Business Studies - Unit 1

Unit 1.1 Spotting a business opportunity

Spotting an Opportunity:

Reasons for starting a business-

• Turning hobbies into businesses
  
• Using their specific training
• As a side line to existing work
• To make use of resources they have avaliable

Understanding Customer Needs:

• NO business can guarantee success
• But steps can be taken to redue risk 

    - Providing products that customers want ( Market Orientation ) 

Types of Purchases:

• Routine Purchases - Everyday purchases which require little or no thought
• Limited-Decision Purchases - Less routine, involving a little more of a thought
• Extensive Decisions - Purchases requiring a lot of thought
• Impulse Purchases - Purchases made on the spur of the moment

Researching the Market:

Finding out what customers want is called MARKET RESEARCH

Market research should be used to answer questions such as:

• Who is in the target market?
• Where are they?
• What do they want?
• What are our competitors doing?
• How can we do things better?

Market research can be done in two ways:

• Secondary Research 
• Primary Research 

Secondary Research:

Sometimes called 'Desk Research'

Involves using information that has already been collected

It can be obtained from a number of sources:

• Government Statistics 
• Market Research Companies, e.g Gallop
• Newspaper
• The Internet 
• Company's past data

Secondary Research:

Advantages-

1. Information is already avaliable 

2. It is cheap

3. Can find out what competitors are doing

Disadvantages-

1. Information may be out of date

2. Data can be difficult to make sense of 

3. Information may not be relevant

Primary Research:

Also known as 'Field Research'

This is information that is newly created

Can be collected by research firms, ie Gallup, mori etc, or by the firm itself

There are a number of methods:

• Test marketing 
• Surveys - Questionnaires, Consumer panels & Interviews 
• Observations - Electronic & Watching 

Primary Research:

Advantages-

1. Obtain the information you want

2. Information is up to date

3. Competitors will not have the information

Disadvantages-

1. It is expensive

2. Takes longer to obtain

3. Difficult to obtain

Market Segmentation:

Most business cannot sell their product to everyone

Instead they break the market into smaller pieces - and then try to sell to these smaller groups 

• These smaller groups are called SEGMENTS. They consist of consumers who buy similar products.

These consumers then become the TARGET MARKET for the firm

Methods of Segmentation:

There are a number of ways in which this can be done-

• Geographical/Regional
• Age
• Gender
• Socio-Economic Groups
• Lifestyle

Market Mapping:

This is the tool used to get an overview of how a market is segmented

It can be used to help you find a GAP in the market

Making a Choice:

With all these different choices avaliable, how do people-

• Choose which product to buy
• Choose which shop to buy it from 

Companies obviously want you to choose a product or service from their business.It is therefore important that they gain a COMPETITIVE ADVANTAGE.

A competitive advantage is offering consumers greater perceived value, either through lower prices, greather benefits or better service.

Competitive Advantage:

Methods of Obtaining Competitive Advantage-

• Value for Money
• Facilities 
• Brand
• Customer Service
• Location
• Image 
• Taste

The Production Line:

In order to make many of the same products they must go through the following stages-

• Input of resources
• Add value to raw materials 
• Outputs

What is Value-Added?:

Added Value is the increase in the benefits of a good or service which are created at each stage.

This means that value can be added simply by making a product more appealing to customers.

Methods of added value include-

• Changing Raw Materials into products of use
• Having packaging that makes products different
• Branding

Calculating Value Added:

Value Added = Value of output - Value of input

Franchises:

A francise is where a large company allows smaller businesses to use their name

They can be identified by-

• An agreement between a franchisor and a franchisee
• Franchisor allows the use of their business name for an agreed length of time
• Franchisor provides materials, training and advice
• Franchisee must provide the money to start their business
• Franchisee must make regular payments to the franchisor

Is it a good idea to be a Franchise?:

Advantages-

• Theres a good chance of success
• Its easier to borrow money because of proven success 
• Most problems will have been overcome already
• Support is avaliable from the franchisor
• Advertising is organised and paid for by the franchisor
• Franchisees are usually small

Disadvantages-

• Franchise can be removed
• Franchisee cannot make all of the decisions 
• Cannot sell the franchise without permission
• Have to make royalty payments to the franchisor 
• Supplies have to be purchased from franchisor

1.2 Showing Enterprise

What is Enterprise?:

Enterprise is a willingness to take riskes, and show initiative in order to establish new business ventures.

