Unit 1 Key terms - Business organization & environment

Unit 1 Key terms - Business organization and environment

Unit 1 - Business organization and environment

It is through the correct use of subject terminology that students show their knowledge and understanding. This unit of the IB Business Management syllabus provides the introductory context to business management.

Unit 1 examines both the internal and external business environments, using a range of business management tools, theories and techniques. These include types of business organizations, organizational objectives, SWOT analysis, the Ansoff matrix, stakeholder analysis, and HL Only topics such as force field analysis, Gantt charts, and decision trees.

Unit 1.1 Key terms - Introduction to business management

Adding value	The process of producing a particular good or service that is worth more than the cost of the resources used to produce it.
Business	A decision-making organization established to produce goods and/or provide services.
Business plan	An official document with details of an organization and the proposals for reaching its aims and objectives (goals).
Entrepreneur	A business-minded person who manages, organizes and plans the production process, taking risks with business decision-making.
Entrepreneurship	The knowledge, skills and experiences of individuals who have the capability to manage the overall production process.
Factors of production	The collective term for the resources used in the production process, i.e. land, labour, capital and entrepreneurship.
Finance and accounts	Function of an organization responsible for ensuring that the business has sufficient funds in order to conduct its daily operations.
Goods	Physical products, such as food, clothes, furniture, cars and smartphones.
Human resources (HR)	The function that handles all aspects relate to the workforce, involving all aspects of business operations related to staff (personnel) within an organization.
Intrapreneurship	Describes the traits of individuals who work for an organization (so are not self-employed) but act as entrepreneurs.
Marketing	Function of identifying the needs and wants of customers so that the business can provide goods and services to meet these requirements and desires, usually in a profitable way.
Operations (or operations management)	The process of making goods and providing services from the available resources of a business to meet the needs and wants of its customers.
Primary sector	Business activity involved with the extraction of natural resources, e.g. fishing, mining and agriculture.
Production	The process of creating goods and/or services using the factors of production available to the business.
Quaternary sector	Business activity involving the creation or sharing of knowledge and information.
Secondary sector	Business activity involved with the manufacturing or construction of finished products.
Services	Intangible products, such as haircuts, tourism, public transport, banking, insurance education, and healthcare.
Tertiary sector	Business activity that involves providing services to customers, i.e. consumers and business clients.
Value added	The numerical difference between the cost of factor inputs in the production process and the price that the final output is sold for.

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Unit 1.2 Key terms - Types of business organizations

Charities	These are altruistic organizations that operate predominantly in the private sector with the goal of promoting a worthwhile social cause.
Companies (corporations)	This refers to any business organisation that is owned by its shareholders, who have limited liability.
Cooperatives	These are for-profit social enterprises owned and run by their members (usually employees, managers or customers). Their primary goal is to create value for their member-owners.
Deed of Partnership	A legally binding contract that all joint owners of a partnership sign, stating the purpose of the business, the formal rights of the partners, and how any profits should be split.
Limited liability	This legal status of a business enables its shareholders (business owners) not to be liable for more than the original amount of money invested in the business.
Limited partnership	This is a special type of partnership where some partners contribute capital and enjoy a share of the profits but do not participate in the running of the business. At least one partner must still have unlimited liability.
Microfinance providers	Financial organizations that advance very small amounts of money to entrepreneurs of small businesses, especially females and those on low incomes.
Non-governmental organizations (NGOs)	A type of non-profit organization (NPO) operating in the private sector of the economy for the benefit of others in society (rather than for shareholders).
Partnership	A business alliance consisting of between 2 and 20 individual owners who are jointly responsible for the business (although this number can vary between countries).
Private sector	This section of the economy is made up of businesses that are owned by individuals or groups of individuals, rather than by the government.
Public limited company (PLC)	A joint-stock company owned by shareholders. The shares in a PLC can be bought and sold by the general public, without prior approval of existing owners.
Public-private partnerships	These are organizations jointly stablished by the government and a private sector business(es) in order to provide certain goods or services.
Public sector	Businesses in this section of the economy are run and owned by the government in order to provide essential services for society as a whole, e.g. education and healthcare services.
Sleeping partner	Also known as a silent partner, this is an investor in a partnership but who does not get involved in the daily running and management of the organization.
Social enterprises	These organizations are revenue-generating businesses with community (social) objectives at the core of their operations in order to benefit the general public, rather than private shareholders.
Sole trader (sole proprietor)	An organization which is owned by a single entrepreneur who has exclusive responsibility for the running of the business.
Stock exchange	This is any marketplace where the general public and other companies can buy and/or sell shares.
Unlimited liability	This means the owner(s) of a business (such as a sole trader or partner) is personally liable for any business debts, even if this requires the debts to be settled by selling off personal assets.

