The business cycle

All countries suffer fluctuations in the level of activity within their economies. At times spending, output and employment all rise; during other periods the opposite is true. A nation’s gross domestic product measures the value of a countries output over a period of time. This figure is dependant upon the levels of economic activity. Rising economic activity will cause a higher level of GDP.

The business cycle describes the regular fluctuations in economic activity and GDP occurring over time.

Trade cycles generally have four stages:

1)      Recovery or upswing

2)      Boom

3)      Recession

4)      Slump

Boom

A boom follows with high levels of production and expenditure by firms, consumers and the government. Booms lead to prosperity and confidence in the business community. Investment in fixed assets is likely to increase. However, sectors of the economy experience pressure during booms. Skilled workers may become scarce and firms may offer higher wages. Simultaneously, as the economy approaches maximum production, shortages and bottlenecks occur as insufficient raw materials and components exist to meet demand. Prices rise. The combination of rising wages and rising prices of the raw materials and components creates inflation.  Inflation usually leads to the end of a boom.

Recession

In a recession incomes and output start to fall. Rising prices of labour and materials increase costs of production. This eats into businesses’ profits. In circumstances such as this, the UK government has raised internet rates to avoid inflation. Falling profits and rising interest rates are likely to lead to delays in implementing plans to invest in new factories and offices. The level of production in the economy may stagnate or even fall and the amount of spare capacity rises. Some businesses fail and the level of bankruptcies is also likely to rise.

Slump

 A slump often, but not always, follows a recession. In some circumstances an economy may enter the upswing stage of the business cycle without moving through a slump period. Governments may take action to encourage this by for example, increasing their own spending or lowering interest rates. A slump sees production at its lowest, unemployment is high and increasing numbers of firms suffer insolvency (limited companies become insolvent, whilst the term bankruptcy applies to individuals, sole traders and partnerships).

Demand and the business cycle

Producers and retailers of basic foodstuffs, public transport and water services may notice little change in demand for their products  as the trade cycle moves through its various stages. This is because these are essential items which consumers continue to purchase even when their incomes are falling – demand for them is not sensitive to changes in income.

Demand for other products is more sensitive to changes in income levels and the stages of the business cycle. Examples include foreign holidays, electrical products, such as televisions and CD players, and construction materials, such as bricks.

Firms selling basic foodstuffs might have to take little or no action to survive a recession. Demand for their products might increase as consumers switch from more expensive alternatives. At the other extreme, businesses supplying materials to the construction industry could be hard hit as firms delay or abandon plans to extend factories and build new offices.  Their position might be made worse by a fall in demand for new houses as hard-up consumers abandon schemes to move home.

External influences – markets + competition

There are many outside influences which affect businesses, of which the market is just one.

Size of the market

Businesses are heavily influenced by the markets in which they trade. The size of the market influences businesses: whether it is local, national or international will affect the nature of the product they supply, as well as the number of units.

Degree of competition

Markets also vary in terms of the degree of competition. It is true to say that improved communications and methods of transportation have made markets more competitive. Many UK businesses now face competition from European and Asian producers, as well as domestic rivals. Competition has become even more intense since the giant American retailer Wal-mart made a bid for Asda, and was successful.

What are markets?

A market is a place where buyers and sellers meet to establish prices and to exchange goods and services. Markets can take two main forms:

1)      Traditional, geographical markets

2)      Non – geographical markets

Traditional, geographical markets

Consumers can purchase fresh fruit or vegetables at a local street market. Firms wishing to sell these products can take a stall at the market and expect to meet buyers. Thus, the market brings together buyers and sellers. The same is true of a high street in any town or city. Retailers set up stores in these locations and customers know where to find the shops.

Neo-geographical markets

An increasing range of products are bought and sold without buyers and seller ever meeting. It is possible to purchase books, company shares and groceries on the internet using a credit card. Rail tickets and theatre tickets can be purchased by phone. Businesses purchase oil and foreign currencies over the phone. Modern forms of communication hae replaced face to face communication in traditional markets.

In general, markets do their job efficiently if information on prices and products is available to buyers and sellers.

