understanding business Flashcards
What is corporate culture?
The values, beliefs and norms relating to the organisation that are shared by all staff.
This is an internal factor
Why would a business want to grow?
If the business grows it has greater control of its market, it is able to compete better with other firms and it can reach more customers, it is more able to resist takeovers and has a better chance of survival
How can organic/ internal growth be achieved?
Opening new outlets
Increasing sales
Increasing profits
Operating in more markets/ countries
Introducing new products (diversifying)
Three benefits of organic growth?
Can be less risky than taking over another business
Can be financed through internal sources
Can build on existing strengths such as brands and good customer relations
Drawbacks of organic growth?
A slower method of growth
Limited by the size of the existing market
How can external growth be achieved?
By buying or taking over another business or by merging with another business
What is backward vertical integration?
When a business takes over a supplier
What are the benefits of backward vertical integration?
Allows the business to control its own source of goods/ materials
Adds the suppliers profit to its own
Can ensure the quality and quantity of supplies
Can control supplies to competitors
What is forward vertical integration?
When the business takes over its customer
What are three benefits of forward vertical integration?
Guarantees an outlet for its goods
Can control the marketing mix for its products
Adds the profit of the customer to its own
How can external growth be achieved?
By buying or taking over another business or by merging with another business
What is horizontal integration?
When two business’ at the same stage in the production process join together. They can be seen as competitors.
It can involve one business completely taking over another business or it may be a joining of the two to create a new business
Benefits of horizontal integration?
Larger, more financially secure
Gets the profits of the other business
Increases its customer base
Greater marker presence
What is a business?
A business organises resources (workers, raw materials and machinery) to produce goods and services for customers.
What’s the difference between goods and services?
A good is a physical product - it is tangible (you can touch it!) e.g. a mobile phone.
A service is provided for a customer. It cannot be touched - intangible e.g. education.
What does businesses exist?
To satisfy needs and wants - Needs are essential for survival e.g. food & shelter, Wants are things we believe will enhance our lives.
To create wealth - A business does this by adding value at each stage of production e.g. the value of a car is more than the
sum of all of the parts.
What is capital?
Man-made resources used in production of a good or service, for example machinery.
What is enterprise?
The idea and the skills to combine the other factors of production.
What are primary sector of Industry?
Raw materials are extracted from the earth, for example wheat.
What are secondary sectors of industry?
Raw materials are processed and transformed into finished products, for example baker.
What are tertiary sectors of industry?
Provision of a service, for example a sandwich shop.
What are quaternary sectors of industry?
Information and knowledge based advice services, for example ICT specialists.
What is a private sector of economy?
Consists of businesses that aim to maximise profits owned by individuals, for example nike.
What are public sectors of economy?
Consists of organisations owned by the government aim to provide services, for example the NHS.
What is a public sector of economy?
Consists of organisations that have been set up for the benefit of others.
Consists of: charities, voluntary organisations, social enterprises & co-operatives. E.g. Blood Bikes (charity), Scouts (voluntary), Social Bite (social enterprise)
Features of a private limited company?
Owned by shareholders
Have limited liability
Financed by selling shares only to people the main shareholders know e.g. friends, family, business associates - cannot sell on stock market
Controlled by the Managing Director
Features of a public limited company?
Owned by shareholders
Have limited liability
Financed by selling shares on stock market
Controlled by Board of Directors
Must register with Companies House
Must have both Memorandum of Association and Articles of Association
What are advantages of a private limited company?
Shareholders have limited liability.
Control is kept of who can buy shares = control is not lost to outsiders.
Finance can be raised by selling shares (although limited as cannot sell publicly).
Skills & experience can be gained through shareholders.
Disadvantages of public limited company?
Profits have to be shared among shareholders.
A complicated legal process has to be followed to become incorporated = time consuming.
Complicated legal process means that PLCs must pay for lawyers = expensive.
Control is lost of who buys shares.
Final accounts must be published = competitors can gain a competitive advantage if they see low profits
What’s a franchise?
