Unit 1- What is business? Flashcards
1
Q
why do business exist?
A
- businesses provide goods and services for the market (consumers and businesses)
- Businesses provide employment which allows individuals to earn an income and purchase goods and services.
- Businesses create new goods and services which can enhance the lives of consumers.
- Businesses can allow a country to improve and develop the country’s reputation.
2
Q
what is the transformation process?
A
- Businesses convert inputs (for example, raw materials) into outputs (finished goods) to satisfy the needs, and wants of other consumers and businesses.
- This is called the transformation process and businesses will add value to their goods and services throughout this process.
3
Q
what are meant by B2B?
A
Other businesses sell their goods and services to other businesses and these are known as business to business (or B2B) organisations.
4
Q
what are the 3 sectors that businesses are divided into and why are they divided in this way?
A
- based on the type of product they supply
- primary sector
- secondary sector
- tertiary sector
5
Q
what is the difference between the primary, secondary and tertiary sectors?
A
- Primary sector businesses extract or grow raw materials including fishing, mining, and forestry.
- Secondary businesses manufacture goods using raw materials such as clothing and mobile phones.
- Tertiary businesses provide services such as hotels and cinemas.
6
Q
what is the difference between products and services?
A
Goods:
These are tangible products which can be physically held.
Services:
These are intangible products.
7
Q
what is meant by a mission statement?
A
Businesses have a mission statement which sets out the business’s beliefs and values.
8
Q
what does a business use mission statements for?
A
A business will use its mission statement to create corporate aims which are the long-term goals of the entire business.
9
Q
what do corporate aims allow a business to do?
A
These corporate aims will allow the business to work towards its overall mission.
10
Q
how do corporate aims link to corporate objectives link?
A
- Corporate aims are stated. Then, corporate objectives that contain the specific tasks and activities a business must accomplish in order to satisfy its corporate aims are written down.
- Corporate objectives can be broken down further into functional (departmental), team and individual objectives.
11
Q
draw out the 4 stage hierarchy with mission statement at the top
A
1 mission statement
2 corporate aims
3 corporate objectives
4 functional, team and individual objectives
12
Q
what is meant by smart objectives?
A
S- Specific so that employees know exactly what they are working towards.
M- Measurable so that employees can actually work out whether they have met their objective.
A- Attainable or achievable so that employees are committed to achieving them.
R- Realistic otherwise employees may feel demotivated and overwhelmed.
T- Timely so that employees know when they must achieve them by.
13
Q
name 6 business objectives
A
1- profit maximisation 2-growth 3- survival 4- cash flow 5- social 6- ethical objectives
14
Q
describe the objective: profit maximisation
A
- Profit maximisation is a business objective that requires a business (and its management) to achieve the highest amount of profit for shareholders.
- Satisficing would mean making enough or some minimum required level of profits.
15
Q
describe the objective: survival
A
Survival is a business objective which requires a business to continue trading despite challenges in the external environment.
16
Q
describe the objective: growth
A
Growth is a business objective which requires the growth of stores or locations, sales value, sales volume or product range.
17
Q
describe the objective: social/ ethical objectives
A
Social, ethical and environmental objectives require a business to focus on supporting society through initiatives including sustainability and fair trade.
18
Q
what are the benefits of setting objectives?
A
- Business objectives provide direction and can support planning and operations.
- Business objectives allow a business to co-ordinate resources and ensure that all employees are working towards the same overall aim.
19
Q
define revenue
A
Revenue is the income earned by a business from the sale of its goods and services.
20
Q
what’s the formula for revenue?
A
Revenue = number of sales x sales price.
21
Q
what are some other terms revenue?
A
turnover and sales
22
Q
what is meant by costs?
A
Costs are all of the expenses that a business incurs (pays). This involves everything from wages paid to employees to the electricity bills at the business’ premises.
23
Q
how do you calculate total costs?
A
The total costs are calculated as the sum of the fixed costs and the variable costs.
24
Q
what is meant by fixed costs and how do they increase?
A
-Fixed costs don’t vary as the business changes its output.
e.g- rent
fixed costs can increase as the business grows
25
what is meant by variable cost + give examples?
- Variable costs are the costs that change directly with output (they change as a business changes output).
- Examples include the wages paid for factory labour, raw materials and transport costs.
