Business activity and influences on businesses- Unit 1

Consumer goods

Good and services sold to ordinary people

Producer goods

Good and services produced by one business and sold to another

Private sector

Businesses owned by individuals or a group of individuals

Public sector

Businesses owned by central or local government

Stakeholder

an individual or a group with an interest in the operations of a business

Types of stakeholders?

• Owners

• customers

• employees

• managers

• financiers

• suppliers

• the local community

• government

Business objective

Goals or targets set by a business

Importance for setting business objectives

• Measures performance of the business

• Motivates owner

• Gives the employees something to work towards

Financial objectives

• Profit

• Survival

• Market share

• Sales

• Financial security

Non- Financial objectives

• Social objectives

• Personal satisfaction

• Independence and control

• Challenge

Why might business objectives change?

• Market conditions

• Technology

• Performance

• Legislation

• Internal Reasons

Large business?

a business that employs over 250 people

Small business?

a business that employs less than 50 people

Entrepreneur

Innovators and risk takers who try to make money out of a business idea.

Unincorporated business?

businesses where there is no legal difference between the owner and the business

incorporated business?

businesses that have a separate legal identity from it’s owners

Sole trader

A business that is owned and controlled by one individual.

Unlimited liability

The owner is responsible for all debts run up by the business

Advantage of sole trader

• The owner keeps all the profit

• Fast decision making

• Simple to set up- no legal requirements

Disadvantages of sole trader

• Long hours + Hard work

• Unlimited Liability

• Too small to exploit economies of scale

Partnership

A business owned and controlled by 2-20 people

Deed of partnership?

binding legal document that states the formula rights of partners.

Limited Liability?

the owner is only reliable for the amount of money invested into the business.

Advantages of partnership

• Workload is shared

• More capital is raised

• Financial info is not published

Disadvantage of partnership

• Profit is shared

• Conflicts

• Unlimited liability

Franchise

When a franchisor gives a franchisee a license to operate the business in a different location

What does a franchisor have to offer a franchisee?

• A license to trade under the brand name

• A start-up package

• Training how to run the business

• Marketing support

• Geographical area of operate in

What does the franchisee have to pay in return?

• a one-off start-up fee

• an ongoing fee (based on sales)

• contribution to marketing costs

Advantages- Franchisor

• Fast method of growth

• Cheaper method of growing the business

Disadvantages- Franchisor

• Profit is shared

• Reputation may get damaged

• Cost of support for franchisees may be high

Advantages- Franchisee

• Less risk

• Back up support is given

• National marketing may be organised

Disadvantages- Franchisee

• Profit is shared

• Lack of independence

• Strict contracts

Social enterprise

Uses profit to improve human and environmental conditions

Limited company

Businesses that have separate legal identity from their owners

Private limited company (Ltd)

type of business that is owned by shareholders, but shares are not available to the public on the stock exchange.

Memorandum of Association?

Sets out the constitution and gives details about the company

• Name of the company

• name and address of the company’s registered office

• objectives of the company and the nature of its activities

• amount of capital to be raised and the number of shares to be issued.

Articles of Association?

Deals with the internal runnings of the company

• rights of shareholders depending on the type of share they hold

• procedures for appointing directors

• length of time directors should serve before re-election

• timing of frequency of company meetings

• arrangments for auditing company accounts

Advantages- Ltd

• Shareholders have limited liability

• more capital can be raised

• control cannot be lost

Disadvantages- Ltd

• Financial information has to be published

• Costs money and takes time to set up

• Profits are shared between members

Public limited company (PLCs)

a company whose shares can be sold to the general public, usually through a stock exchange

Advantages- Public limited company

• Large amounts of capital can be raised

• Can exploit economies of scale

• shares can be bought and sold very easily

Disadvantages- Public limited company

• setting- up costs can be very expensive

• outsiders can take control by buying shares

• financial information has to be made public

Multinational companies (MNCs)

large business with significant production or service operations in at least two different countries

Features of multinationals

• huge assets (land, buildings, plants, machinery and money)

• highly qualified and experienced professional executives and managers

• powerful advertising and marketing capability

• highly advanced and up-to-date technology

• highly influential both economically and politically

• very efficient since they can exploit huge economies of scale

• ownership and control is centred in the host country

Public cooperations

Organisations that are owned and controlled by the government

features of public cooperations

• State owned

• created by law

• state funded

• provides public services

Reasons for public ownership

• Avoids wasteful duplication- Natural monopoly- more efficient to have one business providing a service for the whole market

• Fills gaps left by the private sector- the government will make sure the service is accessible by everyone

Reasons against public ownership

• Difficult to control- very large businesses, are required to employ a lot of workers, difficult to coordinate

• Cost to government- managing a service for such a large amount of people can be very expensive, losses made by the government need to be met by the taxpayer.

