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Higher Business Management > Understanding Business > Flashcards

Understanding Business Flashcards

1
Q

What is a business?

A

A business exists to provide goods and services to satisfy consumers needs and wants.

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2
Q

Describe goods

A

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.

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3
Q

Describe services

A

A service is intangible; the consumer cannot touch, smell, taste or see what they are buying e.g. hairdresser, teacher or banking.

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4
Q

Describe factors of products

A

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

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5
Q

Name the factors of production

A

Capital
Enterprise
Land
Labour

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6
Q

Describe capital

A

These are the man-made resources such as factories, machines, vehicles and other equipment. It also includes the initial financial investment in the business.

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7
Q

Describe enterprise

A

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.

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8
Q

Describe land

A

This includes the natural resources the business uses such as oil, water and land itself e.g. the site of a factory or office.

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9
Q

Describe labour

A

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

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10
Q

Describe wealth creation

A

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.

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11
Q

What are the advantages of wealth creation?

A

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

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12
Q

What are the disadvantages of wealth creation?

A

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

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13
Q

Describe the cycle of business

A

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.

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14
Q

Describe sectors of industry

A

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

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15
Q

Describe the primary sector

A

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
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16
Q

Describe the secondary sector

A

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

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17
Q

Describe the tertiary sector

A

Business which exist in this sector are concerned with providing services rather than producing goods e.g.

Banking
Retail
Tourism
Hairdressing
Plumber
Gym
Transport
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18
Q

Describe the quaternary sector

A

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

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19
Q

Describe changing patterns of employment

A

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

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20
Q

Described the sectors of economy

A

Businesses operate in one of three sectors of economy:

Private Sector
Public Sector
Third Sector

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21
Q

Describe the private sector

A

Private sector organisations are owned and controlled by private individuals and investors. Their main objective is to make a profit

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22
Q

Describe the public sector

A

Public sector organisations are owned and controlled by the government. Their main objective is to provide essential services to the general public

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23
Q

Describe the third sector

A

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.

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24
Q

Name the businesses in the private sector

A

Sole Trader

Partnership

Private limited company (Ltd)

Public limited company (plc)

Multinational Company (MNC)

Franchise

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25
Q

Describe sole traders

A

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.

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26
Q

How is finance raised in sole trader businesses?

A

Finance is raised from the owner’s own savings, bank loans and government grants.

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27
Q

What are the objectives of a sole trader business?

A

Sole traders’ main objectives are survival and profit maximisation.

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28
Q

What are the advantages of sole trader businesses?

A

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.

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29
Q

What are the disadvantages of sole trader businesses?

A

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

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30
Q

Describe partnerships

A

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.

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31
Q

How is finance raised in a partnership?

A

Finance is raised from the partners’ savings, bank loans, new partners and government grants.

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32
Q

What are the objectives of a partnership?

A

Sole traders’ main objectives are survival and profit maximisation.

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33
Q

What are the advantages of partnerships?

A

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

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34
Q

What are the disadvantages of partnerships?

A

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

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35
Q

Describe private limited companies

A

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.

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36
Q

How is finance raised in private limited companies?

A

Financed by shareholder investment, new shareholders, bank loan, grants, retained profits, bank overdraft etc.

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37
Q

What are the objectives of private limited companies?

A

Objectives – maximise profits, maximise sales, survival and growth

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38
Q

What are the advantages of private limited companies?

A

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

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39
Q

What are the disadvantages of private limited companies?

A

Profits are shared between more owners

There is a legal process to set up the business – additional costs

Must abide by the Companies Act

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40
Q

Describe public limited companies

A

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

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41
Q

How is finance raised in public limited companies?

A

Financed by shareholder investment, new shareholders, bank loan, grants, debentures, retained profits, bank overdraft etc

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42
Q

What are the objectives of public limited companies?

A

Objectives – maximise profits, maximise sales, growth and market dominance

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43
Q

What are the advantages of public limited companies?

A

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

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44
Q

What are the disadvantages of public limited companies?

A

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

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45
Q

Describe a multinational company

A

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.

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46
Q

What are the advantages of a multinational company?

A

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

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47
Q

What are the disadvantages of a multinational company?

A

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

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48
Q

Describe a franchise

A

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.

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49
Q

What are the features of a franchise

A

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

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50
Q

What are the advantages of a franchiser?

A

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

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51
Q

What are the disadvantages of a franchiser?

A

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

52
Q

What are the advantages of a franchisee?

A

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

53
Q

What are the disadvantages of a franchisee?

A

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

54
Q

Describe globalisation

A

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.

55
Q

What are the advantages of globalisation?

A

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

56
Q

What are the disadvantages of globalisation?

A

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

57
Q

Who owns public sector businesses?

A

Owned by the Government (local and national) on behalf of the taxpayer

58
Q

Who controls public sector businesses?

A

Controlled by civil servants and elected officials

59
Q

How is the public sector financed?

A

Financed by taxation, e.g. income tax, VAT, corporation tax, and charging the public for facilities e.g. swimming pool

60
Q

What are the public sector businesses objectives?

