Understanding Business Activity

Question 1

What is a need?

Answer 1

A need is a good or service essential for living.

Question 2

What is a want?

Answer 2

A want is a good or service which people would like to have, but which is not essential for living. People’s what’s are unlimited

Question 3

What is the economic problem?

Answer 3

Existence of unlimited wants but limited resources to produce the goods and service to satisfy the wants

Question 4

Unlimited wants + limited resources = ?

Answer 4

Unlimited wants + limited resources = scarcity (economic problem)

Question 5

What are the four factors of production and describe each one?

Answer 5

Land =All of the natural resources provided by nature ( e.g the forests. oil gas, metals)
Labour - Number of people available to make products
Capital - The finance machinery, and equipment needed for the manufacture of goods
Enterprise
The skill and risk-taking ability of the person who brings the other resources or factors of
production together to produce a good service (eg. owner of a business - entrepreneurs

Question 6

What is the definition of the factors of production?

Answer 6

Resources needed to produce goods or services. There are four factors of production and they are in limited supply.

Question 7

What is scarcity?

Answer 7

Lack of sufficient products to fufill the total wants of the population

Question 8

What is the opportunity cost?

Answer 8

The next best alternative given up by choosing another item

Question 9

What is specialisation? And why is it common now?

Answer 9

it occurs when people and businesses concentrate on what they are best at.

specialisation is now very common because:
Specialised machinery and technologies are now widely available
increase in competition means that businesses have to keep costs low
Most people recognise that higher living standards can result from being specialised

Question 10

What is division of labour? And what are the advantages and disadvantages?

Answer 10

When the production process is split up into different tasks and each worker performs one of these tasks. It’s a form of specialisation.

Advantages include:
Workers are trained in one task and specialise in this (increases efficiency and output] less time is wasted
moving from one workbench to another. Quicker and cheaper to train workers (fewer skills needed to be taught)
Disadvantages include:
Workers can become bored doing just one job (drop in efficiency). No one can do the job if one worker is absent
production might be stooped

Question 11

What do businesses do? What would like be like without business activity? What is the purpose of business activity?

Answer 11

Businesses combine factors of production to make products which satisty people’s wants.

Without business activity (different sectors) undeveloped economies, businesses do not exist, everyone
attempts to do everything for themselves self-sufficient. This will cause very basic existence and living standards are low.

• combines scarce factors of production to produce goods and services (products)
Produces goods and services which are needed to satisfy the needs and wants of the population
Employes people as workers and pays them wages to allow them to consume products made by other
people

Question 12

What is added value? Why is added value important? How can a business increase added value?

Answer 12

The difference between the selling price of a product and the cost of bought-in materials and components.

If value is not added to the materials and components that a business buys in, then;
Other costs cannot be paid for
No profit will be made
Added value is also important because sales revenue is greater than the cost of materials bought in by the business. This
means the business
Can pay other costs such as labour costs, management expenses and costs including advertising and power.
May be able to make a profit if these other costs come to a total that is less than the added value.

increase selling price but keep the cost of materials the same
Reduce the cost of materials but keep the price the same.

Question 13

What is the primary sector and give examples?

Answer 13

Primary sector of industry extracts and uses the natural resources of Earth to produce raw materials used by other businesses. Some examples are farming, fishing and mining.

Question 14

What is the secondary sector and give examples?

Answer 14

Secondary sector of industry manufacturers goods using the raw materials provided by primary sector. Some examples are building and food production.

Question 15

What is the tertiary sector and give examples?

Answer 15

Tertiary sector of industry provides services to consmers and the other sectors of industry. Some examples are teaching, bus driver and architects

Question 16

How are the three sectors of economy compared?

Answer 16

The three sectors of the economy are compared by:
Percentage of the country’s total number of workers employed in each sector
value of output of goods and services and the proportion this is to total national output

Question 17

Describe the economic sectors in Developing countries

Answer 17

In developing countries, (LEDC) primary industries such as farming and mining employ many more people than manufacturing or service industries, People are still living in rural areas with low incomes, and there
is little demand for services such as transport, hotels, and insurance

Question 18

Describe the economic sectors in developed countries

Answer 18

In developed countries which started up manufacturing industries many years ago, the secondary and tertiary sectors are likely to employ many more workers than the primary sector. The level of output in the primary sector is often small compared to the other two sectors. In economically developed countries, it is now common to find that many manufactured goods are bought in from other nations. Most of the workers will be employed in the service sector. The output of the tertiary sector is often higher than the other two sectors combined.

