Business

1.1. Business Activity

1.1.1. Needs and wants

Needs: things we must have to survive, such as shelter, clothing, food
Wants: things we would like to have to make our lives more enjoyable

People can live without satisfying their wants, but not without meeting their needs

A business aims to fulfil customers’ needs and wants

1.1.2. Scarcity and opportunity cost

Scarcity of resources creates an economic problem. Resources = limited, but people’s wants = unlimited => Choices must be made. Resources used to make one cannot be used for another.
The value of the option not selected is opportunity cost.
- Next best alternative forgone. All other alternatives you give up when you make a choice

1.1.3. Importance of specialisation

Specialisation: process where workers or businesses focus on specific tasks or products to increase productivity and efficiency. When workers specialise => become highly skilled in a particular area => faster and better results

Advantages	Disadvantages
Increased efficiency (less wastage of scarce resources)	Limited market
Higher quality	Fashion and trends changes
Reduced training and production costs	Workers become bored => mistakes/wastage
Greater output from same amount of effort

1.1.4. The purpose of business activity

Business activity: the process of producing goods and services to satisfy consumer demands

Type of factor	Description of factor
Land	All natural resources and space used for production
Labour	Efforts and skills of employees
Capital (has many meanings, so use based on context)	Tools, machinery, other physical assets used to produce
Entrepreneurship	Organises the other 3 to make profit Identify opportunities, bring new products to market

1.1.5. Adding value

Added value: the difference between the selling price of a product and the cost of raw materials used to make it (NOT the same as profit)
Ways to increase added value:
- Quality (materials)
- Branding (trends)
- Extra features
- Improve customer service
- Convenience
- Design
- Packaging
- Make raw materials into finished goods

1.2. Classification of Businesses

1.2.1. Classification of businesses

Primary sector: involves extraction, growing or harvesting of natural resources. Focuses on activities that obtain raw materials from nature. E.g. mining, farming, fishing
Secondary sector: includes any business involved in assembly, processing or construction. Businesses will either make a finished product or parts for another business. E.g. manufacturing and refining
Tertiary sector: involves the provision of services rather than goods. Focuses on activities that support, distribute or provide services to consumers and businesses. E.g. health care, education, restaurant

Name of sector	Primary	Secondary	Tertiary
Main activity	Extract	Make	Service
Example	Cotton farmer	Clothing factory	Transport company/ retailer

All three sectors are linked together. If any part of the chain breaks down => customer will not get the finished product

1.2.2. The changing importance of business classification

Size of each sector varies among countries. It can also change over time. Reasons:

Deindustrialisation

1.2.3. The public and private sectors

Have both public and private sectors: mixed economy

Private sector organisations: business owned and operated by individuals or groups of individuals. Driven by profit and operate independently from government control
Public sector organisations: business owned and operated by the government. Aim to provide services to the public and funded through taxation and government budgets

1.3 Enterprise, Business Growth, and Size

1.3.1. Characteristics of successful entrepreneurs

Entrepreneur: individual who creates a new business, bearing most of the risk and enjoying most of the rewards
Characteristics:
- Risk-taker
- Creative
- Motivated/ determined
- Initiative
- Effective communicator
- Innovative
- Strong leader
Enterprise: finding new business opportunities and taking advantage of them to make a profit. Whereas an entrepreneur is an individual who takes a risk to start a business

1.3.2. How business plans assist entrepreneurs

Business plan: a document that contains the aims and objectives of a business, and important details about its operations, finance, and owners. Includes:
- The business: details of entrepreneur, idea for business, information about the skills and expertise of employees
- The business opportunity: info about product and why entrepreneurs believe customers will buy it; includes market research
- The market: current size, potential for growth and product’s main competitors
- Business objectives: what they hope to achieve
- Financial forecasts: cash-flow forecast and projected sales, revenue and profit for at least the first year of trading

Advantages	Disadvantages
Supports bank loans/investments	Inaccurate
Give a sense of purpose and direction	Time-consuming
Helps decision-making	New entrepreneurs lack experience
Helps identify potential risks

1.3.3. How and why governments support business start-ups

WHY: New businesses offer many benefits to the economy and consumers:

Jobs => employment
Increased competition => more choices and/or lower prices
Provide specialist or new services
If start-up businesses are successful => large businesses

HOW: Provide a range of support:

Financial – grants and subsidies, lower tax rates
Information, advice and support
Location – enterprise zones, rent-free spaces
Training courses for entrepreneurs and/or workers

1.3.4. Methods and problems of measuring business size

Size can matter. Being large could indicate business growth or a lower risk for lenders. No perfect way to measure size

