need planning is no more
to be undertaken at all difficult than preparing
stages of the business’s life. a holiday.
Reason 5 — What do they Reason 4 — I’m only a

tell me that I don’t small business owner.
already know? Businesses of all sizes need
Without a business plan it is to set goals, prepare
impossible to shape the strategies and evaluate
future, make projections and the outcome.
evaluate the business’s
performance.
FIGURE 12.2 The main reasons for business owners’ failure to plan
Planning is not always easy and it can be time consuming. However, the time
invested in planning is never wasted in the long run, for, with it, the chances of
success are greatly improved.

Types of business plans
Just as no two businesses are identical, neither are any two business plans. Each plan
will be unique, containing information and strategies that apply to one particular
business. A business plan for a transnational corporation, for example, will be
detailed and comprehensive. It will add up to hundreds of pages, having taken BizFACT
much time, effort and money to prepare. Its presentation will be highly professional A business plan is essential for those
business owners who wish to thrive
and distributed to a large number of the company’s senior management. On the
and not just survive.
other hand, a business plan for a SME may be only 10–15 pages in length, word
processed at home and circulated to only a few people.
FIGURE 12.3 There is nothing

mysterious about planning. It simply
means deciding in advance where
the business is heading and working
out the details of how to get there.
Planning is required to achieve your
goals in assessment tasks. It is the same in
business.
Depending on variables such as the product, the market, the size of the business
and its location, each business will have a unique set of information in its business
plan. However, regardless of their type, length, appearance and distribution, all
business plans have a number of common elements, as shown in table 12.1.
TABLE 12.1 The common elements of a business plan
Element Purpose
1. Executive summary A brief overview of the plan
2. Goals What the business hopes to achieve
3. Strategies An overview as to how the business will attempt to

achieve the goals
4. Business description and outlook An overview of the industry in which the business will
operate, including a situational analysis
5. Management and ownership The nature and type of organisational structure
6. Operational plans Details the production process and the people required
now and in the future
7. Marketing plans The product, price, promotion and

distribution details
8. Financial plans A description of the business’s financial

needs and methods for evaluating its performance
9. Human resource plans Details both the present and future staff requirements

While all business plans contain similar information, a comprehensive and
detailed business plan is most beneficial. A sketchy, quickly prepared business plan
will not serve any lasting purpose. Some plans may only briefly refer to some of the
areas, but all points need to be at least considered.
Benefits of a business plan

The planning process acts as a link or bridge between the business owner’s ideas
BizFACT and the actual operation of the business; it is a way of turning dreams into
‘Preparing a business plan allowed me reality. The written plan becomes a useful reference point for the running of the
to think through a lot of important
issues before commencing my
business. Any small business with a plan has direction, which ultimately saves
business. This helped avoid many money, time and effort, and also increases the likelihood of success. Preparing a
pitfalls.’ Troy Bartlett, owner of business plan is very similar to completing an assessment task. The result will
Bartlett Precision Manufacturing. reflect the amount of time, effort and research that goes into the plan and its final
presentation.
Helps test the viability

of the business
Identifies the business’s Assists the business to

strengths and weaknesses be proactive rather
than reactive
BENEFITS OF DEVELOPING
A BUSINESS PLAN
Forces the small business

Assists in maintaining
owner to justify his or her
the business operation,
plans and actions
especially focusing
attention on the goals
and objectives
Indicates the owner’s ability
and level of commitment
FIGURE 12.4 The benefits of developing a business plan
Glenstock Eats and Antiques — it’s all

about the plan
Roberto Quesnay had spent the past six months researching what was involved in
commencing a small business. He had the original idea when he visited Bendigo
SNAPSHOT during his last holiday break and believed he had identified a genuine business
opportunity. The initial feasibility study, undertaken with the assistance of his
accountant, revealed that he could make a success of his business concept — an
antique and coffee shop combined. He had decided:
• to operate as a sole trader
• to commence from scratch
• upon a suitable location.

Roberto was now ready to begin
the next stage — preparing the
❛ The business plan
business plan. The business plan would act as a
would act as a ‘road map’ for
his business and would largely “road map” for his
determine the basis of his success.
The plan would set out the
business . . . ❜
desired goals and directions of the
business. In Roberto’s present job
as purchasing officer for a large
fashion retailer, he had become
aware of the crucial importance of
adequate planning, especially its
importance in obtaining finance.
Roberto did not have adequate money of his own to commence the business,
so the plan would need to be comprehensive enough to convince financiers that
he knew what he was doing, provide a clear idea of what he wanted to achieve,
and outline how he would accomplish the objectives. The business plan would be
professional in its presentation, detail the legal, operational, financial and marketing
aspects, and provide an overview of the business’s main activity. This would give
financiers confidence in his business abilities. Roberto had recently witnessed a
friend’s business fail through lack of planning and this had taught him a valuable
lesson.
At a recent small business seminar, his local Business Enterprise Centre
representative told Roberto that preparing a business plan would force him to
examine and develop his business concept carefully. Roberto was going to enjoy the
challenge of writing his business plan.
Snapshot questions
1. Outline how Roberto Quesnay may benefit from preparing a business plan.
2. State the operations, financial and marketing factors that Roberto Quesnay
should include in his business plan.
3. Predict whether you think Roberto Quesnay has the necessary planning skills
to make a success of his business.
12.2 Business planning process

Planning is a process, a series of actions to achieve a goal. If you decide to have
a party next Saturday night, for example, this becomes your goal. Unless you
undertake some planning you will be unable to achieve this goal. You will need to
invite people, organise food and drinks, arrange music and decide on a venue. These
tasks are the ‘series of actions’ — an action plan — that you need to undertake to BizWORD
achieve the goal. Planning is therefore the preparation of a predetermined course Planning is the preparation of a
of action for a business. It refers to the process of setting objectives and deciding predetermined course of action for
on the methods to achieve them. a business. It refers to the process of
setting objectives and deciding on the
Planning is not always straightforward. However, a number of activities can be methods to achieve them.
undertaken to make it easier (figure 12.5). A business plan is far more than just
listing a few ideas. It is more than merely drawing up a marketing timetable or
keeping financial records. The business plan needs to analyse the whole business
by examining all parts of the operation. As a result, each part of the business
can function effectively and achieve its goals, helping the overall success of the
business.

Terms — the
names of what
Party example Activities — something you do you will be doing
I think my friends would 1. Predicting something in the future Forecasting

like a party.
I want it to be a 2. Determining what you wish to achieve Setting goals

successful party.
Anyone who becomes 3. Outlining how to cope with any Formulating

aggressive will be forced current and future problems that policies
to leave. stand in the way of achieving the goal
I will: 4. Deciding on a course of action — that Programming

• invite people is, the tasks that will help achieve the Scheduling
• arrange a venue goals
• organise food and
music.
I’ll borrow $200 from 5. Arranging the finances to satisfy the Budgeting
Michelle. goals
PARTY! 6. Putting the plans into action Implementing
I want everyone to enjoy 7. Checking on the progress of the Monitoring

the party. activity, evaluating and adjusting the Evaluating
plans if necessary Modifying
FIGURE 12.5 You need to consider a range of planning activities, whether your goal is a party
or business success.

Government departments — such as the New South Wales Small Business
Commissioner or the federal government’s business.gov.au — provide free and
comprehensive advice on a wide range of small business matters including how to
write a business plan. As well, numerous small business magazines often contain
articles examining business planning.
Weblink
Use the Small business
tool kit weblink in your
eBookPLUS to explore the
Small Business NSW’s tool
kit and resources for small
businesses.
FIGURE 12.6 The SmallBizConnect website contains a wealth of information about how to
write a business plan, including templates, video case studies and reference material.
Summary
• It is vital that a SME owner completes a business plan. Businesses do not plan to
fail, they fail to plan.
• A business plan is a written statement of the goals for the business and the steps
to be taken to achieve them. It is a summary and an evaluation of a business
concept in written form.
• A business plan will also assist the SME owner when arranging finance for the
business.
• A typical business plan may include, as a minimum, an executive summary,
an operations plan, a marketing plan, a financial plan and a human resource
plan.
• The planning process acts as a link or bridge between the business owner’s ideas
and the actual operation of the business.
• Planning is the process of setting goals and deciding how to achieve them.
Revision EXERCISE
12.1
1 Define the term ‘business plan’.
2 Outline why it is important for a business owner to develop a business plan.
3 Recall why so many SMEs fail to prepare a business plan.
4 A friend has asked you to help her prepare a business plan for a new fitness centre
she wants to open. Propose the elements she should include in the business plan.

5 ‘A plan is similar to a map — it plots the route the business will travel.’ Discuss.
6 Explain how the business plan acts as a link or bridge between the owner’s ideas and
the actual operation of the business.
7 Identify the benefits of developing a business plan.
8 Explain why planning is a process.
9 Examine figure 12.5 (page 386), then create a plan for one of the following:
(a) taking an overseas holiday
(b) completing an assessable task
(c) organising a hockey match.
For each plan briefly outline what is required for each activity.
10 Identify the most appropriate words from below to complete the following
sentences.
plan strengths
direction fail
review costs
link loan
flexible goals
(a) Businesses do not plan to _________ , they fail to ____________.
(b) Business plans should be ______________ — that is, modified as conditions
change.
(c) A business owner should regularly _______________ the business plan and modify
it when the business environment changes.
(d) Without a business plan the business lacks _____________ .
(e) Many business owners do not prepare a plan because they think it ___________
too much.
(f) When reviewing an application for a __________ , financial institutions will want to
examine the business plan.
(g) _________ are what you want to achieve.
(h) A business plan helps identify the business’s _____________ and weaknesses.
(i) The planning process is the ____________ between the owner’s ideas and the
Weblink actual operation of the business.
Business plan 11 Use the Business plan weblink in your eBookPLUS to find advice concerning the
preparation of a business plan. Evaluate the benefit of this and similar sites to
someone wanting to start a small business.
Extension
1 ‘Businesses do not plan to fail, they fail to plan.’ Critically analyse this statement.
2 Interview a local small business owner to investigate the following aspects of the
business:
(a) the planning options that had to be considered when starting the business
(b) the purpose of the business plan
(c) the role of the business plan within the operation of the business
(d) the importance of planning to the overall success of the business
(e) the government departments and/or private organisations that offered assistance in
developing a business plan.
Present your research as a business report. You may wish to present your report as a
PowerPoint presentation.
3 ‘The process of planning is more important than the finished plan.’ Determine the
benefits this process offers a SME owner.
4 Bruce Thurow, senior loans manager for a local bank, receives a lot of business plans
from clients. He recalls one plan that arrived in three cardboard boxes as volumes of
looseleaf notebooks. Overkill? ‘I knew I wasn’t going to read them. I just put them
aside.’ In small groups, determine why such a detailed plan was inappropriate when
all the small business owner was requesting was a small loan.

12.3 Sources of planning ideas FIGURE 12.7 All of the facts
and information that are relevant
We have already examined how the business environment is divided into two categories: to the business plan must be
1. the internal business environment. This covers the factors within the direct control gathered. Some methods to use
of the owners. It represents what occurs within the business. might simply be talking to people
2. the external business environment. This is the larger environment or completing surveys.
within which the business operates. It consists of factors over

which the business has little control and represents what occurs
on a larger scale outside the business.
Information is the essential ingredient needed to prepare a business
plan. Having access to up-to-date, relevant and accurate information
will allow the business owner to prepare a much superior business plan.
Information for planning is obtained from different sources within and
outside the business. The different levels of management and, in many
cases, employees, may contribute ideas about how the business could
achieve its goals. Research and development undertaken by a business
may extensively contribute to planning (see the following Snapshot).
Kapp Engineering — research and

development
Peter Parlongo, Amir Tanady, Praveen Paul and Kieran Sadlier started KAPP
SNAPSHOT
Engineering in 2005 from a suburban bedroom in Perth.
The four engineers, all aged between 23 and 28, had worked for an engineering
firm that unexpectedly suffered financial difficulties. They were eventually forced
to move on, but the experience provided them with the opportunity to see what
worked in the industry and what did not. They decided to bring their knowledge and
skills together to set up a new company.
The business plan was written over the weekend. The team met at Parlongo’s
house and discussed ideas. Using the first-name initials of the co-founders, KAPP
Engineering was ready to be launched the very next week. A close friend, who is an
accountant, helped them to set up the financial and accounting side of the business.
The team moved into offices at the Stirling Regional Business Centre, which
provided low rent and training. They were also able to network with other new
business owners and access mentors who provided advice when needed. The four
young men chose to start small and concentrate initially on Perth’s metropolitan
market, while competitors focused on big projects presented by the mining boom.
They discovered through their research that most of their potential clients relied on the
internet to find assistance in solving process engineering problems. KAPP developed its
❛ The business plan
website and search engine optimisation to ensure that customers could find them. was written over the
Today, KAPP Engineering provides engineering services, various automation products,
project management and training services to clients such as the Water Corporation of weekend. ❜
Western Australia. It has a client base of 200 companies, and has designed train-lifting
and washing systems for Taiwan’s high-speed rail project, and the roof-closing system
at the Perth Arena. Revenue has increased 700 per cent since its first year, and in 2012,
KAPP Engineering was recognised as a finalist in the Telstra Business Awards (Small
Business Category).
Snapshot questions
1. Identify the experience, knowledge and skills the team of four brought to
their new business.
2. Outline the sources of ideas the four owners utilised to assist in their planning.
3. State the benefits of this planning process for KAPP Engineering.

The external environment is also a source of ideas for planning. Economic, political,
BizWORD
social, technological, geographic and legal factors have an impact on the business. The
A situational (SWOT) analysis
business must account for each factor during the planning stage and gather information
involves the identification and
analysis of the internal strengths and about each one. Specialists such as accountants, finance brokers, consultants, bank
weaknesses of the business, and the managers and solicitors all provide knowledge to assist a business in its planning.
opportunities in, and threats from, the
external environment. Situational (SWOT) analysis
A situational (SWOT) analysis is an excellent technique for gathering information
for use in the business plan. SWOT is an acronym for strengths, weaknesses,
opportunities and threats (see figure 12.8). It is a powerful tool that can be used at all
stages of the planning process. Analysis of the business’s strengths and weaknesses is
Weblink an internal analysis. Given that the business has a degree of control over its internal
Use the SWOT analysis environment, the analysis will provide information that can help place the business
weblink in your eBookPLUS in a stronger financial position. From this position, the business can set new goals.
to discover more about
the SWOT analysis method
Analysis of the business’s opportunities and threats is an external analysis.
including examples and Particularly important to the business plan is the identification of unmet or
SWOT template. unsatisfied demand that the business can perhaps satisfy. At the same time, the
business owner should attempt to convert threats into opportunities.
INTERNAL ASSESSMENT EXTERNAL ASSESSMENT
S W O T
Strengths Weaknesses Opportunities Threats
What are our strengths? What are our weaknesses? What are our opportunities? What are our threats?
• What is the organisation • Do we have competent • What will new technology • What trends have been
good at? managers and staff? bring for us? evident in our markets?
• Is our product popular? • Is our computer system • Is the national economy • Are there new laws
• Are our customers loyal? obsolete? strong? regulating what we do?
• Do we have a skilled and • Have we experienced • Are interest rates low? • Are there new
motivated workforce? past failures? • What are our possible competitors?
• Do we function • Have we been upgrading new markets? • Are current
efficiently? our facilities to keep • What other businesses competitors taking
• Are we in a solid pace with others? can we acquire to over our market share?
financial position? expand the organisation?
• Is our equipment state
of the art?
FIGURE 12.8 A situational (SWOT) analysis
Summary
• The internal and external business environments are sources of planning ideas.
• Information is the essential ingredient needed to prepare a business plan.
• A situational (SWOT) analysis can be used at all stages of the planning process.
EXERCISE Revision
12.2
1 Distinguish between a business’s internal and external environments.
2 Identify two sources of information for planning (i) within, and (ii) outside the business.
3 Recall what the acronym SWOT represents.
4 Outline the benefits of a situational (SWOT) analysis as a planning tool.
5 Construct a situational (SWOT) analysis for either:
(a) a business that you deal with regularly (b) your school.

Extension
1 ‘The most important aspect of the business planning is the process of examining the
environment, one’s self and the business opportunities the two represent.’ Analyse
the accuracy of this statement.
2 In small groups, use the brainstorm technique to determine the advantages of
obtaining ideas from employees in the planning process.
12.4 Vision, goals and/or objectives

Vision BizWORD
A business’s vision is often expressed in their vision statement. A vision statement A vision statement broadly states
broadly states what the business aspires to become in the future. The vision of the what the business aspires to become
in the future.
Commonwealth Bank is ‘to excel at securing and enhancing the financial wellbeing
of people, businesses and communities’.
Vision statements may relate to customers (using such phrases as ‘maximise
customer satisfaction’, ‘remember that customers are our strength’, ‘never have a
dissatisfied customer’) or employees (for example, ‘make the firm an enjoyable and
rewarding place to work’, ‘offer opportunities for career advancement’, ‘remember
that our employees are our strength’). A clear vision statement should be concise,
creative, focused and realistic. It may contain any special features of the business, BizFACT
what it values and what it hopes to achieve. Vision statements are sometimes
The main purpose of the vision statement is to guide and direct the business called mission statements. The two
owners, managers and employees. It creates the culture within the business and acts terms are often used interchangeably.
as a benchmark against which to measure all the business’s decisions and operations.
David Jones
Vision
Our vision is that David Jones will bring the best branded department store shopping
experience to everyone we serve, anywhere, anytime, every time.
Bartlett Precision Manufacturing
Vision
Bartlett Precision Manufacturing is committed to:
• providing high-quality design and engineering services to our customers in accordance
with best international practice
• the safety and wellbeing of our employees BizFACT
• fulfilling the community’s demand for a safe and sustainable environment.
The vision statement of software
Visy company Galacticomm is, ‘To do really
Vision cool things in the field of computer
Visy will be the leading provider of recycling (waste), paper and packaging products and communication and make a buck
services, via a dynamic business model that fosters innovative, sustainable solutions for at it’.
superior returns.
FIGURE 12.9 Vision statements from a range of businesses
Goals and/or objectives

Once the owner has formulated the vision statement for the business, they can
determine specific goals. People start up a business because they want to achieve
something; they have a goal they want to accomplish. As explained in chapter 6, a
goal states what a business expects to achieve over a set time, which will assist in
realising the business’s vision.
Goals for businesses could include the following:
• to become the largest business in the market
• to improve market share

• to provide a reasonable return for investors
• to contribute to the wellbeing of the community.
All these goals have one thing in common: they are the motivating force behind
the business.
Levels of goals and objectives
Once the goals have been established, a SME owner usually then decides how to
BizWORD achieve them. As outlined in section 12.2, this involves developing an effective and
An objective is a specific statement worthwhile action plan. The action plan breaks down the goals into objectives —
detailing what a business (or specific statements detailing what a business (or individual) needs to achieve in order
individual) needs to achieve in order to to accomplish its vision. For example, you may have a goal of achieving a certain result
accomplish its vision.
in the Business Studies Trial HSC examination. Consequently, you will need to set
Strategic goals focus on long-term,
some objectives, such as increasing by 60 minutes each week the time spent revising
broad aims and apply to the business
as a whole. past papers, or weekly practice sessions answering 10 multiple choice questions.
Tactical objectives focus on
In a business, senior management will normally set the strategic goals, which
mid-term, departmental issues focus on long-term, broad aims and apply to the business as a whole. For example,
and describe the course of action the chief executive officer (CEO) may establish a strategic goal of ‘increasing
necessary to achieve the business’s market share’. This will involve the input of the four key business functional
strategic goals. areas — operations, marketing, finance and human resources. Middle management
Operational objectives focus on set tactical objectives, which focus on mid-term, departmental issues and describe
short-term issues and describe the
the course of action necessary to achieve the business’s strategic goals. To use
course of action necessary to achieve
the tactical objective and strategic the example of increasing market share, a marketing manager may set a tactical
goal. objective of researching consumer tastes and preferences in order to help achieve
the strategic goal. Front-line managers or supervisors set operational objectives,
which focus on short-term issues and describe the course of action necessary to
achieve the business’s tactical objectives. For example, a marketing supervisor may
set an objective of arranging for 20 customers to attend a focus group, research
session to help achieve the tactical objective and strategic goal.
In practice, think of the levels of goals and objectives as pyramid-shaped as
shown in figure 12.10.
Vision
BizFACT
The terms goal and objective are often
used synonymously as both terms
refer to something a business wants Each lower level objective • Determined by senior management
to accomplish. However, the people, contributes to the • Broad aims
timeframe and resources involved in achieving of the next • Long term — years
STRATEGIC
higher level goal
achieving each goal and objective vary GOALS
or objective.
significantly.
• Determined by middle management

TACTICAL
• Specific aims
OBJECTIVES
• Mid term — months
• Determined by front-line management

FIGURE 12.10 The objectives OPERATIONAL
• Specific aims
established at each layer of the OBJECTIVES
• Short term — days/weeks
business’s hierarchy are devised with
the purpose of helping to achieve the
strategic goal.

A business needs to have a clear idea of what it is trying to achieve; in other
words, it needs clear goals and objectives. It is the interaction between the vision
statement, goals and objectives that provide a process for a business to accomplish
this (see table 12.2).
TABLE 12.2 The relationship between a vision, goal and objective
Business example
— renewable
Term Definition Personal example energy company
Vision Broad statement of Be healthy To be a company

overall purpose of choice in the
alternate energy
sector
Goal More specific Lose weight To be the market

statement of what leader in alternate
is intended to be energy sales
achieved
Objective Very specific Lose two kilograms To increase sales by

statement of how by 1 December 10% each year
the goal is to be
achieved
Goals — what the business wants to achieve

As explained in chapter 6, common business goals include:
• maximising profits
• increasing market share
• growth
• improve share price
• social goals
• environmental goals.
FIGURE 12.11 Michel’s Patisserie’s

main business goal is to maximise
growth. Franchising is the engine behind
their incredible growth. The business
is well established and resourced for
continued growth within Australia.

