1. Understanding Business Activity Flashcards
1
Q
Define needs and wants with examples
A
Needs are essential goods or services necessary for living.
They satisfy the basic things for life. Examples - Food, water, shelter, warmth, clothing etc.
Wants are non-essential goods and services that people would like to have. They involve interests & tastes. Examples - Coke, Pizza, Mansions, Massage, Branded shirts etc.
2
Q
Define the economic problem.
A
There are not enough resources to satisfy people’s unlimited wants
3
Q
Define scarcity.
A
There are not enough goods and services to meet the wants of the population.
Unlimited wants + Limited resources -> Scarcity
4
Q
Name the factors of production and explain them briefly.
A
Land = All of the natural resources provided by nature
Labor = All people’s efforts to make products
Capital = All finance, machinery & equipment in manufacturing products
Enterprise = All people that have skills & have risk-taking ability to combine the factors of production to produce a good / service
5
Q
Define entrepreneur.
A
Individuals who, typically, set up and run a business and take all the risks associated with this.
6
Q
Define opportunity cost and give an application.
A
Opportunity cost is the next best alternative given up by choosing another item.
I can go to school by bus or car.
I choose car so the opportunity cost is bus.
7
Q
Define specialisation.
A
Specialisation occurs when people and businesses concentrate on what they are best at doing.
8
Q
Define efficient.
A
preventing the wasteful use of a particular resource.
9
Q
Define division of labor.
A
It is a form of specialisation.
This occurs when the production process is split up into different tasks and each worker performs one of these tasks.
10
Q
Give advantages of specialisation.
A
Specialised task training
Increases efficiency which reduces costs
Increases output
Saves time
11
Q
Give disadvantages of specialisation.
A
Bored workers
Possible drops in efficiency
Production stopped due to absence
12
Q
Define added value.
A
Added value is the difference between the price of the finished product/service and the cost of the inputs involved in making it.
13
Q
How to increase added value?
A
There are two main ways:
Increase the selling price but keep the cost of materials the same.
Reduce the cost of materials but keep the price the same.
14
Q
Why is added value important?
A
Added value is important because sales revenue is greater than the cost of materials bought in by the business. This means the business:
can pay other costs such as labour costs, management expenses and costs including advertising and power
may be able to make a profit if these other costs come to a total that is less than the added value.
15
Q
Define private sector.
A
businesses owned by private individuals. They are NOT owned and controlled by the government e.g. Starbucks.
16
Q
Define public sector.
A
businesses and organisations owned and control by the government, e.g. Thai Post.
17
Q
Define mixed economy.
A
A mixed economy has both a private and a public sector.
18
Q
What is often the main objective of private sector businesses?
A
Profit maximisation or maximise sales.
19
Q
What is often the main objective of public sector businesses?
A
Providing public service to all.
Creating employment.
Develop poor economy areas.
20
Q
Define shareholders.
A
The owners of a limited company. They buy shares which represent part ownership of a company.
21
Q
Define dividends.
A
Payments made to shareholders from the profits (after tax) of a company. They are the return to shareholders for investing in the company.
22
Q
What is privatisation and why does it occur?
A
In recent years many governments have sold some of their businesses to the private sector. This is known as privatisation. They have done this because:
They believe the private sector can run them more efficiently (due to the profit motive)
Private sector owners may invest more capital into the business that the government can afford.
Competition in the private sector can help improve quality.
The government can earn much needed revenue from the sale.
23
Q
Name and define the three types of industry in which businesses operate.
A
Primary production: this involves acquiring raw materials. For example, metals and coal have to be mined, oil drilled from the ground, rubber tapped from trees, foodstuffs farmed and fish trawled. This is sometimes known as extractive production.
Secondary production: this is the manufacturing and assembly process. It involves converting raw materials into components, for example, making plastics from oil. It also involves assembling the product, e.g. building houses, bridges and roads.
Tertiary production: this refers to the commercial services that support the production and distribution process, e.g. insurance, transport, advertising, warehousing and other services such as teaching and health care.
24
Q
Define chain of production.
A
This shows the various stages of production that a good or service passes through before it reaches the consumer.