Question 19

What is De-industralization?

Answer 19

De-industrialization occurs when there is a decline in the importance of the secondary (manufacturing sector of
industry) in a country

Question 20

What are the reasons for changes in the importance of the three sectors over times?

Answer 20

Sources of some primary products (e.g. Timber, oil,gpas become depleted (e.g. in Somalia
)Most developed economies are losing competiveness in manufacturing to newly industrialised countries (e.g. BRICS, the five major emerging economies - Brazil, Russia, India, China, and South Africa)
As a country’s total wealth increases and living standards rise, consumers tend to spend a higher
proportion of their incomes on services (e.g. travel and restaurants)

Question 21

What is a mixed economy?

Answer 21

A mixed economy has both a private sector and a public (State) sector

Question 22

What is a private sector?

Answer 22

Business not owned by the government. They make their own decisions about what to produce, how it should be produced and what price should be charged for it (they aim to make profit), even so, there are
likely to be some government controls over these decisions

Question 23

What is a public sector?

Answer 23

Government (or state) owned and controlled businesses/organisations,The government/public
sector authority, make decisions about what to produce and how much to charge consumer. Some goods and
services are provided free of charge to the consumers (e.g. state health and education services) The money for
these come from the taxpayer.

Question 24

Explain privatisation of sectors as well as the reasons behind it

Answer 24

in recent years, many governments have changed the balance between the private sector and the public sector in their
economies by selling some public sector business to private sector businesses, This is called privatisation ( e.g. water
supply, electricity supply, public transport system).
governments claim that private sector businesses are more efficient than public sector businesses to manage these. The
other reason may also be their main objective is profit and therefore costs must be controlled. Private sector owners
might invest more capital in the business than the government can afford - creating competition between private sector
businesses to help improve product quality.

Question 25

What is the definition of an entrepreneur? What are the benefits and disadvantages of being an entrepreneur? Characteristics of being an entrepreneur and why it’s important?

Answer 25

entrepreneur is a person who organises, operates and takes the risk for a new business venture. Benefits = Independence - able to choose how to use time and money
Able to put own ideas into practice
May become famous and successful if the business grows
May be profitable and income might be higher
Able to make use of personal interests and skills
Disadvantages =
Risk - many new entrepreneurs’ businesses fail
Capital - entrepreneurs’ have to put their own money into the business
Lack of knowledge and experience in starting and operating a business
Opportunity cost - lost income from not being an employee of another business.
Characteristics =
Hard working - Long hours and short holidays are typical for many entrepreneurs to make their business successful
Risk taker - Making decisions to produce goods or services that people might buy is potentially risky
Creative - A new business needs new ideas - about products, services, ways of attracting customers
Optimistic - Looking forward to be a better future is essential
Self-confident - To convince other people of your skills and to convince banks, lenders, and customers
Innovative -Being able to put new ideas into practice in interesting and different ways is also important
Independent - They have to work on their own before they can afford to employ others
Effective communicator - Talking clearly and confidently to banks, other lenders, customers, and government agencies

Question 26

What is a business plan? What will the entrepreneur have to think about? What is in a business plan and describe each component? Why is it important?

Answer 26

A business plan is a document containing the business objectives and important details about the operations, finance and owners of the new business. The entrepreneur will have to consider the following:
What products or services do I intend to provide and which consumers am I ‘aiming at’ What will be my main costs and will enough products be sold to pay for them?
Where will the firm be located?
What machinery and how many people will be required for the business plan?

Description of the business - Provide a brief history and summary of the business, and the objectives of the business
2)
Products and services - Describe what what the business sells or delivers, and strategy for continuing or developing products in the future to remain competitive and grow the business. This section includes full details of the product and how it is to be manufactured/distributed.
3)
The market - Describes the market the business is targeting. The description should include total market size, predicted market growth, target market, analysis of competitors, predicted changes in the market in the future, forecast sales revenue from the product.
There should also be a marketing strategy. Market research data should also be included.
4) Business location and how products will reach customers - Describe the physical location if applicable, internet sales or mail order. Also describes how the firm delivers products and services to customers.

