3.1 what is business? Flashcards
what is the purpose of all businesses
to meet the needs of people
how does the incentive to meet peoples needs vary between businesses
vary from one business to another depending on the industry, sector and motives of the owners
how do businesses meet peoples needs
through a transformation process that creates a product (goods or service)
how does added value affect competitiveness
more value a business can add to products the more competitive it is
how can added value be achieved
through branding, quality, convenience and service
inputs into the transformation process (added value)
labour (people)
capital (finance)
land (natural resources and materials)
outputs of the transformation process (added value)
goods and services
role of business and how they meet needs and reward owners
business creates goods and services -
to meet the needs of customers-
business sells products to generate revenue-
if revenue is greater than total costs-
profit (reward of owners)-
reinvested for business growth- back to first stage
why do businesses exist
create wealth
create jobs
develop new products to benefit society
support other businesses in the country such as purchasing materials
provide a source of tax revenue for the government
how does mcdonalds ad value to its products
strong global brand
golden arches
value also added through convenience and speed of service
what do aims and missions do
act as targets and give the business direction
they also give clarity to the decision making process
whats a mission statement
sets out a business’s overall purpose to direct and stimulate the entire organisation
what does a mission statement focus on
the organisations values
non financial goals
the benefits of the business to the community or stakeholder
how consumers are to be satisfied
what is oxfams mission statement
to create lasting solutions to poverty, hunger and social injustice
how does the mission statement help employees
acts as a set of guiding principles for employees
brings employees together with a shared purpose and communicates the values that underpin the business
a mission statement can have significant influence on corporate culture- ‘the way we do things around here’
effect of a mission statement on owners and directors
directors need to see the bigger picture and think strategically
the mission statement helps the directors form and align the business strategy
how does the mission statement help investors
many shareholders will want assurances that their money is being invested in an ethical business with strong values
a mission will also communicate the ambition of the business to potential stakeholders and its desire to grow
how does the mission statement affect customers
many organisations use their mission statement as a promise to their customers
it lays down what they can expect from the goods and services they consume
what does the objectives hierarchy show
shows the relationship between the aims, mission and objectives thrughout a business
what is the objectives hierarchy
aims
mission statement
corporate objectives
functional objectives- finance, marketibg, operations, people
what is the relationship between missions and objectives
the objectives of a business will flow from the mission and aims
whereas a mission outlines the vision of the business in broad terms, the objectives will be SMART
whereas a mission statement will be communicated to all stakeholders, some objectives may only be shared with managers and employees
what are objectives
medium to long term plans established to coordinate the business and act as targets
what are corporate objectives
those set by the owners or directors of the business
these will influence the functional objectives set at department level
why do businesses set objectives
provide quantifiable steps to achieve aims
clarify direction of the business
measure success against targets
provide targets to motivate and reward employees
influence potential leaders/investors
how is the appropriatness of an objective analysed
using SMART
what does SMART stand for
specific
measurable
agreed
realistic
time related
what are the two types of objectives
financial
non financial
financial objectives
survival
profitability
growth
market share
shareholder value
non financial objectives
personal satisfaction
brand recognition
sustainability
customer satisfaction
what objectives are more appropriate for small businesses
survival
personal satisfaction of the owner
what factors influence business objectives
size
sector
market
ownership
owner
consumer satisfaction
how does the size of a business influence objectives
objectives may change as a business grows and becomes more successful
most businesses when starting up will aim to survive
how does sector influence business objectives
unlike most private sector businesses public sector organisations are driven by meeting customer needs not profit
how does market influence business objectives
some markets are more competitive than others and this will determine objectives such as targeting market share
how does ownership influence business objectives
a PLC must satisfy shareholders therefore will set objectives around shareholder value
how does the owner influence business objectives
the owner may run the business for love of the job
how does consumer satisfaction influence business objectives
how to achieve consumer satisfaction
what is one of the main incentives of running a business
profit
what does the wealth created through profit allow owners to do
allow owners to reinvest the money into new projects and stimulate eonomic activity
why is profit important
secures long term success of a businesss
why may profits be reinvested
help the business grow and keep up with the demands of the ever changing business environment
