Business - 3.1

why do businesses exist

1. to provide goods (physical product) and services (intangible item) to their customers

2. meet the customers’ expectations of quality and price

3. satisfy our needs (e.g. water, food etc.) and wants (e.g. TV, internet, beauty products)

small businesses

employ less than 50 employees

micro businesses

employ less than 10 employees

entrepreneur

someone who sets up their own business venture after identifying a gap in the market for a good or service

• take a risk (often financial)

• determined, enthusiastic, calculated risk taker etc.

transformation process

a means by which a business adds value to the product or service they are supplying

adding value

the difference between the price of the finished product/service and the cost of the inputs involved in making it

ways of achieving added value

1. customer service - may be prepared to pay a higher price if receive excellent personal service

2. branding

3. offering convenience - may pay premium if they don’t have to wait e.g. guaranteed next day delivery

4. product features

advantages of adding value

allows businesses to charge a higher price for their product or service (increased profits) and helps differentiate the product/service

BSB business

businesses that supply products or services to other businesses (may advertise using trade fairs and trade magazines)

B2C business

businesses that supply their products and services to the final consumer e.g. packaging and image more important

local markets

provides goods or services to consumers within a small geographical area within a country (town, village or county)

national markets

involves selling goods and services across the country

international markets

involves selling goods and services to customers in other countries (may be multinational in that they have a Head Office in one country but manufacturing or retail outlet in another)

physical markets

business supplies goods and services via shops and other premises (increases costs due to renting, purchasing or leasing and must be maintained and updated on a regular basis)

electronic markets

use of the internet to sell and reach national and international markets (reliant on customers having internet connection and computer access + lack of personal contact)

primary sector

involves extraction of raw materials from land or sea e.g. mining, fishing, farming etc.

secondary sector

transforming raw materials into a finished product through the factory process

tertiary sector

services including retail, banking etc.

chain of production

the independence between different sectors e.g. furniture = growing + lumbering of trees → sawing up timber + construction → selling furniture

deindustrialisation

decrease in primary and secondary sector but increase in tertiary sector

gross domestic product (GDP)

measures the total value of the production or a country over a period of time, normally a year

mission statements

set out what a firm is trying to achieve and the reason it exists e.g. ‘lowest cost producer in the industry’

• based around values, non financial goals, how consumers are satisfied etc.

advantages of mission statements

• ensures that everyone working in the business knows what is expected of them

• all decisions made are working towards the same general goal

• motivational for employees as it will help provide a sense of belonging and direction

disadvantages of mission statements

• public declaration meaning if they act a specific way which doesn’t support these values they may lose loyalty from customers, staff etc.

• may be unrealistic

aims

long term plans from which a business’s objectives are derived (set by senior management)

objectives

turn mission statement and corporate aims into something quantifiable (must be SMART) e.g. to earn 20% return on capital within a year

SMART

S = specific

M = measurable

A = agreed by all employees

R = realistic

T = time bound

Why set objectives

• ensure everyone working towards same goal

• help coordinate the efforts of people from across the organisation and this can improve performance

• can motivate staff as they have clear targets to work towards

• enables them to measure progress

profit as an objective

• common for businesses with shareholders due to dividends being % of profits

• satisficing = happy with a decent amount of profit only

• may sacrifice profit in short term for investment but increases over long term

growth as an objective

• more growth = more market power

• can exploit its market position and earn higher profits benefitting shareholders

• greater potential for economies of scale as greater bargaining power with suppliers

survival as an objective

• common for new start up businesses as chance of failure is relatively high

• may be during periods of recession, intense competition or hostile takeover bid

cash flow as an objective

• without cash the business unable to pay day to day expenses such as wages and suppliers

• cash cycle = the time that elapses between the outflow of cash to pay for materials and other resources and the inflow of cash in payment for the goods and services produced

social and ethical objectives

• can relate to providing employment for people or improving facilities

• may be to protect the environment using sustainable production techniques or sourced from fair trade suppliers etc.

• may be used as a USP

long term objectives

over a period of 5 years or more

short term objectives

within weeks or more

profit

the amount left over after costs have been deducted from the revenue generated from selling goods and services

