3.1 - Business in the Real World

Good

A physical tangible product (pen, water bottle)

Service

An intangible product which still provides a benefit for the user (hair dresser, baby sitting)

Need

Something essential for human survival (air, water, food)

Want

Something you desire but don’t require (holiday, car)

Opportunity cost

The loss of the next best alternative when making a decision. E.g. the opportunity cost of cramming for an exam is the loss of a good night’s sleep.

Customer

Someone who buys a product from a business

Consumer

Someone who uses a product made by a business

What are the factors of production?

Capital - money to buy machinery and raw materials

Enterprise - the idea/skills required to set up a business

Land - place to conduct business from

Labour - the employees required to do the work

Sectors of industry

Primary sector - extraction of raw materials or natural resources from land. Secondary sector - manufacturing of goods made from the raw materials in the primary sector. Tertiary sector - providing a service to the customer.

Entrepreneur

A person who takes a risk and starts their own business using their business idea.

Characteristics of entrepreneurs

Imagination Determinations Ability to spot an opportunity Calculated risk taker Reliable Communicative Decisive Creative Organised Hard working

Reasons for starting a business

Be your own boss and make your own decisions Keep all the profit Unhappy in current job Want to pursue an interest/hobby Spotted a business opportunity

Main sources of business ideas

Experience from previous job Pursuit of hobby Invention (inventing a new product Innovation (adding value to an existing product) Market research

Adding Value

The worth of the final product is more than the value of the products used to make it.

Two ways to add value

Production process - use raw materials and put them through a process to create a new usable product Marketing process - establish a brand identity with a slogan, logo and advertising.

Market mapping

A research method where you choose 2 sets of opposing variables e.g. young/old and cheap/expensive and place existing brands on a cross depending on where they fall in either of the 2 categories. This reveals a gap where specific people aren’t being served well.

Market niche

A small segment of a much larger market with clear different needs to the rest of the market which are not being met well.

4 key functional areas of business

Marketing HR Finance Operations

Effects on business environment

Technological change Economic change Legal change Environmental expectations

Sole trader

A person who owns a business by themselves without the use of company structure or partners. They have full responsibility for the business.

Unlimited Liability

When the owner of a business has full responsibility for it. If the business gets in debt, the sole trader is responsible for these debts and can loose personal possessions such as their car/house in order to pay them.

Main advantages of being a ST

Get to keep ALL of the profits Be your own boss

Main disadvantages of being a ST

Unlimited liability No support with business decision-making Business failure due to weakness

Partnership

A form of business ownership where between 2-20 people own a business together.

Ordinary partnerships

Each partner plays an active role in the business and is entitled to a share of the profits but is responsible for their share should any debts be made.

Limited partnerships

These have sleeping partners who contribute capital but play no active role in the business so are not responsible for any debts made.

Deed of partnership

A document that outlines the details of the partnership which is not a legal requirement but can help to solve and prevent disputes in the future.

Main advantages of a partnership

Easier to raise finance as all partners can contribute and additional partners can join. Specialisation can occur because partners can complement each other with specific skills \= success.

Company

A business which has it’s own legal identity separate from that of its owners. These are owned by investors who are called shareholders.

Limited Liability

The owners of a business can only lose the value of their investment and are not personally responsible for any debts so they can’t lose personal belongings. The business would have to pay up or go bust.

Share

Part ownership of a limited company which gives you voting rights and an entitlement to a share of the profits.

Dividends

A share of the profits given to shareholders base on their percentage of the share.

Shareholder

Someone who owns the shares i.e. the owners of limited companies

2 reasons for being a shareholder

Receive dividend payments Hope that the share prices increase over time so that the value of their shares over time.

How can shares be used to raise finance?

A company can create and issue new shares to sell to raise finance for growth without needing a bank loan with expensive interest payments.

Negative of issuing and selling new shares

Dilutes level of ownership so level of control is diluted. No finance is raised for the company when shares are being transferred between shareholders.

LTD

Private limited company which can sell shares but not via the stock market only to fam + friends. These companies have limited liability but directors must agree to sell the shares.

Main advantages of being an LTD

Limited liability Keeps control of the business Can issue and sell new shares to raise finance

Main disadvantages of being an LTD

May be difficult to issue and share new shares as you can’t sell on the stock market and the existing shareholders have to agree, Have to create and maintain accounts which need to be checked by an independent accountant.

Who controls LTDs?

The board of directors run the company but the shareholders own it (directors re usually major shareholders and play an active role in the business.)

PLC

Public Limited Company which has shares that are sold to the public via the stock market. A minimum share capital of £50,000 is needed for a company to be a PLC.

The difference between ownership and control

Sole traders and partners are owners and also play an active role in the business. In LTDs, the shareholders are directors and often work in the business day to day. However in larger PLCs, the owners (shareholders) usually play no active role in the business and the people that run on it (employees and managers) are often not shareholders.

Main advantages of a PLC

Can advertise and sell new shares on the stock market where the board of directors don’t have to decide so it’s easier to raise finance.