A franchise is a business model that allows one business to pay for the right to trade under the name of another. The original business is known as the franchiser. The business that buys the right to trade under the name of the other is known as the franchisee. Examples include McDonalds, Subway & Red Driving School.
What’s a multinational?
A multinational company/corporation (MNC) is an organisation that has its headquarters in one country (home country) and operations in at least one other country (host country). - Operations = has productive capacity e.g. an office or factory. Increase in the number of MNCs due to globalisation which in turn leads to increased globalisation. - Increased infrastructure, e-commerce, cheaper transport and travel
Advantages of multinationals?
Wages may be cheaper in less developed countries where there is a lower cost of living.
Raw materials may be cheaper in other countries e.g. Ikea buying forests in Romania.
MNCs may receive grants from host governments to set up in their country.
Can avoid trade barriers such as quotas or tariffs by producing in a country the MNC wanting to sell in rather than exporting to it.
Can reduce transport costs by producing in the country the MNC wants to sell in rather than shipping the product to the country.
Disadvantages of operation a multinational?
Language barriers can slow down and communication.
Cultural differences can affect productivity e.g. in Saudi Arabia women are only allowed to work until 11pm and must have separate workspaces from men.
Time differences can make communication more difficult and slow down decision making.
Fluctuations in exchange rates can mean that costs have to be recalculated regularly and profit margins change frequently.
Laws may be different in each country and therefore costs may increase as lawyers / specialists must be hired to ensure the MNC is adhering to them.
Advantages of Charities?
Charities are exempt from paying some taxes such as VAT.
Can have low wage costs due to volunteers.
Can attract high quality paid staff who want to work for a charity.
Private sector organisations will be willing to donate as it is seen as good ‘PR’ (public relations).
Disadvantages of charities?
Rely heavily on volunteers who may leave for paid work.
Can be difficult to compete with large private sector organisations due to their large marketing budgets
What is objectives?
Objectives
The overall aim or goal of an org.
An org’s. choice of objective will be influenced by:
- The sector of the economy
- Size of organisation
- Phase of economic system e.g recession
Ideology of owners e.g Lush
What is PPIGSS?
Provision of a Service
Profit Maximisation
Increase Market Share
Growth
Survival
Social Responsibility
What is Provision of a Service?
Applicable to organisations in all sectors of the economy.
Want to provide a high quality service to satisfy the wants of customers.
This is justified as by providing a high quality service, customers will return increasing long-term sales.
What is profit maximisation?
To reduce costs as much as possible and if possible, increase the selling the price.
Private sector organisation want to maximise profits as it will be able to grow if it has increased retained profits.
Social enterprises may want to maximise profits to have more money to help their cause.
What is increased marketshare?
Market share is the percentage of total sales within a market that a business achieve.
In order to increase their market share a business can release a new product or increase their promotion.
The benefit of increasing market share is that the business can
become market leader. Customers often choose the market
leader as they believe it to be the best, in turn increasing sales
even further.
By increasing their sales they may be able to benefit from
economies of scale
What’s is growth?
Increasing the size of the organisation through increasing production capacity, number of brands/products in a portfolio, sales outlets.
An organisation would like to grow as they will be able to benefit from economies of scale
What’s is survival?
This is ensuring a business has enough cash to cover short-term debts.
Usually the objective of smaller organisations until big enough to maximise profits and increase market share.
Larger org’s. may have this objective during economic downturns
as fewer customers are buying goods & services.
What is social responsibility?
This is when a business aims to carry out its activities AND benefit society or the environment.
Advantages:
Good reputation
Customers are attracted by wanting to support an ethical business
Good quality employees may be attracted to an ethical business
May be able to attract ethical investors
What are objectives of the public sector?
Provide a wide range of goods & services.
Provide high quality services.
Social responsibility.
Maximise a budget to give the most benefit to the public.
What are objectives of a charity?
Advance education.
Advance religion.
