Understanding business Flashcards
Sectors of industry
Primary
Secondary
Tertiary
Quaternary
Primary sector
The sector of industry consisting of businesses which extract raw materials from nature.
Secondary sector
The sector of industry which turns raw materials into new products.
Tertiary sector
The sector of industry which provides a service to the public in exchange for a fee/ commission
Quaternary sector
The support based sector, made up of businesses which provide information based services, to but not exclusively other businesses.
Sectors of economy
Private
Public
Third
Private sector of EC
The sector of economy made up of businesses owned and controlled by private individuals, with the goal of maximising profit and growing the business.
Public sector
The sector of economy made up of businesses owned by the government and controlled by government officials, with the goals of providing a high quality service to the public and staying within their budget.
Third sector of EC
The sector of economy consisting of ethical businesses, involved in raising funds and awareness for ethical causes and developing the community.
Third sector of EC
The sector of economy consisting of ethical businesses, involved in raising funds and awareness for ethical causes and developing the community.
Types of private sector business
Sole trader
Partnership
Private limited company
Public limited company
Franchise
Multinational company
Sole trader definition
A business owned and controlled by one person, in the private sector of economy and has unlimited liability, as well as there being no legal work necessary for setup.
Sole trader features
Owned by one person
Controlled by one person
Private sector of EC
Unlimited liability
No legal work needed for setup
Advantages of sole trader
Get all the profit
Make all the decisions
No legal work needed for setup
Could get government support when setting up.
Disadvantages of sole trader
Workload issues
Unlimited liability
Low startup funds
Illness closes down business.
Partnership definition
A business which is owned and controlled by 2-20 partners, in the private sector of economy, it has unlimited liability and a deed of partnership is typically made.
Features of partnership
Owned and controlled by 2-20 partners.
Private sector EC
Unlimited liability
Deed of partnership (not actually necessary)
Advantages of partnerships
Partners share workload
Partners can specialise in their expertise
Larger startup funds
Partners can share ideas
Share unlimited liability
More likely to get bank support
Disadvantages of partnership
Shared profits
Unlimited liability
Deed of partnership might need to be setup
Decisions may be compromised due to split control
Private limited company definition
A business in the private sector of economy with limited liability, it is owned by shareholders and controlled by directors, it needs an article and memorandum of association to be set up. It can only sell shares to approved members of the public.
Features of private limited company
Private sector of EC
Limited liability
Owned by shareholders
Controlled by directors
Legal work of memorandum and article of association necessary
Advantages of LTD
sell shares for added finance
Limited liability
Won’t lose control to outsiders
Disadvantages of LTD
Dividend profit
Legal procedures completely necessary
Not allowed to sell shares to the public
Being a shareholder doesn’t mean you have control over the business.
Public limited company definition
A business in the private sector of economy with limited liability, it is owned by shareholders and controlled by directors, it needs an article and memorandum of association to be set up. It sells shares in the stock market to the public and must have a share capital of 50,000 macaroons
Features of a PLC
Private sector of EC
limited liability
Owned by shareholders
Controlled by directors
Article and memorandum of association necessary
Share capital of 50,000 and selling shares to the public
Advantages of a PLC
Limited liability
Huge source of finance selling shares
Less risk for banks due to size so more sources of loans and mortgages,
Dominate a market due to size,
Professional directors
Disadvantages of PLC
Lose control to outsiders
Legal work needed for setup
More shareholders so higher dividend
Shareholders don’t necessarily have control of a business.
Franchise definition
A business where a franchiser sells the rights of a company and charges a royalty, and the franchisee buys the rights of a company to set up a branch and sell the business products in the private sector of economy.
Features of franchise
Rights owned by franchiser
Branches owned by franchisee
Controlled by franchiser usually, private sector of economy.
Advantages to the franchiser
Fast and inexpensive growth,
Increases brand awareness when new branches are setup,
Get royalties payment from the business.
Disadvantages to the franchiser
They don’t get all the profit,
Bad business actions on the franchisee’s part can tarnish whole business reputation.
Advantages to the franchisee
Are setting up a business with an already large and loyal customer base,
Can benefit from training employees,
Benefit from advertising campaigns made by the franchiser.
Multinational company definition
A business which does business in more than one country, with a head office in their home country, and branches in their host countries, such as retail outlets and production facilities.
Benefits of operating as an MNC
Increase brand recognition
Spread risk
Access new/developing markets
Lower production costs,
Avoid trader tariffs
Disadvantages of MNC
Difference in legislation
Difference in language
Transportation costs
Difference in demands
Difference in time zones
Disadvantages to the host country
Low paid labour is exploited
Put local firms out of business
They can take profits back to their own country
Use up natural resources
Damage environment
Public / government organisations
Businesses in the public sector of economy owned by the government, and controlled by elected government ministers, with the aim of providing high quality services to the public and staying within their budget, and financed through taxes.