Measure	How it is measured	Possible problems
No. of employees Total count of employees at any given time– simple measure that helps indicate size and capacity	No. of employees in the business	Uses lots of machinery Has lots of part-time employees
Capital employed: Total money/resources and assets that a business uses to generate profits. Shows how much money is being put to work	Amount of money/ invested by owners/borrowed from lenders	Any business can have a lot of expensive machinery
Value of output Amount of goods/services that a business produces over a specific period. Measures how much the company is producing and its productivity	Amount of output over a given period	Comparing different types of products Not all products are sold
Value of sales - market share: The total portion of the market or sales that a particular company controls compared to its competitors. Usually expressed as a percentage and helps show how well a company is performing in its industry	Value of sales over a given period Formula: Market share = (Company sales/total market sales) * 100	A firm might sell few high-value items while others may sell many cheap items

1.3.5. Why owners may want to expand the business

Advantages:

Economies of scale – leading to lower average/unit costs
Diversification/spread risk – less reliant on one market/product
Financial reasons – higher profits, able to borrow money easily
Personal objectives – power and status
Market domination – increased power or market share in existing markets => gain more influence with suppliers and customers
Access to new markets

1.3.6. Different ways a business can grow

Two ways: internally and externally

Method	Internal	External
	Expanding its own activities	Taking over or merging with another business
Advantages	Able to keep control Relatively inexpensive as business can use its own resources	Much quicker => gain benefits of growth faster
Disadvantages	Very slow process	Harder to control Change of ownership

1.3.7. The problems of growth

Growth does not guarantee success.

Problems of growth	Different options to overcome problems
Harder to manage and control (Overexpansion): grow too quickly → mistakes in operation	Hire specialist managers Review organisational structure
Communication problems	Use two-way communication methods Delegate and involve employees in decision-making
Financial problems: cash flow issues → hard to pay bills or invest in new project	Use long-term sources of finance Grow steadily
Lack of focus	Set clear objectives

1.3.8. Reasons why some businesses remain small

Demand not large enough => unable to grow
Offers specialist goods/services (niche markets)
Owners want to be their own boss to maintain control, avoid stress of managing operations
Can be more flexible, able to react to market changes quickly
Limited access to capital, skilled labour can restrict business activity to grow
Too many competitors

1.3.9. Why some businesses fail

Lack of finance/ poor financial management
Changes in technology
Economies factors
Changing market conditions
Overexpansion
Poor planning
Competiton
Lack of effective marketing

Why new businesses fail Common for them to fail	Why established businesses fail
Lack of market research	Failure to adapt
Lack of funding	No innovation
Poor management	No risk-taking
Access to new technology, expertise and knowledge (enhanced innovation)	Increased competition

1.4. Types of business organisation

1.4.1. Sole trader

Sole trader: business that is owned and controlled by just one person who takes all the risks and receives all the profits. Has unlimited liability

Advantages	Disadvantages
Easy to set up	Losing personal wealth if debt (unlimited liability)
Can make decisions quickly	Limited source of finance
Keep all profits	No sharing workload (long hours)
Total control	Rely on own skills and ideas (lack of skills)
Private business details	Carry all business risks
Small amount of start-up capital

1.4.2. Partnerships

Partnership: business formed by two or more people who will usually share responsibilities. Has unlimited liability

Advantages	Disadvantages
Easy to set up (Deed of Partnership)	Unlimited liability
Can cover if other owner ill or away	Limited source of finance
Private business details	Must share profits
Partners can specialise in tasks	Slower decision-making than sole trader
Share risks and responsibilities	Disagreements can cause problems
Share workload and ideas	Everyone responsible for actions of other partners (Decision-binding)
More sources of finance than sole trader

1.4.3. The difference between unincorporated businesses and limited companies

Sole traders and partnerships are both unincorporated => unlimited liability: does not have a legal identity separate from its owner
Unlimited liability: business owners are personally responsible for all of the debts of the business no matter what the value. Might have to give up personal belongings
Limited liability: investors can only lose the money they have invested and no more

1.4.4. What is a limited company?

Incorporated business: business is responsible for its own debts
Shareholders: any individual or organisation that owns shares in a business
Run by directors who do not need to be shareholders
Limited liability
Shareholders have no responsibility for day-to-day decision

1.4.5. Private limited companies

Private limited company (ltd): owned by shareholders who have limited liability. Expand and grow by selling shares
Shares can only be sold if all shareholders agree: “private”
Shares tend to be owned by family and friends

Advantages	Disadvantages
Limited liability	Cannot sell shares publicly (Stock Exchange)
Sell shares = Greater capital	Dividends
Easier to keep control compared to PLC (public limited company)	Expensive to set up
Incorporated business	Restricted number of shareholders
Continuity of existence	Need agreement to sell shares
	Must disclose some financial info

