caie-igcse-business-studies-0450-theory-v1

Understanding Business Activity

• Needs: Essential for survival.

• Wants: Desired but not essential.

• Economic Problem: Unlimited wants, limited resources.

• Scarcity: Insufficient products to fulfill wants.

• Factors of Production:

  • Land: Natural resources.

  • Labour: Mental/physical efforts.

  • Capital: Finance, machinery.

  • Enterprise: Manages other factors, makes decisions, takes risks.

• Opportunity Cost: Next best alternative given up.

Importance of Specialisation

• Specialisation: Focusing on what people/businesses do best.

• Division of Labour: Production split into tasks, each worker performs one.

• Advantages:

  • Increased productivity and efficiency.

  • Better quality output.

  • Economies of scale.

  • Skilled and experienced workers.

• Disadvantages:

  • Boredom and burnout.

  • Production disruption if a worker is absent.

  • Higher wages and training costs.

Purpose of Business Activity

• Businesses combine factors of production to satisfy needs and wants.

• Business activity employs people and produces goods/services.

Added Value

• Added Value: Difference between purchase cost and selling price.

• $Added Value = Selling Price - Total Cost$

• Advantages:

  • Potential profit.

  • Covers expenses

• Disadvantages:

  • Potential lower sales with higher prices

• Increase Added Value:

  • Increase selling price by increasing quality.

  • Reduce material costs.

Classification of Businesses

• Primary Sector: Extracts raw materials.

• Secondary Sector: Manufactures goods.

• Tertiary Sector: Provides services.

• Developing Countries: Primary sector is most important.

• Developed Countries: Tertiary sector has higher output.

• De-industrialisation: Decline in the secondary sector.

Mixed Economy

• Combination of private and public sectors.

• Private Sector: Businesses not owned by the government aim to profit.

• Public Sector: Government-owned, provides services.

• Privatisation: Selling public sector businesses to the private sector.

• Arguments for Privatisation:

  • Controlled costs.

  • Efficient capital use.

  • Competition improves quality.

• Arguments against Privatisation:

  • Increased unemployment.

  • Less focus on social objectives.

Enterprise, Business Growth and Size

• Entrepreneur: Organises, operates, and takes risks to improve a business.

• Characteristics: Hard-working, risk takers, creative, effective communicators, optimistic, self-confident, innovative, independent.

• Advantages of being an Entrepreneur:

  • Independence.

  • Putting ideas into practice.

  • Potential profitability.

  • Using personal interests and skills.

• Disadvantages of being an Entrepreneur:

  • Personal investment required.

  • Risk of failure.

  • Lack of knowledge and experience.

  • Lost income/opportunity cost.

  • Time-consuming and expensive to find finance.

Business Plans

• Business Plan: Document with objectives and details about operations, finance, and ownership.

• Contents: Product description, market analysis, location, organization structure, financial information, business strategy.

• Benefits: Helps gain finance and forces careful planning.

Government Support for Start-Ups

• Start-ups reduce unemployment, increase competition, increase output, benefit society, and promote economic growth.

• Support: Business ideas/help, training, finance, low-cost premises, research facilities.

Business Size

• Beneficial to compare business size for investors, government, competitors, workers and banks.

• Measurements:

  • Number of employees (limitation: capital-intensive firms).

  • Value of output (limitation: doesn't account for sales).

  • Value of sales (limitation: different product prices).

  • Total value of capital employed (limitation: labour-intensive firms).

• No single method is considered to be completely accurate.
  Capital Employed: the total value of capital used in the business

Business Growth

• Benefits: Higher profits, prestige, lower average costs, larger market share.

• Ways of growth:

  • Internal Growth: expanding existing operations.

  • External Growth: takeovers or merges.

• Takeover: One business buys another.

• Merger: Two business owners join their businesses.

• Types of External Growth:

  • Horizontal Integration: Same industry, same stage of production. Reduces competitors, economies of scale, bigger market share. Problems include diseconomies of scale.

  • Vertical Integration: Same industry, different stages of production. Forward (with the next stage) or backward (with the previous stage). Assured supply, absorbs profit margins, controls costs.

  • Conglomerate Merger: Different industry. Diversifies risk, transfers ideas.

Disadvantages Caused by Business Growth

• Harder control and management.

• Poor communication.

• High expansion costs.

• Integration conflicts.

Why Small Businesses Remain Small

• Industry type, market share, owner’s objectives.

Why Businesses Fail

• Lack of management skills, failure to plan for change, over-expansion, poor financial management, competition.

Legal Identity

• Unincorporated Business:

  • No separate legal identity from owners.

  • Unlimited liability.

• Incorporated Business:

  • Separate legal identity.

  • Limited liability.

Sole Trader

• Business owned and controlled by one person.

• Advantages:

  • Few legal regulations, complete control, flexible working time, ability to respond quickly, profit to owner, secrecy.

