Business chp 1-5

Needs

Goods or services essential for living

Wants

Non-essential goods or services people desire (unlimited)

The Economic Problem

Unlimited wants combined with limited resources, creating scarcity

Opportunity Cost

The next best alternative given up by choosing another item

Factors of Production (CELL)

Capital, Enterprise, Land, Labour

Capital (Factor of Production)

Finance, machinery, and equipment needed to manufacture goods

Enterprise (Factor of Production)

The skill and risk-taking ability of the entrepreneur

Land (Factor of Production)

All natural resources provided by nature

Labour (Factor of Production)

The number of people available to make products

Specialisation

Concentrating on what a business, worker, or country is best at producing

Specialisation Disadvantages

Over-reliance on one product/skill; high risk if demand falls

Specialisation Advantages

Higher efficiency, expertise, and output.

Division of Labour

Splitting production into different tasks, each performed by one worker

Advantages of Division of Labour

Increases efficiency and output; less time wasted moving; faster training

Disadvantages of Division of Labour

Worker boredom lowers motivation; production stops if one worker is absent

Purpose of Business Activity

Combines scarce factors of production to satisfy human needs and wants

Added Value

Selling price - cost of bought-in materials

Profit

Added value - other costs (labour, electricity, rent)

How to Increase Added Value

Increase selling price or reduce material costs

How to increase selling price for added value

Branding, Improve quality, Design changes, Convenience

Primary Sector

Extracts natural resources to produce raw materials

Secondary Sector

Manufactures goods using raw materials

Tertiary Sector

Provides services to consumers and other sectors

De-industrialisation

A decline in the importance of the secondary sector towards the tertiary

Why Sector Importance Changes

Exhausted raw materials; cheaper foreign manufacturing; rising incomes increase service demand

Mixed Economy

An economy with both a private sector and a public sector

Private Sector

Businesses owned by private individuals aiming to make a profit

Public Sector

Government-owned organisations aiming to provide essential services

Privatisation

The sale of state-owned (public sector) assets to the private sector

Entrepreneur

A person who organises, operates, and takes the risk for a new business

Characteristics of Entrepreneurs

Hard-working, risk-taker, creative, optimistic, self-confident, innovative, independent, communicator

Business Plan

Document containing business objectives, operations, finance, and owner details

Why a Business Plan Helps

Helps obtain bank/investor finance and forces careful planning

Why Governments Support Start-ups

Reduces unemployment, increases competition, increases output, grows future large firms

How Governments Support Start-ups

Training/advice, enterprise zones (cheap premises), grants/low-interest loans, research links

4 Ways to Measure Business Size

Number of employees, value of output, value of sales, capital employed (NOT profit)

Measuring Size: Number of Employees (Pros & Cons)

Pro: Easy to calculate and understand. Con: Capital-intensive firms use few workers despite high output

Measuring Size: Value of Output (Pros & Cons)

Pro: Useful for comparing firms in the same industry. Con: A few high-value items (yachts) distort comparisons with low-price goods

Measuring Size: Value of Sales (Pros & Cons)

Pro: Useful for comparing retailers selling similar goods. Con: Misleading when comparing firms selling completely different products

Measuring Size: Capital Employed (Pros & Cons)

Pro: Shows total finance/machinery invested. Con: Labour-intensive firms use little machinery despite high output and staff

Why Owners Want Business Growth

Higher profits, higher status/prestige, economies of scale, larger market share

Internal (Organic) Growth

Expanding existing operations (opening new branches, launching new products)

Internal Growth Advantages & Disadvantages

Pros: Easier to manage, avoids culture clashes, funded by retained profit. Cons: Very slow growth

External Growth (Integration)

When a business takes over or merges with another business

Merger

Owners of two businesses agree to join their firms together

Takeover (Acquisition)

One business buys out the owners of another business

Horizontal Integration

Merging with/taking over a firm in the same industry and same stage

Forward Vertical Integration

Merging with/taking over a firm in the same industry at a later stage (e.g. retailer)

Backward Vertical Integration

Merging with/taking over a firm in the same industry at an earlier stage (e.g. supplier)

Conglomerate Integration

Merging with/taking over a firm in a completely different industry (spreads risk)