Long-term growth
As outlined in chapter 6, an important aspect of profit maximisation is the
BizWORD business’s ability to maintain profits over time. To achieve this, a business must
Long-term growth is the ability of a aim for long-term growth — the ability of a business to continually expand.
business to continually expand. Long-term growth depends on a business’s ability to develop and use its asset
structure to increase sales, profits and market share. It is an important goal of
management as it ensures that the business is sustainable into the future. The
department store retailer Myer, for example, recently put in place a five-point
strategic plan, which includes a number of strategies to help increase profits and
guarantee its long-term growth. The strategies include:
• a focus on improving customer service with a cultural change program
• enhancing their merchandise offer
• strengthening their loyalty program through the restructuring of their rewards
program and launching a Myer one smart phone app
• building a leading omni-channel offer to counter online competition (omni-
channel refers to retailing through a variety of different channels)
• optimising their store network through the opening of new stores and the
refurbishment of existing stores.
FIGURE 12.12 A business’s ability to

plan for and adapt to changes in the
external environment will often have
an impact on their long-term growth.
For example, many businesses operate
in a highly competitive environment.
It is therefore essential that these
businesses monitor their competition
and aim to develop strategies to give
them a competitive advantage.
Long-term growth does not happen accidently. Instead, it requires comprehensive,

strategic planning. Consequently, for a business to not only survive competition
but also prosper and grow, it must have a sustainable competitive advantage. This
can be achieved by having a unique good or service, a consistent marketing plan
and adopting a relationship marketing philosophy to encourage customer loyalty.
For example, a number of factors give Apple a global competitive advantage, such
as their product designs, ability to create software that is easy to use, low cost
manufacturing, innovation, creative marketing strategies, product and service
integration, and their strong brand name and reputation. These are only a few of
the factors that have made the company so successful.

Some other strategies that successful businesses have used to achieve long-term
growth include:
1. Customer feedback. Google, the internet’s number one search engine,
continuously and rapidly upgrades its operating system by listening to its
customers.
2. Supplier and customer partnerships. Bridgeport Manufacturing provides
customers with the opportunity to develop products in consultation with the
business’s designers.
3. Cost. IKEA focuses on producing products that are affordable for most people
to buy. The company is constantly trying to do do things more efficiently and
cost-effectively so they can maintain their low prices.
4. Sigma Six. This business management approach, originally developed by
Motorola and used extensively in all types of businesses, aims to improve
business performance by improving quality, reducing costs and creating new BizWORD
opportunities. A sigma-six process is one in which 99.99 per cent of all A sigma-six process is one in which
manufactured products are defect free. 99.99 per cent of all manufactured
products are defect free.
Summary
• The vision statement broadly states what the business aspires to become.
• Vision statements guide and direct the business owners, managers and employees.
• Once the goals have been established, a SME owner determines the objectives.
• Objectives are specific statements detailing what a business needs to do to
accomplish its vision.
• Strategic goals, tactical and operational objectives are determined by different
levels of management.
• Many businesses strive to achieve goals relating to profits, market share, growth
and share price as well as social and environmental goals.
• Longer term growth is the ability of a business to continually expand.
• Longer term growth depends on a business’s ability to develop and use its asset
structure to increase sales, profits and market share.
Revision EXERCISE
12.3
1 Select a number of annual reports for public companies. State the vision (or mission)
statements for each company. Explain how these relate to the business’s goals. To
help you, use the Business vision statements weblinks in your eBookPLUS for the
following public companies:
(a) Boral Limited
(b) Westpac Limited Weblinks
(c) Origin Energy Limited Business vision
(d) Woolworths Limited statements
(e) David Jones Limited.
2 Identify which of the following are vision statements. Give reasons for your
answers.
(a) All breakages must be paid for.
(b) Care for the customer is our number one priority.
(c) Application of an integrated accounting system
(d) A safe and healthy workplace
(e) Commitment to excellence
(f) To increase sales revenue by 5 per cent in the next six months
3 Recall three main goals of most businesses.
4 Outline the relationship between goals and objectives.
5 Identify three objectives you would need to set if you wanted to achieve the goal of
improving your Business Studies results.

6 Distinguish between strategic goals, tactical objectives and operational objectives.
7 Deduce why a business needs clear goals and objectives.
8 Recall the correct level of management that determines the following goal or
objective.
Goal or objective Level of management
Strategic goal
Tactical objective
Operational objective
9 Define the term ‘longer term growth’.

10 State three methods a business can use to achieve a competitive advantage.
11 Propose four strategies a business can use to achieve longer term growth.
Extension
1 ‘The main goal of a business is to maximise profits.’
(a) Define the term ‘profit’.
(b) Determine under what circumstances a business may be prepared to accept
reduced profits in the short term.
(c) In your opinion, assess whether profit should be the only goal of a business.
2 Arrange to interview a local business owner. Create a business profile by asking the
following questions.
(a) What motivated the owner to start the business?
(b) Why is there a need for the business’s goods or services?
(c) How has the business been funded?
(d) Has the business been upgraded or expanded?
(e) What are the future growth areas of the business?
(f) What has been the business’s biggest problem or greatest mistake?
(g) What external threats face the business?
3 Examine figure 12.9 (page 391), then answer the following questions.
(a) Identify the common features of these vision statements.
(b) Explain why it would be important for employees, managers and customers to be
familiar with a business’s vision statement.
(c) Determine under what circumstances the vision statement would need to be
altered.
12.5 Organising resources

Once the SME owner has formulated the vision, goals and objectives, the next
stage in the planning process requires organising the resources — human effort,
time, money, equipment and materials — needed to fulfil the plan. As outlined in
chapter 7, organising is determining:
• what is to be done
• who is to do it
BizWORD • how it is to be done.
At this stage, the owner must determine all the activities that employees
An organisational structure is the
framework in which the business perform — from ordering stock through preparing financial reports to meeting
defines how tasks are divided, with clients — and all the equipment, money and facilities that employees need
resources are used and departments to carry out those activities (see figure 12.13). This results in the creation of an
are coordinated. organisational structure, which defines how tasks are divided (as shown by the
organisation chart) and resources used.

Step 1 ZenTech Fashions
Our vision: To be the
Develop plans and fashion company of choice
establish goals within the Australian market
Step 2 Recruiting Training Sales Compensation
Determine
activities Quality control Accounts Pricing Advertising
Machining Loans Designing Debt control
Step 3 HUMAN
OPERATIONS MARKETING FINANCE RESOURCES
Group Quality control Sales Accounts Recruiting
activities Machining Advertising Loans Training
Designing Pricing Debt control Compensation
Step 4 Joel Vlasie Sanjay Singh Renee Katz Ken Labich

Quality control Sales Accounts Recruiting
Assign work tasks
and delegate
Lee Wong Marcia Johns Bill Jacobs Su Mai
authority
Machining Advertising Loans Training
Jane Hush Mai Lee Jan Buehler Amahl Attik

Designing Pricing Debt control Compensation
Step 5
Design a hierarchy
of relationships
FIGURE 12.13 The five steps involved in the organising process (organising resources)
While driving the business towards its central purpose, as expressed in the vision
statement, the benefits of a properly implemented organising process is that it:
• establishes a chain of command that results in an orderly way of communicating
within the business

• creates a coordinated work environment by outlining sensible guidelines for
who does what and who is responsible for various activities
• provides a sense of common purpose so that all employees are working towards
a common vision, goal or objective
• organises resources in the most efficient manner so that all employees can
perform their tasks.
BizWORD Organising is a device that SME owners can use to gather resources for getting
Resource allocation refers to the things done. Part of the organising process requires resource allocation, which
efficient distribution of resources so refers to the efficient distribution of resources so as to successfully meet the goals that
as to successfully meet the goals that
have been established. Resource allocation establishes what work will be performed
have been established.
by what person and/or machine, and under what conditions. The materials needed
must be determined and ordered. The work tasks must be distributed to different
departments. Human resource requirements must be calculated and time schedules
set for each stage of the production process.
Each of the key business functions — operations, marketing, finance and human
resources — require specific resources that need to be effectively organised.
Organising resources — operations

As outlined in chapter 8, the operations function of a business involves transforming
different types of inputs (raw materials, labour, equipment and other resources)
BizFACT into finished or semi-finished goods or services. To produce either a good or
Strategy outlines what is to be service, therefore, a business needs to have essential equipment and knowledge.
achieved; organising explains how to Consequently, to undertake successful production, the following questions will
achieve it.
need to be asked.
• What type of equipment and raw materials are needed?
• Which suppliers will be used to purchase the equipment and raw materials?
• How much money needs to be allocated for the purchase of the raw materials
and resources?
• What storage, warehouse and delivery systems are required?
• What level of technical expertise will employees need to achieve maximum
production from the raw materials and equipment?
Researching the answers to these questions enables the SME owner to clarify
what changes may need to be made to either the structure of the business or
the production process. For example,
Caroma, Australia’s leading bathroom
manufacturer, needed to purchase
automated robots for their production
process. To arrange for the finance
required to purchase the new machines,
the managers had to revise their business
plan. Organising their operational
resources in this way has enabled the
company to become a market leader.
FIGURE 12.14 Caroma uses automated robots

in its production process to spray finished glaze
onto various bathroom products. In its 60 years of
manufacturing, Caroma has accomplished many
world firsts. It is best known for creating the
world’s first dual flush toilet suite.

Organising resources — marketing
As outlined in chapter 8, a marketing plan will succeed only if all sections of the
business are involved in satisfying a customer’s needs and wants, while achieving
the business’s goals. This means that the marketing plan needs to become integrated
into all aspects of the business. Adequate resources, therefore, must be devoted
to the marketing plan. Where existing employees do not have the expertise or
levels of skills required, additional training may be needed to bring them up to the
levels needed. Additional funds may be needed to accomplish all the marketing
objectives given to a specific department or team. The efforts of all employees
in the marketing department must be coordinated and this is best achieved by
adequate resourcing. For example, the sales consultants, advertising personnel,
market research staff, distribution people and so on must be provided with the
informational, financial and physical resources to perform their jobs.
Organising resources — finance

As outlined in chapters 8 and 11, new business ventures, even micro ones, require
funds to operate. In organising the financial resources, one of the most important
questions the SME owner needs to answer is ‘What will be the most appropriate
source of financing?’ The most common sources are personal savings and/or loans
from family, friends or banks. For example, Megan Pearce started her business
Megan’s Marketplace with a $15 000 loan from the National Australia Bank and
$12 000 borrowed from her sister.
Another important issue associated with organising finances is the amount of
equity (ownership of the business) and potential control a SME owner must hand
over to obtain the necessary financing. If the SME owner decides to fund the
business by using equity capital, the investor will be given some form of ownership
in the business. Frequently, SMEs that are aiming for relatively moderate growth
use mainly debt capital with the owners retaining most or all of the equity.
Finally, when organising the financial resources, the SME owner must explore BizWORD
the wide range of federal and state government grants — any monetary or financial A grant is any monetary or financial
assistance that does not generally have to be repaid — and other funding programs. assistance that does not generally
Generally, there are no grants for starting a business. Grants are usually provided for: have to be repaid.
• expanding a business
• research and development
• innovation
• exporting.
Organising resources — human resources

Of course, new business ventures often require the help of others — employees —
besides the entrepreneur or SME owner. In fact, since each employee in a SME
represents a large percentage of the business’s workforce, a specific individual’s
contribution can be especially important to the success of the business. This is why,
as explained in chapter 8, employees are a SME’s most important resource. A great
deal of care and thought, therefore, needs to be given to how best to organise this
crucial resource.
SME owners need to use good recruitment and selection processes to find
employees who will be invaluable assets as the business grows and expands. For
example, when Danaye Stavropolous started her business, Gateway Information
Systems Pty Ltd, she decided to employ people who had limited experience but
displayed a keen desire to learn and an enthusiasm for the business idea. As the
business grew, Danaye organised the business’s human resources in such a way

BizFACT as to ensure extensive training for all employees, which allowed her to generally
recruit from within. As a result, her business has a skilled group of employees to
Yarrawollen Consulting’s equal
employment opportunity (EEO) policy support her expansion plans.
states: ‘All employees may apply to Another important aspect all SME owners need to consider when organising
participate in any of the business’s their human resource arrangements is the need to comply with legislation relating
Equal Employment programs and to anti-discrimination and equal employment opportunities. The retailer Myer, for
benefit from policies that are relevant example, was able to retain valuable employees when it introduced a policy of six
to their needs’.
weeks paid maternity leave for staff who had worked a minimum of 18 months.
FIGURE 12.15 Women make up 45 per cent of the workforce and 70 per cent of these
women are of childbearing age. It makes good sense for employers to develop policies that
support the needs of women during and after pregnancy.
Summary
• Once the SME owner has formulated the vision, goals and objectives, the next
stage in the planning process requires organising the resources — human effort,
time, money, equipment and materials — needed to fulfil the plan.
• Organising is a device that SME owners can use to gather resources for getting
things done.
• Resource allocation refers to the efficient distribution of resources so as to
successfully meet the goals that have been established.
• Each of the key business functions — operations, marketing, finance and human
resources — require specific resources which need to be effectively organised.
EXERCISE Revision
12.4
1 Examine figure 12.13 on page 397. State the five steps of the organising process.
2 Summarise the benefits of a properly implemented organising process.
3 Define the term ’resource allocation’.
4 Imagine you have been asked to make 50 family-size pizzas for a celebration lunch.
You have five people to help with the task. In small groups:
(a) Identify the resources you would need to make the pizzas.
(b) Classify the resources as either (i) raw materials, (ii) equipment or (iii) knowledge.
(c) Demonstrate how you would allocate the resources.

5 Recall five questions a SME owner needs to ask in order to undertake successful
production.
6 Propose what may happen if a SME owner fails to organise adequate resources for
the marketing plan. Give reasons for your answer.
7 Identify the two main sources of finance for a business. Weblink
8 Use the GrantsLINK website in your eBookPLUS to investigate the range of grants GrantsLINK
available for business and industry. Select two grants that interest you and briefly
outline their purpose.
9 Use the brainstorm technique to deduce three advantages Gateway Information
Systems Pty Ltd received by organising its human resources as it does.
Extension
1 Create an organisational chart for your school. Determine the advantages and
disadvantages of this structure for you as a student.
2 ‘The purposes of organising are to give each employee a distinct task and to ensure
these tasks are coordinated and adequately resourced so that the business achieves its
goals.’ Evaluate the accuracy of this statement.
12.6 Forecasting
A business needs more than just information about present business conditions. It BizWORD
also needs information about possible future events. Forecasts (or projections) are Forecasts (or projections) are the
the business’s predictions about the future. business’s predictions about the
Students sometimes forecast the results they hope to achieve in an assessable future.
task. But just like weather forecasts, what is predicted and what actually happens
may be quite different! Nevertheless, forecasts are needed to enable effective
planning. An owner may need to forecast the availability of labour, raw materials,
finance and building requirements. For this task, business owners rely on internal
and external information sources.
One very useful set of data is the forecast for total revenue and total cost.
Total revenue and total cost

When trying to determine whether a business will be financially successful, a SME
owner can attempt to forecast the amount of money the business may receive as
sales — its total revenue, and how much it has to pay for business expenses — its
total costs.
Total revenue BizWORD

Total revenue (TR) is the total amount received from the sales of a good or service Total revenue (TR) is the total
and is calculated by multiplying the selling price (P) by the quantity (Q) of units amount received from the sales of a
good or service.
sold. This can be represented mathematically as:
P × Q = TR
It is possible to forecast total revenue by estimating how many units are expected
to be sold. For example, if the price of each unit is $100 and 25 are expected to be
sold, then the total revenue forecast will be $2500.
Estimates of future sales are determined by the demand for the business’s good
or service and the amount of competition in the marketplace. Sales forecasting
data:
• can be gathered by using market research techniques such as customer surveys
• are more precise if the business has some previous sales history to act as a guide.

Total cost
The costs involved in operating a business can be broadly classified as either fixed
BizWORD or variable costs (see the BizFact on page 403). Fixed costs (FC) are costs that do
Fixed costs (FC) are costs that do not not vary regardless of how many units of a good or service are produced. Variable
vary regardless of how many units of a
costs (VC) are costs that depend on the number of goods or services produced.
good or service are produced.
Variable cost, therefore, will increase if more goods and services are produced
Variable costs (VC) are costs that
depend on the number of goods or and decrease when fewer goods and services are produced (see the BizFact on
services produced. page 403).
The total cost (TC) of producing a The total cost (TC) of producing a certain number of goods or services is the
certain number of goods or services is sum of the fixed costs (FC) and variable costs (VC) for those units. This can be
the sum of the fixed and variable costs represented mathematically as:
for those units.
FC + VC = TC
It is possible to forecast total cost by estimating the change in variable costs at
different levels of production. Fixed cost, of course, will remain the same.
The forecast of total revenue and total cost make it possible to use the very
useful forecasting technique referred to as the break-even analysis.
BizWORD Break-even analysis

Break-even analysis is used to Break-even analysis determines the level of sales (total revenue) that needs to be
determine the level of sales that needs generated to cover the total cost of production (see figure 12.17, page 403). Total
to be generated to cover the total cost
cost of production includes fixed costs (costs that do not change regardless of how
of production.
much is sold) and variable costs (costs that depend on the amount of sales —
for example, materials). Sales above the break-even point will mean a profit; sales
below the break-even point will mean a loss.
Loss Profit
A business that does The break-even point occurs After the business has
not cover its costs when the revenue of the reached the break-even
will make a loss. business equals total costs. point, every product sold
Profit is zero. will lead to more profit
being earned.
FIGURE 12.16 A break-even analysis is used to determine the number of items that need to
be sold to break even — that is, to cover all costs without making either a profit or a loss.
Break-even analysis is an important planning tool because management can

determine the level of sales required to obtain a profit. It can also be used to
determine the effect on profit if sales increase or decrease. This planning tool is
used in the strategic planning stage, before budgets are prepared.
The break-even sales quantity can also be calculated by using the formula:
Quantity (Q) = Total fixed costs

Unit price − Variable costs per unit

Example: Break-even quantity
Better Rackets produces different lines of tennis goods, including racquets, tennis
balls and tennis bags. It plans to introduce a new style of tennis racquet and
estimates that the new racquet should be priced at $200. Fixed costs are $600 000
and variable costs are $80 per racquet. The number of units that need to be BizFACT
produced to break even is: Fixed costs do not change as
Q = 600 000 sales increase or decrease. They
200 − 80 include rent, insurance, salaries of
management and office staff, rates,
= 600 000 depreciation, interest on loans, and
120
office expenses.
= 5000 units
Break-even is the point where sales equal costs (fixed and variable); that is,
where at this point neither a profit nor a loss is made. In this case, 5000 units will Costs
Fixed costs
need to be sold to break even. ($)
Break-even sales Sales

175 Variable costs increase as sales
Profit increase or decrease when sales go
down. For example, for every $1 of
150 Total costs sales, a business has estimated that
25c (or 25 per cent of sales) represents
variable costs.
125
Total costs ($,000)
110 Variable costs

Loss Costs
100 ($)
Variable costs
Sales
75
Examples of variable costs are direct
sts labour and materials, commission on
)
ue
o
en
50 lc sales, delivery, freight, packaging.

ta
ev
To Total costs are the sum of the fixed

lr
ta
(To
30 costs and the variable costs.

25
les
Total costs
Sa
Fixed costs
Costs Variable costs
($)
0 25 50 75 100 125 150 175 Fixed costs
Sales Sales
FIGURE 12.17 Break-even analysis. Sales of $100 000 will mean a loss of $10 000 because total
costs at this point are $110 000. The point at which total costs ($150 000) intersect total revenue
($150 000) on the diagram is the break-even point at which neither a profit nor a loss is made.
Sales above the break-even point indicate a profit of up to $25 000 ($150 000 to $175 000).
Cash flow projections BizWORD

The cash flow projection shows the changes to the cash position brought about The cash flow projection shows the
by the operating, investing and financial activities of the business. It provides changes to the cash position brought
about by the operating, investing and
information concerning the business’s expected cash receipts (cash inflows) and
financial activities of the business.
cash payments (cash outflows) over an accounting period, usually 12 months.
Cash flow plans consist of a month-by-month projection of the flow of money
into the business. Cash transactions recorded include cash sales, the collection of
debts and the payments the business expects to make. From the information found
in the cash flow projection, the SME owner should be able to estimate the business’s
bank balance for each month and identify the extent and duration of possible cash
shortfalls. A positive cash flow occurs when the amount of money coming into

the business is greater than the amount leaving it. Overall, this information will
point out periods when business expenses are too high or times when a short-term
investment is possible to deal with a cash surplus.
The cash flow projection is an important tool for cash flow management. It offers:
• the SME owner a clear indication of how much capital investment the business
idea requires
• a bank loans officer evidence that the business is a good credit risk.
It is important to not confuse a cash flow projection with a cash flow statement.
The cash flow statement indicates how cash has flowed into and out of the business
in the past period of time. The cash flow projection shows the cash that is expected
to be made or spent over a period of time into the future.
BizFACT 12.7 Monitoring and evaluating

A cash flow projection is used in the
financial plan section of the business
Drivers constantly monitor and evaluate the road conditions, and make necessary
plan. changes to speed and direction as they receive updated information. A business
also has to monitor and evaluate its environment and take corrective action — that
is, it adjusts its business plan to avoid any problems.
Devising a business plan will not guarantee the achievement of the business’s
goals. The plan must be constantly monitored and evaluated so the business can
make accurate modifications as necessary (see figure 12.18 below).
Establish goals and objectives Monitor performance
• What do we want to achieve? • What is actually happening?
Take corrective action Evaluate performance
• Is what is happening good or bad?