25
How are the three sectors of industry compared?
Percentage of the country’s total number of workers employed in each sector or
Value of output of goods and services and the proportion this is of national output.
26
Define de-industrialisation.
Occurs when there is a decline in the importance of the secondary, manufacturing, sector of industry in a country.
27
Why does the relative importance of a sector change?
Sources of some primary products, such as timber, oil and gas, become depleted e.g. Somalia where deforestation is a serious problem.
Most developed countries are losing competitiveness in manufacturing to the newly industrialised countries such as Brazil, Russia, India, China and South Africa (BRICS).
As a country’s wealth and living standard increase, consumers tend to spend a higher portion of their income on services such as travel and restaurants.
28
What is the difference between skills and characteristics?
Characteristics are inherent i.e. you either have them or you don’t.
Skills can be learnt.
29
What are the characteristics of a successful entrepreneur?
Leadership skills, self-confidence, risk-taking, innovative, committed and self-motivated, multi-skilled
30
Give the benefits and drawbacks of being an entrepreneur.
Benefits-
Independence, own ideas, may become famous and successful, income may be higher than working as an employee, able to make use of personal interests and skills.
Drawbacks-
Risk of failure, capital tied up, lack of knowledge and experience when starting, Opportunity cost (lost income from not being an employee somewhere else)
31
Define business plan.
A document containing the business objectives [k] and important details about the operations, finance and owners of a business [k].
32
How does a business plan help?
To help gain finance from a bank/other investors/government grants.
To set objectives/goals/targets.
To encourage careful planning that will reduce risks of financial failure.
To be clear how the business is going to operate and to identify the human and physical requirements of the business.
To identify the target market from market research.
Identify the level of demand for the product/service.
33
How does a business plan not help?
Entrepreneurs may have some knowledge already of the business they are setting up.
Business plans go out of date quickly so time spent preparing it is wasted and could have been spent on other activities.
34
What are the contents of a business plan?
Executive summary
Business aims OR targets OR vision statement
Marketing OR any element of their marketing mix e.g. pricing, product, place or promotion
Market research
Financial statements e.g. cash flow forecast OR budgets
List of potential competitors
Human resources e.g. number of employees OR skills needed
Production details
Organisational and management details e.g. structure, type of business, name and location of business
35
Define grants.
Free money from government if you meet certain targets for example setting up a business in an area with a poor economy.
36
Define interest.
The rate (usually a percentage) which a saver receives if they have money in a savings account. Also applies to loans from the bank.
37
Define loan.
Money that is borrowed that is expected to be paid back with interest.
38
Define premises.
Where the business is run for example a shop or factory.
39
Define enterprise zones.
An area in which policies to encourage economic growth and development are implemented.
40
Why do governments support start-up businesses?
Reduce unemployment – new businesses will often create jobs to help reduce unemployment.
Increase competition – new businesses give consumers more choice and compete with already established businesses.
Increase output – the economy benefits from increased output of goods and services.
Benefit society – entrepreneurs may create social enterprises which offer benefits to society other than jobs and profit (for example, supporting disadvantaged groups in society).
Can grow further – all large businesses were small once! By supporting today’s new firms the government may be helping some firms that grow to become very large and important in the future.
41
Give the benefits and drawbacks to governments for supporting start-ups.
Benefits-
Small businesses can meet demands of smaller markets which means more customers needs are being met which will mean more benefit for the economy.
Larger businesses might not want to produce custom-made goods which restricts choice for customers so small business could produce those goods providing more choice.
Create a number of jobs increases which means more people have more money to spend which helps grow the economy.
Can provide important goods and services to larger businesses.
Drawbacks-
Opportunity cost - the money invested in small businesses cannot be invested in education or health care meaning both these areas would suffer.
Larger businesses can find suppliers from other countries to produce goods and services meaning consumer choice is not restricted.
Depends on government objectives as they want to improve education and healthcare, therefore investment in small businesses is not a priority.
42
How can we measure business size?
Give methods and their limitations.
The number of employees: This is easy to calculate and compare with other businesses.
