Understanding Business Flashcards
What is a business?
A business exists to provide goods and services to satisfy consumers needs and wants.
Describe goods
Goods are tangible and can be physically used or consumed by a person. They are split into two categories:
Durable goods can be used repeatedly over a period of time e.g. cars, washing machines or computers.
Non-durable goods are used only once, usually soon after purchase e.g. food, drinks or newspaper.
Describe services
A service is intangible; the consumer cannot touch, smell, taste or see what they are buying e.g. hairdresser, teacher or banking.
Describe factors of products
To produce goods and service a business needs to use resources.
These resources are the inputs for the business activity
The goods and services produced are the outputs of the business activity.
The resources needs are known as the factors of production
Name the factors of production
Capital
Enterprise
Land
Labour
Describe capital
These are the man-made resources such as factories, machines, vehicles and other equipment. It also includes the initial financial investment in the business.
Describe enterprise
The entrepreneur is the person who brings together all the other resources i.e. capital, land and labour, and takes the risks of setting up the business. Without the entrepreneur there would be no business as they come up with the initial idea.
Describe land
This includes the natural resources the business uses such as oil, water and land itself e.g. the site of a factory or office.
Describe labour
This is the people who work in the business and includes all of their physical and mental effort. The number of people who work in a business will depend on the nature of their operations e.g. Police Scotland has thousands of employees
Describe wealth creation
Businesses create wealth in the economy as they provide people with the goods and services they demand. When goods are produced the business adds value at each stage e.g. using flour to make bread
Wealth creation has a significant positive impact on the economy.
What are the advantages of wealth creation?
Jobs are created which reduces unemployment
Employed people are trained and learn new skills
Higher employment leads to increased demand for goods and services
Tax is paid by employees to the Government which is then invested in services such as the NHS
What are the disadvantages of wealth creation?
Too much demand for goods and services can cause inflation which results in an increase in the price of goods and services
The volume of non-renewables decreases e.g. oil
Greenfield sites (areas once used for agriculture) are lost
Increased environmental impact e.g. noise and traffic pollution
Describe the cycle of business
Goods and services are in constant demand to satisfy consumers’ unlimited wants. To meet this demand businesses identify these wants, through market research, and produce the goods and services to ensure consumers are satisfied. This results in the cycle of business.
Describe sectors of industry
Organisations are split into these sectors depending on the types of product or service they provide.
All organisations can be split into four main sectors:
Primary
Secondary
Tertiary
Quaternary
Describe the primary sector
Business which exist in this sector are those that are concerned with extracting natural resources from land, sea and air, e.g.
Farming Coal mining Oil drilling Fishing Forestry
Describe the secondary sector
Business which exist in this sector are concerned with manufacturing and construction.
They take the raw materials from the primary sector and convent them into products to meet customers needs and wants, e.g.
Car manufacturer
House builder
Food production
Describe the tertiary sector
Business which exist in this sector are concerned with providing services rather than producing goods e.g.
Banking Retail Tourism Hairdressing Plumber Gym Transport
Describe the quaternary sector
Business which exist in this sector are concerned with providing knowledge based and information services e.g.
Information & Communication Technology (ICT)
Consultancy – offering advice to businesses
Research and Development
Market Research
Describe changing patterns of employment
Historically, employment in the UK was mainly through jobs in the primary and secondary sector.
However, in recent history the patterns of employment have changed and most people are employed in the tertiary, and increasingly the quaternary sector. In total these 2 sectors employs 76% of the workforce
Described the sectors of economy
Businesses operate in one of three sectors of economy:
Private Sector
Public Sector
Third Sector
Describe the private sector
Private sector organisations are owned and controlled by private individuals and investors. Their main objective is to make a profit
Describe the public sector
Public sector organisations are owned and controlled by the government. Their main objective is to provide essential services to the general public
Describe the third sector
Third (voluntary) sector organisations are set up to raise money for good causes or to provide facilities for their members. Their main aim is to support their chosen cause.
Name the businesses in the private sector
Sole Trader
Partnership
Private limited company (Ltd)
Public limited company (plc)
Multinational Company (MNC)
Franchise
Describe sole traders
A sole trader is owned and controlled by one person and they take all the risk.
