Understanding Business

Quizlet

Primary sector

Consists of businesses that are involved in the extraction and exploitation of natural resources

Secondary sector

Consists of businesses that are involved in manufacturing and construction, by taking the natural resources provided by the primary sector and turning them into goods to be sold later

Tertiary sector

Consists of businesses and organisations that are involved in providing services rather than goods

Quaternary sector

Consists of businesses providing information and knowledge-based support services, such as ICT, consultancy and research and development services

Private sector

- Consists of businesses that aim primarily to maximise profits and that are owned by private individuals
- Includes all profit-making businesses from small local businesses to multinational companies

Public sector

Consists of government-owned organisations and agencies which aim to provide a service to society

Third sector

- Consists of organisations that have been set up to provide goods or services to benefit others
- Includes charities, voluntary organisations, social enterprises and democratic enterprises

Private limited companies

- Owned by shareholders, who have one or more shares in the business
- Shareholders have limited liability
- Shares are sold privately to investors whom the business knows
- Aim to maximise profits, grow and increase market share
- Controlled by a Board of Directors who are managed by a managing director
- Have to produce documents called the Memorandum of Association and Articles of Association

Limited liability

The owners' personal possessions are not at risk if the business gets into debt, as they only lose their investment in the company

Advantages of a private limited company

- Shareholders have limited liability
- Capital can be raised by selling shares
- They do not have to disclose most of the information that public limited companies have to provide
- Ownership is not lost to outsiders as all shareholders are known

Disadvantages of a private limited company

- Profits have to be split with shareholders by issuing dividends
- Legal process required to set up the company
- Shares cannot be sold publicly on the Stock Exchange, so there is a limited source of capital available
- Financial accounts can't be kept private as they must be shared with the Companies House and are therefore made publicly available
- Larger companies are more difficult to manage effectively

Public limited companies

- Owned by shareholder who have limited liability
- Must have a minimum of £50,000 share capital (usually a large company)
- Controlled by a Board of Directors
- Can sell their shares publicly through the stock market
- They aim to dominate the market, increase market share and market value

Advantages of public limited companies

- Shareholders have limited liability
- Large amounts of finance can easily be raised through the public sale of shares
- Banks are very willing to lend PLCs money due to their size and reputation, as they are seen as less risky
- Organisation has financial stability, enabling it to develop and expand

Disadvantages of public limited companies

- Dividends are shared with many shareholders
- Control of the business can be lost as anyone can buy shares on the stock market
- Annual accounts have to be published
- Setting up a PLC is costly and complicated
- Employees can feel alienated from those at the top
- They can grow so large that they cannot be managed effectively
- Decision making can be slow due to its size

Franchise

A business run by one firm under the name another

Franchiser

- Original business that gives franchisees licenses to sell goods or services under their brand name
- Aims to grow, increase market share and maximise profits

Franchisee

Owner of each individual branch of the franchise

Examples of franchises

* McDonald's
* Subway
* Papa John's
* KFC
* Burger King

Advantages for the franchiser

- Low risk form of growth as the franchisee invests the majority of the capital
- Receives a percentage of all franchisee's profits each year
- Risk is shared between the franchiser and franchisee

Disadvantages for the franchiser

- Reputation of the whole franchise can be tarnished by one poor franchise
- Reliant on the franchisee to make it a success
- Only a share of profits is received rather than all profits

Advantages for the franchisee

- The franchise is a well-known business with an existing customer base, so the risk of business failure is reduced
- Industry knowledge, administration and training is provided by the franchiser
- National advertising is carried out by the franchiser

Disadvantages for the franchisee

- Very little autonomy over decisions as the franchiser decides on products, store layout, uniforms etc
- Royalties have to be paid each year, so not all of the profits can be kept
- High initial start-up fees
- The franchiser can decided not to renew the franchise

Multinational

A business (usually a limited company) that has operations in more than one country, with a head office based in their home country

Advantages of multinationals

- Wages and raw material costs are often lower in the foreign countries they operate in
- Can avoid legislation in their home country
- They can take advantage of grants issued by governments to locate in their countries
- They can avoid certain quotas and tariffs issued by their own governments

Quotas

Limits on the number of imports and exports

Tariffs

Taxes on imports and exports

Disadvantages of multinationals

- Language barriers can slow down communication
- Cultural differences can affect production (e.g. siestas in Spain)
- Exchange rates can affect purchasing and paying expenses in different countries
- Time differences can hinder communication between head office and branches located elsewhere in the world

