What is a business?
What is a business?
A business is defined as any organisation that works to fulfil a common purpose.
The public sector is where goods and services are provided by the government or local authorities. They aim to break-even and are not out to make a profit.
The private sector is a business that is owned by private individuals and is out to make a profit.
Business objectives are stated, measurable targets of how to achieve business aims/objectives. A mission statement sets out the businesses vision and values.
Unlimited wants + Limited resources = Scarcity
Scarcity leads to choices being made. Oppurtunity cost is the cost of choosing the next best alternative.
Goods: tangible, produced, bought/sold, then consumed.
Services: activities that other people/businesses do for you. Intangible.
Marketing is the anticipation, identification and provision of products to customers profitability.
Market led - based on what people want and are prepared to pay (most companies)
Product led - based on the product that you want to sell (morgan cars)
Asset led - based on what the company stands for (Virgin)
A market is a place where business occurs - where things are bought and sold.
Market measuring is measuring the value of all the sales (transactions).
Market size is the value of all sales for that particular market.
Market share is the percentage of the market that you are selling.
Mass marketing Niche marketing
+maximises income -fierce competition +low competition -disappear in changes (taste)
+economies of scale -advertising costs +expert knowledge -targeting promotion difficult
if customers are spread out
Producing Goods and Services
A good entrepreneur
Changes in the proportion of primary/secondary/tertiary jobs
- Primary falls due to:
- imports of raw materials
- less demand
- Secondary rises then falls due to: Full times jobs have declined - industrialisation then deindustrialisation Part time jobs have increased
- U.K was world leader in manufacturing - gives flexibility
- countries start manufacturing and start exporting
- Tertiary rises:
- in support of manufacturing
- rise in retail
- Raw materials
- Machinery and vehicles
- Retained profits
- Owners funds
- Selling assets
- Trade credit
- Debt factoring (selling debts to a company)
- Debentures (long term borrowing similar to shares)
- Bank loans
- Issuing shares
Methods of production
Job production is used to make single items which are usually to the buyers specification. Examples include: bridges, wedding dresses and tailor made suits.
Job production usually requires highly skilled workers, who are usually well paid. Goods take longer to be produced and are likely to be more expensive compared to mass produced goods.
Batch production is used to make goods in batches. The same equipment and labour is then used to make different goods. Examples include: bread, toys and CDs.
Batch production is likely to require semi-skilled workers. It allows firms to aim at niche markets using their assets (equipment and labour), but time is lost when machines have to be reset and firms may not be able to deal with large scale orders.
Flow production involves the production of products on production lines. Mass produced. Examples include: TVs, cars and phones. The making of the products are broken down into simple tasks for unskilled workers or machines. This keeps labour costs down. Flow or continuous production can benefit from economies of scale but may need a lot of capital.
Scale of production
Survival of small firms
Small firms: less than 5 workers, small turnover, under VAT threshold, sole trader.
Can react quickly, flat hierarchy, small span of control, competitive pricing, niche markets.
Maybe hard to set up, competition (E.O.S and low prices), risk, unlimited liability.
Based on investing in what the business already does. E.g expanding product range, targeting new markets, make current products widely available, benefit from E.O.S.
Increase in sales and profits. May damage reputation, possible loss of control.
Involves taking-over or merging with other businesses.
Growth in market share. Expansions may be misjudged, too high a price can be paid.
There are 4 varieties of external growth:
Firm merges with another at same stage in the production process. Makes use of E.O.S.Synergy: two firms pooling products will be better than if seperate.
Backward Vertical integration:
Firm merges with another at the previous stage in the production process. Objective being to reduce costs or secure supplies. E.g Birdseye owning large farms.
Scale of production cont. 2
Forward Vertical integration:
Firm merges with another at the next stage in production process. Guarantees outlets for products. E.g oil companies buying service stations.
No obvious relationship between different parts of the business. Directors see an opportunity to buy firms cheap. E.g Mars and Pedigree being owned by the same company.
Economies of scale
Cost per unit falls as ouptut increases. Main advantage of increasing the scale of production and becoming 'big'.
Economies of scale are important because a large business can pass on lower costs to customers through lower prices and increase its share of a market. This poses a threat to smaller businesses that can be "undercut" by the competition.
Secondly, a business could choose to maintain its current price for its product and accept higher profit margins.
There are two main types of E.O.S: internal and external.
Internal economies of scale have a greater potential impact on the costs and profitability of a business.
Scale of production cont. 3
When a firm benefits from lower unit costs as a result of the whole industry growing in size. E.g Training and education becomes more focused on the industry.
Technical economies of scale: expensive specialist machinery
Marketing economies of scale: better negotiation power in the market
Specialisation of the workforce: split up the production process into seperate tasks
Financial economies of scale: trusted by banks more - favourable rates of borrowing
Diseconomies of scale:
Occur when a business grows so large that the costs per unit increase. Usually down to the difficulties of managing a larger workforce: poor communication, lack of motivation, loss of direction. Possible rememdies include delegation of decision-making (empowerment), job enrichment and team working.