Without enterprise or entrepreneurs new businesses would not be started

What is Creative Thinking?

Creative Thinking is a mental process involving the generation of new ideas or concepts, or new associations between existing ideas or concepts. It usually has both originality and appropriateness.

Creative Thinking is about-

• Innovation
• New product ideas
• Improving existing products
• Solving problems
• Obtaining a competitive advantage 

Why do firms need to think creatively?

Firms need to be creative to stay ahead

Many of the products you take for granted came about because of someones creative thinking.

The 6 Thinking Hats

• White Hat - What facts do we know?
• Black Hat - What are the potential problems?
• Red Hat - What does intuition tell us? What are our feelings?
• Yellow Hat - What are the benefits?
• Green Hat - How can the problems be solved?
• Blue Hat - What decisions have been made?

Why? - Asking why is ablout looking at the current situation to try to identify opportunities

Why Not?

Invention and Innovation

Invention - 

To develop a completely new product

Innovation -

The ability to develop new ideas that build upon those that already exist

Protecting the Product

Patents -

• Gives the inventor the sole rights over their idea for 20 years

Copyright -

• The copyright owner has the legal right to prevent authorised copying of their work

License - 

• Applies to a single product

Why Do Businesses Take Risks?

• To become wealthy
• For the buzz
• Being your own boss

What Does It Take To Be Enterprising?

• Think Ahead
• Make Connections
• Show Initiative
• Make Decisions 
• Show Leadership

1.3 Putting a Business Idea into Practice

Objectives

Financial Objectives -

• Survival 
• Profit
• To Provide For Family 
• Increase Revenues

Non-Financial Objectives -

• To be your own boss
• To create something to be proud of 
• To help others

What Is An Entrepreneur?

An Entrepreneur is someone who has a flair for business ideas, and has the confidence to take the risks involved in setting up a business.

Money in Business

Businesses need money to exist:

• Any money received by a business is REVENUE
• Any money spent by a business is a COST

Revenue

Business will receive money by selling their goods or services 

Revenue can also be called:

• Sales Revenue 
• Total Revenue 

Total Revenue = Selling price per unit X Number of units sold

A business must forecast its sales revenue by:

• Estimating how many units it will sell based on their market research
• Deciding what price they will charge for each unit sold

Costs 

Start-up Costs- 

• Market Research 
  
• Premises
• Machinery 
• Fixtures & Fittings

Running Costs-

• Fixed Costs - Salaries , Rent
• Variable Costs - Hourly Wages, Raw Materials
• Semi-Fixed Costs - Telephone Bills

Total Cost = Total Fixed Costs + Total Variable Costs

Calculating Profit and Loss

Profit = Sales Revenue - Total Cost

Revenue > Costs = Profit

Revenue < Costs = Loss

The Cash Flow Forecast

A business will estimate:

• How much is will sell
• How much it will cost to make what is sold 
• How much fixed costs will be

Inflows are money received from customers and other sources

Outflows are money paid to supplies 

Cash Inflows

This is the money the business receives 

4 main places the money will come from:

• Sales Revenue - Received from customers
• Grants - Recieved from government
• Capital - From the sale of assests e.g. Machinery
• Loans - Received from banks and other lenders

Cash Outflows

This is the money that the business spends

7 main ways that money will be spent:

• Wages and Salaries - To pay for staff
• Raw Materials - To make products
• Utilities - Needed to run the business
• Rent and business rates - To pay for premises 
• Interest - On money that has been borrowed 
• Tax - On profits and spending
• Equipment - Used to make products

A Cash Flow Forecast

A cash flow forecast is a table that summarises the money coming in and going out

Receipts is money coming in 

Payments is money going out 

Net in/out Flow is the difference between the 2

What Affects Cash Flow?

Speed and Cash Flowing in and out-

• Stock Levels  - refers to the materials that a business must buy in to make their product
• Credit Terms - is the time between receiving goods and paying for them

A business cannot survive without cash as they need to always have cash avaliable

Uses of cash flow-

• It can be uised to obtain loans since lenders can see how much money is flowing into the business
• Businesses can spot problems before they happen and make changes 
• Businesses can decide what they want to do with any excess cash

Why Do Firms Need Finance?