Organisation structure and management - Describes the organisation structure, management and details of employees required. It usually includes the number and level of skills required for the employees.
6)
Financial information - Financial information includes:
Projected future financial accounting statements for several years into the future (including income statement, statements of financial position)
Sources of capital (e.g. owners’ capital, revenue, bank loans, other funding sources)
Predicted cost - fixed costs and variable costs
- Forecast cash flow and working capital
Projections of profitability and liquidity ratios
7)
Business strategy - Explains how the business intends to satisfy customer needs and gain brand loyalty. A summary should be included to bring together all the points from above that should demonstrate the business will be successfully.

It is important as a bank will almost certainly ask an entrepreneur for a business plan before agreeing to a loan or overdraft.
By completing a business plan, the entrepreneur is forced to think ahead and plan carefully for the first few years. Without a detailed business plan, the bank will be reluctant to lend monev to the business. This is because the owners of the new business cannot show that they have thought seriously about the future and planned for the challenges they will meet

Question 27

Why do governments support business start-ups? How do governments support business start-ups?

Answer 27

To reduce unemployment - new businesses will
often create jobs to help reduce unemplovment
(Multiplier Effect)
To increase competition - new businesses give consumers more choice and compete with
already established businesses economic growth
To increase output - the economy benefits from
increased output of goods and services (increases
GDP)
To benefit society - entrepreneurs may create
social enterprises which offer benefits to society other than jobs and profit (eg supporting disadvantaged
groups in society)
Can grow further - all large businesses were small once, by supporting todays new firms, the government may
be helping some firms that grow to become very large and important in the future
Business start-ups need:

Business idea and help
Organising training for entrepreneurs that gives advice, and support sessions offered by experiences business people
(Multiplier Effect)
Premises
‘Enterprise zones’, which provide low-cost premises to start-up businesses
Finance
Loans for small businesses at low interest rates
Grants, if businesses start up in depressed areas of high unemployment
Labour
Grants to small businesses to train employees and help increase
their productivity
Research
Encouraging universities to make their research facilities

Question 28

Who would find it useful to compare the size of business and describe why? What are the most common ways to measure business size? What are the limitations to these ways?

Answer 28

Investors - Before deciding which business to invest
Governments - There are different tax rates for small and large businesses
Competitors - To compare their size and importance with other firms
Workers - To have some idea of how many people they might be working with
Banks - To see how important a loan to the business is compared to its overall size
Measure business size:
Number of people employed
Value of output
Value of sales
Value of capital employed
Limitations:
Number of people employed
some firms use methods which employ very few people but produce high output levels (e.g. automated
factories) These are called capital-intensive firms
Value of output -A high level ot output doesn’t mean that a business is large when using the other methods of measurements. A
firm emploving few people might produce several very expensive computers each vear. This might give higher
output figures than a firm selling cheaper products but employing more workers.
Value of sales - it could be misleading to use this measure when comparing the size of businesses that sell very different
products ( e.g. market stall selling sweets vs retailer of luxury handbags)
Value of capital employed - This has similar problem to that of the ‘number of people employed’ measure, A company employing many
works may use labour-intensive methods of production. These give low output levels and use little capital equipment.

Question 29

Why might the owners of a
business want to
expand the business? What are the two main ways in which a business can grow?

Answer 29

The possibility of higher profits for the owners
More status and privilege for the owners and managers - higher salaries are often paid to managers
who control bigger businesses
Lower average costs (relating to the economies of scale)
Larger share or its market - the proportion of total market sales it makes is greater. This gives a business
more influence when dealing with supoliers and distributors, and consumers are otten attracted of the
‘big names’ in an industry
Two main ways: Internal growth - Internal growth occurs when a business expands its existing operations- this growth is often paid for by profits from the existing business. This type of growth is often quite slow but easier to manage than external growth
External growth - external growth is when a business takes over or merges with another business. It is often called integration as one business is integrated into another one

Question 30

What is capital employed?