Limitations - business which use more machinery and technology i.e. capital intensive production may have few employees but they still might be big. Example Microsoft has less employees than some smaller businesses but it is still considered to be one of the biggest businesses in the world.
Value of capital employed:
This means the total value of capital invested into the business (value of machinery and long-term loans).
Limitations - A business which might not have a lot of investment in machinery may still be big. Take the example of management consultancy firms like McKinsey & Company, they are a global business.
Value of output:
Calculating the value of output is a common way of comparing businesses in the same industry, especially in manufacturing.
Limitations – A high value of output does not mean that a business large when using the other measures. A firm employing few people, producing several very expensive computers may have higher sales turnover than a company producing cheaper products who employs more people. For value of output to be considered all the products must be sold.
Value of sales (sales revenue/turnover):
The income of a business during a period of time from the sale of goods or services.
Total revenue = quantity sold × price
This measure is often used to compare retailing businesses who sell similar products e.g. Tesco Lotus and Big C.
Limitations - A business may have lower revenue but this does not reduce their size. Also, it could be misleading to compare businesses in different industries that sell different products, for example Apple and Starbucks.
Market share- this is the percentage of total market sales achieved by a business. This is often used to compare the proportion of sales one business has to another.
market share = company sales/total market sales x 100
Limitations - A business may lose its higher profit margin by increasing market share too quickly by reducing prices and offering too many special deals to achieve greater sales volumes.
43
Which is the best method to measure business size?
There is no best method, it depends on the businesses being compared and what you want to measure.
If you want to know the size of a firm in an industry then using one measure as a comparison would be useful.
However, if you wish to know the absolute size of a business then you would need to use at least two of the measures in order to get a more complete idea of their size and to help conduct a comparison.
44
Why do businesses grow?
Profit – Seek to earn more money for owners.
Reduce costs – Economies of scale (Bulk buying of more items but at a reduced cost for each item). 500 items costs 10,000 Baht. 1000 items costs 16,000 Baht.
Market Share – Firms seek to be the market leader. Have the largest amount of sales in a market.
Ambitious Owner – The owner may want the status of a bigger company
45
What are the two ways businesses can grow?
Internal Growth – this happens when a business expands its current operations.
This could be Bon Chon Chicken opening a new restaurant or McDonald’s offering a new product on their menu. This is often paid for by the businesses current profit.
External Growth – this happens when a business merges (joins) with another business or takes over a business. A take over is when one business (Business A) buys out the owners of another business (Business B) and it becomes part of Business A.
46
Why do some businesses remain small?
There are several reasons why many businesses remain small, including:
the type of industry the business operates in = Businesses in these industries offer personal services or specialised products. If they were to grow too large, they would find it difficult to offer the close and personal service demanded by consumers.
In these industries, it is often very easy for new businesses to be set up and this creates new competition. This helps to keep existing businesses relatively small.
the market size = If the market – that is, the total number of customers – is small, the businesses are likely to remain small.
For example shops in rural areas.
It is also why businesses which produce goods or services of a specialised kind, which appeal only to a limited number of consumers, such as very luxurious cars or expensive fashion clothing, remain small.
the owners’ objectives = Some business owners prefer to keep their business small.
They could be more interested in keeping control of a small business, knowing all their staff and customers, than running a much larger business.
Owners sometimes wish to avoid the stress and worry of running a large business.
47
Why do businesses fail?
Poor Management – lack of experience and bad decisions
Failure to change as the business environment changes
Poor financial management – shortage of cash
Growing too quickly – leads to problems with money and management
48
Define sole trader.
A sole trader is a business that is owned by one person. The owner has total control over the business. It may have one or more employees. A sole trader is liable for any debts that the business incurs.
49
Why is being a sole trader a risky business?
Sole traders have what is known as unlimited liability.
50
What is unlimited liability?
if a business fails, the owner would have to sell their personal belongings if necessary in order to pay off debts owed by the business.
51
What kind of debts could be incurred by a sole trader?
capital borrowed from the bank
money owed to suppliers
employee wages.
52
What documentation does the sole trader need to complete?
register as self-employed with the Inland Revenue, and complete annual self-assessment tax forms.