Types of government
Uk government
Scottish government
Local government
Matters controlled by the UK government
Reserved matters such as foreign policy and defence
Scottish government matters
Things such as education and health
Local government matters
Road maintenance and disposing of waste
Public corporation
A government organisation founded on an act of parliament, which is run by elected chairpeople and financed through taxes
Nationalisation definition
The act of taking a private industry or business into public ownership.
Privatisation definition
The act of selling a publicly owned organisation to private individuals, to become part of the private sector.
Nationalisation reasons
Economic reasons - having one supplier for one industry
Ethical reasons To protect customers by charging fair prices
Financial reasons - private sector businesses may not be able to pay for the costs of maintenance
Social reasons - to ensure certain services are provided to everyone in the public.
Reasons for privatisation
Creates a profit motive
Increases competition
Cuts government spending
Increases government income
Charities definition
Non profit organisations which have the goal of raising funding and awareness for ethical causes, they are financed by donations and are owned and controlled by a board of trustees.
Charities advantage
Exempt from tax
Low wage cost /volunteers
Private companies will support the business to seem ethical
Receive government grants
Disadvantages of charities
They may struggle to compete with private organisations with more funding
They may have inconsistent workforce due to volunteering
Non profit
Voluntary organisations
Businesses which provide a service to the local community and their members, which are run by an elected committee and financed through membership
Social enterprise definition
A business which functions like a private sector business, however is in the third sector due to using profit made to fund an ethical cause and reinvest in the business, meaning owners get no profit.
Advantages of social enterprises
Have good CSR
High quality employees/ volunteers
Brand loyal customers
Receive government grants
Asset lock
Disadvantages of social enterprises
Must compete with private sector businesses, owners get no profit
Private sector business objectives
Maximise profit
Maximise market share
Grow the business
Satisfice owners
Survival
Good CSR
High quality product
Satisficing definition
Where a business managers and directors ensure that business shareholders or owners are happy with adequate results/ performance.
Public sector objectives
Provide high quality services
Stay within budget
Satisfice the members of parliament who run the government
Satisfy public
Mission statement
The overall aim of the business
Third sector goals
Maximise funding for ethical cause
Maximise awareness for ethical causes
Maximise profit (social enterprises)
Ensure members are happy with the voluntary organisations
Methods of growth
Internal/ organic growth
Horizontal integration
Lateral integration
Forwards vertical intervention
Backwards vertical integration
Conglomerate integration
Diversification
Organic/ internal growth
Where a business expands without integrating themselves with other businesses. Using their own resources
Methods of internal/ organic growth
Opening new branches
Increasing production output
Launching new products
Hiring more staff
Opening e commerce
Reasons for growth
Increase sales and profit
Increase market share
Take advantage of economies of scale
Spread risk over markets
Advantages of internal growth/ organic growth
Maintains control over business
Economies of scale
Increase market share
Grow how you want to
Disadvantages of internal / organic growth
Slower than external
May be limited opportunity in a saturated market
External/ inorganic growth
Where a business integrates with another to become larger and more powerful
Advantages of external growth
Reduced competition in market
More control over price
Economies of scale
Grow in markets with no room to grow
Grow faster than internal growth
External/ inorganic growth disadvantages
Businesses may disagree on objectives and goals
Costly to integrate businesses
Communication issues
Consumers may be unhappy with less market choice and product price
Lose control of a business .
Ways to achieve growth
Franchising
Acquisition
Takeover
Merger
Advertising
Producing new product ranges
Increasing staff
Merger definition
A where two businesses integrate with each other on equal terms and share control.
Takeover
Where one larger business purchases another smaller business hostilely, meaning that the larger business has control.
Acquisition definition
Where one larger business purchases a smaller business in an agreed fashion, however the larger business has control.
Lateral integration def
Where a business does a merger or takeover with another business in related markets and the same sector of industry but not the same stage of production, meaning there is no direct competition.
Horizontal integration
Where a business does a merger or takeover with another business in the same stage of production and market. Meaning they directly compete.
Backwards vertical integration
Where a business does a merger or takeover with another business which is the business supplier, meaning they are integrating with a business of a previous sector of industry.
Forwards vertical integration
Where a business does a merger or takeover with another business in a later sector of industry, meaning they integrate with their customer
Diversification definition
Where a business moves into a new market either by itself, or by taking over or merging with a business already in the new market.
