Business Term 1

Business

An organisation which produces goods and services.

Need

a good or service essential for living.

Want

a good or service which people would like to have, but which is not essential for living. People's wants are unlimited.

Economic problem

There exist unlimited wants but limited resources to produce the goods and services to satisfy those wants, this creates scarcity.

Consumer

a person who uses goods or services

Consumption

the utilization of economic goods to satisfy needs or in manufacturing

Producer

The individuals, firms, businesses, entrepreneurs, et cetera, provide the needs and wants of consumers.

Production

Using resources to make goods and services.

Scarcity

the lack of sufficient products to fulfil the total wants of the population.

CELL

Capital, Enterprise, Land, & Labor

Factors of production

those resources needed to produce goods or services. There are four factors of production and they are in limited supply.

Land (factor of production)

all of the natural resources provided by nature, including fields, forests, oil, gas, metals and other resources.

Labour (factor of production)

the number of people available to make products.

Capital (factor of production)

the finance, machinery and equipment needed for the manufacture of goods.

Enterprise (factor of production)

the skill, and risk-taking ability of the person who brings the factors of production together to produce a good or service. For example, the owner of a business. These people are called entrepreneurs.
- Know-how skills

Opportunity cost

the next best alternative given up by choosing another item.

Specialisation

when people and businesses concentrate on what they are best at.

Why specialisation is common

•Specialized machinery and technology are widely available
•Increasing competition means businesses have to have low cost
•Higher living standards can result from being specialized

Division of labour

when the production process is split up into different tasks and each worker performs one of these tasks. It is a form of specialisation.

Advantages of division of labour and job specialization

•Workers are trained in one task and specialize in this-Increases efficiency
•Less time is wasted moving from one workbench to another
•Employment increases
•Lower costs
•Increased production

Disadvantages of division of labour and job specialization

•Workers can become bored doing just one job-efficiency might fall
•If a worker is absent no one else can do the job- production might be stopped
•Products become standardized
•Small businesses can't compete

Added value

the difference between the selling price of a product and the cost of bought in materials and components.

How to increase added value

-Increase selling price but keep the costs the same, to do this you need to have a good image of your product
-Reduce cost but keep selling price the same, this might decrease the quality

Consumer goods

Sold to the public—Final products, tangible goods.

Durable consumer goods

can be used over and over again. Example: Television

Non-durable consumer goods

can only be used once. Example: Food

Consumer services

Services used by the public.

Capital goods

Products bought by businesses for usability. Ex: Machinery

Industry or Industrial sector

A group of firms specializing in similar products or using similar production processes.

Primary sector

- First stage of production
- extracts and uses the natural resources of the earth to produce raw materials used by other businesses
- Ex: Oil Extraction, Dairy farming

Secondary sector

- Second stage of production
- manufactures goods using raw materials provided by the primary sector.
- Ex: Products, Oil Refinement

Tertiary sector

- Last stage of production
- provides services to consumers and the other sectors of industry.
- Ex: Hospitals, Schools, Restaurants, Gas Station

De-industrialisation

when there is a decline in the importance of the secondary, manufacturing sector of industry in a country.

Why does de-industrialization happen

-Sources of primary products become depleted
-Most developed countries can't compete in manufacturing against newly industrialized countries
-As the country's total wealth increases and living standards rise, more people spend more money on travel and restaurants than on manufactured products

3 kinds of economy

Less-developed, Rapidly developing, & Developed

Less-developed economy

There are more primary sectors

Rapidly developing economy

There are more secondary sectors

Developed economy

There are more tertiary sectors

Mixed economy

An economy that has both a private sector and a public sector.

Private sector

Businesses not owned by the government. Goods and services are charged and paid for by the customer

Public sector

Government owned and controlled businesses and organisations. Services provided are free and are paid for by taxes.

Privatisation

When governments sell public sector businesses to private sector businesses

Subsidy

- a grant paid by a government to an enterprise that benefits the public
- Scholarship for business

Entrepreneur

a person who organizes operates, and takes risks for a new business venture.

Benefits of being an entrepreneur

-Independence- able to choose how to use time and money
-Able to put ideas into practice
-May become famous and successful if business grows
-May be profitable and the income might be higher than working as an employee for another business
-Able to make use of personal interests and skills

Disadvantages of being an entrepreneur

-Risk-the business might fail
-Capital- have to put own money into business and might have to find other sources of money
-Lack of knowledge and experience in starting and operating a business
-Opportunity cost- lost income from not being employed in another business

Qualities/Characteristics of an entrepreneur

-Hard working- Have to work long hours and have few vacation days
-Risk taker- Making decisions to produce goods or services that people might buy is potentially risky
-Creative- A new business needs new ideas about products , services and ways to attract customers, in order to make it different from other companies
-Optimistic- Looking forward to the future is essential, if you think you will fail you will fail
-Self-confident- Necessary to convince to convince banks, other lenders and customers that your business will be successful
-Innovative- Being able to put new ideas into practice in interesting and different ways is important
- Independent- Will often have to work on their own before they can hire other people, have to be able to be motivated and be able to work by their self
-Effective communicator- Talking clearly and confidently to banks, other lenders, customers and government agencies about the new business will raise the profile of the new business

Why do governments support business startups

-Reduce unemployment- New businesses will often create jobs
-Increase competition- New businesses give customers more choice and compete with already established businesses
-Increase output- The economy benefits from being increased output of goods and products
-Benefit society-Entrepreneurs may create social enterprises
-Can grow further- May help some small firms grow to become very large and important in the future

How do governments help business

-Business idea and help- Governments organize advice and support sessions offered by experienced people
-Finance- Loan money to businesses at small interest rates
-Labour- Gives businesses money to train employees
Research- Encourage universities to make their research facilities available to new businesses

Business plan

a document containing the business objectives and important details about the operations, finance and owners of the new business.