They should also prepare a business plan.
53
What are the key features of a sole trader?
1 owner
Total control over decision making
Keep all the profit
As many employees as they need
Unlimited liability
Liable/responsible for all debts
Personal possessions at risk
54
List the advantages of being a sole trader.
Owner has control of decision making
Any profits can be kept by the owner
55
List the disadvantages of being a sole trader.
Unlimited Liability
capital is limited to owner’s savings and bank loans
May need to work long hours
56
What is an unincorporated business?
The owner is the business - no legal difference
Owner has unlimited liability for business actions (including debts)
Most unincorporated businesses operate as sole traders
57
What is an incorporated business?
Legal difference between the business (company) and the owners
Owners (shareholders) have limited liability
Most incorporated businesses operate as private limited companies
58
Define partnership.
A business organisation owned and managed by two or more partners who all contribute resources, share profits and losses and each are personally liable for the actions of the business.
59
What is the deed of partnership?
The legal partnership agreement (Deed of Partnership) sets out how the partnership is run, covering areas such as:
How profits are to be shared
What the partners have to invest into the business
How decisions are taken
What happens if a partner wants to leave or dies
The partners between them own all the business assets and owe all business liabilities – UNLIMITED LIABILTY
60
What are the benefits of a partnership?
Minimal paperwork once Partnership agreement set up
Business benefits from the expertise and efforts of more than one owner
Partners can provide specialist skills
Greater potential to raise finance – partners each provide the investment
61
What are the drawbacks of a partnership?
Full personal liability – “unlimited liability”
A poor decision by one partner damages the interests of the other partners
Harder to raise finance than a company
Partners are bound to honour decisions of others
Complicated to sell or close
62
Define limited companies.
A limited company is a business organisation that has a separate legal entity (identity) from that of its owners. The owners of a company are shareholders.
63
How is a limited company set up?
Register with Companies House
Company is a “separate” legal person so far as the law is concerned – i.e. it is separate from its shareholders
Issued with a Certificate of Incorporation
Date of incorporation
Company number
Memorandum of Association - describes what company has been formed to do
Articles of Association - internal rules covering:
What directors can do
Voting rights of shareholders
64
Who are directors and what is their role?
Company employs directors to control management of business
The directors may also be shareholders (most are)
Directors are responsible to shareholders
Have a duty to act in best interests of shareholders
Have to account for their decisions and performance
Have to prepare financial statements and directors report for shareholders each year
65
Why should directors be appointed?
Shareholders who may not want to get involved in day-to-day decision-making
Special skills and experience
66
What is limited liability?
Limited liability – an important concept
Shareholders can only lose money they have invested
Encourages people to invest in companies – lower risk than operating as a sole trader or partnership
67
What are the features of a private limited company?
The business name ends in Limited or Ltd.
Shares can only be transferred privately, from one individual to another. All shareholders must agree on the transfer and they cannot be advertised for sale.
They are often family businesses owned by family members and/or close friends.
The directors of private limited companies tend to be shareholders and are involved in running the business.
68
What are the benefits of a private limited company?
Shareholders have limited liability
More capital can be raised by issuing shares
Control over the business cannot be lost to outsiders
The owners have tax advantages. Owners may pay less tax.
Ltds are considered to have a higher status than some other types of organisations, such as a sole trader
69
What are the drawbacks of a private limited company?
Ltds have to publish their financial information
Setting-up costs have to be met
Profits are shared between more members
It takes time to transfer shares
Ltds cannot raise large amounts of money like public limited companies.
70
What is a public limited company?
a company whose shares are available to the public on the stock exchange. They are owned by shareholders and they have limited liability.
71
What is stock exchange?
A market in which shares are bought and sold.
72
What are shareholders?
The owners of a limited company. They buy shares which represent part ownership of a company.
73
Define dividends.
Payments made to shareholders from the profits (after tax) of a company. They are the return to shareholders for investing in the company.
74
What is the Annual General Meeting (AGM)?
A legal requirement for all companies. Shareholders may attend and vote on who they want to be on the Board of Directors for the coming year.
