Understanding Business

Question 1

ROLE OF BUSINESSES IN SOCIETY
Needs and Wants:

Answer 1

Need - required in order to survive, e.g. food, water, clothing, shelter

Want - makes lives more comfortable and enjoyable, e.g. electronics, salons.

Question 2

ROLE OF BUSINESSES IN SOCIETY
Needs and Wants:

Answer 2

Goods are tangible, i.e. they can be seen and physically touched, e.g. mobile phone, packet of crisps, and a pen. They are categorised as follows:
* durable – goods that last a long time and used multiple times, e.g. washing machine
* non-durable – goods that can only be used once, e.g. food
* capital – goods that help to produce other goods, e.g. machinery

Services are intangible, i.e. they cannot be seen or physically touched. Services are when someone else does something for you, e.g. banking, hairdressing, teaching, plumbing.

Question 3

ENTERPRISE AND ENTREPRENEURS
What is an Entrepreneur?

Answer 3

An individual who develops a business idea and combines the factors of production – land, labour, enterprise, capital – in order to produce a good or provide a service, usually with a view to earning profit.

Question 4

ENTERPRISE AND ENTREPRENEURS
Skills and Qualities of an Entrepreneur:

Answer 4

Skills
* risk taker
* leadership
* communication
* decision making
* problem solving
* identify a gap in the market

Qualities
* positive
* creative
* conifdent
* motivated

Question 5

ENTERPRISE AND ENTREPRENEURS
What are the Reasons for Setting up a Business?

Answer 5

• to be their own boss
• to develop a hobby into a business
• have an idea for a new product/service - gap in the market
• to earn more money than working for someone else
• been made redundant or are unhappy in present job
• believe they can provide products/services better than existing businesses

Question 6

ENTERPRISE AND ENTREPRENEURS
What are the Risks of Setting up a Business?

Answer 6

• competition may enter the market
• giving up financial security of a wage/salary (unlimited liability)
• losing their investment - may result in losing their own home
• uncertainty over the demand for their products/services

Question 7

FACTORS OF PRODUCTION
What are the Factors of Production?

Answer 7

Capital
* the tools, machinery and equipment that a business uses to make goods or provide services.
* e.g. motor vehicles, buildings, factories, tools, etc

Enterprise
* the business idea that an entrepreneur or owner has on how to use land, labour and capital in their business.
* e.g. Richard Branson, Alan Sugar

Land
* the natural resources that businesses use.
* e.g. plot of land, coal, trees, water, wood, fields, rivers etc

Labour
* the workforce of a business.
* e.g. joiners, shop assistants, teachers, clerical staff, electricians, cleaners, etc

Question 8

FACTORS OF INDUSTRY
What are the Factors of Industry?

Answer 8

Primary
* grows the products, or extracts natural resources.
* e.g. farming, mining, oil drilling, forestry, fishing

Secondary
* tthe manufacturing or construction of products using raw materials from the primary sector.
* e.g. car manufacturer, food manufacturer, house building

Tertiary
* provides services.
* e.g. banking, tourism, hairdressing, teaching, hospitality

Question 9

SECTORS OF ECONOMY
What are the Sectors of Economy?

Answer 9

Public
* sole traders
* partnerships
* private limited company (Ltd)
* public limited company (plc)

Main objectives (aims) are:
* grow/expand
* maximise profits
* socially responsible
* customer satisfaction

Private
* central government
* local government

Main objectives (aims) are:
* socially responsible
* provide essential services such as hospital care, education and police
* provide a high-quality product/service to the general public
* raise finance through taxes and use taxpayers’ money effectively

Third
* charities
* voluntary organisations

Main objectives (aims) are:
* fund raising to support causes
* raise awareness of their specific cause
* socially responsible
They do not aim to make a profit, though they may achieve a surplus of income over expenditure.

Question 10

PUBLIC SECTOR ORGANISATIONS
What is the Central Government?