A

Provide a service to the general public, manage allocated budget effectively

61
Q

Describe the local government

A

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.

62
Q

Describe the central government

A

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

63
Q

Describe public corporations

A

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.

64
Q

Describe third sector organisations

A

The Third sector of the economy is split into 2 groups:

Charities and voluntary organisations

Social enterprises

65
Q

Describes charities

A

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.

66
Q

Who owns and controls charities?

A

Owned and controlled by a Board of Trustees

67
Q

How are charities financed?

A

Financed by donations, lottery grants, government grants, fundraising, shops etc.

68
Q

What are the objectives of charities?

A

Provide a specific service, e.g., cancer research, relieve poverty

69
Q

Describe voluntary organisations

A

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.

70
Q

Describe social enterprises

A

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

71
Q

Who owns and controls social enterprises?

A

Owned and controlled by owners/shareholders

72
Q

How are social enterprises financed?

A

Financed by donations, lottery grants, government grants, fundraising, shops etc.

73
Q

What are the objectives of social enterprises?

A

To benefit a specific group or cause e.g. The Big Issue, make a profit

74
Q

What are the advantages of social enterprises?

A

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

75
Q

What are business objectives?

A

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

76
Q

Name the business objectives

A

Corporate social responsibility (CSR)

Growth

Profit maximisation

Managerial objectives

Satisficing

Survival

Sales maximisation

Provision of a service

77
Q

Describe corporate social responsibility

A

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

78
Q

What are the advantages of corporate social responsibility

A

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

79
Q

Describe growth

A

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

80
Q

Describe profit maximisation

A

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

81
Q

Describe managerial objectives

A

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

82
Q

Describe satisficing

A

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

83
Q

Describe survival

A

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

84
Q

Describe sales maximisation

A

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

85
Q

Describe the provision of a service

A

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.

86
Q

Why is it important to provide a good service in the private sector?

A

It creates loyal customers

Attracts new customers

Improves reputation

Can charge higher prices

87
Q

Why is it important to provide a good service in the public sector?

A

Satisfy the needs of the public

Improve the standard of living in the UK

To show responsible use of funds

88
Q

Describe customer service

A

To meet customers needs and expectations and encourage them to make repeat purchases

89
Q

Describe enterprise/innovation

A

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

90
Q

Why does a business want to grow?

A

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

91
Q

Describe business growth

A

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
92
Q

Describe internal (organic) growth

A

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

93
Q

Describe ways to achieve growth

A

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.

94
Q

Describe a takeover

A

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

95
Q

Describe a merger

A

When two businesses agree to join together to form one larger business, e.g. Cadburys and Schweppes became Cadbury Schweppes plc.

96
Q

Describe franchising

A

Selling more franchises to achieve growth in the market

97
Q

Describe becoming a multinational

A

Expand operations to trade in more than one country

98
Q

Describe horizontal integration

A

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.

99
Q

What are the advantages of horizontal integration?

A

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

100
Q

What are the disadvantages of horizontal integration?

A

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

101
Q

Describe lateral integration

A

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.

102
Q

What are the advantages of lateral integration?

A

The business can target new markets

Increase sales and profits

New business can complement existing business by offering customers more choice

103
Q

What are the disadvantages of lateral integration?

A

Lack of knowledge and experience in new business can increase risk of failure

It may adversely affect core activities

104
Q

Describe backward vertical integration

A

This happens when a business takes over or merges with a business at the previous stage of production, i.e. their supplier.

105
Q

What are the advantages of backward vertical integration?

A

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

106
Q

What are the disadvantages of backward vertical integration?

A

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

107
Q

Describe forward vertical integration

A

This happens when a business takes over or merges with a business at the next stage of production, i.e. the customer.

108
Q

What are the advantages of forward vertical integration?

A

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

109
Q

What are the disadvantages of forward vertical integration?

A

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

110
Q

Describe conglomerate integration

A

This occurs when businesses in different markets join together. The activities of these businesses are unrelated.

111
Q

What are the advantages of conglomerate integration?

A

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

112
Q

What are the disadvantages of conglomerate integration?

A

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

113
Q

Describe diversification

A

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

114
Q

What are the advantages of diversification integration?

A

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

115
Q

What are the disadvantages of diversification?

A

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

116
Q

How can a business raise finance for growth?

A

Retained profits

Divestment

De integration

Asset Stripping

De-merger

Management buy in/buy out

Outsourcing (contracting out)

117
Q

Describe retained profits

A

These are profits earned by the business in previous years which they have kept (retained) rather than distributing them to shareholders as dividends.

118
Q

What are the advantages of retained profits

A

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.

119
Q

Describe divestment

A

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

120
Q

Describe de integration

A

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.

121
Q

Describe asset stripping

A

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.

122
Q

Describe a de merger

A

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.

123
Q

Describe management buy ins and buy outs

A

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.

124
Q

Describe outsourcing (contracting out)

A

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.

125
Q

What are the advantages of outsourcing (contracting out)

A

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

126
Q

What are the disadvantages of outsourcing (contracting out)

A

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

Higher Business Management (6 decks)

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