26
how do you compete with costs?
As well as being able to generate more revenue than costs, cost leadership is a way to compete against other businesses.
27
what did Michael porter argue?
Michael Porter, the man who came up with the 5 Forces analysis also wrote a paper in 1980.
He argued that a business cannot be a cost leader (the business in the industry with the lowest costs), whilst also having a differentiated (or innovative product).
+
He argued that a 'sustainable competitive advantage' over other people in the industry came from focusing on 1 thing.
28
how does Ryanair get cost leadership? (4)
1- It buys new planes
New planes are more fuel-efficient so Ryanair's fuel costs on each flight are lower than competitors with older planes.
2- It flies to cheaper airports
Ryanair often flies to the second airport in a city (usually the airport further from the city centre).
This means that Ryanair's landing fees and airport costs are lower than others.
3- Its planes take off straight away
Some airlines' planes spend 3 hours on the ground at the airport before their next flight. Ryanair's planes take off as quickly after landing as possible.
This means they can do more flights per day using the same number of aircraft.
4- Ryanair backloads its prices
Ryanair has the lowest airfares on price comparison websites so it looks the cheapest.
Then it tries to charge you to choose a seat, or to take a carry on bag, or to avoid them putting your bag in the hold.
So it might not be that cheap!
29
what is meant by profit?
Profit is the amount of money that the business makes when taking into account costs. It is in effect, a surplus.
30
what's the formula for profit?
Profit = total revenue – total costs.
31
what's the formula for average unit cost?
Average unit cost = total cost ÷ output (total number of units produced).
32
what does average unit cost tell us?
- This gives a business an idea of what price they need to charge.
- In order to make a profit on each item, they need to charge a price that is more than the average unit cost.
33
what is meant by interest?
- When you borrow money, you usually pay back more than you borrowed.
- This extra amount is known as the interest on the loan and it is the percentage of the loan that is charged as extra.
34
how do we calculate interest?
Interest = interest rate x the size of the loan.
35
4 features of an effective mission statement
- Differentiates the business from its competitors
- Defines the markets or business in which the business wants to operate
- Irrelevant to all major stakeholders - not just shareholders and managers
- Excites, inspires, motivates & guides – particularly important for employees
36
what are 5 reasons why mission statements are often criticized?
- Not always supported by actions of the business
- Often too vague and general or merely statements of the obvious
- Viewed as a public relations exercise
- Sometimes regarded cynically by employees
- Not supported wholeheartedly by senior management
37
what is meant by sole trader?
- A sole trader is a single person who is the exclusive owner of a business.
- They can still have employees and the owner is entitled to keep all of the profits after tax but is also personally liable for the business’ debts.
38
what are some advantages of being a sole trader?
- They are the easiest type of business to set up.
- The sole trader gets to be their own boss.
- The sole trader decides what to do with the profit.
- It is easy to change the legal structure if circumstances change.
- SIMPLICITY - there's LESS FORM-FILLING than for a limited company. Bookkeeping is less complex.
- SAVING ON FEES - there aren't any legal costs for drawing up an ownership agreement.
39
what are some disadvantages of being a sole trader?
- Unlimited Liability means that there is no legal distinction between the sole trader’s assets and the business’ assets.
- It can be hard to raise finance. Banks often see sole traders as riskier.
- All the responsibility for making business decisions is yours. Having someone to share decision making with, can improve performance.
- It can be harder to retain (keep) good employees as they aren’t necessarily given a share of the profits.
- TIME - sole traders often need to WORK LONG HOURS to meet tight deadlines
- EXPERTISE - the sole trader may have LIMITED SKILLS in areas such as finance
- VULNERABILITY - there's NO COVER if the trader GETS ILL and can't work
40
what is meant by private limited companies (Ltds)?
Private limited companies (Ltds) are companies where ownership of shares is restricted. For the company to sell shares, all the current shareholders must agree to sell them. These companies have Ltd. after their name.
41
what are some advantages of private limited companies?
- The key advantage over sole traders and partnerships is that shareholders have limited liability.
- The fact that ownership is restricted means that all shareholders must agree to sell shares. This means that the owners retain (keep) a lot of control over how the business is managed.