Classifying markets

Markets can be classified according to the number of firms trading and the degree of competition. This type of categorisation allows the likely effects on the business to be identified and analysed. Three main categories exist:

1)      Perfect competition

2)      Oligopoly

3)      Monopoly

Perfect competition

Perfectly competitive markets have many small firms producing virtually identical products at very similar prices. Firms can enter and leave such markets freely. Firms operating in such markets do not earn excessive profits and use resources with great efficiency.

Oligopoly

A market is said to be oligopolistic when few firms exist and the firms are interdependent in their actions. Oligopolistic firms consider the likely reactions of competitors when considering changing prices of introducing new products. Oligopolistic markets are common and include industries such as chocolate manufacture, television broadcasting and high street banking.

Monopoly

A monopoly exists when only a single producer operates within a market. Examples of UK monopolies might include the Post Office (delivering letters) and Transco – the company responsible for piping gas.

Planning/developing the workforce

Human resource management is the process of making the most efficient use of an organisations personnel. HRM covers a broad range of business activities.

-         Assessing future labour needs

-         Recruitment and selection

-         Training

-         Appraisal

-         Motivation and reward of employees

Until recently, most businesses have relied on the concept of personnel management. Latterly, the influence of Japanese management techniques has encouraged the adoption of at least some elements of HRM. The most enthusiastic supporters of HRM are foreign-owned companies operating in the EU. However, many firms do not engage in human resource planning and management.

HRM views activities relating to the workforce as integrated and vital in helping the organisation to achieve its objectives. People are viewed as an important resource to be developed through training. Thus, policies relating to recruitment and training, for example, should be formulated as part of a co-ordinated humans resource strategy.

Conversely, personnel management considers the elements that comprise managing people (Recruitment, selection and so forth) as separate elements. It does not take into account how these parts combine to assist in the achievement of organisational objectives. At its simplest, personnel management within businesses carries out a series of unrelated tasks.

Planning the workforce

Before business recruits or trains employees, it must establish future labour needs. This is not simply a matter of recruiting sufficient employees. Those recruited must have the right skills and experience to help the organisation achieve its corporate objectives.

Managers will draw up a human resource plan to detail the number and type of workers the business needs to recruit.

The plan will also specify how the business will implement its human resource policies. As important element of the plan is a skills audit to identify the abilities and qualities of the existing workforce. This many highlight skills and experience of which managers were unaware.

Businesses require specific information when developing human resource plans:

-         They need to research to provide sales forecasts for the next year or two. This will help identify the quantity and type of labour required.

-         Data will be needed to show the number of employees likely to be leaving the labour force in general (and the firm in particular). Information will be required on potential entrants to the labour force.

-         If wages are expected to rise, then businesses may reduce their demand for labour and seek to make greater use of technology.

-         The plan will reflect any anticipated changes in the output of the workforce due to changed in productivity or the length of the working week.

-         Technological developments will impact on planning the workforce. Developments in this field may reduce the need for unskilled employees whilst creating employment for those with technical skills.

Developing the workforce.

One strategy to improve the performance of employees requires businesses to recruit employees with the appropriate skills from outside the organisation. An alternative is to train existing staff to develop their skills and knowledge. This option can be expensive and takes time.

Empowerment and Team working!

Empowerment involves redesigning employee’s jobs to allow them greater control over their working lives. Empowerment gives employees the opportunity to decide how to carry out their duties and how to organise their work.

Empowerment can make work more interesting as it offers opportunities to meet a number of individual needs. Empowered workers can propose and implement new methods of working as they bring a new perspective to decision-making. They may spend a part of their working lives considering the problems they face and proposing solutions.

Vauxhall Motors operated empowerment teams at its Luton plant. In 1998, one team proved productivity by designing a swing chair to improve access to cars on the production line. Using the chair made it easier for employees to move in and out of the cars when adding components and improved productivity.

Empowerment would receive the approval of Maslow and Hertzberg. It provides motivators, as well as offering employees the opportunity to fulfil higher needs.

Employees require training if they are to be empowered. They are unlikely to have the skills necessary to schedule tasks, solve problems, recruit new employees and introduce new working practices. It takes time to implement empowerment and teething problems are common.

