UNIT 1 - UNDERSTANDING BUSINESS ACTIVITY Flashcards
1
Q
Need
A
Good or service essential for living.
2
Q
Want
A
Good or service which people would like to have, but which is not essential for living (peoples wants are unlimited).
3
Q
Economic Problem
A
Unlimited wants but limited resources to satisfy those wants (this creates scarcity).
4
Q
Scarcity
A
The lack of sufficient products to fulfil the total wants of the population.
5
Q
Factors of Production
A
Resources needed to produce goods and services.
6
Q
4 Factors of Production
A
Capital, Enterprise, Land and Labour
7
Q
Capital (Factors of Production)
A
Finance, machinery and equipment needed for manufacture of goods.
8
Q
Enterprise
A
Skill and risk-taking ability of person who brings together resources to produce a good/service.
9
Q
Land
A
Any natural resources used in production.
10
Q
Labour
A
Mental and physical efforts of employees.
11
Q
Opportunity Cost
A
Next best alternative is given up by choosing another item.
12
Q
Specialisation
A
When people or a business focus on what they are best at.
13
Q
Division of Labour
A
When production is split into tasks and each worker performs one of these tasks. It’s a form of specialisation.
14
Q
Advantages of Specialisation
A
- Increase in productivity and efficiency because workers are trained in one specific task and specialise in this.
- Specialisation with division of labour will result in better quality output.
- Increase in efficiency will lead to economies of scale (higher productivity, lower cost of material so higher added value).
- Quicker and cheaper, because workers are more skilled and experienced so less resources needed in training.
15
Q
Disadvantages of Specialisation
A
- Repetitive tasks will cause workers to become bored and burnt out, reducing motivation and job efficiency.
- If a worker is absent, production will be interrupted, causing a waste in time and resources, as well as less output and efficiency.
- Specialised workers require higher wages, and training current employees will increase costs.
16
Q
Businesses
A
Combine scarce factors of production to produce goods and services to satisfy people’s wants and needs.
17
Q
Business Activity
A
- Combine scarce factors.
- Produce goods or services.
- Employees people.
18
Q
Added Value
A
Difference in selling price of product and material and bought-in costs.
19
Q
Advantages of Added Value
A
- Maybe be able to make profit if other cost come to a total less than added value.
- Can be used to pay other expenses.
20
Q
Disadvantages of Added Value
A
- Increasing selling price can lead to decrease in sales and perhaps profits.
21
Q
What can you do to increase added value?
A
- Increase selling price by increasing quality of goods and services to convince customers/consumers (NOTE: other prices might increase).
- Decrease cost of materials but keep selling price the same (NOTE: quality of product will decrease).
22
Q
Primary Sector
A
Industry extracts and uses earth’s natural resources to produce raw materials for other businesses.
23
Q
Secondary Sector
A
Industry manufacture goods using raw materials provided by primary sector.
24
Q
Tertiary Sector
A
Industry provides services to consumers and to other industry sectors.
25
Examples of Primary Sectors
1. Farming
2. Fishing
3. Mining
4. Oil refinery
26
Examples of Secondary Sectors
1. Computer manufacture
2. Construction
3. Ship building
4. Dress-maker
27
Examples of Tertiary Sectors
1. Gyms
2. Banking
3. Hotels
4. Restaurants
28
Developing Countries
Primary sectors are important, as more employees and output are produced than in secondary and in tertiary sectors.
29
Developed Countries
Output of tertiary sector is often higher than the two other sectors combined.
30
Reasons for relative importance of three sectors overtime.
- Sources of some primary products become depleted.
- Developed countries are losing competitiveness to newly industrialised countries.
- Due to rise in living standards, consumers spend more of their income on services such as travel and restaurants than on manufactured goods.
31
De-industrialisation
When there is a decline in the importance of the secondary sector.
32
Mixed Economy
Has both a public and a private sector.
33
Private Sector
Businesses NOT owned by the government decide what and how to produce. The main aim is to make profit.