Most small businesses are sole traders, for example, hairdressers, window cleaners and joiners.
Although one person owns the business, they may employ staff.
How is finance raised in sole trader businesses?
Finance is raised from the owner’s own savings, bank loans and government grants.
What are the objectives of a sole trader business?
Sole traders’ main objectives are survival and profit maximisation.
What are the advantages of sole trader businesses?
The business is usually small- scale, so small amounts of investment (capital) are required to set-up
It is easy for the owner to keep overall control because of the small-scale nature.
They make all decisions and can make them quickly!
They can offer a more personalised service compared to larger businesses resulting in customer loyalty.
It is easy to set-up, no legal paperwork required.
All profits are kept by the owner.
What are the disadvantages of sole trader businesses?
The sole trader has unlimited liability. This means that if the business is unsuccessful the owner could lose their personal possessions such as their home and car.
The sole trader has full responsibility and must make all of the decisions and will normally work long hours.
There is no-one to share the workload with if there are no employees.
It can be difficult to raise finance as banks may be reluctant to lend you money.
If the owner dies the business will cease to exist
Describe partnerships
A partnership is a business with 2 to 20 partners - people who own and control the business together.
The partners should produce a Partnership Agreement which outlines all the rules and conditions that each partner must adhere to and can prevent disagreements in the future.
It also outlines the procedures to be followed when a partner joins, leaves or dies.
How is finance raised in a partnership?
Finance is raised from the partners’ savings, bank loans, new partners and government grants.
What are the objectives of a partnership?
Sole traders’ main objectives are survival and profit maximisation.
What are the advantages of partnerships?
Partners bring new skills and ideas to a business. Partners may have expertise in different areas so they can specialise.
Partnerships can raise more capital as there are more owners to contribute
Workload, responsibility, and decision-making is shared - so there is less pressure on one individual
It is easy to set-up; no legal paperwork is required although a Partnership Agreement is strongly advised!
Risk is shared between partners
What are the disadvantages of partnerships?
The partners have unlimited liability. This means that if the business is unsuccessful all the partners could lose their personal possessions such as their home and car
Profits have to be shared between partners.
Dispute and disagreements can take place between the partners over the direction of the business.
If one partner leaves or dies a new Partnership Agreement has to be arranged
Describe private limited companies
Owned by a minimum of one shareholder
Controlled by a Board of Directors (a shareholder can be a director)
Shareholders have limited liability meaning they can only lose the value of their shares and not their private assets or belongings.
How is finance raised in private limited companies?
Financed by shareholder investment, new shareholders, bank loan, grants, retained profits, bank overdraft etc.
What are the objectives of private limited companies?
Objectives – maximise profits, maximise sales, survival and growth
What are the advantages of private limited companies?
Shareholders have limited liability
Capital is raised by inviting new shareholders
Control of the company is maintained by inviting shareholders
Can be easier to raise finance than a sole trader/ partnership
Shareholders and directors bring different expertise
Annual accounts do not have to be made publicly available
The company does not die when the owner dies
What are the disadvantages of private limited companies?
Profits are shared between more owners
There is a legal process to set up the business – additional costs
Must abide by the Companies Act
Describe public limited companies
A plc is usually a large business and must have a minimum of £50,000 share capital and at least two shareholders.
The shares in a plc are bought and sold on the stock exchange and can be bought by any member of the public – this is why they are called public limited companies.
Owned by a minimum of 2 shareholders
Controlled by a Board of Directors
Minimum share capital of £50,000 required
How is finance raised in public limited companies?
Financed by shareholder investment, new shareholders, bank loan, grants, debentures, retained profits, bank overdraft etc
What are the objectives of public limited companies?
Objectives – maximise profits, maximise sales, growth and market dominance
What are the advantages of public limited companies?
Shareholders have limited liability
Large amounts of finance can be raised from selling shares on the stock market
Plc’s can dominate their markets
Easier to raise finance from lenders as viewed as the most secure type of business
Tend to be more financially stable
Company does not die when owner dies
What are the disadvantages of public limited companies?
