Business Studies 0450 - Complete Notes
Understanding Business Activity 1.1
Purpose and Nature of Business Activity
Needs: Essential goods or services for living.
Wants: Non-essential goods or services people desire.
Business Activity: Producing goods/services to satisfy consumer needs/wants.
Economic Problem: Unlimited wants vs. limited resources, creating scarcity.
Factors of Production: Resources used to produce goods/services.
Land: Natural resources (minerals, oil, forests).
Labour: Available workforce.
Capital: Machinery, equipment, finance.
Enterprise: Entrepreneurs taking business risks.
Scarcity: Insufficient goods/services to meet population wants.
Opportunity Cost: Benefit lost from the next best alternative forgone.
Importance of Specialization
Specialization: Focusing on what people/businesses do best.
Minimizes wastage of factors of production.
Benefits to Businesses: Increased efficiency, reduced costs.
Benefits to Consumers: Higher quality, larger supply, lower prices.
Pros of Specialization
Increased efficiency and productivity.
Reduced time wasted switching tasks.
Improved product quality.
Machinery can operate 24/7.
Cons of Specialization
Boredom leading to lower efficiency.
Lack of flexibility; workers can only do one task.
Production stops if a specialized worker is absent.
High costs of hiring skilled employees.
Division of Labour: Dividing production into separate tasks, each worker doing one task.
Purpose of Business Activity
Consumer Goods: Products sold to final consumers.
Tangible goods that can be seen and touched.
Durable (e.g., computers) - used repeatedly.
Non-durable (e.g., food, drink) - used once.
Consumer Services: Non-tangible products.
Examples: insurance, transport, hotels, salons.
Capital Goods/Producer Goods: Physical goods used by businesses to produce other goods/services.
Examples: machinery, delivery vehicles.
The Concept of Added Value
Added Value: Difference between selling price and cost of raw materials.
Businesses add value at each production stage.
Turning raw materials into a good/service sold at a higher price.
Other costs (wages, energy) must be deducted from added value to calculate profit.
An important business objective.
How to Increase Added Value:
Branding: Creates consumer desire and perceived value (e.g., Ferrari, iPhone).
Excellent Service Quality: Personalized service justifies higher prices (e.g., 1st class travel).
Product Features: More features allow higher pricing.
Convenience: Ready meals, home delivery justify higher prices.
Reducing Costs: Lower material costs while maintaining or increasing selling price.
Classification of Businesses 1.2
Basis of Business Classification:
Primary Sector: Extracts natural resources (farming, fishing, mining).
Secondary Sector: Processes and manufactures goods (refining, food processing, construction).
Tertiary Sector: Provides services to consumers/businesses (shops, restaurants, banks).
Chain of Production: Involves activities from primary, secondary and tertiary sectors.
*Reasons for changing importance of Business Classification:Industrialization: Growing secondary sector; declining primary sector (e.g., China, India).
De-Industrialization: Growing tertiary sector; declining secondary sector (e.g., UK, USA).
Change in Customer behavior as a result of both industrialization and de- industrialisation:
Higher incomes lead to demand for better quality and wider product choice.
Better education leads to better product knowledge.
More leisure time increases demand for tertiary sector activities.
Change in Business Behavior resulting from:
Need for finance to fund expansion and combat global competition.
Need for quick and cheap internal and external communications to cater to wider markets.
Need to provide better customer services.
Business Enterprises Between Private Sector and Public Sector 1.2.2
Mixed Economy: Resources owned/controlled by both private and public sectors.
Private Sector: Owned/controlled by individuals/companies for profit.
Types: Sole traders, partnerships, limited companies, franchises, joint ventures, social enterprises.
Public Sector: Controlled by the state/government.
Types: Government departments, public corporations, nationalized industries (airports, railways).
Decision Making of Production:
Private Sector
What to produce: Consumer choices determine what is produced to maximize profit.
How to produce: Firms choose the most cost-effective production methods to maximize profits.
For whom to produce: Products available to customers with sufficient buying power.
Public Sector
What to produce: Government decides based on the needs of the population.
How to produce: Decisions based on providing good quality rather than profit-making.
For whom to produce: Some products are free; others are subsidized for affordability.
Examples:
*Retail shops, Jet Airways (Private).
*Electricity production, government hospitals. (Public)
Enterprise and Entrepreneurship 1.3.1
Entrepreneurs: Individuals with a business idea who take financial risks to start and manage a business.
Prepared to invest savings, accept failure risks, control management decisions.
Characteristics of Successful Entrepreneurs:
Innovative: Generates new ideas for goods/services.
