business unit 1 exam - introduction to business management

business definition

a decision making organisation that aims to meet the wants and needs of individuals or organisations

what do businesses do?

businesses add value to inputs and are rewarded by gaining revenue or gaining recognition

resource inputs categories of a business

human, physical, financial and enterprise

human resource inputs definition

the right quality and quantity of people required to make the product or provide the service

physical resource inputs definition

the right quality and quantity of materials, machinery and land to make the product or provide the service

financial resource inputs definition

the right quality and quantity of cash and other forms of finance required to make the product or provide the service

enterprise resource inputs definition

the business idea and the will to see the other elements becoming a thriving and functioning business

consumer goods definition

goods sold to customers that can be further split to durable and non durable

capital goods definition with example

the products used in the production process of other goods, not for consumption e.g. wheat to make bread

business functions

human resources, finance, marketing and operations management

what is the role of human resources?

• employ and recruit people

• train employees

• help with employee issues

what is the role of finance?

• records inflows and outflows of money

• manages businesses money

• must comply with legal requirements and inform those interested

what is the role of marketing?

• manages branding and target audience

• does market research

what is the role of operations management?

• determines best methods of production

• control quantity and flow of stock

• quality management

what are the sectors of a business?

primary, secondary, tertiary and quaternary

what happens in the primary sector? with examples

raw materials are acquired e.g. mining, farming, fishing

what happens in the secondary sector? with example

raw materials are processed by manufacturing e.g. making furniture

what happens in the tertiarty sector? with examples

services are provided e.g. transportation, hairdresser

what happens in the quanternary sector? with examples

provides services focuses on knowledge, subgroup of tertiary sector e.g. IT, media services

what are the reasons for starting a business?

• rewards

• necessity

• interest (passion)

• independence

• challenge

• finding a gap

• sharing an idea

what is the process of starting a business?

• organising basics

• research the market

• planning

• establish legal requirements

• raising finance

• testing the market

what are the challenges for a new business?

• finances

• organisation

• structure

• market research

• competition

• business plan

• legal requirements

what is the public sector? with example

government owned, funded or controlled e.g. NS

what is the private sector? with examples

not government owned or controlled e.g. private banks, hotels

how to calculate net profit

net profit = total revenue - total costs

sole trader definition

a business owned and run by one individual, is unincorporated meaning owner is same legal entity as business

what are the characteristics of a sole trader?

• limited finance

• privacy

• flexible working hours

• unlimited liability

advantages of a sole trader

• control over decisions

• flexible working hours

• more personal financial gains

• easy to register

• minimal paperwork

disadvantages of a sole trader

• finance is limited

• unlimited liability (accountable for financial loss)

• higher tax rate

• suffers if owner is ill etc

definition of a partnership

a profit seeking business owned by two to twenty people, does not create a different legal entity

what are the characteristics of a partnership?

• raises money from personal funds

• can raise money from silent partner

• decisions of partners are made jointly

silent partner

individuals who invest in the business but don’t take part in the running

what does a deed of partnership contract include for a partnership?

• amount of finance each partner contributes

• roles and responsibilities

• how profits or losses will be shared

advantages of a partnership

• more stable

• easier to get funding

• safer

• more skills and qualities

disadvantages of a partnership

• unlimited liability

• more complex

• conflict between partners

• less individual profit

purpose of unlimited liability

it exists to prevent businesses (sole traders and partnerships) from making careless decisions when managing

what does it mean if you have limited liabilty?

the only loss a shareholder has is the amount they have invested

company definition

business owned by their shareholders and managed by a board of directors

public limited company with example

a large business with the legal rights to sell shares to the general public and its share price is quoted on the national stock exchange e.g. apple

advantages of a public limited company

• limited liability

• finance is more available

• continuity of company

• possibilities for expansion

• ability to raise capital

private limited company with example

a small business that is owned by shareholders who are often family members, they cannot sell shares to the public e.g. Chanel

advantages of a private limited company

• limited liability

• enhanced status

• no minimum capital

• possibilities for expansion

• continuity

disadvantages of a private limited company

• division of ownership

• limited stock exchange access

• privacy loss

disadvantages of a public limited company

• lots of time and money needed to meet legal requirements

• privacy loss

• owners risk loss of control

social enterprise definition

a business with mainly social objectives that reinvests most of its profits into benefiting society rather than maximising returns to owners

what are the aims of a social enterprise?