Central government organisations

- Usually national services that would be difficult to rely on the private sector to provide
- Examples include defence provided by the armed forces, healthcare provided by the NHS and transport infrastructure through the road network
- Paid for through taxation
- Control of policy surrounding the organisations is held by elected politicians
- Individual departments are controlled by civil servants
- Aim to provide a quality service

Nationalised companies

- Private sector businesses that have been bought in part or in full by the government
- e.g. the UK Government bought shares in the Royal Bank of Scotland during the recession to stop it going bust

Privatised companies

- Public sector organisations sold to the private sector
- e.g. the Royal Mail was floated on the stock market in 2013

Local government organisations

- Used to provide essential services to the public, such as schools, refuse collection and street lighting, free of charge
- Decision making surrounding these organisations is carried out by elected councillors, whilst the day-to-day running of the organisations involves managers and council employees
- Financed by taxation collected by central government, local council tax and local business rates
- Aim to provide a quality service, stick to their budget and not overspend

Charities

- Set up to raise money to benefit others
- Raise finance through donations, sponsorship, fundraising events and trading arms (e.g. a retail outlet such as an Oxfam shop)
- Any profits they make from trading arms are given to their cause rather than kept by the owners
- Not owned by one individual
- Set up by a trust, which is controlled by a board of trustees
- Outlets and departments of the charity are often run by paid managers who are assisted by volunteers
- Can have a variety of aims related to their cause (e.g. the SSPCA aims to improve animal welfare in Scotland)

Advantages of charities

- Exempt from paying some taxes, such as VAT anf corporation tax
- Low wage costs as volunteers work for free
- Private companies are often willing to donate and sponsor charities for good PR

Disadvantages of charities

- It can be difficult for them to compete with the large marketing budgets of private sector organisations
- They rely heavily on volunteers who may leave for paid work elsewhere

Voluntary organisations

- Aim to provide a service for their members and the local community
- Examples include local sports clubs (e.g. golf clubs or youth football teams)
- Finance is raised through membership subscriptions and fees
- Controlled and run by an elected committee and helped by volunteers

Social enterprises

- Organisations that aim to make a profit to benefit a specific group or cause
- e.g. The Big Issue aims to help the homeless in the UK
- They operate like private sector businesses as they can be owned by a sole trader, partners or shareholders, can be controlled by directors or managers and finance can come from capital investment or bank loans
- However, they use their profits to benefit a social, environmental or cultural cause and not solely the business' owners

Advantages of a social enterprise

- Social aims can endear a social enterprise to customers
- Good quality employees who believe in the social 'mission' are attracted to the business
- They are likely to receive government grants due to their positive impact on society
- 'Asset lock' means that if the enterprise closes down, the sale of any assets and any profits remaining will be used to benefit the cause

Democratic enterprises

- Aim to generate profit, not necessarily maximise profit
- Decision making and profits are shared among members democratically
- Popular with governments trying to encourage enterprise and increase wealth in the economy, but which also want their citizens to share in this prosperity

Co-operatives

- A type of democratic enterprise
- Aims to provide a quality service for the benefit of its members and customers
- Invite their customers and employees to become members, who then share ownership, decision-making and profits
- In this way, customers can influence the business they use and employees can have a say in how their organisation is run
- Subscribe to an internationally agreed set of values and principles which give them their ethical business approach and distinguish them from social enterprises
- Some well-known co-operatives in the UK are The Co-operative Group and Nationwide Building Society

Business activity

Providing goods and services to satisfy consumers' needs and wants

Needs

Items essential for survival (e.g. food, clothing and shelter)

Wants

Luxury items that are not essential for survival (e.g. holidays, mobile phones and cars)

Goods

Tangible items that we get ownership of when we purchase them

Services

Intangible things that are done for us (e.g. banking, health, getting a haircut)

Land

The natural resources used to make a good or service (e.g. oil, water, land)

Labour

The human resource used to produce the good or service

Capital

Man-made resources used to make the good or service that money has been invested into (e.g. machinery, equipment, tools and factories)

Organisations

Groups of people who combine their efforts and use their resources for a particular purpose

Business organisations

Organisations whose purpose is to satisfy consumers' wants by producing goods and services

Share

One of the equal parts into which a business' capital is divided, entitling the holder to a proportion of the profits

Stock exchange

A market where shares are bought and sold

Dividend

A share of a business' profits paid regularly to its shareholders

Subsidiary

A branch of a multi-national corporation in a different country

Market share

The percentage of total sales in a market captured by a business

Economies of scale

Savings in costs gained by an increased level of production

Objective

Something an organisation sets out to achieve

Maximising profits

- To make as much profit as possible
- Private sector aim
- Keeps shareholders satisfied, ensuring future investment
- Generates money for future growth