Team working

Team working exists when an organisation breaks down its production processes into large units instead of relying upon the use of the division of labour. Teams are then given responsibility for completing the large units of work. Team members carry out a variety of duties including planning, problem solving and target-setting.

A number of different team types operate within businesses:

-         Production teams – many production lines have been organised into distinct elements called cells. Each of these cells is staffed by teams whose members are multi-skilled. They monitor product quality and ensure that production targets are met.

-         Quality circle teams – these are small teams designed to propose solutions to existing problems and to suggest improvements in production methods. The teams contain members drawn from all levels within the organisation.

-         Management teams – increasingly, managers see themselves as complementary teams establishing the organisations objectives and overseeing their achievement.

There has been a major trend in businesses towards team working over recent years. Team Working is a major part of the so-called Japanese approach to production and its benefits have been extolled by major companies such as Honda and John Lewis.

Team working offers employees the opportunity to meet their social needs, as identified by Maslow; Hertzberg identified relationships with fellow workers as a hygiene factor. However, much of the motivational force arising from team working comes with the change in job design that usually accompanies it. Team working requires jobs to be redesigned, offering employees the chance to fulfil some of the higher needs identified by Maslow such as esteem needs. Similarly, team working offers some of the motivators, for example – achievement.

This is an example which can be used in team working

The style of leadership – Some managers are content to give employees greater freedom in organising their working liven in an attempt to motivate them. Others prefer to retain control and rely on monetary techniques of motivation.

Profit sharing, employment + motivation

Profit sharing schemes may improve employees loyalty to the company. These schemes can help to break down the ‘them and us’ attitude. Under profit sharing schemes, a greater level of profit regarded as being of benefit to all employees, and not just senior managers and shareholders. Employees may be more willing to accept changed designed to improve the businesses profitability. The danger with profit-sharing schemes is that they can be too small and fail to provide employees with a worthwhile payment. On the other hand, if schemes are too generous, the company may have insufficient funds for capital investment.

Share ownership

This can be a development of profit-sharing schemes. Some businesses pau their employees share of the profits in the form of company shares. Share ownership schemes vary enormously in their operation. We shall consider two of the main schemes operated by UK companies.

Some businesses such as Asda offer employees the opportunity to purchase shares after saving for a period of time. After say, 5 years, employees can purchase shares at the price they were at the start of the saving scheme. This is a popular type of scheme, though tax changes introduced in the chancellor’s 1999 budget will make it more difficult to operate in the future.

Share options are a form of share ownership normally aimed at senior managers. About 14% of UK companies operate share option schemes, according to a recent survey.

Under share options, managers have the opportunity to buy company shares at some agreed date in the future, but at the current share price. This, the current share price might be £2.50 and the manager is given the option to purchase 1000 shares in 3 years’ time at this price. In 3 years the market price of shares may have risen to £3.50. This offers the manager the chance to purchase the 1000 shares for £2500 (£2.50 x 1000) and to sell them immediately for £3500, giving a profit of £1000. If the share price falls over the 3-year period the manager will choose not to buy the shares.

Job enrichment

Job enrichment occurs when employee’s jobs are redesigned to provide them with more challenging and complex tasks. This price also called vertical loading is designed to use all employees’ abilities. The intention is to enrich the employee’s experience of work.

Frederick Hertzberg was a strong supporter of job enrichment. He believed that enrichment provided employees with motivators that increase the satisfaction they might get from working. Job enrichment normally involves a number of elements:

-         Redesigning jobs so as to increase not just the range of tasks, but the complexity of them

-         Giving employees greater responsibility for managing themselves

-         Offering employees the authority to identify and solve problems relating to their work

-         Providing employees with the training and skills essential to allow them to carry out their enriched jobs effectively.

Job enrichment involves a high degree of skill on the par of these managers overseeing it. They must ensure that they do not ask employees to carry out duties of which they are not capable.

Wages

Salaries and wages

Most employees in the UK receive their payments in the form of salaries or wages. Salaries are expressed in annual terms (E.G production manager earns £30,000 a year) and are normally paid monthly. Salaried employees are not normally required to work a set number of hours per week though their contract of employment may state a minimum number of hours.

