Topic 1 - What Is A Buiness ? Flashcards
1
Q
What do businesses provide for markets ?
A
Goods and services
2
Q
What are goods ?
A
Tangible products that can be physically felt
3
Q
What are services ?
A
Intangible products
4
Q
How can a business impact a country ?
A
Provide employment so more people can make an income
Create goods and services to enhance lives of consumers
Improve a countries reputation
5
Q
What’s the ‘transformation process’ of a business ?
A
When inputs (raw materials) get made into outputs (finished goods)
6
Q
What is B2C ?
A
Business to customer
When businesses sell goods and services directly to consumers
7
Q
What is B2B ?
A
Business to Business
When businesses sell goods and services directly to businesses
8
Q
How can businesses be categorised ?
A
Into the types of goods and services they supply
9
Q
What are the three sectors ?
A
Primary - business that extract raw materials e.g. mining, sheep shedding, fishing and forestry
Secondary - businesses that manufacture goods using raw materials e.g. clothing
Tertiary - businesses that provide services e.g. hotels and cinemas
10
Q
What do businesses have which sets out the business’s beliefs and values ?
A
mission statements
11
Q
What are mission statements used for ?
A
To create corporate aims that are long term aims of the entire business
12
Q
What do mission statements order out ?
A
Mission statement
Corporate aims
Corporate objectives
Functional, team and individual objectives
13
Q
What are needed in order for corporate aims to fulfil the businesses mission?
A
Business objectives
14
Q
What are 4 business objectives ?
A
SMART targets
Profit maximisation
Survival
Growth
Social objectives
15
Q
What are SMART targets ?
A
Specific
Measurable
Attainable
Realistic
Timely
16
Q
Why do objectives need to be Specific ?
A
Specific so that employees know exactly what they are working towards
17
Q
Why do objectives need to be Measurable ?
A
so that employees can actually work out whether they have met their objective
18
Q
Why do objectives need to be Attainable/achievable ?
A
or achievable so that employees are committed to achieving them
19
Q
Why do objectives need to be Realistic ?
A
Objectives must be Realistic otherwise employees may feel demotivated and overwhelmed
20
Q
Why do objectives need to be Timely ?
A
so that employees know when they must achieve them by
21
Q
What is profit maximisation as an objective ?
A
Profit maximisation is a business objective that requires a business (and its management) to achieve the highest amount of profit for shareholders.
Satisficing would mean making enough or some minimum required level of profits.
22
Q
What is survival as a business objective ?
A
Survival is a business objective which requires a business to continue trading despite challenges in the external environment.
23
Q
What is growth as a business objective ?
A
Growth is a business objective which requires the growth of stores or locations, sales value, sales volume or product range
24
Q
What are social objectives as business objectives?
A
Social, ethical and environmental objectives require a business to focus on supporting society through initiatives including sustainability and fair trade
25
What are the benefits of setting business objectives ?
Business objectives provide direction and can support planning and operations.
Business objectives allow a business to co-ordinate resources and ensure that all employees are working towards the same overall aim
26
What is revenue ?
Revenue is the income earned by a business from the sale of its goods and services
27
What’s the equation for revenue ?
Revenue = number of sales x sales price.
E.g. if a stationery store sells 500 pens for £2 each, then the revenue is £1000 (500 x £2).
28
What are costs ?
Costs are all of the expenses that a business incurs (pays)
29
What are total costs the sum of ?
The total costs are calculated as the sum of the fixed costs and the variable costs
30
What are fixed costs ?
Fixed costs don't vary as the business changes its output.
So whether a business produces 10,000 units of a product or 2 units of a product, its fixed costs will be the same.
Snapchat registering as a business would cost the same regardless of how many adverts they sold or how many users they had.
Note that fixed costs can increase as the business grows.
31
What are examples of fixed costs ?
Office rent
insurance
fixed employee salaries
32
What are variable costs ?
Variable costs are the costs that change directly with output (they change as a business changes output)
33
What are examples of variable costs ?
