Understanding Business Flashcards
Private Limited Company
Owner - Shareholders
Controlled - Board of directors
Finance - Selling shares to family & friends
Private Limited Company - Advantages
Owners have limited liability
Ownership not lost to outsiders
Business retains close feel with a high level of customer service
Private Limited Company - Disadvantages
Profits split with many shareholders by issuing dividends
Complicated legal process required to set up company
Financial statements have to be shared with Companies House
- Profits not kept private
Public Limited Company
Owners - Shareholders
Controlled - Board of directors
Finance - Shares sold publicly through stock market
Public Limited Company - Advantages
Shareholders have limited liability
Finance can be raised through public sale of shares
PLCs can dominate the market
Public Limited Company - Disadvantages
Dividends shared with many shareholders
Annual accounts have to be published
Setting up a PLC is complicated
CSR
Organisations aiming to act in any way that benefits society or the environment
Legal responsibilities
Economical responsibilities
Business gains a good rep for its caring nature
Customers who agree with aims likely to use business
Business can attract high-quality staff who believe in businesses ethics
Internal Growth
Introducing e-commerce
- Business can trade 24/7 to a global market
Hiring more staff
- Improves business’s ability to make sales
Increasing production capacity
- Businesses can invest in new technology to make more products
Diversification
Products launched across different markets
Horizontal Integration - Advantages
Two businesses from the same sector become one business
New business will dominate market as competition is reduced
New business can raise prices due to lack of competition
Horizontal Integration - Disadvantages
Quality may suffer due to lack of competition
Customers may have to pay higher prices for the same goods
Forward Vertical Integration
Business takes over or merges with a business from a later section of industry
Backward Vertical Integration
Business takes over or merges with a business from an earlier section of industry
Forward Vertical Integration - Advantages
Business can control supply of products
Can increase profits by adding value itself
Backward Vertical Integration - Advantages
Guaranteed & timely supply of inventory
Quality of supplies strictly controlled
Vertical Integration - Disadvantages
Focusing on new activities can adversely affect core activities
Monopolising markets may have legal repercussions
Lateral Integration
Business merges with a business that is in the same industry but doesn’t provide the exact same product
Lateral Integration - Advantages
Business can target new markets & increase sales
New products can complement existing ones
Lateral Integration - Disadvantages
Lack of knowledge in a slightly different market may affect performance of the products
May adversely affect core activities
Conglomerate Integration
When businesses in different markets join together
Conglomerate Integration - Advantages
Business is larger & more financially secure
Buyer acquires assets of the other company
Business gains customers & sales of the acquired business
Conglomerate Integration - Disadvantages
One business may take on another in a market they know nothing about
Business may become too large & inefficient to manage
Outsourcing
When an organisation arranges for another organisation to carry out certain activities for it instead of doing it itself
Outsourcing - Advantages
Able to use service when required
Allows business to concentrate on doing what it’s good at
Outsourcing- Disadvantages
Business will have less control over outsourced work so quality may fall
More expensive that in-house as specialists come at a price
Political Factors - Advantages
Changing laws & legislation
- Government could introduce environmental laws & by complying, organisations will gain a good rep
Changing income tax rates
- Government could reduce tax rates giving customers a higher disposable income meaning they are more likely to buy products
Changing VAT rates
- Government could lower VAT making products more affordable for customers
Political Factors - Disadvantages
Changing laws & legislation
- Government could increase minimum wage meaning organisations have higher wage costs resulting in a lower annual profit
Changing income tax rates
- Government could increase income tax giving customers a lower disposable income
Changing VAT rates
- Government could raise VAT & selling price could put customers off buying
Third Sector - Charities
Set up with sole purpose of raising money to benefit others
Financed - Donations or sponsorships
Controlled by - Board of trustees
Charities - Advantages
Exempt from paying some taxes
Low wage costs as volunteers work for free
Private companies more willing to donate as it’s good PR
Charities - Disadvantages
Difficult to compete with large marketing budgets of organisations in the private sector
Charities rely on volunteers who may leave for paid work
Third Sector - Voluntary Organisations
Aim to provide a service for their members & the local community
Financed by - Membership subscriptions
Controlled by - Elected committee & helped by volunteers
Third Sector - Social Enterprises
Aim to make a profit to benefit a specific group
Owned by - Sole trader, partnership or shareholders in a limited company
Controlled by - Board of directors
Social Enterprise - Advantages
Social aims can endear a social enterprise to customers
