Unit 1. Understanding Business

Unit 1: Understanding business

1. Business activity

Need: a good or service which is essential to living

Want: a good or service that people want but is not essential

Economic problem: unlimited wants that cannot be met because of limited resources → scarcity

opportunity cost: the benefit that could’ve been gained from an alternative use of resources

The factors of production: 

Land: all natural resources

Labour: number of people available for work

Capital: machinery, equipment and money needed

Enterprise: people prepared to take the risk of starting a business (entrepreneur)

Specialisation: people and businesses concentrating on what they do best

→ division of labour: production is divided into separate processes, each worker focuses on just one

Businesses produces:

• customer goods

• customer services

• capital goods

Methods of adding value:

+ Brading: products with recognisable logos → people find more reliable

+ Higher service quality

+ Convenience: when a product is more convenient → people tend to prefer it

+ Product features

⇒ if we manage to add value to a product without increasing the cost → we can make a profit

2. Classification of business

Primary sector: involves the extraction of natural resources

Secondary sector: involves the manufacturing of natural resources into finished products

Tertiary sector: involves supplying services to customers and other businesses

→ Chain of production: the production & supply of goods to customers involving all 3 sectors 

Industrialisation: the growing importance of the secondary sector and lessening importance of the primary sector

De-industrialisation: the growing importance of the tertiary sector and the lessening importance of the secondary sector

Private sector: includes businesses owned by individuals to make a profit

Public sector: businesses owned by the government (produces goods and services the public needs)

→ Mixed economy: an economy that includes both public and private sectors

3. Enterprise, business growth and size

Characteristics of a successful entrepreneur

• Innovative

• Responsible

• Risk-taker

• Independent

• Collaborative

Measuring business size

• Capital employed: all long-term finances invested in a business 

• Value of output: the amount businesses earn from selling their products

• Number of employees

• Market share: the portion of the total market controlled by a business

Why some businesses fail

Poor planning

Liquidity problems: when the business does not have enough capital to pay for expenses and debts

Poor management skills

Economic influences: when the economic condition is difficult → consumers lack the financial means to buy the product → businesses make a loss

Competition

Poor marketing: when businesses fail to do market research beforehand 

Poor choice of location

Lack of objectives

Failure to invest in new technologies

Why some businesses want to expand

• Increase in profit

• Market shares

• Control trends of a market

• Protection from takeover

Internal growth

• Increase the number of goods a business can produce

• Develop new products

• Finding new markets to operate in

External growth

• horizontal integration: when 2 firms of the same industry and sector merge together

• Forward vertical integration: when 2 firms of the same industry merge but 1 is the customer of the other

• Backward vertical integration: when 2 firms of the same industry merge but 1 is the supplier of the other

• Conglomerate integration: when 2 firms of completely different industries and sectors merge together

4. Types of business organisation

Unincorporated business 

Sole trader: a business owned and managed by one person

• Has unlimited liability: sole trader is responsible for all debts occurred → risk losing their personal wealth

Partnership: a business owned and managed by two or more people

• Has unlimited liability

Incorporated business

Private limited company (ltd): a company owned by shareholders

• Have limited liability: shareholders will not lose more than what they have invested in the business → personal wealth not at risk if the company fails

• Cannot sell their shares to the general public (only to relatives/friends/acquaintances 

Public limited company (plc): a company owned by shareholders

• Have limited liability

• Can sell their shares to the general public

Franchise: the type of business where entrepreneurs buy the right to use the name/logo/product of an existing business

Joint venture: when two or more businesses work together on a project. They share the capital risk but remain separate 

5. Business objectives and stakeholder objectives

Aim: a big idea of what the business wants to achieve

Objective: a series of tasks/goals that the business needs to achieve to reach their aim 

• Survival

• Profit

• Growth

• Market share