1- Business activity and influences on business Flashcards
Business
organisation that produces goods and services
Goods
physical products, such as a mobile phone, a packet of crisps or a pair of shoes
Services
non-physical products, such as banking, car washing and waste disposal
private sector
business organisations owned by individuals or groups of individuals
public sector
business organisations owned by central or local government
entrepreneur
person who takes risks and sets up businesses; individual who organises the other factors of production and risks their own money in a business venture
stakeholder
an individual or group with an interest in the operation of abusiness
show the different business stakeholders
Owners
Customers
Employees
Managers
Financiers
Suppliers
Government
Local community
objectives
goals or targets set by a business
The importance of clear objectives
Objectives help to motivate employees.
Without objectives owners might not have the motivation needed to keep the business going.
Make it easier to assess the performance of a business.
The financial objectives
Survival
Profit
Sales
Increase market share
Financial security
profit maximisation
making as much profit as possible ni agiven time period
dividends
share of the profit paid to shareholders ni a company
profit satisficing
making enough profit ot satisfy the needs of the business owners
The non-financial objectives
SOCIAL OBJECTIVES
PERSONAL SATISFACTION
CHALLENGE
INDEPENDENCE AND CONTROL
SMART objectives
Specific
Measurable
involved Realistic
Time specific
An example of a SMART objective might be for a business to increase
its revenue by 8 per cent ni the next 12 months.
Why might objectives change as business evolve ?
As a business develops and evolves over time, its aims and objectives are likely to change. This is usually because businesses have to respond to events
or changes in circumstances.
What are the reasons for a company to change its objectives?
MARKET CONDITIONS
TECHNOLOGY
PERFORMANCE
LEGISLATION
unincorporated
businesses where there is no legal difference between the owner and the business
incorporated
business that has a separate legal identity from that of its owners
sole trader
business owned by a single person
unlimited liability
owner of abusiness is personally liable for al business debts
Advantages of a sole trader
-The owner keeps al the profit.
-Owner has complete control.
-It is simple to set up with no legal requirements.
-Flexibility
-Can ofer a personal service because they are small.
Disadvantages of a sole trader
-Have unlimited liability.
-May struggle to raise finance
-Long hours and very hard work.
-No continuity - the business dies with the owner.
partnership
business owned by between 2 and 20 people
deed of partnership
legal document that states the formal rights of partners
advantages of partnerships
-Easy to set up and run
-The job of running a business si shared.
-More capital can be raised with more owners.
-Financial information is not published.
Disadvantages of partnership
-Partners have unlimited liability.
-Profit has to be shared.
-Partners may disagree and fall out.
-Partnerships still tend to be small.
-Any partners’ decision is legaly binding on all.
legally binding
agreement has been made, and certain actions are now either required or prohibited by law
limited partnership
partnership where some partners contribute capital and enjoy a share of the profit but do not take part in
the running of the business
limited liability
business owner is only liable for the original amount of money invested in the business
franchise
structure in which a business (the franchisor) allows another operator (the franchisee) to trade under their name
Advantage to the franchisee
-Less risk
-Back-up support is given.
-Set-up costs are predictable.
-National marketing may be organised.
Disadvantages to the franchisee
-Profit is shared with the franchisor.
-Strict contracts have to be signed.
-Lack of independence
-Can be an expensive way to start a business.
Advantage to the franchisor
-Fast method of growth.
-Cheaper method of growth.
-Franchisees take some of the risk.
-Franchisees more motivated than employees.
Disadvantages to the franchisor
-Potential profit is shared with franchisee.
-Poor franchisees may damage brand’s reputation.
-Franchisees may get merchandise from elsewhere.
-Cost of support for franchisees may be high.
merchandise
goods that are being sold
social enterprise
business that aims to improve human or environmental well- being, charities for example
cooperative
company, factory
or organisation in which all the people working there own an equal share of it
consumer cooperative
retail cooperative
worker cooperative
cooperative that is owned by its customers
cooperative of retail members, who often work together to assert their purchasing power
cooperative that is owned by its employees
What are the forms of the social enterprises ?
