Unit 1: Business Activity

Needs

A good or service that is essential for living

Want

A good or service which people would like to have

Why do businesses exist?

• To give employment/jobs

• Make profit

• To satisfy wants and needs

• To allocate resources to people/other businesses

The Economic Problem

There are unlimited wants, but limited resources, which creates scarcity

Scarcity

Limited availability of resources for everyone to use

Factors of Production

Resources used to satisfy

4 Factors of Production

Land, Labour, Capital, Enterprise

Economic Problem Sequence

Factors of production → Limited resources → Economic Problem → Scarcity → Choice is necessary → Opportunity cost

Opportunity cost

The next best alternative given by choosing another item/option, or the option given up

Specialisation

When factors of production are used in the most efficient way or when a business does one specific thing efficiently

Division of Labour

When production process is split up into different tasks and each worker performs one of these tasks

Primary sector

Businesses that extract natural resources from Earth, tends to be the largest sector in developing countries, requires low cost to set up

Primary sector examples

• Mining

• Oil drilling

• Forestry/logging

• Bottled water industry

• Farming

• Fishing

Secondary sector

Businesses that process raw materials into products, takes products of the primary stage to manufacture. Manufacturers usually locate in lower wage locations for simple manufacturing, while complex manufacturing happens in richer economies as more high skilled workers are found there.

Secondary sector examples

• Car manufacturing

• Textile production

• Construction work

Tertiary sector

Businesses that offers services and sells products to the market

Tertiary sector examples

• Hotels

• Supermarket

• Spa

• Convinience stores

• Restaurants

Why are service/tertiary sector businesses so important to modern economies?

• More money + free time = more need for this sector to exist

• Deindustrialisation: when the secondary sector moves away from an area

• It reduces a country's dependence on the primary sector

• Provides stability when in economical crisis

Adding value

Additional features/value on services and products before offering it to customers

Ways to add value

• Extra ingredients/materials

• Packaging

• Delivery services

• Celebrity endorsement

• Branding (adding logo or business related features)

• Highlighting benefits of the product/service

Public sector

Any organisation that is owned and controlled by the government, funded by tax money

Where does tax come from?

• When a person commits an offence

• Owning property

• Income tax from salaries

• Value added tax

• Driving tax

• Capital gains

Capital gains

The increase in a capital asset's value that is realised when the asset is sold

Public sector examples

• Hospitals

• Schools

• Military

• Airports

• Police force

Private sector

Organisations not owned by the government, but private individuals. Funded through sales, loans from banks and owner’s investments

Mixed economies

When countries have a mixture of public and private businesses.

Privatising public sector

When the government sells public sector businesses to private individuals

Why does the government privatise the public sector?

• To generate income for the government when selling

• They don’t want to fund it further

• Reduce inefficiency as private sector tends to be more efficient

Entreprenurs

A person who takes a risk to start their own business

Benefits of being an entrepreneur

• Provide oneself a job

• Full control over your business

• Financial rewards are yours

• Sense of achievement

Risks that entrepreneurs may face

• Business failure, debt/financial loss

• Stronger competitors

• May dedicate too much time/consume their lives

Characteristics of an entrepreneur

• Determined

• Ambitious

• Hard-working

• Risk-taker

• Self-confident

• Expert in the area

• Good communicator

• Innovative/creative

Business plan

A document that lists a business’s ideas and objectives and their strategies to achieve them

What is part of a business plan?

• Description of idea

• Finance: money needed, money source, money purpose

• Target audience

• Manufacturing plan

• Objectives

• Human resources: who does what

• Equipment needed

• Market research

• Price

• Forecast of profits and cash flow

How a business plan assists entrepreneurs

• Secures financial support or attracts investments

• Keeps company’s executive team on track on strategy and targets

• Describes the company’s core beliefs and plans to achieve its goals

• Lets the company think through ideas before investing too much

• Identifies potential obstacles

• Distinguishes company’s goals from competitors

Comparing the size of businesses

To identify a business’ efficiency and profitability

Comparing: Number of employees

Easy to calculate, only need to count who is working under the company

Problem: how do you count full time and part time staff

Comparing: Value of output

Calculates value/revenue of output, common way to compare business in the same industry

Problem: value may not be the same as unsold goods

Comparing: Value of sales

Comparing sizes of retail business selling similar products

Problem: companies may sell very different products

Comparing: Value of capital employed

The total value of capital invested into the business

Problem: companies with many workers could have lower output and capital equipment use

Why does the government help a business

• Business pays tax

• Makes population richer

• Provides jobs for people

• Attracts international business into their country

How can governments assist entrepreneurs?

• Promotes cooperation between researchers and the private sector

• Develops IT tools

• Can grant permits more quickly

• Access to networks: international trade, agencies

• Lowers interest rate plans

• Provides business advisors

• Government grants

Why do businesses want to grow?

• Greater financial income/rewards

• Can benefit from economies of scale

• Sense of achievement

Problems of business growth

• Costs rise rapidly → need cash available before growing

• Managing employees take money and time

• Communication will be difficult when more employees join

• A risk of failure

Why do some businesses remain small

• Poor goods/ services provided

• Poorly managed

• Small market/demand

• Lack of funding

• Lack of interest to grow

Why do some businesses fail?

