Unit 1 and 2

Business objective

a target or goal set by a business. They can be ‘financial’ or ‘non-financial’ objectives.

Financial Objectives

· Survival

· Increase profit

· Increase sales

· Increase market share

· Financial security

Non-Financial Objectives

· Social Objectives

· Personal Satisfaction

· Challenge · Independence and control

Why do businesses set ‘Objectives’?

· Motivate employees / owners, give them a clear goal to work towards.

· Helps a business achieve their overall strategy – gives them direction and focus.

· Can help a business measure their success or failure by comparing their planned objectives vs their outcomes.

Why might business objectives change?

· Market conditions (New competition etc)

· Technology (Changes could help or hinder the business)

· Performance of the business

· Legislation (Law changes could help or hinder the business)

· Internal reasons (A change in CEO – leads to a different vision)

Mixed economy

where the private and public sectors operate. The public sector is run by the government where the private sector is run by private individuals.

Sole Traders:

A business which is owned and operated by one individual but they can employ workers.

Sole Trader Advantages

· Owner keeps all the profits.

· Full independence – owner has complete

control.

· It is simple to set up with no legal requirements

Sole Trader Disadvantages

· Have unlimited liability.

· Struggle to raise finance / capital – as only one person and banks see it as a risk.

· Independence is a positive but long working hours as a result.

Partnership

A business owned by 2-20 owners

Partnership Advantages

· Additional skills as more people involved –

specialise in different roles.

· Increase capital investment as more partners in

the business.

· Sharing of responsibility – more time off as

duties can be split.

Partnership Disadvantages

· Unlimited liability (Same as a Sole trader);

· Potential for disagreements between partners.

Unlimited liability

Unlimited liability Owners of the business is personally liable for all the businesses debts.

Unincorporated

There is no legal difference between the owners and the business.

Deed of Partnership

Legal document that is binding between partners that states the rights of partners.

Why create a deed of partnership and what will be included?

A major disadvantage of a partnership is the shared decision making and lack of autonomy that leads to disagreements. Therefore, a legal document is formed ‘The Deed of Partnership’ which states many important points:

· How much capital each partner invested

· How profits or losses will be shared

· How to bring the partnership to a close

· The controlling stake / voting rights of partners

· The rules for bringing on new partners

‘Limited Partner

a partner with limited liability (As they do not take an active role in the business – they’re an investor)

Private Limited Companies (LTD)

A LTD is a type of incorporated business with limited liability who can sell shares to private individuals

LTD Advantages

· Shareholders have limited liability.

· More capital can be raised through selling of

shares to private individuals.

· Control cannot be lost like the situation of a PLC

takeover.

LTD Disadvantages

· Have to publish accounts (This is available to competitors).

· Takes time and costs to set up the business.

· Profits must be shared with shareholders in the form of a dividend payment.

Public Limited Companies (PLC):

A PLC is a type of business that can sell shares on the stock exchange (Publicly to all).

PLC Advantages

· Has limited liability.

· Can sell shares on the stock exchange – large

amounts of capital.

· Likely to have a strong brand image.

· Economies of scale is a big benefit for this type

of ownership.

PLC Disadvantages

· Setting up can be very high, for example, £50,000 in the UK.

· Risk of loss of control (Takeover of the business).

· Potential of diseconomies of scale (The opposite of EofS – Control and communication loss).

Limited liability

Owners (Shareholders) of the business are not personally liable for the business’s debts.

Dividend payments

the sharing of profit from an LTD / PLC to the shareholders. Usually paid every 6 or 12 months (Varies business to business).

incorporated

There is a legal difference between the owner and the business.

Memorandum and article of association

Documentation for incorporation. Memorandum contains ‘general details’ – such as, name, address, and objectives. Article contains the rights of shareholders etc (See page 29 of textbook).

IPO

(Initial Public Offering) / Flotation Process of a business going ‘public’ – selling shares on the stock exchange.

similarities between an LTD and PLC

· Both businesses can sell shares (Different in their nature – Private or on the stock exchange);

· Limited liability.