-Cooperatives : usually operate as consumer cooperatives or retail cooperatives.
-Worker cooperatives : are businesses in which its employees share ownership.
-Charities : organisations that give money, goods or help people who are poor.
limited companies
business organisations that have a separate legal identity from that of their owners
certificate of incorporation
document needed before a new company can start doing business
private limited companies
-Their business name ends in Limited or Ltd.
-Shares cannot be traded on the stock market.
-They are often family businesses or close friends.
-The directors of these firms tend to be shareholders and are involved in the running of the business.
Advantages of private limited companies
-Shareholders have limited liability.
-Control cannot be lost to outsiders. -Business continues if ashareholder dies.
-Has more status .
Disadvantages of private limited companies
-Financial information has to be made public.
-Costs money and takes time to set up.
-Profits are shared between more members.
-Takes time to transfer shares to new owner.
-Cannot raise huge amounts of money, like PLCs.
public limited company (PIC)
-tend to be larger than private limited companies.
-Their shares can be bought and sold by the public on the stock exchange.
-Any person or organisation can buy shares in a PLC.
Why going public can be expensive ?
-the company needs lawyers
-a bank may be paid to process share applications
-there are advertising and administrative expenses
-the PLC must have a minimum of £50 000 share capital.
Advantages of public limited companies
-Large amounts of capital can be raised.
-Shareholders have limited liability.
-May be able to dominate the market.
-Shares can be bought and sold very easily.
-May have a very high profile in the media.
Disadvantages of public limited companies
-Setting up costs can be very expensive.
-Outsiders can take control by buying shares.
-More financial information has to be made public.
-Managers may take control rather than owners.
Multinational company
large business with significant production or service operations in at least two different countries
The features of the multinational
-huge assets (land, buildings, plant, machinery and money).
-highly qualified and experienced executives and managers.
-highly advanced and up-to-date technology.
Public corporations
business organisations owned and controlled by the state/ government.
Features of public corporations
-State owned.
-Created by law.
-State-funded.
-Provide public services.
Reasons for the public ownership of businesses
-Avoid wasteful duplication.
-Maintain control of strategic industries.
-Save jobs.
-Fill the gaps left by the private sector.
-Serve unprofitable regions.
Reasons against the public ownership of businesses
-Cost to government.
-Inefficiency: Public corporations are often criticised for their low productivity.
-Political interference: Public corporations often suffer owing to government interference.
-Difficult to control.
privatisation
transfer of public sector resources to the private sector (business).
The forms of Privatisation
-Sale of public corporations.
-Deregulation.
-Contracting out.
-The sale of land and property.
Why does privatisation take place?
-To generate income.
-To reduce inefficiency in the public sector.
-As a result of deregulation.
-To reduce political interference.
Factors affecting the appropriateness of different forms of ownership
- Groth: Many businesses start small and gradually get bigger.
- Size: Many small businesses are sole traders or partnerships. Public
limited companies are much larger. - The need for finance: Quite often the only way to get more money is to change the type of organisation.
- Control: Some owners like their independence.
- Limited liability: some owners become limited companies to give themselves more financial protection.
Show that different types of business organisation wil have different objectives.
-Sole traders might be happy to make a modest amount of profit ( profit satisficing).
- Family businesses and private limited companies often do not wish to go public because they are afraid of losing control to outsiders.
- multinationals want to grow, so that they can dominate global markets.
primary sector
production involving the extraction of raw materials from the earth.
Examples of primary sector
- Agriculture.
- Fishing.
- Forestry.
- Mining and quarrying.
Secondary sector
production involving the conversion of raw materials into finished and semi-finished goods.
Examples of secondary sector
- metalworking.
- car production.
- textile production.
- chemical and engineering industries.
- aerospace manufacturing.
- engineering,
- food processing.
assembly plant
factory where parts are put together to make a finished product.