• What should be done about it?
• Why is it happening?
FIGURE 12.18 The monitoring and evaluating process
BizWORD Monitoring
Monitoring is the process of Monitoring is the process of measuring actual performance against planned
measuring actual performance against
performance. This process involves constantly asking two questions about the
planned performance.
business plan:
1. What does the business want to achieve — that is, what are its goals?
2. Are these goals being achieved?
This will indicate the business’s true achievements, rather than vague
generalisations such as ‘things aren’t too bad’.
These questions should be asked at every stage of developing the business plan.
Such monitoring involves two distinct steps:
1. establishing forecast performance standards
2. comparing actual performance with forecast performance.
BizWORD The first step in the monitoring process requires the business to outline what it wants
A performance standard is a to accomplish — that is, to establish a performance standard. A performance standard
forecast level of performance against is a forecast level of performance against which actual performance can be compared.
which actual performance can be
A performance standard could be, for example:
compared.
• a 5 per cent increase in monthly sales
• a production quota of 1000 units per week.

The second step in the monitoring process is to compare or evaluate actual
performance against the performance standard. Budgets, sales statistics and cost
analyses can be used to evaluate results. A business owner could compare each
individual salesperson’s results, for example, with their sales quota. It is only
by establishing performance standards and then comparing them with actual
performance that a business owner can evaluate the effectiveness of the business
plan.
Evaluating
SME owners evaluate their business’s performance to determine whether the goals
have been achieved. They do this by constantly asking:
• how the business is performing in terms of profit etc.
• whether the business is performing as planned BizWORD
• whether its performance has improved over time Evaluation is the process of assessing
• how its performance compares to that of similar businesses. whether the business has achieved
stated goals.
When a SME owner undertakes this task, he or she is engaged in evaluation —
that is, the process of assessing whether or not the business has achieved its stated
goals (see the following Snapshot).
Studio Latitude — business mentoring

Studio Latitude had run into some difficulty. Its owners, jewellery designer Melissa
Voderberg and graphic designer and sculptor Louise McDonald, realised that
something needed to be done when they found that they had too much stock,
which was creating cash flow problems. SNAPSHOT
It was time to evaluate their business. ‘We were growing quickly and
needed assistance with strategic planning, pricing and cash flow,’ Melissa
Photograph by Andrew Maccoll

says. Studio Latitude’s owners asked a business mentor for help. Together,
they improved their business plan and movement of stock. Melissa and Louise
branched out, selling products to tourists, and also began to concentrate on the
conference market.
Following this change, the number of new clients increased by 35 per cent. Sales
and profits increased by 20 per cent, and inquiries increased by 15 per cent. Studio
Latitude now specialises in creative products (art pieces and gifts) for the events and
promotion industry, and is an award-winning business that uses environmentally
sustainable materials.
❛ We were growing
Snapshot questions
1. Identify the indicators Melissa Voderberg and Louise McDonald used to quickly and needed
evaluate their business’s performance. assistance . . . ❜
2. Explain why Melissa and Louise need to have such information.
3. Recall how Melissa and Louise improved Studio Latitude’s performance.
Once measurements have been collected, the SME owner can compare them with
the planned goals. The SME owner needs to ask whether the business operations
achieved the desired results and, if not, where and why he or she failed. If the business
Weblink
plan was successful, the SME owner should examine what strategies made it a success
Use the Studio Latitude
and re-use them. By evaluating a successful business plan, the SME owner may also weblink in your eBookPLUS
identify weak spots that could be improved and modify the plan to fix them. to visit the website of this
The three areas that need constant monitoring and evaluating are sales, budget business.
and profit.

FIGURE 12.19 A business owner must
monitor and evaluate the business plan,
just as a driver must with road conditions.
Monitoring and evaluating sales

Sales generate revenue for the business, so it is important that the sales
management control function be regularly performed. Sales management control
involves comparing budgeted sales against actual sales, and making changes where
necessary. For example, if a new selling technique is introduced, the level of sales
will need to be closely monitored to determine whether actual sales are above or
below what was forecast. The new selling technique will be deemed a success if the
sales are above what was forecast. If the figures are below what was forecast, the
business will need to take some type of corrective action.
Sales for DeltraWear Fashions Pty Ltd — 2nd quarter
Sales Forecast sales Actual sales Difference* % change^

territory $ $ $ ( − decrease + increase)
1 25 000 29 000 4 000 +16.0

2 40 000 42 500 2 500 +6.3
3 35 000 33 500 −1 500 −4.3
4 32 500 36 000 3 500 +10.8
5 22 500 25 000 2 500 +11.1
Total sales
revenue 155 000 166 000 11 000 +7.1
*Difference = Actual sales − Forecast sales

Difference
^% change = × 100
Forecast sales
FIGURE 12.20 Second quarter sales for DeltraWear Fashions Pty Ltd
Consider the sales figures for April, May and June — the second quarter of the
year — for DeltraWear Fashions Pty Ltd (see figure 12.20). The figures reveal that
total sales revenue increased by $11 000 or 7.1 per cent above what was forecast.
DeltraWear would be pleased with this result. There would be some concern about
the result in sales territory 3, which would require further investigation. However,
all the other territories performed above expectations. This tells the business that
the new selling technique is a success and should be continued.

Monitoring and evaluating budgets
No business should commence operating without having prepared a budget. A BizWORD
budget is the business’s financial plan for the future. It outlines how the business A budget is the business’s financial
will use its resources to meet its goals. The budget contains projections of incomes plan for the future.
and expenses over a set period of time.
Budgets enable constant monitoring of goals and whether they are being achieved.
Budgets assist in emphasising the goals of the business and provide a basis for
administrative control, direction of sales effort, production planning, control of stocks,
price setting, financial requirements, control of expenses and production cost control.
Budgets are used in both the planning and the monitoring aspects of a business;
for example, the business owner can measure planned performance against actual
performance and take corrective action as needed.
A budget is an important part of the planning process. Its preparation must BizFACT
account for various factors, such as: Budgets provide the facts and figures
• a review of past figures and trends, and estimates gathered from relevant for planning and decision making,
departments in the business and enable constant monitoring of
progress and problem areas. They
• potential markets or market share, and trends and seasonal fluctuations in the signal where things are not going
market according to plan so that adjustments
• proposed expansion or discontinuation of projects can be made, and they show where
• proposals to alter price or quality of products achievement towards objectives has
• current orders and plant capacity occurred.
• considerations from the external environment (for example, financial trends
from the external environment, availability of materials and labour).
The budget should be regularly compared with actual revenue and expense
amounts to detect any discrepancies. For example, once the owner has determined
the goals, they can then estimate the business’s various costs and its revenue. A
profit budget will establish the viability of the business by predicting how much
profit is likely to be made from the expected sales. These figures are estimates, but
the budget must be realistic. Figure 12.21 illustrates the information that should be
included in a profit budget.
Profit budget for 12 months ending . . .
A. Sales
Less cost of goods sold
(made up of)
Stock at beginning of year
+ Purchases
− Stock at end of year/
B. Cost of goods sold
C. Gross profit (A–B)
Less expenses
Advertising
Insurance
Wages
Rates
Stationery
Telephone
Fax
Travel
Interest paid
Depreciation
D. Total expenses
E. Operating profit before tax (C–D)
F. Stock estimate
G. Receivables FIGURE 12.21 Example of a profit
budget

Once the budget has been completed, the business owner can determine the extent
and timing of financial requirements. This profit budget should then be reviewed at
least once per month, and the owner should compare the projected amounts and the
actual amounts. Modifications must be implemented if there are any discrepancies.
Working to a budget — the school dance

You have been appointed manager of a student group that operates the annual
Year 11 school dance as a part of the Business Studies curriculum. This is a major
event in the school calendar and your principal has stipulated that the school
SNAPSHOT expected you to deliver a profit of $500. This will be donated to a charity of the
students’ choice. The school also wants its own costs covered from the evening. The
key points to consider are:
• Between 300 and 400 people are expected, depending on the success of your
promotion to other schools. Art students at your school will be designing and
then distributing posters.
• The event is in the school hall.
• You are expected to provide food, drink, security and music.
• The costs for last year’s dance are:
–– School costs. Printing of posters, plus electricity, water and gas on the night
— $100
–– DJ Snoopy spins. Music and light show — $900 for 4 hours
–– Decorations. Supplied by local company Party Guys & Sons — $300
–– Finger food and drink. Party pies and soft drink — $500
–– Security. Two security guards from Crusher Securities — $400 for 4 hours.
Snapshot questions
1. Calculate last year’s costs for the school dance to work out its break-even
point (they charged $10 per ticket).
2. (a) As manager of the school dance, identify what type of market you are
seeking to target.
(b) Predict what might happen if ticket prices and promotional material are
not ‘positioned’ for this market.
3. Working in small groups, discuss ways in which you could reduce your costs
for the school dance. For example, you might consider offering your suppliers
(of catering, security, DJ and decorating services) the chance to promote their
businesses on the night in exchange for reduction in their usual charge.
4. As a group, construct a cash budget for the dance. You must also explain your
price structure in terms of the agreed cost of tickets.
5. You sell 380 tickets at $15 each.
• The finger food and drink expense increased by $63, but you needed only
one security guard.
• You had to pay insurance of $689 at the last minute.
All prices include GST. Calculate the profit or loss you made for this
event. Remember to reduce all amounts by one-eleventh to remove the
GST component.
Monitoring and evaluating profit

As the following headlines suggest, profit is at the centre of a business’s activities
and one of the most intensely watched financial indicators.
JB Hi-Fi hits the right note with 11.2 per cent lift in profit to $116.4 million.
Wesfarmers turns in a mixed profit performance of $2.26 billion.
CEO quits as BHP profits plunge by 58 per cent fall in first half profit to $4.24 billion.
Commonwealth Bank rings up a record $7.8 billion profit.

In a sense, a business’s profit levels can be compared to a student’s subject
grades: they are an indication of performance. Such feedback is crucial to evaluate
whether or not specific goals have been achieved and what, if any, changes need to
be implemented.
There are five main reasons why a business’s profit levels must be carefully
monitored and evaluated.
1. Profit as reward. As outlined in chapter 1, profit is what remains after all
business expenses have been deducted from the business’s sales revenue. Profit
is regarded as the return, or reward, that business owners receive for taking the
risks in operating a business that produces goods and services that consumers
want.
2. Profit maximisation. In chapter 6, it was explained that one of the main goals of
a business is to maximise its profits in the long term.
3. Profit as a source of finance. Chapter 11 outlined that one of the most
important sources of finance for businesses is profits that have been ploughed
back.
4. Profit as a performance indicator. The profit level also acts as the main indicator
of a business’s performance. Changes to the level of profit act as a guide to how
well the business is succeeding or failing.
5. Profit as a dividend payment. For incorporated businesses a proportion of the
profit is allocated to shareholders as dividends.
FIGURE 12.22 Careful monitoring and evaluation by a business of its profits will pay off.
Evaluating the profit levels will also reveal important information about a
business’s costs and revenues. These amounts must be accounted for and business
owners need to be able to identify their source and quantity. For example, a fall in
a business’s profit level may be a result of simply a rise in costs or a fall in revenue.
Therefore, variations to the profit level act as a ‘signal’ alerting the business owner
to a change in the business’s performance.

12.8 Taking corrective action —
modification
Students are constantly involved in comparing planned performance with actual
performance — for example, planning to score 70 per cent for an assessable task
but receiving only 43 per cent. A mismatch between the planned and the actual
performances means a student has to take some corrective actions and modify their
behaviour: study more for the next assessable task, complete all the homework,
BizWORD drop out of the course or prepare a topic summary.
Modifying is the process of changing Modifying is the process of changing existing plans, using updated information
existing plans, using updated to shape future plans. Sometimes the planned performance standards are unrealistic
information to shape future plans.
when they are first formulated. At other times, changes to the external environment
make the standards unattainable. Whatever the case, the situation cannot continue
and the business owner must undertake some corrective action/modification.
Corrective action may involve changes to the materials, products that are the
firm’s output, the costs of turning raw materials into products, management
practices, delivery of products to the market and so on. It may also involve changes
to the organisation’s human resources, because each individual’s performance in the
organisation is as important as the finished product.
FIGURE 12.23 These small businesses affected by record floods in Brisbane in 2011 had to
adjust their profit expectations as a result of external environmental factors over which they
had no control.
Summary
• Forecasts are the business’s predictions about the future.
• Total revenue is the total amount received from the sales of goods or services.
• The total cost of producing a certain number of goods or services is the sum of
the fixed and variable costs for those units.
• Break-even analysis determines the level of sales that need to be generated to
cover total production costs.

• The cash flow projection shows the changes to the cash position brought about
by the operating, investing and financial activities of the business.
• SME owners need to monitor and evaluate the business’s performance by asking
themselves:
–– Is my business performing as planned?
–– Has the performance of my business improved over time?
–– How does the performance of my business compare to that of similar businesses?
• Budgeted sales should be compared against actual sales.
• The budget should regularly be compared with actual revenue and expense
amounts to detect any discrepancies.
• When using indicators, the main types of analysis are:
–– comparing figures within one financial year
–– comparing figures from different financial years.
• Profit levels are an indicator of a business’s performance and should be carefully
monitored and evaluated.
• Modification is the process of changing existing plans, using updated information
to shape future plans.
Revision EXERCISE
12.5
1 Define the term ‘forecasting’.
2 State how total revenue and total cost are calculated.
3 Distinguish between fixed costs and variable costs.
4 Identify three fixed costs and three variable costs your school incurs.
5 Outline why the break-even analysis is an important planning tool for businesses.
6 Explain how a house painter might make use of break-even analysis when providing
a quote to a potential customer.
7 (a) Calculate the level of break-even sales, given fixed costs of $50 000, variable costs
of $11 per unit and a selling price of $16 per unit.
(b) Calculate the level of break-even sales, given fixed costs of $600 000, variable
costs of $500 per unit and a selling price of $2000 per unit.
(c) From the graph below, calculate amounts for (i) to (v).
(i) the amount of fixed costs
(ii) the break-even point
(iii) the loss or profit if sales are $100 000
(iv) the loss or profit if sales are $300 000
(v) the amount of variable costs when sales are $250 000
400
Total revenue
350
300
Total costs
250
Total costs ($)
(fixed and
variable)
200
150
100 Fixed costs
50
0
50 100 150 200 250 300 350 400 450 500
Sales ($)

8 Outline why the cash flow projection is an important tool for cash flow
management.
9 Distinguish between a cash flow projection and a cash flow statement.
10 Distinguish between monitoring and evaluating. Discuss how the two processes are
linked.
11 ‘Any business that fails to monitor its sales will not be able to evaluate the
effectiveness of its selling techniques.’ Discuss.
12 Identify the data DeltraWear Fashions Pty Ltd (see page 406) needed to collect to
monitor the new selling technique.
13 A business has a sales potential of $70 000 but achieves actual sales of only $32 000.
Interpret what this signifies. Recommend what the business should do next.
14 You have just been appointed sales manager for Digital@Work Software. One of your
first tasks is to conduct a sales management control using the following sales figures:
Sales for Digital@Work — 1st quarter

Sales Forecast sales Actual sales Difference % change
territory $ $ $ (− decrease + increase)
1 29 000 35 000 _________ _________

2 54 000 58 000 _________ _________
3 32 000 36 000 _________ _________
4 37 000 33 000 _________ _________
Digital doc 5 44 000 52 000 _________ _________
document in your Total sales
eBookPLUS to compile your revenue _________ _________ _________ _________
Searchlight: DOC-14121 (a) Complete the table.
(b) Examine the forecast and actual sales. Analyse what these figures indicate.
(c) Recommend whether you would continue with the selling technique. Explain
your reasons.
15 Examine the following market share results for Crystal Water:
Sales revenue Market share

Year ($ million) (%)
2007 28 18
2008 25 18
2009 33 14
(a) Explain how it is possible for sales revenue to decrease but market share to remain
the same.
(b) If you were the owner of Crystal Water, identify which year’s result you would find
most pleasing. Give a reason for your answer.
16 ‘No business should operate without monitoring and evaluating its profit levels.’
Discuss.
17 Explain why the budget should be regularly compared with actual revenue and
expense amounts.
18 A business’s profits have been declining over the past two years. Recommend two
modifications the business could take to correct the situation. Justify your answer.
Extension
1 CCD Enterprises has been very successful producing and selling a range of sporting
goods in the Australian market. It has decided that there is potential in the Asian
market. Describe two planning tools that the company may have used in deciding to
expand into the overseas market.
2 ‘The more accurate the predictions, the better the chances the business has of
surviving.’ Evaluate this statement.

3 Read this case study, then answer the questions that follow.
Anna and Bill are technicians working in a relatively small electronics factory. They
are trained and competent tradespeople, and live and work for new developments
in the electronics field. At home, both have accumulated journals and papers on
what’s new in the electronics field. They met by coincidence on an overseas trip
and their mutual interests brought them together, eventually to work with the
same company. Before joining the company, Bill worked with the government and
Anna was in a sales position for a retail firm. This was a position that really came
about by accident through personal contacts by her family. The sales position held
no real interest and this led to a change in employment.
For some time they have been thinking about an idea that would mean leaving
the company and setting up their own business. There are a number of electronic
components currently imported from overseas that they believe they could
manufacture locally for a reasonable price and perhaps launch into the export
arena. Digital doc
They have both talked with their spouses, immediate families and a number of
friends about the possibility of branching out on their own. Together they believe terms by completing the
they would have some $60 000 available through equity capital and loans. The Chapter crossword in your
amount of money required to establish a factory and various outlets is unknown eBookPLUS.
at this stage, but they are assuming that individual funds would be available from Searchlight: DOC-1217
banks or other sources.
(a) Identify what other personal factors Anna and Bill should consider before making
the final decision.
(b) Investigate what factors may be important in the preparation of their business
plan.
(c) If you were in their position, determine how you would go about analysing
market prospects.
4 (a) Determine what is the most important aspect of preparing a business plan.
(b) Explain why a financial institution would require a business plan before approving
a loan to the business.
(c) Explain why a business plan should be flexible and constantly revised.
5 Recall a situation in which you evaluated your performance. An example could be an
assessment task, a part-time job or sports event.
(a) Identify your goal for this activity.
(b) Assess whether you achieved your goal. Give reasons for your answer.
(c) Analyse what corrective action, if any, you were required to take.

CHAPTER 13
Critical issues in business

success and failure
13.1 Introduction
When a business commences operation, the SME owner/manager is optimistic of
eLesson
success. Most businesspeople are aware of the general pitfalls, but all businesses —
Global Kidz Oz 2
regardless of their size or function — must pay close attention to a number of
J.J. Stanan of Global Kidz Oz
critical issues. These issues include:
talks about actual issues in
her business success. • having a business plan
Searchlight: ELES-2297 • managing employees
• analysing trends
• identifying and sustaining competitive advantage
• avoiding overextension of financing and other resources
• using technology
• considering economic conditions.
While there are many reasons for business failure (see chapter 4), careful
attention to the above factors will allow businesses to avoid failure and achieve
success. These critical issues form the basis for discussion in this chapter.
13.2 Importance of a
business plan
The vital point of the previous chapter was that all business owners must take
time to develop a business plan (see figure 13.1). Chapter 12 also introduced
you to the planning process and the activities to be undertaken to prepare
the business plan. No two business plans will be identical but they should all
contain some common information. Some plans will be structured and detailed;
others will be less complex and more informal. However, regardless of its
format, a plan must contain reliable and accurate information in enough detail
to be valid.
The business plan should contain:
1. a clear, concise statement of the goals of the business — what the business
wants to achieve
2. well-developed plans for achieving these goals — how the business is going to
achieve the goals
3. reliable control standards for measuring performance — has the business
achieved the goals; if not, what needs to be changed?
A comprehensive plan is essential for business success.
As outlined in chapter 12, the business plan is the ‘blueprint’ for future growth
and development within a business. It sets out the desired goals and direction
of the business. It is widely accepted that a business plan is essential to long-
term success and necessary for all businesses regardless of their size or function.
If prospective business owners neglect to develop a business plan or make
profit projections, business failure is distinctly possible because there is no clear
understanding of the business’s future.