Answer 30

Capital employed is the total value of capital used in the business

Question 31

Three examples of external growth & benefits and the different types of vertical integration + the benefits

Answer 31

Horizontal merger/horizontal integration - Horizontal integration is when one business merges with or takes over another one in the same industry at the same stage of production
(merger reduces number or competitors and opportunities for economies of scale)
Vertical merger/vertical integration - Vertical integration is when one business merges with or takes over another one in the same industry but at a different
stage of production. Vertical integration can be forward or backward
conglomerate merger conglomerate integration - Conglomerate integration is when one business merges with or takes over a business in a completely different industry
This is also known as diversification
(business spreads the risk as they diversify its activity. There might be a transfer of idea between different sections

The two different kinds of vertical integration are
Forward - When a business integrates with another business which is at a later stage of production (closer to the consumer)
[merger gives an assured outlet for its product and retailer could be prevented from selling competing models of car)
Backward - When a business integrates with another business at an earlier stage of production (closer to raw materials supplier merger gives an assured supply of important components and supplier could be prevented from supplying other manufactures)

Question 32

What are Problems linked to business growth and how these might be overcome?

Answer 32

Larger business is difficult to control (higher cost as higher size) = Operate the business in small units - this is a form of decentralisation
Larger business leads to poor communication (longer chain of command) = Operate the business in smaller units
Use latest IT equipment and telecommunications - but even these can cause problems
Expansion costs so much that business is short of finance (cost increases) = Expand more slowly - use profits from slowly expanding business to pay for further growth
Ensure sufficient long-term finance is available
Integrating with another business is more difficult than expected (poor management) = Introducing a different style of management requires good communication with the workforce - they will need to understand the reasons for the change

Question 33

Why do some businesses remain small? And explain.

Answer 33

The type of industry the business operates in - Some examples of industries where most businesses remain small: hairdressing, car repairs, convenience stores.
Businesses in these industries offer personal services or specialised products. If they were to grow too large, they would find it difficult to offer the close and personal service demanded by products.
Market size - If the market (total number of customers) is small, the businesses are likely to remain small. This is because even if your supply is high, your (customer) demand is low.
Owners’ objectives - Some business owners prefer to keep their business small. They could be more interested in keeping control of a small business, knowing all their staff and customers, than running a much larger business. Owners sometimes also wish to avoid the stress and worry of running a large business.

Question 34

Causes of business failure and why are new businesses at a greater risk of failing?

Answer 34

Not all businesses are successful. The rate of failure of newly formed businesses is high. Even old-established businesses can close down because they make losses or run out of cash. The main reasons why some businesses fail including:
Lack of management skills - Lack of experence can lead to bad decisions (e.g location within high costs but low demand) Family businesses can fail because the children of the founders of a business do not necessarily make good managers- and they mint be reluctant to recruit professional managers
changes in the business environment- failure to plan for a change is a feature in many of the later chapters as it adds to the risk and uncertainty of operating a business. New technology, powerful new competitors and major economic changes are just some of the factors that can lead to business failures if they are not responded to efficiently
Liquidity problems/poor financial management - shortage of cash means workers, suppliers, landlords and governments cannot he paid what they are owned. Failure to plan or forecast cash flows can lead to this problem and is a maior cause
of businesses of all sizes failing.
Over-expansion (diseconomies of scales) - When a business expands too quickly, it can lead to big problem of management and finance. If these are not solved the difficulties can lead to the whole business closing down.

Many new businesses fail due to lack of finance and other resources, poor planning and inadequate research. In addition, the
owner of a new business may lack the experience and decision-making skills of managers who work for larger businesses. This
means that new businesses are nearly always more at risk of failing than existing, well-established businesses

Question 35

What is a takeover?

Answer 35

A takeover or acquisition is when one business buys out the owners of another business, which then becomes part of
the ‘predator’ business (the business which has taken it over).

Question 36

What is a merger?

Answer 36

A merger is when the owners of two businesses agree to join their businesses together to make one business.

Question 37

What are the main forms of business organisation in the private sector?