Tertiary sector
production of services in the economy
Examples of tertiary sector
- commercial services.
- Financial services.
- household services.
- leisure services.
- professional services.
- Transport.
interdependent
Businesses in each of the three sectors are likely to be interdependent. This means that they rely on each other.
de-industrialisation
decline in manufacturing.
the main causes of de-industrialisation
- People may prefer to spend more of their income on services than manufactured goods.
- There is fierce competition in the production of manufactured goods from developing countries such as India and China.
- As countries develop, the public sector grows, this adds to the growth of the tertiary sector.
- Advances in technology mean that employment in manufacturing falls because machines replace people.
Factors influencing the location of business
- Proximity to market.
- proximity to labour.
- proximity to material.
- proximity to competitors.
- services.
- office- based business.
- Manufacturing and processing.
- Agriculture.
brownfield sites
areas of land that were once used for urban development.
greenfield sites
previously undeveloped areas of land, usually on the outskirts of towns and cities.
globalisation
growing integration of the world’s economies, Firms and people are behaving as though there
is just one market or one economy in the whole world.
Reasons for globalization
- Developments in technology.
- International transport networks have improved.
- There has been a huge amount of deregulation. Privatisation has allowed
more competition in many industries. - An increase in tourism.
- Many firms want to sell abroad.
monetary system
system of money in a particular country or the world as a whole, and the way that it is controled by governments and central banks
saturate (market)
To offer so much of a product for sale that there is more than people want to buy.
The government and globalization
- countries cannot trade if the government keeps international borders closed.
- international trade wil be very limited if governments put up trade barriers.
- people cannot be free to live and work in overseas countries unless borders are kept open.
- firms cannot develop their businesses overseas if planning permission
is denied.
Governments can aid globalisation by relaxing laws and regulations that prevent or complicate trade and business.
Opportunities of globalization for business
- Access to larger markets.
- lower costs.
- access to labour.
- reduced taxation.
Threats of globalization to businesses
- Competition.
- International takeovers.
- Increased risk of external shocks.
How have multinationals developed?
- Economies of scale
- Marketing
-Technical and financial superiority
Benefits to a business of becoming a multinational
- LARGER CUSTOMER BASE
- LOWER COSTS
- HIGHER PROFILE
- AVOIDING TRADE BARRIERS
- LOWER TAXES
Benefits of multinationals to a country and economy
- increase in income and employment.
- increase in tax revenue.
- increase in exports.
- transfer of technology.
- improvement of the quality of human capital.
- enterprise development.
Drawbacks of multinationals to a country/ economy
- environmental damage.
- exploitation of less developed countries.
- repatriation of profits.
- lack of accountability.
exploitation
situation in which you treat someone unfairly by asking them to do things for you, but give them very little in return.
repatriation (of profit)
where a multinational returns the profits from an overseas venture ot the country where it is based, typically from a developing country to a developed country.
International trade
International trade benefits the world. It creates opportunities for business growth, increases competition and provides more consumer choice.
Exports
goods and services sold overseas
Imports
goods and services bought from overseas
visible trade
trade in physical goods.
invisible trade
trade in services
balance of trade (or visible balance)
difference between visible exports and visible imports.
exchange rate
value of one currency in terms of another.
fiscal policy
using changes in taxation and government expenditure to manage the economy.
How can governments affect business activity?
- change the law.
- influence the rate of interest and exchange rates in the economy.
- change levels of government expenditure and taxation.
- introduce polices that have a direct impact on businesses such as giving subsidies to farmers.
infrastructure provision
- the government is responsible for developing the nation’s key infrastructure. Such as schools, hospitals, roads,… and government offices. These projects can be very expensive.
- Heavy expenditure on large-scale projects like this can have big benefits for businesses.
- This is because private sector businesses are likely to get most of the work.
Legislation
One of the roles of the government is to provide a legal framework in which businesses can operate and ensure that vulnerabl groups are protected.
government intervention
government becoming involved in an argument, fight or other difficult situation in order to change what happens.