Lack of planning can be as disastrous as a lack of capital. In all businesses, the
best results come from effective management. This means that the manager uses
the business plan and, more importantly, adjusts the plan when changes occur.
‘The business plan is a written summary and

evaluation of all the research and thinking a
SME owner has done in the development of a
business idea. It is organised in such a way that
all the factors necessary for the success of the
business – operations, finance, marketing and
human resources – have been adequately covered.
A detailed business plan greatly increases
the chance of success.’
FIGURE 13.1 An effective business plan contains a number of important elements that will
make the plan an operating tool that assists in the management of the business.
Business plan: presentation and preparation

All business plans should be presented in a professional manner, because they may be
read by bank managers, accountants, financial advisers, company directors, potential
purchasers or interested partners. These people often have first contact with the details
of the business via the business plan, so it is important that the plan reflects the skills
and abilities of the business owner. A poorly presented plan will convey the impression
that little thought has been given to the planning process. This will reflect poorly on
the business owner and their capabilities of getting the business ‘up and running’.
Sometimes it is a good idea to get professional help from an accountant, business
adviser, solicitor or marketing consultant, particularly with plan elements such as the
projected profit and loss statements, break-even analysis and market research.
BizFACT
Preparing a business plan is similar to completing an assessable task. The final
Accuracy and realistic expectations are
result will reflect the amount of time, effort and research that goes into the plan crucial to an effective business plan.
and its final presentation. Any task that is completed quickly and at the last minute It is unethical to deceive investors and
will probably lead to poor performance. But businesspeople who use the planning financiers, and it is unwise to deceive
process effectively will end up with a valuable working document that will help oneself.
guarantee a business’s success.
Critical issues in business success and failure • CHAPTER 13 415

13.3 Management — staffing
and teams
As outlined in chapter 5, management can be traditionally described as being
concerned with coordinating a business’s resources to achieve its goals. More
contemporary descriptions highlight that management is the process of working
with and through other people to achieve the goals of the business in a rapidly
changing environment. What both these explanations have in common is that
management:
• must make the best use of limited resources
• is responsible for the business achieving its goals.
Think of a manager’s role as being similar to that of a chef whose task is to
efficiently combine the resources (ingredients) to effectively achieve a goal (a
delicious meal). A skilled, competent chef could probably deliver an appetising
meal even with limited resources; whereas an unskilled, incompetent chef would
probably serve up an unappealing meal even if he or she had access to superb
ingredients. The chef’s level of skill (ability) is the critical factor determining how
well the goal is achieved.
FIGURE 13.2 While it helps to have

access to high quality ingredients
(resources), the success of a meal — one
that is appetising and delicious —
will mainly depend on the skills and
knowledge of the chef.
It is the same for the management of a business. A manager’s skill is the most
critical factor in determining a business’s success or failure. For example, a business
may have the most up-to-date computer equipment, well-furnished offices, access
to adequate sources of finance, a committed and motivated group of employees,
an excellent location, and an outstanding range of goods or services backed up
by a highly-expensive marketing campaign, but if it fails to have a competent
manager(s), who can make effective and efficient use of these resources, then the
business will not succeed.
Overall, the most important accomplishments a skilful manager will achieve for
a business include the ability to:
• solve difficult problems
• set and help attain important goals

• develop attitudes of commitment and ownership
• create a positive business culture through their words and actions
• monitor the business’s external and internal environments
• plan and allocate resources
• coordinate teams and departments
• monitor the performance of teams and individuals
• successfully put workplace and business changes into action
• develop and implement schedules and operating plans.
Two important areas of business that a manager must pay special attention to are
staffing and teamwork.
Staffing
If a SME owner wants the business to succeed, then it is essential to have employees
who are satisfied and motivated (as was outlined in chapters 6 and 8), as they will
be more productive. They also provide the business with a competitive advantage,
especially if the business offers a service where the customers come into direct
contact with the employees. Therefore, the management of the staffing function
— the recruiting, selecting, maintaining, training and separating of employees —
must be undertaken with care.
Bartlett Constructions — matching staff to

the business
It is especially crucial for the small business owner to select employees whose
SNAPSHOT
business approach complements that of the business. This is a philosophy that
Guy Bartlett, founder of domestic building company Bartlett Constructions has
passionately adopted since he commenced his business. Guy takes great care in
recruiting and selecting the most suitable employees.
Guy started Bartlett Constructions six years ago. What started out as a two-person
operation has now grown to a business employing five staff members. The quality
of the work performed by Bartlett Construction’s employees is largely responsible for
the business’s success. According to Guy, this is the main reason that his employees
must be ‘the best in the business’: ‘I can supply the equipment and training but I
can’t do it all by myself. I rely on having a committed team of people who enjoy their
work and gain satisfaction from a job well done. My staff members really are my
greatest resource. The high quality of their work has enabled the business to gain an
excellent reputation within the district.’
‘I like to think of my staff as working with me, not for me. We are one team
and all responsible for the long-term success of the business.’ Currently, Bartlett
Constructions employs four licensed builders, one apprentice and one part-time
office assistant.
Guy encourages his employees to gain extra qualifications, and he provides financial
assistance for course fees, materials and study days. ‘For example, one of my builders
❛ I like to think of my
recently attended a customer service training session at the local TAFE college. It is staff as working with
important for all staff to realise they are responsible for professional customer service;
not just the office assistant. An employee’s willingness to learn and to work as part of a me, not for me. ❜
team are two important personal qualities I look for when selecting new staff.’
Snapshot questions
1. Outline why Guy Bartlett believes staff are his greatest resource.
2. Assess the impact Guy Bartlett’s approach to human resource management
would have on his employees.

One mistake that some SME owners often make is not providing enough time
or financial resources to satisfactorily carry out the recruitment process. Making
hasty recruitment and selection decisions often ends in misfortune for both the
SME owner and the employee. For this reason, many SME owners outsource this
function and use an external recruitment agency.
External recruitment
It is time consuming to advertise, screen and interview potential employees.
Many businesses use recruitment agencies as a way of decreasing the time
involved in searching for a new employee. They pay an agency to interview
candidates and recommend a shortlist of potential employees or an employee
suitable for the available position. Outsourcing of staff recruitment is
becoming popular with small businesses, especially as the skill shortage worsens
and owners see the advantage of using an expert to make sure they hire the best
people.
A community employment agency such as Mission Australia Employment
Services is one of the most common sources of employees for business.
Mission Australia competes with other mainstream recruitment agencies for
government contracts. Their recruitment service is provided at no charge to
businesses.
Weblink
Use the Mission Australia
Employment Services
to visit the website
of Mission Australia
Employment Services.
FIGURE 13.3 Mission Australia Employment Services will attract and screen candidates —
including apprentices and traineeships — without the expense of using a private recruitment
agency.
Employee skills databases

Once people have been employed, the next important staffing management function
is to achieve the right mix and level of employees’ skills. This is best accomplished
by using a skills audit and skills inventory.
Skills audit
It is important for any business to detail the current skills base of the people
BizWORD involved in the business, as well as identifying any skills needed in the
A skills audit is a process that future. A personnel skills audit is used for this purpose. A skills audit is
establishes the current skills levels a process that establishes the current skills levels of employees and future skills
of employees and future skills requirements.
requirements.
The aim of the audit is to identify:
• the skills that will give the business a competitive advantage
• weaknesses in the skills base which, unless overcome by training or recruitment,
will threaten the business’s survival.
Figure 13.4 provides an example of a skills audit form. One form should be
completed for each employee. Once this information is collected, it can be used

to produce a skills inventory — that is, a computerised database containing
information on the skills and experiences of all present employees.
EMPLOYEE SKILLS AUDIT FORM

Date
Future skill
Employee Personal experience Current skills requirements
FIGURE 13.4 Skills audit form
Skills inventory
An employee database is an important tool used by business owners for recording
personal and work details of their employees. This type of database should be
regularly updated as new employees join the business and existing ones leave. BizWORD
One particular type of employee database is the skills inventory. A skills inventory A skills inventory is a database
is a database containing information on the skills, abilities and qualifications of containing information on the skills,
existing staff. It is used to search for appropriate candidates to fill new positions abilities and qualifications of existing
staff.
within the business. For example, a business may be seeking a current employee
with a commerce or business-related tertiary qualification, at least 10 years’
experience, fluency in Japanese, and with some knowledge of marketing. By
accessing the skills inventory, a search can quickly identify employees who match
these specifications.
Teams
As was outlined in chapter 7, many businesses are starting to realise that a
team approach can be a catalyst for superior performance. Teams are replacing
individuals as the basic building blocks of businesses of all sizes, especially in those
businesses that are adopting flatter organisational structures.
Businesses are learning that teams: BizFACT
• make more informed and creative decisions One undesirable consequence of team
• work without the need for close supervision (group) cohesiveness is the problem of
• create greater levels of employee cooperation groupthink: blind conformity in unified
• provide improved customer service and/or production output. in-groups. Groupthink helps explain
why intelligent people can sometimes
How teams are managed, therefore, is another critical issue determining make incredibly unwise decisions.
business success. However, it can sometimes be difficult for SME owners to
have the time or expertise to develop highly functioning teams or improve the
communication and efficiency of already established teams. Consequently, many
SME owners are seeking professional help from training and coaching businesses.
By investing time and money in the development and training of team leaders
and team members, the business reaps the rewards of improved productivity (see

CompuWorks — productive teamwork
Don Russell, owner of CompuWorks, has a favourite saying: ‘To build a great
business, you must build great teams.’ However, Don was faced with a dilemma. ‘I
wanted the four teams within the business to become more self-directing. Because I
SNAPSHOT was so busy dealing with the daily problems that cropped up, I was not able to stand
back and work out how to achieve this.’
Not being able to devote enough time to strategic planning is a problem faced by
many SME owners. Don decided to hire the training company New Vision Pty Ltd to
work with the teams. ‘As the owner of a medium-sized business, I feel the pressure
to continually generate the entrepreneurial energy. What I wanted was for the teams
to create ideas and explore different ways of solving problems. This would help lift
productivity by reducing the number of production problems.’
Working with New Vision showed Don and the team leaders the importance of
setting clear, realistic and attainable goals. Each team was given the responsibility for
setting production targets and mutually beneficial outcomes for team members and
the business.
‘One of the most important changes we introduced was regular, informal
meetings where all team members are allowed to participate. We call these sessions
“participate and review” sessions. At these meetings we acknowledge what teams
have done well, how productivity might improve and set monthly goals.’
‘These new procedures have so far proved successful with the average productivity
❛ To build a great rising by 9 per cent. Not all employees were happy with the changes and three
business, you must employees resigned. However, the majority of employees report feeling more
motivated and satisfied.’
build great teams. ❜
Snapshot questions
1. State what changes were introduced to make the teams more productive.
2. Recall why Don Russell decided to hire the services of a training company.
3. Explain what is meant by the phrase ‘To build a great business, you must
build great teams’.
4. Determine why many SME owners are not able to devote enough time to
strategic planning. Share you answer with other class members.
13.4 Trend analysis

Examine table 13.1 below. What do you notice about the business’s net profit results?
TABLE 13.1 Net profit results for OzTrack Logistics Limited 2014–17
OzTrack Logistics Limited
Year Net profit ($ million)
2014 62
2015 78
2016 85
2017 90
On a quick inspection, you would say that net profit is increasing over the
four years. However, upon closer examination, you will detect that the rate of net
profit growth is decreasing; that is, net profit is increasing but at a decreasing rate.
This trend is best shown by graphing the net profit results (see figure 13.5). As a
business owner, such a trend could be cause for alarm because it could mean that
future net profit may fall.

100
80
Net profit ($ million)
60
40
20
2014 2015 2016 2017
Years
OzTrack Logistics Limited
FIGURE 13.5 OzTrack Logistics Limited net profit results 2014–17
Trend analysis is a process of investigating changes over time and looking for
a pattern (trend) in order to predict the future. Trend analysis is based on the
idea that what happened in the past provides an idea of what will happen in the
future. For example, as a student you probably keep a record of your grades for
each assessable task or test. You do this to determine whether your grades are BizFACT
generally rising, falling or stable. Analysing this information also allows you to Examinations of a business’s financial
predict what mark you will receive for a future assessable task or test. You will base information or total sales are two of
your prediction on past performance. The more past grades you have to examine, the most common applications of
the more accurate your prediction will be. trend analysis.
Trend analysis is a powerful tool which, when used properly, will assist SME
owners to achieve business success by helping forecast such factors as:
• potential sales
• total revenue
• total operating costs
• gross and net profits
• availability of labour.
As was outlined in chapter 12, forecasts are needed to enable effective planning,
and trend analysis helps make forecasting more accurate. Overall, trend analysis
will provide more reliable information on which a SME owner can base decisions.
If, for example, a retailer’s trend analysis of past sales forecasts sales to decrease,
then appropriate strategies — such as new products or a revamped marketing
campaign — can be put in place to avoid the poor performance.
Summary
• Business plans are essential for owners/managers because:
–– they allow the owner to clearly define the goals and future projections
(e.g. finance)
–– they assist in the securing of finance from banking institutions or investors
–– they reflect the skills and abilities of the business owner.
• Management:
–– must make the best use of limited resources
–– is responsible for the business achieving its goals.
• A manager’s skill is the most critical factor in determining a business’s success
or failure.

• If a SME owner wants the business to succeed, then it is essential to have
employees who are satisfied and motivated as they will be more productive.
• Outsourcing of staff recruitment is becoming popular with SME owners.
• Teams are replacing individuals as the basic building blocks of businesses of
all sizes especially in those businesses that are adopting flatter organisational
structures.
• How teams are managed is another critical issue determining business success.
• Trend analysis is a process of investigating changes over time and looking for a
pattern (trend) in order to predict the future.
• Trend analysis is a powerful tool which assists SME owners achieve business
success by helping with forecasts.
EXERCISE Revision
13.1
1 Explain the purpose of a business plan.
2 Recall why a business plan should be professionally presented.
3 State what the traditional and contemporary description of management have in
common.
4 ‘To be successful, every business needs skilled managers.’ Discuss.
5 Identify one advantage and one disadvantage of using a private external recruitment
agency.
6 Account for why businesses of all sizes outsource their recruitment function.
7 State three benefits of working in teams.
8 Define the term ‘trend analysis’.
9 Demonstrate how you, as a student, could benefit from using a trend analysis.
10 Examine figure 13.5 (page 421) and explain why it is easier to identify a trend when
using a graph rather than a table of figures.
Extension
1 Referring to a business you have studied, answer the following questions.
(a) Investigate the planning options that had to be considered when the business
was established.
(b) Examine what essential components were included in the business plan.
(c) Determine how important the business plan was to the overall success of the
business.
2 ‘The output of teamwork is, in many instances, greater than the combined output of
its individual members working alone.’ Assess the accuracy of this statement.
3 ‘A favourite method of forecasting is to base the estimate entirely on past sales.’
Investigate the advantages and disadvantages of using this method to predict future
sales.
13.5 Identifying and sustaining

competitive advantage
Business success and failure is linked (in the long term) to a business’s ability to
BizWORD develop a strategy that allows it to gain an advantage over other competitors in
Competitive advantage refers to the its market. A competitive advantage can be defined as the strategies used by a
strategies used by a business to gain business to ensure it has an ‘edge’ over its competitors. A business cannot always
an ‘edge’ over its competitors.
sustain above-average performances in all areas for long periods. For this reason,
it must choose a strategy (outlined below) that will allow it to use and develop
its strengths as a business. This strategy can give the business a competitive
advantage.

Price/cost strategy
The price/cost strategy requires the business to be serious in terms of wanting to be
the leader within its industry. The business does not just compete with others, but
leads the way by achieving the lowest production costs, which in turn allow it to
reduce the product price. While the price is lower, it is important not to compromise
the product’s quality in relation to that of competitors’ products. Figure 13.6
suggests the main ways in which to develop a cost advantage over competitors.
Efficiency of operation refers to the ability of a business to streamline the BizFACT
processes that occur within that business. A manufacturing business, for example, Labour costs in Australia per unit of
may use more machinery or perhaps specialise parts of the production line (where output have grown by 3.25 per cent
one operator completes one part of a process, such as placing finished products per year over the last decade. In the
into boxes while someone else loads the boxes onto the transport). United States the increase was
1.9 per cent and in Germany, only
Low-cost labour is an obvious way to gain a cost advantage over the competition. 0.5 per cent over the same period.
In Australia, labour is one of the most expensive components of the p roduction
process because minimum wages are set by the government. The union movement
has fought for these requirements over the past 100 years. They include minimum
wages and working conditions, as well as holiday and sick leave entitlements
(as outlined in chapter 8).
Economies of scale can achieve a cost advantage for the firm. Simply, this concept
relates to the level of outputs for a business and the cost of the inputs (for example,
the cost of labour or raw material). To achieve economies of scale, the business
tries to reduce the cost of inputs — perhaps by using more machinery, buying in
bulk or increasing the specialisation of labour — and increase the level of outputs.
Improve efficiency Seek low-cost

of operations labour
WAYS ORGANISATIONS
Achieve economies CAN COMPETE ON COST
Utilise technology
of scale
FIGURE 13.6 How to develop a cost advantage over your competitors

Many businesses attempt to reduce the cost of labour by decreasing the size of
their workforce and using machinery where possible. Other companies choose to
move their operations to countries where labour costs are low. Some countries,
such as China, require employers to pay only small wages, so a firm in a labour-
intensive industry (such as the clothing and textiles industry) may choose to
relocate this part of its operations overseas.
The final way to develop a cost advantage over the competition is to use
technology. Nearly all businesses today have found that technology — whether
computerisation or the use of automation and robotics — has enabled them to
improve efficiency and production. As a result, a business can reduce its overall
costs. This is obvious in the car manufacturing industry where computers and
machinery have gradually replaced labour.
The changes are more subtle, however, in a service industry: they may include,
for instance, the computerisation of client information, or the use of advanced
communication mediums such as the internet or email.
Differentiation strategy
The concept behind this strategy is to offer customers something that is not already
offered by business rivals. The differentiation could be high product quality,
innovative design, positive brand image or top-quality service.
Patties Foods — competing on cost

Patties Foods is one of Australia’s leading branded frozen food companies. The
business, which owns popular brands such as Four‘N Twenty, Nanna’s and Herbert
Adams, has achieved a competitive advantage using a price/cost strategy as well as
SNAPSHOT differentiation.
In their 60th year in business, instead of outsourcing their operations, Patties
Foods made the decision to become more competitive by increasing the production
capacity of their facility. This efficiency of operation enabled them to achieve
economies of scale. The company invested $21 million in product innovation by
purchasing the world’s best practice pastry-making equipment in an attempt to
increase production. Patties Foods added two new pie lines and a 10 000 pallet
freezer warehouse at the company’s bakery in Victoria. This investment allowed the
company to increase production to 38 000 pies per hour. Patties Foods have also
recently invested another $10 million in automation so that on one of their product
lines, their products will be packed using robots.
In addition to competing on cost, Patties Foods has also sought to achieve a
❛ . . . very competitive competitive advantage through promoting their iconic Australian brand name and
through their investment in marketing and the development of unique advertising
from a cost point of campaigns. The company has also been able to increase sales by innovating with
new products every year.
view. ❜ Patties Foods increased their revenue by 8.8 per cent to $19.5 million in 2012, at a
time when most food manufacturers were struggling. The increase in production and
improved efficiency has also made it possible for the company to begin pursuing an
exporting strategy.
Patties Foods began as a family run bakery more than 60 years ago. Identifying
Weblink and sustaining a competitive advantage through a variety of strategies led the
Use the Patties Foods company to become one of the biggest pie bakeries in the world. The managers
weblink in your eBookPLUS believe the key to their success has been their investment in new technologies, which
to view a company timeline allowed the company to become more efficient and very competitive from a cost
for Patties Foods. point of view.

Snapshot questions
1. Outline how Patties Foods has achieved a competitive advantage through
pursuing a price/cost strategy.
2. Describe how Patties Foods has attempted to differentiate themselves from
their competitors.
Many businesses adopt a range of strategies to develop and enhance differences

in their product. An example of this strategy is the use of celebrities to endorse and
contribute to a product’s image, such as Beyonce’s association with Pepsi and Justin
Bieber’s endorsement of Proactiv.
Once a business achieves its product differentiation strategy, the challenge then
is to sustain this competitive advantage, especially as competitors attempt to match
this strategy.
Ensuring long-term success

Long-term success can be difficult to achieve if a business is unable to develop
a competitive advantage. The business may succeed for a short period, but often
only because other businesses in the same industry are not striving for any sort of
advantage so they all exist at the same level.
Sustaining a competitive advantage is just as important as devel oping that
advantage. Long-term success is assured if a business sustains its competitive edge.
The business must be able to resist the actions of competitors who introduce new
strategies, while also tracking changes within the industry (especially technological
changes).
To limit the advances of competitors, a business must protect itself and reduce
opportunities available to the competitors. This may be achieved through:
• research and development, which helps the business develop inno vative
products
• patents/copyrights, which protect against copying of inventions
• exclusive contracts with suppliers, which mean a supplier gives preference to
the business
• lobbying government to limit foreign competition, which aims to restrict
imported products.
Most importantly, for a business to sustain a competitive advantage, the actions
of management must be dynamic. Staying in front of the competition requires
constant action. All businesses operate in a constantly changing environment. The
owner/manager must be constantly aware of issues that may affect their operation,
market share and profit. If a business is not looking to the future and its impact,
then its competitors will be. To sustain a competitive advantage, a manager must
be able to predict changes and trends, and act on these predictions.
Summary
• Business success and failure is linked (in the long term) to a business’s ability
to develop a strategy that allows it to gain a competitive advantage over other
competitors in the market.
• A competitive advantage refers to a business’s ability to gain an ‘edge’ over its
competitors.
• A competitive advantage is achieved through:
–– price/cost strategy. This is best accomplished by achieving the lowest production
costs, which in turn allow it to reduce the product price.