Answer 37

There are several main forms of business organisation in the private sector. These are:
- Sole traders
- Partnership
- Private limited companies
Public limited companies
Franchises
Joint ventures

Question 38

What are sole traders? Why is such a common form of organisation? What are the legal regulations which must be followed? Advantages and disadvantages of sole traders

Answer 38

Sole trader is a business owned by one person with unlimited liability
A sole trader can employ other people - there is only one person who owns the business. One of the reasons it is such a common form of organisation is because there are so few legal requirements to set it up.
There are only a few legal regulations which must be followed:
Owner must register, and send annual accounts to, the Government Tax Office
The name of the business is significant. It must be registered with the Registrar of Business Names. In some other countries, such as UK, it is sufficient for the owner to put the business name on all of the business’ documents and to put a notice in the main office stating who owns the business
In some industries, the sole trader must observe laws which apply to all businesses in that industry. These include health and
safety laws and obtaining a licence (e.g. to sell alcohol or operate a taxi)

Advantages and disadvantages
Advantages: Few legal regulations; He is his own boss; He has the freedom to choose his own holidays/hours of work/prices to be charged; close contact with customer; Incentive to work hard as he keeps all of the profit; Enjoys complete secrecy
Disadvantages: No one to discuss business matter; Do not have the benefit of limited liability; Don’t have the capital; Business likely to remain small; No one will take control of the business if you’re ill

Question 39

What is a partnership and describe it? What is a partnership agreement? What are the advantages and disadvantages?

Answer 39

Partnership is a form of business in which two or more people agree to jointly own a business.

In some countries, like India, there is a maximum limit of 2o people. The partners will contribute to the capital of the business, and
will usually have a say in the running of the business and will share any profits made
Partnerships can be set up eastly by asking someone he knows to become his partner. This would be called a verbal agreement. The
partners would be advised to create a written agreement with a partner called a partnership agreement or deed of partnership. without this document, partners may disagree on who put most capital into the business of who is entitled to more of the profits. A partnership spreements the wntten and lerd agreement between business partners. It is not essential for partners to have such an agreement but it is always recommended.
Advantages: More capital could be invested; Responsibilities of running business are now shared; Both partners were motivated to work hard to benefit from the profits
Disadvantages: Partners will not have limited liability (means the liability of shareholders in a company is limited to only the amount they invested); Business will not have a separate legal identity (if one of the partners died, then the partnership would end - unincorporated business); Partners can disagree due to lack of trust; If one of the partners is inefficient/dishonest, then the other partners could suffer by losing money; Most countries limit the number of partners to 20

Question 40

What are private limited companies? What are advantages and disadvantages?

Answer 40

private limited companies are businesses owned by shareholders but they cannot sell shares to the public. Private limited companies are incorporated business (have separate legal status from their owners), meaning that:
A company exists separately from the owners and will continue to exist if one of the owners should die
- A company can make contracts or legal agreements
Company accounts are kept separate from the accounts of the owners
Companies are jointly owned by the people who have invested invested in the business - they buy shares and they are called shareholders. In a private limited company, the directors are usually the most important or majority shareholders.

Advantages and disadvantages
Avantages: Shares can be sold to a large number of people; All shareholders have limited liability (if the company failed with debts owing to creditors, the shareholders could not be forced to sell their possessions to pay debts)
Disadvantages: There are significant legal matters which have to be dealt before a company can be formed (two important forms/documents to be sent - The Articles of Association, The Memorandum of Association); Shares in private limited company cannot be sold or transferred to anyone else without agreement of other shareholders; Accounts of a company are less secret than for either sole trader or partnership

Question 41

What is limited liability?

Answer 41

limited liability means the liability of shareholders in a company is limited to only the amount they invested
(the condition of which shareholders are legally responsible for the debts of a company only to the extent of the nominal
value of their shares)

Question 42

What in unlimited liability?

Answer 42

unlimited liability means that the owners of a business can be held responsible for the debts of the business they own. their liability is not limited to the investment they made in the business.

Question 43

What is unincorporated business?

Answer 43

An unincorporated business is one that does not have a separate legal identity. Sole traders and partnerships are unincorporated businesses

Question 44

What is a legal identity?

Answer 44

A legal identity is any company or organization that has legal rignts and responsibilities, including tax tilings.

Question 45

What is an incorporated business?

Answer 45

incorporated business are compantes that have separate legal status from their owners

Question 46

What are shareholders?