Answer 10

Central Government is organised and operated by elected politicians.
To help achieve its aims and objectives central government delegates financial resources, a budget, and responsibility to local government to manage on a day-to-day basis.

Question 11

PUBLIC SECTOR ORGANISATIONS
What is the Local Government?

Answer 11

Local Government are set up by central government and are run on its behalf by locally elected councillors.

The day to day running of services is organised by managers and employees (civil servants) of each local council. They aim to meet the needs of local people and businesses and do not aim to make profit, instead they are required to provide the most efficient service possible within allocated budgets.

Question 12

PUBLIC SECTOR ORGANISATIONS
Services of the Local Government:

Answer 12

• education and leisure, e.g. schools, museums, sports centres, libraries
• planning and transport, e.g. roads, public transport, planning permission
• environmental services, e.g. refuse collection, street lighting, maintenance of parks and cemeteries
• housing, e.g. allocation and maintenance of public housing, homeless provision, rent collection, building new council houses
• finance, e.g. annual budgets for managing income and spending, financial reports, collection of Council Tax

Question 13

PRIVATE SECTOR ORGANISATIONS
What is a Sole Trader?

Answer 13

A business that is owned and controlled by one person, they take all the risk.
Most small businesses are sole traders, e.g. hairdressers, window cleaners, joiners.

Question 14

PRIVATE SECTOR ORGANISATIONS
Advantages and Disadvantages of a Sole Trader:

Answer 14

Advantages
* all profits are kept by the owner.
* it is easy to set-up, no legal paperwork required
* the owner keeps overall responsibility

Disadvantages
* will normally work long hours and difficult to take time off
* has unlimited liability - if the business is unsuccessful the owner could lose their personal possessions, such as their home or car
* must make all the decisions themselves with no other advice or input, there is no-one to consult or share ideas with

Question 15

PRIVATE SECTOR ORGANISATIONS
What is a Partnership?

Answer 15

A partnership is a business with 2 to 20 partners, who own and control the business together. The partners should produce a Partnership Agreement which outlines all the rules and conditions for the partnership. It also outlines the procedures to be followed when a partner joins, leaves or dies.
Examples of partnerships include accountants, dentists, vets and lawyers.

Question 16

PRIVATE SECTOR ORGANISATIONS
Advantages and Disadvantages of a Partnership:

Answer 16

Advantages
* partners bring new skills and ideas to a business - partners may have expertise in different areas so they can specialise
* partnerships can raise more finance as there are more owners to contribute
* risk, workload, responsibility, and decision-making is shared - so there is less pressure on one individual

Disadvantages
* profits must be shared between partners
* the partners have unlimited liability - if the business is unsuccessful the partners could lose their personal possessions such as their home and car
* dispute and disagreements can take place between the partners over the direction of the business

Question 17

PRIVATE SECTOR ORGANISATIONS
What is a Private Limited Company (Ltd)?

Answer 17

A company whose shares are owned privately and shareholders are invited to buy shares. Shareholders are usually friends and family.

A private limited company can have a minimum of one shareholder. Shareholders have limited liability meaning they can only lose the value of their shares and not their private assets or belongings. A Ltd is controlled by a Board of Directors (who are usually shareholders).

Question 18

PRIVATE SECTOR ORGANISATIONS
Advantages and Disadvantages of a Private Limited Company:

Answer 18

Advantages
* capital can be raised from inviting individual to buy shares (usually family or friends)
* shareholders may have experience and expertise they can bring to the business
* shareholders have limited liability - if the business fails, each shareholder only loses the amount they invested rather than their personal possessions

Disadvantages
* decision making is more complex as there could be many shareholders and could be disagreements
* profits are shared amongst more people - shareholders receive a share of the profits known as a dividend
* there is a legal process involved in setting up the business, making it more expensive than a sole trader or partnership

Question 19

THIRD SECTOR ORGANISATIONS
Types of Third Sector Organisations:

Answer 19

Charities
Exempt from paying most taxes. Set up as trusts with no individual owner, and overall management and control is undertaken by unpaid trustees (people who are placed in a position of trust with the responsibility for looking after the interests of others).