Survival

- Private and third sector aim
- To avoid going out of business and having to cease trading
- Allows a business to respond to changes in the market, such as recession

Satisficing

- To aim for a satisfactory result rather than for the best possible outcome
- Short term objective set at times of uncertainty, such as economic changes, or when new legislation is introduced

Providing a quality service

- Private, public and third sector aim
- Encourages customers to return and gives and gives the business a good reputation that will attract new customers (private)
- Satisfies the needs of the community and improves the standards of living in the area (public)
- Helps the organisation to better aid the individuals or groups they aim to help (third)

Increasing market share

- To increase the percentage of total sales in a market a business has
- Private sector aim
- Allows the firm to weaken competition
- Takes a firm closer to becoming market leader

Managerial objectives

- When managers pursue their own objectives to improve their status in the business
- Motivates them, helping the business to operate more efficiently
- Examples include to expand into new markets or to develop new technologies

Sales maximisation

- To make as many sales as possible
- Private sector aim
- Allows the business to increase their market share
- Also helps them to get rid of unwanted stock
- Could be achieved by dropping product prices

Corporate Social Responsibility (CSR)

- When an organisation aims to act in an ethical or responsible way
- Can be achieved through philanthropy and by being ethically and environmentally responsible
- Gives the business a good reputation
- Allows them to win customers from less ethical competitors
- Can help them to attract high quality staff who believe in their mission

Growth

- To make the business larger
- Private and third sector aim
- Reduces the risk of the business failing
- Reduces the risk of a takeover
- Brand becomes more well known
- Allows the business to benefit from economies of scale

Customer satisfaction

- To provide a service in the best possible way to meet the needs of customers
- Private sector aim
- Keeps customers happy, generating repeat business, customer loyalty and increased sales and profits

Third sector objectives

- To provide a quality service
- To raise awareness of a cause
- To raise funds for a cause
- To maximise donations
- To recruit more volunteers
- To grow
- To survive

Public sector objectives

- To provide a quality service
- To provide an efficient service
- To stick to a budget
- To raise revenue

Internal/Organic growth

- Businesses decide to grow on their own without getting involved with other organisations
- Increases market share without losing control of the business to outsiders

Methods of internal/organic growth

- Launching new products or services allows the business to meet the needs of different market segments, especially if they diversify
- Opening new branches allows the business to reach new markets by opening up in new locations
- Introducing e-commerce allows the business to trade 24/7 to a global market
- Hiring more staff improves the business' ability to make sales, decisions and develop more products
- Increasing production capacity allows the business to make more products themselves

Integration

- Two businesses become one
- Can occur through a takeover or a merger

Takeovers/Acquisitions

- When a larger business buys another smaller business
- Can often be hostile and comes as a result of the smaller business struggling financially and the larger business exploiting this
- Examples are when the Spanish bank Santander took over Abbey National and when Google bought YouTube

Advantages of takeovers

- The buying business gains the market share and resources of the taken-over business
- Risk of failure can be spread better over the bigger business
- Economies of scale can be achieved as the business grows
- Competition is reduced, increasing sales for the business

Disadvantages of takeovers

- Can lead to job losses in the taken-over business, leading to bad publicity
- If the buying business moves the headquarters or production to its area, this can have a negative effect on the taken-over business' local economy
- Less competition means that the business can employ higher prices and customers get a bad deal
- A change of name can put off loyal customers of the taken-over business
- Can be expensive to acquire another business

Merger

- Two businesses agree to join forces and become one organisation
- Friendlier than a takeover
- Results in a new name and logo for the new, merged organisation
- Examples are when Disney merged with Pixar and when insurance companies Norwich Union and CGU merged to become Aviva

Advantages of mergers

- Market share and resources are shared, which can spread the risk of failure and increase profits
- Economies of scale can be achieved
- Each business can bring different areas of expertise to the newly merged organisation
- Jobs are more likely to be spared in both businesses
- Can make it easier for a business to enter a market with strong competition

Disadvantages of mergers

- Customers may dislike the change as the familiarity of the previous businesses are lost
- Marketing campaigns designed to inform customers about the change can be expensive
- Can be bad for customers as less competition means higher prices

Horizontal integration

- Occurs when two businesses from the same sector of industry become one business
- Could be through a takeover or merger

Advantages of horizontal integration

- The new larger business can easily dominate the market as competition has been reduced
- Business can benefit from economies of scale
- Due to the reduced competition, the new business can raise prices, increasing profits

