Topic 1 - Business in the Real World

1.1 - What is a business?

An organisation that produces a good or supplies a service

e.g. Amazon

1.1 - What is a good?

A good is a physical object

e.g. a car

1.1 - What is a service?

An intangible product (can’t touch it)

e.g. financial advice

1.1 - What is a customer?

Someone who buys a product from a business

1.1 - What is a consumer?

Someone who uses products from a business

1.1 - What is a need?

A basic necessity

e.g. food and water

1.1 - What is a want?

The desire for a particular product

e.g. chocolate and coffee

1.1 - What is an entrepreneur?

Someone who is willing to take the risks involved in starting a new business

1.1 - What is entrepreneurship?

The ability to be an entrepreneur

1.1 - Why might people want to become an entrepreneur?

• Be their own boss

• Keep profits

• Need a job

• An interest or hobby

• Prove something to themselves/others

• Unhappy with previous job

• Flexible working hours

• Gap in the market

• To provide services as a social enterprise

1.1 - What is a social enterprise?

A non-profit business

1.1 - What is Factors of Production and what does it include?

Factors of Production is the resources that businesses use to provide goods/services. These include:

• capital = equipment used

• enterprise = skills of people involved in identifying business opportunities

• land = physical land of where the business is and where resources are produced

• labour = skills and number of employees employed

1.1 - What are resources?

The inputs that businesses use to provide goods/services

1.1 - What is enterprise?

Another word for business

OR

The skills of the people employed

1.1 - What is opportunity cost?

The sacrifice made when decisions are made/the trade-off

1.1 - What are some characteristics of an entrepreneur?

Most entrepreneurs are:

• innovative

• risk takers

• hard working

• determined

• organised

1.1 - What are the different sectors of business?

• Primary sector = businesses that produce and use raw materials

e.g. farmers

• Secondary sector = businesses that convert raw materials into products

e.g. manufacturers

• Tertiary sector = businesses that sell products/services

e.g. fast food stores

1.1 - What are the four functions of a business?

• Marketing = promoting, pricing and placement

• Operations = the activities involved in the production of a product

• Human resources = Managing people/staff

• Finance = raising, managing and monitoring money

1.1 - What are the changes in the business environment?

• Technological change = this creates new markets and products

• Economic change = this involves a range of factors

e.g. interest rate, inflation, and GDP

• Legal change = new laws and regulations which may affect costs or demand

• Environmental expectations = Customers and consumers are growing increasingly concerned about whether a business is eco- friendly or not. This could affect stuff like demand and sales.

1.2 - What is a sole trader?

Someone who sets up a business on their own

1.2 - What are some advantages of being a sole trader?

• Quick and easy to set up

• In control of all decisions

• Keep profit

• Own boss

• Quick decisions

1.2 - What are some disadvantages of being a sole trader?

• May not have all the skills required

• Unlimited liability

• Heavy workload

• Finance

• Difficult for time off

1.2 - What does profit mean and how is it calculated?

Difference between revenue and total costs

Revenue - total costs

1.2 - What does unlimited liability mean?

If the business goes bankrupt, the owner has to pay using personal finance and/or possessions

1.2 - What is a partnership?

When two or more people start a business

1.2 - What is a Deed of Partnership?

An agreement that sets out rules for a partnership like:

• profit division

• decision making

• etc

1.2 - What are some advantages of a partnership?

• Workload is shared

• More finance sources

• Skill sharing

• Easier for time off

1.2 - What are some disadvantages of a partnership?

• Disagreements

• Unlimited liability

• Liable for what partners do

• Profit is divided

1.2 - What is a company?

A business which has its own legal identity which allows suing and ownership of products. It is owned by its stakeholders

1.2 - What is a stakeholder?

A person or organisation which owns part of a business (a share)

1.2 - What are some advantages of a company?

• Limited liability

• Better status in the eyes of some customers

• Continues after the death of the founders

• Can have shareholders

1.2 - What are some disadvantages of a company?

• Have to register

• Have to disclose sale information

• Have to have accounts independently checked

• Not in full control if there is other investors

1.2 - What are the types of companies?

1. Private limited company (ltd) - members of public cannot buy shares

2. Public limited company (plc) - members of public can buy shares off the Stock Exchange

1.2 - What is the Stock Exchange?

A market for the buying and selling of shares

1.2 - What is a flotation?

When a private limited company becomes a public limited company

1.2 - What are some advantages of being a private limited company?

• Limited liability

• Higher status

• Company still exists after its founders

• Can employ managers to run it day-to-day

1.2 - What are some disadvantages of being a private limited company?

• Various legal procedures

• Summaries of finance but be produced to be available to the public

• Accounts must be checked by an independent accountant (auditor)

• Must pay corporation tax

1.2 - What are some advantages of a public limited company?

• Advertisement of shares

• Attract more media coverage as they have more stakeholders

• Higher status

1.2 - What are some disadvantages of a public limited company?

• Media coverage could be bad if a mistake is made

• Buyers of shares cant be controlled

• Take overs are more likely

• Legal procedures

1.2 - What is a not for profit organisation?

A business set up to achieve objectives other than profit

e.g. a charity

1.3 - What is an aim?

A general goal of a business

1.3 - What is an objective?

A specific target set for the business to hit

1.3 - What is the purpose of setting objectives?

• Helps with decision making

• Helps understand the businesses direction

• Provides a target

• Motivates people involved

1.3 - What are the roles of objectives?