Things to take into account when thinking about location:
- The product
- Power and raw materials
- Telecommunications and I.T
- Markets and transport costs
- Government influence
- Industrial inertia - don't want to move
- Land - brown/green field sites
Historically we didn't have roads, those businsses get stuck as now to much to move. Transport networks have reduced costs and enables businesses to be footloose. (free to move). Government has an important role in choosing a businesses location due to unemployment ect.
Brownfield sites: Previously developed land. Often contaminated so higher costs.
Greenfield sites: Fresh undeveloped land.
The Private Sector
The private sector consists of business activity that is owned by private individuals. Their aims and objectives could be:
- survival: a short term objective
- profit maximisation: to make as much profit as possible
- profit satisficing: to make enough profit to keep the owners comfortable
- sales growth: to try and make as many sales as possible
A business plan is something to organise the business, which makes the business look good and allows you to measure success. The main elements in a business plan are:
- the product - promotion - staffing
- place - aims and objectives - cash flow forecast
- pricing - methods of finance - business structure
Types of businesses in the public sector:
- Sole trader - Private Limited (LTD) - Co-operative - Franchisises
- Partnership - Public Limited (PLC) - Social enterprise
The Public Sector
The Public Sector
The aims and objectives of the public sector are not only to generate a profit, but to provide a service to the public at a subsidised cost so it is accessible by all.
Public goods: An item whose consumption is not decided by the individual consumer but by the society as a whole, and which is financed by taxation. E.g national defence and street lighting.
Merit goods: Goods or services provided free for the benefit of the entire society by a government, because they would be under-provided id left to the market forces or private enterprises. E.g education, health services and public libraries.
Demerit goods: A good which is considered unhealthy ot damaging in some way. Pysically harmful or mentally harmful. Subject to additional tax. E.g cigarettes and gambling.
Excludable good: A good that people can be prevented from using. E.g cinema
Non-excludable good: A good whereby it is not possible to exclude people from using the good. E.g firework display.
Rival good: A good which one used cannot be used again. E.g petrol and an apple.
Non-rival good: Allows consumption or possession to multiple users. E.g skateboard, road and the internet.
Supply and Demand
Supply and Demand
When considering the price of their products, businesses should look at supply and demand.
Supply looks at how businesses set prices
Demand looks at what prices are acceptable from the consumers view.
Demand: The amount that people are willing to buy at any given price.
For virtually all products, demand increases as price falls and vice-versa.
DEMAND CURVES GO DOWN
Supply: The amount of goods that producers are willling to supply/sell at any given price.
In virtually all cases supply increases as price increases and vice-versa. This is because producers are aiming to make a profit. SUPPLY CURVES GO UP.
Businesses want to supply their products at the highest possible price.
Price equilibrium is found where supply and demand are equal. Point where both sellers and buyers are happy with the price and quantity.
Monopoly: One firm controls the market and is thus able to force a price upon customers. >25% of the market.
- Natural monopoly: when it only makes sense for one firm to supply the product e.g gas supply.
- Local monopoly: a business has and effective monopoly on the local area.
Monopsony: One business controls >25% of purchases.
Duopoly: Two firms controls the market.
Oligopoly: A small number of firms controls the market, selling similar products at similar prices. They may collude on prices.
Oligopoly -> Concentration ratio -> Collusion -> Cartel
Monopolistic competition: A large number of firms sells differentiated products. e.g They differ by branding, quality and product features.
Perfect competition: A very large number of firms sells identical goods. e.g Ebay: a large number of sellers selling near identical products at the going rate price.
Concentration ratio: A measure of the degree of competition in an industry.
e.g CR4=70% means the four biggest firms have a total of 70% market share.
Technological change is the overall process of invention, innovation and diffusion of technology or processes.
Business technology has revolutionized the way companies conduct business.
Small businesses can implement business technology and level the playing field with larger organisations.
- Small business owners can use technology to reduce business costs.
- Business technology helps automate back office functions e.g payroll
- Business owners can also use technology to create secure environments to maintain consumer information.
- Many types of business technology/software programs are user friendly. This allows almost all business owners to use the hardware and software.
- Machinery could replace peoples jobs.
- More people are working in tertiary rather than secondary and primary.
- If the business goes overseas, the current staff could be made redundant.
Exogenous shocks and Change
Exogenous shocks are unexpected or unpredictable events that occur outside an industry or country, but can have dramatic effect on performance or markets within an industy or country.
A large shock would push up prices, deflate demand, and ofcourse reduce profitability.
Types of Exogenous shocks:
- Supplier going bust
Change is the act or instance of becoming different. Change is important because without it it is nearly impossible for a business to move forward, as they would lose their competitive edge and would fail to meet the needs and wants of customers.
All people affected in the change should be informed. The business must assess if the change is going to help reach their goal.
- You are taking employess out of their comfort zone
- Employees may not favour a change
- The costs could outweigh the profit you will gain from it