Conglomerate definition
Where a parent business takes over a smaller business in a different market meaning the business expands into many different markets.
Advantages of Horizontal integration
The business already has expertise in that market
The business is decreasing it’s competition
The business can charge a higher price
The business can become a market leader
Disadvantages of Horizontal integration
Businesses could have to share resources,
Can be expensive to purchase another business,
Could lead to dissatisfaction in customers with less market choice
Could be prevented by monopoly
Advantages of lateral integration
Business spreads risks across markets
Business can increase customer base over many markets,
Gain assets from business, that could be useful for both businesses.
Disadvantages of lateral integration
May have to distribute resources and focus from main business
Don’t have expertise in that market
Forwards vertical advantages
Always have an outlet for the product
Spreads risk across different markets
Could allow for beneficial product placement
Disadvantages of forward’s vertical integration
Could mean distribution of resources and business focus
Business may not have the expertise to survive in new market
Backwards vertical integration advantages
Can decrease the cost of raw materials
Limits competition supply choice
Could mean middle man is cut out, increasing profit margins
Allows for continuous supply of raw materials.
Disadvantages of backwards vertical integration
Distribution of resources and business focus
May not have expertise to succeed/ survive in market
Advantages of diversification and conglomerate
Spread risk across markets
Increase customer base and market share
Disadvantages of diversification and conglomerate
May not have expertise necessary to survive and succeed
New markets mean business resources and focus are shared
Customers may be unhappy if larger businesses start running their company, concern about product quality and values.
Methods of funding growth
Buy in
Buy out
Outsourcing
Asset stripping
Retaining profit
Divestment
Demerger
De integration
BBOARDDD
Buy out
Where business managers and employees purchase the business because they think that they can run the business better.
Buy in
Where a business is purchased by people outside of the business, in order to run the business better.
Outsourcing
Where a business pays another firm to do work for them, this is typically done cheaper or with more expertise, in order for the business to focus on other activities.
Asset stripping
Where a business purchases a failing business in order to sell off all of their valued items, by selling them individually for a higher price.
De merger
Where a business splits into two different businesses. The businesses are owned by the same people but carry out different activities
De integration
Where a business sells of and removes a business that had been previously integrated
Divestment
Where a business sells off unnecessary business assets in exchange for capital
External factors
PESTEC
Political
Economic
Social
Technological
Environmental
Competitive
Political external factors
Income tax
Corporation tax
VAT
Legislation
political stability
Public spending
Income tax
The tax which employees pay to the government on all money they earn.
Corporation tax
The tax which businesses pay on all profit they make to the government.
VAT
The tax the general public pays on top of the price of goods and services.
Rates of VAT
standard - 20- most things
Reduced - 5 - home energy and gas
Zero -0 - food and children clothes
Legislation
Laws made by the government which businesses must abide to. (HASAWA) (national minimum wage act)
Political stability
Factors resulting in a change in the current political climate.
Public spending
How and where the government spends their finance to improve the lives of citizens and provide infrastructure.
Political policy
The governments plan for the economy and competition
Types of policy
Economic and competition
Types of economic policy
Fiscal and monetary
Fiscal policy
Where tax rates are changed to impact public sector spending and demand
Monetary policy
The policy which controls the supply of money into the economy - changing interest rates.
Competition policy
The policy put in place to promote and regulate markets for increased success.
Economic factors
Economic cycle
Inflation
Exchange rates
Interest rates
Unemployment
Economic factors
Economic cycle
Inflation
Exchange rates
Interest rates
Unemployment
Economic cycle
The economic activity of the country, whether it is in a boom or recession.
Boom
An Increase in the gross domestic product of a country, resulting in an increase in consumer spending.
Recession
A decrease in gross domestic product for two quarters, resulting in a decrease in consumer spending.
Gross domestic product
The value of all of the products in the economy.
Inflation
The increase of products price over a period of time.
Unemployment rate
The percentage of capable workers without jobs in the economy.
High unemployment means
More competition for jobs
Decrease in demand of products.
Low unemployment rate means
Less competition for jobs
Increase in demand.
Interest rates
The percentage extra that has to be paid back on borrowing or saving money.
Exchange rate
The conversion rate for turning one currency into another.
Strong pound
Where the pound has a high exchange rate
Meaning importing products costs us less
Exporting products costs other countries more
Weak pound
Where the pound has a low exchange rate
Meaning importing cost us more
Exporting products to other countries costs them less.
Social factors
Demographics
Changes in trends
Changes in ethics
Demographics
Changes in the populations characteristics, such as life expectancy.
Changes in trends
The change in what people are purchasing/ what is fashionable at the moment.
