IGCSE Business Studies

Business

An organisation which combines the factors of production to produce goods and services to satisfy people's wants and needs

Need

is a good or service essential for living.

Want

is a good or service which people would like to have, but which is not essential for living. People's wants are unlimited.

Economic problem

There exist unlimited wants but limited resources to produce the goods and services to satisfy those wants, this creates scarcity.

Scarcity

Scarcity is the lack of sufficient products to fulfill the total wants of the population.

Factors of production

are those resources needed to produce goods or services. There are four factors of production and they are in limited supply.

(factor of production) Land

is the term used to cover all of the natural resources provided by nature and includes fields, forests, oil, gas, metals and other resources.

(factor of production) Labour

is the term used to describe the number of people available to make products.

(factor of production) Capital

is the finance, machinery and equipment needed for the manufacture of goods.

(factor of production) Enterprise

is the skill, and risk-taking ability of the person who brings the factors of production together to produce a good or a service. For example, the owner of a business. These people are called entrepreneurs.

Opportunity cost

is the next best alternative given up by choosing another item.

Specialisation

occurs when people and businesses concentrate on what they are best at.

Division of labour

is when the production process is split up into different tasks and each worker performs one of these tasks. It is a form of specialisation.

Advantages of division of labour and job specialization

•Workers are trained in one task and specialize in this-Increases efficiency

•Less time wasted moving around workbenches

•Employment increases

•Lower costs

•Increased production

Disadvantages of division of labour and job specialization

•Efficiency might fall from bored workers

Production can be stopped if no one to fill in for worker

Added value

is the difference between the selling price of a product and the cost of bought in materials and components.

How to increase added value

-Increase selling price but keep the costs the same, to do this you need to have a good image of your product

-Reduce cost but keep selling price the same, this might decrease the quality

Primary sector

of industry extracts and uses the natural resources of the earth to produce raw materials used by other businesses

Secondary sector

of industry manufactures goods using raw materials provided by the primary sector.

Tertiary sector

of industry provides services to consumers and the other sectors of industry.

Industrialization

The growing importance of the secondary sector in developing countries

Advantages of industrialization

Increased living standard since higher national output

•Increasing output result: lower imports and higher exports

•Employment increases

•Tax money increases

•Value added to country's raw materials

Disadvantages of industrialization

•Urban overcrowding- housing shortages and poor living standards

•Expansion on manufacturing makes it difficult to recruit and maintain staff

•Business import costs will increase

•Pollution from factories is bad

•small businesses can't compete against multinationals

De-industrialisation

occurs when there is a decline in the importance of the secondary, manufacturing sector of industry in a country.

Disadvantages of de-industrialization

•Increase in competition for businesses

•Structural unemployment- some people become unemployed since don't have the skills to work in the tertiary sector

Advantages of de-industrialization

•Income and living standards of the citizens increase •Reduction of manufacturing goods leads to less pollution

Why does de-industrialization happen

-Sources of primary products become depleted

-Most developed countries can't compete in manufacturing against newly industrialized countries

-As the country's total wealth increases and living standards rise, more people spend more money on travel and restaurants than on manufactured products

Mixed economy

has both a private sector and a public sector.

Private sector

Businesses not owned by the government. Services are charged and paid for by the customer

Public sector

Government owned and controlled businesses and organisations. Services provided are free and are paid for by taxes.

Privatisation

When governments sell public sector businesses to private sector businesses

Entrepreneur

is a person who organises, operates and takes the risk for a new business venture.

Benefits of being an entrepreneur

-Independence- able to choose how to use time and money

-Put ideas into practice

-May become famous and successful if business grows

-May be profitable and the income might be higher than working as an employee for another business

-Uses of personal interests and skills

Disadvantages of being an entrepreneur

-Risk of failing business

-Capital- source own money

-Lack of knowledge and experience

-Opportunity cost- lost income from not being employed in another business

Qualities of an entrepreneur

Hard-working: Long hours, few vacation days

Risk-taker: Makes uncertain decisions

Creative: Develops new ideas for products, services, and marketing

Optimistic: Has a positive outlook on the future

Self-confident: Convinces others of business success

Innovative: Puts new ideas into practice

Independent: Motivated to work alone

Effective communicator: Clearly presents business ideas to various stakeholders

Why do governments support business startups

-Reduce unemployment

-Increase competition- Give customers more choice and compete with already established businesses

-Increase output of goods/services

-Benefit society with social enterprises

-Can grow further to become successful

How do governments help business

-Business idea and advice from expertises

-Finance- Loan money to businesses with little interest

-Labour- Gives businesses money to train employees

Research- availability of research facilities from unis

Business plan

A business plan is a document containing the business objectives and important details about the operations, finance and owners of the new business.