- It is normally easier for a limited company to get a loan than it is for partnerships, as a company is normally seen as less risky. This should increase a company’s access to finance.
42
what are some disadvantages of private limited companies?
- Finance is needed to incorporate a business. There is an upfront fee as well as costs associated with paperwork. This means that it may not be possible for smaller firms (or brand new firms).
- Unlike sole traders and partnerships, the company is legally obliged to publish their accounts each year and competitors may use these to become more competitive.
43
what is meant by public limited companies?
- Public limited companies sell shares on the stock exchange.
- This means that anybody over 18 can buy shares (often through brokers).
- Firms often become public companies when they want to expand because selling shares on the stock exchange allows them to raise finance for investment.
44
what are some advantages of public limited companies?
- Selling shares on a stock exchange allows companies to raise money for investment, which enables the company to grow faster or bigger.
- It is much easier for companies to raise capital (money) from banks if they are public limited companies because they present less of a risk (given the number and size of investors).
- Shareholders have limited liability because the company is incorporated.
45
what are some disadvantages of public limited companies?
- Owners often have very little say over how the business is run. This means that it can be hard to agree on how the business is run.
- Anyone can take over the company if they are able to buy enough shares. When shareholders own more than half the shares, then they will have control over the company.
- The company’s accounts must be made public. This means that competitors can see how well the company is doing.
46
what is meant by flotation?
Flotation is when firms become public companies and their shares are made available to buy.
Selling shares on the stock exchange allows businesses to raise finance for investment.
47
what is meant by a not- for- profit organisation?
Any profit made by not-for-profit organisations is reinvested (put back) in the business. Any profit cannot be kept by the owners.
48
describe what is meant by social enterprises + give examples
- Social enterprises, like the Big Issue or TOMs are another form of not-for-profit organisation.
- They are more similar to for-profit businesses in that they make a surplus through selling goods or services. This profit is reinvested to support the social enterprise’s aim.
- SOCIAL ENTERPRISE are normal businesses with a SOCIAL OBJECTIVE. The business trades and makes profit like any other business, but its profits are used to pay for its SOCIAL ACTIVITIES.
49
describe the benefit of charities + give examples
- Charities, like Oxfam or Save the Children, are a type of not-for-profit organisation.
- Getting charitable status lets a business get tax relief and lets it apply for certain grants. For a business to get charitable status, they must follow rules and regulations.
50
what is meant by 'unincorporated association'?
- Not-for-profit organisations can choose to be an ‘unincorporated association’ but, like sole traders and partnerships, the people who manage it have unlimited liability.
- This means that they get no profit and they are legally responsible for all of the organisation’s debt.
- Bigger organisations, like Oxfam, tend to be incorporated so that the people running it are protected from unlimited liability.
51
what are 3 types of not-for-profit organisations?
- charities
- social enterprises
- unincorporated association
52
describe mutual organisations
- MUTUAL ORGANISATIONS like buildings societies aim to offer their customers the best possible value on products and services.
- PROFIT and REINVESTED into the business in order to reduce prices - that means that building societies can offer higher savings rates and lower loan rates than banks, because they don't have to pay any of their profits to shareholders.
53
how does franchising work?
Franchising is where a business gives someone the right to sell its products and use its trademarks.
The ‘franchisee’ usually pays the business an upfront fee and a percentage of the profits.
54
what are some advantages of franchising?
- Low-cost way of scaling without needing lots of investment.
- Increased brand awareness.
- Less risk of diseconomies of scale.
55
what are some disadvantages of franchising?
- Lose control over how franchisees operate.
| - Badly run franchises can damage the brand.
56
explain franchising
Franchising involves the franchisor selling a license to the franchisee, who can then own a business that uses the brand of the franchisor. Many large businesses, such as McDonald's, operate as franchises. Entrepreneurs running their own franchise of McDonald's take on less risk because people already know & like the product, and they benefit from an established brand name and product portfolio. Franchising is often used as a method for businesses like McDonald's for external growth.
57
how does franchising lead to increased reach?
Allowing franchisees to open franchises allows for faster growth, both in terms of the number of stores and the number of geographic locations. The business does not have to find the finance to open every store and franchisees often have to pay a large lump sum to purchase the license. Franchisees are motivated and have the drive to start and run a new business. Franchising can be a cost-effective way of reaching a wider target market and increasing sales.