Wages paid for factory labour
raw materials
transport costs
34
What is cost leadership ?
The business in the industry with the lowest costs
35
What did Michael Porter argue about cost leadership in 1980 ?
Michael Porter, the man who came up with the 5 Forces analysis also wrote a paper in 1980. He argued that a business cannot be a cost leader (the business in the industry with the lowest costs), whilst also having a differentiated (or innovative product).
He argued that a 'sustainable competitive advantage' over other people in the industry came from focusing on 1 thing.
36
In 2019, Ryanair had what in the airline industry ?
Cost leadership
Focused scope = a decision to focus on 1 particular type of customer or market segment. Ryanair focused on the price-sensitive market segment. To win this audience, Ryanair had to build cost leadership.
37
How does Ryan air have cost leadership ?
It buys new planes
New planes are more fuel-efficient so Ryanair's fuel costs on each flight are lower than competitors with older planes.
It flies to cheaper airports
Ryanair often flies to the second airport in a city (usually the airport further from the city centre).
This means that Ryanair's landing fees and airport costs are lower than others.
Its planes take off straight away
Some airlines' planes spend 3 hours on the ground at the airport before their next flight. Ryanair's planes take off as quickly after landing as possible.
This means they can do more flights per day using the same number of aircraft.
Ryanair backloads its prices
Ryanair has the lowest airfares on price comparison websites so it looks the cheapest.
Then it tries to charge you to choose a seat, or to take a carry on bag, or to avoid them putting your bag in the hold.
So it might not be that cheap!
38
Which of Ryanair's costs are variable costs?
Fuel costs
Pilot wages
39
What is profit ?
Profit is the amount of money that the business makes when taking into account costs. It is in effect, a surplus.
40
What is the equation for profit ?
Profit = total revenue – total costs.
This is a simple and yet very important formula.
If revenue is greater than costs, a business will make a profit.
If costs are greater than revenue, a business will make a loss.
41
What’s the equation for average unit cost, and why is it good to know ?
Average unit cost = total cost ÷ output (total number of units produced).
This gives a business an idea of what price they need to charge.
In order to make a profit on each item, they need to charge a price that is more than the average unit cost.
42
What is interest ?
When you borrow money, you usually pay back more than you borrowed. This extra amount is known as the interest on the loan and it is the percentage of the loan that is charged as extra.
43
What is the equation for interest ?
Interest = interest rate x the size of the loan.
So, if a business borrows £200 at an interest rate of 5%. Then the interest they pay on the loan each year is 200 x 0.05 = £10.
44
Roughly how many people does Tesco employ?
300000
45
What is a sole trader ?
A sole trader is a single person who is the exclusive owner of a business. They can still have employees and the owner is entitled to keep all of the profits after tax but is also personally liable for the business’ debts.
46
What are the advantages of a sole trader ?
They are the easiest type of business to set up.
The sole trader gets to be their own boss.
The sole trader decides what to do with the profit.
It is easy to change the legal structure if circumstances change.
47
What are the disadvantages of sole traders ?
Unlimited Liability means that there is no legal distinction between the sole trader’s assets and the business’ assets.
It can be hard to raise finance. Banks often see sole traders as riskier.
All the responsibility for making business decisions is yours. Having someone to share decision making with, can improve performance.
It can be harder to retain (keep) good employees as they aren’t necessarily given a share of the profits.
48
What are private limited companies (Ltds) ?
Private limited companies (Ltds) are companies where ownership of shares is restricted. For the company to sell shares, all the current shareholders must agree to sell them. These companies have Ltd. after their name
49
What are the advantages of private limited companies (Ltds) ?
The key advantage over sole traders and partnerships is that shareholders have limited liability.
The fact that ownership is restricted means that all shareholders must agree to sell shares. This means that the owners retain (keep) a lot of control over how the business is managed.
It is normally easier for a limited company to get a loan than it is for partnerships, as a company is normally seen as less risky. This should increase a company’s access to finance.