–– differentiation strategy. The concept behind this strategy is to offer customers
something that is not already offered by business rivals.
–– ensuring long-term success. This is assured if a business sustains its competitive
edge by limiting the advances of competitors.
• A price/cost competitive advantage is best achieved by:
–– efficiency of operation
–– low-labour costs
–– economies of scale
–– technology.
• For a business to sustain a competitive advantage, the actions of management
must be dynamic.
EXERCISE Revision
13.2
1 Explain competitive advantage and how a business can try to achieve it.
2 (a) Explain cost advantage.
(b) Discuss why it is considered important to a business trying to achieve a competitive
advantage.
3 Outline the differentiation strategy in terms of achieving a competitive advantage.
4 Identify three examples of businesses that may use the differentiation strategy.
5 Explain what is meant by a sustainable competitive advantage.
6 Outline how a business can limit the advances of its competitors.
Extension
‘All businesses must be able to achieve a competitive advantage if they wish to succeed.’
Assess the accuracy of this statement.
13.6 Avoiding overextension of

financing and other resources
Ideally, those financing a business should start small and gradually expand.
Unfortunately, some business owners overextend their capacity in the establishment
or takeover stage, resulting in excess expenditure that is financed primarily by
external sources such as banks. A business can overextend financially by:
• using hire purchase and/or leasing commitments made on:
–– cars
–– equipment
–– office furniture
–– plant and machinery
–– the premises.
• purchasing excess stock
• employing too many staff for the business’s current needs.
These types of expenditures are fixed, which means the business has a lease
contract that is valid for a certain period (such as one or two years). This can create
a higher degree of business risk. If economic conditions weaken, for example,
businesses that are highly geared (that is, they have a higher debt-to-equity ratio)
BizWORD
come under greater financial pressure and are more susceptible to bankruptcy.
Leasing is a long-term source of
borrowing for businesses. It involves Another expenditure problem can arise if the business owner purchases the
the payment of money for the use of business premises. Leasing is an effective option, yet many owners decide
equipment that is owned by another to buy premises and may find themselves overbor rowing. If the business
party. cannot meet its capital and interest repayments, then its working capital will also
be affected.

There are many tips for a business of any size and type to avoid overextending
financially, including:
• business planning. This involves the completion of cash flow projec tions,
preliminary establishment costs, personal financial budgets and financial
statements of position, along with the setting of the business’s goals and
objectives.
• avoiding an overdependence on debt financing. This helps avoid problems during
weak economic periods when lenders or creditors are unwilling to wait for the
business to overcome difficulties.
• long-term financial planning. This concerns not just the current financial aspects
of the business, but anticipating future problems and planning the business’s
direction in terms of growth and expansion.
• a small start. Many businesses ‘walk before they crawl’ and quickly find
themselves in difficulty. It is important to start slowly and allow the market to
determine the right times for expansion and growth.
Overextension of other resources

Finance is not the only area in which a business can overextend. A business can
also overcommit to resources. Resources refer to the inputs necessary for a business
to carry out its function. The following two factors have the potential for problems
if they are not monitored by management.
Stock
A business that overextends in terms of stock has invested too much money in
goods or raw materials. This may occur if the business anticipates customer demand
incorrectly, or purchases a ‘bargain’ from a supplier (such as end-of-season stock)
without establishing whether it is saleable among its own customers. BizFACT
Stock is unrealised sales, and a business with too much stock not only ties up Just-in-time is a method used by some
its own cash but potentially loses revenue. Many businesses avoid stockpiling, and firms to ensure that inventory (stock)
prefer to keep only limited supplies and order regularly. is not lying idle. The business has
an arrangement with a supplier that
orders will be supplied immediately.
Staff Thus the business carries little or no
A business may find itself with too many staff. This may be due to over-optimism inventory and relies on the supplier to
about sales levels, or just poor job allocations and hiring. Staff are costly, but fill the orders. Many major companies,
including the Coca-Cola bottling plant
options are available for a business to decrease its dependence on this resource and
in Australia, use this practice.
reduce costs in the long term. These options include:
• outsourcing
• redefining current job descriptions
• using more equipment/machinery.
13.7 Using technology

Technology is having many effects on the business world. It is changing the
machinery and equipment we work with, and changing the workplace environment.
These changes have had a major impact on the internal and external business
environments, and the extent and speed of change is likely to continue.
Advances in information technology include:
• iPhones
• BlackBerry smartphones
• Skype
• email.

These have reduced communication time delays and improved distance
communi cation between colleagues, suppliers and customers. But not just
information technology has advanced: robotics, machinery and equipment for
production processes have allowed for faster production times, higher productivity
and greater flexibility, which in turn reduce overall costs.
There is little hope for a business that is not prepared to use some forms of
technology. Figure 13.7 illustrates some of the technology available for all types of
businesses.
Customer transaction — for Communication equipment — for

example, EFTPOS example, faxes, mobile phones,
pagers
TECHNOLOGIES AVAILABLE
TO BUSINESS
Transportation of Machinery and

products and raw equipment — for example,
materials computers, robotic machines,
manufacturing machinery
Internet and intranet
BizFACT
Many businesses are using social
networking sites such as Twitter and FIGURE 13.7 Examples of the technology available to business
Facebook to communicate with their
customers.
Internet applications (e-business and
e-commerce)
Over the past decade, there has been an explosion in electronic business, largely
brought about by the development of the internet. The internet, a giant computer
network connecting millions of computers around the world, has revolutionised the
way in which small business owners both access information and do business —
e-business and e‑commerce.

Accessing electronic information services via the internet
One of the main advantages of accessing material electronically is that specific
information can be located quickly, 24 hours a day, seven days a week. An electronic
search is relatively inexpensive and fast. Such a search can also be designed to
answer individual requests. These individual requests may include: BizFACT
• legal requirements for starting a business or changing the formation of a business The term ‘Web 2.0’ refers to the
transformation of the World Wide
• techniques for marketing a good or service
Web into a more creative and
• changes to business administrative requirements, such as taxation changes interactive platform for information
• current requirements for industrial relations, such as award conditions sharing, rather than just a means of
• work health and safety requirements retrieving information.
• support from government agencies, such as Austrade or the Australian Taxation
Office.
However, there are some disadvantages, including:
• expense in terms of hardware, software and service provider charges
• slowness to display web pages
• corruption by a virus
• unwanted spam
• information overload.
E-business BizWORD
E-business (electronic business) is using the internet to conduct business. It occurs E-business (electronic business) is
when a business: using the internet to conduct business.
• uses the internet to find information — such as suppliers, prices and product
details — and to keep track of delivery schedules
• uses email to communicate with customers and suppliers
• uses the internet for online working and paying of accounts
• uses the internet to research market conditions, industry trends and economic
forecasts
• uses its website to market its goods and services
• uses the internet to lodge forms or apply for licences via a govern ment
department’s website.
Save on long-distance Avoid lost opportunities

telephone bills from not having
an online presence
Reach a large
number of customers,
both domestic and global
Satisfy customer expectations
of online access, 24 hours a day,
seven days a week
Use the internet as
an additional
marketing tool
Ensure easy access
by customers, suppliers
and employees
Update or change
information
easily and at a Save time and money
low cost Generate through internet banking
additional sales and bill paying
FIGURE 13.8 E-business can bring a range of competitive advantages to the small business
owner.

Online businesses — steps in setting up
You’ve got the computer and the
brilliant business idea, now it’s time
to get your e-business running.
SNAPSHOT The first step is choosing an

internet service provider (ISP). It’s a
good idea to choose one that is in
a city near you, is business-focused,
❛ Remember, online runs a help desk and provides
training if necessary. Be wary of
businesses need to a low price; it may mean it won’t
provide all the services you require.
be maintained as You can now choose your domain name. Domain names allow potential customers
much as traditional to type in a website address to access your site.
If you wish to buy a .com.au or .net.au domain name, you must be a commercial
shopfront outlets. ❜ entity and possess either an ACN or ABN, which you can apply for from the
Australian Taxation Office.
When you choose a name, it has to be registered through a registrar and a fee
must be paid to protect the name. Registration companies will set up your domain
name so it can be accessed on the internet.
You can now start thinking about your website and how it looks and operates.
Some ISP providers can help you with this or you can use a specialist website design
organisation. If you’re tech-savvy, try doing it yourself using a software package or
some of the free design platforms that are now available.
If you want your customers to pay online for your product or service, you will also
need a merchant services agreement with a bank. You will have to make sure the
services offered by your bank and your ISP are compatible.
Remember, online businesses need to be maintained as much as traditional
shopfront outlets.
Source: K. Cambourne, ‘Setting up is as easy as ISP’, The Age, 1 December 2010.
Snapshot question
Outline the steps involved in starting an e-business.
E-commerce
The term e-commerce (electronic commerce) has a narrower meaning than that
of e‑business. It refers to the buying and selling of goods and services via the
BizWORD internet — it is a part of e-business. Today consumers expect a business to have
E-commerce is the buying and selling an online presence. In response, more Australian small businesses are using the
of goods and services via the internet. internet to cover all aspects of e-commerce.
Due to the perceived cost and complexity of e-commerce, some small business
owners are tentative in their use of it. Apart from having an email facility and a
website, they do not make full use of the technology and consequently do not
realise its full potential.
13.8 Economic conditions

As outlined in chapter 3, section 3.3, a nation’s economy will go through fluctuations;
it will experience good times — booms — and downturns — recessions. The
economic conditions are an aspect of the external business environment in which
the business has no control.

Changes in the economic conditions in the economy have the ability to impact
dramatically on a business in regards to success and failure.
Economic conditions that promote

business success
When an economy is in a boom, it will most likely mean that consumers are BizFACT
prepared to increase their spending because consumer confidence is high.
The Consumer Sentiment Index is a
Consumers are certain their jobs are secure and incomes are expected to increase; measure of consumer confidence in
they have an optimistic outlook. Australia. It is based on a survey of
In periods of strong economic activity the economy will experience: over 1200 households. When the
• high levels of consumer spending. This will mean businesses have a greater index scores above 100, it indicates
capacity to sell goods and services and therefore profits are maintained and that optimists outweigh pessimists.
improved. Businesses that sell more luxury type goods and services (such as
brand clothing, jewellery and imported cars) will benefit in this type of economic
condition because the consumer has a higher level of disposable income.
• falling unemployment. Unemployment is lower as businesses can afford to hire
more employees when sales and profits are steady and growing. As well, to meet
the increased demand for goods and services, businesses will be required to
increase the size of their workforce.
• increased production. Businesses’ output will increase to meet buoyant trends
that provide opportunities for future increased sales and profit.
Economic conditions that lead to

business failure
When an economy is in a downturn, it will most likely mean that consumers are
not spending as much. This is because consumer confidence is low. Consumers
fear they may lose their job or their wages may not increase. Overall, reduced
consumer spending translates to reduced profits for business. This will eventually
lead businesses to reducing their production levels.
In periods of weak economic activity the economy will experience:
• lower levels of consumer spending. This will mean businesses have a reduced
capacity to sell goods and services and therefore profits will decline. Businesses
that sell more necessities and budget-type goods and services (such as groceries
and cheaper clothing) will benefit in this type of economic condition. This is
because consumers become more cost conscious and will seek out goods and
services they consider to be value for money.
• rising unemployment. Unemployment is higher as businesses cannot support
current employee numbers when sales and profits are decreasing or negative.
Weblink
As well, cutting back production levels may reduce inventories of goods and
Use the Economic news
services that are potentially unsaleable. Consequently, existing employees may weblink in your eBookPLUS
be made redundant. to explore the latest news on
• decreased production. Businesses’ output will decrease in response to the fall in the Australian economy.
consumer spending. As a result, profits will also decrease.
Summary
• A business can overextend financially by:
–– hire purchase or leasing overcommitments
–– purchasing excess stock
–– employing too many staff for the business’s current needs.

• Overextending expenditure can create a high degree of business risk.
• To avoid overextending financially, a business should:
–– undertake thorough planning
–– avoid overdependence on debt financing
–– engage in long-term financial planning
–– grow at a sustainable rate.
• Overextension of stock ties up a business’s cash and can lose revenue.
• Overextension of staff results in employing too many staff.
• The integration of technology into the business is essential to succeed in
contemporary society.
• E-business (electronic business) is using the internet to conduct business.
• E-commerce (electronic commerce) is the buying and selling of goods and
services via the internet.
• A nation’s economy will experience periods of boom and recession.
• In periods of strong economic activity, consumer spending, sales of goods and
services, production and profits are rising.
• In periods of weak economic activity, consumer spending, sales of goods and
services, production and profits are falling.
EXERCISE Revision
13.3
1 Identify the main ways in which a business can overextend financially.
2 Outline how a business can protect against overextending its finances.
3 Explain why technology is so crucial in terms of business success and failure.
4 Distinguish between e-business and e-commerce. Provide two examples
of each.
Weblinks 5 Select and explain two advantages and two disadvantages (for a business) of using
• Yahoo! Australia the internet to access information.
• Amazon 6 Use the Yahoo! Australia, Amazon and ninemsn Shopping weblinks in your
eBookPLUS to investigate the operation of the large e-tailers. Evaluate the three
• ninemsn Shopping
sites, reporting on:
(a) the ease of navigation
(b) the layout of the home page
(c) methods of payment
(d) the ease of product selection
(e) the return and refund policy.
Digital doc
7 Distinguish between an economic boom and a recession.
document in your 8 Explain the impact a period of (i) strong and (ii) weak economic growth will have
eBookPLUS to compile your upon most businesses.
Extension
1 Analyse the importance of financial planning for short-term and long-term success in
business.
2 ‘Business expansion should be slow and steady.’ Evaluate.
3 ‘Technology has had a great impact on the internal and external business
environment.’ Discuss.
4 Determine the advantages and disadvantages of the dynamic nature of technology
in Australian business.

5 Create either an oral or ICT report about the internet. The following terms and
phrases are a guide to the content you will need to research:
• modem • site domain name
• security and authenticity of the website • internet service provider (ISP) Digital doc
• 3D web technology • spamming privacy implications Test your knowledge of key
• universal resource locator (URL) • What is the internet? terms by completing the
• hyperlink. Chapter crossword in your
eBookPLUS.
6 Arrange to interview a small business owner whose business has an online presence.
Investigate: Searchlight: DOC-1219
(a) the reasons for going online
(b) the benefits of a web presence
(c) the difficulties encountered in setting up the website.
You may wish to video the interview, then watch and discuss it in class.

Business planning
1 Which of the following characteristics best describes an entrepreneur?
(a) An inventor
(b) A risk taker
(c) An academic
(d) A highly skilled employee
2 What legislation is designed to protect both consumers and businesses?
(a) Fair Work Act
(b) Small Business Act
(c) Consumer Affairs Act
(d) Competition and Consumer Act
3 What does equity finance refer to?
(a) Money obtained through loans
(b) Money obtained from the owner’s personal funds
(c) Money obtained from a financial intermediary such as a bank
(d) Monetary or financial assistance from the government that doesn’t have to be repaid
4 The variable cost of producing yo-yos is $2 and management suggests that the selling
price be $5. The business expects to sell 50 000 yo-yos in the next year. Fixed costs are
$30 000. What is the break-even number of units of production of yo-yos required for
next year?
(a) 50 000
(b) 10 000
(c) 20 000
(d) 30 000
5 What does just-in-time refer to?
(a) Producing goods quickly in anticipation of increased demand
(b) Keeping minimal stock and ordering supplies just prior to use
(c) Maintaining a large inventory so that goods can be delivered on time
(d) Avoiding industrial action at the last minute by agreeing to union demands
6 Which of the following statements is FALSE in relation to a business plan?
(a) A business plan is prepared only when the business is initially established.
(b) A business plan is a statement of goals for the business and the strategies taken to
achieve them.
(c) A business plan allows stakeholders to determine the viability and profitability of
the business.
(d) Having a business plan is a critical factor determining business success and failure.
7 Which of the following is considered to be an on-cost for a business?
(a) Wages
(b) Superannuation
(c) Staff training costs
(d) Goods and services tax
8 Which of the following would be a reason for deciding to start a new business from
scratch as opposed to buying an existing business?
(a) Easier to obtain finance
(b) Equipment is available for immediate use
(c) Sales to existing customers will generate instant income
(d) The owner has the freedom to set up the business as they wish
9 The owners of a café have implemented policies to ensure they comply with their local
government regulations. Which influence in establishing a SME are they addressing?
(a) Legal
(b) Market
(c) Taxation
(d) Sources of information

10 Which of the following best describes a vision statement?
(a) It details the main purpose of the business
(b) It states what the business aspires to become
(c) It explains the role of each key business function
(d) It provides information of the financial stance of the business

1 When establishing a business, the entrepreneur risks capital and personal confidence.
(a) Describe the personal qualities essential to all entrepreneurs. 3 marks
(b) Discuss entrepreneurship and its importance in terms of the development of new
businesses. 6 marks
2 Referring to a business you have studied, answer the following questions:
(a) Identify the three personal factors that should be taken into account before
establishing a new business. 3 marks
(b) Explain what considerations are necessary when identifying business
opportunities. 6 marks
(c) Determine how a business can achieve a competitive advantage in terms of its
chosen market. 12 marks
3 (a) Define the phrase ‘identifying a business opportunity’. 2 marks
(b) Explain its importance. 4 marks
(c) Determine what factors need to be considered before the business idea
can be developed. 8 marks
4 (a) Define the term ‘target market’ 2 marks
(b) Demonstrate why it is essential for a business to identify its target market. 4 marks
(c) Once a business has identified its target market, recommend three strategies the
business can use to achieve a competitive advantage. 6 marks
5 (a) Outline the two advantages and two disadvantages of buying an existing
business. 4 marks
(b) Explain how a franchise operates. 4 marks
(c) Examine the costs and benefits of buying a franchise. 4 marks
(d) Discuss why franchises have become so popular in recent years. 5 marks
6 Location is considered crucial in terms of business success.
(a) Outline the main factors that must be considered in terms of choosing a business
location. 3 marks
(b) Discuss the differences in location choice for a manufacturing business and a retail
clothing store. 6 marks
7 ‘Government regulations are necessary for the business sector to function efficiently and
equitably.’
(a) Describe two of the legal requirements to which businesses must adhere. 4 marks
(b) Discuss the accuracy of this statement and give reasons for your answer. 5 marks
8 (a) Define the term ‘business plan’ 2 marks
(b) Explain the purpose of a business plan. 4 marks
(c) Evaluate the importance of planning to the overall success of a business. 10 marks
9 (a) Outline what motivates people to start their own business. 2 marks
(b) Identify the personal skills required to successfully operate a small business. 3 marks
10 (a) Define the term ‘business concept’. 2 marks
(b) Explain how a prospective business owner might devise a business concept. 4 marks
(c) Analyse the role of innovation and entrepreneurship in the establishment of new
businesses. 8 marks
11 Identify the range of support services that small business owners should utilise. 3 marks
12 (a) Identify three advantages that the use of computers can bring to a small
business. 3 marks
(b) Select three different examples of business hardware and explain the purpose of
each. 6 marks
(c) Analyse how the use of information and communication technology can assist a
small business owner to make appropriate decisions. 10 marks

13 (a) Outline two business objectives that could be assisted by a business engaging in
e-commerce. 2 marks
(b) Distinguish between e-business and e-commerce. 4 marks
(c) Recommend three strategies a small business could implement to increase revenue
as a result of engaging in e-commerce 6 marks
14 (a) Distinguish between debt and equity financing. 5 marks
(b) Investigate why funds should be borrowed for as long as it will take the increased
profits to repay the loan. 6 marks
15 Gerry has had an interest in antique and unusual children’s toys since he was a child,
and has been collecting toys from the 1940s and 1950s for many years. He is interested
in setting up a toy shop, incorporating a museum or similar display for his collection. His
hope is that the display of antique toys will be a means of attracting customers.
(a) Identify the source of inspiration behind Gerry’s business concept. 1 mark
(b) Outline how he has sought to differentiate his business from those of possible
competitors. 3 marks
(c ) To assist Gerry in making a decision about whether to implement his business idea,
propose a list of six questions that a market researcher might ask. 6 marks
(d) Create a step-by-step process that Gerry can undertake to determine whether or
not there is sufficient demand for the type of business he is proposing. 12 marks

1 Research reveals that women-owned small businesses are good prospects for financial
institutions that lend money. Yet women still face discrimination when organising
finance and often end up borrowing from family members. Investigate why this
discrimination still occurs.
2 Discuss the key considerations for an entrepreneur in terms of setting up a business.
Use examples.
3 Phillip and Janice worked in a bank, but had always wanted to run their own
business. While on holiday in a small seaside town, they noticed that the local
general store and takeaway food shop was up for sale. The business was the
only one of its type in the town, but the town is very small and seems to have a
reasonably large population only during summer and holiday periods, when the
local camping and caravan park, and other holiday accommodation are all full. They
are very interested in purchasing the store, but realise they have to make a number
of important decisions before committing to making an actual offer on the store.

As a business consultant, prepare a report that could be given to Phillip and Janice. In
your report, you should:
(a) Outline the main personal qualities needed to successfully operate a small business.
(b) Create a list of 10 questions Phillip and Janice should consider before committing
to making an actual offer.
4 Referring to a business that you have studied, determine three critical issues that will
influence the success or failure of the business.
5 ‘Competitors can be a threat to a business but they can also ultimately lead to business
success.’ Explain how competition may in fact be good for business.
6 Investigate how the following act as the primary influences on an individual’s decision
to establish a business:
(i) personal qualities (ii) motivation
(iii) experience (iv) expectations.
7
‘Choosing the right location was crucial because not everyone is interested
in up-market garden accessories. We chose a location that had the right
demographics — people took pride in their gardens and most of the people
who live in the area are professional working people with cash to spend. It was
also a big decision to set up our website where customers can order our garden
accessories online.’ Sonya Mezups, proprietor, blooming nursery.