Relieve poverty.
Maximise donations.
Maximise awareness of a cause.
Social responsibility
What are objectives of a social enterprise?
Social responsibility
Profit maximisation for their cause.
Maximise awareness of a cause.
Growth - to help more people/of their cause.
What are methods of growth?
Internal/Organic
Horizontal Integration
Backward Vertical Integration
Forward Vertical Integration
Lateral Integration
Conglomerate Integration
What is Internal/organic growth?
This is growth without involving other businesses. This can be done by:
Launching new products
Opening new branches/expanding existing branches
Introducing e-commerce
Hiring more staff
Increasing production Capacity
Part of internal growth might be diversification, This is where a business releases products in different markets - this spreads risk across different markets, if one fails they have another to fall back on.
What is Horizontal Integration?
This is when two businesses from the same sector of industry become one business. E.g two banks merging together
What are advantages of Horizontal Integration?
Competition is reduced - can increase market share
Competition is reduced - can raise prices - increasing profit margin
Increased size of organisations means economies of scale can be achieved
Can benefit from R&D carried out by the other organisations - improved products - increased customer satisfaction
What are disadvantages of horizontal integration?
By joining with a business in the same sector the merger/takeover may breach competition rules e.g ASDA/Sainsburys
Communication may be slower in a larger organisation - slower decision making
Redundancies may take place as don’t need duplication of functions - lower staff morale
Due to reduced competition quality may decrease, decreasing customer satisfaction
Larger costs involved in integrating the two businesses e.g new branding
What is backwards vertical integration?
This is when a business merges with/takeover a business in an earlier sector of industry e.g a manufacturer taking over a primary sector supplier
What are advantages of backwards vertical integration?
Controls the supply chain and can choose not to supply to competition = giving the org. a competitive advantage
Supplier no longer trying to make a profit on sale to org. therefore raw materials are cheaper
Can arrange better terms including trade credit and delivery times
Can control the quality of supply
What are disadvantages of backwards vertical integration?
The organisation may not have experience of the sector they are now involved in and may not be as efficient
May lose focus of core activities meaning poor decisions may be made
Monopolising markets e.g taking over the only supplier may not be allowed by the competition authorities
What is Forward Vertical Integration?
This is when a business merges with/takes over a business in a later sector of industry e.g a manufacturer taking over a retailer
Advantages of Forward Vertical Integration?
The organisation now has its own channel of distribution meaning they can choose not to supply other retailers.
No need to sell it at a reduced price to enable another retailer to make a profit
Has control over how the product is is displayed in its own retailers - increased brand awareness and clarity
Disadvantages of Forward Vertical Integration?
The organisation may not have experience of the sector they are now involved in and may not be as efficient
May lose focus of core activities meaning poor decisions may be made
Monopolising markets for example, not supplying to other retailers if they are the only supplier may be against competition rules
What is lateral integration?
This is when a business merges with/takes over a business in the same industry but does not provide the exact same product
What are advantages of lateral integration?
Can target new markets = increased sales
New products gained can compliment existing ones which can create new products/combinations
Can benefit from resources gained
Disadvantages of lateral integration?
The organisation may not have the experience of the market they are now involved in and may affect performance
May lose focus of core activities meaning poor decisions may be made
May lead to redundancies of duplicate departments =low morale + high redundancy payments
What is Conglomerate Integration?
This when two businesses in completely different markets and are complete unrelated join together
Advantages of Conglomerate Integration?
The businesses can spread risk - if one fails they have others to fall back on
The businesses can overcook seasonal fluctuations in their markets to have more consistent sales revenue e.g a business that provides snow shovels
Increase in sales as gain customers through the deal
Gains assets that could be sold
Benefits from economies of scale
Can benefit from the research and development of the other company
Disadvantages of Conglomerate Integration?
Means the business may be operating in markets they know nothing about
Can lose focus on core products may impact on quality
May become too large, diseconomies of scale - poor communications, managers have too many activities to oversee
