Business Lecture Notes Flashcards

3.1.1 Understanding the Nature and Purpose of Business

• Why businesses exist:
  • Basic Purpose: To provide goods/services that meet customer needs or wants, solving problems or delivering value. Example: Tesla solves environmental issues via electric cars.
  • Entrepreneurial Drive: Often set up by entrepreneurs spotting market gaps or innovating. Example: Spotify innovated music streaming.
  • Profit Motive: Central to private sector businesses. Profit enables growth, reinvestment, and rewards to owners.
  • Wider Roles:
    • Employment Creation: Reduces unemployment, boosts incomes.
    • Wealth Creation: Taxes and wages stimulate economic growth.
    • Social Contribution: Many modern businesses aim for Triple Bottom Line: profit, people, planet.
• Business Objectives:
  • Profit Maximisation: Traditional key aim; focuses on surplus for owners/shareholders.
  • Growth: Increases market share, economies of scale. Example: Amazon's global expansion.
  • Survival: Priority in the early stages or during downturns. COVID-19 made survival critical.
  • Cash Flow Management: Vital for liquidity. Poor cash flow = insolvency risk even if profitable.
  • Social/Ethical: CSR, sustainability. Example: Patagonia commits 1% of sales to environmental causes.
• SMART Objectives:
  • Specific, Measurable, Achievable, Realistic, Time-bound- ensures clarity and achievability.
• Relationship Between Mission and Objectives:
  • Mission Statement: Sets visionary direction; inspires stakeholders but often non-quantifiable.
  • Objectives: Translate mission into actionable steps (short, medium, long term).
  • Strategic Alignment: Objectives must align with mission to avoid strategic drift.
  • Example: Starbucks:
    • Mission: "To inspire and nurture the human spirit…"
    • Objective: "Reduce carbon emissions by 50% by 2030."

Share Price Influences

• Company performance (profits, growth)
• Macroeconomics (inflation, interest rates)
• Sector trends (e.g., tech boom)
• Global crises (e.g., COVID-19 crash 2020)

Significance of Share Price Changes

• Impacts ability to raise finance
• Reflects investor confidence
• May trigger hostile bids if undervalued

Ownership Impact:

• Sole trader: Focus on independence & survival
• Ltd/PLC: Shareholder value becomes central
• Non-profit/social enterprise: Social mission dominates decisions

3.1.3 External Environment

External Environment Effects:

• Competition:
  • Cost Impact: Marketing, innovation to stay competitive (e.g., Aldi vs Tesco price wars).
  • Demand Impact: Customers may switch for better offers.
• Market Conditions:
  • Boom: High demand, rising input costs.
  • Recession: Falling demand, pressure to cut prices (e.g., 2008 crisis).
• Incomes:
  • Normal Goods: Demand rises with incomes (cars, holidays).
  • Inferior Goods: Demand falls as incomes rise (own-brand groceries).
• Interest Rates:
  • High: Discourages borrowing, reduces consumer spending.
  • Low: Stimulates loans and mortgages (UK rates <1% 2009-2022 encouraged spending).
• Demographics:
  • Ageing population: Healthcare demand up.
  • Migration: Expands workforce and demand (e.g., UK Polish community impact on retail).
• Environmental/Fair Trade:
  • Costs: Investment in eco-friendly processes (e.g., plastic ban compliance).
  • Demand: Ethical consumers favor sustainable brands (e.g., Lush, Patagonia).
• Evaluation:
  • Dynamic Environment: External factors constantly evolve - businesses need agility.
  • PESTLE Analysis: Helps systematically scan external factors.
  • Risk Management: Diversifying products/markets (e.g., Apple: iPhones, services) mitigates external shocks.

Why Businesses Set Objectives

• Coordination: Ensures all departments work toward the same goal.
• Performance Monitoring: Allows for benchmarking; underperformance can be identified early.
• Accountability: Clarifies responsibility across the organization (e.g., functional objectives).

Profit Measurement:

• Revenue = Price \times Quantity \,sold
• Fixed Costs: E.g., rent, business insurance - remain constant.
• Variable Costs: E.g., raw materials - increase as output rises.
• Total \, Costs = Fixed + Variable \, Costs
• Gross Profit: Revenue - Cost \, of \, Sales
• Operating Profit: Gross \, Profit - Operating \, Expenses
• Net Profit: Operating \, Profit - Interest \, and \, Tax

Why Profit Matters:

• Internal Funding: Reinvestment in R&D, marketing.
• Shareholder Returns: Dividends, rising share value.
• Indicator of Efficiency: High profits often show strong management.
• Market Confidence: Attracts investors and creditors.
• Limitations:
  • Short-term profit focus may damage long-term health (e.g., underinvestment in quality).

3.1.2 Understanding Different Business Forms

Reasons for Choosing/Changing Business Form

• Growth Needs: Ltd to PLC allows access to large capital (e.g., Facebook IPO 2012).
• Risk Mitigation: Incorporation offers limited liability, reducing personal financial risk.
• Ownership Control: Sole traders have complete control but may seek partners or Ltd structure to grow.
• Flexibility vs Regulation: Sole traders have fewer legal requirements; PLCs face strict regulation (e.g., disclosure rules).

Business Forms:

• Sole Trader: Easy setup, full control, but personal risk. Example: Local hairdresser.
• Ltd: Limited liability, more credibility, but harder to transfer shares. Example: Dyson Ltd.
• PLC: Raise large funds, but vulnerable to hostile takeovers. Example: Tesco PLC.
• Private/Public Sector: NHS (public); Sainsbury's (private).
• Non-Profit: Operate to meet social goals, e.g., Oxfam.
• Social Enterprise: Balance profit & social mission. Example: Divine Chocolate - Fairtrade co-owned by cocoa farmers.

Issues:

• Unlimited Liability: Risk of bankruptcy affecting personal assets.
• Limited Liability: Encourages entrepreneurship, but may lead to reckless risk-taking (moral hazard).
• Ordinary Share Capital: Equity holders expect returns; may push for short-termism.
• Market Capitalisation: Reflects company size; influences investor confidence.
• Dividends: Balancing act: retain earnings vs satisfy shareholders.

Shareholders’ Role:

• Provide Equity
• Appoint Directors
• Influence Strategy (via voting rights)

Investment Motives:

• Income Investors: Seek dividends.
• Growth Investors: Seek capital gains.
• Influence-Seekers: Push strategic/ethical agendas (activist investors).

Exam Level Tips

• Use real-world examples consistently – this shows application skill.
• Always evaluate – pros/cons, short/long term, different stakeholder perspectives.
• Link concepts: e.g., "A business with a social mission (3.1.1) may limit dividends (3.1.2) to prioritise ethical goals, even if it means higher costs due to fair trade sourcing (3.1.3)."
• Consider diagrams: Ownership structure charts, cost/revenue curves for profit analysis.