Objective
* socially responsible
* fund raising to support causes
* raise awareness of their specific cause

Finance
* sponsorship
* lottery grants
* government grants
* donations from the public
* sale of goods in charity shops

Voluntary Organisations
Run and staffed by volunteers, e.g. the Scouts, youth clubs, Brownies, sports clubs. They bring together people with similar interests and are run by a committee of elected volunteers.

Finance
* grants from the lottery, Sports Council, or local authorities
* fees charged to use facilities/become a member of the organisation

Social Enterprise
Operates in the third sector of the economy and have a social and/or environmental purpose such as tackling social problems, improving local communities or people’s life chances. However, a social enterprise will aim to make a profit (like a private sector organisation) which will be reinvested back into their cause.

Objectives
* social responsibility
* customer satisfaction
* clear social/environmental mission
* reinvest the profit made to support their mission
* generate income through selling goods and/or services

Finance
* grants
* bank loans
* sponsorship
* sale of shares
* bank overdraft
* selling goods and/or services

Question 20

BUSINESS OBJECTIVES
Types of Business Objectives:

Answer 20

Profit Maximisation
* costs/expenses are kept to a minimum
* key objective of private sector organisations - shareholders/owners may focus on this objective
* the organisation aims to make as much profit as possible

Providing a Service
* although they are not in business to make a profit, funds must be managed efficiently and within budget
* this applies to most publicly funded organisations and charities
* main aim is to provide a service that people require, e.g. health and education

Social Responsibility
* this objective is very important for the image of all organisations
* the organisation should behave in a way that has a positive impact on the community it operates in, e.g. avoiding pollution, sponsoring local sports teams
* many organisations now aim to reduce their “carbon footprint” and display a “green” image to their customers

Survival
* new businesses focus on this objective
* this means to simply continue trading/operating as a business
* to avoid being taken over by other businesses and to continue operating in their own right

Customer Satisfaction
* the reasons for this depend on which sector of economy the organisation operates
* all organisations are concerned with providing the best possible service to their customers

Growth/Increase Market Share
* it could try to do this by charging lower prices than competitors to attract more customers
* reduces risk of being taken over by another business
* this is where the organisation tries to grow larger and increase its share of the market in which it operates

Question 21

CUSTOMER SATISFACTION
What is Customer Satisfaction?

Answer 21

One of the most important factors to consider for an organisation. A happy customer is more likely to return to the organisation to purchase more goods and/or services and they are more likely to recommend the organisation to other people.

The ability of an organisation to successfully meet customer expectations can have a significant impact on an organisation as it is more costly to attract a new customer than to keep an existing one.

Question 22

CUSTOMER SATISFACTION
How to Ensure Customer Satisfaction:

Answer 22

• having a returns policy
• produce good quality products
• having a customer service policy
• getting feedback from customers
• giving customers value for money (price v quality)

Question 23

CUSTOMER SATISFACTION
The Importance of Customer Satisfaction:

Answer 23

• good publicity means that the company is likely to attract a better quality of employees
• good customer service improves the organisation’s reputation
• increased loyalty results in more sales and a bigger market share
• good customer relations are likely to mean regular repeat orders - customers happy with the service they received are likely to become loyal customers

Question 24

CUSTOMER SATISFACTION
Complaints Procedure:

Answer 24

Most organisations will have a procedure for dealing with customer complaints. All employees need to know the complaints procedures as customers are more likely to remain with an organisation after making a complaint if it is dealt with to their satisfaction.

When dealing with complaints the business should consider:
* complaints should be handled by trained staff
* time limits for dealing with complaints should be established
* complaints should be treated seriously and recorded
* complaints should be acknowledged, and the customer kept informed

Question 25

CUSTOMER SATISFACTION
Benefits of Good Customer Service:

Answer 25

• can gain a competitive advantage
• leading to an increase in sales and profits
• satisfied customers are likely to become loyal
• there are likely to be fewer complaints to deal with
• having a good reputation will attract new customers and staff

Question 26

CUSTOMER SATISFACTION
Impact of Poor Customer Service:

Answer 26

• loss of competitive edge
• bad publicity or reputation
• decrease in customer loyalty
• failure to attract new customers
• demotivated and demoralised staff

Question 27

EXTERNAL FACTORS
What are the External Factors?