On the other hand, wages are usually paid weekly and employees are required to be at work for a specified number of hours. Employees are normally paid a higher rate (knows as overtime) for any additional hours worked.

Fringe Benefits

These are sometimes referred to as ‘perks’. Fringe benefits are those extras an employee receives as a park of their reward package. Examples include the following

-         A company car

-         Luncheon vouchers

-         Private health insurance

-         Employers’ contributions to pension schemes

-         Discounts for company products

Firms tend to use fringe benefits to encourage employee loyalty and to reduce the proportion of employees leaving the firm. A danger of the widespread use of fringe benefits are that costs can increase quickly, reducing profitability.

Performance related pay

Performance related pay has become more widely used over recent years and has developed along with employee appraisal systems. Performance related pay is only paid to those employees who meet or exceed some agreed targets. Under performance related pay, employees are paid for their contribution to the organisation, rather than their status within it.

A number of large-scale manufacturers such as Cadburys and Nissan, and public sector industries, for example the NHS, introduced performance related pay schemes during the early 1990’s. A recent survey indicated that 68% of private sector businesses in the UK have introduced Performance related pay for some or all of their non-manual employees, thought the rate at which performance related pay is being introduced is slowing.

Criticisms of price related pay

- A number of criticisms of performance related pay have been put forward:

Many employees perceive performance related pay as fundamentally unfair. This is particularly true of those working in the services sector where employee performance is difficult to measure. Employees fear that they might be discriminated against because they do not get on with the manager conducting their appraisal interview. This can result in their performance worsening, not improving.

- A majority of businesses operating performance related pay systems do not put sufficient funds into the scheme. Typically, the operation of a performance related pay scheme adds 3-4% to a businesses wage bill. This only allows employees to enjoy relatively small performance awards, which may be inadequate to change employee performance.

Development in performance related pay

Increasing numbers of firms are implementing a system knows as variable pay. Companies such as Levi-Strauss in America and Unilever in Britain recognise that company performance often depends upon the achievements of the few.

Variable pay is really a development of performance related pay. It is similar in that it rewards employee performance, but there are differences. Performance related pay operates according to a formula used throughout the company. Variable pay is far more flexible and the potential rewards for star employees are greater. The Bank Of England, for example, retains 10% of its pay budget to reward good performers amongst their employees.

Name: Barry Dunlop

Web sites: Many sites, here are just a few: http://www.midascode.co.uk ~ http://www.conservatoriesonline.com ~ http://www.almostimpartialguide.co.uk ~ http://www.bensbookmarks.com

Date: 19^th November 2006

Please introduce yourself: Barry Dunlop, Age 46 - My interests include: Self Help, Walking, Entrepreneurship and being father to four teenage children.

Tell us about your main project, project.

I have been online since 1998 (when I registered my first domains) and up until 2006, I was really only involved in one online business. This business that had over 40 active websites within it.

My PR company say I was a First Mover in the UK Online Leads Businesshaving been actively online since 1998, using the Internet to generate sales leads.

Early in 1999 I launched and later developed the very successful Ebuilders Ltd brand of Home Improvement Portals which included websites such as http://www.conservatoriesonline.com and http://www.doubleglazing.com

These websites included a Contractor Matching Service and an Information Request service that generated leads which we sold to home improvement companies.

The Ebuilders name was a play on my own experience as the owner of an offline building and contracting business having decided that I now wanted to be an E-Builder building home improvement websites rather than homes.

These websites and their related partners sites produced hundreds of thousands of leads and generate 10s of millions in sales each year.

In 2006 I sold a controlling interest in Ebuilders Ltd and while I still have some involvement with Ebuilders I have now decided to focus on my next online business model which will be as a fixer-upper of websites. A sort of online Virtual Property Development Business that buys and re-sells websites. My new company is MidasCode Ltd website: http://www.midascode.co.uk and our business model is about turning website code from neglected and forgotten, under performing websites into GOLD.

I also make occasional postings at my BLOG, which can be found at www.BarryDunlop.com

How did you start off on the net? Believe it or not, I think my first websites where on Free Web Space, provided by my ISP and people like Geocities

What was your first project? A website for the company that I owned at that time. The website is still there today at: http://www.conservatoriestoday.co.uk

What advice do you have for someone who is starting web design/ web development? To embrace all the latest technology and tools and for your programming to be FUTURE PROOF and able to cope with at least twice the traffic of your best estimate.

