Understanding Business

Roles of business in society

  • A business is an organisation that makes, buys or sells goods or provides a service. All businesses aim to satisfy consumer needs and wants

  • Needs are the basic requirements that are essential for survival. These are food, water, clothing, shelter and warmth

  • Wants are things we would like to have but don’t need to survive. These include luxuries such as mobile phones or holidays

For a business to survive, it needs to satisfy the needs and wants of the consumer. Business can satisfy needs and wants by providing goods and services to the consumer

  • Goods are products that you can see and touch (tangible) such as laptops, clothes or food

  • Services are products that you cannot hold hold or touch (intangible) such as public transport, a haircut or a visit to the cinema

For a business to be able to provide goods and services it will need to combine a variety of resources. These are known as the factors of production

Sectors of Industry

  • Primary

  • Secondary

  • Tertiary

  • Quaternary

Primary

The primary sector of industry is concerned with the extraction of raw materials or natural resources from the land. Any business that grows goods or extracts materials from the land would be classed as a primary sector business

  • Farming

  • Mining

  • Fishing

  • Oil production

Secondary

The secondary sector of industry is concerned with manufacturing. This would involve taking the raw materials from the primary sector and converting them into new products

  • Car manufacturers

  • Food production

  • Building companies

Tertiary

The tertiary sector of industry is concerned with providing a service. Services are activities that are done by people or businesses for consumers

  • Hairdressers

  • Banks

  • Supermarkets

  • Cinemas

Quarternary

The quaternary sector consists of those industries providing information services

  • Computing

  • ICT

  • Consultancy

  • Research and development

Sectors of economy

  • Private

  • Public

  • Third

Private

  • Sole trader

  • Partnership

  • Private limited company

Owned and controlled by private individuals.

Aims are to survive and make a profit

Public

  • National government

  • Local government

Owned and controlled by the government

Aims are to provide a service to the public and are financed by taxes

Third

  • Charities

  • Voluntary organisations

  • Social enterprises

Owned and controlled by volunteers

Aims to raise money and increase awareness for good causes

Types of organisations

Private sector

Sole trader

A sole trader is a business owned by one person

They are usually small in size.

Sole traders rely on their own savings, bank loans or loans from friends and family to finance their business

Advantages

  • keep all their profits for themselves

  • run the business on their own terms

  • make decisions by themselves

Disadvantages

  • very risky

  • unlimited liability (liable for debt)

  • work longer hours as fully responsible

  • they save money on labour as they do things themselves

Partnership

Minimum of two and maximum of 20 partners

A partner who invests but is not involved in the running is called a sleeping partner

Advantages

  • can raise more finance than sole traders

  • different partners can bring different skills

  • workload is shared

Disadvantages

  • unlimited liability

  • profit is shared between partners

  • partners may not always agree on decisions for a business

Limited companies

Private limited company (Ltd)

Companies larger than a partnership

Limited liability meaning an investor only loses the initial stake if a company goes bust

Advantages

  • owners can retain control

  • more able to raise money

  • limited liability

Disadvantages

  • must be registered with the Registrar of Companies

  • high set up costs (legal and administrative)

  • harder to motivate and control workers as theres many more

Public limited company (Plc)

Can offer shares of the business to the public, unlike private limited companies who must invite

There are requirements to be met before becoming a Plc

  • must have a shared capital of £50,000

  • must have two shareholders, two directors and a qualified company secretary

Advantages

  • raise more money by selling shares on the stock exchange

  • easier to growth and diversify

Disadvantages

  • disagreements over how to run the company

  • difficult to pursue objectives other than increasing profit

  • threat of take over

Multinational companies

A multinational company has its headquarters in one country but has assembly or production facilities in other countries

Reasons to become a multinational

  • to increase market share: companies may find they are at saturation point in the market and need a new outlet such as exploring to other countries.

  • to secure cheaper premises and labour: cost of land and labour will be cheaper in developing countries like sweatshops

  • to avoid tax or trade barrier: different nations have different corporation tax and may have different barriers to entry. Japan allow a small percentage of foreign cars to be sold to protect their own industry

  • government grants: many US companies were attracted to the UK due to the government giving money to start corporations

Advantages

  • creating jobs: this boosts the local economy and employs workers

  • bringing expertise in and improving the skills of the workforce like IT

  • benefitting from economies of scale: cost per unit is less as bulk buying

  • gaining technical economies with automated equipment: fixed costs of machines can be spread out over outputs

Disadvantages

  • relying on “deskilled jobs” that may be low paid, repetitive assembly line work

  • not keeping profits in the host country: money will always go back to the HQ

  • cutting corners: social responsibility may be overlooked

  • exploiting the workforce and/or the environment: workers can work below minimum wage for longer hours

  • exerting political muscle: the multinational may threaten to pull out of a country if they dont get deals on wages, land rent and rates

Franchises

A franchise is a joint venture between

  • a franchisee: who buys the right from a franchiser to copy a business format

  • a franchiser: who sells the right to use a business idea in a particular location

Many well known high street opticians and fast food restaurants are franchises

Opening a franchise is usually less risky than setting up as an independent retailer.