Explain how selecting the correct location can make the difference between success
and failure.
8 Select a small business that you buy from regularly and identify its strengths and
weaknesses. If this business were for sale, determine whether you would consider
purchasing it. Give reasons for your answer.
9 Assess the relationship between key success factors and the competitive edge that a
small business should seek.
10 You have been employed as a business reporter with the local newspaper. You are asked
to prepare an article that examines the number of government and private support
agencies that provide assistance to small business owners. A major focus within your
article should be an evaluation of two government websites that assist small businesses.
11 A friend wishes to go into business for herself. She is not sure whether to purchase an
existing business or set up a new business. She comes to you for advice. Outline for her
the advantages and disadvantages of each option.
12
Jane has just set up a small business as a wedding planner. She hopes that
couples planning a wedding will commission her to put together a ‘total wedding
package’, for which she will charge a fee. To create the type of wedding packages
her customers want, she has to deal with a number of different wedding
service suppliers. These include reception venues, wedding car hire businesses,
photographers and video businesses, florists, printers, dressmakers and formalwear
hire businesses. Jane wants to make sure she fulfils all her legal responsibilities and
she wants to have a reputation as an ethical business owner, because she knows that
most of her business will come from personal recommendations and word of mouth.
Jane’s biggest concern is that she doesn’t know whether the other businesses
she has to deal with share her principles. Imagine you are her solicitor and she
comes to you seeking advice. She wants to know how she can tell whether or
not the wedding service suppliers she will be dealing with are acting legally and
ethically, because any unlawful or inappropriate activities will reflect back on her
and her business.

Construct a report for Jane that will help her identify whether or not her business
is meeting its legal responsibilities to its customers, to other businesses and to the
community. Your advice should include the following:
• how to tell whether a business is conforming to the Competition and Consumer Act
• the responsibilities of food businesses, such as reception venues, in ensuring food
safety
• what Jane can do to ensure she manages her legal responsibilities in an ethical and
socially responsible manner.
13 Analyse why it is important for small business owners to have a detailed understanding
of the market in which the business will be competing.
14 ‘A business plan won’t guarantee success but it does improve the chances of success.’
Assess the accuracy of this statement.
15 ‘Undertaking a break-even analysis in the early stages of the planning process is
crucial. The information it provides determines how I advise the client to proceed.’ Nick
Aquilano, small business consultant, BizVest Planning.
(a) Define the term ‘break-even analysis’.
(b) Explain why it is an important planning tool.
(c) Demonstrate how to calculate the break-even point.

ICT ACTIVITIES
SUGGESTED SOFTWARE Planning for success

� ProjectsPLUS
Searchlight ID: PRO-0057
� Microsoft Word
� Microsoft Excel
Scenario
The opportunity to put into practice what you have been learning in Business
Studies is here. You have decided to start your own business and use this
experience, not only to earn money, but to apply some of the knowledge that you
have acquired so far.
Based on your knowledge, skills and feedback from your friends, you have
narrowed your potential new business down to a T-shirt company based on your
own designs or boutique pastries and cakes thanks to your grandma’s secret
recipes.
Your Project Brief includes an interview with successful

young entrepreneur Jamie Xuereb. Jamie gives insight
into his experience in the different elements of starting
and growing his small business of stickers, labels and
printing.
Your task
To best prepare yourself for the challenge of starting and, more importantly,
maintaining a new small business, you have decided to prepare a business plan to
help plan all aspects of your new venture.
In order to complete your business plan you will need to:
� Research the different sections of a business plan and gather the information
that you will require to complete it thoroughly.
� Investigate all the legal requirements (documentation) that you will need to
complete in order to establish your business.
You must also attach completed templates of the legal documentation required
to start a business such as ABN applications, Business Name Registration and
Taxation forms.
438 ICT ACTIVITIES
MEDIA CENTRE
Your Media Centre contains:
� a business plan model
and template
� weblinks to research
sites
� a selection of media
� a guide to starting a new
Process business
� an assessment rubric.
� Open the ProjectsPLUS application for this book in your eBookPLUS. Watch the
introductory video lesson, click the ‘Start Project’ button and then set up your
project group. You can complete this project individually or invite other members
of your class to form a group. Save your settings and the project will be launched.
� Navigate to your Research Forum. Here you will find a series of pre-loaded
Your ProjectsPLUS
topics which outline the main categories of your business plan. This will provide application is available
you with a framework for your research and investigation. You can view and in this book’s Student
comment on other group members’ articles and rate the information they have Resources section inside
entered which provides a source of valuable feedback. your eBookPLUS. Visit
� Visit your Media Centre and download the Business Plan model, template www.jacplus.com.au
and guide. In your business plan, you must address the following sections in to locate your digital
relation to your proposed business: resources.
– Situational analysis
– Operations plan
– Marketing plan
– Financial plan
– Human resources plan
– Executive summary.
� Research. Your business plan needs to be based on realistic data. In order to help
with your research, your Media Centre contains a selection of images of your
product, a series of weblinks which provide you with information and guidance on
starting your own business as well as a guide to creating your business plan. The
included SWOT analysis template may also be useful in supporting your data.
� You might like to use Microsoft Excel or alternative similar software to create
graphs to display your research and figures in a visual manner. A Guide to
Creating Graphs has been included in your Media Centre.
� As part of your project, you must also include completed templates of the
legal documentation required to start a business. This might include ABN
applications, Business Name Registration and Taxation forms. The weblinks in
your Media Centre will help you locate these downloadable forms online.
� Once you have researched and responded to all sections of your project, print
out your business plan and relevant forms from projectsPLUS and hand them in
to your teacher with any supporting documents.
ICT ACTIVITIES 439

APPENDIX: UNDERSTANDING KEY PROCESS VERBS
Assessment using key process verbs
The purpose of a key process verb in a question is to provide instructions on
how to answer a question and how much to write. There is a direct relationship
between the type of key process verb and the mark value allocated. The more
thinking skills the key process verb requires, the higher the mark allocated.
On the right is a colour coded list of the key process verbs that may be used
for assessment. It is divided into three categories based on Bloom’s Taxonomy.
Each category represents the level of thinking skills required to complete a
question.
Mark allocation
The suggested marks used in these examples are specifically for short answer
questions. Essay questions may also include a number of key process verbs.
Lower order Clarify, define, describe, extract, identify,

1–3
thinking questions outline, recall, recount, state, summarise
Account, apply, calculate, classify, compare,

Middle order construct, contrast, deduce, demonstrate,
3–6
thinking questions discuss, distinguish, examine, explain, interpret,
investigate, justify, propose, recommend
Analyse, appreciate, assess, create,

Higher order
critically analyse/evaluate, determine, 6–12
thinking questions
evaluate, extrapolate, predict, synthesise
Time allocation
In order to complete each question, time allocation is very important. If a student
does not complete the examination in time, because they have not calculated
the minutes/marks correctly, they will lose marks. A formula for calculating
minutes/marks is as follows:
Total exam time in minutes

Marks/minute = = minutes/mark
Total exam marks
180 exam minutes (3hrs)

Example: Marks/minute = = 1.8 minutes/mark
100 exam marks
In the above example, the student would need to allocate 1.8 minutes
per mark in an examination. Therefore, a 4-mark question should be allocated
1.8 minutes x 4 = 7.2 minutes (or rounded to seven minutes). This ensures
the allocation of an appropriate amount of time for each question.
APPENDIX: UNDERSTANDING KEY PROCESS VERBS 441

DEFINITIONS AND EXAMPLES
Lower order thinking key process verbs

Short answer questions using the lower order thinking key process verbs will typically have a mark value between 1 and 3.
Clarify — make clear or plain.
Define — state meaning and identify essential qualities.
Describe — provide characteristics and features.
Extract — choose relevant and/or appropriate details.
Identify — recognise and name.
Outline — sketch in general terms; indicate the main features of.
Recall — present remembered ideas, facts or experiences.
Recount — retell a series of events.
State — describe the main points clearly and specifically.
Summarise — express, concisely, the relevant details.
Middle order thinking key process verbs
Short answer questions using the middle order thinking key process terms will typically have a mark value between 3 and 6.
Account — account for; state reasons for; report on. Give an account of; narrate a series of events or transactions.
Apply — use, utilise, employ in a particular situation.
Calculate — ascertain/determine from given facts, figures or information.
Classify — arrange or include in classes/categories.
Compare — show how things are similar or different.
Construct — make; build; put together items or arguments.
Contrast — show how things are different or opposite.
Deduce — draw conclusions.
Demonstrate — show by example.
Discuss — identify issues and provide points for and/or against.
Distinguish — recognise or note/indicate as being distinct or different from; note differences between.
Examine — inquire into.
Explain — relate cause and effect; make the relationships between things evident; provide why and/or how.
Interpret — draw meaning from.
Investigate — plan, inquire into and draw conclusions.
Justify — support an argument or conclusion.
Propose — put forward (for example a point of view, idea, argument, suggestion) for consideration or action.
Recommend — provide reasons in favour.
Higher order thinking key process verbs
Short answer questions using the higher order thinking key process verbs will typically have a mark value between 6 and 12.
Analyse — identify components and the relationship between them; draw out and relate implications.
Appreciate — make a judgement about the value of.
Assess — make a judgment of value, quality, outcomes, results or size.
Create — produce; design; invent; devise a new solution or plan.
Critically analyse/evaluate — add a degree or level of accuracy, depth, knowledge and understanding, logic, questioning, reflection or quality.
Determine — make a decision or work out an answer after appropriate thought and investigation.
Evaluate — make a judgement based on criteria; determine the value of.
Extrapolate — infer from what is known.
Predict — suggest what may happen based on available information.
Synthesise — put together various elements to make a whole.
442 APPENDIX: UNDERSTANDING KEY PROCESS VERBS

Lower order examples
Clarify the reasons for…
Define the term…
Describe four roles…
Extract the issues that may arise…
Identify two effects of…
Outline the roles of…
Recall the factors that…
Recount under what circumstances…
State how a business may address…
Summarise how the two issues affected the…
Middle order examples

Account for the improvements to…
Apply one of the processes relevant to…
Calculate which you believe to be the more…
Classify the following list of consumers into the…
Compare the problems experienced by…
Construct a SWOT analysis for the following small businesses…
Contrast a range of businesses with different legal structures…
Deduce what impact this had on the…
Demonstrate the opportunities a business can…
Discuss the role of…
Distinguish between internal and external growth…
Examine the reasons for…
Explain the processes undertaken…
Interpret the reasons for the business owner deciding to…
Investigate three options available to the employees…
Justify your selection…
Propose a plan that may provide the business with…
Use the information provided to recommend a strategy…
Higher order examples

Analyse the impact of changes to the…
Appreciate the importance of government bodies…
Assess the importance of…
Create a marketing strategy suitable to a business at this stage…
Critically analyse this statement…
Determine whether the change required would…
Evaluate the processes…
Extrapolate the data found in…
Predict the outcome for a business if the following…
Consider a business’s function and synthesise this information…
APPENDIX: UNDERSTANDING KEY PROCESS VERBS 443