Privatisation

Transfer of public sector resources to private sector resources

Reasons for privatisation

• Generates income

• Reduces inefficiency

• Reduces political interference

Factors influencing the choice of an organisation

• Growth- businesses can start as sole trader and grow into a partnership.

• Finance- may want to raise more capital so they become a PLC

• Control- businesses like to maintain control of the business

• Limited Liability

• Type of business- can depend on a particular type of business

Primary Sector

These industries extract raw materials directly from Earth

Secondary Sectors

production involving the conversion of raw materials into finished and semi-finished goods

Tertiary sector

the production of services in an economy

Interdependence

When all three sectors depend on each other

Deindustrialisation

Decline in the manufacturing sector

Why change sectors?

• People may prefer services over manufactured goods.

• Increased competition from manufacturing companies

Factors of location

• Proximity to market

• Proximity to labour

• Proximity to raw materials

• Nature of business activity

• IT

• Legal control

• Trade blocs

Globalisation

The growing integration of world economies

Reasons for globalisation

• Development in technology- The internet and computers allow people to work from anywhere

• Improved international networks- cost of air travel and restrictions have decreased so good can be transported easily and more people can travel for business.

Trade Blocs

Closing off international borders to prevent trade and job opportunities

Economies of scale

Cost advantage of buying in bulk

Opportunities of globalisation

• Access to large markets

• Lower costs

• Access to labour

Threats of globalisation

• Competition

• International takeovers

• Increased risk of international takeovers

Multinational

A large business that owns and controls the production of goods and services in more than one country

Advantages of being a multinational

• Large customer base (company)

• Lowers costs- Economies of scale (company)

• Increase in employment (country)

• Increase in tax revenue (country)

Disadvantages of being a multinational

• Damage to the environment

• Exploitation of less developed countries

• Repatriation of profit- When profit is sent back to the home country

International trade

Selling goods and services abroad

Exchange rates

The rate at which one currency may be converted to another

Appreciation

Rise in rates

Depreciation

Fall in rate

Fiscal policy

When the government changes the amount of taxes to manage the economy

Income tax

From salary

Cooperation tax

From profit of a business

VAT tax

On items

Monetary policy

When the government changes interest rates to manage the economy

Trade Policy

When the government tries to protect local businesses using trade tariffs, quota and subsidies

Trade tarrifs

Tax on imports and exports

Quotas

Quality restrictions

Subsidies

Payment given to local businesses- Lowers production costs- cheaper for consumer.

Legislation

Government creates laws that effect how a business operates

Consumer Legislation

Protects customers

Health and safety regulations

Protects workers

Environment legislation

Protect environment

Competition Legislation

Allows competition

Consumer issues covered by legislation

• Prices

• Information of products

• quality of products

• safety of products

• consumer rights

Interest rates

Price of borrowing money from banks

External factors?

• Factors that affect the business that are out of its control

P- Political- political conditions of the economy

E- Environmental- damage to the environment

S- Social- changes that occur in society

T- Technology- businesses adapting to a technological environment.

Measuring success in a business

• Revenue- measured against competitors by years compared their set objective.

• Profit- measured against competitors their original set objectives + size of business

• Growth- measured by market share, number of employees+ capital.

• Customer satisfaction- measured by loyalty and feedback (surveys)

• Market share- the percentage a business operates in an industry

• Owner/ Shareholder satisfaction- measured in dividends and financial security.

• Employee satisfaction- measured by low labour turnover and surveys

Reasons for business failure

1. Cash flow problems

   • External factors- a change in legislation.

   • Over-Borrowing- more money borrowed = interest rate

2. Not competitive

   • Ineffective marketing

   • poor leadership

3. Failure to innovate

• Failed to adapt to new technology

• not developing new products

• not prepared to take risks and invest money

Failure to innovate

• Failure to adopt new technology

• Not developing new products

• Not prepared to take risks and invest money