· Publishing of accounts.

Social enterprises

A social enterprise is a business that aims to improve the human and environmental well-being rather than operating for a profit. Typically, through selling goods or services.

features of a social enterprise:

· Have a clear social and/or environmental mission.

· Reinvest their profits (For their cause).

· Accountable and transparent in their nature

Different types of social enterprises

* Cooperatives (Consumer and retail
* Worker cooperatives
* Charities

Cooperatives (Consumer and retail)

Retail and consumer cooperatives, they are owned and controlled by their members. Profit tends to be shared with members of the cooperative.

Worker cooperatives

This is a cooperative run by workers. These types are where workers share in the decision making and share the profit. They buy a share of the cooperative and work within the organisation.

Charities

Help a disadvantaged part of society from homelessness to cancer charities. They raise money for the ‘good’ of society. They will also raise awareness of the issue. Donations are the main form of ‘Revenue’.

Franchising

A structure in which a business (The franchisor) allows another operator (The franchisee) to trade under their brand / name.

Franchisor

The group / person who sells the rights of a brand to the franchisee.

Franchisee

The group / who buys the rights of a brand from the franchisor.

Royalty Payments

A payment made by the franchisee to the franchisor based on the revenues/profits of a franchise venture.

What does the franchisor offer the franchisee?

· A license (The brand name) to trade under.

· A start-up package of help, advice, and essential machinery.

· Training in how to use equipment and how to run the business model.

· Marketing support – national campaign for all franchisees.

What does the franchisee need to provide to receive the rights to trade under the brand name?

· A one-off start-up fee (Can be high, depending on the strength of brand);

· An on-going ‘Royalty fee’ based on revenues or profits.

· Contributions to the marketing budget.

· Franchisor normally makes franchisee purchase stock exclusively from them. Can be costly.

Franchisor +ves

· Fast method of growth.

· Receive large upfront fee from franchisee and

on-going royalty fees / stock purchase fees.

· Franchisee take some of the risk and are

motivated to succeed.

Franchisor -ves

· Profits are shared with the franchisee (They do not receive 100% of the profits);

· The potential of the franchisee giving the brand a bad name.

· The costs of support (Training etc) may be high for the franchisor.

Franchisee +ves

· Less risk as the brand is recognisable – also

statistically less franchises fail.

· National marketing and training provided by the

franchisor.

Franchisee -ves

· Must pay a large upfront fee and ongoing royalty payments to the franchisor.

· Strict rules to follow, can lose the rights If not followed (A lack of independence).

Stakeholders

An individual or group with an interest in the operation of the business (Success of failure). These can be internal or external.

Internal stakeholders

· Owners (Shareholders for an LTD or PLC).

· Managers.

· Employees.

External stakeholders

· Customers.

· Competitors.

· Suppliers.

· Governments.

Local communities.

· Financiers (Banks / Venture capitalists etc).

· Pressure groups.

Shareholders vs employees example

A conflict occurs as shareholders want to reduce costs by lowering employee wages = employees undertake industrial action such as a strike = leading to a business not being able to offer service = bad reviews as results and reduction in sales.

Suppliers’ vs owners / shareholders (Or managers)

Suppliers are not happy with the current level of payment for supplies = A fallout between shareholders / managers = stopping of supply = No stock to sell = bad name and damage to brand image = damage to sales levels = reduction in profit levels.

Primary

The sector associated with extraction of raw materials from the earth. Examples: Coal, oil and gas extraction / Farming / Fishing.

Secondary

Production involving the conversion of raw materials into finished and semi-finished goods. Examples: Production of any good (Where they make the good).

Tertiary

Production of services in the economy (Service sector). Examples: Retail stores / Banking / Insurance (Any services dealing with the final consumer).

What’s happening in the sectors?

