UNDERSTANDING BUSINESS ACTIVITY

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  • UNDERSTANDING BUSINESS ACTIVITY
    • 1. Business Activity
      • ECONOMIC PROBLEM
        • Limited Resources
      • SPECIALIZATION: THE BEST USE OF LIMITED RESOURCES
        • Specialization occurs when people and businesses concentrate on what they are best at
        • Division of labour: when the production process is split up into different tasks and each worker performs one of these tasks. A form of specialisation
          • Advantages: Workers are trained in one task- efficient + increases output; less time is wasted
          • Disadvantages: Workers become bored- fall of efficiency; if one worker is absent, no one can replace, production might stop
      • PURPOSE OF BUSINESS ACTIVITY
        • Combines scarce factors of production
        • Produces goods and services to satisfy needs and wants
        • Employs people as workers
        • Added Value: the difference between selling price of a product and the cost of bought in materials and components
          • To pay other costs such as labour costs
          • May be able to make a profit
          • How to increase it: increase selling price OR reduce material costs
    • 2. Classification of businesses
      • STAGES OF ECONOMIC ACTIVITY
        • Chain of production: The various stages of production through which a good goes before reaching the secondary and tertiary sector
          • Primary sector: Extract and uses the natural resources of the earth to produce raw materials used by businesses e.g. farming
            • DEVELOPING COUNTRIES
          • Secondary sector: Manufactures goods using the raw materials provided by the primary sector e.g. building and construction
            • ECONOMICALLY DEVELOPED COUNTRIES
          • Tertiary sector: Provides services to consumers and the other sectors of industry e.g. transport, retail
            • MOST DEVELOPED COUNTRIES
          • RELATIVE IMPORTANCE OF ECONOMIC SECTORS IN COUNTRIES DEPEND ON:
            • The number of workers in each sector
            • The value of the output of goods and services
      • CHANGES OF ECONOMIC SECTOR IMPORTANCE
        • De-industrialisation: when there is a decline in the importance of the secondary, manufacutring sector of industry in a country
          • Primary sources depleted
          • Most developed economies are losing competitiveness in manufacturing to the newly industrialised countries
          • Total wealth increases, consumers tend to spend on services
      • MIXED ECONOMY
        • Both a private and public (state) sector
        • Private sector: owned by private individuals; make own decisions; most businesses aim to run profitably
          • Free market: where there isnt any gov control over the factors of production
        • Public sector: gov owned; gov makes decisions; some products are free of charge; money comes from the taxpayer
          • health; edu; defence; public transport; water and electricity supply
      • MIXED ECONOMIES- RECENT CHANGES
        • Government selling some public sector to private sector businesses
          • Privatisation: The process of government transference of a business or industry from the public sector to the private sector. It does this by offering shares in the business to the public
          • Private sector businesses are more efficient: main objective= profit; competition= increase quality; private owners invest more capital
    • 3. Enterprise, business growth and size
      • ENTERPISE AND ENTREPRENEURSHIP
        • Characteristics of successful entrepreneurs
          • HARDWORKING
          • RISK TAKER
          • CREATIVE
          • OPTIMISTIC
          • SELF-CONFIDENT
          • INNOVATIVE
          • INDEPENDENT
          • EFFECTIVE COMMUNICATOR
      • GOVERNMENT SUPPORT FOR BUSINESS START-UPS
        • WHAT SUPPORT
          • Business idea and help
          • Low cost premises
          • Finance- loans (low interest rates) and grants (in high unemployment areas)
          • Labour- grants to train employees
          • Research- uni research facilities available to business
        • WHY SUPPORT
      • IMPORTANCE OF BUSINESS PLAN
        • Business plan: doc. containing the business objectives and important details about the operations, finance and owners of the new business.
        • Products
        • Cash flow
        • Business costs
        • Location
        • Resources required
        • Uses
          • to help gain finance
          • Careful planning reduces risks
      • COMPARING SIZE OF BUSINESSES
        • WHO USES IT
          • Investors
          • Gov
          • Competitors
          • Workers
          • Banks
        • Number of employees
          • Limitation: some firms may have high output levels but few employees- automation (capital intensive) + how to consider part-time workers?
        • Value of output- compare size in the same industry (manufacturing)
          • Limitations: A firm employing few people might produce several very expensive computers- higher output figures than a firm selling cheaper products but employing more workers
          • The value of output in any time period might not be the same as the value of sales if some goods are not sold
        • Value of sales- compare size of retailing businesses- similar products
          • Limitations: misleading when compare size of businesses selling different products
        • Value of capital employed: the total value of capital invested into the business
          • Limitations: A company with many workers- labour-intensive methods- low output levels and use little capital equipment
        • COMMON TO USE MORE THAN 1 METHOD
      • BUSINESS GROWTH
        • Why?