Self-motivated and Determined: Has drive to keep moving forward.
Self-confident: Believes strongly in their abilities and ideas.
Multi-skilled: Understands finance, marketing, human resources.
Leadership Qualities: Communicates well, motivates others.
Initiative: Develops good plans to achieve objectives.
Results-driven: Focuses on profit.
Risk-taker: Accepts potential failure.
Good at Networking: Learns from others.
Business Plan: Detailed written document outlining business purpose and aims.
Used to persuade lenders/investors to provide finance.
Contents of a Business Plan:
The Business: Details of entrepreneur, business idea, skills, and expertise of managers/workers.
Business Opportunity: Product information, market research, reasons customers will buy product.
The Market: Current size, potential growth, main competitors.
Objectives of the Business: Goals the business hopes to achieve.
Financial Forecasts: Cash-flow forecast, projected sales, revenue, and profit for the first year of trading.
Revenue The amount a business earns from the sale of their products.
How Business Plans Assist Entrepreneurs:
Persuades lenders/investors to provide finance.
Provides a sense of purpose and direction.
Sets out required resources (finance, skills, workers).
Provides targets and enables progress monitoring.
Why and How Governments Support Start-Ups 1.3.1
Business Start-up: A newly formed business.
Why Governments Support Start-ups:
Job Creation: Employs a large workforce, reducing unemployment.
Increased Variety of Products: Introduces new goods/services.
Increased Competition: Leads to lower prices and better quality.
Specialist Goods: Supplies niche markets.
Become Larger Businesses: May grow in future, increasing economic benefits.
Lower Costs: Sells at lower prices than larger businesses.
How Governments Support Startups:
Grants and low-interest loans.
Lower taxation rates or tax holidays.
Rent-free premises.
Free/subsidized training.
Information, advice, and support from specialist agencies.
Measuring Business Size 1.3.2
Methods of Measuring Business Size:
Capital Employed: Value of long-term finance invested.
Smaller businesses invest less capital.
Problem: Varies across industries.
Value of Output: Earnings from selling products.
Smaller businesses have lower revenue.
Problem: Doesn’t fairly compare different industries.
Number of Employees: Larger businesses employ more people.
Problem: Automated firms need fewer workers.
Market Share: Larger share indicates larger business.
if a market is a small one, some businesses may have a larger market share, though value of output may be smaller than a firm which may have a larger value of output with a smaller market share in a larger market.
Business Growth and Size 1.3.3
Why Owners May Want to Expand Their Business:
Increase in Profits: Higher output leads to increased sales, revenue, and profit.
Increase in Market Share: More widely known products and brand names; less risky product launches.
Economies of Scale: Reduced average costs due to higher efficiency and output.
Greater Power to Control Market: Larger businesses can influence prices and government policies.
Protection from Takeover: Larger companies are more difficult and expensive to takeover.
Different Ways Businesses Expand:
Internal Growth (Organic Growth): Slow but avoids problems of external growth.
Increasing production capacity by buying more machinery.
Developing new products.
Finding new markets.
Growing customer base through marketing.
External Growth (Inorganic Growth/Integration): Merging with or taking over other businesses.
Horizontal Integration: Combining firms in the same industry and sector.
Forward Vertical Integration: Combining firms where one is a customer of the other.
Backward Vertical Integration: Combining firms where one is a supplier to the other.
Conglomerate Integration: Combining firms in completely different industries.
Problems Linked to Business Growth:
Internal growth is slow compared to external growth.
Mergers can cause job losses and poor decision-making.
Diseconomies of scale may occur, increasing average costs.
Different management styles and objectives may lead to conflict/loss of control.
How to Overcome These Problems: Careful planning, adequate resources, worker awareness.
Why Some Businesses Remain Small:
Owner’s Choice:
Doesn’t want increased responsibility and workload.
Wants total control of business and wishes to maintain close relationship with customers.
Avoids risks of growth.
Market Size:
Local market services may not want to expand beyond neighborhood. Consumers might not travel farther away for services easily found nearby.
Access and Availability of Capital:
Lack of capital and bank loans can prevent expansion.
Market Domination:
Large companies dominate market, making it hard for smaller businesses to compete. Consumers have loyalties to bigger firms because they offer economies of scales.
Reasons for Business Failure 1.3.4
Causes of Business Failure:
Poor Planning and Lack of Objectives: Lacks detailed business plan.
Poor Cash Management: Ineffective handling of cash inflow & outflow.
Poor Choice of Location: Businesses not located closer to market or raw materials.
Poor Management: Lack of relevant skills.
Failure to invest in new technologies: Business is unable to compete in terms of price, quality and design.