50
What are the disadvantages of private limited companies (Ltds) ?
Finance is needed to incorporate a business. There is an upfront fee as well as costs associated with paperwork. This means that it may not be possible for smaller firms (or brand new firms).
Unlike sole traders and partnerships, the company is legally obliged to publish their accounts each year and competitors may use these to become more competitive.
51
What are public limited companies ?
Public limited companies sell shares on the stock exchange. This means that anybody over 18 can buy shares (often through brokers). Firms often become public companies when they want to expand because selling shares on the stock exchange allows them to raise finance for investment. In 2017, Snapchat went through this process (which is called a flotation).
52
What are the advantages of public limited companies ?
Selling shares on a stock exchange allows companies to raise money for investment, which enables the company to grow faster or bigger.
It is much easier for companies to raise capital (money) from banks if they are public limited companies because they present less of a risk (given the number and size of investors).
Shareholders have limited liability because the company is incorporated.
53
What are the disadvantages of public limited companies ?
Owners often have very little say over how the business is run. This means that it can be hard to agree on how the business is run.
Anyone can take over the company if they are able to buy enough shares. When shareholders own more than half the shares, then they will have control over the company.
The company’s accounts must be made public. This means that competitors can see how well the company is doing.
54
What is a not-for-profit organisation ?
Any profit made by not-for-profit organisations is reinvested (put back) in the business. Any profit cannot be kept by the owners.
55
What are the types of not-for-profit companies ?
Unincorporated association
Charities
Social enterprise
56
What are unincorporated associations ?
Not-for-profit organisations can choose to be an ‘unincorporated association’ but, like sole traders and partnerships, the people who manage it have unlimited liability.
This means that they get no profit and they are legally responsible for all of the organisation’s debt.
Bigger organisations, like Oxfam, tend to be incorporated so that the people running it are protected from unlimited liability.
57
What are charities?
Charities, like Oxfam or Save the Children, are a type of not-for-profit organisation.
Getting charitable status lets a business get tax relief and lets it apply for certain grants. For a business to get charitable status, they must follow rules and regulations.
58
What are social enterprises?
Social enterprises, like the Big Issue or TOMs are another form of not-for-profit organisation.
They are more similar to for-profit businesses in that they make a surplus through selling goods or services. This profit is reinvested to support the social enterprise’s aim.
59
What’s is franchising ?
Franchising is where a business gives someone the right to sell its products and use its trademarks. The ‘franchisee’ usually pays the business an upfront fee and a percentage of the profits
60
How is Kentucky Fried Chicken (KFC) a franchise ?
Kentucky Fried Chicken (KFC), which is part of the TacoBell Group is an example of this.
Many KFC’s all over the world are not owned by KFC but instead owned by individuals who pay a fee and percentage of the profits to KFC. This lets them use the KFC brand name and the “original recipe”.
61
Whats are the advantages of franchising ?
The business can expand without needing large amounts of investment. The firm does not incur the costs involved with opening new stores.
The business also does not have to be concerned about some of the risks of becoming a larger corporation, for example, diseconomies of scale (which may be caused by the growth from opening and operating new stores themselves).
Franchising increases brand awareness of the firm’s products or services.
62
What are the disadvantages of franchising?
A disadvantage of franchising is that the franchiser does not have complete control over how they operate.
If a franchise is run badly, then a single franchise or store can negatively affect the brand image.
The example of Blockbuster shows a further disadvantage of franchising. Franchising can reduce the potential strategic options of a business. Once you have franchisees, technology can change & your business model may have to change. Franchisees might make it harder to change.
63
What is Gina Keating's (2013) book Netfixed about ?
Gina Keating's book Netflixed explains that Blockbuster struggled to move into DVD by mail and online streaming because of its franchisees.
The business model of consumers going into stores was dying. Blockbuster needed to centralise the technology to ship DVDs in the post, but this would compete with the franchisees' businesses, so many resisted the change. This delayed Blockbuster and who've you heard of now... Netflix or Blockbuster?