1.4.6. Public limited companies

Public limited companies (plc): type of company whose shares can be bought and sold by the general public on the stock market
Characteristics:
- Minimum capital requirement
- Shares traded on stock exchange
Stock exchange: centralised location where the shares of publicly traded companies are bought and sold

Advantages	Disadvantages
Limited liability	Expensive to set up
Very large capital	Must disclose detailed financial info every year
Able to sell on stock exchange	Additional costs of advertising/selling shares on stock exchange
Do not need permission to sell shares	Individual shareholders have little say
Incorporated	Greater risk of takeover because no control of who buys shares (51%)
Continuity of existence	Dividends

1.4.7. Franchises and joint ventures

Franchise: business model where one party (franchisor) allows another (franchisee) to operate under its brand and sell its products/services
Franchisor: the original business owner that grants the rights to franchisees and provides support
Franchisee: the individual/entrepreneur that buys the rights to operate a franchise and follows in the franchisor’s model
Royalty: a fee paid by the franchisee to the franchisor, usually a percentage of sales, for using the brand and receiving support

Franchisor

Advantages	Disadvantages
Expanding business without investing a lot of money	One bad franchisee can ruin whole reputation
Shared risks with franchisee	Costs of supporting all franchisees
Receive royalty payments	Only gets a percentage of profit made
Most franchisees are more motivated, so greater chance of profit

Franchisee

Advantages	Disadvantages
More chance of success, as selling well-known product	Less independence because of rules
More likely bank investments because less risks than new business	Cannot keep all profit
Has support of franchisor – advice, training and marketing	Can only sell products of franchisor
Success of another franchisee and help that own	Expensive initial cost

Joint venture: business arrangement in which two or more parties agree to join their resources for a specific project or business activity. Sharing risks, profits, and management

Advantages	Disadvantages
Shared resources	Unclear communication of objectives
Access to new markets	Objectives could clash, reducing success chances
Reduced risk as it is shared	New entrepreneurs lack experience
Access to new technology, expertise and knowledge (enhanced innovation)	Shared profits
Increased capacity	Complexity in management
Increased credibility	Cultural differences

1.5. Business Objectives

1.5.1. Why businesses need objectives

Business objectives: a specific measurable goal that a company aims to achieve within a defined time period
Can have several objectives and their importance can change, depending on factors such as size, type of business, economic situation and differing aims of stakeholders
Stakeholders: any group of individuals who have an interest in the activities of a business
Important to provide direction, act as a measure to determine what success is
Types of objectives
- Survival/break-even (not making profit/loss)
- Profit (Revenue greater than costs
- Growth
- Increasing market share
- Increasing sales revenue
Others
- Providing quality products/services
- Brand awareness
- Corporate social responsibility (commitment to positively impact society and the environment beyond profit making)

1.5.2. Social enterprise

Social enterprise: a business with social objectives that reinvests most of its profits back into the business or society to benefit others. Puts social objectives ahead of financial objectives

1.5.3. Different stakeholders and their objectives

Stakeholders: Someone who impacts the business and someone who have an interest in the business and how it runs
Internal stakeholders (inside): working for it or owning it

Internal group	Typical objectives	Possible influence
Owners/Shareholders	Increased dividends (payment for shareholders with profits at the end of the year) Growth (Rise in value of shares)	Power to vote out directors Sell off or refuse to buy more shares
Employees (includes managers)	Good working conditions Better pay Job security Success → promotion Status and power bonuses	Take industrial action Affect quality/quantity of products Quitting Managers have some control over actions

External stakeholders: outside

External group	Typical objectives	Possible influence
Customers	High-quality products Good customer service Fair/Competitive prices	Stop buying goods Write bad reviews
Banks and other lenders	Want businesses that can afford and pay back Good return on investment Being paid on time	Can demand money back Refuse to lend money
Local community	Social/environmental issues such as jobs, less pollution, and available local services Job opportunities	Organise pressure groups to influence business or government to act ethically and morally
Government	Economic growth Increased employment Protection of employees and customers	Legislation Financial support Government politics
Suppliers	Increase sales volume Regular and on-time payments Good relationship	Can withdraw supplies or trade credit

Stakeholder conflicts: Different stakeholders may disagree with each other

Managers have to compromise when they come to decide on the best objectives for the business they are running
Ex. of conflicts between stakeholders:

Customers	Suppliers
Low price	High price for more profit

Pressure groups	Business owner/Shareholders
Better life quality– environment	Higher profit, so they avoid using high-quality waste management