Employment is changing over the sectors. In developed economies such as the USA, UK and France, the economy will be dominated by the tertiary sector. However, in developing nations such as Vietnam, India and China, there is a mixture across sectors with a growing tertiary sector. In less developed nations, there is a dominance of primary and secondary sectors

Decrease in Primary?

· Automation (Technology)

· Reduction in natural resources

Decrease in Secondary?

· Technology

· Education

Increase in Tertiary?

· Education

· Higher salaries therefore appealing

Consumer goods and services

Goods and services sold to ordinary people

(consumers) rather than businesses.

Consumer goods: Chocolate bars, mobile phones,

and televisions.

Consumer services: Haircuts, taxi services and dental

services.

Producer goods and services

Goods and services produced by one business for another business (Goods used by businesses). Producer goods: A delivery van, tractors, and industrial power tools. Producer services: Accounting services, market research and industrial cleaning.

What affects where a business is located?

The factors that impact on a business’s location will differ depending on the type of business. A business which sells calls may need a large area to store the cars at a low cost. On the other hand, a high-tech business may need to be near skilled labour. Look at the business case before deciding the important factors of location.

Factors that affect location of a business

· Proximity to market (Closeness to the customers / The business the producer is supplying).

· Proximity to labour (Closeness to workers – some business needs skilled labour; other types need a large workforce).

· Proximity to materials (Such as suppliers / land costs / taxes etc).

· Proximity to competitors (Best to be away from competition, however, some businesses may locate near each other for external economy on scale).

E-Commerce

The use of electronic systems to sell goods and services (Can be called E-Tailing).

Advantages of selling online (E-commerce)

· Cheaper form of distribution as online

businesses has lower costs.

· Consumers can shop 24/7.

· Larger market as people can access the website

from around the world.

Disadvantage of selling online (E-commerce)

· Lack of personal service which can discourage some customers (Older generations possibly);

· Technical problems – lead to dissatisfaction and a bad image.

Legal controls governments can use to encourage or discourage location in of business:

· To encourage businesses to locate, the government may reduce taxes and give grants to MNC’s to operate in their nation.

· To discourage companies from entering the market, there’s a possibility to use ‘Protectionist policies’ such as tariffs (A % of taxes on all goods) or quotas (A restriction on the amount allowed to import).

Trade bloc

A trade bloc is a group of countries situated in the same region that join and enjoy trade free of barriers.

Globalisation

Globalisation is the growing integration of the world’s economies.

Key features of Globalisation:

· Goods and services are freely sold across international borders (We can buy goods from most nations around the world!).

· People are free to live and work in countries of their choice (For work purposes – if they satisfy skills for a visa).

· Capital ($) can flow between nations.

Why is globlisation increasing?

· Development of technology – ability to access customers around the world.

· Improvement in transport systems. Ease of transport of goods.

· Changes in political viewpoints – Nations are now open to trading with each other.

What is a Multinational business (MNC)?

Large businesses with significant operations in at least two different countries.

MNC +ves for business

· Access to a large customer market – operating in

many countries – increased sales – increased

revenue streams.

· Lower costs – as businesses benefit from

economies of scale or lower production costs –

increased profits.

· Reduction in taxation – some countries have

lower corporation tax – increased profits after tax.

MNC -ves business

· Increased competition in the global market – harder to compete – reduction in market share / sales.

· Increase risks of being impacted by external shocks – If China or USA go into recession – likely to impact on businesses in any market – risk of insolvency.

MNC Host nation +ves

· Increase in tax revenue – pays for public sector

goods such as education and health care.

· Increase in employment – reduction in

unemployment – increase taxation from income

tax – more revenues for public goods.

MNC Host nation -ves

· Exploitation of local people in developing countries and or environmental damage.

· Repatriation of profits – most profits returned headquarters – less money in the economy as a result. Host nation loses out.

Exchange rates

Exchange rates are the value of one currency against another

Fiscal policy

Changes in taxation and government spending to manage the economy

How can fiscal policy affect the economy?

The government uses taxation to generate revenues to pay for the public services. This means increase in taxes would lead to and increased government quota to spend on the public sector.