75
Why do owners want their business to grow?
Higher profile in the marketplace
Larger revenues
Lower unit costs due to economies of scale
Higher profits
Easier to raise finance
76
What is stock market flotation?
Stock market flotation is when a company launches on the stock market by the offer of shares to the public.
This occurs when a business ‘goes public’. The process can also be called an Initial Public Offering (IPO). This means shares are offered to the public for the first time.
77
What is bad about stock market flotation?
This is a time consuming and expensive process and one of the first jobs is to produce a prospectus.
78
What are the benefits of stock market flotation?
Selling shares publicly through flotation is one way to raise this large sums of capital, particularly if new services are to be offered.
NOTE: Raising finance through selling shares does not raise revenue, it raises cash. (Source of finance)
Flotation may enable a company to compete with large competitors more effectively.
79
What are the drawbacks of stock market flotation?
The company needs lawyers to ensure that the prospectus is legally correct.
The company is likely to need to pay an investment bank to process share applications
The company must have a minimum of £50,000 share capital
Less finance may be raised than expected as the flotation may not attract sufficient investment
The current owners/board are likely to lose some ownership/control to new investors attracted during flotation.
80
What are the features of a public limited company?
Name ends in PLC.
Owned by shareholders
Shares can be bought and sold on the stock market which is accessible to anyone.
Capital can be raised by selling shares (significant source of finance).
Run by directors who are elected by shareholders. The board of directors, headed by a chairperson, is accountable to shareholders.
81
What are the benefits of operating a public limited company?
Able to sell shares on stock market so no limit to potential number of investors
Access to more sources of finance – so easier to raise funds to expand.
Limited liability so investor only liable for amount invested
Investors could be more likely to invest in company as risk limited.
Separate legal identity accounts separate to owners, so if one dies, business can continue.
High status so easier to attract suppliers who will sell to them on credit
Banks are more likely to lend to them as seen as lower risk
82
What are the drawbacks of operating a public limited company?
PLCs have to disclose their accounts so they are less able to keep financial details secret from competitors.
Selling shares is expensive because shares need to be listed on the stock market
Shares are freely traded so there is a greater risk of takeover/danger that original owners might lose control
Shareholders in public companies expect a steady stream of income from dividends
Increased threat of takeover
Greater public scrutiny and profile (e.g. analyst reports, press reports)
83
What is the difference between a private and public limited company?
Shares in a plc can be traded on Stock Exchange and can be bought by members of general public
Shares in a private limited company are not available to general public
Issued share capital (initial value of shares put on sale) must be greater than £50,000 in a plc
A private limited company may have a smaller (or larger) capital.
84
What happens during a flotation?
When shares in a “PLC” are first offered for sale to general public
Company is given a “listing” on Stock Exchange
Opportunity for company to raise substantial funds
Also a chance for existing shareholders to “cash in” by selling some or all of their shares (e.g. a venture capitalist who may have invested earlier)
Complex and expensive process
85
Why do people buy shares in a company?
Shares normally pay dividends = a share of profits
Companies on Stock Exchange usually pay dividends twice each year
Over time value of share may increase and so can be sold for a profit (known as a “capital gain”)
86
What are the drawbacks of buying shares?
`price of shares can go down as well as up, so investing in shares is risky.
If shareholders have enough shares they can influence management of company
shareholder’s liability is limited
However, there are still risks in investing:
Company reduces its dividend or pays no dividend
Value of share falls below price shareholder paid
Company fails and investor loses money invested
87
What is franchising?
when a business is allowed to trade using the brand/logo/business model of an existing firm in return for a fee also known as a royalty.
88
Who is a franchisor?
The franchisor is the business who sells the right to another business to operate a franchise e.g. McDonald’s. They may run a number of their own businesses, but also may want to let others run the business in other parts of the country.
89
Who is a franchisee?
The franchisee is an individual or company that holds a franchise for the sale of goods or the operation of a service.
90
What are the advantages of operating as a franchise
Still your own business
Tested & developed format & brand
Advice, support, training
Easier to raise finance
No industry expertise required
Buying power of franchisor
Lower risk method of market entry + lower failure rate
91
What are the disadvantages for the franchisee?
