Section 1 - Understanding Business Activity Flashcards
Define Need and Want
Need: good/service essential for living
Want: good/service people would like to have, but isn’t essential for living
Factors of production (4)
Land: raw materials extracted from earth/sea
Labour: number of people available to work
Capital: machinery, equipment and finance required for production of product
Enterprise: people prepared to take risk of opening new business venture + bring factors of production together, called entrepreneurs
Define Economic Problem
unlimited wants & limited resources
Define Scarcity
not enough goods/services to meet all wants
Define Opportunity Cost
benefit that could’ve been gained from alternative use of same resource
Define Specialization
people & business focus on their specialty
Define Division of Labour
production process divided into separate tasks and each employee has to complete one
Benefits of Specialization (7)
its machinery is widely available higher competition = lower costs leads to higher living standards less time wasted switching jobs each employee works on only one task = more efficient = higher output lower costs of production
Types of goods/services (3)
consumer goods: physical/tangible products sold to public (durable/non-durable)
consumer services: virtual/tangible products sold to public
capital goods: products sold to other businesses to help them in their production process
Define Added Value
selling a product for more than it cost to produce it
added value = selling price - material costs
How to increase Added Value (8)
branding excellent service quality product features convenience packaging decoration increasing selling price buy cheaper ingredients/materials (=low quality)
Classification of businesses (3)
primary sector: extract natural resources from land/sea
secondary sector: takes resources from primary sector = turns into manufactured finished goods
tertiary sector: providing services to consumers/businesses
chain of production: the production and supply of goods to final consumer, involving activities from 3 sector businesses
Reasons for change in the importance of business classifications (4)
industrialisation: more secondary, less primary
deindustrialisation: more tertiary, less secondary
change in consumer behavior:
- higher incomes = demand better quality and wider market
- better education: expect better products and can compare
- more leisure time = more activities
change in business behavior:
- need for finance for expansion
- need communication, internal/external
- need to provide better services for employees
Define Mixed Economy
economy where resources are owned/controlled by both private/public sectors
Private Sector
- owned by citizens
- own decisions, prices & produce
- aim to make a profit
Public Sector
- owned by state/government
- some products/services are free
- money comes from taxes
- don’t aim for profit, but providing service to community
Define Entrepreneur
an individual that organises, manages, operates and takes the financial risk for a new business venture
Characteristics of an entrepreneur (10)
- innovative
- initiative
- self motivated, determined & confident
- multi skilled
- strong leadership qualities
- results driven
- risk taker
- good at networking/communicating
- hard working
- experienced
Define Business Plan
detailed written document outlining purpose and aims of business
Advantages of Business Plans (7)
- persuade lenders/investors to provide finance
- gives sense of purpose & direction
- financial forecasts help control profits & expenses
- gives targets for business’s workers to aim at
- helps allow the business to monitor its progress
- measure of success
- helps in decision making / planning / budgeting
Why governments support small businesses (6)
- job creation
- wider choice in market
- greater competition = lower prices & better quality
- produce capital goods
- if they grow = help economy
- cheaper prices than large businesses
How governments help small businesses (5)
- grants & low interest or interest free loans
- lower taxation on profits in early years
- rent free premises for certain period of time
- free or subsided training schemes for employees
- info, advice & support from specialist agencies
Methods of measuring the size of a business (5)
- Number of employees:
- easy to calculate & compare
- few employees = high output (automation) - Value of output:
- value of products produced
- compare in same industry, esp manufacturing
- automation - higher output than labor - Value of sales:
- value of products sold
- less than value of output
- misleading in different industries - Value of capital employed:
- value of all long term finance invested in business
- cant compare different industries
- small businesses invest less capital - Market share:
- percentage of share from business from total market
- misleading if comparing different markets
Why businesses want to grow (5)
- increase in profits
- increase in market share
- economies of scale
- greater domination over market
- protection of risk from takeover
Internal Growth (3)
- produce greater number of goods
- developing new products
- finding new markets for products
External Growth (4)
- horizontal integration: same sector merge
- forward vertical integration: manufacturer w retailer
- backward vertical integration: retailer w producer
- conglomerate integration: different industries
Problems linked to business growth (5)
- internal growth is slow
- in integration, workers fear loss of job/status
- if firm = too large = diseconomies of scale
- different objectives, pay, etc. = conflict
- loss of control may occur
Reasons why some businesses remain small (4)
- owner’s choice
- market size
- access & availability of capital
- market domination`