PROFIT = TOTAL REVENUE - TOTAL COSTS

reward to an entrepreneur for risk

split up into dividends if PLC

total revenue

selling price x quantity sold

total variable costs

variable costs per unit x number of units

total costs

fixed costs + total variable costs

fixed costs

costs that are not directly related to the number of products manufactured / sold or the amount of services produced (indirect costs or overheads)

e.g. rent, utility bills, salaries + wages

variable costs

costs directly related to the amount of goods/services produced or provided (direct costs)

e.g. raw materials. piece rates, packaging, shipping costs, credit card transaction fees

profit as a reward

business owners take risk when purchasing shares or setting up a business with profit as the reward

profit as a motivator

healthy motivator to invest further or work harder as more productive = higher profit e.g. money sharing schemes

measure of success

PLC profits announced on the news to attract investors as used to show success and see if objectives have been met

profit as a source of finance

fund expansion as no interest and will increase profits in the long term

profit as a guide to business investment

limited amount of resources in the economy and therefore scarce resources are channeled towards the more useful activities

profit as attractive to stakeholders

includes anyone with a vested interest in the business and if profitable, a business will find it easier to establish links with people and other organisations

sole trader

businesses owned and controlled by one individual

unincorporated (legally no distinction between the business and the owner)

advantages of sole trader

• easy to set up - generally no legal procedures

• only small amount of start up capital needed

• the wage bill is low as will do much or all the work themselves

• total control of the business (quick decision making)

• no sharing of profits

disadvantages of sole trader

• unlimited liability - if business goes bankrupt, the sole trader may have to sell personal assets to pay off the debts

• total control can lead to pressure and strain on the individual

• no one to take their place if ill so lose money while not working

• business dies with the sole trader

• nobody to consult on day-to-day basis

private limited companies (Ltd)

typically small, family run businesses where the shares are traded privately and are not open to members of the public to buy

has to apply to Companies House as draw up legal documents

legally the business has an existence on its own which is separate from the owners of a company

advantages of Ltds

• inviting shareholders is a good way to attract finance into the company which can be used for expansion etc.

• controls who has shares

• limited liability = if the business were to go bankrupt, the shareholders only lose what they have invested and not personal assets

• more owners mean more input of ideas

• tax advantages as only taxed on profits (20%) rather than personal tax rates (up to 40%)

disadvantages of Ltds

• gaining limited liability status can be a costly, time-consuming process

• may involve giving up more control to others who may want an input into running the business

• Companies House want a copy of the company accounts (not detailed) but can be viewed by anyone meaning some lack of financial privacy

Public limited companies (PLCs)

often larger business enterprises where shares are sold to anyone over the age of 19 on the stock exchange and then receive dividends (% of profits)

must apply to Companies House and complete legal documentation in the same way as Ltds but also must have £50,000 to which they can then issue shares on stock exchange

shareholders entitled to voting rights at the Annual general Meeting

must employ a Board of Directors to manage the business

absent shareholders

shareholders that never step foot in the company e.g. institutional shareholders

divorce of ownership and control

when a company’s owners (shareholders) differ to the management and have different aims/objectives

advanatges of PLCs

• opening shareholding up to members of the public means that the business has greater access to funds (equity) which can be used to expand the business

• limited liability = if the business were to go bankrupt, the shareholders only lose what they have invested and not personal assets

• quoted on stock exchange which can increase visibility

• viewed less risky by potential investors and so cheaper loans can be obtained

disadvantages of PLCs

• shareholders may have little direct contact / knowledge of the business as they may only be interested in dividends which puts pressure on company to perform well in short term

• always open to takeover should the value of the company on the stock exchange fall

• divorce of ownership and control means there is a loss of autonomy and the only way control is maintained is if 51% of shareholding is maintained (controlling interest)

• must publish detailed company accounts which is freely available so lack of financial privacy

insolvency

occurs when the liabilities of the business (what the business owes) is greater than its assets (what the business owns) and is unable to meet its financial obligations

liquidation

turning assets into cash in order to pay off short-term debts e.g. selling machinery to pay off its creditors

shareholders

those with a financial stake in the business and are therefore the owners

may gain capital gain by selling shares for a higher price than what was originally paid for

market capitalisation

the total value of the issued shares in a PLC

CURRENT MARKET PRICE OF INDIVIDUAL SHARE X NUMBER OF SHARES ISSUED

value of ordinary share capital

number of ordinary shares originally issued x initial price investors paid for them on floatation

institutional investors

pension funds, insurance companies, banks and other financial institutions that invest huge amounts of money in PLCs on the behalf of others

role of shareholders (x5)

1. provide finance for a business

2. influence decision making if have controlling interest

3. shareholders with ordinary shares are invited to AGM and have a right to vote

4. right to inspect company’s financial records

5. right to dividends declared based on the amount of shares they hold

how does the state of the economy influence share price?

if economic conditions are good and likely to continue, investors will tend to feel confident as businesses more likely to perform well so high demand

how does the performance of the company influence share price?

when a company reports good profits, investors have more confidence so higher demand

how does competition in the market influence share price?

if market is highly competitive, the company may reduce profit margins which may decrease dividends which causes demand to decrease

how does a proposed takeover influence share price?