58
what is the importance of finding the right franchisee?
However, it is important for the franchisor to find the right franchisee for the business and brand. If one franchise is run badly and a customer has a particularly negative experience, this can impact the reputation of the overall business and all franchises within this. The franchisee is restricted in terms of lots of decisions (for example the branding, uniforms, processes) and so it is important for them to be bought into the business and the culture, to ensure that the individual business is aligned to the overall business that owns the brand and trademarks.
59
what can limited companies do?
Limited companies can raise additional finance by selling shares.
Individuals or groups who buy shares in limited companies are called shareholders.
60
what is meant by ordinary share capital?
Ordinary share capital refers to the amount of finance raised through selling shares to shareholders. Businesses usually use ordinary share capital as a source of long-term finance.
61
what is meant by market capitalisation and how is it calculated?
Market capitalisation is one way of valuing a business and can be calculated by multiplying the number of shares issued by the current market price of one share.
62
what is meant by dividends?
Businesses may decide to share a proportion of their profits with shareholders, and this payment is called a dividend.
63
what is an advantage of dividends?
Dividends can make shareholders satisfied so that they do not wish to sell their shares.
64
what is a disadvantage of dividends?
Dividends can mean that profit is not spent on long-term growth which can limit the growth potential of the business.
65
what is a public sector organisation ?
PUBLIC SECTOR organisations are owned and run by the GOVERNMENT. They aim to provide services to the public, rather than make a profit. NHS hospitals are one example - their aim is to provide health care that's available to everyone. Organisations like the NHS, UK police forces and the fire service are run in a similar way to other businesses, but they don't change for their services so don't make a profit - they are funded by the UK tax system.
66
what is a private sector organisation ?
PRIVATE SECTOR organisations are owned and run by PRIVATE INDIVIDUALS. They range from small sole traders to huge organisations such as John Lewis and ASDA. Most private sector businesses aim to make A PROFIT, however this is not always the case - NON-PROFIT organisations such as CHARITIES are also part of the private sector.
67
what happens in public limited companies that doesn't in private limited companies?
- In a public limited company, any member of the public can buy shares through the Stock Exchange.
- Shareholders usually provide a public limited company with finance, though they are not routinely involved in the running of the business as this is controlled by a board of directors.
68
what happens in private limited companies that doesn't with public limited companies?
In a private limited company, shares can only be bought by the friends and family of the original owner. Shareholders usually provide a private limited company with finance, and they are usually involved in the running of the business.
69
how are decisions made in public limited companies?
- Shareholders have a right to attend a business' Annual General Meeting (AGM) which is where votes can be made on key decisions affecting the business, including appointing a Board of Directors.
- The number of shares held is used to calculate a shareholder’s power so that each shareholder has a vote relative to the number of shares they hold.
70
what are some factors influencing whether shareholders decide to invest?
1
Share prices may increase in future years
2
To receive annual dividend
3
Agreeing with a business' aims and values
71
what are some factors influencing the value of shares?
- Business performance affects demand for its shares and greater performance will increase demand, which increases the share price.
- Economic performance affects demand for shares as economic growth gives individuals confidence in the market which may increase the demand for shares which increases the share price.
- News articles may affect demand for shares as businesses accused of being involved in scandals may receive a bad reputation which decreases demand for shares, therefore, decreasing share price.
72
what are some impacts of changing the value of shares?
- Decreasing and increasing share prices can have a significant effect on a business.
- Decreasing share prices may mean future investors are concerned about the business and this will make it more difficult for the company to raise additional finance through the sale of shares.
73
What do companies host every year that shareholders are allowed to attend?
An Annual General Meeting
74
what is the difference between unlimited and limited liability?
-Unlimited Liability means that there is no legal distinction between the sole trader’s assets and the business’ assets.
WHEREAS
-Limited liability means that the owners AREN'T PERSONALLY RESPONSIBLE for the debts of the business.
75
how do non- profit organisations effect the missions, objectives and decisions?
The MISSIONS and OBJECTIVES of NON-PROFIT organisations are usually to help people or communities in need. They will see objectives to generate enough profit to achieve these aims.
76
how do private sector organisations effect the missions, objectives and decisions?