Causes of business failure (9)
- poor planning & lack of objectives
- liquidity problems
- poor choice of location
- poor management
- failure to invest in new technologies
- poor marketing
- lack of finance
- competition
- economic influences
Define sole trader
business owned/managed by 1 person
Advantages of sole traders (4)
- easy to set up + small start up capital
- makes all decisions
- complete control
- keeps all profit
Disadvantages of sole traders (5)
- unlimited liability
- difficult to raise funds for expansion
- may have to work long hours
- difficult to compete with large firms
- may not have skills to run business
Advantages of partnerships (4)
- easy to setup deed of partnership
- greater access to funds = shared investments & expenses
- shared decision making
- shared management
Disadvantages of partnerships (5)
- unlimited liability
- shared profits
- if one partner leaves = businesses ceases to exist
- frequent disagreements
- difficult to raise finance
Define incorporated
separate legal identity from owners
Define shareholders
people who buy shares of an LLC which represents part ownership of the company
Define dividend
amount of profit that each shareholder gets
Define private limited companies
shares are sold privately to friends & family
Advantages of private limited companies (4)
- more capital to expand than partnerships
- owner keeps control, unless too many shares sold
- limited liability
- company continues after shareholder dies
Disadvantages of private limited companies (4)
- difficult to setup (legal formalities)
- all shareholders are required to agree before share is transferred
- secrecy decreases
- can’t offer shares to public
Define public limited company
shares sold to public
Advantages of public limited companies (2)
- opportunity to raise high capital funds
- no restriction over buying, selling or transferring shares
Disadvantages of public limited companies (3)
- difficult to setup (legal formalities)
- danger of business due to public shares (risk of takeover)
- selling shares is expensive
Define franchise
an agreement of a business based upon an existing brand/business
Define franchisor
the main (existing) brand/business
Define franchisee
individual to start up franchise
Explain franchise process
- franchisor allows franchisee to trade under its name and sell its products for a fee
- franchisee pays original fee + % of profits to francisor
Advantages for franchisee (4)
- less chance of business failure
- franchisor provides advice/training to franchisee
- finance promotion of brand through national advertising
- franchisee is guaranteed quality supplies
Disadvantages for franchisee (4)
- initial cost of franchise is expensive
- franchisor will take % of profits
- strict controls over decisions about product & prices
- franchisee pays for local promoting, if they decide to
Advantages for franchisor (4)
- franchisee pays franchisor for a license to use brand name
- expansion of franchise is much faster, as franchisor doesn’t have to finance a new outlet
- management is responsibility of franchisee
- all products sold are obtained from a trusted source , the franchisor
Disadvantages for franchisor (2)
- poor management for 1 outlet = damages entire reputation
- franchisee keeps most profit from the outlet
Define joint venture
when 2 or more businesses work closely together on a business opportunity/project, sharing capital, risks and profits
Advantages of joint ventures (3)
- shared costs
- shared knowledge/expertise
- shared risks
Disadvantages of joint ventures (3)
- any mistake damages reputation of all businesses involved
- shared profits
- different cultures, styles of leadership, etc. = conflict
S.M.A.R.T objectives
specific, measurable, agreed, realistic and time specific
Most common business objectives (5)
- profit
- higher market share
- expansion & growth
- survival
- provide service to community
Advantages of growth of a business (5)
- high job security for employees
- higher salaries/status for managers
- opens new possibilities in market & spreads risk for owners
- higher market share & sales for enterprise
- economies of scale
Possible threats to survival of business (3)
- firm recently launching in market (new business)
- financial issues in economy (recession)
- competition in market
Define Corporate Social Responsibility (CSR)
interest in social, ethical and environmental issues & impact of business decisions on stakeholders and environment.
result of: pressure groups, media, trade unions, government & laws they pass
Advantages of business objectives (4)
- have an aim/target to work towards
- provides a sense of direction
- can measure success & performance of business
- motivates managers
Define stakeholder
an individual with interest in business + is affected by its activities & decisions
List stakeholders of a business (8)
- owners/shareholders
- directors/managers
- staff/employees
- customers
- suppliers
- local community
- government
- lenders
Owners/shareholders (3)
- profit
- business growth & success
- good reputation
Directors/managers (4)
- profit
- good salary & working conditions
- hard working staff
- make owner happy
Staff/employees (8)
- fair pay/good wages
- good uniform
- good staff relations
- good working conditions
- job security
- promotion opportunities
- benefits from job
- feels like part of the team
Customers (6)
- fair prices
- good service
- good quality products
- honesty & integrity
- good value
- special offers
Suppliers (3)
- paid on time
- buy in bulk
- fair prices
Local community (3)
- jobs created
- no pollution
- little/no disturbance
Government (4)
- jobs created
- taxes paid
- exports goods overseas
- obey the law
Lenders (3)
- will interest be paid?
- will loans be returned?