shareholders being targeted for takeover usually receive a very generous offer to purchase their shares and so value of shares increases

how do investors’ expectations influence share price?

investors may rush to sell their shares if company is struggling or going into liquidation

private sector organisations

those owned, financed and controlled by private individuals (includes non-profit organisations)

public sector organisations

those owned and controlled by the government e.g. NHS, education, street lighting etc. (funded by taxation)

public corporations

enterprises owned by the state but offering products for sale to the public and private sector which may be managed by central governments

public services

include organisations which provide services for the whole nation

municipal services

include services offered by local governments and councils

privatisation

the process by which ownership of these organisations is transferred from the government in the public sector to the private sector

non-profit organisations

those which are not driven by the need to maximise profits and use any surplus to provide a social benefit (often not taxed) e.g. charities, voluntary and community organisations, social enterprises, trade unions etc.

external environment

the context in which the businesses activities take place within

how does price influence demand

when price is low, there is higher demand and when the price is high less is demanded

• the amount of this change depends on how sensitive it is to price (inelastic = less sensitive, elastic = more sensitive)

how do tastes and fashions influence demand

clothing is subject to changes in demand due to seasonal fashion changes and so must check consumer trends when ordering stock etc.

how does price of other goods influence demand

the demand for one product can be influenced by another when it can

1. be used as a substitute

2. complements where products are purchased alongside one another e.g. fish and chips

how does marketing and advertising influence demand

businesses can spend a vast amount of money on promoting their product or service which can increase demand (added value)

how do seasonal factors influence demand

some products experience a huge surge in demand at certain times of the year which changes demand throughout

positive market conditions

1. a product becomes popular or fashionable

2. a major competitor leaves a market

3. the number of consumers in a country increases

4. interest rates fall - cheaper to borrow money or to buy products

5. consumers having steadily rising incomes

negative market conditions

1. consumers demand environmentally friendly products, increasing costs

2. new businesses enter a market, increasing degree of competition

3. a market is over-supplied with products, decreasing prices

4. more people become unemployed, reducing consumers’ incomes and spending

how does the size of a business influence profits

can gain economies of scale which means average unit costs fall as the business produces or sells more

how to operate efficiently (x6)

1. using new up to date technologies - speeds up production, limits waste, improves quality

2. improve operating procedures e.g. factory layout

3. effective marketing mix

4. innovation through R&D

5. checking financial planning etc. ensuring budgets and profit targets met

6. keeping staff well trained and offering incentives

how does income affect demand

usually increase in income increases demand (not for inferior goods) but the level of this increase depends on the income elasticity of demand (inelastic = less sensitive, elastic = more sensitive)

products with strong influence of income on demand

1. jewellery

2. luxury electrical items e.g. widescreen HD TV

3. restaurant meals

4. long-haul holidays

5. household furniture

products with little influence of income on demand

1. bread, milk etc.

2. cigarettes and tobacco

3. petrol

4. water

5. lottery tickets

influence of recession on the economy

GDP remains negative for 3 consecutive quarters → production falls in value and income paid to people falls → demand falls → unemployment increases → disposable incomes fall

interest rates

the cost of borrowing and the reward for saving (high risk = high rate)

influence of high interest rates on demand

1. customers prefer to save rather than spend

2. cost of borrowing increases meaning cost of mortgages increase meaning less disposable income

3. many consumers borrow to fund purchase of consumer durables e.g. washing machines and cars

influence of high interest rates on businesses

1. may use bank loans to fund investment so increased interest rates increases this cost

2. adds to the cost of the original investment so may delay or cancel any investment projects/expansion

3. exchange rates increase which will mean cost of imports fall whereas cost of exports become more expensive for foreigners to purchase

demographic factors

study of human population including population size, gender mix, age mix, ethnicity, size of household and geographical shifts

how does size of population affect profit

increases demand if population increasing as well as increasing available workforce (decreasing labour costs)

UK population growing rapidly due to migration + excess births

how does age mix affect profit

UK = ageing population meaning old workforce which as they retire, disposable incomes fall and so does demand. Older workers also have fewer accidents, take less time off and are more punctual decreasing costs

how does gender mix affect profit

more women in workforce (more employment legislation having been issued to protect women and to promote equality). Increases costs facing a business as maternity and paternity leave is offered but women more likely to take up part time, flexible working which is a cost advantage (+ boosts family incomes)

how does size of household affect profit

getting smaller due to single person households increasing which increases demand for households + consumer durables to increase

how does ethnicity affect profit

UK → increasingly diverse ethnic population with over 18% of the population not born in the UK meaning demand for specific products increases e.g. halal butchers