Reasons include-

• To start a new business
• To pay workers
• To cover a fall in demand
• To pay bills
• To buy stocks 
• To buy premises 
• To buy new equipment 
• To expand the business

Different Types Of Finance

Types of finance-

• Internal- Money that is obtained from within the business
• External- Money obtained from outside the business

Sources of Finance

Internal-

• Owners Funds
• Retained Profit
• Sale of Assets 
• Changing Stock Levels
• Changing Credit Terms

External-

• Long Term - Share Capital, Venture Capital, Mortgage, Government Grants

Sources of Finance

Internal-

• Owners Funds
• Retained Profit
• Sale of Assets 
• Changing Stock Levels
• Changing Credit Terms

External-

• Long Term - Share Capital, Venture Capital, Mortgage, Government Grants
• Short Term - Bank Overdraft, Bank Loan, Hire Purchase, Leasing, Trade Credit

Finance and Time

Short-Term - This refers finance that is only required for a maximum of 12 months

Medium-Term - This refers to finance that is required for more than 1 year, but less than 5 years

Long-Term - This refers to finance that is required for more than 5 years

1.4 Making the Start-up Effective

Customer

To survive the business must provide what the customer wants.

The Marketing Mix

In order to meet customer needs, a business must:

• Sell them products that they want
• Charge a price they are willing to pay
• Make them avaliable in the right place
• Make them aware by using promotion

4 Elements Of Marketing Mix-

• Product
• Price
• Place
• Promotion

The Product Life-Cycle 

Introduction-

• Sales are low
• Profits will be negative

Growth-

• Sales increase rapidly
• Profits will reach their highest point at the end of this stage

Maturity-

• Sales reach their highest point and profits will begin to fall as competition increases

Decline-

• Sales are falling and profits continue to fall and may become negative

Product

Life cycles can be lengthened by-

• Extra advertising 
• Special Deals
• Widening the product range
• Changing the product image to ain at new markets

Price

Pricing Strategies-

• Cost-Plus - Add % profit to the actual cost
• Competition - Charge a price similar to competitors
• Penetration - Start with a low proce to attract customers
• Skimming - Start with a high price for a unique product
• Promotional - Special price for a limited time

Promotion

Types of Promotion-

• Advertising 
• Sales promotion
• Direct Mailing
• Public Relations
• Packaging

Place

In order to get a product to the right place a firm has a number of options. This is called Channels of Distribution.

Liability

Businesses either have Limited or Unlimited Liability.

Unlimited Liability - The owners of the business are personally liable for any debts with the business may have 

The businesses that have this are Sole Traders and Partnership

Limited Liability - The liability of the owners of the business, the shareholders, to pay off its debts is limited to the amount of money which they have invested in the business when buying shares

The businesses that have this are Private Limited Companies (Ltd) and Public Limited Companies (Plc)

Liability

If a business has unlimited liability then the owner:

• Is responsible for ALL debts
• Must pay off these debts using their own money if the business cannot afford to pay them
• May have to sell their own house/car in order to pay these debts

If a business has Limited Liability then the owner:

• Are only responsible for the business' debts up to the amount of money they have put in to the business
• Do not personally have to pay off these debts using their own money
• This mean that their own possessions are not at risk 

Business Start-Up

Reasons for business start-up - 

• Profitable
• More variety
• Being my own boss
• The dream becomes reality
• Work to own deadlines
• Allows you to have 2nd Career
• Doing what im interested in 
• Cut the commute

Start-Up Legal Issues 

There are four main legal areas to be aware of when starting a business:

• Business Organisation - A company has a separate legal entity
• Employment  - Many employment laws
• Consumer Protection - Law provides protection for consumers that businesses must meet
• Environmental Protection - Strict laws covering pollution

UK Taxes

Direct -

• Income Tax
• National Insuarance 
• Coporation Tax
• Inheritance Tax
• Capital Gains Tax
• Council Tax

Indirect - 

• Value Added Tax
• Excise Duties
• Air Passenger Duty 
• Betting &Gaming Duty 
• Insurance Premium Tax

Taxes

VAT - A tax on Consumer Expenditure 

Corporation Tax - Tax on companies (Ltd & Plc) profits

Income Tax - Tax paid by anyone who has an income

Delivery

Offering a delivery service is an example of providing what the customer wants!