The legal process to set up a plc is very costly
Financial information has to be made available to public
Can become inflexible and difficult to manage if they grow too big
No control over who buys shares
Describe a multinational company
If a business operates in more than one country it is known as a Multinational Company (MNC). The head office will be based in the home country e.g. UK, and the other countries the MNC operates in are known as the host countries. Examples include Shell and Coca Cola.
The availability of relatively inexpensive air travel, single currencies e.g. Euro and the growth of e-commerce has made it easier to operate as an MNC.
What are the advantages of a multinational company?
Market share can increase
Lower wage rates and costs of production
Less restrictive legislation e.g. health & safety
To take advantage of lower tax rates
Incentives from the host country e.g. grant
Avoids trade barriers
Reduces transport costs
What are the disadvantages of a multinational company?
Damage to reputation – exploiting cheap labour; moving jobs from UK; using non renewable resources in host country
Political instability
Cultural/language differences
Poor infrastructure
Currency fluctuations
Legal restrictions
Profits go back to parent company rather than reinvested in host country
Describe a franchise
A franchise is a business agreement that allows one business to operate under the trading name of another and sell their products/services.
The business which owns the name is called the FRANCHISER (e.g. McDonald’s) and the business which has bought the right to use the original business name and sell its products/services is called the FRANCHISEE.
What are the features of a franchise
The franchisee pays the franchiser a percentage of annual sales or a set royalty per annum for the privilege of trading their brand name. The franchisee can set up any type of business e.g. partnership, Ltd, plc.
One of the franchisers aims is to grow and increase market share.
Selling the right to trade under their name facilitates this and shares the risk with the franchisees
There are advantages and disadvantages of this business model for both the franchisee and franchiser
What are the advantages of a franchiser?
The business can expand quickly with limited risk as franchisee pays for set up of new branch
Increased market share is achieved
Income is guaranteed from the franchisee annually
Franchiser retains control over the business e.g. decision making, image etc
Risk is shared with franchisee
What are the disadvantages of a franchiser?
Reputation of brand can be damaged by the actions of individual franchisees
Franchiser could earn more by operating the business themselves as they only receive a percentage of sales/profits from the franchisee
Income can be less than predicted if franchisees do no perform as expected
What are the advantages of a franchisee?
Well known business with existing customer base and reputation
Franchiser pays for and manages advertising/promotion
Industry knowledge and training provided by the franchiser
Risk of failure is reduced as franchise has an established business model
What are the disadvantages of a franchisee?
Initiative is stifled as business model must be followed
Royalty or % of sales must be paid to the franchiser
Initial costs to purchase franchise are high
Operation of business is controlled by franchiser e.g. products, store layout, uniforms etc
The reputation and success of the business is reliant on other franchisees and the franchiser
Describe globalisation
The marketplace for goods and services are now global because of improvements in technology and infrastructure.
The Internet and e-commerce gives even the smallest businesses access to international markets and the opportunity to trade globally.
What are the advantages of globalisation?
Access to a larger marketplace
Opportunity to develop a brand internationally
Home market may be saturated therefore international trade is the only option for growth
Profit margins may increase due to lower costs in other countries
What are the disadvantages of globalisation?
More competition in the marketplace overall
Legislation in different countries may restrict production and advertisement of goods.
Differences in culture can affect the demand for a product
Language barriers can create barriers
Who owns public sector businesses?
Owned by the Government (local and national) on behalf of the taxpayer
Who controls public sector businesses?
Controlled by civil servants and elected officials
How is the public sector financed?
Financed by taxation, e.g. income tax, VAT, corporation tax, and charging the public for facilities e.g. swimming pool
What are the public sector businesses objectives?
Provide a service to the general public, manage allocated budget effectively
Describe the local government
These are set up by central government and run by locally elected councillors. Managers and employees of the council are responsible for the day to day running of the services, which include:
Education
Housing
Environmental services
Leisure facilities
Finance comes from central government budget allocation, council tax and charges for local services such as swimming pools.
Describe the central government
Westminster and the Scottish Parliament provide us with important services such as the National Health Service, Treasury and Defence. Each service is overseen by a government minister and run on a day to day basis by civil servants.
Finance is raised from various forms of taxation e.g. Income Tax
Describe public corporations
These are business organisations which are owned by the government on behalf of the public. The government chooses a chairperson and board of directors to run the company.