          • Higher profits for the owners
          • More status and prestige for the owners and managers- higher salaries for managers
          • Lower average cost
          • Large share of its market
        • How?
          • Internal growth (organic): when a business expands its existing operations
          • External growth: when a business takes over or merges with another business
            • Merger: when the owner of two businesses agree to join their firms together to make one business
            • Takeover acquisition: when one business buys out the owners of another business which then becomes part of the 'predator' business (firm that has taken it over)
            • Horizontal merger/ integration: when one firm merges with or takes over another one in the same industry at the same stage of production
              • Benefits: reduces number of competitors; opportunities for economies of scale; bigger share of the total market
            • Vertical merger/ integration: when one firm merges with or takes over another one in the same industry but at a different stage of production
              • Forward: when a firm integrates with another firm which is at a later stage of production (closer to consumer)
                • Benefit: assured outlet for their product; profit margin made by the retailer is absorbed; retailer prevented from selling competing makes of car; info about consumer needs and preferences obtained
              • Backward: when a firm integrates with another firm at an earlier stage of production (closer to raw material supplies)
                • Benefit: assured supply of important components; profit margin of the supplier is absorbed; suppliers prevented from supplying other manufacturers; costs of components controlled
            • Conglomerate merger/integration: when on firm merges with or takes over a firm in a completely different industry- diversification
              • Benefit: Activities in more than one industry- spread risk- other areas supporting failing area; Transfer of ideas between different sections
        • Problems and solutions
          • Difficult to control
            • Operate in smaller units- decentralisation
          • Poor communication
            • Operate in smaller units- use latest IT equipment + telecommunications
          • Short of finance
            • Expand more slowly; Ensure sufficient long-term finance is available
          • More difficult than expanded
            • Different style of management- good communication with the workforce- understand the reasons for the change
        • Why stay small?
          • The type of industry the business operates in: person services or specialized products- hairdressing
          • Market size: the total number of customers= small- luxurious cars
          • Owners' objectives: owner prefer small sized business- control
      • BUSINESS FAILURES:
        • Poor management: lack of experience, bad decisions- new businesses + family businesses (kids not manager materials)
        • Failure to plan for change
        • Poor financial management
        • Over-expansion
        • Risk of new business start-ups: lack of financial, resources and research | no skills in decision making
    • 4. Types of business organisation
      • Sole Trader: a business owned by 1 person
        • Pros
          • Few regulations to follow
          • Own boss
          • Decision-making: Freedom to choose holidays, working hours, prices
        • Cons
          • No one to discuss
          • Unlimited liability: fully responsible for debts
          • Sources of finance are limited- savings, profits and small bank loans
          • Small: restricted capital for expansion- no economies of scale
          • When absent, no one to replace + no continuity of the business
        • suitable for: setting up business; low capital required; public business; personal and direct service
      • Partnership: a form of business in which two or more people agree to jointly own a business
        • Partnership agreement or deed of partnership- written and legal agreement between business partners- recomended
        • Pros
          • More capital invested- expansion of business
          • Responsibilities of running the business were now shared- specialisation
          • Motivation: both benefit from profits + losses now shared
        • Cons
          • Unlimited liability
          • No separate legal identity: if one died, the partnership ends- unincorporated business
          • Disagreements on decisions
          • One partner= dishonest / inefficient, losses are made
          • Countries have limited numbers of partners- 20- business growth= limited
        • Suitable for: avoid legal complications; professional body- medicine; partners well known to each other
        • Limited partnership: offers partners limited liability- separate legal unit- continuity of partnership
      • Private limited companies (Ltd.): A limited company that does not issue share on the stock market and where only certain individuals can purchase the shares.
        • Pros
          • Limited liability- less risk
          • People who started the business- keep control- as long as not sell to too many people
          • Incorporated business: Separate legal identity= continuity
        • Cons
          • Significant legal matters to be dealt before starting
          • Articles of Association- rules the company will be managed
            • Time consuming
          • Memorandum of Association: important info about the company and the directors
            • Time consuming
          • Shares cannot be sold/ transferred without agreements of other shareholders
          • Accounts= less secretive
          • No shares sold to public: Less possible to raise very large sums of capital
      • Public limited companies (PLC):A form of limited company where the public are invited to buy shares and so become owners of the business through the issue of those shares on the stock exchange.