How does a business plan help an entrepreneur

-Keep strategy

-Clear objectives

- Idea on cost and revenue

-Know their target market

-Helps hiring people and buying machinery

-Encourages banks to give them loans

Ways to measure business size

-Number of employees

-Value of output

-Value of sales

-Value of capital employed

Business size: Number of employees

Easy to calculate and compare with other businesses.

-Some firms are capital intensive, using a lot of machinery.

-Should 2 part-time employees be considered one employee or two

Value of output

Common way to compare business in the same industry(especially secondary sector)

-A high value of output does not mean that a business is large when using other methods, e.g a business has few workers but produces few, expensive products whereas a business has many workers producing many cheap products

-The value of output doesn't mean all products get sold

Value of sales

Method used to compare businesses usually selling the similar kind of product

- Misleading if used to compare businesses selling different products

Value of capital employed

The total capital invested into the business.

Limitations:

-Some companies might employ a very little amount of capital but might have a large number of employees.

Value

How much something is worth.

Capital employed

is the total value of capital used in the business.

Why do owners want their business to grow

-Higher status for owners and managers, managers and owners paid more in bigger firms

-Lower average cost( Economies of sale)

-Larger market share giving business more influence when dealing with suppliers and distributors

Internal growth

occurs when a business expands its existing operations

External growth

is when a business takes over or merges with another business.

Integration

is when one firm is integrated into another one.

Merger

is when the owners of two businesses agree to join their firms together to make one businesses.

Takeover

is when one business buys out the owners of another business.

Horizontal integration

is when one firm merges with or takes over another one in the same industry at the same stage of production.

Benefits of horizontal integration

-Internal economies of scale

-rationalisation- produces more with less

-Diversification of products

-Reduces competition

-Increases market share and pricing power

-creates harder industry to compete in

Benefits of vertical integration

-Control of the supply chain reduces costs and improves products' quality

-Access to key raw materials limiting rival businesses also supplying from there

-Better control over how products are sold in retail- leads to higher profit margin

-Removing suppliers for other businesses

Vertical integration

is when one firm merges with or takes over another one in the same industry but at a different stage of production, it can be forward (higher stage of production) or backward (lower stage of production).

Conglomerate integration

is when one firm merges with or takes over a firm in a completely different industry, this is also known as diversification.

Benefits of conglomerate integration

-Diversification spreads risk

-Transfer of ideas between the different

sections of the business

Problems of business growth and how to overcome them

- less control over larger business - Operate in small units

-Poor communication- Operate in small units or use technology

-Expansion is expensive leading to not enough finance- Expand slowly and ensure sufficient long-term finance is available

-Integration- Introducing different styles of management and communication with workforce

Why do some businesses stay small

-The type of industry business operates in- Expansion of personal services or specialised products is difficult

-small market size- business which operates in that market is likely to remain small

-owner's preference- Owner want to avoid the stress of a large company

Why some businesses fail

-Poor management

-Failure to plan for change

-Poor financial management

-Over-expansion

-Risks of new business startups

Sole trader

is a business owned by one person.

Sole trader advantages

Easy to setup- low capital and little legal formalities

No need to publish annual financial accounts

Full control and quick decision-making

Owner gets all profit

Personal touch allows for strong customer relationships and feedback.

Sole trader disadvantages

Unlimited liability

Full responsibility

Limited capital and finance: restricted growth and reliance on savings or loans

Lack of continuity: business ceases to exist if owner dies or retires

Liability

The state of being responsible for something, especially by law.

Limited liability

means that the liability of shareholders in a company is only limited to the amount they invested.

Unlimited liability

means that the owners of a business can be held responsible for the debts of the business they own. Their liability is not limited to the investment they made in the business.

Partnership

is a form of business in which two or more people agree to jointly own a business.