• Disadvantages:

  • Hard decisions, unlimited liability, difficulty raising funds, long hours, difficulty competing, may lack skills.

Partnerships

• Jointly owned by two or more people.

• Advantages:

  • Easy to set up, greater access to funds, shared management.

• Disadvantages:

  • Unlimited liability, shared profit, decisions binding, difficult to raise finance.

Private Limited Company (LTD)

• Owned by shareholders; cannot sell shares publicly.

• Advantages:

  • Raise capital from share sales, limited liability, legal formalities, separate identity, continuity.

• Disadvantages:

  • Cannot sell shares to the public, accounts public, uneasy to transfer shares.

Public Limited Company (PLC)

• Owned by shareholders; can sell shares publicly.

• Advantages:

  • Can sell shares, rapid expansion, specialist managers, limited liability, continuity.

• Disadvantages:

  • Legal formalities, disclosure of information, divorce between ownership and control, expensive.

Franchise

• Agreement to conduct business based on an existing brand.

• Franchisor: Company allows business to operate under its brand.

• Franchisee: the business allowed to conduct business under an existing brand

• Advantages to Franchisor:

  • Franchisee buys a license

  • Fast expansion

  • Management is the responsibility of the franchisee

• Disadvantages to Franchisor:

  • Bad reputation if a branch is managed poorly

  • Percentage of profits every year

• Advantages to Franchisee:

  • Reduced business failure.

  • Pays for advertising.

  • Training for staff and management.

  • Banks may offer loans due to low risk.

• Disadvantages to Franchisee:

  • Less independence.

  • Cannot make decisions that suit local area

  • Franchisor can withdraw agreement and prevent the business's operations

Joint Venture

• Two or more businesses join to create a new business.

• Advantages:

  • Shared costs and risks.

  • Shared knowledge and experience.

• Disadvantages:

  • Shared profits.

  • Conflict in decision-making.

  • Different business methods.

Public Corporations

• Business in the Public sector owned and controlled by the government.

• Advantages

  • Essential to some countries' industries like water supply and electricity.

  • Ensures consumers aren't taken advantage of.

  • Can create job opportunities by stabilizing failing businesses.

  • Important public interests.

• Disadvantages

  • Inefficient because managers rely too much on the government.

  • Can be unfair to the private sector if subsidies are provided to the public sector.

  • Lack of close competition may prevent key business activities.

  • Can be used for political reasons.

Business Objectives

• Aims or targets for a business.

• Benefits: Motivation, decision-making, unites the business, assesses performance.

• Private Sector Objectives: Business survival, generating profit, returns to shareholders, business growth, market share.

• Why Objectives Change: Setting profits and stability after a crisis.
  *Calculation formula: $Market Share = 100 × \frac{Company Sales}{Total market Share}$

Social Objectives

• Objectives of Social Enterprise:

  • Social: provide jobs for disadvantaged groups.

  • Environmental: protect the environment.

  • Financial: make a profit to reinvest.

• Objectives of Public Sector Businesses:

  • Financial: meet profit targets.

  • Service: meet quality targets.

  • Social: protect or create employment.

Stakeholder Objectives

• Stakeholder: Person/group with direct interest in business performance.

• Internal: Owners, managers, workers.

• External: Consumers, government, banks.

• Conflicting objectives can occur, so managers must compromise.

People in Business

• Motivation: Factors influencing worker behaviour.

• Factors: Money, job security, training, promotion, status, responsibilities, work environment, benefits.

• Benefits of a Well-Motivated Workforce: Improved productivity, low absenteeism, low labour turnover, better quality goods/services, improved labour productivity.

• Key Motivational Theories:

  • F.W. Taylor - Scientific Management: Economic man motivated by money.

  • Abraham Maslow: Concept of Human Needs - Maslow’s Hierarchy.

    • It is easy to set goals and objectives.

    • Is it possible for managers to satisfy some or all of their needs

  • Fredrick Herzberg - Two-Factor Theory:

    • Hygiene Factors: Prevent job dissatisfaction (working conditions, relationships, salary).

    • Motivators: Variety of jobs and challenging tasks through job enrichment

Methods of Motivation

• Financial Rewards: Cash and non-cash rewards.

  • Hourly wage rate

  • Salary: fixed annual payment, not based on hours worked or output

  • Piece Rate: Payment based on units produced.

  • Commission: Payment based on the value of the items they sell.

  • Bonus Scheme: Reward for target achievement.

  • Fringe Benefits: Non-cash rewards (car, insurance, healthcare).

  • Profit Sharing: Additional payment based on business profit

  • Advantages and Disadvantages of each factor

• Non-Financial Rewards and Methods:

  • Job rotation

  • Job Enlargement

  • Job Enrichment

  • Job Redesign

  • Quality Circles

  • Team Working

  • Delegation
    *Delegation: passing responsibility to perform a task to workers lower down in the organisation

  • There is no need to hire new employees, decreasing recruitment costs, training costs and retaining skilled employees improving productivity

Organisation and Management

• Organisational Structure: Management levels and division of responsibilities.