• for total revenue to be greater than total costs

• to achieve social objectives

what are the main objectives of social enterprises (the triple bottom line)?

economic - to make profit or surplus to reinvest into business and provide return to the owners

social - to provide jobs or support for local disadvantaged communities

environmental - to protect environment and run sustainably

what are the three types of for profit social enterprises?

private sector companies, public sector companies and cooperatives

private sector companies definition with example, how do they operate?

operate in the private sector, use ethical practices e.g. TOMs shoes

surplus → donated/reinvested → create positive social change

public sector companies definition with example

state owned, earn revenue and provide services not provided by private sector e.g. food banks

cooperatives definition

for profit social enterprises owned by a group of people acting together to meet the common needs and aspirations of their members by operating socially responsibly

advantages of cooperatives

• favourable legal status

• strong community identity

• social benefits

disadvantages of cooperatives

• decision making is complex

• limited finances and financial strength

• slower decision making

what is a type of not for profit social enterprise?

non governmental organisation (NGO)

NGO definition

private organisations that pursue activities to help poverty, protect the environment, provide social services or help community development

operational NGOs definition with example

are established from given objectives or purpose e.g. Unicef

advocacy NGOs definition with example

take a more aggressive approach to promote/defend a cause to raise awareness through direct action e.g. Greenpeace

vision statement definition

a statement of what the organisation would like to achieve or accomplish in the long term

mission statement definition

a declaration of the underlying purpose of an organisations existence and its core values

→ an intermediate step on the way to the vision which provides a sense of direction

common business objectives

• profit

• growth

• protecting shareholder value

• ethical objectives

what are the 3 common business objectives?

strategic, tactical and operational objectives

strategic objectives definition with examples

medium to long term objective set by the senior managers to achieve aims e.g. profit max, growth, market standing, image and reputation

tactical objectives definition with examples

medium to short term objectives set by middle managers to achieve strategic objectives e.g. survival, sales

operational objectives definition

day to day objectives set by floor managers

what are internal reasons for objective changes?

• leadership change

• finances e.g. overseas growth

• HR actions taken by unions

• corporate culture

• type and size of organisation change e.g. legal structure

what are external reasons for objective changes?

• state of the economy

• government constraints

• new technology

• ethical changes

• social changes e.g. demographic change

• culture change

• participation of women

what is the SWOT analysis?

a form of strategic analysis that identifies and analyses the main internal strength and weaknesses and the external opportunities and threats that will influence the future direction and success of a business

advantages of using SWOT analysis

• simple an quick

• wide range of applications

• determines organisations position in the market

• encourages foresight and proactive thinking

Ansoff matrix definition

a marketing planning tool used to help an organisation select its market and product growth strategy

four strategy quadrants of the Ansoff matrix

market penetration, market development, product development and diversification

what is market penetration, what can it lead to?

where an organisation focuses on selling existing products into existing markets

• this enables an organisation to increase its market share and potentially grow organically to achieve a monopoly

• leads to increased economies of scale and brand loyalty

what is market development? what is the difference of it from market penetration?

where an organisation focuses on selling their existing products in new markets

e.g. new geographical markets or new distribution channels

• it is more risky than market penetration as it involves expenditure in ensuring that you meet the needs of the new market that you are entering

product development definition with example

where an organisation focuses on selling a new product in an existing market

e.g. the investment in research and development to improve the features of the product or service

diversification definition, what are its downside and upside?

where an organisation focuses on developing a new product and selling it in a new market

• most risky but potentially rewarding strategy

• expensive and requires extensive market research

what is corporate social responsibility?

the idea that corporations should do positive good for society, socially responsible businesses are those that act morally towards their stakeholders

what do firms need to do to meet their corporate social responsibilities?