Income Tax

The tax paid by employed

people based on their

income.

Increase in income tax leads to…

less disposable income – leads to a reduction in sales for luxury businesses – decrease in revenue and profit.

Decrease in income tax leads to…

more disposable income – leads to an increase in sales for luxury businesses – decrease in revenue and profit.

Corporation Tax

The tax paid by businesses

on their profits.

Increase in corporation tax will lead to…

a reduction in profit after tax – leading to less investment – less growth – fewer potential dividends for shareholders.

Decrease in corporation tax will lead to…

an increase in profit after tax – leading to more investment – increased growth – more potential dividends for shareholders.

How can Government impact on business activity?

* Change the law
* Influence on the interest rates or exchange rates
* Change level of expenditure and change levels of taxation
* Supply subsidies or grants to sectors or industries
* Trade policy

How can changing the law affect impact a business?

· Change the law: – A change in a law could result in benefits or drawbacks for businesses. A change in competition policy (P.93) could lead to a merger (Or acquisition) being halted from going ahead. Thus, reducing the opportunities for growth for a business.

How can government Influence on the interest rates or exchange rates impact a business?

As mentioned below, a change in interest rates (Up or down) can impact on business activity.

How can change level of expenditure and change levels of taxation impact a business?

A government can change taxation policies which could increase the tax a business must pay, leading to a decrease in profit after tax.

How can supplying subsidies or grants to sectors or industries impact a business?

some businesses will receive subsidies to support their industry, leading to an ability to survive and stay solvent.

Interest rates

Interest rates are the cost of borrowing and rewards for saving. Interest is payable on loans and is gained from savings in the bank

Increase in intrest rates for business leads to…

· If a business has a bank loan (Mortgage / Bank loan for expansion) – will need to pay more back in interest payments each month - costs will increase – leading to reduction in profits. · Consumers will also see a rise in their repayments on loans )– as they have mortgages and car finance – leading to a fall in demand for luxury goods especially – as they have less disposable income - reduction in sales for businesses.

However, if they have large ‘Cash reserves’ or ‘retained profits’ – increased interest rates could be a positive thing – more interest received – increase in closing balance.

State the STEP factors and their examples?

Social: more people eating vegan meals

Technological: Increase in E-commerce

Environment: people prefer using recycable products

Political: new tradebloc

Benefits for businesses of being more environmentally friendly:

· Improved brand image – leads to an increase in customers as many are now environmentally minded – leads to an increase in overall profit levels.

· Could give the business a USP (Unique selling point) – leads to taking customers from the competition – increase in sales – increase in market share.

How can the success of a business be measured using Revenue:

Revenue – Use level of revenue to measure success – by comparing with previous year or against rivals in the same industry – increase indicates good performance.

How can the success of a business be measured using Marketshare:

Market share - Use level of market share to measure success – by comparing with against rivals in the same industry – increase indicates good performance.

How can the success of a business be measured using customer satisfaction?

Customer satisfaction – measure through a questionnaire – if customers responses are positive – customers are satisfied – if not there will be decrease in sales.

How can the success of a business be measured using profit?

Profit - Use level of profit to measure success – by comparing with previous year or against rivals in the same industry – increase indicates good performance. (Remember, there are different types on profit!)

How can the success of a business be measured using growth?

Growth – This could be in the growth of sales / amount of employees / users / number of stores

How can the success of a business be measured using shareholder satisfaction?

Shareholder satisfaction – If share price / Dividend payments have increased – indicates good performance – if performance is good there will be increased interest in investment.

How can the success of a business be measured using employee satisfaction?

Employee satisfaction – If employees are satisfied – motivation and productivity will be high – if unhappy, increase in labour turnover or absenteeism rates.

“Explain one way a business can measure their success.” (3)

Market share can be used to measure success (1) – An increase will show good performance and decrease bad performance (2) - the increase or decrease will help the business plan a strategy to improve their market share (3).