What would you do differently? I could have done with THINKING BIGGER I had no idea my websites would be so successful and if I had, I would have created more websites sooner

Tools of the trade? Dreamweaver and all the usual tools but for some time now, I have employed the staff to take care of the Webmaster tasks.

What do you enjoy doing in your spare time? : Studying Self Help and Personal Development, Walking, Entrepreneurship and being father to four teenage children.

What are your current Projects? Midascode Ltd: http://www.barrydunlop.com ~ http://www.bensbookmarks.com ~ http://midascode.co.uk ~ http://collectiblog.com

Thanks for taking your time to take do an interview with us, anything else you would like to add?

Think BIG, we can achieve much more than most of us ever think we can. You do not need to take until age 45 (like me) to become financially independent. It is entirely possible to be financially independent by the age of 25 or even 21 if you put your mind to it.

As Donald Trump says: like thinking big. I always have, - If youre going to be thinking anyway, you might as well think big.

Entrepreneurial structures and factors determining organisational structures

These are frequently found in businesses operating in competitive markets and particularity in those where rapid decisions are essential. News organisations, for example Sky News, often operate with an entrepreneurial structure. A few key workers at the core of the organisation – frequently the owners in the case of small businesses – make all the major decisions. The business is heavily dependant upon the knowledge and skills of these key workers. Entrepreneurial structures are suited to markets where rapid decisions are essential and where organisations are small enough to be controlled effectively by a few trusted employees. It is a structure frequently used by charismatic and dynamic leaders. Sir Alan Sugar used this approach to manage his electronics company Amstrad during the early years of its business. Because all-important decisions are taken at the centre, little use is made of the hierarchies and the organisation is relatively ‘flat’.

However, there are distinct drawbacks to the entrepreneurial structure. Its effectiveness depends upon two factors:

1)      The quality of management and decision-making by the ‘core’ employees. If decisions are delayed or if the workers lose touch with the market, the business is unlikely to perform effectively.

2)      As the business grows, the ‘core’ employees experience increasing difficulty in managing the business. The work may overwhelm them and the quality + speed of decisions may suffer. At this point the business may adopt another structure.

When deciding upon an organisational structure a business will be subject to both internal and external influences.

The size of the business

As the scale of the business increases an entrepreneur structure, for example, becomes unsuitable. As the business grows further, the chain of command is likely to be lengthened, encouraging the removal of some layers of hierarchy and broader spans of control.

The nature of the product

If the firm supplies a diverse range of products it may organise itself traditionally – perhaps in the form of division’s reporting to the board of directors. The rank organisation operated in this way with key areas of the business, such as film services and leisure activities such as the hard rock cafes, having some degree of independence.

The skills of the workforce

The higher the level of skill the typical employee has, the more likely it is that businesses will organise along matrix or informal lines. A small group of professionals may simply carry out their professional duties with administrative support from the organisation. Less skilled employees may respond better to a more formal structure with more authority retained further up the hierarchy.

The culture of the organisation

This is a major influence on the structure the firm adopts. If a business has a highly innovative culture whereby it wishes to be a market leader selling advanced products, it may adopt a matrix structure to minimise bureaucracy and to allow teams to carry out the necessary research. On the other hand, an organisation which places importance on traditions and wants to appear conventional may be best suited to a form, hierarchical structure. This structure places emphasis on positions rather than people and this factor encourages the continuance of existing policies and practices. Some high-class hotels may fall into this category.

Different types of organisations

Organisational structures

An organisational structure is the way in which a business is arranged to carry out its activities. The organisational structure, which may be shown in an organisational chart, sets out :

1)      The routes by which communication passes through the business

2)      Who has authority, power and responsibility within the organisation

3)      The roles and titles of individuals within the organisation

4)      The people to whom individual employees are accountable and those for whom they are responsible.

Businesses change the structure of their organisation rapidly and regularly; some entrepreneurs believe that they should be continually reorganising their firms to meet the demands of a dynamic marketplace.