Answer 27

Political
* the actions of the government and aims to protect employees, customers, and the general public.
* e.g. UK law, taxation, development of infastructure, government grants

Economic
* the affects of economy on the business.
* e.g. intrest rates, inflation, recession, unemployment, disposable income, government spending

Social
* satisfying the needs and wants of customers by being aware of socio-cultural changes in lifestyles and attitudes.
* e.g. social/cultural, tastes/fashions, age and gender, size population

Technological
* keeping up-to-date with technological inovations.
* e.g. developments in technology, costs of technology

Environmental
* being environmentally friendly and taking on environmental issues, such as water disposal or recycling.
* e.g. attitudes towards the environment, environmental damage, maintaining green areas, severe weather

Competitive
* forces a business to react to a situation in a way that they may not have planned, such as lowering prices.
* e.g. amount of competition, competitors products/prices

Question 28

EXTERNAL FACTORS
What are the External Factors Impact on Businesses?

Answer 28

Political
*

Economic
* e.g. may have to reduce prices and accpet a cut in profit to survive and encourage customers

Social
* e.g. changes in taste, fashion, increase in spending power in one group can make the business popular

Technological
* e.g. being able to sell products online or using automation in factories

Environmental
* e.g. weather conditions can affect sales and/or production, and growing intrest in being a ‘green’ business

Competitive
* e.g. the impact of a rival firm with a similar product or lower prices would influence the business to do better

Question 29

STAKEHOLDERS
What is a Stakeholder?

Answer 29

An individual or groups of individuals with an interest or influence on the business.

Stakeholder interest is what the stakeholder wants from the business.
Stakeholder influence is the actions or decisions the stakeholder can take which will affect the business

Question 30

STAKEHOLDERS
What are Internal Stakeholders?

Answer 30

• owners
• shareholders
• managers
• employees

Question 31

STAKEHOLDERS
What are the Interests of Internal Stakeholders?

Answer 31

Owners
* personal status
* survival and growth of business
* good return on their investment (profit)

Shareholders
* stability of busines
* increased value of shares
* share of profits/dividends

Managers
* personal status
* fair salary/bonuses
* job security and satisfaction

Employees
* fair rate of pay
* good working conditions
* promotion opportunities
* job security and satisfaction

Question 32

STAKEHOLDERS
What are the Influences of Internal Stakeholders?

Answer 32

Owners
* makes decisions for the business
* can invest more money or take their money out of the business

Shareholders
* can invest more or less capital
* appoint the Board of Directors

Managers
* motivate, recurit, and train staff
* make decisions, e.g. what products/services to sell

Employees
* motivation
* industrial action
* leave the business

Question 33

STAKEHOLDERS
What are External Stakeholders?

Answer 33

• customers
• suppliers
• pressure groups
• local community
• government (local and national)

Question 34

STAKEHOLDERS
What are the Interests of External Stakeholders?

Answer 34

Customers
* good customer service
* good quality product at the best price (value for money)

Suppliers
* large orders
* repeat orders
* receive payment on time

Pressure Groups
* business is caring for the environment
* paying a fair amount to suppliers and employees

Government
* payment of taxes
* complying with legislation
* behave in a socially responsible way

Question 35

STAKEHOLDERS
What are the Influences of External Stakeholders?

Answer 35

Customers
* can go to competitors instead
* can give negative or positive feedback
* can choose to support the business by buying products/services

Suppliers
* deliver on time
* change credit terms
* change prices/discounts

Pressure Groups
* complain to government
* demonstrations or campaign against the business

Government
* change tax rates
* introduce new legislation
* grant or refuse planning permission