Understanding Business Flashcards
What are the sectors of industry?
-Primary sector- involves exploiting natural resources from the land e.g. farming, fishing etc.
-Secondary sector- processing industries, construction (outside the workplace) and manufacturing (inside a factory.)
-Tertiary sector- all service providers so covers both direct (to general public) and commercial (to other businesses)
-Quaternary sector- developed from the tertiary sector as it involves services but it is a more specialised group of industries. found in well developed countries, requires a highly educated workforce, generates higher profit.
Explain a private limited company
-Owned by 2-50 shareholders, often family members or long standing employees.
-Controlled by directors who are often shareholders and paid managers.
-Financed by share equity, loan, mortgage, trade credit etc.
-Limited liability.
-Complex to set up as specific paperwork must be completed, business must publish annual accounts.
Explain a public limited company
-Owned by unlimited shareholders.
-Controlled by paid directors who sit on the board of directors and experts managers.
-Financed by share equity, loan, mortgage, trade credit etc.
-Limited liability.
-Complex to set up as specific paperwork must be completed. Business must publish annual accounts.
Explain a public sector organisation
-Owned by state and controlled by the government.
-Financed by income, corporation, VAT tax, gov grants and charges for some services.
-Limited liability.
-Act of parliament for public corporations, government departments run public services.
Explain a third sector organisation
-Owned by the cause- set up as a trust.
-Controlled by trustees who fill roles such as chair, secretary, treasurer etc.
-Financed by donations.
-Limited liability.
-Scottish charity regulator oversees all-registration number given and closely regulated.
Advantages and disadvantages of limited companies (private sector)
✅ltd co shareholder experience and skills available
✅ltd shares only sold with agreement of all shareholders
✅plc can dominate the market
✅plc shares traded on stock exchange so late amounts can be raised
❌high initial start up costs so lower initial profits
❌decision making can be slow particularly if many layers of management
❌higher tax rates
Advantages and disadvantages of public sector organisations
✅provide services which private firms would not fund
✅provide services not everyone could afford but need
✅social inequalities are reduced
❌profit not primary motivation so costs may not be well-controlled
❌long-term planning difficult as govt change and politicians interfere
❌managers may be unfamiliar with modern business practices
Advantages and disadvantages of charities (third sector organisations)
✅accounts must be published and annual audits undertaken
✅volunteers give their services for free reducing admin costs
✅helps social inequality, medical cures, and protection of animals
❌competition from other charities
❌badly affected by economic downturns and bad publicity
❌no guarantee of income so difficult to make long-term plans
Objectives of the private sector
-maximisation of profit, sales or market share- needed for survival and keeps shareholders happy.
-trained and motivated staff promotes good customer service and staff retention.
-most efficient methods of production will help to reduce costs and/or wastage or achieve quality standard.
-being responsible and improving corporate social responsibility helps better the public image.
Objectives of the public sector
-provide a best value service to satisfy taxpayers and voters.
-make efficient use of funds to gain maximum social benefit.
-improve society which will serve the public interest.
-break-even by not overspending agreed budget and prevent services being cut.
Objectives of the third sector
-make greatest surplus in order to support cause/charity activities.
-increase donations/volunteers to provide more help or services.
-fund more medical research for condition of wish to find treatment.
-protect animals/environment which is the reason charity exists
Reasons for business growth
-greater status and prestige from running a large organisation.
-higher salaries are often available to those controlling larger firms.
-possibility of higher profits if sales increase because larger target market of consumers.
lower average costs can be achieved by larger businesses e.g. bulk buying discounts.
Methods of organic growth
-opening premises or outlets by setting up new branches, offices or factories which may be in new locations.
-engaging in product development to extend the range by introducing new products that target more customers.
-expanding operations by employing more staff so increased productive capacity.
Methods of external growth
-merger- when the owners of two businesses agree to join to make a new business- it is generally seen as being positive for both parties.
-acquisition- purchase of shares or assets of one business by another with the Directors’ permission- a friendly takeover.
-take-over- when one business buys out owners (shareholders) of another business and takes control- called hostile takeovers if it is without the firms agreement.
What are the different types of integration
-backwards vertical integration
-forward vertical integration
-conglomerate integration
-horizontal integration
-lateral integration
Explain backwards vertical integration
when a business joins with another business in a previous stage of production e.g. a manufacturer joining with a supplier.
✅guaranteed quality and quantity supply of parts or raw materials
✅supplier’s profit margin no longer exists so adds to profits
✅limits supplies to competitors
Explain forward vertical integration
when a business joins with another business in the next stage of production or a future stage e.g. a manufacturer joining with a customer.
✅guaranteed outlet for the product and greater control over the chain of distribution and supply
✅the customer’s profit margin no longer exists so increase in profitability
✅the customer no longer buys competitors goods
Explain conglomerate integration
when a business joins with another business in an entirely different market not part of process/chain e.g. a manufacturer joining with an unrelated industry.
✅greatest diversification- spreads risk of failing over more industries
✅transfer of ideas and technical knowledge between businesses
✅expensive specialist skills in one area benefit whole organisation
Explain horizontal integration
when a business joins with another business in the same stage of the production process e.g a manufacturer joining with a competitor.
✅reduces the number of business rivals and gain larger market share because customers ‘inherited’ from the competitor
✅benefit from economies of scale e.g. specialist managers, technology
✅greater influence so can dominate market and charge a higher price
Explain lateral integration
when a business joins with another business which has a connected product or service- an associated item but not in direct competition e.g. a hairdresser and a beauty therapist.
✅shared knowledge of wider market and good business practices
✅guaranteed source of component parts or equipment
✅can deny competitor access to items-competitive advantage
Reasons for external growth
-accelerates growth as business becoming immediately bigger with greater productive capacity.
-diversification of or new opportunities, to share knowledge, good practices and spread risk by moving into a different market.
-increased efficiency (reducing costs) through economies of scale and improve knowledge of the market which should bring greater profits.
Issues with external growth
-requires significant funding e.g. share issues, retained profits, finding new partners etc.
-no guarantee the cos structures will merge easily or enhance each other- ‘teething problems’ - so synergies fail to emerge.
-negative publicity about job losses and factory/branch closures can damage reputation.
What may a reduction in business size result from
-De-merger
-Divestment
-Deintegration
-Asset stripping
-Outsourcing/contracting out
-Management buy-out
-Management buy-in
What is a de-merger?
If diseconomies of scale set in a business may choose to split into 2 organisations.