Likely to receive government grants due to positive impact on society
Good-quality employees who believe in social mission attracted to organisation
‘Asset lock’ means if it shuts down the sale of any profits will benefit their cause
Franchiser
Aims to grow & increase market share
A - Low-risk form of growth as franchisee invests the majority of the capital
- Receives a percentage of franchisee’s profits each year
D - Reputation of whole franchise can be tarnished by one poor franchisee
- Only a share of the profits is received
Franchisee
Aims to maximise profits
A - Well known business with existing customers
- Industry knowledge & training provided by the franchiser
- Benefits from national advertisements carried out by the franchiser
D - Little autonomy over decisions as the franchiser decides it all
- Royalties have to be paid each year
- High initial start-up fees
Multinationals
A business that has operations in more than one country
Multinationals - Advantages
Wages & raw material costs lower in host country
Business can avoid legislation in the home country
Grants can be issued by governments to locate in their country
Businesses can avoid quotas & tariffs issued by their own governments
Multinationals - Disadvantages
Language barriers can slow down communication
Cultural differences can affect production
Exchange rates can affect purchasing & paying expenses in different countries
Time differences can hinder communication between head office & branches around the world
Primary Sector
Consists of businesses that are involved in exploiting natural resources
Secondary Sector
Businesses involved in manufacturing & construction, by taking natural resources & turning them into goods that can be sold later
Tertiary Sector
Businesses that are involved in providing services rather than goods
Satisficing
Aiming for satisfactory result rather than best possible outcome
Could aim only to make a level of profit good enough to satisfy main stakeholders
Managerial Objectives
Try to achieve objectives they believe will improve their status within the country
Working Within a Budget
Aiming to stick to their annual budget & not overspend
Mergers & Takeovers
Involves one business buying another business
Takeovers - Advantages
Risk of failure can be spread
Economies of scale can be achieved
Competition reduced which increases sales
Buying business gains market share & resources of taken-over business
Takeovers - Disadvantages
Can lead to job losses in taken-over business as buying business wants own employees
Integration can be bad for customers as less competition means higher prices
Change of name can put off loyal customers of taken-over business
Can be expensive to acquire another business
Merger
Involves 2 businesses agreeing to join forces & become one organisation
Merger - Advantages
Economies of scale can be achieved
Each business can bring different areas of expertise to the merger
Jobs more likely to be spared in both businesses
Can overcome barriers to entering a market
Merger - Disadvantages
Customers may not like the changes a merger brings
Marketing campaigns to inform customers of changes can be expensive
Can be bad for customers as less competition will mean higher prices
Other Ways to Achieve Growth
Franchising
Becoming a multinational
Retained Profits
Profits made by the business that aren’t given to shareholders
Divestment
Selling off part of an organisation in order to concentrate on other more profitable areas of the business
De-integration
When a business sells off part of the supply chain it owns
De-integration - Advantages
Business can focus on core activities
Increased choice in ‘vertical chain’ as the business can look for supplies outside its organisation
De integration - Disadvantages
Business will now have to pay marked-up prices for supplies
Competitors could acquire de integrated components & take control of the supply chain
Asset Stripping
Taking over another company with intent to sell off its assets for a profit
De-merger
When a single business splits into 2 or more separate components
De-merger - Advantages
Each new component can concentrate on its own core activities & grow as a result
Each new component has the best chance to operate efficiently
De-merged components can be divested which can meet competition regulations
De-merger - Disadvantages
Customers may be put off & abandon the businesses altogether
Significant financial costs involved
Buy-in
Management of another business takes over the business
Buy-out
Management of a business buy the company they work for
Outsourcing
When an organisation arranges for another organisation to carry out certain activities for it instead of doing it itself
Outsourcing - Advantages
Allows the business to concentrate on doing what it’s good at
Should be high-quality work from outsourced activities
Less labour & equipment required for outsourced activities
Business is able to use the service when required
Outsourcing - Disadvantages
Business will have less control over outsourced work so quality may fall
Communication between businesses needs to be clear to make sure specifications are met
Business may have to share sensitive information that could get into hands of competitors
More expensive than in-house as specialists come at a price
Competition Policy
In order to promote competition for consumer benefit
Prices kept low for customers
Customer service is good
Products & services are high quality
Organisations can’t participate in cartels
The CMA can block mergers
Economic Policy
Fiscal policy
- Concerns tax rates it sets