Poor Marketing: Inadequate market research.
Lack of Finance: Fails to make the most of opportunities.
Competition: Globalization increases the competition.
Economic Influences: Unemployment, high-interest rates, and taxation.
Types of Business Organization 1.4.1
Sole Trader: Owned/controlled by one person, takes risks, receives profits.
Advantages
*Easy to set up.
*Makes all decisions.
*Keeps all profit.
*Be their own boss, and make their own decisionsDisadvantages
Unlimited liability.
Difficult to raise funds.
Lacks business skills.
Difficult to compete with larger firms.
Long working hours.
Business ceases to exist if owner dies.
Partnerships: Formed by two or more people sharing responsibilities/profits.
Advantages
Greater access to finance.
Shared decision-making.
Reduced workload.
Easy to set-up.
Disadvantages
Unlimited liability.
Profits must be shared.
Business ceases to exist if one partner leaves.
Partners bound by business decisions, even if they don’t agree.
Difficult to raise extra finance.
Unincorporated Business: No separate legal identity from owners.
*Owner's personal possessions are at risk.Unlimited Liability: Owners use personal wealth to cover business debts.
Private and Public Limited Companies:
Private Limited Company: Small to medium, owned by shareholders with limited liability; cannot sell shares to the public.
*Shares are only sold to a small amount of shareholders.Public Limited Company: Large, owned by shareholders with limited liability; can sell shares to the public at the stock exchange.
Same Features for Private and Public Limited Companies:
Legal documents (articles of association and memorandum of association) must be completed.
Shareholders invest capital by purchasing shares.
Shareholders have limited liability.
Finance can be raised by selling shares.
Company financial accounts are available for public.
*Business continues despite death or retirement.
Ordinary shareholders are owners.
*Shareholders vote during AGM.
End of year statements given to tax authorities.
* **Differences Between Private and Public Companies**:
| Feature | Private Limited | Public Limited |
| :-------------------------- | :-------------------------------------------- | :-------------------------------------------------- |
| Owners | Small no. of shareholders (family or friends) | Large no. of shareholders (general public) |
| Size | Fairly small | Very large companies |
| Company Title | Name ends with LTD | Name ends with PLC |
| Sale of Shares by company | Sold privately often to friends & family. | To general Public and other organizations |
| Sale of Shares by Shareholders| Often difficult | Quick and easy to sell |
| Control | Few shareholders | Thousands of shareholders |
| Raising Capital | Difficult. | Easy |
| Borrowing Finance | Easier than unincorporated businesses. | Can raise large sums at good rates due to reputation |
*Limited liability means owner only risk losing shares and not personal wealth.\Payment reward from profits to shareholders are called dividend.
Collateral means non-current assets offered as security against borrowing.
* Disadvantages of Public Limited Companies: Shared by private companies.
* Costly legal formalities.
* Director's decisions can be influenced by major investors.
* Risk of takeover due to easy share trading.
* Stricter legal requirements for information disclosure.
Franchise: Buying the right to use name/logo/product of an existing business.
Advantages
Less chance of failure.
Franchisor provides training and advice.
*Take percentage of revenue and profits.
*Checks for quality as supplier is guaranteed supplies.
Disadvantages
High initial cost.
*Strict controls in what the Franchisee is allowed to do
Joint Venture: Two or more businesses work together on a project.
Advantages:
Reduced risks and costs shared. Reduces risks for each business and cuts costs
*Each business brings different expertise.
Market and product knowledge is shared.
Disadvantages:
*Mistakes can damage reputations.Businesses may have different styles making Decisions difficult.
\Incorporated Business: Have separate legal entity with limited liability and Legally separate.
Unincorporated Business: doesn't have a separate legal identity from its owners and the liability is unlimited
*Both the risk and financial responsibility falls on the owner.CHOOSING TYPE OF BUSINESS ORGANISATION
Depends on Number of Owners, business owners role in management,Finacial risk, How quickly owners want to start operating their business and the potential size of their business.BUSINESS ORGANISATIONS IN THE PUBLIC SECTOR EX PUBLIC CORPORATIONS example of a public sector
Owned and controlled by the state financed through taxation.social objectives.services are often provided for free or at low price.
Business Objectives for businesses 1.5
Objective must be SMART: Specific: Refer to something specifically,Measurable: Relate it with numbers to measure progress Achievable and Agreed: Should be agreed by everyone including Employees Realistic and Relevant:To fulfill the objective you need to have the required resources in hand. Time-Specific:should be set by deadlines.