34
Public Sector
Owned by the government. Government will decide what and how to produce. The main aim is to provide a service to customers.
35
Privatistation
Refers to selling a public sector business to a private sector.
36
Advantages of Privatistation
- Costs can be controlled because private sectors main objective is profit.
- More efficient use of capital.
- Competition between private sector will help improve product quality.
37
Disadvantages of Privatistation
- Increased unemployment as private sector may want to cut costs.
- Less likely to focus on social objective.
38
Capital
The money invested into the business by the owners.
39
Entrepreneur
A person who organises, operates and takes risks for a new business venture.
40
Characteristics of an Entrepreneur
- Hard-working
- Risk takers
- Creative
- Effective Communicators
- Optimistic
- Self-confident
- Innovative
- Independent
41
Advantages of being an Entrepreneur
- Independent, able to choose how to use time and money.
- Able to put own ideas into practice.
- May become successful and profitable if the business grows.
- Able to make use of personal interests and skills.
- Profits to themselves, no need to share them with anyone.
- Income is higher than a regular employee.
42
Disadvantages of being an Entrepreneur
- Entrepreneurs have to put their own money into the business.
- Many entrepreneurs businesses fail (risk).
- Lack of knowledge and experience in starting and operating a business.
- Lost income for not being an employee for another business (opportunity cost).
- They will have to invest their savings as well as find other sources of finance, which is time-consuming and expensive.
43
Business Plan
A document containing business objectives and essential detail of operation, finance and owners of the new business.
44
Contents of Business Plan
- Description of Product
- Product and Services
- The market
- Location and how product will reach the customers.
- Organisation structure and management.
- Financial Information.
- Business strategy.
45
Business plans assist entrepreneurs because
- It will help gain profit. Banks ask for a business plan before agreeing to a loan or a overdraft for the business.
- Forces entrepreneurs to plan carefully, which decreases the risk of business failing.
46
Governments encourage entrepreneurs to set up a business because start-ups
- Reduces unemployment.
- Increases competition.
- Increases output.
- Benefits society.
- Further growth of the economy.
47
Governments may give support to entrepreneurs by
- Business plans & ideas, organising training for entrepreneurs to give them advice and support sessions.
- Finance, may lend loans at low-interest rates or grants, as well as low-cost premises.
- Governments provides grants for training employees to make them more efficient and productive.
- Government allow entrepreneurs to use research facilities in universities.
48
Why is it beneficial to compare business size
- Investors can decide which firm they want to invest in.
- Governments, different tax rates for small and large firms.
- Competitors, to compare size and importance with other firms.
- Workers, to get an idea of how many employees needed.
- Banks, to see importance of loan compared to business size.
49
Capital Employed
The total value of capital used in the business.
50
Different ways to measure business size with their limitations
1. Number of people employed in the business / Capital-Intensive business employ less workers but produce higher levels of output.
2. The value of output in the business / Does not take into account value of goods sold and sale of goods.
3. The value of sales / Different businesses sell different products (cheap and expensive)
4. Total value of capital employed / Some businesses use labor-intensive methods, which require less capital more workers.
51
Benefits of expansion of a business
- Possibility of higher profits for the owner.
- More status and prestige for owners and managers.
- Lower Average Costs
- A large share of its market portion of total market sales it makes, is greater.
52
Ways business can grow
- Internal Growth
- External Growth
53
Internal Growth
Business expands its existing operations.
54
Advantages of Internal Growth
- Use retained profits (don’t need bank loan & interest cost).
- Build on existing strengths & culture
- Steady rate – less risk
55
Disadvantages of Internal Growth
- Reduces profits available for owners
- New markets/products take considerable market research
- Slow growth – slow returns for owners
56
External Growth
Business takes over or merges with another business.
57
Take over
One business buys out the owner of another business, which then becomes part of the 'predator' business.
58
Merger
Two owners of a business agree to join their businesses together to make one business.