GLOSSARY
accountability: occurs when a business acts in the best brand logo: a graphic representation that identifies a
and highest interests of its owners. Full and complete business or product. p. 224
‘disclosure’, which means to be open and not hide break-even analysis: used to determine the level of
the truth, ensures that the books of account are kept sales that needs to be generated to cover the total cost
accurately and that the information reflected in them, of production. p. 402
and which is summarised in reports, is based on budget: the business’s financial plan for the future. p. 407
the true and actual transactions. Another term for bureaucracy: the set of rules and regulations that control
accountability is stewardship. p. 231 a business. p. 167
accounting: a managerial and administrative tool for business: can be defined as the organised effort of
recording financial transactions, so that a summary of what individuals to produce and sell, for a profit, the products
has happened to business money can be traced. p. 229 that satisfy individuals’ needs and wants. p. 6
acquisition: (takeover) occurs when one business takes business activity statement (BAS): records a business’s
control of another business by purchasing a controlling claim for input tax credits and accounts for GST
interest in it. p. 95 payable. p. 376
acquisition: (staff) the process of attracting and business (corporate) culture: refers to the values, ideas,
recruiting the right staff for roles in a business. p. 251 expectations and beliefs shared by members of the
assets: items of value owned by the business that can be organisation. p. 77
given a monetary value. p. 242 business environment: refers to the surrounding conditions
audit: an independent check of the accuracy of financial in which the business operates. It can be divided into two
records and accounting procedures. p. 278 broad categories: external and internal. p. 51
Australian Business Number (ABN): a single business ethics: the application of moral standards to
identifying number that a business uses when dealing business behaviour. p. 272
with government departments and agencies. p. 378 business information system (BIS): also referred to
autocratic leadership style: a manager using an autocratic as a management information system (MIS),
leadership style tends to make all the decisions, dictates gathers data, organises and summarises them, and then
work methods, limits worker knowledge about what converts them into practical information. p. 292
needs to be done to the next step to be performed, business life cycle: refers to the stages of growth and
frequently checks employee performance and sometimes development a business can experience. p. 86
gives feedback that is punitive. p. 175 business opportunity: can be described as something
award: a legally binding agreement that sets out the an entrepreneur can see as an avenue to success. It
minimum wages and conditions for a group of is often identified when a person believes they can
employees. p. 264 provide goods or services in a better or different way
balance of payments (BOP): a record of a country’s from those already on the market. p. 345
trade and financial transactions with the rest of the business plan: the ‘road map’ for future growth and
world over time, usually one year. p. 319 development within a business. It sets out the desired
balance sheet: represents a business’s assets and liabilities goals and direction of the business. p. 380
at a particular point in time, expressed in money terms, cash flow: simply the money coming into the business
and represents the net worth of the business. p. 241 in the form of cash receipts, and the money leaving the
bankruptcy: a declaration that a business or person is business as cash payments. p. 90
unable to pay his or her debts. p. 106 cash flow projection: shows the changes to the cash
behavioural approach: to management stresses that position brought about by the operating, investing and
people (employees) should be the main focus of the financial activities of the business. p. 403
way in which the business is organised. p. 178 cash flow statement: a financial statement that indicates
benchmark: a standard by which something can be the movement of cash receipts and cash payments
measured or judged. p. 145 resulting from transactions over a period of time. p. 233
best practice: refers to those business practices that are chain of command: a system that determines responsibility,
regarded as the best or of the highest standard in the supervision and accountability of members of the
industry. p. 299 organisation. p. 173
body language: the use of gestures, facial expressions change: any alteration in the internal or external
and posture to communicate. p. 128 environments p. 283
brand: a name, term, symbol or design that identifies change agent: a person or group of people who act as
a specific product and distinguishes it from its catalysts, assuming responsibility for managing the
competitors. p. 224 change process. p. 297
444 GLOSSARY
change management: a methodical approach to dealing data: unprocessed facts and figures such as sales figures
with change, both from the perspective of a business and customer complaints. p. 292
and on the individual level. p. 299 debt finance: relates to the short-term and long-term
choice: is the act of selecting among alternatives. p. 12 borrowing from external sources by a business. p. 362
classical approach: to management stresses how best decision making: the process of identifying the options
to manage and organise workers so as to improve available and then choosing a specific course of action
productivity (output). p. 165 to solve a specific problem. p. 134
closing stock: the value of stock on hand at the end of delegation: the handing over of certain tasks or
the financial year. p. 238 responsibilities to an employee who is suitably capable
common law: refers to law developed by courts and and qualified to carry them out. p. 181
tribunals. p. 262 deregulation: the removal of government regulation
communication: the exchange of information between from industry, with the aim of increasing efficiency and
people; the sending and receiving of messages. p. 126 improving competition. p. 54
competition: rivalry among businesses that seek to development: refers to activities that prepare staff to
satisfy a market. p. 345 take greater responsibility in the future. p. 259
Competition and Consumer Act 2010: (Cwlth) a dismissal: when the behaviour of an employee is
law that protects both consumers and businesses. unacceptable and it then becomes necessary for a business
It protects consumers from deceptive or misleading to terminate the employee’s employment contract. p. 269
practices, and it regulates the trade practices of distribution channels: ways of getting the product to
businesses. p. 367 the customer. p. 227
competitive advantage: refers to the strategies used by a
diversification: (or conglomerate integration) occurs
business to gain an ‘edge’ over its competitors. p. 422
when a business acquires or merges with a business in
complementary business: a business that sells a similar
a completely unrelated industry. p. 95
range of goods and services. p. 71
dividend: part of a business’s profit that is divided
conflict of interest: occurs when a person takes advantage
among shareholders. p. 11
of a situation or piece of information for his or her own
division: refers to the separation of key business
gain rather than for the employer’s interest. p. 278
functions into specialised units or departments. The
consumer buying behaviour: refers to the decisions
business is divided into functional areas. p. 196
and actions of consumers when they purchase goods
driving forces: those forces that support the change. p. 296
and services for personal household use. p. 219
contingencies: unanticipated events that can lead to e-business: (electronic business) using the internet to
financial difficulty. For a business to be well managed, conduct business. p. 429
it needs to have saved money for such events. p. 229 ecological sustainability: occurs when economic
contingency approach: stresses the need for flexibility growth meets the needs of the present population
and adaptation of management practices and ideas to without endangering the ability of future generations
suit changing circumstances. p. 190 to meet their needs. p. 84
continuous improvement: involves an ongoing e-commerce: the buying and selling of goods and
commitment to achieving perfection. p. 211 services via the internet. p. 430
control process: involves establishing standards in line economic cycles: (or business cycles) the periods of
with the goals of the business, measuring the performance growth (‘boom’) and recession (‘bust’) that occur as a
of the business against those standards or benchmarks, result of fluctuations in the general level of economic
and making changes where necessary to ensure that the activity. p. 52
goals of the business have been met. p. 171 economic growth: occurs when a nation increases
controlling: compares what was intended to happen the real value of goods and services over a period of
with what has actually occurred. pp. 121, 171 time. p. 318
Corporate Code of Conduct: a set of ethical standards economy: a system used to determine what to produce,
for managers and employees to abide by. p. 279 how to produce and to whom production will be
cost of goods sold (COGS): the value of stock that a distributed. p. 317
business has sold to its customers. p. 237 effectiveness: measures the degree to which a goal has
creditors: those people or businesses who are owed been achieved. p. 120
money. p. 106 efficiency: compares the resources needed to achieve a
curriculum vitae or résumé: a summary of a person’s goal (the costs) against what was actually achieved (the
previous employment experience. p. 256 benefits). p. 120
GLOSSARY 445
employee selection: involves gathering information about flexible: refers to being responsive to change and able to
each applicant for a position, then using that information adjust to changing circumstances. p. 135
to choose the most appropriate applicant. p. 256 flexible manufacturing: production by computer
employee training: generally refers to the process of controlled machines that can adapt to various versions
teaching staff how to perform their job more efficiently of the same operation. p. 288
and effectively by boosting their knowledge and float: the raising of capital in a company through the sale
skills. p. 162 of shares to the public. p. 47
employment contract: a legally binding, formal agreement forecasts (or projections): the business’s predictions
between an employer and an employee. p. 262 about the future. p. 401
enterprise agreements: collective agreements made at franchise: involves buying the rights from another business
a workplace level between an employer and a union, to distribute its products under its name. p. 350
acting on behalf of its employees, or between the franchisee: an individual or business that purchases a
employer and a group of employees, about terms and franchise. p. 350
conditions of employment. p. 265 franchisor: an individual or business that grants a
entrepreneur: someone who starts, operates and franchise. p. 350
assumes the risk of a business venture in the hope of geographical spread: the presence of a business and
making a profit. p. 15 the range of its products across a suburb, city, state or
entrepreneurship: the ability and willingness to start, country or the globe. p. 25
operate and assume the risk of a business venture in global business: commonly referred to as a
the hope of making a profit. p. 15 multinational corporation, is a large company that
equity finance: the funds contributed by the business has branches in many different countries. p. 26
owner(s) to start and then expand the business. p. 362 globalisation: the process that sees people, goods,
evaluation: the process of assessing whether the
money and ideas moving around the world faster and
more cheaply than before. p. 57
business has achieved stated goals. p. 405
goal: a desired outcome (target) that an individual or
expenses: simply costs. Specifically, expenses are
business intends to achieve within a certain time
the costs incurred in the process of acquiring or
frame. p. 144
manufacturing a good or service to sell and the costs
goods: items that can be seen or touched. p. 6
(direct and indirect) associated with managing all
goods and services tax (GST): a broad-based tax of
aspects of the sales of that good or service. p. 238
10 per cent on the supply of most goods and services
external environment: includes those factors over
consumed in Australia. p. 376
which the business has very little control. p. 51
goodwill: the monetary value attached to the reputation
external recruitment: involves filling job vacancies with
of a particular business. p. 349
people from outside the business. p. 254
government enterprises: government-owned and
Fairtrade: a trading partnership that seeks greater equity operated businesses. p. 43
(fairness) in international trade. It promotes the rights grant: any monetary or financial assistance that does not
of marginalised workers, especially in low-income generally have to be repaid. p. 399
countries. p. 275
gross domestic product (GDP): the total money value
finance: refers to how a business funds its activities — for of all goods and services produced in Australia over a
instance, where it gets the money to trade, why it chooses one-year period. p. 318
to use certain lenders — as well as the costs, risks and gross profit: the term given to the sales less cost of
benefits of different types of borrowings. p. 231 goods sold (COGS). p. 237
financial resources: the funds the business uses to meet holistic: approach looks at the whole picture. p. 292
its obligations to various creditors. p. 74 horizontal integration: occurs when a business
financial statements: reports that summarise acquires or merges with another firm that makes and
transactions over a period of time. p. 233 sells similar products. p. 95
finished product: one that is ready for customers to buy human resources: the employees of the business and are
and use. p. 6 generally its most important asset. p. 74
fixed costs (FC): costs that do not vary regardless of how human resource/employment cycle: covers all stages
many units of a good or service are produced. p. 402 in the process of employing staff, from initial planning
flatter organisational structures: evolved due to a through to recruitment, selection, induction, training
‘de-layering’ of management structures resulting in the and development, performance management, and
elimination of one or more management levels. p. 186 eventual separation of employment. p. 249
446 GLOSSARY
human resource management (HRM): in its simplest internal recruitment: involves filling job vacancies with
terms, is defined as the effective management of the present employees, rather than looking outside the
formal relationship between the employer and the business. p. 254
employees. p. 247 interpersonal (people) skills: those skills needed to
human resource planning: the development of strategies work and communicate with other people and to
to meet the business’s future staffing needs. p. 252 understand their needs. p. 125
income: money received by a person for providing intrapreneur: an individual who takes on the
his or her labour, or a business from a return on its entrepreneurial roles within a business. p. 157
investments. p. 10 involuntary cessation: occurs when the owner is forced to
income statement or statement of financial cease trading by the creditors of the business. p. 106
performance: a summary of the income earned and involuntary separation: occurs when an employee is
the expenses incurred over a period of trading. It helps asked to leave the business against their will. p. 269
users of information see exactly how much money job analysis: a systematic study of each employee’s
has come into the business as revenue, how much duties, tasks and work environment. p. 252
has gone out as expenditure and how much has been
job description: a written statement describing the
derived as profit. p. 236
employee’s duties, tasks and responsibilities associated
incorporated: refers to the process companies go through
with the job. p. 253
to become a separate legal entity from the owner/s. p. 35
job specification: a list of the key qualifications needed
incorporation: the process that companies go through
to perform a particular job in terms of education, skills
to become incorporated, i.e. to become a registered
and experience. p. 253
company and a separate legal entity. p. 39
labour productivity: measures how much an employee
incremental change: results in minor changes, usually
involving only a few employees. p. 285 can produce in a set period of time. p. 156
leadership: the ability to influence people to set and
industry: consists of businesses that are involved in
similar types of production. p. 30 achieve specific goals. p. 132
inertia: refers to an unenthusiastic response to proposed leadership style: A manager’s leadership style is essentially
change. p. 295 their way of doing things — their behaviour and
information: processed data that have been deliberately
attitude. p. 174
selected and organised to be useful to an individual leading: the process of influencing or motivating people
manager. p. 292 to work towards the achievement of the business’s
information resources: include the knowledge and data objectives. pp. 121, 180
required by the business, such as market research, learning organisation: monitors and interprets its
sales reports, economic forecasts, technical material environment, seeking to improve its understanding
and legal advice. p. 74 of the relationship between its actions and its
innovation: either creating a new product, service or environment. p. 260
process, or significantly improving an existing one. p. 13 leasing: a long-term source of borrowing for businesses.
input tax credit: an allowable tax deduction that a It involves the payment of money for the use of
business can claim for any GST included in the price equipment that is owned by another party. p. 426
of business inputs. p. 376 liabilities: items of debt owed to other organisations (e.g.
inputs: the resources used in the transformation suppliers, banks) and include loans, accounts to be
(production) process. p. 202 paid by the business, mortgages, credit card debt and
insolvent: occurs when a company is not able to pay its accumulated expenses. p. 242
debts as and when they fall due. p. 107 limited liability: a feature of corporate ownership that
intangibles: include services that cannot be touched. p. 200 limits each owner’s financial liability to the amount of
interdependence: refers to the mutual dependence money he or she has paid for the business’s shares. p. 40
that the key functions have on one another. The key liquidation: occurs when an independent and suitably
business functions work best when they overlap, and qualified person – the liquidator – is appointed to take
employees work towards common goals. For each control of the business with the intention of selling
function area to perform at capacity, it depends on the all the company’s assets in an orderly and fair way in
support of the others. p. 196 order to pay the creditors. p. 107
interest: the cost of borrowing money. p. 363 liquidity: refers to the amount of cash a business has
internal environment: includes those factors over access to and how readily it can convert its assets into
which the business has some degree of control. p. 51 cash so that debt can be paid. p. 233
GLOSSARY 447
local business: has a very restricted geographical spread; marketing strategies: actions undertaken to achieve the
it serves the surrounding area. p. 25 business’s marketing goals. p. 222
long-term growth: the ability of a business to mass markets: in a mass market the seller mass-
continually expand. p. 394 produces, mass-distributes and mass-promotes one
management: the process of working with and through product to all buyers. p. 218
other people to achieve business goals in a changing mass production: the process of manufacturing standardised
environment. Crucial to this process is the effective goods on a huge scale by automation. p. 165
and efficient use of limited resources. p. 119 mentor: someone — usually a more experienced
management consultant: someone who has specialised employee — who helps develop a less experienced
knowledge and skills within an area of business. p. 299 employee (the protégé). p. 160
management hierarchy: the arrangement that mentoring: is the process of developing another
provides increasing authority at higher levels of the individual by offering tutoring, coaching and
hierarchy. p. 172 modelling acceptable behaviour. p. 160
manager: someone who coordinates the business’s limited merger: occurs when the owners of two separate
resources in order to achieve specific goals. p. 119 businesses agree to combine their resources and form a
market analysis: involves collecting, summarising and new organisation. p. 95
analysing information about the state of the market, micro business: employs fewer than five people
customers, the threats and opportunities that the market (including the owner). p. 25
presents, and any advantages or disadvantages that the modifying: the process of changing existing plans, using
business is likely to have over its competitors. p. 355 updated information to shape future plans. p. 410
market concentration: refers to the number of monitoring: the process of measuring actual
competitors in a particular market. There are four performance against planned performance. p. 405
main types of market concentration: mortgage: a loan secured on some type of asset. p. 362
• a monopoly — complete concentration by one firm motivation: refers to the individual, internal process
in the industry, e.g. Australia Post that directs, energises and sustains a person’s
• an oligopoly: — where a small number of larger behaviour. p. 158
firms have a greater control over a market, e.g. car multiskilling: allows employees to develop skills in a
manufacturers wide range of tasks through ongoing training. p. 162
• monopolistic competition — where there is a
national business: a business that operates within just
large number of buyers and sellers in a particular one country. p. 25
market, e.g. local retailing shops
net profit: the difference between the gross profit and
• perfect competition — where there is a large number
operating and non-operating expenses. p. 239
of small firms that sell similar products. They are
niche market: a narrowly selected target market
unable to differentiate products from each other and so
segment. p. 221
can only use price as a way of achieving market share,
nonverbal communication: any message that is not
e.g. fruit and vegetable growers. p. 65
written or spoken. p. 128
market segmentation: occurs when the total market
is subdivided into groups of people who share one or objective: a specific statement detailing what a business
more common characteristic. p. 218 (or individual) needs to achieve in order to accomplish
its vision. p. 392
market share: refers to the business’s share of the total
industry sales for a particular product. pp. 23, 148 on-costs: payments for non-wage benefits. p. 371
marketing: the process of planning and executing the opening stock: the value of stock (or inventory) that the
conception, pricing, promotion and distribution of business has at the start of the financial year. p. 238
ideas, goods and services to create exchanges that satisfy operating expenses: all the costs of running the
individual and organisational objectives (American business except the cost of goods sold. p. 9
Marketing Association). A more simplified definition is operational objectives: focus on short-term issues and
that marketing is a total system of interacting activities describe the course of action necessary to achieve the
designed to plan, price, promote and distribute products tactical objective and strategic goal. p. 392
to present and potential customers. p. 214 operational planning: provides specific details about
marketing mix: refers to the combination of the four the way in which the business will operate in the short
elements of marketing, the four Ps — product, price, term. p. 170
promotion and place — that make up the marketing operations: refers to the business processes that involve
strategy. p. 222 transformation or, more generally, ‘production’. p. 198
448 GLOSSARY
operations management: consists of all the activities problem solving: a broad set of activities involved in
in which managers engage to produce a good or searching for, identifying and then implementing a course
service. p. 198 of action to correct an unworkable situation. p. 133
organisation process: the range of activities that product: a good or service that can be bought or sold. p. 6
translate the goals of a business into reality. p. 171 product life cycle: describes the life of a product over four
organisational structure: the framework in which the stages: introduction, growth, maturity and decline. p. 223
business defines how tasks are divided, resources are production: refers to those activities undertaken by the
used and departments are coordinated. p. 396 business that combine the resources to create products
organising: the structuring of the organisation to that satisfy customers’ needs and wants. p. 6
translate plans and goals into action. pp. 121, 171 profit: what remains after all business expenses have
outputs: refer to the end result of a business’s efforts — been deducted from sales revenue. p. 9
the service or product that is delivered or provided to profit maximisation: occurs when there is a maximum
the consumer. p. 206 difference between the total revenue (that is, the number
outsourcing: the use of external sources or businesses of sales made multiplied by the price) coming into the
to undertake business functions or activities for the business and total costs being paid out. p. 147
business. pp. 194, 286 promotion: describes the methods used by a business
overdraft: with an overdraft, the bank allows a business to to inform, persuade and remind a market about its
overdraw their account up to an agreed limit for a specified products. pp. 150, 225
time, to overcome a temporary cash shortfall. p. 362 proprietary (private) company: an incorporated
owner’s equity: the funds contributed by the owner(s)
business and usually has between two and 50 private
to establish and build the business. It is also called shareholders. p. 40
‘capital’. p. 243 prospectus: a document giving details of a company and
inviting the public to buy shares in it. p. 47
packaging: involves the development of a container and
quality: refers to the degree of excellence of goods or
the graphic design for a product. p. 224
service and its fitness for a stated purpose. p. 207
participative or democratic leadership style: one in
quality assurance: involves the use of a system so that a
which the manager consults with employees to ask
business achieves set standards in production. p. 209
their suggestions and then seriously considers those
quality circles: groups of workers who meet to solve
suggestions when making decisions. p. 187
problems relating to quality. p. 210
partnership: a legal business structure that is owned and
quality control: involves the use of inspections at
operated by between two and 20 people with the aim
various points in the production process to check for
of making a profit. p. 37
problems and defects. p. 208
performance standard: a forecast level of performance
quality management: the strategy which a business
against which actual performance can be compared.
uses to make sure that its products meet customer
p. 405
expectations. p. 207
physical resources: include equipment, machinery,
quality of life: refers to the overall wellbeing of an
buildings and raw materials. p. 74 individual, and is a combination of both material and
place or distribution: activities that make the products non-material benefits. p. 19
available to customers when and where they want to quaternary industry: includes services that involve
purchase them. p. 227 the transfer and processing of information and
planning: the preparation of a predetermined course of knowledge. p. 32
action for a business. pp. 121, 170, 385 quinary industry: includes all services that have
primary industry: includes those businesses involved in traditionally been performed in the home. p. 32
the collection of natural resources. p. 30 reactive: to wait for a change to occur and then respond
primary target market: the market segment at which to it. p. 284
most of the marketing resources are directed. p. 220 realisation: the process of converting the assets of a
privatisation: the process of transferring the ownership business into cash. p. 106
of a government business to the private sector. p. 43 receivership: where a business has a receiver take charge
proactive: (management style) incorporates dynamic of the affairs of the business. Unlike liquidation, the
action and forward planning to achieve particular business may not necessarily be wound up. p. 107
objectives. p. 135 recruitment: the process of finding and attracting the right
proactive: to initiate change rather than simply to react quantity and quality of staff to apply for employment
to events. p. 284 vacancies or anticipated vacancies. p. 253
GLOSSARY 449
redundancy: occurs when a person’s job no longer exists, social justice: in business is about adopting a set of
usually due to technological changes, an organisational policies to ensure that employees or other community
restructure or a merger or acquisition. p. 269 members are treated equally and fairly. p. 151
regulations: rules, laws or orders that businesses must socialisation: the process a new employee undergoes in
follow. p. 61 the first few weeks of employment through which he
research and development (R&D): is a set of activities or she learns how to cope and succeed. p. 160
undertaken to improve existing products, create new sole trader: a business that is owned and operated by
products and improve production. p. 13 only one person. p. 36
resignation: the voluntary ending of employment by the specialisation of labour: refers to the degree to which
employee ‘quitting’ their job. p. 268 tasks are divided into separate jobs. p. 173
resource allocation: refers to the efficient distribution of staff involvement: means involving employees in the
resources so as to successfully meet the goals that have decision-making process and giving them the necessary
been established. p. 398 skills and rewards. p. 156
restraining forces: those forces that work against the stakeholder: any group or individual who has an interest in
change. p. 296 or is affected by the activities of a business. p. 80
retirement: occurs when an employee decides to give up stakeholder engagement: refers to businesses sharing
full-time or part-time work and no longer be part of information with and seeking input from stakeholders,
the labour force. p. 268 and involving them in decision making. p. 139
retrenchment: when a business dismisses an employee strategic goals: focus on long-term, broad aims and
because there is not enough work to justify paying him apply to the business as a whole. p. 392
or her. p. 269 strategic planning: planning for the following three
revenue: the money a business receives as payment for to five years. This level of planning will assist in
its products. p. 9 determining where in the market the business wants to
risk: refers to the possibility of loss. p. 15 be, and what the business wants to achieve in relation
salary: a fixed amount of money paid on a regular to its competitors. p. 170
basis, usually fortnightly or monthly, to a permanent strategic thinking: allows a manager to see the business as
employee of a business. p. 10 a whole and to take the broad, long-term view. p. 130
scientific management: an approach that studies a job in strategies: the actions that a business takes to achieve
great detail to discover the best way to perform it. p. 165 specific goals. p. 194
secondary industry: involves taking a raw material and structural change: refers to changes in the business’s
making it into a finished or semi-finished product. p. 31 structure — that is, the organisation chart. p. 285
secondary target market: usually a smaller and less superannuation: a scheme set up by the federal
important market segment. p. 220 government. It requires all employers to make a
separation: the ending of the employment financial contribution to a fund that employees can
relationship. p. 267 access when they leave or retire from a job. p. 373
services: things done for you by others. p. 6 support services: the activities needed to assist the core
share: a part ownership of a public company. p. 151 operations or prime function of a business. p. 74
shareholders: people who are part owners of a company sustainable competitive advantage: refers to the
because they own a number of shares. p. 11 ability of a business to develop strategies that will
sigma-six: process is one in which 99.99 per cent of all ensure it has an ‘edge’ over its competitors for a long
manufactured products are defect free. p. 395 period of time. p. 64
skill: the ability that comes from the knowledge, practice sustainable development: occurs when the needs of
and talent to do something well. p. 123 the present population are met without endangering
skills audit: a process that establishes the current skills levels the ability of future generation to meet their own
of employees and future skills requirements. p. 418 needs. p. 152
skills inventory: a database containing information (SWOT) analysis: a situational (SWOT) analysis involves
on the skills, abilities and qualifications of existing the identification and analysis of the internal strengths
staff. p. 419 and weaknesses of the business, and the opportunities
small to medium enterprises: defined by the in, and threats from, the external environment. p. 390
Australian Bureau of Statistics as firms with less than tactical objectives: focus on mid-term, departmental
200 full-time equivalent employees and/or less than issues and describe the course of action necessary to
$10 million turnover. p. 24 achieve the business’s strategic goals. p. 392
450 GLOSSARY
tactical planning: flexible, adaptable planning, usually transnational (multinational) corporation: a company
over one to two years, that assists in implementing the that has branches in many different countries. p. 23
strategic plan. p. 170 triple bottom line: refers to the economic, social and
tangibles: goods that can be touched. p. 200 environmental performance of a business. pp. 138, 275
target market: a group of c ustomers with similar undercapitalisation: occurs when there is a lack of
characteristics who presently, or who may in the sufficient funds to operate a business normally. p. 104
future, purchase the product. p. 217 unfair dismissal: occurs when an employer dismisses
taxation: the compulsory payment of a proportion of an employee for discriminatory reasons, such as firing
earnings to the government. p. 374 someone because they are pregnant. p. 270
teamwork: involves people who interact regularly and unlimited liability: occurs when the business owner is
coordinate their work towards a common goal. p. 185 personally responsible for all the debts of his or her
tertiary industry: involves performing a service for business. p. 36
other people. p. 31 variable costs (VC): costs that depend on the number of
time and motion study: a process of examining each of goods or services produced. p. 402
the steps in a production procedure and the time taken venture capital: money that is invested in small and
to perform them. p. 166 sometimes struggling businesses that have the potential
total cost (TC): of producing a certain number of goods to become very successful. p. 48
or services is the sum of the fixed and variable costs vertical integration: occurs when a business expands
for those units. p. 402 at different but related levels in the production and
total quality management: an ongoing, business-wide marketing of a product. p. 95
commitment to excellence that is applied to every vision: is the clear, shared sense of direction that allows
aspect of the business’s operation. p. 209 people to attain a common goal. p. 132
total revenue (TR): the total amount received from the vision statement: states the purpose of the business and
sales of a good or service. p. 401 what it aspires to become in the future. pp. 292, 391
traditional definition of management: the process voluntary administration: occurs when an independent
of coordinating a business’s resources to achieve its administrator is appointed to operate the business
goals. p. 118 in the hope of trading out of the present financial
training: generally refers to the process of teaching staff problems. p. 107
how to peform their job more efficiently and effectively voluntary cessation: occurs when the owner ceases to
by boosting their knowledge and skills. p. 259 operate the business of their own accord. p. 106
transformation: the conversion of inputs (resources) voluntary separation: occurs when an employee
into outputs (goods or services). p. 202 chooses to leave the business of their own free
transformational change: often results in a complete will. p. 268
restructure throughout the whole organisation. p. 285 wage: money received by workers, usually on a weekly
transformed resources: those inputs that are changed basis, for services they provide to an employer. p. 10
or converted in the operations process. p. 202 zoning: a means by which local councils allocate land
transforming resources: those inputs that carry out the for different uses, such as residential, commercial,
transformation process. p. 202 recreational and industrial. p. 356
GLOSSARY 451
INDEX
Note: Entries in bold type in this index indicate businesses featured in Snapshots throughout this book.
accountability 231 Branson, Richard 189 business names 365