Answer 46

Shareholders are the owners of a limited company. They buy shares which represent part-ownership of the company

Question 47

What are public limited companies? What are some mistakes made about public limited companies? What are the advantages and disadvantages of public limited companies? Control and ownership

Answer 47

Public limited companies are businesses owned by shareholders but they can sell shares to the public and their shares are tradable on the Stock Exchange (e.g.Bursa Malaysia. NYSE. NASDAQ). This form is most suitable for very large businesses. Public limited companies are able to raise the capital to expand nationally o
even internationally when other people investors purchase shares
Mistakes about public limited companies: Public limited companies are not in the public sector of industry - they are not owned by government but by private individuals hence they are in the private sector
In the UK, the title ‘plc (e.g. J Sainsbury plc) means public limited companies; the term ‘Limited’ in the UK refers to private limited companies. However, in other countries, the title ‘Limited” is used to refer to public limited companies
Advantages = Advantages and disadvantages
Advantages: Limited ability to shareholders: incorporate business and has separate legal entity to owners shareholders: Opportunity to
raise very large capital sums; No restriction on buying selling/transfer of shares: Business trading as a public limited company usually has
high status and should find it easier to attract suppliers prepared to sell goods on credit and banks willing to lend it to than other type of businesses.

Disadvantages: Legal formalities of forming such company are complicated; More regulations and controls over PLC to try protect interests
of shareholders, selling shares to public is expensive; Orginal owners may lose control of business (if over 50% of shares are to public)
Expensive to set up

In all sole trader businesses and partnership, the owners have control over how their business is run (they take the decisions). This also the case in most private limited companies with relatively few shareholders. With a public limited company, the situation is very different. There are a lot of
shareholders and they are all invited to the Annual General Meeting (AGM). It is
a legal requirements for all companies. shareholders may attend and vote on
who they want to be on the board of directions for the coming year.

The shareholders own, but the directors and managers control. This might be important for the shareholders, as the directors and
managers may run the business and managers may run the business to meet their own objectives. These could be increased status, growth of the business to justify higher management salaries, or reducing dividends to shareholders to pay for expansion plans

Question 48

What is a franchise? Advantages and disadvantages to the person selling franchise and person buying franchise

Answer 48

A franchise is a business based upon the use of the brand names, promotional logos and trading methods of an
existing successful business. The franchisee buys the licence to operate this business from the franchisor.

This is an extremely widespread form of business operation. Two of
the best-known international examples of franchises are McDonald’s restaurants and the body shop
Advantage to the person selling franchise:

Franchisee buys a license from the franchisor to use the brand name
Expansion of the franchised business is faster
The managements of the outlets is the responsibility of the franchisee
All products sold must be obtained from franchisor
Disadvantages to the person selling the franchise:

Poor management of one franchised outlet could lead to bad reputation
The franchisee keeps profit from the outlet

Advantage of person buying franchise:

Chances of business failure are reduced
Franchisor pays for advertising
supplies are obtained from central source (franchisor)
Fewer decisions to make than independent business
Training for staff and management provided by franchisor
Banks are often willing to lend to franchises due to low risk

Disadvantages to person buying franchisor:

Less independence than with operating a non-franchised business

Licence fee must be paid to franchisor and perhaps percentage of annual turnover
May be unable to make decisions that would suit local area

Question 49

What is an Annual General Meeting?

Answer 49

An Annual General Meeting is a legal requirements for all companies. Shareholders may attend and vote on who they want to be on the Board of Directors for the coming year.

Question 50

What are dividends?

Answer 50

Dividends are payments made to shareholders from the profits (after tax) of a company. They are the return to
shareholders for investing in the company

Question 51

What is a joint venture? Advantages and disadvantages of join ventures?

Answer 51

A joint venture is where two or more businesses start a new project together, sharing capital, risks and profits.

Advantages of joint ventures
sharing of costs - very important for expensive projects such as new aircraft

Local knowledge when joint venture company is already based in the country

Risks are shared

Disadvantages of joint ventures:
If the new project is successful, then the profits have to be shared with the joint venture partner.
Disagreements over important decisions might occur

The two joint venture partners might have different ways of
running a business - different cultures

Question 52

What is a public corporation? Advantages and disadvantages of public corporation?

