Unit 1.1

Purpose of business Reasons for starting a business Basic functions and types of business Business enterprise and entrepreneurship Dynamic nature of business

business

an organization that exists to provide goods & service to customer’s profitability

• aim is not always profit

customer

whom buys the product from a business

consumer

the person who uses goods & services produced by a business

need

something that must be fulfilled for the purpose of survival

• food, water, shelter

want

something non-essential but desired

• chocolate, spotify, nintendo

good

a physical product(car, phone)

service

intangible product(non-physical)

factors of production

resources/materials that businesses use to provide goods & services

land

physical land needed/ the site which the business is located

labour

the amount of people employed along with the skills they possess

capital

the equipment used to provide goods and services such as machinery

enterprise

the skill of those involved in the business to identify opportunities, bring resources together and execute them.

• management, essentially.

opportunity cost

the benefit lost from the next best alternative

• what could you have earned from a different decision?

primary sector

produces goods using raw materials.

• collected, extracted underground, grown

secondary sector

manufactures the goods

• any utility(like water)

• manufacturing capital for other products

• direct production of consumer goods

Tertiary sector

provides services and goods

• to other businesses or directly to customers

chain of production

all businesses included in the making of goods/providing services

• they are all interdependent and rely on one another

functions of a business

• marketing

• finance

• operations

• human resources(HR)

marketing

responsible for understanding the needs & wants of a customer

marketing responsibilities

• customer feedback

• product development

• monitoring/setting prices

• promotional campaigns

• customer research

finance

manages the financial resources of the business & reports on business’ financial position/performance

finance responsibilities

• monitors use of finance,

• ensures business has cash to pay its liabilities & meet legal requirements

• accounting

operations

turns input(materials & skills) into finished goods & services

operations responsibility

• organizes production

• controls use of input

• manages quality of output

human resources(HR)

responsible for all aspects of managing those that work in a business

HR responsibilities

• organizes employee recruitment & training

• sets up employee rules

• ensures business complies with employee related legislations

• communication between employees

business environment

how business are affected by external factors they cannot control

external factors business face

• rapid technological change affected how/what is bought

• changes in economy such as interest, inflation and income levels

• legal changes in regulations that business must keep up to date

• environmental expectations that consumers have

(LEET)

unlimited liability

there is no legal separation between the owner and the business

• responsible for all the business's debts, personal assets involved

lack of continuity

a business is unable to maintain its essential functions or resume normal operations after a disruptive event

division of labour

breaking a large production process into many small, specific tasks, with different workers (or machines) performing each task

dividend

a portion of a company's after-tax profits that is distributed to its shareholders (owners) as a reward for their investment.

• based on percentage of investment

sole trader

1 person who sets up a business, works for themself and runs it themself

sole trader details

• profit and losses fall on one person along with financing

• the person has unlimited liability with the goals of a business

• a sole trader has no partners but may employ

advantages of sole trading

• high profit margin

• quick/easy set up

• flexible hours

• total control

disadvantages of sole trading

• high risk, pressure & spending

• lots of effort

• hard to raise capital

• limited continuity

• unlimited liability

• long hours/workload

examples of sole trading

hairdressers, private tutors, nail technician, plumber

partnerships

owned by 2 to 20 people, where owners share responsibilities, decisions, & liabilities

deed of partnership

created when a partnership is entered, includes:

• how profit & losses are shared

• how much money each partner should put in

• how much a partner is paid(salary)

• working arrangements

• how a partner is added/removed

• arrangements for where money goes after dissolving

sleeping partner

provides capital for the business but doesn’t take part in the running.

• loss is limited to the capital they provided

advantages to partnering

• shared work

• less liability in losses

• social interaction and reviewing work between partners

• providing more skills

• raises capital with less costs

• less stress

disadvantages to partnering

• less flexible hours

• profit is shared in dividends

• slower decision making & disagreements

examples of partnerships

solicitors, dentists, accountants, doctors

company

owned by its investors(shareholders) whilst being ran by managers/owners

the 2 types of limited companies

• LTD(private limited company)

• PLC(public limited company)

LTD

made up of shareholders that can only be invited to purchase shares by the owner

• shareholders have the right to vote on important issues/decisions as owners are legally responsible to earn profit

advantages of LTDs

• limited liability(banks are more willing to lend loans too)

• high credibility for marketing

• continuity

• raising capital(easier than sole/partner)

disadvantages of LTDs

• longer legal procedures

• financial accounts must be published to public & checked by an external auditor(accountant)

• corporation tax

• slower decision making & disagreements between all shareholders with a vote

• profit is shared

examples of LTDs

specsavers, ikea, virgin atlantic

PLC

anyone can buy shares in the business and shares can be easily sold.