There used to be numerous public corporations, but many have now been privatised e.g. Royal Mail. The British Broadcasting Corporation (BBC) is a public corporation.
Describe third sector organisations
The Third sector of the economy is split into 2 groups:
Charities and voluntary organisations
Social enterprises
Describes charities
Run on a daily basis by volunteers
Regulated by the government
Sometimes referred to as “Not for profit”
These organisations exist to raise money and support a charitable cause
Recognised charities are given ‘charitable status’ which means that they are exempt from paying certain taxes e.g. VAT.
Who owns and controls charities?
Owned and controlled by a Board of Trustees
How are charities financed?
Financed by donations, lottery grants, government grants, fundraising, shops etc.
What are the objectives of charities?
Provide a specific service, e.g., cancer research, relieve poverty
Describe voluntary organisations
Many clubs also operate in the third sector e.g. scouts, bowling clubs and youth clubs
These organisations bring together people with similar interests and are run by a committee of elected volunteers
These organisations raise finance from the Lottery, local authority grants and fees charged to members.
Describe social enterprises
Social enterprises are set up and run specifically for a social or environmental aim
They are run in a business-like way and aim to make a profit just like a private sector business;
However, the profit that social enterprises make must be reinvested into the social enterprise to support their specific aims.
The main difference between a social enterprise and a charity is the legal structure and social enterprises are not so closely regulated by the government.
Profits are reinvested into the social enterprise
Who owns and controls social enterprises?
Owned and controlled by owners/shareholders
How are social enterprises financed?
Financed by donations, lottery grants, government grants, fundraising, shops etc.
What are the objectives of social enterprises?
To benefit a specific group or cause e.g. The Big Issue, make a profit
What are the advantages of social enterprises?
Help tackle social problems it has chosen
Some funding/grants/support is only available to social enterprises
Publicity for the social issue promotes the business
Attract customers who appreciate the good causes they help
Attract good quality staff who want to help the social cause
Can sell shares to raise finance if they are a limited company
What are business objectives?
All organisations have objectives
Objectives (aims/goals) provide a focus for the organisation and employees to work towards
Organisations will have different objectives depending on:
Sector of economy e.g. manage budget v profit maximisation
Size of organisation e.g. survival v growth
Changing circumstances e.g. environmental awareness, new competition, Covid19
They will aim to achieve more than one objective simultaneously
Name the business objectives
Corporate social responsibility (CSR)
Growth
Profit maximisation
Managerial objectives
Satisficing
Survival
Sales maximisation
Provision of a service
Describe corporate social responsibility
CSR means aiming to act in an ethical, environmental or socially responsible way. For example:
recycling to reduce waste
minimising packaging/using recyclable packaging
ensuring production process minimises pollution
paying living wage to employees
providing a safe working environment
ethical marketing
pay suppliers a fair price
philanthropy - supporting local charities, sports teams
What are the advantages of corporate social responsibility
Improved reputation
Attracts customers
Attracts high quality staff
Improved sales and profits
Improved environment and society will provide a more sustainable future for the business
Describe growth
This means making the business larger by expanding sales and increasing profits.
Growth increases market share which means customers are taken away from competitors
This can reduce the number of competitors in the market
It is a sign of success and can attract more investors and customers
It can reduce the risk of failure or takeover
It shows effective leadership and decision making
However, there can be cash flow problems
Describe profit maximisation
This means making as much profit as possible. Profit is made by having higher income than costs. This is the main aim of businesses in the private sector.
This can be achieved by charging a high price – although only as much as a customer is willing to pay: and
Reducing costs e.g. cost of materials, wages, rent etc. However, the business has to be careful that this does not affect the quality of the product/service
Profit gives the owners a return on their investment and can be reinvested in the business
Describe managerial objectives
Managerial objectives are wide ranging for the organisation as a whole, e.g. operate efficiently and manage budgets.
However, individual managers may also have personal objectives which can conflict with the objectives of the organisation e.g.