- for potential lenders: profitability and debts/loans of business
Define social enterprise
a business operated by private individuals with social objectives that reinvest most of its profits back into the business or into benefiting society at large
Aims of social enterprises (3)
- social: provide jobs & support disadvantaged groups
- environmental: protect the environment
- financial: makes profit = invest back into business = expand social work/services
Public sector objectives (3)
- provide services to the public
- increase living standards to the public
- increase jobs = lower unemployment rate
Features of a very competitive market (5)
- Many rival companies
- Many similar products
- Marketing is important
- Innovation
- Low or similar prices
Reasons why staff are paid high wages (6)
- Highly skilled
- Scarcity value
- motivation/reward
- Level of responsibility
- Retention
- Business can afford to
Problems caused by oftenly updating/redeveloping product (7)
- Capital requirements
- Time
- Skilled workers
- Failure to keep pace with market needs
- Cost of research/promotion
- Errors in the program/quality issues
- retention/motivation of workers
Ways of measuring SUCCESS of business (9)
- Increase in market share
- Sales value
- Greater profit margin
- Market leader
- Meet objectives of owners
- Good reputation
- Growth
- High share price
- Survival
Problems of selling products in foreign markets (6)
- Lack of knowledge about customer needs = produce wrong product
- Competition = customers more loyal to other brand
- Lack of distribution channels = can’t supply customers on time
- Language barriers/difference = wrong order
- Legal restrictions = can’t sell certain products in certain countries
- Problems of entry, e.g. quotas = restrict number of products that can be sold
Aims of public sector enterprises (6)
- Free access for all OR provided irrespective of ability to pay OR affordable for all
- Minimum standard of provision
- Provide (essential) services
- Strategic – control production of certain goods
- Meet (profit/quality) target set by government
- Protect or create employment in certain areas
Importance of profits to private sector businesses (6)
- Source of finance = to help fund future activities/expansion
- Inexpensive source of funds as no need to pay interest
- Needed for long term survival as have funds to help if business makes a loss
- Represent a return on owners’ capital as otherwise would invest elsewhere
- Pay dividends/employee bonuses to help attract/retain shareholders/employees
- Measure of success (large profits would indicate image of good years trading)
WHEN DESCRIBING CHANGES IN GRAPHS: (4)
- Describe the line and if it is rising or falling (increase/decrease)
- Use numbers
- Then compare with other data
- May need to analyse why that happened or effects
Effect of large decrease in number of employees in public sector on ALL workers (6)
- Possible increase in unemployment = less disposable income = lower sales for private sector businesses
- Rates of pay [on average] will be higher in private sector + hours of work will be lower = better standard of living
- Private sector businesses expand = make up for loss of services in public sector = more job opportunities
- Workers who stay in public sector businesses the hours might have to increase = demotivation
- Increase in competition for private sector jobs = lower wages
- Might lead to lower tax rates as fewer wages to be paid in public sector
Features of partnerships (6)
- Legal agreement between 2 or more people
- Owned and financed by partners
- Profits shared
- Unlimited liability
- Unincorporated
- Share risk of failure
Reasons for difficulty in competing against large businesses (5)
- Lack of economies of scale = higher prices charged by small businesses
- Lack of capital to be able to market/advertise effectively
- Less stock held = less consumer choice
- Sales volume is low= need higher profit margins
- Vulnerable to price wars because of lower retained profit
Advantages of unlimited to limited liability business (4)
- Access to more capital (able to sell shares) = allows them to expand
- Lenders more likely to agree loans for LTD’s, as seen as lower risk
- Limited liability for owners, therefore private assets are secure
- Continuity of existence, owners can retire knowing that the business will continue
Disadvantages of unlimited to limited liability business (3)
- Extra costs as more legal requirements
- Financial results are available = competitors can see how well you are doing
- Potential decrease in control of existing partners = ownership may be shared between more people
Ways to increase profits (8)
- Target new markets / segments
- Develop new products to attract new customers
- Increase sales revenue by advertising / attract more customers
- Change price
- Improve Efficiency methods so cutting waste
- Automation increases output & lowers wage cost (less labor)
- Cheaper supplier = lower cost of sales
- Merger / takeover = buy supplier = cheaper materials = lower cost of sales
Benefits of websites (6)
- Improved communication as email/phones means employees are in contact = respond to customer requests quickly
- Increases public awareness/advertise
- Reinforces image, customers will expect business to have website these days
- Increased sales potential as allows customers to easily view options before sale
- Lower marketing costs, advertises latest products without reprinting brochures
- Can sell/advertise to people around the world = increases potential market
Benefits of new businesses (3)
- Job creation
- Improved infrastructure
- Economic growth due to related jobs also being created
Limitations of new businesses (3)
- Pollution
- Loss of natural resources
- If loud, lower rent of houses in area