what is profit
what is left after all costs have been deducted from revenue
what is revenue
the value of sales made during a trading period
it also includes products sold on credit as well as those sold for cash
how can a business increase revenue
by increasing the price of its products and by stimulating more demand
what are the two types of costs
variable costs
fixed costs
variable costs
those that change directly with the level of output or sales such as the meterials used to make a product
fixed costs
those that do not change with the level of output or sales such as rent
what can calculating fixed and variable costs help with
when making decisions about profit margins, average costs and pricing decisions
how can a business improve profit
by reducing fixed or variable costs whilst maintaining value in their productss
what is revenue
the value of sales made during a trading period
it also includes products sold on credit as well as those sold for cash
how can a business increase revenue
by increasing the price of their products and by stimulating demand
total revenue formula
price x quantity sold
total costs formula
total variable costs + total fixed costs
profit formula
total revenue - total costs
what does achieving high revenue demonstrate
that the business has been able to produce a product that is desirable and at the right price for consumers
so revenue is an important measure of success for most businesses
what is revenue
the value of sales made during a trading period
it also includes products sold on credit as well as those sold for cash
how can a business increase revenue
increasing the price of their products and by stimulating more demand
total revenue formula
price x quantity sold
total costs formula
total variable costs + total fixed costs
profit formula
total rvenue - total costs
why is it important to consider profit margins when analysing sales revenue
it is difficult to analyse the success of a business without being able to compare revenue and profit
what determines what the most appropriate form of ownership for a business is
nature and size of each business
private businesses are
owned by shareholders and private individuals
most businesses in the uk
driven by profit motive (most)
determined by market forces
50/50 private and public businesses
some industries and business feature aspects of both the private and public sector such as the MHS
pubic businesses are
owned and funded by national or local government
account for approximately 19% of UK employment
are driven by public interest
are made up of public corporations, public services and municipal services
what is privatisation
selling of public owned industries to raise capital and improve efficiency
how may a business change its form as it grows
sole traders
private limited company
public limited company
non profit organisations
size- as businesses grow they gain access to more capital
sole traders
easy to start up- no registration
requires wide range of skills and flexibility
own boss but long hours
keep all profits
unlimited liability
private limited company
must go through process of incorporation
limited liability
customers may trust a limited company more than a sole trader
wider access to capital- easier to borrow money as a limited company
who are sole traders owned by
individuals
self employed
who are private limited company owned by
owned by shareholders seperate legal entity
public limited company
can raise capital through selling shares to the public
size measured by market capitalisation
ability to take over other businesses
can lose control of the business
pressure to pay dividends to its shareholders
who owns public limited companys
large publically owned companies
non profit organisations
a business may also be set up as a charity- a not for profit business
a charity may be exempt from tax on most forms of income
alternatively a business may take the form of a mutual
a mutual can take any legal foprm but is distinguished by the fact that it is run for the benefit of its members (employees, customers or community)
incorporation
involves the registry of a business with Companies House and includes documents such as a Memorandum of association and articles of association
limited liability
where the liability of the owners is detached from the company
shateholders lose their investment in the event of financial difficulties
but their personal belongings are safe unlike with unlimited liability where there is no distinction in law between the individual and the business
what are the aims and objectives of a business influenced by
the type of ownership
its size
the external environment in which it operates
aims and objectives of public limited companies
has external shareholders due to stock market floatation
as a result the aims and objectives of the business are likely to relate to increasing shareholder value
private limited companies and sole traders do not have this pressure to satisfy external shareholders
as a plc is more likely to operate in internnational markets its objectives may alos refer to how it intends to operate in these markets
aims and objectives of a private limited company
many businesses can be formed as a private limited company
although the limited status does not necessarily influence aims and objectives the business may have ambitions to become a plc
objectives are likely to involve growth and expansion
aims and objectives for sole traders
typically small businesses and owned by one person
if the business is newly formed the objectives are likely to focus on survival
establishing a loyal customer base or building reputation
objectives may only extend to providing the owner with a comfortable income
aims and objectives of a charity