64
Analyse franchising as a method of growth for a business.
Explain franchising
Franchising involves the franchisor selling a license to the franchisee, who can then own a business that uses the brand of the franchisor. Many large businesses, such as McDonald's, operate as franchises. Entrepreneurs running their own franchise of McDonald's take on less risk because people already know & like the product, and they benefit from an established brand name and product portfolio. Franchising is often used as a method for businesses like McDonald's for external growth.
Increased reach
Allowing franchisees to open franchises allows for faster growth, both in terms of the number of stores and the number of geographic locations. The business does not have to find the finance to open every store and franchisees often have to pay a large lump sum to purchase the license. Franchisees are motivated and have the drive to start and run a new business. Franchising can be a cost-effective way of reaching a wider target market and increasing sales.
Finding the right franchisee
However, it is important for the franchisor to find the right franchisee for the business and brand. If one franchise is run badly and a customer has a particularly negative experience, this can impact the reputation of the overall business and all franchises within this. The franchisee is restricted in terms of lots of decisions (for example the branding, uniforms, processes) and so it is important for them to be bought into the business and the culture, to ensure that the individual business is aligned to the overall business that owns the brand and trademarks.
65
What do franchisees usually pay the franchisor?
An upfront fee
Royalties
66
What’s the difference between limited and unlimited liability?
Limited companies can raise additional finance by selling shares. Individuals or groups who buy shares in limited companies are called shareholders.
67
What is ordinary share capital ?
Ordinary share capital refers to the amount of finance raised through selling shares to shareholders.
Businesses usually use ordinary share capital as a source of long-term finance.
68
What is market capitalisation ?
Market capitalisation is one way of valuing a business and can be calculated by multiplying the number of shares issued by the current market price of one share.
69
For example, in 2013, Royal Mail issued one billion shares at 330p each, what is the ordinary share capital ?
For example, in 2013, Royal Mail issued one billion shares at 330p each, generating ordinary share capital of £3.3 billion.
Royal Mail’s shares are now worth around 395p, so Royal Mail’s market capitalisation could be calculated by multiplying the current share price, 395p, by the number of shares, which is one billion, giving a market capitalisation of £3.95 billion.
70
What are dividends ?
Businesses may decide to share a proportion of their profits with shareholders, and this payment is called a dividend
71
What are the advantages of dividends ?
Dividends can make shareholders satisfied so that they do not wish to sell their shares.
72
What are the disadvantages of dividends ?
Dividends can mean that profit is not spent on long-term growth which can limit the growth potential of the business.
73
What’s a shareholder ?
A shareholder is an individual who holds shares in a business
74
Who are the shareholders in public limited company (PLCs) ?
In a public limited company, any member of the public can buy shares through the Stock Exchange.
Shareholders usually provide a public limited company with finance, though they are not routinely involved in the running of the business as this is controlled by a board of directors.
75
Who are the shareholders in private limited companies (Ltds) ?
In a private limited company, shares can only be bought by the friends and family of the original owner. Shareholders usually provide a private limited company with finance, and they are usually involved in the running of the business.
76
What are Annual General Meetings (AGM) ?
Shareholders have a right to attend a business' Annual General Meeting (AGM) which is where votes can be made on key decisions affecting the business, including appointing a Board of Directors.
The number of shares held is used to calculate a shareholder’s power so that each shareholder has a vote relative to the number of shares they hold.
For example, Airbus is seeking to appoint a new Executive Director and is currently waiting for an AGM where shareholders can vote on this appointment.
77
What factors influence shareholders ?
Shareholders may decide to purchase shares if they think that the share price may increase in future years, as this will create a return for the shareholder.
Shareholders may decide to purchase shares as they would like to receive an annual dividend.
Shareholders may decide to purchase shares if they agree with a company’s aims and values and wish to be part of the company’s future journey.
78
What factors influence the value of a businesses shares ?