Consumer protection
Consumers want to buy good quality products at a fair price and receive good customer services , Without government regulation, some firms may exploit consumers by using anti-competitive practices or restrictive practices.
anti-competitive practices (restrictive trade practices)
attempts by firms to prevent or restrict competition
Competition policy
Governments should try to promote competition by:
- Encourage the growth of small firms.
- Lower barriers to entry.
- Introduce anti-competitive legislation.
Environmental legislation
One approach used by many governments is to pass new laws to minimise the damage done by businesses to the environment.
barriers to entry
restrictions that mean
it is difficult for new firms to enter a market
merger
two or more businesses joining together to form one new firm.
protectionism
use of trade barriers to protect domestic producers.
dumping
where abusiness sells goods in another country often below cost
trade barriers
measures designed to restrict trade.
Trade policy
Governments can use trade barriers to restrict trade:
- Tariffs: a tax on imports, which makes them more expensive.
- Quota: a physical limit on the amount allowed into the country.
- Subsidy: the giving of financial support, such as grants or tax breaks, to exporters or domestic producers that face fierce competition from imports.
- Administrative barriers: the use of strict health and safety or environmental regulations to make importing more awkward.
quota
physical limit on the quantity of imports allowed into a country.
subsidy
financial support given to a domestic producer to help compete with overseas firms.
interest
the cost of borrowing money and the reward to savers.
monetary policy
using changes in interest rates and the money supply to manage the economy.
Effects of high interest rates on business
- Higher interest rates wil therefore reduce profits.
- businesses won’t be able to invest in new machinery, so they may fail to keep up with changes in technology.
Effects of high interest rates on consumer spending
- House-owners with mortgages will be affected negatively because most people buy houses using a mortgage.
- Demand for goods bought with borrowed money will fall because Many people use loans and credit cards to fund their spending.
- Savers will be hit if interest rates are low. This is because they will earn less interest on their savings.
External factors
- Sometimes businesses have to deal with events and issues that are completely beyond their control.
- The effects of external factors can be both positive and negative.
Types of external factors
- Social
- technology
- environment
- Political
The external factor social
examples of changes that have occurred in society in recent years and may affect business:
- Increased consumer awareness.
- Changing demand patterns.
- Increased numbers of women at work.
- More part-time workers.
- urbanisation : process of constructing more and more buildings on rural land.
The external factor technology
- new technology means production becomes more capital-intensive and costs are reduced.
- Changes in technology can shorten the amount of time products can be marketed for.
- Developments in technology often mean that businesses can replace labour with capital.
- The development of social media has helped to improve communications
between businesses and customers.
The external factor environment
Some examples of the impact of business on the environment:
- global warming.
- habitat destruction.
- resource depletion.
- sustainable development.
The external factor political
Some parts of the world are politically unstable so it will affect business negatively, also political factors can influence businesses positively in stable, democratic countries.
Measure of business success
- revenue.
- market share.
- customer satisfaction.
- profit.
- growth.
- Owner satisfaction.
- employees satisfaction.
capital employed
amount of money invested in a business
overtrading
taking on more work than a business can afford to fund effectively.
Reasons for business failure
- cash flow problems.
- lack of finances.
- not competitive.
- failure to innovate.
Cash flow problems
- overtrading.
- investing too much in fixed assets.
- allowing too much credit.
- over borrowing.
- seasonal factors.
- unexpected expenditure.
- poor financial management.
Lack of finance
- New businesses often struggle to attract funding because they do not have a trading history and they are too risky for investors, so if a business does not raise enough money before trading begins it will risk failure.
Not competitive
- new entrants: a business may begin successfully and then fail because a new rival enters the market and takes away their trade.
- ineffective cost control: businesses cannot keep their costs down so a business needs to charge more to make a profit.
- ineffective marketing.
- lack of business skills.
- poor leadership.
Failure to innovate
Some businesses collapse because they fail to innovate - they do not change with the times. They may have failed to adopt new technology or to develop new products.