a charity is a not for profit organisation so its aims and objectives will not focus on the incentive of profit
a charity may set a unique way to measure its success such as the number of donors, the number of people it has supported or the awareness of the cause it promotes
what happened in 2013 when twitter floated itself on the New York stock exchange
initial public offering was valued at $14.2 billion
and the share price for its first day of trading settled at around $44 per share
what is a shareholder
an individual or an institution that owns a percentage of a company
shareholders invest in companies to make a profit (return) on their investment
shareholders can influence the decision making in companies and often have a vote in key company policy
the two ways shareholders gain from shares
therough profits returned in the form of dividends and the appreciation of share value when they come to sell them
what are share prices affected by
the companys performance and the business enviornment in which it trades
a companies share price could fall even if it is performing well if there are fears for its future
when share prices rise
managers recieve a bonus
the company fimds it easier to raise capital
consumers with shares feel more confident
the business may recieve posotive publicity
when share prices fall
the company may become vulnerable to a takeover
price fall gives an indication of poor performance
the company finds it harder to raise capital
consumers with shares feel less confident to spend
external factors for businesses
competition
market conditions
demographic factors such as birth rates, migration, consumer tastes
market conditions such as consumer incomes, competition, growth in demand
environmental issues such as consumer preference for fair trade products and green business practices
economic factors such as consumer incomes, interest rate changes
what might determine how attractive or changeable a market is
range of factors
they may determine how responsive and flixible a business needs to be to succees within its market
what factors affect market conditions and competition
the growth rate of the market
the typical profit margin that businesses can generate
the number and size of competitors in the market
the pace of innovation and new product development
the bargaining power of suppliers and customers
the level of differentiation between competitors
the seasonality of the product
the volaitility of costs during incurred by businesses such as commodity prices
what is a key market factor in thr mobile phone industry
the pace of technology and new product development
most smartphone manufacturers launch a new product every 6-8 months
sales growth for smartphones in western europe and the usa is declining whilst africa amnd asia pacific offer considerable growth opportunities for manufacturers and network providers
economic factors in the external environment
income of consumers
incomes are determined by the gross domestic product (GDP)
what is GDP a measure of
the output of an economy in terms of the goods and services it produces over a year
how will high DGP affect incomes
will increase the incomes of consumers leading to increased spending on a range of goods and services
how will consumer spending on luxuries/neccesities respond to a change in incomes
will respond differently
consumers may purchase more luxury items as their incomes rise but there may be little change in demand for necessities as incomes fall
how will low GDP affect incomes
may result in unemployment and falling incomes
spending will fall for certain goods and services
what is an interest rate
the cost of borrowing money or the reward for saving
interest rates are closely linked to the level of inflation and the exchange rate
high interest rates
cost of existing loans may increase
consumers may have less disposable income (consequence of increased mortgage payments)
demand for products bought on credit may fall
consumers more likely to save their money
low interest rates
cost of existing loans may fall
demand for products bought on credit may rise eg luxury goods
consumers more likely to spend
disposable income rises
savers lose out on earnings from investments
what is demography
the study of the human population
what demographic factors affect the uk
UK population is growing leading to an increase in demand for most goods and services
migration to the uk from eastern european countries is growing, fuelling growth in the labour market
the uk population is getting older, changing the demand for different products and services
what two key stakeholder groups does the population form
changes in the population will impacy the size of a potential market and their wants and needs
changes in the population will impact the size of the labour market and the skills of those workers
what do the government try to get businesses to do
ensure businesses pay for the total cost of production including the external costs such as pollution which ultimately has to be paid for by society
benefits for a business of being environmentally friendly
avoid negative publicity from the media
opportunity for differentiation
avoids fines or penalties imported through environmental legislation
opportunity for government incentives such as tax relief
creates a sustainable business
limitations for a business of being environmentally friendly
increased cost of raw materials
increased cost of waste disposal
lower profit margin on fair trade goods
uk environmental legislation includes
the environmental protection act 1990
the environment act 1995
the climate change act 2008
eg of enviornmentally friendly practices for businesses
global retail sales of fairtrade products such as coffee,sugar and bananas increased by 15% in 2014
the uk is currently the worlds largest market for fairtrade products