Answer 52

A public corporation is a business in the public sector that is owned and controlled by the state (government)

These are wholly owned by the state or central government. They are usually businesses which have been nationalised meaning
they were once owned by private individuals, but were purchased by government, examples of these include water supply and rail
services however, these businesses are now being privatised.
Public corporations are owned by the government but it does not directly operate the business. Government ministers appoint a Board of Directors, who will be given the responsibility of managing the business. The government will, however, make clear what the obiectives of the business should be. The
directors are expected to run the corporation according to these objectives.

Advantages:
some industries are considered so important that government ownership is thought essential (e.g. water supply)
If industries are controlled by monopolies because it would be wasteful to have competitors (e.g. two sets of railway lines to
a certain town), then these natural monopolies are often owned by government
If an important business is failing and likely to collapse, the government can step in to nationalise it.
important public services (e.g. Tv and radio broadcasting) are often in the public sector. non-profitable but important proprammes can sull be made available to the pubic
Disadvantages:
There are no private shareholders to insist on high profits and efficiency
Government subsidies can lead to inefficiency as managers will always think the government will help them if the business makes a loss.

Often there is no close competition to the public corporations. There is therefore a lack of incentive to increase consumer
Choice, increase efficiency or even improve customer service
Governments can use these businesses for political reasons (e.g. create more jobs before election). This prevents public corporations being operated like otner profit-making businesses

Question 53

What are business objective and what is the Need for business objectives and the importance of them? What are the different business objectives and explain each one? Why business objectives might change? Conflict of stakeholder objectives

Answer 53

business objectives are the aims or targets that a business works towards.

All businesses should have objectives (like a just cause.) they help to make a business successful. There are
venerics of seting objectives.
They give workers and managers a clear target to work towards and this helps motivate people
Taking decisions will be focused on: ‘Will it help achieve our objectives
Clear and measurable objectives help unite the whole business towards the same goal
Business managers can compare how the business has performed to their objectives - to see if they have been successful or not.
Gives a sense of direction
The most common objectives for business in the private sector are to achieve:
- business survival
- profits
Returns to shareholders (dividend)
- growth of the business
- market share
- service to the community
Survival:

Survival
when a business has recently been set up, or when the economy is moving into recession, the objective of the business will be more concerned with survival than anything else.
New competitors can also make a business feel less secure. The managers of a business threatened in this way could decide to lower prices in order to survive, even though this would lower the profit on each item sold.

Profit
when a business is owned by private individuals rather than government, it is usually the case that the business is operated with aim of making a profit.
Profits are needed to:
Pay a return to the owners of the business for the capital invested and the risk taken
Provide finance for further investment in the business

Return to shareholders
Shareholders own limited companies. The managers of companies will often set the objective of ‘increasing returns to shareholders’. This is to discourage shareholders from selling their shares and helps managers keep their jobs!
Return the share olders are increased in two ways.
Increasing profit and the share of profit paid to shareholders as dividends
Increasing share price - managers can try to achieve this not just by making profits, but by putting plans in that give the business a good chance of growth and higher profits in the future.

Growth
The owners and managers of a business may aim for growth in the size of the business - Usually measured oy value of sales or outout - in order to:
Make jobs more secure if the business is larger
Increase the salaries and status of managers as the business expands
Open up new possibilities and help to spread the risks of the business by moving into new products and new markets
Obtain a higher market share from growth in sales
Obtain cost advantage, called economies of scale, from business expansion
Growth will be achieved only if the business’ customers are satisfed with the products or serices being provided.
Market share

Market share is the percentace of total market sales held by one brand or business
The equation for market share is = (total sales of the company/total sales of the market) X 100
Increased market share gives a business:

Good publicity, as it could claim that it is becoming ‘the most popular’
Increased influence over suppliers, as they will be very keen to sell to a business that is becoming relatively large than others in the industry
Increased influence over customers (for example, in setting prices)

Why business objectives could change
It is most unusual for a business to have the same objective forever. Here are some examples of situation in which a business might change its objective:
A business set up recently has survived for three years and the owner now aims to work towards higher profit
A business has achieved higher market share and now has the objective of earning higher returns for shareholders
A profit-making business operates in
country racing a serious economic recession so now has the shorter
objective of survival