Changes in ethics
Where the public becomes much more philanthropic and generous towards negative social issues.
Technological factors
ICT
Automation
E commerce
New R+D
ICT
Information communication technology
Automation
Where machines are used to replace employees to do a job more efficiently.
E commerce
Selling products online - prevents necessary retail outlet.
New R AND D
Where new technology and scientific evidence is produced , allowing a company to be more efficient.
Environmental factors
Climate change
Weather
Recycling
Pollution
Biofuels
Competitive factors
Imitators
Price wars
Product differentiation
Imitators
Rival products from competitors which copy your own product, and sell them for a cheaper price.
Product differentiation
How your product stands out from competitors
Price wars
Where competitor businesses drop their prices to steal each other’s customers
Stakeholders
Shareholder
Employees
Government
trade unions
Lenders
Pressure groups
Local community
Owners
Suppliers
Directors/managers
Customers
External stakeholders
Banks
Government
Pressure groups
Suppliers
Customers
Local community
Internal stakeholders
Shareholders
Owners
Employees
Directors
Managers
Conflicts of interest between stakeholders
Where business stakeholders goals and interests for the business clash and can’t occur at the same time.
Interdependence of stakeholders
Where business stakeholders rely on each other for the business to succeed.
What does the structure of a business depend on
Technology
Size
Product
Finance
Span of control
The number of subordinates who report to a supervisor or manager
Chain of command
How information and instructions are passed down the organisation.
Tall/hierarchical structure
Long chain of command
Short span of control
Found in the public sector frequently
With employees of lowest authority and responsibility at the bottom and highest at the top
Many layers of management
Flat structure
Short chain of command
Large span of control
Found in medium sized organisations
Few layers of management
Lowest authority and responsibility at bottom, higher sat the top.
Matrix structure
A business structure which facilitates for two different business operations.
Where business employees and managers are arranged into two separate projects - their faculty job and team project.
The employees will have a two different managers
One line manager and a project team leader
When projects are finished matrix structure is disbanded.
Entrepreneurial structure
A small business with one owner who controls the business, the owner makes all the decisions quickly, there is a short chain of command and a wide span of control.
Delayering
Where layers of hierarchy are removed from a business structure.
Consequences of Delayering
Wider span of control
Shorter chain of command
Faster business decisions
More staff responsibility
Greater delegation
Downsizing
Where business activities are removed, by merging faculties together.
Advantage downsizing
Decreases costs of wage and rent to the business
Business is more efficient
Business can focus on most important business activities..
Disadvantages of downsizing
Valuable skills can be lost
Remaining staff will feel demotivated if not needed to use their most valued skills.
Centralised businesses structures
Where decisions are kept at the top of the business structure
Associate with tall
Relies on competent managers
Employees a don’t make decisions
Greater uniformity
Less responsive to local external pressures
Decentralised structure
Decisions are delegated to other departments
Associated with flat structure
Motivated staff
More responsive to local external pressures
Less uniformity
Advantages of tall
More promotion opportunities
Staff know who to report to and their role
Greater supervision of employees due to narrow span of control means less mistakes
Disadvantages of tall
Slower communication
Slower reaction to changes on market
Staff may feel stifled by intense supervision of managers
Disadvantages of tall
Slower communication
Slower reaction to changes on market
Staff may feel stifled by intense supervision of managers
Advantages of flat
Information is quickly communicate
Faster response to external factors
Staff feel empowered by large amounts of work delegated
Flat disadvantages
Fewer promotion opportunities
Staff put under pressure by amount of work delegated
Mangers have less time supervising each staff meaning more mistakes made.
Types of decision making
Strategic
Tactical
Operational
Strategic decisions
Long term business decisions concerned with the focus and goals of the organisation, establishing what it hopes to achieve in the future, made by senior management or owners with little detail into how these goals are going to be achieved.
Strategic decisions
Long term business decisions concerned with the focus and goals of the organisation, establishing what it hopes to achieve in the future, made by senior management or owners with little detail into how these goals are going to be achieved.
Tactical decisions
Medium term decisions concerned with achieving the strategic goals of the decision, made by senior or middle management, and go into detail about what resources are needed to achieve these goals and how they will achieve these goals.
Operational decisions
Short term decisions which are made by low level managers and employees to prevent and address day to day problems decreasing efficiency of the business
Advantages of centralised decision making
Decisions are made by most experienced
Made quickly
Greater uniform
Decentralised Decisions advantages
Motivates staff
Responds to local external pressures better
Provide better customer service
Disadvantages of centralised decision making
Demotivates staff
Less response to local external pressures
Disadvantages of decentralised decisions
Less experienced people make decisions
Less uniformity
