Business and its Environment Flashcards
Revision
What are the four factors of production?
Land, Labour, Capital and Enterprise
How is land an economic problem?
Businesses need a supply of raw materials for manufacturing but there is a limited supply resulting in scarcity.
How is labour an economic problem?
Businesses will need skilled workers to carry out specific tasks but there aren’t enough for every business.
How is capital an economic problem?
Businesses need capital to startup but often don’t have the amount of money it needs.
How is enterprise an economic problem?
A business needs an entrepreneur in order to make the business successful but such people are scarce.
What is an opportunity cost?
The next alternative that would have been chosen.
What is the primary sector?
Businesses producing raw materials for other businesses.
Give three examples of businesses in the primary sector.
Fishing, Mining and Farming
What is the secondary sector?
Businesses that use raw materials to manufacture products.
What is the tertiary sector?
Businesses that provide a service to customers.
Give three examples of tertiary sector businesses.
Retail, Banking and Insurance
Define specialisation.
When a business focuses one particular activity.
What is the chain of production?
The process of a product from raw materials, manufactured and then sold.
Give one advantage of specialisation.
The business can reduce costs, producing cheaper goods.
Define added value.
When a business increases the value of a product.
Give three factors that have lead to the decline of the primary sector in Britain.
- Raw materials have been fully depleted.
- Machinery has replaced workers.
- Foreign competition.
What is the decline of the secondary sector?
De-industrialisation
Give two factors that have lead to the decline of the secondary sector in Britain.
- Cheaper foreign competition.
- The use of machinery in the place of workers.
How has the importance of the tertiary sector changed in Britain?
The importance has increased.
Give four factors that have lead to the change of importance for the tertiary sector.
- Jobs are connected to a growing population.
- The increase in wealth.
- The increase in leisure time spent.
- The increase of customer service.
What are the four main business objectives?
- Profit
- Growth
- Survival
- Providing a service.
How might a business achieve sales growth?
Opening more outlets.
Give three different forms of growth.
- Sales growth
- Increased market share
- Elimination of competition
What is a business’ market share?
The amount of the market that a business controls generally in sales pc.
What is elimination of competition?
A business takes over / buys its competitor resulting in instant growth.
When might a business see survival as a vital objective?
During a time of recession when people don’t have much income.
what is the acronym S.M.A.R.T stand for?
S- specific M- measurable A- achievable R- realistic & relavent T- time specific
what is a mission statement?
a statement of the businesses core aims, phrased in a way to motivate employee’s and to stimulate interest by outside groups e.g of mission statements: Google; “to organise the worlds information and make it universally accessible and useful”
what are corporate aims
these are the very long-term goals which a business hopes to achieve. The core of a businesses activity is expressed in its corporate aims and plans.
what are the benefits of having corporate aims?
- become a starting point for which successful management would take place.
- help develop a sense of purpose and direction for the whole organisation if they are clearly communicated to the workforce
- They allow future assessment to be made, at later date of how successful the business has been attaining its goals?
- they provide the framework within which the strategies or plans of the business can be drawn up. A business without a long term corporate plan or aim will often stray from event to event without a clear purpose.
arguments used to in favour of a mission statement
- they quickly inform groups outside the business what the central aim and vision are. 2. they prove motivating to employees, as well as to the community if mission statement is positive to the environment or to the public. 3. they help guide and direct employee’s 4. helps a business tell outsider ‘what the business is about’
mission statements are of the criticized
- they can be to vague and general 2. virtually impossible to analyse or disagree with 3. it can be common for 2 rather opposite businesses having similar mission statements
Common corporate objectives
- profit maximisation 2. profit satisficing 3. growth 4. increasing market share 5. survival 6. corporate social responsibility (CSR) 7. maximising short term sales revenue 8. maximising shareholder value
profit maximisation is?
producing at the that level of output that where the greatest positive difference between total sales revenue and total costs is achieved.
limitations of profit maximization
- the focus on short term profits may encourage competitors to enter the market and jeopardiser the long-term survival of the business 2. most business analysts assess the performance of a business on capital employed and not total profits. 3. it is difficult to to asses whether the point of profit maximisation has been reached 4. constantly changing prices or output to attempt to achieve profit maximisation may have a negative affect on the business
profit satisficing is?
aiming to achieve enough profit to keep the owners happy but not be working ‘flat out’, often common among owners who wish to live comfortably but do not want to work longer hours.
benefits of growth (Common corporate objectives) is?