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Unit 1.3 Key terms - Organizational objectives

Aims	These are the long-term aspirations of an organization.
Ansoff Matrix	This is a strategic management tool, used to devise product and market growth strategies for an organization.
Corporate social responsibility (CSR)	This is an organization’s decisions and actions that impact society in a positive way.
Diversification	A growth strategy in the Ansoff matrix, which involves a business launching new products in new markets, such as Honda (motor vehicles) manufacturing lawnmowers and jet planes.
Ethical objectives	Organizational goals based on moral guidelines that determine decision-making.
Ethics	These are moral guidelines or codes of practice which govern good organizational behaviour.
Market development	A growth strategy in the Ansoff matrix which focuses on using customer loyalty to persuade them (and prospective customers) to buy a new product.
Market penetration	A growth strategy in the Ansoff matrix that focuses on developing existing markets with existing products to increase sales revenue and market share.
Mission statement	A succinct and motivating declaration of an organization’s purpose of existence, who they are, and what they do.
Objectives	These are the clearly defined targets of a business in order to achieve its aims. They are often based on the SMART acronym – specific, measurable, agreed, realistic and time specific.
Product development	This growth strategy in the Ansoff matrix that involves introducing new products to existing customers by developing or replacing current products.
SMART objectives	Peter Drucker’s framework for setting organization objectives, which should be specific, measurable, agreed (or achievable), realistic (or relevant), and time bound.
Strategy	Strategies are the ways in which a business plans to reach its long-term organizational aims.
SWOT analysis	A strategic analysis tool that allows managers to assess the current situation facing an organization, including both internal factors and the external business environments.
Tactic	The short-term methods, often on a daily basis, used to implement business strategy.
Vision statement	An inspiring declaration of what an organization ultimately strives to be, or to achieve, in the distant future.

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Unit 1.4 Key terms - Stakeholders

Arbitration	Method of stakeholder conflict resolution with all stakeholder groups in conflict agreeing to accept the decision or judgment of the independent arbitrator.
Competitors	These are the firm’s rivals, which operate in the same industry and contest for the same customers.
Conciliation	Method of stakeholder conflict resolution which aims to align the incompatible interests of different stakeholder groups by helping different parties to better understand each other’s interests.
Conflict	This refers to the mutually exclusive and incompatible interests of different stakeholder groups. If this is not managed, it often leads to protracted disagreements, disputes and arguments in the workplace.
Customers	These are the firm’s clients, individuals and other businesses, who purchase the organization’s goods and/or services. Their interests include competitive prices, fit-for-purpose products and overall value for money.
Directors	The group of senior managers who run a company on behalf of the owners of the company.
Employees	These are the workers within an organization. Their interests include: job security, a competitive remuneration package, a safe working environment, and opportunities for career development.
External stakeholders	Stakeholder groups that are not directly involved in the running of an organization but have a direct interest in its operations.
Financiers	Financial institutions (such as banks) and individual investors who provide source of finance for businesses. They are interested in the organization’s ability to generate profits and to repay debts.
Internal stakeholders	These stakeholders are part of the organization, such as employees, managers, directors, and shareholders.
Local community	The general public and local businesses that have a direct interest in the activities of the organization. They are interested in the firm’s ability to create jobs and to operate in a socially responsible way.
Managers	The people hired to be responsible for overseeing certain functions, operations or departments within an organization.
Pressure groups	Individuals who come together or organizations that are set up for a common concern. They aim to influence government and public opinion in order to create the desired social change.
Shareholders	The people or organizations that have shares in a company. Their interest is financial, i.e. regular dividends and a higher share price.
Stakeholders	The individuals, organizations or groups with a vested interest in the actions and outcomes of a specific organization. They are directly affected by the performance of the business.
Suppliers	Organizations that provide the goods and support services for other businesses. Their interests include receiving regular orders and receiving payments from their business customers on time.

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Unit 1.5 Key terms - External environment

Business cycle	Describes the regular fluctuations in the level of economic activity in an economy, over time.
Direct tax	A category of tax, imposed on the income, wealth or profit of an individual or organization. Examples include income tax (imposed on wages and salaries, for example) and corporate tax (imposed on the profits of businesses).
Economic growth	Stage / phase in the business cycle when the value of a country’s output of goods and services (Gross Domestic Product) increases.
Environmental factors	Ecological influences which have a direct impact on the operations of a business, such as adverse weather, climate change and green technologies.
Ethical factors	External influences concerned with the moral values and beliefs that apply to businesses and how they operate.
External business environment	The framework of factors that are beyond the control of any individual organization, but which affect all businesses and their operations in the economy.
Indirect tax	A category of tax, applicable on the sale of goods and services, such as value added tax (VAT), goods and services tax (GST) and excise duties.
Political factors	Influences from the role that governments play in business operations, e.g. tax laws and rules or restrictions on international trade.
Quota	A quantitative restriction on imports. As a form of trade restriction, it is used to limit the number of a particular product that can be imported into the country.
Recession	Phase in the business cycle that occurs when there is a decline in the level of economic activity (GDP) for at least half a year.
Social factors	Influences related to people, their lifestyles and their beliefs (or values).
STEEPLE analysis	A management tool used to analyse the factors in the external business environment that impact on business operations, i.e. social, technological, economic, ethical, political, legal, and environmental factors.
Tariff	An import tax placed on certain goods coming into the country from overseas. As a form of trade restriction, it raises the price of the imported product, thereby making this less attractive and giving domestic producers a relative competitive advantage.