PRIVATE SECTOR for-profit organisations often have objectives which focus on MAXIMISING profits, although they will also pursue other objectives. Public sector organisation tend to have missions aimed towards benefiting society. This can mean that SOCIAL BENEFITS are put before costs when making decisions.
77
how do sole traders effect the missions, objectives and decisions?
SOLE TRADERS and owners of small PRIVATE LIMITED COMPANIES have CONTROL over objectives and decision making. They may change ownership if the business is expanding. For sole traders in particular, changing the business to a LTD company may mean gaining EXPERTISE from shareholders, however they may not share the same VALUES as the original owner, leading to different OBJECTIVES and difficulties when making DECISIONS. Shareholders may also buy a large proportion of the shares, meaning the original owner(s) may LOSE CONTROL of the business, which may lead to change in the mission or objectives.
78
how do public limited companies effect the missions, objectives and decisions?
For PUBLIC LIMITED COMPANIES, the majority of shareholders are not involved in the management of the business. This can lead to a conflict of interests. E.g. management may wish to pusher objectives designed to achieve long-term gains, but which may cause short-term REDUCTIONS in profits. However, they may need to take into account shareholder's wishes for short-term BOOST to profit.
79
what is meant by the external environment?
PESTLE
| -The external environment contains all the elements that impact on the business which are outside its direct control.
80
how does competition affect a business' costs and demands?
- Competition can affect a business’ costs and demands as the presence of competitors may reduce demand for a business' product or service.
- The presence of a competitor can also increase business costs as a business may increase its spending on promotion and advertising or may invest in research and development to improve the products offered for sale.
81
how does market conditions affect a business' costs and demands?
Market conditions can affect a business’ costs and demands. If a market is increasing in size, a business must ensure it competes against other competitors to secure its own share of the increasing market, and this increases costs.
82
how does consumer income affect a business' costs and demands?
- Consumer income can affect a business’ costs and demands.
- If consumer incomes are decreasing, demand for luxury items, like watches and cars may decrease as people make decisions to stop purchasing these products.
- Businesses may also invest more heavily in promotional and advertising campaigns to try and increase demand, and this also increases business costs.
83
how does interest rates affect a business' costs and demands?
-Interest rates can affect a business’ costs and demands as an increase in interest rates increases the cost of business’ borrowing whilst also reducing the amount spent by consumers as they make decisions to save instead of spend.
84
how does demographic changes affect a business' costs and demands?
- Demographic changes, such as an ageing population, can affect a business’ costs and demands. For example, as the UK’s population ages, there is an increase in the number of people in higher age brackets, and this increases demand for items such as holiday packages targeted at senior citizens and cruises.
- As net migration continues to increase, demand for cultural shops such as Polish food stores continues to increase and this can reduce demand for groceries from existing retailers such as Asda.
85
how does environmental and ethical factors affect a business' costs and demands?
- Environmental and ethical factors can affect a business’ costs and demands. As consumer awareness of environmental and ethical factors continues to develop, consumers are demanding products which are produced ethically and in an environmentally friendly way which increases business costs and can decrease demand if businesses fail to address changing needs.
- For example, consumers are becoming increasingly aware of the issues caused by plastic production which has led cosmetics businesses to remove plastic beads from its products, which may increase costs or reduce demand.
- There is also a focus on vegan foods and artificial meat businesses like Impossible Foods.
86
what factors do you need to consider when assessing the impact of the external environment on a business?
- The nature of the product: good or service, hi or low tech, how easy it is to transport.
- The customer: household, business or government.
- Location of business and where it sells the product.
- Now or later: how will any change impact on the business now and in the future.
87
define interest rates
Cost of borrowing or the return on savings
88
define competition
Businesses who sell similar products in your marketplace
89
define disposable incomes
The amount of income left to spend by households after tax and other essential expenditure
90
define demographic factors
Movements and changes in the makeup of a population
91
define fair trade
Businesses from more developed countries making ethical business deals with businesses from less developed countries
92
what is the role of a manager?
- A manager must set objectives so that success criteria are available to later establish whether or not a task has been completed successfully.
- A manager must review and analyse data so that adaptations to current processes can be made if required.
- A manager must select strategies and implement these to ensure processes are working efficiently and are supporting overall objectives.