- larger firm will be less like to be taken over and should be able to benefit form economies of scale 2. motivate managers from the desire to see the business succeed due to them getting higher pay or fringe benefits . 3. business who do not attempt to grow are argued to cease to be competitive and will loose appeal to investors.
limitations of growth (Common corporate objectives)
- expansion that is too rapid can lead to cash-flow problems 2. sales growth might be achieved at the expense of lower profits margins 3. larger businesses can experience diseconomies scale 4. using retained profits to finance growth can lead to lower short-term return to shareholders 5. growth into new business areas and activities could cause a loss of direction and focus for the whole origination
benefits of having the highest market share, being ‘market leader’
- retailers will be keen to stock and promote the best selling brand 2. profit margins offered to retailers may be lower than competing brands as the shops are so keen to stock it - this leaves more profit for the producer. 3. effective promotional campaigns are often based alongs the lines of “buy our product with confidence, its the market leader”
the survival objective is?
likely to be the key objective of new or starting up businesses. high rate of failure within the first 2 years of a business means that survival is important. after being firmly established long-term goals are set in place
corporate social responsibility (CSR) is
this concept applies to those businesses that consider the interest of society by taking responsibility for the impact of their decisions and activities on customers, employee’s, communities and the environment
ways in which businesses promote corporate social responsibility (CSR)
- firms the promote organic and vegetarian foods 2. retailers the emphasise the promotion of their products being made from recycled materials 3. businesses that refuse to stock goods that have been tested on animals, or foods that base on genetically modified ingredients
The main factor that affects most business
The main factor that affects most business is the degree of competition
degree of competition
how fiercely other businesses compete with the products that another business makes.
other factors that can affect the business are
Social – how consumers, households and communities behave and their beliefs. For instance, changes in attitude towards health, or a greater number of pensioners in a population.
Legal – the way in which legislation in society affects the business. E.g. changes in employment laws on working hours.
Economic – how the economy affects a business in terms of taxation, government spending, general demand, interest rates, EXCHANGE RATES and European and global economic factors.
Political – how changes in government policy might affect the business e.g. a decision to subsidise building new houses in an area could be good for a local brick works.
Technological – how the rapid pace of change in production processes and product innovation affect a business.
Ethical – what is regarded as morally right or wrong for a business to do. For instance should IT TRADE with countries which have a poor record on human rights.
main reasons why markets change rapidly
Customers develop new needs and wants.
New competitors enter a market.
New technologies mean that new products can be made.
A world or countrywide event happens e.g. Gulf War or foot and mouth disease.
Government introduces new legislation e.g. increases minimum wage.
Types of competition in the market?
Many small rival businesses – e.g. a shopping mall or city centre arcade – close rivalry.
A few large rival firms – e.g. washing powder or Coke and Pepsi.
A rapidly changing market – e.g. where the technology is being developed very quickly – the mobile phone market.
A business could react to an increase in competition (e.g. a launch of rival product) in the following ways
Cut prices (but can reduce profits) Improve quality (but increases costs) Spend more on promotion (e.g. do more advertising, increase brand loyalty; but costs money) Cut costs, e.g. use cheaper materials, make some workers redundant
Social change
Social change is when the people in the community adjust their attitudes to way they live. Businesses will need to adjust their products to meet these changes, e.g. taking sugar out of children’s drinks, because parents feel their children are having too much sugar in their diets.
social responsibilities
These are the way they act towards the different parts of society that they come into contact with.
social benefit
is where a business action leads to benefits above and beyond the direct benefits to the business and/or customer. For example, the building of an attractive new factory provides employment opportunities to the local community.
