A-Level Business Unit 1.1 (Year 1/AS AQA Slides)

What you need to know

- Why businesses exist

- The relationship between mission and objectives

- Common business objectives

- Why set objectives

- The measures and importance of profit, including costs and revenue

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Why do Businesses Exist?

- Businesses create employment − 30.61 million people were in employment in September 2014, the highest rate since 2008. Unemployment was at 2.02 million. Employed workers pay income tax, claim less benefits and are able to purchase more goods and services to stimulate economic growth

- Businesses create wealth – not only do businesses pay workers, they also pay corporation tax which can be used by the government to pay for public services such as hospitals and schools

- Businesses create new products and services e.g. pharmaceuticals to cure illnesses or green technology to solve environmental issues

- Businesses can enhance a country's reputation e.g. the UK’s music and film industry or the French wine industry

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What Does a Business do?

- Production: The process whereby resources (factors of production) are converted into product that is intended to satisfy the requirements of potential customers. The output of the production process may be a service (e.g. a haircut) or a finished good (e.g. a toy).

- Transformation process: The conversion of a firm’s inputs into outputs that reach the customer and adds value.

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Adding Value

- The process of increasing the worth of resources by modifying them.

- It can be calculated by the following formula:

Added value = selling price – the cost of bought in materials,components and services

- Firms add value through manufacturing the goods or providing the service but also through all of the other activities they undertake such as customer service, after-sale service, their branding which can be established over many years and by having a unique selling point (USP).

- USP: A feature of a product or service that allows it to be differentiated from other products.

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The Factors of Production

- The resources which are needed in the process of turning inputs into outputs and adding value:

  • Capital - Goods that are made in order to produce other goods and services, e.g. machinery, lorries, computer systems, shops
  • Enterprise - The act of bringing the other factors of production together to create goods and services; making decisions and providing the finance. 
  • Land - All the natural resources that can be used for production, e.g. coal, oil, livestock
  • Labour - Describes the physical and mental effort involved in production, e.g. manual effort in producing finished goods or individuals providing a service i.e. accountant

- They can be remembered using the acronym CELL

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Types of Business

- There were an estimated 4.9 million private sector businesses in the UK at the start of 2013. Of these businesses, 99.9 per cent are SMEs employing an estimated total of 14.4 million people.

- Business can be categorised into the sectors of the economy they are in based on their main form of operation. The three sectors are:

  • Primary – the extraction of raw materials from the earth, e.g. farming, fishing, mining, oil extraction, forestry
  • Secondary – transforming or refining the raw materials, e.g. manufacturing, construction, oil refining, energy firms
  • Tertiary – the service industry, e.g. retail, restaurants, hotels, transportation, financial services, health industry and education

- Some of these businesses will sell directly to consumers (business to consumer − B2C) and some will sell to business (business to business − B2B). The type of business will influence all actions, from how it manages its staff to how it promotes and deals with its customers.

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The Relationship Between Mission and Objectives

- Mission statement: a qualitative statement of an organisation’s aims which describes the general purpose of the organisation.

- The Coca‑Cola Company mission

- Our mission is:

  • To refresh the world - in mind, body and spirit
  • To inspire moments of optimism - through our brands and actions
  • To create value and make a difference everywhere we engage.
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The Relationship Between Mission and Objectives

- Corporate vision: What the company aspires to be.

- Coca Cola’s vision

- Our vision serves as the framework for our road map and guides every aspect of our business by describing what we need to accomplish in order to continue achieving sustainable, quality growth.

  • People: Be a great place to work where people are inspired to be the best they can be.
  • Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people's desires and needs.
  • Partners: Nurture a winning network of customers and suppliers; together we create mutual, enduring value.
  • Planet: Be a responsible citizen that makes a difference by helping build and support sustainable communities.
  • Profit: Maximize long-term return to shareowners while being mindful of our overall responsibilities.
  • Productivity: Be a highly effective, lean and fast-moving organization

(Examples taken from http://www.coca-cola.co.uk/about-us/coca-cola-mission-vision-statement.html )

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The Relationship Between Mission and Objectives

- Corporate aims: the long-term statement of what the business intends to achieve.

- Objectives: More precise and detailed goals or targets that must be achieved in order to achieve the corporate aims and mission.

- Business will often have a hierarchy of objectives from corporate and departmental sometimes down to team and individual objectives. 

- Team objectives must be achieved to help meet the department objectives which will help the company to achieve its overall corporate objectives, thereby striving towards its overall mission.

- Example: 

  • Corporate objective: To increase revenue by 15 per cent by the end of 2020.
  • Marketing department objective: To increase spend per customer per month by £5 by 2017.
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SMART Objectives

  • Specific 
  • Measureable
  • Agreed
  • Realistic
  • Time-bound

E.g.

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Common Business Objectives

- Survival

- Break Even

- Sales Growth and Maximisation

- Profit Growth and/or Maximisation

- Growth and Expansion

- Reducing Risk

- Diversification

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Common Business Objectives

- Improving Cash Flow and Liquidity

- Increasing Market Share

- Increasing Shareholder Value

- Maximising Customer Satisfaction

- Social and Ethical Objectives

- Staff Retention, Engagement, Motivation and Morale

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Why Set Objectives?

- Objectives provide a clear set of guidelines for workers to follow and strive to achieve, and a sense of direction for the company to achieve what it wants to

- They co-ordinate business activity and guide the actions of the whole organisation

- They motivate workers and departments to strive for success

- They emphasise what is important for the business (priorities) and what time and money should be spent on

- They influence the actions of workers helping to ensure they make decisions and take actions in-line with what senior managers/owners want as set out in the aims and objectives.

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The Measures and Importance of Profit: Revenue

- Revenue (also known as turnover and sales) is the money received from sales of goods or services

             Total revenue =  selling price x number of items sold

- For example: If an ice cream kiosk has sales of 1,115 ice creams a month at a selling price of £2 what would revenue be?

Answer: Total revenue = £2 x 1,115 = £2,230

- The owner is considering changing his price. What would happen to his revenue if he cut his price to £1.50.

Answer: Total revenue = £1.50 x 1,115 = £1.672.50 

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The Measures and Importance of Profit: Types of Co

- Fixed costs: Costs that do not change directly with the level of output. 

- They will increase as a firm grows, for example rents a larger store, but will not go up by a set amount for each new unit made. 

- For example:

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The Measures and Importance of Profit: Types of Co

- Variable costs: Costs that change directly with output. They will increase by a set amount each time a new unit is made.

- For example:

- Total costs = total fixed costs + total variable costs

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The Measures and Importance of Profit: Profit

- Profit: the difference between total revenue and total costs. The money that is left from sales once all costs have been paid.

                                                 Profit =  total revenue – total costs

- For example: If a bar had revenue of £10,500 a week and total costs £5,400. What would be its profit?

Answer: Total profit = £10,500 - £5,400 = £5,100

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Why is Profit Important?

  • To be reinvested into the firm
  • To keep owners/shareholders happy
  • To help attract new shareholders to invest
  • To help obtain investment and bank loans
  • To pay taxes
  • To avoid share prices drops and potential hostile takeovers
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Summary

  • Objectives give firms clear direction and focus
  • They enable a firm to set its priorities and drive it to be successful
  • They motivate staff and ensure that they act in the interest of the business
  • They are also important to be able to measure success; to see if they have been achieved
  • However, objectives must be SMART to be effective.
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