Objectives give a sense of purpose and direction to business.DIFFERENT BUSINESS OBJECTIVES
Suvial: Prevents failure during the first years
Growth: Aims to produce and sell the output
Market Share: Increased brand image.
Corporate Social Responsibility: Ethical issues with the community and Pressure groups and Government and laws.OBJECTIVES OF SOCIAL ENTERPRISES
Profits to be reinvested in business, Benefit the Employees Needs of Environment needs of Local Community.
Role of Stakeholder groups
MAIN INTERNAL AND EXTERNAL STAKEHOLDER GROUPS
Internal Stakeholders:Owners,and shareholders, Managers and employees
External Stakeholders:Lenders,Suppliers, Customers,Government Local community.
*OBJECTIVES OF STAKEHOLDER GROUPS. THEY WANT TO
*Owners/ Shareholders:higher returns, increase Share values
*Managers: Job satisfaction, salary increase and bonuses employees secure pay, fair wage.
*Lenders:Get interest payments when due
*Customers Value for money.
The aims of public sectors are.Accessible for services,Affordable must be cheaper than private sector and open to all regardless.
Motivation of Workers 2.1
*WHY PEOPLE WORK AND WHAT MOTIVATION MEANS
Motivation means behavior of achieving business goals
labour productivity means The efficiency of workers by calculating the output per worker.
Absenteeism: Worker’s non-attendance at work without a good reason.
Labour Turnover means: the rate at which workers leave the business for better opportunity in other businesses.
Benefits of Well-motivated Work force: More competitive, High Productivity. always present better quality.
Motivation theories
*Maslow's Hierarchy five different motivation: physiological, Security, Social ,Esteem , Self-actualization
Some levels are not present in some jobs; rewards belong to more than one level;level of motivation in any job the level of motivation needs to be identified.
*Theory of economic man all individuals are motivated by personal gain money is the main motivator and paid more to work more the extra pay is less than the increased productivity.
difficult to measure an employees output can not guarantee a rise in productivity and non finacial motivators
*Frederick Herzberg Theory aka Herzberg's motivational 2 types Hygiene Factors and motivational Factors/motivators
Hygiene Factors
the workplace to prevent job dissatisfaction:Includes things such as how clean and safe. relationship with others,Supervision and company regulations
motivators increases efforts.Workers more responsibility, advancement Achievement motivation by work by management To satisfied there are no demotivators effect wears off
Job Dissatisfaction:Unhappy discontent a person is with the job.
*Financial Rewards: Used to motivate workers to increase their efforts
Hourly Wage Rate: Workers are payed for the hours they work pay is not related to the production, or efficiency.
Salary: Fixed Annual payment to certain grades and types of staff is not based on hours. do not receive if they have worked longer hours Salary is not linked to worker effort or production.
Piece Rate: Payment to workers based on the number of units produced. Only used to reward production workers Quality of produced may be poor.
Commission: Payment to sale staff based on the value of the items they sell.
Pay is linked to the value of sales and Workers may start leaving, since there is no definite pay
Bonus: An additional reward paid to workers for achieving targets set by managers increase productivity
Performance Related Pay bonus scheme used to reward staff for performing to the required standard fringe Benefits Non-cash rewards and having children discounts on products health care options. accommodation.
Profit Sharing an additional payment to workers based on the profits of the business
Non-financial Rewards: Do not involve any financial rewards Job Rotation: Increasing variety in the workplace by allowing workers to switch from one task to another Job Enlargement: Increasing or widening tasks to increase variety for workers Job Enrichment: Organising work so that workers are encouraged to use their full capabilities additional training is scope for fulfilling the higher levels of the Hierarchy of Needs. How happy and content a person is with their job.
*Job Redesign increase a new challenge learn a new skill chances of promotion
Quality Circles: Groups of workers who meet regularly to discuss work related problems Team-Working groups of workers complete the whole unit of work.
Delegation passing responsibility to perform tasks lower down Cost to business: types workers for some motivators
Here are some policies to increase job satisfaction: Job rotation and job enlargement this is when group of workers are given total responsibility to organise themselves makes the
Organisation and Management2.2
Organisational Structure:levels of management and division of responsibilities Functional departments include finance, marketing, operation,humane resources research& development. Simple organizational charts and hierachy for large firms
Chain of Command route through which authority passes down through the organization and information is passed up the chain of command
Span of control the number of subordinates reporting to each supervisor/manager
Wider the Less expensive Fewer managers Improves worker motivation:better conrtol Better control and quality check worker’s work More managers oppurtunities :More expensive and more slow communication and decision making worker motivation
levels organisation More Closer
Centralized:one where power is held head office.
decentralized:one where power is passed down the organization