Not cheap! Initial fees + royalties
Restrictions on actions, including selling
Long-term rewards for hard work compared with going it alone?
What happens if franchisor fails?
92
What are the advantages for the franchisor?
A classic growth strategy for a proven service business format
Enables rapid geographical growth for a minimum investment
Still have an option to open solus branches (your own)
93
What are the disadvantages for franchisor?
Potential profit is shared with franchisees.
Poor franchisees may damage the brand’s reputation.
The cost of supporting franchisees may be high.
94
What is a joint venture?
When two or more businesses agree to work closely together on a particular project, they create a separate business division and share risks, capital, profits and resources.
95
What do businesses create joint ventures?
Reduce costs and risks as they are shared between two or more businesses.
Different businesses have different strengths and experiences so a JV can take advantage of these and create a good fit.
They may have major markets in other countries and they could exploit these with newly developed products more effectively than if they decided to go it alone.
96
What are the problems with joint ventures?
Profits must be shared.
Differing styles of management and culture might prevent successful partnership.
Errors that occur will often be blamed on the other party.
The business failure of one of the partners may put the entire project at risk.
97
What is the difference between the public and private sector?
Private:
Owned by private individuals known as shareholders in limited companies.
Not controlled directly by government.
They are profit orientated.
Public:
Owned by state or local government
Important to economies in all countries
98
What is a public corporation?
Owned by state/local government e.g. rail services or water supply.
99
What is the role of the government in a public corporation?
DO NOT directly operate business
Government set clear objectives for the public corporation
Government appoint a Board of Directors (BOD)
The day to day running of the public corporation is the responsibility of management (BOD).
100
What are the objectives of public corporations?
Keep prices affordable to ensure access for all people for vital public services
Provide a minimum standard e.g. Universal Coverage for Emergency Patients - ALL Thai hospitals must offer a minimum of 72 hours care to emergency patients.
Offer public service in ALL areas
Protect or create employment in certain areas
101
What are the issues faces by public corporations?
Keeping to objectives costs huge amounts of money
Often make huge loses
“Subsidies” often paid by government
102
What are the advantages of a public corporation?
Essential Services owned by government
Strategically necessary
Important Industry
Consumers not taken advantage of
Availability for public use
Open Business & Secure Jobs
If collapse occurs, government can help
103
What are the disadvantages of a public corporation?
No Shareholders
No Profit Motive
No Efficiency Motive
Subsidies lead to inefficiency
Managers think that government there for bailout all the time
Unfair
Subsidies not given to private sector business who are competing.
Lack of Incentive
Increase consumer choice
Increase efficiency
Used for Political Gain
Offering more jobs at election time
104
Why would the public sector grow?
Political views regarding desirability
- There may be an increase in the number of schools/universities as a government wishes to invest more in education for the long term benefit of the country
State of economy might demand action
- The economy might be performing badly and unemployment may be high. Therefore, the government may decide to create more public sector jobs to provide future growth.
Expectations of society change
- Populations in developed countries are getting older and require more elderly (old people) care facilities. Some of these will have to be provided by the government.
105
What are objectives?
Objectives are medium term targets that act as stepping stones to achieving the longer term aims of a business.
106
What is purpose of business objectives?
To provide direction for the organisation
To form a basis for allocating resources
To be motivational – for managers and workers
To monitor performance
To measure success
107
What are smart objectives?
Specific
Measurable
Achievable
Relevant
Time-framed
108
What objectives do businesses set?
The most common objectives include:
Business survival
Growth of the business
Profit
Increase market share
Providing a service to society – public corporations!
109
When is survival a business objective?
When a business has recently been set up
When the economy is moving into recession.
New competitors can also make a business feel less secure.
The managers of a business threatened in this way could decide to lower prices in order to survive, even though this would lower the profit on each item sold.
110
What is market share?
The percentage of total market sales achieved by one brand or business.
111
How to calculate market share?
company sales/total market sales x 100
112
What is the benefit of increased market share?
good publicity, as they could claim that they are becoming ‘the most popular’ MARKET LEADER
increased influence over suppliers, as they will be very keen to sell to a business that is becoming relatively larger than others in the industry
increased influence over customers (for example, in setting prices).