A principle reason for the regular change in organisational structures is the pace of external change. All businesses have to ensure that they are able to compete with rival firms. Keeping costs to a minimum is an important part of competing successfully and is a common factor causing businesses to change their organisational structures.

The main issues in organisational structures

Factors determining the structure adopted by an organisation include the number of levels or layers of hierarchy used and the extent of the span of control.

Levels of hierarchy

Organisations with a large number of layers of hierarchy are referred to as ‘tall’. That is, there are a substantial number of people between the person at the top of the organisation and those at the bottom.

Traditionally,     UK businesses have tended to be tell. Such businesses have long chains of command from those at the top of the organisation to those at the bottom. Businesses with many layers of hierarchy frequently experience communication problems as messages moving up and down the organisation pass through many people.

Perhaps attracted by the prospect of faster and more effective communication, and influenced by Japanese and American companies, UK businesses have moved towards flatter organisational structures. This process of flattening structures has led to businesses operating with significantly wider spans of control.

Spans of control

A narrow span of control allows supervisors and managers to keep close control over the activities of the employees for whom they are responsible. As the span of control widens, the subordinate is likely to be able to operate with a greater degree of independence. This is because it is impossible for an individual to monitor closely the work of a large number of subordinates. A traditional view is that the span of control should not exceed six, if close supervision is to be maintained. However, where subordinates are carrying out similar duties, a span of control is ten or even twelve is not unusual. It is normal for a span of control to be less at the top of an organisation. This is because senior employees have more complex and diverse duties and are, therefore, more difficult to supervise.  

Delayering

Delayering occurs when businesses remove one of more layers of hierarchy from the organisation. A number of businesses have implemented large-scale delayering programmed over recent years. Many businesses have removed middle managers from their organisational structures.

Cost and Profit Centres

Cost and Profit Centres

A cost centre is a distinct part of a business of which costs and revenues can be determined.

A profit centre is similar to a cost centre, being a part of a business for which costs and revenues (hence profits) can be determined.

For a cost centre it is only possible to calculate the associated costs. This, the accounts department or the department providing IT services to a business could be cost centres. For these areas it is straightforward to calculate costs such as wages and salaries. However, it is impossible to calculate the revenues earned by areas of the business uscj as the accounts department, as they do not charge separately for their services.

Profit centres can calculate costs and revenues. So, it is possible to determine the profit generated by this aspect of the businesses operation.

Creating cost and profit centres

1) Some large businesses might operate a number of factories, offices or branches. In these circumstances, profit centres can be developed on a geographical basis. High street banks, for example, expect branches (Or groups of branches) to achieve agreed levels of profits.

2) In manufacturing industries, it is possible to operate smaller cost or profit centres relating to a particular product or even a single production line.

3) A relatively simple approach is to use departments or divisions as cost or profit centres. Hospitals use wards and individual departments such as x-ray to develop cost and profit centres, for example.

4) Profit and cost centres can also relate to individual products or brands.

Why operate cost and revenue centres

These are three broad categories of reason why businesses decide to operate cost and profit centres

1) Financial reasons

2) Organisational reasons

3) Motivational reasons

Financial Reasons

Businesses gain more detailed information from running a number of separate cost and profit centres, rather than merging all the figures into a single set of financial statements. Having separate cost centres allows managers to compare the costs incurred by various parts of the business. This enables managers to identify the less cost-efficient parts of the business. Senior managers can then attempt to reduce costs in this area, perhaps through more training of staff, creating a more profitable business overall.

Organisational reasons

The financial data provided by cost and profit centres gives managers more in-depth information about the operation of their business. Using this information, managers might be able to organise the business more effectively and make higher profits.

Many businesses are made up of a number of separate elements. If a company wishes to expand, having information on the relative financial performance of each of the divisions of the business will be helpful. It might be argued that they should focus on their profitable activities.

Motivational Reasons

Many psychologists recognise that giving people greater responsibility is an effective way to motivate them. This responsibility can take the form of achieving cost or profit centres. Businesses have increasingly recognised this and have sought to allow employees a greater role in managing budgets. When managing a profit or cost centre, employees have more varied and interesting jobs, as well as the satisfaction of achieving cost or profit targets.