Business performance affects demand for its shares and greater performance will increase demand, which increases the share price.
Economic performance affects demand for shares as economic growth gives individuals confidence in the market which may increase the demand for shares which increases the share price.
News articles may affect demand for shares as businesses accused of being involved in scandals may receive a bad reputation which decreases demand for shares, therefore, decreasing share price.
79
What is the impact of share price changing for a business ?
Decreasing share prices may mean future investors are concerned about the business and this will make it more difficult for the company to raise additional finance through the sale of shares.
80
What can affect a business’ costs and demands ?
External environmental factors
81
What are some external environment factors that’s business need to respond to ?
Competition
Market conditions
Consumer incomes
Interest rates
Demographic challenges
Environmental and ethical factors
82
Why do businesses need to respond to competitors ?
Competition can affect a business’ costs and demands as the presence of competitors may reduce demand for a business' product or service.
The presence of a competitor can also increase business costs as a business may increase its spending on promotion and advertising or may invest in research and development to improve the products offered for sale
83
What’s an example of a business responding to a competitor?
For example, from 2012, Tesco experienced falling demand as competition from Aldi and Lidl rose in the food retail industry.
This competition increased Tesco’s costs as it increased its promotional activity and increases its investment in developing its new range of food items, known as Stockwell & Co, which replaced its Tesco Value range.
84
Why do businesses need to respond to market conditions?
Market conditions can affect a business’ costs and demands. If a market is increasing in size, a business must ensure it competes against other competitors to secure its own share of the increasing market, and this increases costs.
85
What’s an example of a business responding to market conditions?
For example, the market for online food shopping has increased in recent years and Morrisons has had to invest in its website and delivery network to maintain competitiveness otherwise the demand for Morrisons' services may fall.
86
Why do businesses need to respond to consumer incomes?
Consumer income can affect a business’ costs and demands.
If consumer incomes are decreasing, demand for luxury items, like watches and cars may decrease as people make decisions to stop purchasing these products.
Businesses may also invest more heavily in promotional and advertising campaigns to try and increase demand, and this also increases business costs.
87
What’s an example of a business responding to consumer incomes ?
In the 2007-08 recession, consumer incomes fell. The demand for luxury goods and upmarket groceries fell during the time of the recession. This initially impacted food retailers like Waitrose. Many people shifted from supermarkets like Tesco and Asda to Aldi and Lidl too.
But, falling consumers incomes can benefit some businesses e.g Aldi
88
How has online shopping impacted brick and mortar retail shops ?
Brick and mortar market share have fallen
89
Why do businesses need to respond to interest rates ?
Interest rates can affect a business’ costs and demands as an increase in interest rates increases the cost of business’ borrowing whilst also reducing the amount spent by consumers as they make decisions to save instead of spend.
For example, an increase in the interest rate will affect a car manufacturer, such as Toyota, as consumers are less likely to take out loans to purchase new cars, which decreases demand.
If Toyota has any variable rate loans, then Toyota's business costs will rise too as they repay the loan.
90
Why do businesses need to respond to demographic changes ?
Demographic changes, such as an ageing population, can affect a business’ costs and demands. For example, as the UK’s population ages, there is an increase in the number of people in higher age brackets, and this increases demand for items such as holiday packages targeted at senior citizens and cruises.
As net migration continues to increase, demand for cultural shops such as Polish food stores continues to increase and this can reduce demand for groceries from existing retailers such as Asda.
91
Why do businesses need to respond to environmental and ethical factors ?
Environmental and ethical factors can affect a business’ costs and demands. As consumer awareness of environmental and ethical factors continues to develop, consumers are demanding products which are produced ethically and in an environmentally friendly way which increases business costs and can decrease demand if businesses fail to address changing needs.
For example, consumers are becoming increasingly aware of the issues caused by plastic production which has led cosmetics businesses to remove plastic beads from its products, which may increase costs or reduce demand.
There is also a focus on vegan foods and artificial meat businesses like Impossible Foods.