- A manager must review the impact of their decisions and use this review to inform the setting of future objectives.
93
what is the role of a leader in a larger business?
In a growing business, a focus on long-term vision and direction is often needed, and it is the role of a leader to provide this.
94
what is the role of a manager in a larger business?
Managers focus on ensuring tasks are completed, and deadlines are met, in such a way to support the long-term vision and direction of the leader.
95
why do we not use the same management style for all businesses?
- Businesses are diverse in their size, structure, and approach.
- One management or leadership approach might be successful in one type of business and unsuccessful in another type of business.
96
what are some factors which will influence styles of management and leadership?
-The external environment can affect the type of management or leadership style which is appropriate for a business.
-The culture of a business can affect the type of management or leadership style which is best suited to the business’ needs.
+For example, in businesses with a very clear and well-defined culture, a change of leadership style may be difficult to introduce without resistance from the majority of employees.
-The skill level of the workforce can influence the type of management or leadership style used as managers may, or may not, want to involve employees in the decision making process.
+For example, managers and leaders often value the knowledge of skilled and qualified staff but less so when staff are unskilled or inexperienced.
97
what is meant by autocratic leadership?
This is an approach by leaders or managers to keep control of decision making and ensure that employees are closely supervised.
98
what is meant by democratic leadership?
This is an approach by leaders or managers to discuss and consult with employees, delegate decision making authority and empower employees through their involvement.
99
In an unstructured business, would you expect a change in leadership to face much resistance?
no
100
what does the effectiveness of a leadership style depend on?
- Strengths and weaknesses of the leader.
- The quality of the workforce.
- Perception of the workforce, where the employer thinks workers want to work for the business or just themselves.
- The culture of the business.
- The type of situation the business faces.
- The amount of time available to make the decision.
- The size of the risk.
101
what do the specific roles of managers, depending on their responsibility within the business include?
1__Setting objectives __– setting the long-term goals for their department or the business as a whole.
2Analysing – is considering data and trends to determine what’s happened and what needs to happen.
3Leading – is making decisions for others to then follow.
4Making decisions – preferring a course of action.
5Reviewing – looking back at the results of actions to determine their success.
102
whats the difference between leaders and managers?
```
Managers= Organise the workforce and control the functions of the business
Leaders= Those who set the direction and strategy for the business
```
103
what is the Tannenbaum and Schmidt continuum?
Shows a range of leadership styles, from autocratic to democratic
104
what is meant by delegation?
Giving authority to someone else
105
describe the Blake Mouton grid
- Country club: safe environment with little conflict
- Team leader: plenty of staff involvement
- Middle of the road: compromises
- Impoverished: less control, less responsibility for outcomes
- Produce or perish: very autocratic
106
describe the left of the Tannenbaum and Schmidt continuum
- At the far left of the continuum, managers maintain full authority and decision making power.
- At the far left of the continuum, managers communicate such decisions to employees who have to comply.
- The left of the continuum is similar to an approach of autocratic leadership.
107
describe the right of the Tannenbaum and Schmidt continuum
- At the far right of the continuum, employees are given authority and decision making power.
- The right of the continuum is similar to an approach of democratic leadership.
108
describe each stage of the Tannenbaum and Schmidt continuum
- Towards the left of the continuum, employees are still informed of decisions, though will be involved in discussions to provide employee buy-in.
- Towards the centre-left of the continuum, employees are invited to question and debate ideas, though overall authority is still maintained by the manager.
- Towards the centre of the continuum, employees are given an opportunity to inform and challenge decisions and their views may be considered and taken into consideration.
- Towards the centre-right of the continuum, employees are actively asked questions and are encouraged to make contributions.
- Towards the right of the continuum, employees are given defined freedom to contribute and make decisions.
109
why would there be a changing styles of leadership?
- If there is a state of emergency, managers and leaders may prefer to retain all decision making and authority.
- If managers and leaders require communication to be fast, for example in cases of emergency, like BP’s Deepwater Horizon oil spill which killed 11 people in 2010, a position on the left of the continuum may be appropriate.
- If employees’ views are valued, managers and leaders may adopt a position on the right of the continuum so that these views can be gathered from employees.
110
what are the 3 different leadership styles?
- democratic leadership
- autocratic leadership
- laissez- faire management