Partnership advantages

Easy setup with minimal legal formalities

No need to publish annual financial accounts

More skills and idea input to the business

Increased capital investments from partners

Partnership disadvantages

Conflict delays decision making

Unlimited liability

Smaller investments compared to larger companies

Lack of continuity: business may dissolve if a partner retires or dies.

Partnership agreement

is the written and legal agreement between business partners. Not essential to have it but always recommended.

Unincorporated business

is one that does not have a separate legal identity. Sole traders and partnerships are unincorporated businesses.

Incorporated business

are companies that have separate legal status from their owners.

Shareholders

are the owners of a limited company. They buy shares which represent part ownership of a company.

Private limited companies

businesses owned by shareholders but they cannot sell shares to the public

Private Limited companies advantages

Raise capital from sale of shares- business expansion

Limited liability for shareholders

Separate legal identity

Continuity- company can continue operations even if shareholders change

private limited companies disadvantages

Cannot sell shares to public

Legal formalities

Accounts are available to public

Not easy to transfer shares

Public limited companies

businesses owner by shareholders but they can sell shares to the public and their shares are tradeable on the Stock Exchange

public limited companies advantages

Can sell shares to public

Rapid expansion/specialist managers appointed

Limited liability

Continuity - company can continue operations even if shareholders change

public limited companies disadvantages

Legal formalities

Accounts and other info available to public

Separate ownership and control

Selling shares to public is expensive

Annual general meeting (agm)

is a legal requirement for all companies. Shareholders may attend and vote on who they want to be on the Board of Directors for the coming year.

Dividends

are payments made to shareholders from the profits (after tax) of a company. They are the return to shareholders for investing in the company.

Joint venture

is when two or more businesses agree to start a new project together, sharing the capital, the risks and the profits.

Joint venture advantages

sharing of costs- good for expensive projects

Local knowledge when joint venture company is already based in the country

Risks are shared

Joint venture disadvantages

If project is successful, then profits are shared with the joint venture partner

Disagreements over important decisions

Culture clash

Franchise

is a business based upon the use of the brand names, promotional logos and trading methods of an existing successful business. The franchisee buys the license to operate this business from the franchisor.

Advantages to the franchisor

Rapid, low cost method of business expansion

Gets income from franchisee in form of franchise fees and royalties

Franchisee will better understand local preferences and so can advertise and sell appropriately

Ideas and suggestions from franchisee

Franchisee will run the operations

Disadvantages to the franchisor

Poor management of one franchised outlet could lead to bad reputation for the whole business

Franchisee keeps profits from the outlet

Advantages to the franchisee

Low fail rate due to established brand

Franchisor gives technical/managerial support

Franchisor will supply the raw materials/products/advertising payments

Banks are often willing to lend to franchisees due to low risk

Disadvantages to the franchisee

Less independence than operating non-franchised business

Maybe unable to make decisions for the local area

License fee needs to be paid to franchisor and possibly percentage of annual turnover

Public corporations

These are businesses that are fully owned by the government. But they are managed by a board of directors who are made clear what the purpose of the business is.

Public corporation advantages

Very important businesses can't be owned by individuals

Businesses, natural monopolies, are controlled by the government.

Reduces waste in an industry.

Rescue important businesses when they are failing through nationalism

Provide essential services to the people

Public corporation disadvantages

Low motivation since profit isn't main objective

Subsidies lead to inefficiency and unfair to private businesses

No competition to public corporations, so no incentive to improve

Governments support businesses for popularity

Business objectives

are the aims or targets that a business works towards.

Benefits of business objectives

Gives workforce a clear target to work towards, increasing motivation

Decisions are focused on achieving objectives

Unites entire business under one goal

Comparison of business performance vs objectives

Different types of objectives

-Survival

-Profit

-Growth

-Returns to shareholders

-Market share

-Service to the community

Survival

New business's main objective to keep it operating, this might need to lower product prices reducing profits

Profit

Total income of a business (revenue) less total costs. They pay a return to owners after investing capital into business and provide finance for further investment into business.

Increase of return to shareholders

Increasing profit and by increasing share price

Growth

Job security in larger business

Increases managers salaries and status

Opens up taking risks like moving into new products and new markets

higher market share from growth in sales

lower average costs (economies of scale)