Understanding Business Flashcards
Primary sector Industry
Are extractive
Involve taking natural resources from the land or sea eg agriculture, forestry, mining, fishing
Output of the primary sector produces the raw materials that are input into later stages of the production process.
Secondary sector industry
Factors of production to manufacture or construct goods
Eg roads, hospitals, cars, food products
These may be made for consumer goods or capital goods
Tertiary Sector Industries
Provision of any services
Eg banking and hairdressing
Tertiary sector also includes the distribution and retailing of goods that have been made in secondary sector
Quaternary sector industry
Providing info services
Eg- computing, ICT, consultancy and research, particularly in scientific fields
Included with the tertiary sector as they are both service sectors
Tertiary and quaternary sectors make up the largest part of the economy employing 76% of workforce
Wealth Creating
Wealth is defined as the value of goods and services produced in an economy
Not money but money VALUE of the goods and services produced
Business create wealth by adding value to goods and services as they pass through a chain of production
Limited liability companies— (PLC AND LTD) ownership
Investors buy shares of ownerships in the companies- the more share of ownership an investor has, the greater their share of any profits that are generated by business
Limited liability companies— (PLC AND LTD) control
Day to day running is in hands of a board of directors who are appointed by shareholders at annual general meeting. In order to become a director one must be a shareholder BUT directors don’t need majority of voting shares in business
Limited liability companies— (PLC AND LTD) finance
Setting up a limited company is financed through sale of shares, issuing debentures and commercial loans
Advantages of limited companies -BOTH
Limited liability means investors do not risk personal bankruptcy if the business makes a loss as their liability is limited to the amount of their original investment
Company can continue trading if share ownership changes unlike a partnership which has to be dissolved If ownership changes
Advantages for LTD
Don’t need to make their financial information as public as a Plc although do have to file their accounts with companies house and these can be viewed on request
Cannot be subject to hostile takeover as sale of shares must be agreed between the existing owners so they can control who is buying the shares
Advantages to PLC
Shares can be resold on stock exchange encourages owners to buy shares of ownership, easier to tasks larger sums of money more quickly
Huge sums of capital can be raised as shares can be sold to institutional investors such as pension fund managers and insurance companies who may buy hundreds of thousands of shares at a time to have as in investment or in a pension plan
Disadvantages of limited companies BOTH
Profits must be shared between larger numbers of owners- the more shareholders there are more ways the profit must be shared
There is a legal process to be followed to set up the business before it can begin trading. Has to abide by conditions set out in Companies Act
Ltd disadvantage
Can be difficult to secure agreement as to who can buy shares which means limited scope for raising finance compared to a PLC
PLC disadvantage
Hostile takeover as can gain control by purchasing 51% of shares with voting rights
Large organisations and may become inflexible and unresponsive to changes in market and may become difficult to manage effectively- diseconomies of scale
Key features of a Franchise
Run by one business under the name of another. Franchise technically self employed as a sole trader or partnership
Franchiser gives franchisee a license to trade under the franchisees brand name in return for a fee and share of profits
Franchiser may supply product to franchisee who then sells it or franchisee nah be responsible for producing the product
Advantages to Franchiser
- Franchisers name becomes better known as their business expands thus strengthening the brand of the franchise and making it easier to market
- franchisers receive a percentage of the franchisees profits without taking any majors financial risk
- Franchiser gets to expand their business without having to raise all the finance to pay for investment—- new premises and equipment
Advantages to the Franchisee
New business can immediately begin trading on the established reputation of the Franchiser and is therefore likely to be profitable more quickly with a reduced risk of offering a product which will not sell
Benefits from access to the ideas of other franchisees— McDonald’s franchisee thought up the egg McMuffin recipe was circulated to other franchisees and became v successful
Have ongoing support and advice from Franchiser who works out pricing, provides stock and controls advertisement
Disadvantages for Franchiser
- Some risks as it may take a while to realise that franchisee is not up to standard, meanwhile there may be damage to the franchisers reputation which may affect overall image and future sales
- profits are split with the franchisee so they are not getting as much profit as they would have if they had been operating themselves
- franchiser may be locked into a 20year agreement and may not be able to leave it
Disadvantages to the Franchisee
Reputation and profitability depend partly on the ability of the Franchiser to market the business. Can be affected by bad publicity relation to other franchisees poor performance
Franchiser may impose strict rules on franchisees and limit their ability to use their own initiative can be demoralising.
A percentage of profit has to be paid to the Franchiser and franchisees still fun the risk of failure if their franchise license is withdrawn.
Advs of operating as a multinational company
May be an increase in market share by producing products which meet the need of the consumers in host country— maximising sales revenues making organisation more profitable