• Survival

• Profit

• Shareholder value

• Customer satisfaction

• Market share

• Growth

• Being ethical

• Environmental and sustainability targets

1.3 - What is the equation for market share?

Market share = $\frac{sales..from..a..pro.duct}{total..sales}$ x 100

1.3 - What should an effective objective state?

1. What the target is

2. When it must be achieved by

3. Who needs to achieve it

4. How to achieve it

1.3 - What resources can businesses use to achieve objectives?

• Time

• People

• Money

• Equipment

1.3 - What is a private sector organisation?

An organisation owned by individuals

1.3 - What is a public sector organisation?

An organization owned by the government

1.3 - Is profit an objective for private sector organisations?

Yes, most of the time

1.3 - Is profit an objective for public sector organisations?

No, not usually

1.3 - Can a business change objectives?

Yes, business usually have the objective of surviving for the first few months/years then its changes to fit the businesses success so far

1.4 - What are the main stakeholders of a business?

• Employees

• Government

• Suppliers

• Community

• Customers

• Shareholders

1.4 - What are the objectives of different stakeholders?

1.4 - How does a business have an impact on stakeholders?

• Success affects number employed/salary

• Values of owners/managers affects staff treatment

• Local community

• Treatment of suppliers

• Success affects share price/dividends

• Reducing tax affects governments revenue

1.4 - How can stakeholders influence a business?

• Negotiation

• Direct action

• Refusal to co-operate

• Voting

1.5 - Why is business location important?

• Costs

• Sales

• Image

1.5 - What factors influence location?

• Type of business

• Proximity to the market

• Competitors

• Availability of raw materials

• Availability and cost of labour

• Transport links

• Technology

• Costs

1.5 - What are some advantages of locating overseas?

• Cheaper labour

• Access to a wider range of resources

• Financial incentives from foreign governments

• Avoids protectionist measures by foreign governments

• Overseas market may be fast growing

1.5 - What are some disadvantages of locating overseas?

• Different rules/regulations

• Different demands

1.6 - What is a business plan?

A document setting out what a business does and what it hopes to achieve in the future

1.6 - What is the purpose of business planning?

• Help set up a business successfully

• Raise finance

• Set objectives

• Co-ordinate actions

1.6 - What are some disadvantages of business planning?

• Uncertainty

• Lack of experience

• Change

1.6 - How can a business reduce the risk of business planning?

• Research the market

• Talk to experts and consultants

• Plan for a variety of outcomes

• Regularly review and update the plan

1.6 - What are the main sections of a business plan?

• Background information on founders and investors with experience

• Analysis of the market and the firm's expected position within it

• Objectives

• Prices set and expected sales

• How the business will compete with rivals

• Analysis of financial position

1.6 - How is revenue calculated?

Revenue = units sold x price

1.6 - How is profit calculated?

Profit = revenue - total costs

1.6 - How is total cost calculated?

Total cost = fixed cost + variable cost

1.6 - What is fixed cost?

Costs that don't differ when output changes

e.g. rent

1.6 - What is variable cost ?

Costs that are affected when output changes

e.g. packaging

1.7 - What are the methods of expansion?

• Internal growth (organic growth) = selling more of its own products

• External growth (integration) =joining another business

1.7 - How can size of a business be measured?

• Value of sales

• Value of the business

• Number of employees

1.7 - What different ways can internal growth occur?

• Franchising

• Opening new stores

• E-commerce

• Outsourcing

1.7 - What is franchising?

When a franchiser sells the right for another business to use its name/sell its products

1.7 - What are the advantages of selling a franchise?

• Can grow quickly

• Franchisee provides some finance

• Franchisees motivated

1.7 - What are the disadvantages of selling a franchise?

• Lose some control

• Franchisee problems could affect

• Share profits

1.7 - What are the advantages of buying a franchise?

• Established brand

• Access to training and supplies

• Share marketing costs

• Learn from other franchises

1.7 - What are the disadvantages of buying a franchise?

• Sharing profits

• Work within franchiser's guidelines

• Contribute to group marketing

• Bad reputations can be carried

1.7 - What is e-commerce?

The act of buying or selling a product using an electronic system

1.7 - What is outsourcing?

When a business uses another business to produce for it

1.7 - What different ways can external growth occur?

• Merger

• Takeover

1.7 - What is another name for external growth?

Integration

1.7 - What is a merger?

When two or more firms join together and create another joint business

1.7 - What is a takeover/acquisition?

When one firm buys control of another

1.7 - What are the different types of business integration?

• Horizontal

• Vertical

• Conglomerate

1.7 - What is horizontal integration?

When one firm joins another at the same stage of the same production process

1.7 - What is vertical integration?

When one firm joins another at a different stage of the same production process

What is backward vertical integration?

When a firm joins with its suppliers

1.7 - What is forward vertical integration?

When a firm joins with its distributors

1.7 - What is conglomerate integration?

When a firm joins another firm in a different type of production process

1.7 - What are some advantages of business expansion?

• Can lead to economies of scale

• More power market-wise

• Higher status/importance

• Greater rewards for staff

1.7 - What are some disadvantages of business expansion?

• Slower decision making

• Demotivated employees

• Not as efficient to control/coordinate

1.7 - What is economies of scale?

When unit costs fall and sales increase as a business expands

1.7 - What is diseconomies of scale?

When unit costs increase as a business expands

1.7 - What are some disadvantages of expanding abroad?

• Laws and regulations may differ

• Existing businesses may resist new entrants

• Customers buying habits/expectations may differ