• Organisational Charts: Diagrams outlining the management structure.

• Hierarchy: Management levels.

• Benefits
  *Allows employees to know their chain of command and to whom they must report to

• Chain of Command: Instructions pass from senior management to subordinates.

• Span of Control: Number of subordinates under a manager.
  Different types of organisational structures of a business
  Tall Structure:
  *The longer the chain of command is the taller the organisational structure and the ‘narrower‘ the span of control.
  Flat Structure
  *When a chain of command is short, the organisation will have a ‘wider’ span of control, thus making it a ‘flat‘ structure.
  **Delayering
  *reducing the size of the hierarchy by removing one or more levels, often the middle management
  **Delegation: Giving a subordinate the authority to perform particular tasks.

• Centralised Organisation: Decision-making power held at the head office.

• Decentralised Organisation: Decisions made based on local needs.

Role and Function of Management

• Directors, Line Managers, Supervisors, Staff Managers.

• Functions: Planning, Organising, Communicating, Coordinating, Controlling.

Leadership Styles

• Leadership Styles: Approaches to dealing with people and making decisions.

• Autocratic: Manager expects orders to be followed; does not take input from others

• Democratic: Gets employees involved in decision-making; Unpopular decisions are not effectively made by using this style.

• Laissez-Faire: Employees make decisions; the leader only gives guidance; Unlikely in organisations with clear decision making

Trade Unions

• Group of employees protecting their interests.

• Roles: Negotiating, resolving conflict, providing legal support, providing services.

• Advantages
  *Strength in numbers when negotiating with employer
  *Improved conditions of employment.
  *Improved environment where people work
  *Improved benefit for members if not working
  *Disadvantages:
  *Costs money to be a member
  *May be required to take industrial actions even if they disagree
  *Wages are likely higher - adding to business costs

Work of Human Resource Department

• Recruitment and selection

• Wages and salaries

• Health and safety

  • Training Programs

• Industrial Relations

• Redundancy and Dismissal.

Recruitment Process

• 1. Analyse the exact nature of the job and duties to be undertaken

• 2.Design a job description

• 3.Design a job specification

• 4.Advertise the vacancy

  • Internal Requirement
    Advantages
    *Quicker and cheaper than external recruitment.
    *The reliability, ability and potential of the person, are known.
    Disadvantages
    *No new ideas or experiences come into the business.
    *Rivalry and jealousy may arise.

  • External Requirements
    Advantages
    *A more comprehensive selection of candidates.
    *Adding a fresh perspective and ideas.
    Disadvantages
    *Increased costs due to advertising.
    *Adding training time

• 5.Send out the application forms to the applicants or read curriculum resumes and letters of application

• 6.Produce a shortlist from the applications for interviews and take up references

• 7.Hold interviews and selection of tasks

• 8. Select suitable applicants and offer them the job

Types of Workers

• Part-time Employees:

  • Works for less than 35 hours per week
    *Advantages (Flexibility; easier to extend hours)
    *Limitations(Less commitment; take tasks longer to recruit)

• Full-time Employees:

  • Works more than 35 hours per week
    *Benefits (Consistency of schedules; reliability)
    *Limitations (Permanent contracts means long term commitment; fixed pay)
    *Note: Full-time employee benefits are the limitations of Part time.

The Importance of Training and the Methods of Training

Importance of Training
To introduce new processes or equipment
Improve efficiency of the workforce and internal promotion
To introduce new processes or equipment and improve labour skills

There are three types of Trainings:

• Induction Training - Introducing the business' customs and procedures while introducing them to their coworkers
  Advantages
  *Helps new employees settle into their jobs quickly & they make workers less likely to make mistakes
  Disadvantages
  Time-consuming & workers are being paid while no work is being done

• On-the-job-Occurs by watching a more experienced worker doing their job
  Advantages
  *The individual is given in the workplace, so there is no need to send them away & ensures there is some production while training
  Disadvantages
  Trainers won't be as productive because they are teaching employee & they might have bad habits

• Off-the-job-Being trained away from the workplace (Specialist trainers usually trained well)
  Advantages
  *A broad range of skills can be taught. & Usually uses expert trainers who have up-to-date business practices and knowledge
  Disadvantages
  High costs & Means an employee's chances of leaving for another job are high

Reducing the Size of the Workforce

*Why reducing the size of the workforce Might Be Necessary:
WorkForce Planning: establishing the workforce the business needs for the foreseeable future about number and skill required for jobs
Reason's to reduce workFace:

• The business might have relocated abroad

• The business has merged & now there are too many people doing the same worker.