Monetary policy
- The ways it controls the supply of money into the economy
Boom
High demand for products & employment
Can increase prices improving businesses profits
Inflation means increasing wage costs
Recession
Little demand for products & employment
Have to make staff redundant & pay redundancy
Prices cut meaning little profit
Recovery
Demand for products & employment increases
Customers in a better position to purchase products, increasing sales
Developing new products & increasing prices leading to bigger profits
Social Factors - Advantages
Ageing population
- Can produce tailored products
- Most are retired & can afford products so prices can increase
Changing fashion trends
- Can offer products customers want, increasing sales
Ethical considerations
- Businesses that practise ethically seen in a good light by customers, suppliers & the government
Social Factors - Disadvantages
Ageing population
- Market research needed which is expensive & time consuming
Changing fashion trends
- Some products have a short shelf-life
Ethical considerations
- Operating ethically will increase costs & therefore reduce overall profits
Technological Factors - Advantages
Social media
- Organisations can keep in touch with customers & raise their profile to worldwide market
Wi-Fi
- Providing free wi-fi will attract customers who need to use it
4G
- Enables employees to download information quickly
Technological Factors - Disadvantages
Social media
- Customers can use it to spread bad reviews leading to a bad reputation
Wi-Fi
- Expensive to set up & maintain
4G
- Not everywhere is equipped for 4G leaving these organisations behind
Environmental Factors - Advantages
Weather
- Could be impacted by favourable weather
Recycling
- Encourage recycling by their customers to impact less negatively on the environment
Carbon footprint
- Businesses that use renewable energy will save money on fuel bills
Environmental Factors - Disadvantages
Weather
- Adverse weather can affect transport networks
Recycling
- Takes time & effort to recycle rather than dispose
Carbon footprint
- Expensive to invest in renewable energy
Competitive Factors - Advantages
Competition opening next door provides more choice to customers
Improves market as it brings more choice & keeps prices low
Competitive Factors - Disadvantages
Competition could lower prices which forces business to lower prices or risk losing customers
Competition could launch new products meaning businesses will have to spend money developing products
Conflicts of Interest
Employees vs owners
- Employees want a pay rise, owners want to maximise profits
Government vs owners
- Governments want to introduce legislation to improve society, owners may disagree with legislation as it will impact their business
Customers vs owners
- Customers want low prices whereas owners want to maximise profits
Suppliers vs owners
- Suppliers want to be paid as soon as possible in cash whereas owners want to trade credit to keep good cash flow
Interdependence
Owners & suppliers
- Owners need suppliers to provide quality raw materials while suppliers need owners to keep buying from them
Owners & customers
- Owners need customers to buy their products & customers need a good quality product
Owners & employees
- Owners need employees to perform their best to increase sales while employees need owners to make good decisions & keep their job safe
Managers & employees
- Employees & managers need to work together to help the business succeed
Tall Structure - Advantages
Each staff member knows who to report to
More promotion opportunities can motivate staff
Narrow span of control means managers can support subordinates
Tall Structure - Disadvantages
Many levels slows down decision-making
Organisation can be slow to react to changes in the market
Narrow span of control means managers have fewer staff to share ideas with
Flat Structure - Advantages
Information can quickly be communicated through levels
Can quickly respond to external factors
Wide span of control means staff are empowered to make decisions themselves
Flat Structure - Disadvantages
Fewer promotion levels so staff may leave
Staff may be delegated more tasks increasing pressure
Wide span control means there’s less time for planning
Delayering - Advantages
Money saved on managers salary
Quick communication as shorter chain of command
Wider span of control
Delayering - Disadvantages
Fewer promotion opportunities
Will lose key staff in restructure
Wider span of control
Centralised Structure - Advantages
Standardised procedures ensures consistency
Low risk of important info leaking from branches
High degree of corporate identity as decisions made for the whole organisation
Centralised Structure - Disadvantages
Less responsibility given to subordinates demotivating staff
Decisions won’t reflect needs of local markets
Organisation will react slowly to external factors
Decentralised Structure - Advantages
Quick decisions as local managers don’t need to consult senior managers
More subordinates empowered encouraging creativity
Senior management relived of constant decision-making
Decentralised Structure - Disadvantages
Local branches may compete with each other
Additional training required for middle management
Lower-level management can make decisions harmful for the whole business
Downsizing - Advantages
Can cut wage costs
Business is more competitive
Downsizing - Disadvantages
Valuable skills lost when redundancies are made
Remaining staff are demotivated
Centralised Decision Making
Kept at senior level of business