59
3 Types of External Growth
- Horizontal Integration
- Vertical Integration
( Forwards or Backwards)
- Conglomerate Integration
60
Horizontal Integration
When one business takes over or merges with another in the same industry at the same stage of production.
61
Benefits of Horizontal Integration
- Reduces number of competition in the industry.
- Opportunities for economies of scale.
- Bigger share of total market can be achieved.
- Synergies - One larger, merged firm may need fewer workers, managers and premises than two – achieves cost savings.
62
Problems of Horizontal Integration
- Diseconomies of scale.
- Difficulty in managing and controlling the business (argue).
- Clash of organisational cultures.
- Risk attracting attention of competition.
63
Vertical Integration
When one business takes over or merges with another one in the same industry but different stage of production. This can be forwards or backwards.
64
Forward Vertical Integration
When merging/takeover is done with the next stage of production
65
Benefits of Forward Vertical Integration
- Merger provides an assured outlet for its products.
- Expanded business absorbs profit margin made by retailer/manufacturer.
- Information regarding consumer needs and preferences can be obtained directly from manufacturer.
66
Backward Vertical Integration
When merging/takeover is done with previous stage of production.
67
Benefits of Backwards Vertical Integration
- Merger gives an assured supply of essential components.
- Expanding business absorbs profit margin of suppliers.
- Supplier could be prevented from supplying to other manufacturers.
- Costs of components and supplies are controlled.
68
Conglomerate Integration
One business merges with or takeovers a business in a completely different industry. This is also known as diversification.
69
Advantages of Conglomerate Integration
- Activity in more than one industry will diversify
- Spread the risk taken by the business.
- Share knowledge between business can help.
70
Disadvantages of Conglomerate Integration
- Requirement for very different skills/expertise.
- Clash of cultures.
- Diseconomies of scale.
71
Disadvantages cause by business growth
- Control and management get harder with expansion.
- Larger businesses lead to poor communication.
- Expansion costs are high and can result in a shortage of finance for businesses.
- Integrating with another business can have conflicts and difficulties, for example, business culture and style of management.
72
Why should businesses remain small
- The type of industry the business operates in.
- Market share.
- Owners’ objective.
73
Why business fail
- Lack of Management Skills.
- Failure to plan for change.
- Over-Expansion – (diseconomies of scale).
- Poor financial management.
- Competition with other businesses.
74
Unincorporated Business
Owners and businesses are seen as the same legal entity.
75
Unlimited Liability
The owners & business are seen as the same legal entity. The owners are personally responsible for any debts of the
business. If the business were to fail, then the business owner may have
their personal assets seized to pay the debt of the business e.g. house/car.
76
Incorporated Business
Business and owners are separate legal entities.
77
Limited Liability
The business and the owners are separate legal entities. So, the owners are not personally responsible for the business debts. If the business fails, the owners cannot lose more than they
originally invested i.e. their personal assets cannot be taken.
78
Shareholders
Owners of a limited company who buy shares represent part-ownership of the company.
79
Private Limited Company
Business owned by shareholders but cannot sell shares to the public (can only sell to family and friends).
80
Advantages of Private Limited Company
- Raise capital from the sale of shares.
- Limited liability for shareholders.
- Separate Legal entity.
- Continuity of company after death.
81
Disadvantages of Private Limited Company
- Cannot sell shares to public.
- Legal Formalities.
- Accounts are available for public to see.
- Not easy to transfer shares.
82
Articles of Association
Contains the rules for managing the company.
83
Memorandum of Association
Contains vital information about the company and the directors.
84
Public Limited Company
Businesses owned and controlled by the shareholders, but they sell to the public, and their shares are tradeable on the stock exchange.
85
Advantages of Public Limited Company
- Can sell shares to public.
- Rapid expansion possible as now there is opportunity to raise very large capital sums.
- Limited Liability.
- No restriction in buying, selling or transfers of sales.
- Easier to attract suppliers.