A social cost
is where the action has the reverse effect – there are costs imposed on the rest of society, for instance pollution.
business cycle
Economies go through a regular pattern of ups and downs in the value of economic activity (as measured by gross domestic product or GDP
The business cycle is characterised by four main phases
Boom: high levels of consumer spending, business confidence, profits and INVESTMENT. Prices and costs also tend to rise faster. Unemployment tends to be low as growth in the economy creates new jobs
Recession: falling levels of consumer spending and confidence mean lower profits for businesses – which start to cut back on INVESTMENT. Spare capacity increases + rising unemployment as businesses cut back and reduce stocks
Slump / depression: a prolonged period of declining GDP - very weak consumer spending and business INVESTMENT; many business failures; rapidly rising unemployment; prices may start falling (deflation)
Recovery: things start to get better; consumers begin to increase spending; businesses feel a little more confident and start to INVEST again and build stocks; but it takes time for unemployment to stop growing
Businesses whose fortunes are closely linked to the rate of economic growth are referred to as “cyclical”businesses. Examples include
Fashion retailers Electrical goods House-builders Restaurants Advertising Overseas tour operators Construction and other infrastructure firms
Government Spending
Government spending is also known as public spending and in Britain, it takes up over 45% of GDP. Spending by the public sector can be broken down into three main areas
What are the 3 main areas of government spending?
Transfer Payments
Current Government Spending
Capital Spending
government spending has direct and indirect effects on firms selling goods and services to individual consumers and to other firms. what are they?
Increased government spending may mean higher taxes
Higher taxes reduce the ability of customers to purchase goods and services, which is likely to reduce consumer spending
Businesses that supply services to the public sector, demand is directly linked to how much government is spending. Good examples include
Construction firms that build and repair the road network
Publishers who supply schools and colleges
IT systems consultants who develop computer systems for public sector organizations
5 methods of measuring a business size.
- number of employee’s
- sales turnover
- capital employed
- market capitalisation
- market share
Sales turnover is?
Total value of sales made by a business in a given time period.
Capital employed is?
The total value of all long-term finance invested in the business
Market capitalisation is?
the total value of a company’s issued shares
formulae = current share price x total number of shares issued
Market share is?
sales of the business as a proportion of total market sales
formulae = total sales of business
total sales of industry x100
=___%
Advantages of a Small business
- can be managed & controlled by the owner
- often able to adapt quickly to meet changing customer needs
- offer personal service to customers
- find it easier to know each other, and many staff prefer to work for smaller, more human business.
Disadvantages of a Small business
- may have limited access to sources of finance
- may find the owner/s has to carry a large burden of the responsibility. (if unable to afford specialist managers)
- may not be diversified, so there are greater risks of negative impact on external change
Advantages of a large business
- can afford to employ specialist managers
- may be able to set low prices that other firms have to follow
- have access to several sources of finance
- may be diversified in several markets and products so that risks are spread.
- are more likely to be able to afford research and development into new products or processes.
Disadvantages of a large business
- may be difficult to managed, especially if geographically spread
- may suffer from slow decision making and poor communication (due to the structure of a large business)
- may often have conflicts of interest and objectives among members and partners.
Internal growth is?
The expansion of a business by means of opening new branches, shops, or factories, (organic growth)
External growth is?
Is expansion achieved from merging with or taking over another business. same industry or different.
4 types of integration
- horizontal integration
- vertical integration - forward
- vertical integration - backward
- conglomerate integration
Horizontal integration is?
integration within the same industry and same at the same level of production.
Vertical integration - forward is?
integration with a business in the same industry but a customer of the existing business
Vertical integration - backward is?
integration with a business in the same industry but a supplier of the existing business
Conglomerate integration is?
integration with a business in a different industry
Advantages of vertical integration - backward
- gives control over quality, price delivery time or suppliers
- encourages joint research and development into improved quality of suppliers
- may now control supplies that go to competitors
advantages of conglomerate integration
- diversifies the business away from its original industry and markets
- this will spread the risk,
- may take business into faster growing market
disadvantages of conglomerate integration
- lack of management experience in the acquired business sector
- there could be lack of clear focus and direction now that the business is spread across more than one industry.
disadvantages of horizontal integration
- rationalisation may bring bad publicity
2. may lead to monopoly investigation if the combined business exceeds certain market share limits
disadvantages of vertical integration - forward
- consumers may suspect uncompetitive activity and react negatively
- lack of experience in this sector of the industry - successful manufacturer doesn’t necessarily make a successful retailer.
disadvantages of vertical integration - backward
- may lack experience of managing a supplier company
2. supplying business may become complacent(self satisfied, smug) due to having a guaranteed