• provide accurate information and labelling

• follow fair employment practices

• have consideration for the environment

• do active community work

stakeholder definition

someone who is effected by the performance of an organisation

external stakeholder definition

individuals or groups that are outside the business, those who own shares but are not involved in daily running

internal stakeholders definition with examples, who are they?

individuals or groups that work within the business e.g. directors, employees that hold shares

interests of internal stakeholders

• shareholders → return on their investment

• CEO/owners → making a profit

• employees → income and working conditions

• managers → meeting objectives

interests of external stakeholders

• government → improve standard of living

• suppliers → maintaining stable relationship

• local community → tax and employment

• financiers → return on their investment

• pressure groups → impact on areas of concern

• media → impact on news stories

advantages of being a big business

• survival

• economies of scale

• higher status (market leader)

• large market share

• can determine prices and decide industry standards

advantages of being a small business

• greater focus

• competitive advantages (less competition)

• flexible and personalised service

• greater cachet (indication of approval)

internal organic growth

and external growth

internal organic growth

growth that occurs out of existing operations of the business

• occurs slowly

• is low risk

• most growth is self financed using retained profit

external growth

business expands by entering into some type of arrangement to work with another business

• a quick but riskier method

• businesses can increase market share and decrease competition quickly

external growth definition

a quick but riskier method, businesses can increase market share and decrease competition quickly

what are the sources of external growth?

• mergers and acquisitions

• takeovers

• joint ventures

• strategic alliances

• franchises

mergers and acquisitions

with advantages and disadvantages

occurs when two businesses become integrated, either by joining together and forming a bigger combined business (merger) or by one business taking over another (acquisition)

advantages

• economies of scale

• control up and down the chain of production

disadvantages

• can be costly

• culture clash may occur

takeover

when one company acquires a majority or all of the shares of another company

→ it is often involuntary

joint venture

with advantages and disadvantages

when two businesses combine resources for a specific goal over a finite period of time

advantages

• greater sales

• allows for more expertise

disadvantages

• can cause conflict

• may be unsuccessful

strategic alliances

with advantages and disadvantages

when two or more businesses collaborate in some legal way to meet a specific goal

→ no new organisation is created unlike joint venture

advantages

• more flexible

• businesses remain independent

disadvantages

• lack of stability

• coordination is challenging

franchising

with advantages and disadvantages

method of distributing products or services where the franchisor sells the right to use their brand and products/services to franchisees in return for a percentage of profit

advantages

• rapid form of growth

• allows for international expansion

disadvantages

• unlimited liability

• less control for franchisor

costs calculation

costs = fixed costs + variable costs

what are fixed costs? with example

if their is no output, you still have to pay it e.g. rent

what are variable costs? with example

paid only when there is output e.g. electricity

average total costs calculation

average total costs = total costs/quantity

economies of scale definition

when a firm faces a reduction in average cost as it increases its size

diseconomies of scale definition

when a firm faces an increase in average cost as it increases its size

external economies of scale

with examples

efficiencies that the business achieves because someone else has expanded

examples:

• the development of research facilities in local universities that businesses in an area can benefit from

• the spending by a local authority on improving the transport network in an area

internal economies of scale

with examples

efficiencies that the business itself can make

examples:

• technical

• marketing → more effective marketing campaigns

• managerial

• purchasing

• financial

• risk bearing → produce a larger range of products

internal diseconomies of scale

with examples

inefficiencies that the business itself can make

examples

• technical

• managerial

• financial → poor investments

• marketing

• purchasing → buying too much stock

• risk bearing