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Unit 1.6 Key terms - Growth and evolution

Acquisition	Also called a takeover, this method of external growth involves one company buying a controlling interest (majority stake) in another company.
Backwards vertical M&A	Also referred to as backward vertical integration, this growth strategy occurs when a purchasing company buys another company further away from the consumer in the chain of production.
Conglomerate M&A	Also known as diversification, this form of external growth occurs when two businesses in unrelated industries integrate through a merger or acquisition.
Diseconomies of scale	Growth that is excessive results in inefficiencies and higher average costs of production, perhaps due to problems such as miscommunication, misunderstandings and poor management of resources.
Economies of scale	These are cost-saving benefits enjoyed by a business as it increases the size of its operations, i.e. lower average costs (the cost per unit).
External economies of scale	Category of economies of scale that occurs when a firm’s average cost of production falls as the industry grows, i.e. all firms in the industry benefit.
External growth	Also known as inorganic growth, this takes place when an organization requires the support of a partner organizations for its growth.
Financial economies of scale	Banks and other lenders charge lower interest to larger businesses for overdrafts, loans and mortgages as they represent lower risk.
Forward vertical M&A	Also referred to as forward vertical integration, this growth strategy occurs when one business buys another firm that is closer to the consumer in the chain of production.
Franchise	This hybrid growth strategy involves the right to trade using another company’s products, brand name and corporate logo.
Franchising	A growth method that involves two parties, with the franchisor giving the legal rights to a franchisee to buy, own and sell goods and services using the franchisor’s brand.
Globalization	Refers to the process of greater integration and interdependence of businesses and economies throughout the world.
Horizontal M&A	Also known as horizontal integration, this growth strategfy occurs when a merger or acquisition occurs between two companies operating within the same industry (i.e. they are rivals).
Internal economies of scale	Category of economies of scale that occurs for and within a particular organization (rather than the industry in which it operates) as it grows in size.
Internal growth	Also known as organic growth, this takes place when an organization expands without the help of an external partner firm.
Joint venture	An external growth method that involves two or more organizations agreeing to create a new business entity, usually for a finite period of time.
Managerial economies of scale	Larger businesses can afford to hire specialist functional managers, thus improving the organization’s efficiency and productivity.
Marketing economies of scale	Larger businesses can spread their fixed costs of marketing by promoting and advertising a greater range of brands and products.
Merger	This form of external growth involves two or more companies agreeing to form a single, larger company thereby benefiting from operating on a larger scale.
Multinational company (MNC)	A business that operates in two or more countries, or is legally registered in more than one country.
Optimal output level	The level of output where the average cost of production is at its lowest value, so at this level of output, profit is maximised.
Purchasing economies of scale	Larger firms can gain huge cost savings by buying vast quantities of stocks (raw materials, components, semi-finished goods and finished goods).
Risk bearing economies of scale	Large businesses can bear greater risks than smaller ones due to a greater product portfolio. Hence, inefficiencies will harm smaller firms to a greater extent.
Specialization economies of scale	Larger firms can afford to hire and train specialist workers, thus helping to boost output, productivity and efficiency (thereby cutting average costs of production).
Strategic alliances	These are formed when two or more organizations join together to benefit from external growth without having to set up a new separate legal entity.
Technical economies of scale	Cost savings by greater use of large-scale mechanical processes and specialist machinery, such as mass production techniques.
Vertical M&A	Also known as vertical integration, this growth strategy occurs when an acquisition or takeover occurs between two companies operating in different industries.

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Unit 1.7 Key terms - Organizational planning tools (HL Only)

Chance node	Shown as circles on a decision tree diagram, this represents the probable outcome of different decisions.
Decision node	Shown as squares on a decision tree diagram, this refers to a decision that needs to be made.
Decision trees	A visual management tool, illustrating the likely outcomes arising from various decisions that an organization can pursue.
Driving forces	These are the factors that push for or support change in a business organization.
Fishbone diagram	Also known as the cause and effect diagram, this visual tool is used to determine the root cause(s) of a particular problem or issue.
Force field analysis	A decision making tool used to identify and weigh up the driving forces for and the restraining forces against change.
Gantt charts	A visual organizational tool used to show the sequencing and timing of different tasks in a business project.
Restraining forces	These are the are the factors that act against or obstruct change in a business organization.

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Unit 1 Key terms - Business organization & environment

Unit 1 Key terms - Business organization and environment

Unit 1.1 Key terms - Introduction to business management

Unit 1.2 Key terms - Types of business organizations

Unit 1.3 Key terms - Organizational objectives

Unit 1.4 Key terms - Stakeholders

Unit 1.5 Key terms - External environment

Unit 1.6 Key terms - Growth and evolution

Unit 1.7 Key terms - Organizational planning tools (HL Only)