Problems of Growth & Solutions

Control/communication issues (decentralise/IT); cash shortage (grow slowly); culture clashes

Why Some Businesses Remain Small

Personal service industry, small market size, or owner wants control/less stress

Why Businesses Fail

Poor management skills, changing environment, lack of cash (liquidity), over-expansion

Unincorporated Business

No separate legal identity; unlimited liability and no continuity

Unlimited Liability

Owners are personally responsible for all business debts (personal assets at risk)

Incorporated Business

Separate legal identity from owners; limited liability and continuity

Limited Liability

Shareholders only lose the money invested in shares; personal assets are safe

Sole Trader

A business owned and operated by one person

Sole Trader Advantages

Easy setup, complete control, keeps all profits, private accounts

Sole Trader Disadvantages

Unlimited liability, limited finance, heavy workload, no continuity

Partnership

2 to 20 people jointly own and run a business

Partnership Agreement

Written legal contract stating capital invested, profit share, and partner duties

Partnership Advantages

More capital than sole trader, shared workload, shared skills/ideas

Partnership Disadvantages

Unlimited liability, shared profits, risk of disagreements, no continuity

Private Limited Company (Ltd)

Incorporated business selling shares privately to family and friends only

Ltd Advantages

Limited liability, continuity, original owners keep control, more capital

Ltd Disadvantages

Legal setup documents, shares need agreement to transfer, accounts filed publicly

Public Limited Company (Plc)

Incorporated business selling shares to the general public on a Stock Exchange

Plc Advantages

Limited liability, continuity, raises huge capital, high status

Plc Disadvantages

Expensive setup, published accounts, hostile takeover risk, divorce of ownership and control

Divorce Between Ownership and Control

Shareholders own the Plc, but hired directors run it day-to-day

Franchisor

Sells the licence to use its brand name and business model

Franchisee

Buys the licence to operate under the franchisor's brand and model

Franchisee Advantages

Lower failure risk, established brand, national advertising, training and supplies provided

Franchisee Disadvantages

Less independence, pays licence fee and royalties, fixed prices/suppliers

Franchisor Advantages

Fast expansion using franchisee capital, receives fees/royalties

Franchisor Disadvantages

One bad outlet ruins brand reputation; franchisee keeps outlet profits

Joint Venture

Two or more businesses start a new project together, sharing capital, risks, and profits

Joint Venture Advantages

Shared costs, shared risks, gains local knowledge in foreign markets

Joint Venture Disadvantages

Shared profits, risk of disagreements and culture clashes

Public Corporation

Business wholly owned and operated by the state/government

Public Corporation Advantages

Protects vital industries, prevents private monopolies, provides unprofitable essential services

Public Corporation Disadvantages

No profit motive causes inefficiency, subsidies reduce cost control, political interference

Why Business Objectives Matter

Gives direction, motivates workers, unites decisions, measures performance

Objective: Business Survival

Crucial for new start-ups, during recessions, or against strong new competitors

Objective: Profit

Total revenue minus total costs; rewards owners and funds reinvestment

Objective: Returns to Shareholders

Achieved via higher dividends and rising share price

Objective: Growth

Increases manager pay/status, job security, economies of scale, and market share

Objective: Market Share

Percentage of total market sales held by one business; gives bargaining power

Market Share Formula

(Company Sales / Total Market Sales) x 100

Objective: Service to Community (Social Enterprise)

Triple bottom line: social, environmental, and financial goals

Why Objectives Change Over Time

Start-ups move from survival to profit/growth; recessions force firms back to survival

Stakeholders

Any person or group with a direct interest in a business's activities

Stakeholder: Owners / Shareholders

Internal; want high profits, dividends, and share price growth

Stakeholder: Workers

Internal; want fair pay, job security, and safe working conditions

Stakeholder: Managers

Internal; want high salaries, bonuses, status, and business growth

Stakeholder: Customers

External; want safe, reliable, good-quality products at fair prices

Stakeholder: Suppliers

External; want regular orders and prompt payment

Stakeholder: Government

External; wants tax revenue, job creation, and compliance with laws

Stakeholder: Banks / Lenders

External; want business liquidity so loans and interest are repaid on time