The contents of a business plan

- Aims and objectives.
- Resources.
- Descriptions of goods and services.
- Assessment of potential market for the goods and services.
- How and where production will be organized.
- Financial plan and sources.

How does a business plan help an entrepreneur

-Help them stay on strategy
-Objectives will be clear
- Helps have a good idea about cost and revenue
-Helps with keeping track of what customers they are aiming at
-Helps with hiring people and buying machinery
-Encourages banks to give them loans

Ways to measure business size

-Number of employees
-Value of output
-Value of sales
-Value of capital employed

Number of employees

This method is easy to calculate and compare with other businesses.
Limitations:
-Some firms use productions methods which use very little labour and give a high output, this is true for capital intensive companies which use a lot of machinery.
-Also should 2 part-time employees be considered one employee or two

Value of output

Common way to compare business in the same industry(especially secondary sector)
Limitations:
-A high value of output does not mean that a business is large when using other methods, e.g a business employing very few people might produce very few very expensive products each year might have a higher value of output then a business which produces cheap products but has a large amount of employees
-Also the value of output might be different than value of sales of some products aren't sold

Market Share

Common way to compare the size of retailers, usually selling the similar kind of product
Limitations:
- It could be misleading to use this to measure when comparing the size of businesses who sell different products

Market

consists of all those consumers willing and able to buy no matter where they might be located. There is a market for everything.

Market size

total sales revenue or turnover for a particular product over a given period of time. OR the total amount spent by consumers on that product per week, month, or year.

Market share

the proportion of total sales of a product achieved by one firm.

Value of capital employed

The total capital invested into the business.
Limitations:
-Some companies might employ a very little amount of capital but might have a large number of employees.

Why do owners want their business to grow

-Possibility of higher profit for owner
-Higher status and prestige given to owners and managers, managers of bigger firms are usually paid more
-Lower average cost( Economies of sale)
-Larger market share- this gives the business more influence when dealing with suppliers and distributors

Internal growth

when a business expands its existing operations, e.g creating a new product or expanding to another market(location)

External growth

- when a business takes over or merges with another business.
- more common

Integration

when one firm is integrated into another one.

Merger

when the owners of two businesses agree to join their firms together to make one business.

Takeover or Acquisition

when one business buys out the owners of another business.

Horizontal integration

when one firm merges with or takes over another one in the same industry at the same stage of production.
- Primary sector + Primary sector
- Second sector + Second sector
- Tertiary sector + Tertiary sector

Benefits of horizontal integration

-Internal economies of scale
-Cost savings from rationalisation
-Potential to secure revenue "synergies"
-Wider range of products - (diversification)
-Reduces competition by removing rivals
-Increases market share and pricing power
-Can make the entry barriers higher for new rivals

Criticism to horizontal integration

Very large firms are formed which may be able to dominate their markets, and thus, they may be able to raise prices and reduce competition by creating entry barriers for new firms.

Vertical integration

when one firm merges with or takes over another one in the same industry but at a different stage of production, it can be forward (higher stage of production) or backward (lower stage of production).
- Ex: Secondary + Primary or vice versa

Forward integration

A smaller firm merging with a bigger firm within the same industry
- Ex: Manufacturer -> retailer
- Closer to consumer

Backward integration

A bigger firm merging with a smaller firm within the same industry
- Ex: Producer

Benefits of vertical integration

-Control of the supply chain - this helps to reduce
costs and improve the quality of inputs into the
production process
-Improved access to key raw materials perhaps at
the expense of rival businesses
-Better control over retail distribution channels
-Removing suppliers, information and retailers from competitors which helps to make a market less contestable

Lateral/Conglomerate integration

when one firm merges with or takes over a firm in a completely different industry, this is also known as diversification.

Benefits of conglomerate integration

-Diversification spreading the risk taken by the
business
-Transfer of ideas between the different
sections of the business

Problems of business growth and how to overcome them

- Larger business is harder to control - Operate business in small units
- Poor communication - Operate a business in small units or use the newest IT technology
- Expansion is expensive so business will be short in finance- Expand slowly and ensure sufficient long-term finance is available
- Integrating with a business is hard - Introducing different styles of management requires good communication with the workforce, they need to understand why it is happening

Why do some businesses stay small

- The size of their market is small
- Location.
- Population.
- Consumer income.

- Access to capital is limited
- Small business owners use their own savings.
- Banks will not lend money.
- If banks lend money, there is a high-interest rate.

- New technology has reduced the scale of production needed
- Access to the internet.
Access to computers and modern equipment.

Why some business owners CHOSE to stay small

- Reasonable profit is enough.
- Taxes are lower.
- Less stressful and time-consuming.
- Lack of skills.

Why some businesses fail

- Poor planning and lack of objectives.
- Poor cash management.
- Poor choice of location.
- Poor management.
- Failure to invest in new technologies.
- Poor marketing.
- Lack of finance.
- Competition.
- Economic influence.