- Incorporated business, business and owner separate entities.
- Continuity of company after death.
86
Disadvantages of Public Limited Company
- Legal Formalities, complicated and time-consuming.
- Disclosure of accounts and other information.
- Selling shares to public is expensive.
- More regulations and controls to try and protect interest of shareholders.
87
Annual General Meeting (AGM)
A yearly meeting where shareholders may attend to vote for a Board of Directors for the upcoming year.
88
Dividends
Payments made to shareholders from the profit of a company. They are the return for investing in the company.
89
Sole Trader
It is a business owned and controlled by one person- the owner, who is the sole proprietor. It is a form of an unincorporated business.
90
Advantages of a sole trader
- Few legal regulations (easy to set up).
- Complete control.
- Flexible working time.
- Ability to respond quickly to the needs and wants of customers.
- All profit goes to owner.
- Complete secrecy in business matters.
91
Disadvantages of a sole trader
- Decisions can be hard to make, no one to discuss it with.
- Business and owner are same legal entity, unlimited liability.
- May not be able to raise funds to expand business (finance limited to owners saving), so company most likely to remain small.
- May have to work long hours.
- May not have proper skills to run a business.
- Difficult to compete with large firms.
92
Partnership
Form of business in which two or more people agree to own a business jointly.
93
Partnership Agreement / Deal of Partnership
The written and legal agreement between business partners. It is not essential but is recommended.
94
Contents of Partnership Agreement.
- Amount of capital invested by all partners.
- Tasks to be done by each partner.
- The way profits are shared out.
- How long partnership will last.
- Arrangements for absence, retirement and how partners could be let known.
95
Advantages of Partnership
- Greater access to funds (source of money).
- Move capital invested so allows expansion of business.
- Shared responsibility/management and workload.
- Shared decision-making of business.
- Both partners motivated to work because they both benefit from the profits, any losses shared by partners.
- No problems on absences and holidays.
96
Disadvantages of Partnership
- Unlimited liability.
- Partners can disagree.
- Share the profit.
- If one partner is inefficient, other could suffer losing money.
- Business stops if one partner leaves.
97
Franchise
Business based upon the use of the brand names, promotional logos and trading methods of an existing successful business.
98
Franchisee
Buys the license to operate this business from the franchisor.
99
Franchisor
The company that allows another company to conduct business using the company’s name and brand.
100
Advantages to franchisor
- Franchisee buys the license, which means another source of finance.
- Expansion is much faster than if franchisor had to finance all new outlets.
- Management is the responsibility of the franchisee.
- Percentage of sale revenue is given to the franchisor every year.
101
Disadvantages to franchisor
- Bad reputation if one branch has poor management.
- The franchisee keeps some profit.
- Training, some aspects of administration, and advertising are paid by the franchisor.
102
Advantages to franchisee
- Chances of business failure are reduced.
- Franchisor pays for advertising.
- Fewer decisions to make with an independent business (all made by franchisor)
- Franchisor provides training and staff for management.
- Banks are often willing to lend to franchisees due to the low risk.
- All supplies obtained from franchisor.
103
Disadvantages to franchisee
- Less independence than with operating a non-franchised business.
- Unable to make decisions that would suit the local area.
- License paid to franchisor and maybe percentage of annual turnover.
- The franchisor has the power to withdraw the agreement and can prevent the use of the premises.
104
Joint Venture
Where two or more businesses start a new project together, sharing capital, risks and profits.
105
Advantages of a Joint Venture
- Sharing of costs.
- Knowledge and experience can be shared.
- Risks shared.
106
Disadvantages of Joint Venture
- Profits are shared if project is successful.
- Disagreements in decision-making.
- Partners may have different methods of running a business can create conflict.
107
Public Corporations
A business in the public sector that is owned and controlled by the state [government].
108
Advantages of Public Corporations
- Government ownership may be essential to some countries' industries, such as water supply and electricity generation.
- Ensure consumers are not taken advantage of.