        • Not in public sector
        • Pros
          • Limited liability
          • Incorporated business: separate legal unit- continuity
          • Raise very large capital sums- no limit to no. of shareholders
          • No restriction on buying, selling or transfer of shares
          • High status- easier to attract suppliers and banks to lend finances
        • Cons
          • Legal formalities- complicated + time consuming
          • More regulations and controls to protect interests of shareholders.
          • Difficult to control and manage
          • Sell of shares is expensive
          • Original owner lose control
          • Disclosure of accounts
        • Annual General Meeting: vote for Board of Directors to take decisions + appoint managers to take day-to-day decisions
      • Joint Ventures: two or more businesses agree to start a new project together, sharing capital, the risks and the profits
        • Pros
          • Costs shared
          • Local knowledge-joint venture company based in the country
          • Risks are shared
        • Cons
          • Disagreements over decisions
          • Different ways of running a business- different culture
      • PRIVATE SECTOR
      • Franchise: a business based the upon 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.
        • Pros
          • Franchisor
            • Franchisee buys a licence from the franchisor
            • Expansion of the business is much faster than the franchisor finance all new outlets
            • Franchisee is responsible for the management of the outlet
            • All products sold must be obtained from the franchisor
          • Franchisee
            • Low chances of business failure
            • Franchisor pays for advertisements
            • Fewer decisions to make
            • All supplies are obtained from the franchisor
            • Training for staff and management is provided by the franchisor
            • Banks are more willing to lend
        • Cons
          • Franchisor
            • Poor management of outlet lead to be repu.
            • Franchisee keeps profits made
          • Franchisee
            • Less independence
            • Licence fee need to be paid + percentage of the annual turnover
            • Unable to make decisions that would suit the local area
      • Public corporations
        • All business owned by the state (nationalised)
        • Pros
          • Gov ownership is essential (water supply)
          • Keep business open and secure jobs
          • Consumers are not taken advantage of by privately owned monopolists.
          • Non-profitable but important programmes are still available
        • Cons
          • No private shareholders to insist on high profits and efficiency- no motives
          • Inefficiency- gov subsidies= gove help managers even making a loss
          • No competition- lack of incentive to increase consumer choice and increase efficiency
          • Use these businesses as political reasons
      • Public sector enterprise
        • Free (out of local taxes): street lighting, school
        • Charged: street markets; swimming pools and theatres
    • 5. Business objectives and stakeholder objectives
      • BUSINESS OBJECTIVES
        • The aims or targets that a business works towards.
        • Why?
          • Clear target- motivation
          • Taking decisions will be focused on
          • Unite the whole business towards the same goal
          • Business managers can compare how the business has performed
        • What?
          • Business survival
            • New businesses, first encounter recession
          • Profit
            • Pay a return owners of the business for capital invested and risk taken
            • Provide finance to further invest in the business
          • Returns to shareholders
            • To discourage shareholders from selling their shares
              • Increasing profit- share of profit as dividends
              • Increase share price- plans- growth and higher profits in future
          • Growth of the business
            • Secure jobs; increase salaries; open new possibilities to spread the risks; higher market share; economies of scale
          • Market share
            • Good publicity; influence over suppliers; influence over customers
          • Service to the community
            • Social enterprises (3 objectives)
              • Social: support disadvantaged groups
              • Environmental: protect environment
              • Financial: profit invest back into the enterprise to expand social work
        • Changes
          • Usual
      • STAKEHOLDER OBJECTIVES
        • Any person or group with a direct interest in the performance and activities of a business
        • Owners (internal)
        • Workers (internal)
          • Regular payment
          • Contract of employment
          • Job security
          • Job giving satisfaction and motivation
        • Managers (internal)
          • High Salaries
          • Job security
          • Growth of the business: more control
        • Customers (external)
          • Safe and reliable products
          • Value for money
          • Well-designed products of good quality
          • Reliability of service and maintenance
        • Government (External)
          • Business to succeed in their country- employ workers, pay taxes, increase country's output
          • Expect all firms to stay within the law
        • Whole Community (External)
          • Jobs for working popu.
          • Safe products that are socially responsible
          • Products not damaging the environment
        • Banks (External)
          • Expect the business to pay interest
        • CONFLICTS= COMPROMISE (BEST OBJECTIVE)
          • DIRECTORS: GROWTH
          • WORKERS: JOBS
          • LOCAL COMMUNITY: ENVIRONMENT/ LOW POLUTION/ JOBS
          • CONSUMER: PRICE AND QUALITY
      • PUBLIC- SECTOR BUSINESSES' OBJECTIVES
        • Financial: meet profit targets set by gov- reinvested or handed to gov
        • Service: service to teh public and meet quality targets set by gov
        • Social: Protect or create employment in certain areas

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