Public sector

Organisations run by government that exist to provide a service for the population and communities

Money used is from taxes such as:

  • income tax

  • national insurance

  • VAT

  • air passenger duty

  • fuel duty

Three different levels of government in Scotland

  • UK government

  • Scottish government

  • Local government

UK Government

based in westminster

they manage “reserved” matters:

  • economic policy

  • defence

  • international relations

The BBC is an example of a public corporation which are founded by an act of parliament and funded by taxpayers

Scottish Government

based in holyrood

they manage “devolved” matters:

  • health

  • education

  • police

  • transport

They receive a block grant from the UK government. The Scottish Government sets the budget for running Scotland

Local Government

often called councils

allocated budgets by the Scottish Government

they manage:

  • housing

  • libraries

  • schools

  • bin collection and recycling

Third sector

Not about making a profit but rather making a difference to society

Categorised into:

  • charities and community groups

  • social enterprises

Charity

Set up for a specific cause

Charities receive grants from many fund raising activities like the national lottery. Also from sales in charity shops and public donations.

All money goes to help the cause

Charities are controlled by elected trustees. They provide support to the chief executive and control the volunteers.

Community groups

Community groups exist to provide a service for people. They are non-profit making and all the profit goes back into the organisation to ensure it can keep running.

Example: rugby clubs

Social enterprise

An organisation that exists with a clear goal to help the community but runs the organisation like a business. All profit is reinvested

Aims and objectives of different business types

  • survival

  • increased profit

  • increasing market share

  • growth

  • satisficing (do the minimum to achieve goals)

  • managerial objectives (working within a budget)

  • corporate social responsibility (aims to act ethically and responsibly to look better

  • provide a quality service

Why business objectives change

Private

  • maximise profit

  • provide a good quality service

  • survive

  • operate ethically

  • maximise sales

  • corporate social responsibility

Public

  • provide a service

  • work within a budget

  • operate ethically

  • serve the community

Third

  • support a cause

  • provide a service

  • raise awareness of a cause

  • maximise donations

  • operate ethically

  • survival

  • increase volunteer numbers

Corporate social responsibility

  • reducing carbon footprint as seen as eco friendly

  • creating safety measures to gain quality and safety awards and used as a marketing tool

  • improving working conditions of employees to motivate existing staff and give the company a competitive advantage

  • recycling, reducing waste and minimising packages to reduce costs and improve reputations

Internal factors (corporate culture, staffing, finance, technology)

Business can be influenced and affected by internal factors

Internal factors are factors within a business that can be controlled by the organisation

  • corporate culture

  • staffing

  • finance

  • current technology

Corporate culture

attitudes, beliefs, values and norms of the firm are visible and evident

  • staff uniform

  • the corporate logo and colour scheme

  • the mission statement

  • company policies

  • incentives and rewards for staff

  • training and developing

  • team building for employees

Benefits of corporate culture

Staff

  • staff will feel a sense of belonging and increase their loyalty: fewer staff will leave

  • staff feel valued and want to work for a firm if it promotes excellence or quality in their culture

  • company values and perks can attract high quality staff

Customers

  • customers may become aware of the standards and culture the company and increase sales

Costs of corporate culture

  • It can take a long time to develop or change the corporate culture of a business

  • the most successful corporate cultures are often created when a business is founded

  • not all staff will feel comfortable with a business’ corporate culture and lead to less creativity within the business

Staffing

Human resources cover:

  • managers

  • employees

Managers

  • decision making - good decision making can increase productivity, increase profits and grow the business

  • creating policy - managers create policies that aim to motivate employees and set realistic goals

  • hiring and firing employees

  • setting budgets

  • conducting appraisals with staff (assess their work)

Employees

  • productivity

  • ability to satisfy customers

  • absenteeism

  • ability to perform their job

  • training

  • industrial action

  • motivation

  • availability

Finance

A business needs adequate funds in place in order for it to survive and grow successfully

Customers needs and wants are always changing so must be prepared for that

  • developing new product

  • upgrading software

  • wage rises

  • hiring new staff

  • extending premises

  • advertising

Could be funded by bank loans or a grant from the government

Technology

Rely on -

  • specialist software

  • top of the range hardware

  • access and control of social media

  • apps

Technology is used to ensure efficiency

Savings can be made on staff

Work from home

Social media to advertise

External factors (PESTEC)

political - new legislation

economic - inflation and unemployment

social - changes in taste and fashion

technological - being able to sell goods online or using automation

environmental - weather conditions affecting sales or production

competitive - impact of a rival firm which has similar products or lower prices