• listed on stock exchange, prices change according to demand

advantages to PLCs

• access to large amounts of capital through selling shares(buying is encouraged as selling is easy)

• limited liability for shareholders

• enhanced corporate image

• more publicity

disadvantages to PLCs

• risk of loss of control to shareholders or external buyers

• increased costs and complexity for setting up

• finances must be reported

• a greater risk of hostile takeovers

• share profits with potentially thousands of shareholders

examples of PLCs

coca cola, tesla, toyota

not-for-profit

organisation set up to help others rather than to make a profit

• wide varieties with different social objectives, often set up as a charity

stakeholder

anyone with an interest in a business

• those affected by activity of a business

stakeholder internal vs external

internal= a part of the business (owners, managers, workers, shareholder(customers, government, supplier, lenders)

business impact on stakeholders

• success impacting earnings of employed

• local people impacted by pollution

• suppliers impacted by relationship

stakeholder impact on business

• employees negotiating terms

• government may increase tax

• customers can stop buying the products

conflicting interests

when stakeholders have opposing aims in the business

factors influencing business location

• type of business

• proximity to market

• size of business

• proximity to competitors

• availability & cost of labor

• technology

overseas advantages

• cheaper labor

• access to raw materials

• financial incentives

• avoidant of protectionist measures

• growing market overseas

overseas disadvantages

• different regulations

• different regional tastes

• environmental impacts

• supply chain problems

aims of a business

overarching goal that a business sets itself

objectives of a business

smaller goals that will help the business achieve the aim

SMART objective

specific, measurable, achievable, realistic, time-based

aims examples

survival, profit maximisation, customer satisfaction, environmental

purpose of objectives

• helps in decision making

• provides target than everyone can compare actual results

• helps with investors understand business direction

changing objectives

• achieving a previous objective

• change in business environment

• change in product technology

business plan

document setting out what a business does & what it hopes to achieve in the future

reasons for a business plan

• aids in reducing risk by predicting possible problems

• helps setting up a business successfully

• raises finances

problems of a business plan

• uncertainty

• lack of experience

• change & regular update

reducing the risk of business planning

• research market thoroughly

• talk to experts & consultants

• planning for a variety of outcomes

• regularly reviewing/update the plan

main factors of a business plan

• background information

• market analysis

• firm’s objectives

• expected prices/sales

• competitive strategies

fixed costs

costs that do not change with output (not dependent on output/volume)

variable cost

costs that vary directly with output(linked with items/materials made)

revenue

income earned by a business over a period of time, dependent on number of items sold & selling prices

profit

surplus left from revenue after paying all costs

business expansion

business becoming bigger by increasing sales & output

the two methods of business expansion

internal growth(organic)- gets larger by increasing the scale of its operations & selling more products

external growth(integration)- join/buying another business

how is business size measured

• volume of sales

• value of sales

• number of employees

• value of business minus liabilities

two types of external growth

merger- agreed deal wherein two businesses join to form a larger one

takeover- when a business buys control over another

(conglomerate integration) diversification

when a business takes over a business in a different industry

horizontal intergration

two business joining in the same stage/type of business in the production process

• e.g. audi taking honda

backward vertical integration

business takes over a business earlier in the supply chain

• e.g. pocky buys wheat manufacturer

forward vertical intergration

business takes over a business later in the supply chain

• e.g. pocky buys lotte

franchise

an investment into someone else’s company; paying them to use the brand’s product and store(form of internal growth)

franchisees/franchisors

franchisees- shares royalty fee (profits)

franchisors- receives profits

pros of owning a franchise

• established brand with success and customer relationship

• access to training and supplies

• shared marketing costs

• learning from other franchisees

• furnished + suppliers

cons of owning a franchise

• sharing profits

• must work within franchisor guidelines

• contributing to group marketing

• sales directly proportional to performance of other franchisees

• very EXPENSIVE

pros of selling a franchise

• quick growth

• franchisees provide some finance

• franchisees have source of motivation as it is treated as their own business

cons of selling a franchise

• losing some control

• one franchisee affects the whole brand

• sharing profits with franchisees