- Reduce wasteful competitors.
- Can help stabilize failing businesses to create job opportunities.
- Important public services are often in public sector.
109
Disadvantages of Public Corporations
- The profit objective is not as powerful or important as in private-sector industries.
- Inefficiency because managers rely too much on the government.
- It can be unfair to the private sector if support are provided to the public sector.
- Lack of close competition can decrease many activities.
- It can be used for political reasons, preventing the business from opportunities like other profit-making businesses.
110
Business Objectives
Are aims or targets a business works towards.
111
Benefits of having business objectives
- A clear target to work towards, thus improving Motivation.
- It can help in decision-making.
- It helps unite the whole business towards the same goal.
- It can be used to compare how the business performs through objectives.
112
Private Sector business objectives
- Business Survival - Adjust to business environment, change price of products if necessary.
- Generating profit (total income of business revenue subtracted by total cost)– pay a return to owners or provide finance to invest further in business.
- Returns to shareholders - discourage shareholders from selling their shares (helps managers keep their jobs). This can be done by increasing profit or increasing the share price
- Growth of business – increase salaries, economies of scale. This is only achieved if customers are satisfied with the product.
- Market Share - gives good publicity and more influence over suppliers and customers.
113
Why business objectives can change
- It will work towards profit after being set up and stable.
- After achieving a high market share, it aims to earn higher returns to shareholders.
- A profit-making business hit with a crisis now has the short-term objective of survival.
114
Profit
Total income of a business [revenue] minus total costs.
115
Market Share
Percentage of total market sales held by one brand or business ( (Company sales/total market sales) x100 ).
116
Social Enterprise
Has social objectives as well as an aim to make a profit to reinvest back into the business.
117
Three objectives of Social Enterprise
- Social: to provide jobs and support for disadvantaged groups
- Environmental: to protect the environment.
- Financial: to make a profit to reinvest in the enterprise and expand its social work.
118
Objectives of Public Sector Businesses
- Financial: Meet profit targets set by the government - either reinvested or funded back to the government.
- Service: meet quality targets the government sets and provide services to the public.
- Social: protect or create employment in certain areas.
119
Stakeholders
Any person or group with a direct interest in the performance and activities of a business.
120
Two types of stakeholders
- Internal Stakeholders
- External Stakeholders
121
Internal Stakeholders
Work/own the company (owners, managers, workers).
122
External Stakeholders
Outside the business (consumers, government, banks).
123
Examples of Internal Stakeholders
- Employees and managers.
- Shareholders/owners
124
Examples of External Stakeholders
- Suppliers
- Banks
- Customers
- Competitors
- Government
- Pressure Groups
- Local Community
125
Employees (Internal) Objectives
Regular payment, contract for employment, job security, job that provides satisfaction and motivation.
126
Managers (Internal) Objectives
High salaries, job security and growth of business so managers can have more decision-making control over a big known business.
127
Shareholders/owners (Internal) Objectives
Maximise Dividends, achieve capital gain in the value of the shares.
128
Customers (External) Objectives
Safe, reliable and well-designed products of good quality, Value for money, reliability of service and maintenance.
129
Suppliers (External) Objectives
Clients who pay their bills on time, regular contracts with clients and good working relationship with clients.
130
Banks (External) Objectives
Business that is able to pay interest and repay capital lent, long-term relationships with firms in order to achieve subsequent earnings.
131
Local Community (External) Objectives
Noise/air/environmental pollution, job for working population, safe products.
132
Government (External) Objective
Money from taxes, employing more people, increasing the country’s output
133
Competitors (External) Objectives
Innovation that arises
from rivalry, responding to
competitive threats
including pricing, performance
benchmarking
134
Pressure Groups
Organizations who seek to place demands on businesses to influence a change in their behavior. (Interests environmental / ethical)
135
Trade Unions
Type of
pressure groups who
represent employees rights’,
usually with a particular
focus on pay & pensions.