Responsibility for a large team
Financial reward e.g. pay rise, benefits
Status within the organisation
Allocation of budget for their own area of responsibility to improve their performance
Describe satisficing
This means that the business will operate in a way to keep all stakeholders happy (or satisfied) with how the business operates and the decisions made:
this involves compromise, e.g. owners will want to maximise profit whereas employees will want a pay rise.
satisficing means achieving a profit that owners are happy with, while also giving employees a pay rise (as this will reduce profits)
all stakeholders have an influence on the business and by satisfying them the business hopes the influence will be positive
Describe survival
This means that the organisation will continue to trade in the future.
Small and new businesses will want to avoid being taken over by larger businesses/competitors
They will also want to avoid cash flow problems which could cause them to fail
The recession can cause a business to fail as there is likely to be a reduction in sales revenue
Describe sales maximisation
This means having the highest level of sales revenue (income) as possible.
The selling price of each unit could be reduced to increase the volume of sales made
This means that profit is not maximised as the profit earned on each item is reduced, however, this can improve cash flow
Managers and sales people may want to reduce the price to increase bonuses or commission they earn
Describe the provision of a service
Most businesses provide a product or service and will aim to do this in a way which satisfies their customers.
However, some business organisations, especially in the public and third (voluntary) sectors, have the provision of a service as their main objective.
This means that they aim to provide the service in the best way possible to meet the needs of their customers or users.
A hospital, school or charity may have this as their main objective.
Why is it important to provide a good service in the private sector?
It creates loyal customers
Attracts new customers
Improves reputation
Can charge higher prices
Why is it important to provide a good service in the public sector?
Satisfy the needs of the public
Improve the standard of living in the UK
To show responsible use of funds
Describe customer service
To meet customers needs and expectations and encourage them to make repeat purchases
Describe enterprise/innovation
Combine the resources need to produce the product or service the consumer wants. It might involve developing a new idea and trying to satisfy customers needs in a different way
Why does a business want to grow?
To avoid being a takeover target
To reduce the risk of failure
To become the market leader and dominate the market
To increase sales and profits
To gain a better reputation in the market place
To remove a competitor
To benefit from economies of scale
Describe business growth
Growth can be internal or external
Internal growth is also known as organic growth - see next slide
There are various methods of growing externally: Horizontal integration Vertical integration Lateral integration Conglomerate Diversification
Describe internal (organic) growth
Internal growth occurs when:
New products/services are launched
New shops are opened or existing ones expanded
New channels of distribution e.g. e-commerce
Increasing production capacity by investing in new machinery and technology
Increasing the number of employees
Describe ways to achieve growth
Many businesses will choose external growth as it is a quicker method of growth than internal. The objective is to eliminate competition and reduce costs in the long term, through economies of scale.
Describe a takeover
When a business buys another business. This can be friendly or hostile.
Usually the business taken over loses it’s identity (Brand). e.g. when Santander took over Abbey National
Describe a merger
When two businesses agree to join together to form one larger business, e.g. Cadburys and Schweppes became Cadbury Schweppes plc.
Describe franchising
Selling more franchises to achieve growth in the market
Describe becoming a multinational
Expand operations to trade in more than one country
Describe horizontal integration
This is when a business takes over or mergers with another business at the same stage of production, this means they provide the same products/services.
What are the advantages of horizontal integration?
New larger business can dominate the market as competition is reduced
Benefits from economies of scale e.g. receiving discounts for buying in bulk
Can charge higher prices as less competition
Acquire the assets of other businesses e.g. production facilities/shops
What are the disadvantages of horizontal integration?
May breach competition rules
Customer satisfaction could be reduced if higher prices charged
Could result in job losses
Could push smaller businesses out of the market
Describe lateral integration
This is similar to horizontal integration as a business will takeover or merge with a business in the same industry
However, they do not provide the exact same product and are not in direct competition with each other.
What are the advantages of lateral integration?
The business can target new markets
Increase sales and profits
New business can complement existing business by offering customers more choice
What are the disadvantages of lateral integration?
Lack of knowledge and experience in new business can increase risk of failure
It may adversely affect core activities
Describe backward vertical integration
This happens when a business takes over or merges with a business at the previous stage of production, i.e. their supplier.
What are the advantages of backward vertical integration?
The business has control over the source of its supplies
It gains the profits from the supplier – cutting out the “middle man”
It has control over the quality and quantity of products supplied
It can control the availability of supplies to competitors
What are the disadvantages of backward vertical integration?