113
Why is growth often a business objective?
The owners and managers of a business may aim for growth in the size of the business – usually measured by value of sales or output – in order to:
make jobs more secure if the business is larger
increase the salaries and status of managers as the business expands
open up new possibilities and help to spread the risks of the business by moving into new products and new markets
obtain a higher market share from growth in sales
obtain cost advantages, called economies of scale, from business expansion.
114
Why is profit a business objective?
When a business is owned by private individuals it is usually operated with the aim of making a profit. The owners will each take a share of these profits.
Profits are needed to:
pay a return to the owners of the business for the capital invested and the risk taken
provide finance for further investment in the business.
Profits can be improved by increasing revenues or decreasing costs.
Without any profit at all, the owners are likely to close the business.
115
What are the dangers of profit maximisation?
Criticised as too short term. By focusing aggressively on maximising short-term profits, it is possible that longer term more lucrative opportunities are overlooked.
Other stakeholders may resent the decisions made in pursuit of profit, employees may not see their wages increase and customers may be asked to pay higher prices.
116
Why is increasing returns to shareholders a business objective?
The managers of companies will often set the objective of ‘increasing returns to shareholders’. This is to discourage shareholders from selling their shares and it helps managers to keep their jobs.
117
How can returns to shareholders be increased?
increasing profit and the share of profit paid to shareholders as dividends
increasing share price – managers can try to achieve this not just by making profits but by putting plans in place that give the business a good chance of growth and higher profits in future.
118
Why do business objectives change?
Previous objectives met
Change in competition
Change in demand
Survival
Change in board of directors
Change in ownership type
Changes in the demands of stakeholders
Change in profit / business costs
Changes in economic conditions
119
What factors influence business objectives?
The overall aims
Analysis of business performance
Ownership – public sector objectives are more likely to focus on providing a service whereas private sector firms may focus on profit and growth.
120
How do the following conflict:
1) Profit and Growth
2) Providing a service and growth
Profit and growth - expansion can increase costs, especially in the short term
Providing a service and growth - smaller firms may know their customers better than large firms and therefore be able to provide a more personalised service
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What is a stakeholder?
Stakeholders are people or groups of people who can be affected by, and therefore have an interest in any action by an organisation.
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Name some stakeholder groups.
Owners/Shareholders
Consumers
Workers
Government
Suppliers
Managers
Banks
Local Community
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What is a pressure group?
A pressure group is formed by people with a common interest who will take action to achieve the changes they are seeking.
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What are the objectives of environmental pressure groups?
To protect the environment
Reduce or limit amount of pollution/environmental damage
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What are internal stakeholders?
Internal stakeholders are part of the business and spend the majority of their time working at the office or factory.
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What are external stakeholders?
External stakeholders are not part of the business, they may deliver supplies, provide finance, however, they will work for another business or the government.
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What are the objectives of owners/shareholders?
Share of the profits so that they gain a rate of return on the money put into the business
Growth of the business so that the value of their investment increases
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What are the objectives of customers?
Safe and reliable products
Value for money
Well-designed products of good quality
Wide range of choice of products
Reliability of service and maintenance
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What are the objectives of employees?
Regular payment for their work
Contract of employment
Job security – workers want to feel that they are not going to lose their job as they do not want to look for new jobs frequently
Job that gives satisfaction and provides motivation
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What are the objectives of the local community?
Jobs for the local working population
Production that does not damage the environment.
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What are the objectives of the government (stakeholder group) ?
They want businesses to succeed in their country. Successful businesses will employ workers, pay taxes and increase the country’s output.
Expect all firms to stay within the law – laws affect business activity such as paying taxes and low pollution levels.
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What are the objectives of managers?
High salaries because of the important work they do
Job security
Growth of the business so they have more status and power.
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What are the objectives of banks?
Expect the business to be able to pay interest and repay capital lent – business must have enough cash to make these payments.
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What are the objectives of suppliers?
Quick payment for good/services supplied
Regular orders
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