The whole community (external)=
Main features - The community is greatly affected by business activity. For example, dangerous products might harm the population.
Factories can produce pollution that damages rivers, the sea, and air quality Businesses also create jobs and allow workers to raise their living standards.
Many products are beneficial to the community, such as medicines or public transport
Most likely objectives =

Jobs for the working population
Production that does not damage the environment
Safe products that are socially responsible

Banks (external)=
Main features =

They provide finance for the business operations
Most likely objectives =

Expect the business to be able
to pay interest and repay
capital lent - business may remain liquid

Question 54

What are the objectives of social enterprises?

Answer 54

Providing a service to the community - the objectives of social enterprises
Social enterprises are operated by private individuals - they are in the private sector - but they do not just have profit as an objective. The people operating the social enterprise often set three objectives for their business:
Social - to provide jobs and support for disadvantaged groups in society, such as the disabled or homeless
Environmental - To protect the environment
Financial . To make a profit to invest back into the social enterprise to expand the social work that it performs

Question 55

Who are stakeholders? What are the main internal and external stakeholders groups, their main features and their objectives? Conflicts of stakeholder objectives

Answer 55

The following groups of people are involved in business activity in one way or another or are affected by it:
Internal stakeholders= Owners, workers, managers
External stakeholders = consumers, government, the whole
community, banks
These groups are sometimes called the stakeholders of the business as they have an interest in how the business is run.

Owners (internal) = main features - They put capital in to set up and expand the business
They will take a share of profits if business succeeds
If business doesn’t attract enough customers, they may lose the money they Invested
Most likely objectives =

Share of the profits so they gain a rate of return on the money they put into business
Growth of the business so that the value of their investment increases

Workers (internal) =
Main features - They’re employed by the business
Have to follow instructions of managers and may need training to do work efficiently
May be employed on full or part time contracts and on a temporary or
permanent basis
If there’s not enough work for all workers, some may be redundant (retrenchment) and told to leave the business
Most likely objective =

Regular payment for their work
Contract of employment
Job security - workers do not want to look for new jobs frequently
Job that gives satisfaction and
provides motivation

Managers (internal) =
Main features - They are also employees of the business and control the work of other workers
They take important decisions
Their successful decisions could lead to the business expanding
If they make poor decisions, the business could fail
Most likely objectives=

High salaries because of the
important work they do
Job security - this depends on how successful they are
Growth of the business so that
managers can control bigger
and better known business -
giving them more status and power

Customers (external) =
Main features - They are important to every business.
They buy the goods that the business produces or the services that the business provides
Without enough customers, a business will make losses and will eventually fail The most successful businesses often find
out what consumers want before making goods or providing services - this is called market research
Most likely objectives =

Safe and reliable products
Value for money
Well-designed products of good quality
Reliability of service and maintenance

Government=
Main features =

It is responsible for the economy of the
country
It passes laws to protect workers and
consumers
Most likely objective =

Wants businesses to succeed in
its country. successtul business
will employ workers, pay taxes
and increase the county’s output (Multiplier Effect)
Expects all firms to stay within
the law - laws affect business activity

Conflict= Most businesses are trying to satisfy the objectives of more than one group, whether it’s internal or external
Managers therefore have to compromise when they come to decide on the best objectives for the business they are running. Managers will also have to be prepared to change the objectives over time.
Growth could be the best option during a period of expansion in the economy, out survival by cost might be better if the economy is in recession

Question 56

What are the differences in the objectives of the private sector and public sector enterprises?

Answer 56

Objectives of public sector businesses
Financial - Meet profit targets set by government (sometimes profit is reinvested)
Service - Provide a service to the public and meet quality targets set by government (e.g. health services)
Social - Protect or create employment in certain areas - especially poor regions with few other business
employers
Objectives of private sector businesses
(They may change overtime)
Financial - Make profits and growth of the business. As well as increasing shareholder returns and increasing market share
Service - Providing a service to the community
Social - For survival

Question 57

What is a social enterprise?

Answer 57

A social enterprise has social objectives as well as an aim to make a profit to reinvest back into the business