Disadvantages of horizontal integration

- The merger or takeover could breach EU competition laws
- Quality may suffer due to a lack of competition, leading to angry customers
- Customers have to pay higher prices for the same goods

Vertical integration

When two businesses from different sectors of industry become one business

Forward vertical integration

- A business takes over or merges with a business in a later sector of industry, often a distributor or customer
- An example would be if a mobile phone manufacturer took over a mobile phone shop, such as Carphone Warehouse

Backward vertical integration

- A business takes over or merges with a business in an earlier sector of industry, such as a supplier
- An example would be a coffee company, such as Starbucks, taking over a coffee bean plantation

Advantages of forward vertical integration

- The business can control supply of their products and could decide to not supply to competition
- Can increase profits by cutting out the middle man

Advantages of backward vertical integration

- Guaranteed and timely supply of stock
- No need to pay a supplier marked up prices, therefore stock is cheaper
- Quality can be strictly controlled

Disadvantages of forward and backward vertical integration

- Company may be incapable of managing new activities efficiently, meaning that costs could become higher
- Focusing on new activities can negatively affect core activities
- Monopolising markets can have legal repercussions

Conglomerate integration/Diversifying

- Occurs when two businesses in different markets join together through a takeover or merger
- An example of this is Proctor & Gamble (P&G), who took over Gillette to enter the male grooming market

Advantages of conglomerate integration

- Can spread risk, as if one market fails, the losses can be compensated for by profits in another
- Can overcome seasonal fluctuations in their markets and have more consistent year-round sales (e.g. if a mince pie company took over a company that made chocolate bars)
- The business is larger and therefore more financially secure
- The buyer acquires the other company's assets and resources
- The business gains the customers and sales of the acquired business

Disadvantages of conglomerate integration

- One business may take on another in a market they know nothing about, causing the new business to fail
- Having too many products in different markets can cause the business to lose focus on core activities
- The business may become too larger and inefficient to manage

Outsourcing

- Also known as contracting out
- When an organisation arranges for another organisation to carry out certain activities for them, instead of doing it themselves

Advantages of outsourcing

- Allows the business to concentrate on doing what they are good at, rather than getting bogged down with additional services
- Less labour and equipment is required for outsourced activities
- High-quality work is produced from the outsourced business as it should have greater expertise and specialist equipment
- Outsourced business may be able to provide the service cheaper than an in-house department as they do the same work for many businesses and can benefit from economies of scale
- The business only needs to use the service when required, saving costs on idle staff and machinery

Disadvantages of outsourcing

- Less control over outsourced work, therefore quality may fall
- Communication has to be clear to ensure exact specifications are met
- Sensitive information may have to be shared with the outsourced business, which could fall into the hands of competitors
- Outsourcing could be more expensive than in house as specialists and expertise come at a high price

De-merger

- Occurs when a single business splits into two or more separate components
- The de-merged components are still owned by the same organisation as before, but they are managed independently of each other
- An example is when Lloyds TSB split into two separate banks - Lloyds Bank and TSB - after the EU judged that more competition had to be created in the UK banking industry

Advantages of a de-merger

- Each new component can concentrate on its own core activities, leading to growth
- Each new component has the best chance to operate efficiently
- The components can be divested to meet competition regulations set by the EU, as well as generating money for the business

Disadvantages of a de-merger

- Customers may be put off by the de-merger and abandon the business
- Significant financial costs are involved, such as rebranding

Divestment

- Selling off part of an organisation, such as a subsidiary company or one of the company 's brands
- An organisation may do this to concentrate on more profitable areas of the business, to focus on a specific target market or simply to cash in on selling part of the business
- Examples of divestment are when Lloyds Banking Group divested TSB after Lloyds TSB had de-merged and when P&G divested Pringles and sold it to Kellogg's

Asset stripping

- Taking over another company with the intent to sell of its assets for a profit
- This could lead to a business selling a company's factories, retail spaces or fleet of vehicles as they may be more valuable than the organisation as a
whole
- Can cause the buyers to gain a bad a reputation as it can occur after a hostile takeover and can result in job losses as areas of the business are sold or closed down

Hierarchy

- Positions within the organisation with different levels of authority and responsibility
- Those with the least authority and responsibility are at the bottom of the organisation and those that have the most are at the top

Chain of command

Commands flow down from decision-makers at the top of the organisation to the worker at the bottom

Tall structure

- Has many levels of management
- Suits large organisations with many specialised departments
- Narrow span of control
- Commands flow from top to bottom