accountants 340 budgets, monitoring and evaluating business opportunities
accounting 407–8 assessing finance for 360–1
introduction and scope 229–31 Bupa Health Dialog 248 identifying 345
main reports or statements 230 bureaucracy 167 business ownership, rewards 333
acquisitions 95 business business plan
Adam James Harley v. Aristocrat definition 6 benefits of 384
Technologies Australia Pty Ltd 270 nature of 6–8 definition 380
adaptability to change 135 role of 3, 4 importance 414–15
advertising social and economic importance 9 presentation and preparation 415
ethical dilemmas 279 business activity statement (BAS) role 380–2
and promotion 225 376 types 383–4
ageing population 55, 56 business cessation business planning process 385–7
Ambulance Victoria 210 bankruptcy 106 business records 376
annual leave loading 373–4 involuntary cessation 106 business size, classification 22–5, 313
Apple 127, 198 liquidation 107–9 business start-ups
assets 242 voluntary administration 107 and business idea 343–5
audits 278 voluntary cessation 105–6 buying an existing business 349–50
Australia Post 44, 211 business (corporate) culture establishment options 347–52
Australian Arrow Pty Ltd 211 impact of change 287 finance 360–4
Australian Bureau of Statistics 343 influence on business 77–9 franchises 350–2
Australian Business Award for business cycles 52–3 market considerations 354–8
Environmental Sustainability 153 business decline personal qualities needed 328–38
Australian Business Number (ABN) 378 contributing factors 104 sources of advice 340–3
Australian Company Number (ACN) 39 nature of 86–9, 100 starting from scratch 348–9
Australian Competition and Consumer Business Enterprise Centres (BEC) business studies 5–6
Commission (ACCC) 59 Australia 330–1, 341 business success
Australian Geographic 26 business environment and economic conditions 431
Australian industry, growth of 33 external influences 51–69 SMEs 322–4
Australian inventions 14 influences on 50–1 businesses
Australian Postal Corporations Act 1989 internal influences 70–80 geographical spread 25–8
(Cwlth) 44 stakeholders 80–4 growth and decline 86–9
Australian Securities Exchange 43, 63 business ethics 272 industry sector 30–3
Australian Securities and Investments business expansion methods 95 legal structure 35–8
Commission (ASIC) 39, 365 business failure methods of classifying 22
Australian Taxation Office (ATO) 375 and economic conditions 431 renewal 101
autocratic/authoritarian leadership style SMEs 325–6 steady state 100
174, 175–6 business functions 8–19 types 4
awards 264–5 coordination 196–7
interdependence 196 Campbell Inquiry 55
balance of payments, SME key functions 195 capital gains tax 375
contribution 319 business goals capital markets 67
balance sheet equation 244–5 achieving a mix of 153–4 cash flow 90
balance sheet items 242–3 determining 391–2 cash flow management 233–4
balance sheets 241–3 environmental goals 152–3 cash flow projections 403–4
bank managers 341 growth 150 cash flow statements
bankruptcy 52, 106 market share 148–50 description 233
Bartlett Construction 417 profits 147–8 and effective cash flow management
Bartlett Precision Manufacturing 226 share price 151 233–4
Bauer Media 148 social goals 151 for larger businesses 235
Beau’s Floral Studio 220–1 staff involvement 156–62 Cavalicious 91–2
behavioural approach to management strategic 392 chain of command 173
178–89, 192 types 393 chambers of commerce 342
benchmarks 145 business idea 343–5 change
BHP Billiton 139–41 business information systems 292 creating a culture of change 297
Billabong 104–5 business laws 61 driving and resisting forces 296
body language 128–9 business life cycle positive leadership 298
The Body Shop 77, 151 establishment stage 90–2 strategies for reducing resistance to
boom cycles 53 growth stage 92–6 296–7
brand logos 224 maturity stage 97–9 see also organisation change
branding 224 post-maturity stage 99–102 change agents 297
break-even analysis 402–3 stages 86–9 choice, freedom of 12
452 INDEX
City Health 125 creditors employment
classical approach to management 165–76, definition 106 by industry sector 11
192 impact of liquidation 108 contribution of SMEs 318–19
classical–bureaucratic approach to creditors’ (voluntary) liquidation 108 generation of 10
management 167–8 cultural background, and business employment agencies 418
classical–scientific approach to management establishment 335–6 employment contracts
165–7 current assets 242 awards 264–5
Club Assist 153 current liabilities 243 common law rights and obligations
Coca-Cola Amatil 154 curriculum vitae 256 262–3
Coles 88–9, 149 Curry, Andrew 15–17 enterprise agreements 265–6
common law 262–3 customer feedback 395 minimum employment standards 263–4
Commonwealth Post and Telegraph Act 1902 customer focus 211 nature and operation of 262
(Cwlth) 44 customers, as stakeholders 82–3 enterprise agreements 265–6
communication entrepreneurial ability, assessing 328
definition 126 data 292 entrepreneurs 15, 334
and management 183–4 David Jones 26, 99, 274 entrepreneurship
miscommunication 128 debt finance 54, 362, 363 assessment of suitability for 328
nonverbal communication decision-making skills 134 benefits of 335
128–9 delegation 181 burdens of 335
secrets of 127 Deming, W Edwards 210, 211 definition 15
truthful communication 279 demography 55 and risk 14–18, 333
communication skills 126–9 deregulation 54, 55, 60 skills and qualities needed 333–4
companies, types 39–44 development 259 environmental goals of business 152–3
company directors, impact of Dexus 83 equity finance 362
liquidation 108 differentiation strategy 424–5 establishment stage of business life cycle
company tax 375 dismissal 269–70 90–2
competition 345 distribution channels 227 ethical business behaviour
Competition and Consumer Act 2010 diversification 95 encouraging 279–80
(Cwlth) 59, 367–9 dividends 11 and ethical issues 277–8
competition-based pricing 355 divisions 196 nature of 272–7
competitive advantage driving forces 296 Ethical Clothing Australia 273–4
definition 422 Dvorak, Jan 125 ethical issues
differentiation strategy 424–5 conflict of interest 278
ensuring long-term success 425 e-business 316, 429–30 fairness and honesty 277
identifying and sustaining 422–6 e-commerce 225 financial management 278
price/cost strategy 423–4 ecological sustainability 84 respect for people 277–8
competitiveness economic conditions, and business success truthful communication 279
complementary businesses 71 or failure 431 Etiko 275
ease of market entry 65–6 economic cycles 52–3 evaluation 405
influencing factors 64–7 economic growth 318 expenses breakdown 238
local and foreign competitors 66 economic influences on business experience 330
marketing strategies 67 52–4 external influences on business
number of competitors 65 economy 317 competitive situation influences 64–7
CompuWorks 420 Ed Hardy Pty Ltd 105 economic influences 52–4
conflict of interest 278 education 330–1 financial influences 54–5
consumer buying behaviour 219 effectiveness 120 geographical influences 55–7
consumer markets, changes in 68 efficiency 120 institutional influences 61–3
contingencies 229 electronic information services legal influences 59–60
contingency approach to 429 main influences 51
management 190–1, 192 employee costs 371–4 markets 67–8
continuous improvement 211 employee empowerment 210–11 political influences 60
control processes 171 employee motivation 158–60 social influences 57–8
controlling, definition 121, 171 employee recruitment 253–6, 418 technological influences 63–4
Corporate Code of Conduct 279 employee selection 256 external recruitment 254–5
corporate social responsibility 137 employee skills 371
Corporations Act 2001 (Cwlth) 39 employee skills databases 418–19 factory system 165
cost 395 employee training and development 162, Fair Work Commission 265, 266, 270
cost of goods sold (COGS) 258–61 Fairfax Media Ltd 102
237, 238 employees fairness 277
cost-based pricing 355 impact of liquidation 108 Fairtrade 275
court (involuntary) liquidation 108 as stakeholders 81–2 FareShare 275
Crayons Childcare Centre 337 employer associations 63 Fayol, Henri 167–8
INDEX 453
federal government, regulations affecting Greenspan Technology 14 interest costs 363
business 61 gross domestic product (GDP), contribution internal influences on business
federal government advice/support of SMEs 318 business culture 77–9
agencies 341–2 gross profit 237 location 71–4
federal taxes on business 374–5 groupthink 419 main influences 71
FedEx 118 growth stage of business life cycle 92–6 management 75–7
finance product influences 71
accounting 229–31 ‘Hawthorne effect’ 179 resources 74–5
assessing for a business opportunity Hawthorne studies 179, 182, 183 internal recruitment 254
360–1 health regulations 366–7 interpersonal (people) skills 124–6
avoiding overextension 426–7 healthy management 125 intrapreneurs 157
cost of 363 holistic approach 292 inventions
introduction and scope 228–9, 231–3 home-based businesses 358 Australian inventions 14
sources 361–2 honesty 277 SME contributions 320
financial influences on business 54–5 horizontal integration 95 investing activities 235
financial management, ethical issues 278 human resource cycle/staffing process involuntary cessation of businesses 106
financial markets 67 249–51 involuntary separation 269–71
financial resources 74 human resource management (HRM) 247,
financial statements 287 job analysis, specifying staffing needs
balance sheet equation 244–5 human resource planning, identifying 252–3
balance sheets 241–3 staffing needs 252–3 job descriptions 253
cash flow statements 233–5 human resource/employment cycle 249 job specification 253
income statement 236–40 human resources 74 Jobs, Steve 127
introduction to 233 acquisition 251–3 Johnson & Johnson 152
financing activities 235 employment contracts 262–7 Jordan Taylah 87
Fingerscan 14 introduction 247, 249
finished products, definition 6 recruitment 253–6 kaizen 211
fixed costs 402 selection 256–7 Kapp Engineering 389
flatter organisational structures 186, 286 separation 267–71 Kelly & Co 41
flexibility 135 and SMEs 370–4 Kelly Engineering 319–20
flexible management 288 training and development 258–61 Kettle Chips 14
floats (shares) 47 kikki.K 381
Ford, Henry 166 IBM 290 Kimberley-Clark 153
forecasts (projections) 401 income, generation of 10–12 Kotter, John 290
franchisees 350 income statements KPMG 15
franchises 350–2 definition 236–7
franchisors 350 gross profit and cost of goods sold labour markets, changes in 67–8
free trade 60 237–8 labour productivity 156
fringe benefits tax (FBT) 375 net profit 239 land tax 375
net sales 237 large businesses 23–4
Gates, Bill 15 other expenses 238 leadership
gender, and business establishment 336–8 separation of expenses by type 238 and change management 298
geographical spread of businesses 25–8 income tax 375 definition 132
geography, influence on business 55–7 incorporated businesses 35 visionary leadership 133
Glamazon 311 incorporated enterprises 39 leadership styles 173–6
global businesses 26–8 incorporation 39 leading
globalisation 56–7 incremental change 285 definition 121
goals industries 30 and management 180–2
importance of 145 industry sectors 30–3 learning organisations 260
nature of 144 inertia 295 leasing 426
S.M.A.R.T. technique 145–6 information 292 legal influences on business 59–60
see also business goals information resources 74 legal structure of businesses
Golden Estate Property Development innovation and business size 47
336 by intrapreneurs 157 factors influencing choice 46–8
goods 6, 200 role of business 13–14 and finance 48
goods and services tax (GST) 375, 376–7 SME contribution to 320 incorporated and unincorporated 35–6
goodwill 349 input tax credits 376 and ownership 47
Google 79 inputs 202 partnerships 37–8
government agencies 341–2 insolvency 107–8 sole traders 36–7
government enterprises 43–4 institutional influences on business 61–3 liabilities 242–3
grant 399 intangibles 200, 242 libraries 343
Greenleaf, Robert K. 181 interdependence, business functions 196 Limited Liability Act 1855 (UK) 40
454 INDEX
limited liability companies 40 management process Microsoft Corporation 15
liquidation 107–9 coordination of functions and resources Milgrom, Naomi 117
loans 363 196–7 minimum employment standards 263–4
local businesses 25 ethical business behaviour 272–80 Miracle Massage 15–16, 16–17
local government finance 228–45 miscommunication 128
encouragement of business 342 human resources 247–71 Mission Australia Employment Services
rates and charges 378 key aspects 119 418
regulations affecting business 61 marketing 212–27 Mocks 344
location operations 198–212 modifying 410
influence on business 71–4, 356–7 overview 194–6 monitoring 404
selection of 72–4 management skills monopolies 65
Locke, Edwin 293 communication skills 126–9 monopolistic competition 65
long-term borrowing 362 decision-making skills 134 Morgan Stanley 76–7
long-term growth 394 flexibility and adaptability to change mortgages 362
Lovebird Weddings 94 135 motivating, and management 158–60,
Lush Fresh Handmade Cosmetics interpersonal (people) skills 124–6 182–3
153 overview 123–4 motivation
problem-solving skills 133–4 and business ownership 331–3
M&M Real Estate 360 reconciling conflicting interests of definition 158
McDonald’s 167 stakeholders 135–42 Motorola 261
McGrath Estate Agents 26 strategic thinking skills 129–30 multinational corporations 26–8
McMahon Services 42 vision skills 132–3
Madhu’s Restaurant 351–2 managers Nars Chocolates 126
Magnatech Industries 299–303 definition 119 NASA 135
management effectiveness 121–2, 123–4 national businesses 25–6
autocratic/authoritarian leadership 174, role 121 National Employment Standards 263,
175–6 as stakeholders 81 265
behavioural approach 178–89, 192 manufacturing, transformation National Sustainability Council 56
classical approach 165–78, 192 process 203–4, 205 net profit 239
classical–bureaucratic approach market analysis 355 net sales 237
167–8 market concentration 65 Network Video 64
classical–scientific approach 165–7 market considerations, small business niche markets 221
as communicating 183–4 start-ups 354–8 Nine2Three Employment Solutions
comparison of approaches 192 market segmentation 218–21 291
contemporary definition 119–20 market share 23, 148–50 Noble, Catriona 182
contingency approach 190–1, 192 market-based pricing 355 non-current assets 242
as controlling 171–2 marketing non-current liabilities 243
development of different approaches definition 214–15 nonverbal communication 128–9
164–5 identification of target market NSW Food Authority 367
effectiveness 121–2 217–22 NSW Trade and Investment –
functions 173 importance of 212–13 SmallBizConnect 341
hierarchical organisational structure marketing mix 222–7
172–3 role of 216 objectives
influence on business 75–7 marketing fundamentals 213–14 operational 392
introduction 118–19 marketing mix tactical 392
leadership styles 173–6 four Ps 222–3 oligopolies 65
as leading 180–2 place 227 on-costs 371–4
as motivating 182–3 price 225 oniomania 7
as organising 171 product 223–4 online businesses 357
participative/democratic leadership 174, promotion 225–6 online presence 357–8
187–9 marketing strategies 67, 222 opening stock 238
as planning 170 mass markets 218 operating activities 235
staffing and teams 416–20 mass production 165 operating expenses 9
teams 185–6 maturity stage of business life cycle operational planning 170
ten commandments for modern 97–9 operations
manager 191 Mayo, Elton 178, 179, 179, 182 definition 198
traditional definition 118 medium businesses 23–4 goods and/or services 200
within the business 120–1 mentoring 160–1 production process 201–6
management consultants 298–303, 341 mentors 160 quality management 207–12
management hierarchy 172–3 mergers 95 operations management
management information systems (MIS) Michaels, Harriet 276–7 impact of organisational change 288
292 micro businesses 24–5 nature of 198–9
INDEX 455
organisation process 171 product, as part of marketing mix 223–4 retirement 268
organisational change product branding 224 retrenchment 269
and human resource management 287 product influences on business 71 revenue 9
identifying need for 292 product life cycle 223 Rip Curl 137–8
impact on business culture 287 product packaging 224 risk, and entrepreneurship 14–18
management consultants 298–303 production, of goods and services 6–8 Ronald McDonald House 152
management of 283–4, 290–303 production process
nature of 282–3 inputs 202 SaferGate 213
and operations management 288 key elements 201 St James Ethics Centre 279
resistance to 294–8 outputs 206 salaries 10
responding to internal and external transformation processes 202–5 sales, monitoring and evaluation 406
influences 285–9 products, definition 6 sales promotion 225
setting achievable goals 292–3 professional advisers 340–1 Sasy n Savy 231
structural responses 285–6 profit generation 9–10 scientific management 165–7
organisational structures 396–8 profit maximisation 147–8 secondary industry 31
and business culture 78 profit, monitoring and evaluating 408–9 secondary target market 220
flatter organisational structures 186 projections see forecasts Seek.com.au 127, 255
new and emerging 75 promotion separation (employment relationship)
traditional 75 and advertising 225 involuntary separation 269–71
organising 121, 171 definition 150 types 267–8
Origin Energy 78 as part of marketing mix 225–6 voluntary separation 268–9
outputs 206 proprietary (private) companies 40–2 service businesses, transformation process
outsourcing 194, 286 prospectus 47 204–5
outworkers 273–4 public companies 42–3 services 6, 200
overdrafts 362, 363 Public Health Act 2010 (NSW) 366 sexual harassment 274
overextension, avoiding 426–7 public relations 225 share price 151
owner’s equity 243 publicity 225 shareholders
Publisher Textiles 54 definition 11
packaging 224 impact of liquidation 109
PaperlinX 87 qualifications, for starting SME 329 as stakeholders 81
participative/democratic leadership style quality 207 shopping centre complexes 356
174, 187–9 quality assurance 209 short-term borrowing 362
partnerships 37–8 quality circles 210 Sigma Six 395
Path to Health 348 quality control 208 SITA Australia 153
Patties Foods 424–5 quality of life 19 situational (SWOT) analysis 390
pay-as-you-go (PAYG) tax 375 quality management 207–11 size of businesses 22–5
payroll tax 375 quaternary industry 32 skills, for starting SME 330–1
perfect competition 65 Quick-fire Clay 215 skills audit 418–19
performance standard 404 quinary industry 32 skills inventory 419
personal qualities, required by SME owners Slim Secrets 316
328–38 Ramsay, Gordon 175 Small Business Association of Australia and
personal selling 225 reactive approach 135, 284 New Zealand 342–3
physical resources 74 realisation 106 SmallBizConnect 387
place, as part of marketing mix 227 receivership 107 small businesses 23–4
planning 121, 170 recessionary cycles 53 small to medium enterprises (SMEs)
planning ideas, sources 389–91 recruitment of staff 253–6, 418 business idea 343–6
political influences on business 60 redundancy 269 characteristics 313–14
Polosak, Steve 283 regulations 61 definition 24, 312–15
post-maturity stage of business life cycle regulatory bodies 61–2 economic contribution 317–21
99–102 research and development (R&D) 13 establishment options 347–52
Postal Act 1825 (NSW) 44 resignations 268 failure rates 324
Practice Manager 24/7 331–2 resource allocation 398 finance 360–3
price resources, influence on businesses 74–5 human resources 370–4
determination of 355 resources, organising importance 22–3, 312
as part of marketing mix 225 finance 399 keys to success 322–4
price/cost strategy 423–4 human resources 399–400 legal and regulatory considerations
primary industry 30–1 marketing 399 365–9
primary target market 220 operations 398 market considerations 354–8
privatisation 43–4, 60 respect for people 277–8 number of 314–15
proactive approach 135, 284 restraining forces 296 owners’ personal qualities 328–38
problem-solving process 133 résumés 256 reasons for failure 325–6
problem-solving skills 133–4 retail shopping strips 356–7 role 315–16
456 INDEX
sources of advice 340–3 structural change 285–6 and staff involvement 162
taxation 374–8 Studio Latitude 405–6 types 260–1
S.M.A.R.T. technique 145–6 superannuation 373 transformation processes 202–5
Smith, Dick 182 supplier and customer partnerships 395 transformational change 285
Smith, Jared 320 support services 74 transformed resources 202
Smoljko, Mira 311 Sussan Corporation 117 transforming resources 202
social goals of business 151 sustainable competitive advantage 64 transnational (multinational) corporations
social influences on business 57–8 sustainable development 152–3 23
social justice 151 SWOT analysis see situational analysis trend analysis 420–2
social media marketing 226 triple bottom line 138, 275
socialisation 160 tactical planning 170
socially responsible management 276–7 tangibles 200 unfair dismissal 270–1
society, as stakeholder in businesses 83 target market identification unincorporated businesses 35
SOHO (small office home office) market segmentation approach 218–21 unlimited liability 36
businesses 24–5 mass marketing approach 218
sole trader businesses 36–7 niche markets 221 variable costs 402
solicitors 341 taxation Vegemite 13
Southern Cross Austereo 82 federal and state taxes 374–5 venture capital 48
specialisation of labour 173 goods and services tax (GST) 375, vertical integration 95
Sportsgirl 26 376–7 Virgin 189
staff involvement major taxes on businesses 375 vision 132, 391
as business goal 156–62 record keeping 376 vision skills 132–3
definition 156 SMEs 340–3 vision statements 292–3, 391
innovation 157 Taylor, Frederick W. 166 voluntary administration 107
mentoring 160–1 teams 419–20 voluntary cessation of business
motivation 158–60 teamwork 185–6 105–6
training 162 technological advice 342 voluntary separation 268–9
staffing 417–19, 427 technological influences on business
stakeholder engagement 139–41 63–4 wages 10
stakeholders technology Wall Sticker Company 314
customers 82–3 internet applications 428–30 Wallis Report 55
employees 81–2 and need for ongoing training 260 Waratah Press 161
environment 84 using 427–30 wealth, production and distribution
main stakeholders of businesses 80 Telstra 43, 211, 286 18–19
managers 81 Telstra Australian Business Awards 54 Web 2.0 429
problems caused by liquidation 108–9 Telstra’s Young Business Woman of the Weber, Max 167
reconciling conflicting interests 135–42 Year Award 360 Welcome Home program 276–7
shareholders 81 tertiary industry 31 Wesfarmers Limited 89
society 83 time and motion studies 166 Westfield Group 27–8
stamp duty 375 total quality management (TQM) 209–11 Westpac 286
state government, regulations affecting total cost 402 Woolworths 149
business 61 total revenue 401 work teams 286
state government advice/support agencies Tourism Australia 226 working capital (liquidity) management
341 Toyota 199 process of 344–5
state taxes on business 374–5 trade associations 343 strategies 351–2
statement of financial performance 236 trade and industry associations 63 workplace bullying 278
stock, avoiding overextension 427 Trade Marks Act 1995 (Cwlth) 365
strategic planning 170 trade unions 63 Yo-get-it 323–4
strategic thinking 130 training
strategic thinking skills 129–30 and business success 330–1 Zara 66
strategies 194 nature 259 zoning 356, 366
INDEX 457

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BUSINESS STUDIES

Third edition published 2011 © S. Chapman

Typeset in 10.5/12.5 pt ITC Berkeley Oldstyle Std

© John Wiley & Sons Australia, Ltd 2014

The moral rights of the authors have been asserted.

National Library of Australia

Author: Chapman, Stephen (Stephen John), author

Reproduction and communication for educational purposes

Reproduction and communication for other purposes

Front and back cover images: © Oliver Marquardt/123RF.com;

Internal design images: © Sundari/Shutterstock.com

Illustrated by various artists and Wiley Composition Services

Typeset in India by Aptara

TOPIC 1: NATURE OF BUSINESS 2

Chapter 1 Role of business 4

Chapter 2 Types of businesses 22

Chapter 3 Influences in the business environment 50

Chapter 4 Business growth and decline 86

TOPIC 2: BUSINESS MANAGEMENT 116

Chapter 5 Nature of management 118

Chapter 6 Achieving business goals 144

Chapter 8 Management process 194

Chapter 9 Management and change 282

TOPIC 3: BUSINESS PLANNING 310

Chapter 10 Small to medium enterprises

Chapter 11 Influences in establishing a small

Chapter 13 Critical issues in business success

ICT activities 438

vi TO THE STUDENT

ABOUT THE AUTHORS vii

2 TOPIC 1 • Nature of business TOPIC 1 • Nature of business 3

viii HOW TO USE THIS BOOK

are used consistently in

this profit . . . to the

concepts are reinforced recognisable brand or image

For businesses that adopt a customer-oriented approach, the customer

216 TOPIC 2 • Business management Management process • CHAPTER 8 217

This book features eBookPLUS:

eBookPLUS gives instant access to an online

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TOPIC 1: NATURE OF BUSINESS 2

TOPIC 2: BUSINESS MANAGEMENT 116

TOPIC 3: BUSINESS PLANNING 310

Business growth Types of

2 TOPIC 1 • Nature of business

TOPIC 1 • Nature of business 3

FIGURE 1.1 As consumers, we rely on a

4 TOPIC 1 • Nature of business

FIGURE 1.2 Many Business Studies

Importance of business to you

Role of business • CHAPTER 1 5

Producing goods and services

6 TOPIC 1 • Nature of business

Role of business • CHAPTER 1 7

Activity undertaken by business Example

Production — creating products Making necklaces and bracelets

Organising natural, capital and human resources

Controlling production — quantity and quality

Forecasting sales, expenses and profit

1.3 Other functions of business

TOPIC 1: NATURE OF BUSINESS 2