Can be higher risk than horizontal integration as business does not have experience in the new operations (stage of production)
Focusing on new business activities can adversely affect core activities
Describe forward vertical integration
This happens when a business takes over or merges with a business at the next stage of production, i.e. the customer.
What are the advantages of forward vertical integration?
There is a guaranteed sales outlet for the manufacturer
The business controls the distribution of the products
The business has greater control over the marketing of its products
The “middle man” is removed therefore more profits are made overall
What are the disadvantages of forward vertical integration?
Can be higher risk than horizontal integration as business does not have experience in the new operations (stage of production)
Focusing on new business activities can adversely affect core activities
Describe conglomerate integration
This occurs when businesses in different markets join together. The activities of these businesses are unrelated.
What are the advantages of conglomerate integration?
Risk is spread – if one market fails others will still be profitable
Smooths out seasonal fluctuations
Gains customers and sales revenue of acquired business
Buyer acquires the assets of other business
The business becomes more financially secure
What are the disadvantages of conglomerate integration?
Risky as no experience in new business
Having too many products can be difficult to manage effectively
The business can become too large to manage efficiently
Describe diversification
This is when a business moves into a new market. It can be done through organic/internal growth, or through external growth e.g. Virgin
What are the advantages of diversification integration?
Risk is spread – if one market fails others will still be profitable
Smooths out seasonal fluctuations
Gains customers and sales revenue of acquired business
Buyer acquires the assets of other business
The business becomes more financially secure
What are the disadvantages of diversification?
Risky as no experience in new business
Having too many products can be difficult to manage effectively
The business can become too large to manage efficiently
How can a business raise finance for growth?
Retained profits
Divestment
De integration
Asset Stripping
De-merger
Management buy in/buy out
Outsourcing (contracting out)
Describe retained profits
These are profits earned by the business in previous years which they have kept (retained) rather than distributing them to shareholders as dividends.
What are the advantages of retained profits
The benefits of using retained profits to fund growth is that the business does not incur any debt and will not have to pay interest.
Describe divestment
This is the opposite of investment and means selling off part of the business e.g. subsidiary companies, brand or excess stores/factories after a takeover or merger.
The business can focus on more profitable areas of the business. The funds raised can be used to fund growth e.g. Channel 4 sold Big Brother to Channel 5.
There is social pressure now to discourage Investment Funds to divest any investments they have with businesses that use fossil fuels because of the damage it causes to the environment
Describe de integration
When a business sells off part of the supply chain.
It happens when the business has previously vertically integrated with another business and then decides to sell that business and return to focusing on their core activities.
Referring to the earlier example the wine business would sell off the potato farm and/or the distributer.
Describe asset stripping
Asset Stripping means taking over another business (usually a hostile takeover) with the intention of selling off its assets for profit.
Assets such as factories, shops and vehicles could be worth more when sold than the cost of the takeover.
Usually the buyers gain a bad reputation as they sell off the profitable areas of the business and close down areas which are not profitable.
Describe a de merger
De-merger is when a single business splits into two or more separate businesses.
They are owned by the same business as before the demerger but are managed and run independently of each other.
Shareholders are given shares in the new company according to how many they have in the original one.
Each component will concentrate on their core activities which improves efficiency and can result in growth.
Describe management buy ins and buy outs
Management buy in is when a management team from another business, usually a competitor, takes over the business i.e. they come in to the business.
Management buyout is when the existing management of the business buy the business they work for.
In both cases the management team will feel they have the knowledge and ideas to improve the business.
Describe outsourcing (contracting out)
This is when, instead of the firm undertaking certain activities itself, it pays other firms to do them.
The objective is to save time and money on non-core activities.
Many businesses nowadays contract out services like cleaning, accountancy and catering.
What are the advantages of outsourcing (contracting out)
Allows the business to concentrate on their core activities
Only need to pay for the service when used
Less labour and equipment are required for these activities e.g. printers
Outsourced business should have greater expertise and specialist equipment therefore higher quality produced
What are the disadvantages of outsourcing (contracting out)
The business has less control over the work produced
Communication needs to be clear to ensure exact specifications met
Trust is important as outsourced business may be handling confidential information
Less control over deadlines