• Poor business plan

• No/small target market

• Costs are too high

• Inexperience

• No unique selling point

• Stronger competitors

• Lack of funding/capital

Unincorporated business

Cannot be called companies, they do not exist legally and is not an entity that exists separately as its owner

UB: Sole traders

• Managed/ Owned by one person

• Often very small businesses

• Few legal requirements

• Legally inseparable from business (business is the person, vise versa)

• Unlimited liability

Unlimited liability

Owners can lose more than what they have invested e.g paying for lawsuit due to employee injury on the job

Advantages of sole traders

• All profits to yourself

• Full control

• Low legal requirement: easy to set up

• No employees to manage

Disadvantages of sole traders

• Hard to take time off for sick days or holidays

• All the risks are on one person

• Low access to financial resources

• Unlimited liability: responsibility is all on you

Sole trader examples

• Private trainers

• Street roasters

• Small stall holders

• Shoe menders

UB: Partnerships

• Consists of 2-20 people

• People involved contribute to capital and agree to own the business

• Workload and profits are shared

• Legally inseparable from the business

• Still usually small businesses

Deed of partnerships

• How profits are split

• Rights of the business: who owns what if someone leaves

• Roles of each person

• How/who is contributing

Advantages of partnerships

• Workload is shared

• Risk is shared

• Funding has more contribution

• Shared ideas and discussions

• Communicating is quicker between less people

• Legally quick and easy to start

Disadvantages of partnerships

• Disagreements

• Work-load shared may not be equal

• Unlimited liability

• Profit is shared

Incorporated businesses

A legal entity called companies, companies are separable from their owners who are now called shareholders who have limited liability.

Limited liability

Can only lose what shareholders invest

What can companies do?

• Borrow money

• Sell shares to raise capital/money

• Have their own bank accounts and contracts that are not tied to shareholders

• Own assets

• Be sued and sue

• Pay dividends

• Pay tax

Dividends

A portion of profits that go to shareholders

Capital

The money used to build, run, or grow a business

Shareholders

An owner of shares of a company

Share

Ownership in the company, entitling the shareholder to a portion of its profits and often voting rights in company decisions

IB: Private limited companies (LTD)

• Must have a board of directors, who are senior managers

• Can sell shares to friends and family (private business deals)

• Not sold on stock market

• Shareholders have limited liability

• Pay tax on profits

• Must have financial accounts available to the government every year

• Continuity

Continuity

Company continues to exist even when shareholders die

Advantages of a private limited company

• Limited liability

• Sell shares to raise money and can decide who to sell to

• Easier to take loans

• Business continuity

Disadvantages of private limited companies

• Must produce financial documents that takes money and time to make

• Cannot sell shares to public on the stock market, this limits growth

IB: Public limited companies (PLC)

• Shares can be sold to the public

• Can raise capital by selling shares on stock markets

• Must make financial accounts available to the government and public to know how much the company is worth before becoming a shareholder

And everything in a private limited company

Advantages of a public limited company

• Sell shares on stock market to access capital more easily

Disadvantages of a public limited company

• Business with 50%+ shares available are open to competitors taking over your company

• Large administrative task: costs are high

• Competitors can see finance information

Franchises

• A form of marketing arrangement

• Franchises must pay an initial investment → the bigger the company, the larger the investment

• Receive training from the franchiser

• Franchiser finds the best possible site and stops other franchises from opening in that area

• Adverting and sponsorship are given by the franchiser

Advantages of franchises

• Access to advertising otherwise unaffordable

• Helpful for new to industry entrepreneurs

• Reduces risk of failure

• Access to training/support

Disadvantages of franchises

• High initial fee/cost

• Sharing profit with the franchiser (0-20%)

• Reduces owner’s ability to make decisions

Joint ventures

When two or more businesses share resources to start an entirely new business to make a successful organisation

Advantages of joint ventures

• Share resources, lower cost of investment

• Reduces risk of failure

• Gain access to specialist knowledge

Disadvantages of joint ventures

• Potential for disagreements: culture clash, language barriers

• Profits must be shared

Examples of joint ventures

• Disneyland

• Coca cola and nestle

Public corporation

Owned by state or central government. They are nationalised businesses, which were once owned by private individuals and now purchased by the government

Examples of public corporations

• Water supply

• Rail services

Advantages of public corporations

• Some business are essential

• Similar businesses are owned by government

• If business is failing, the government can help

Disadvantages of public corporations

• Profit motivation might be less

• Inefficiency, managers will think the government does all

• Profit goes to the government

Business objectives

A goal a business works towards in order to achieve the over all aim

Why do business objectives exist?

• How to spend resources

• Gives managers a clear understanding of what they should be aiming for

• Lets shareholders know a business’ intention

Survival

For new business and businesses making large losses

Changes when it becomes more successful and financial stable, or fails

Profit maximisation

For businesses that are mature and established with loyal customers

Changes when things go wrong or focus is on growing instead

Growth

Rapidly developing businesses

Ethical objectives

For businesses that helps communities, environment or are doing good things

Public limited company

A business that is legally allowed to sell its shares to the public

Private limited company

A type of business where the company shares are not available to the general public

Stakeholders

A person, a group of people or an organisation who are influenced by a business’ actions

Stakeholder examples

• Banks

• Government

• Customers

• Competitors

• Employees

• Suppliers

• Senior managers

• Shareholders

• Local community

Conflicting objectives

When stakeholders have opposite aims and wishes for how the business operates