Main disadvantages of a PLC

Lack of control over who buys shares which could lead to unwanted takeovers and chance of conflict if existing shareholders don’t agree.

Non-profit business

A business whose main aim is not to make a profit like most private sector businesses.

Social enterprise

A business set up for a specific purpose or cause, they may or may not make it a profit but if they do it all goes towards the purpose/cause.

Charities

Rely on donations which raise money for their clothes (money/clothes)

Aim

A long term goal of the business - a statement of purpose about where they want to be in the future.

Objective

Short tern specific targets which makes aims measurable.

SMART

Specific - very clear of what you’re trying to achieve Measurable - quantifiable to measure success Achievable - challenging but not impossible Relevant - link to the business aim Time limited - a clear deadline of when

Purpose of setting objectives

A motivational tool which gives you something to work toward. To judge success and compare actual results to plans Helps with decision making and establishing priorities Help investors understand where the business aims to be heading.

What are the 6 objectives for a start up

Survival Profit maximisation Shareholder value Customer satisfaction Growth Market share

Market share calculation

Sales of firm/total sales of market x 100

Social objectives

Doing business the right way by paying people the correct wage, playing suppliers Fairtrade prices and being honest with customers.

Benefits of ethical behaviour

Fair pay \= lower labour turnover and increased loyalty Loyalty + flexibility from suppliers Customers are happier which can increase sales, revenue and market share Good media coverage and PR Customers pay more \= higher profit margin

Negatives of ethical behaviour

Increased costs which reduces profit Low cost can be great competition - customers don’t want to pay for organic/sustainable due to high prices.

Environmental objectives

Being sustainable and considering the environment when making business decisions so they don’t damage the environment and natural resources aren’t depleted.

Stakeholder

An individual/group who can either affect or be affected by the actions of a business.

Stakeholders in a typical business

Customers Suppliers Directors/shareholders Competitors Managers/employees Local community

If a business if successful how can it affect employees

Job security Promotions/pay rises

If a business if unsuccessful how can it affect employees

No job security (potential redundancy) No pay rise (potential pay cuts) Demotivation

4 ways stakeholders can affect a business

Negotiation - employees ask for more pay Direct Action - Employee strikes, customer boycotting Refusal to co-operate - local council refuses planning permission Voting - owners outvoting partners

Key aim with business location…

maximise revenue but minimise unnecessary costs

Name 5 location factors

Proximity to target market Cost of land Proximity to suppliers Location of competitors Room for future expansion

Qualitive factors + examples

Factors that refer to other things not associated with revenue/cost E.g. Effect on employee morale Personal ties to an area

3 most important location factors for smaller businesses

Visibility if customer facing Away from competitors Close to target market

3 most important location factors for larger businesses

Cost of land + expansion Availability and cost of labour Access and cost of suppliers

Globalisation

Increasing trend for goods to be trade internationally and for companies to locate abroad to become multi-national businesses.

Off-shoring

Involves another company making parts of products in other countries for you. Services can also be off-shored.

3 advantages of setting up abroad

Cost of labour, raw materials, land and rent is less New access to market base which would be struggling in the home market Access to resources which saves transport costs

3 disadvantages of setting up abroad

Bad publicity Different cultures and markets \= increased cost for tailoring to local taste Loss of quality of products

Business plan

A document that sets out what a business does and what it

hopes to achieve in the future

Give 3 main advantages of business plans.

Helps attract investment

.e.g. bank loan as it helps persuade them that you know what you're doing, acts as

a guide to follow to keep you on track, particularly if you lack business experience

and helps set objectives to judge success when looking back

Give 4 disadvantages of business plans.

Opportunity cost is it is time consuming, often is overly optimistic, not always useful as estimates may be inaccurate

and inflexible plans are unable to cope with change

Give 4 ways to reduce risk when business planning.

Create a best and

worse case scenario (for flexibility), use experts if you lack the skill, research the

market thoroughly to get accurate data and regularly review and update the plan

so it remains relevant.

Variable cost

a cost that rises or falls depending on how much is produced

Fixed cost

a cost that does not change as output is increased or decreased

total cost formula

fixed costs plus variable costs

profit formula

total revenue - total cost

revenue formula

selling price x quantity sold

Executive summary

Introduction to your business plan which tells the reader who you are, what the markets problem is, how you will solve it and how much capital you will need

Marketing plan

You explain how you will communicate with your customers

so they are aware of your product and how they can buy it

Organisational plan

This explains who will be in the business, how they will

be managed and organised. CV's should be provided for all key managers

Operational plan

This is how the product/service will be produced and delivered. It may include supplier information

The market

You focus on what is happening to the market and include a brief analysis of competitors. Results of market research and a description of potential customers are also needed

Internal growth (organic growth)

When a company grows by expanding its own activities

External growth (inorganic growth)

when a business grows by collaborating with, buying or merging with another firm

Name the three types of external growth.

Vertical forward integration, vertical backward integration and conglomerate integration

Franchising

When a business sells the right to another business to use its name and sell its products

Franchisor

The existing business that sells franchises in return for a license fee and share of the profits (royalty payments)