To fulfil customers orders, it is important to:

• Keep Accurate Records
• Deliver on the agreed date 
• Between the stated times
• Publish any cost involved

Why are workers needed?

A business may need to employ more workers because:

• Increased Sales
• Some Staff Leave
• Staff get promoted
• Staff have temporary absence

The Job Description

Should contain-

• Job Title
• Purpose of Job
• Place in organisation
• Specific duties of the job 
• Location of job
• Hours of work

The Person Specification

Should contain-

• Educational qualifications
• Previous experience
• General intelligence
• Specialised skills
• Interests
• Personality 
• Physical requirements

Advertising the Job

• Job centres
• Internet
• Internally (via notice boards and journals)
• Local Newspapers
• National Newspapers 
• Trade Journals
• Local Shop Window

Should contain- 

• Job Title, Contact details and wage information
• Brief description and location
• Qualifications and experience required
• Organisations identity and logo

The Contract of Employment

Legal Document

Should contain- 

• Name of employer 
• Date on which employment started
• Job Title
• Rate of pay and Payment method
• Normal hours of work 
• Holiday entitlement & holiday pay 
• Conditions relating to injury
• Pension arrangements
• Length of notce required 
• Disciplinary rules
• Arrangements for handling problems

Training

• Induction - Familiarise workers with their job
• Re-Training
• Upgrading Skills
• Multi-Skilling

Training is expensive as courses must be paid for

Motivation

Monetary Rewards (giving workers more money) -

• Increases in pay
• Bonus Schemes
• Staff Discounts
• Shares in the company

Non-Monetary Rewards (giving rewards) -

• Company car
• Free health care
• On-site creche

Increasing Motivation

• Job Enlargement - More tasks 
• Job Enrichment - More responsibility
• Job Rotation - Changing of jobs
• Good working conditions - Pleasant surroundings
• Good communication - So workers know whats happening

1.5 Understanding The Economic Context

Buyers and Sellers

For trade to take place a market must be created.

• A market brings buyers and sellers together so than an exchange of goods or services can take place at a price.
• A commodity is a product that is sold on the basis of price rather than brand qualities. There is almost no difference in the product irrespective of where you buy it from.

Supply

Supply - This shows the quantity of a product a business is prepared to make and sell at a given price. As the price rises, quantity supplied rises.

A business may increase the supply of a product to make more profit. Tthey may decrease the supply of a product in order to charge more for it

Demand

Demand - Shows how a consumer will react to changes in price. As price fall, quantity demanded rises.

When demand for a product decreases and supply is the same,price of the product will fall. When demand for a product increases and supply stays same, price of the product will rise.

Equilibrium Point

Equilibrium point - is where the supply and demand lines cross.

Interest Rates

Interest rates is the price of borrowing money.

Have to pay more back on their mortgage > So will have less money to spend in shop

Borrow less money since it costs more > So reduce their spending in shop

If rates increase then -

• Reduce or cancel planned investment
• Reduce borrowing, may mean cutting costs
• Reduce production as expect to sell less as consumers have less money

The bank of England make decisions about the rate of interest.

Exchange Rates

The exchange rate is - The price of one currency expressed in terms of another currency.

A currency's value depends upon Demand and Supply

Affect on imports into the UK- 

• Increase in value of the pound will become cheaper so will increase
• Decrease in value of the pound will become more expensice so will fall

Affect on exports out of the UK- 

• Increase in value of the pound will become more expensive so will fall
• Decrease in value of pound will become cheaper so will increase

The Business Cycle

The economic stages that the UK goes through can be reffered to as either the business cycle or sometimes the trade cycle.

There are 4 stages- 

• Peak/Boom
• Recession 
• Recovery/Expansion
• Trough/Slump

What happens at each stage?

Recovery/Expansion -

• Increasing consumer spending
• Production rises
• Investment increases

Boom - 

• Inflation increases
  
• Some firms unable to satisfy demand
• Interest rates rise

Recession -

• Demand is low 
• Investment falls
• Profits fall

What happens at each stage?

Slump -

• Increasing number of bankruptcies
• High unemployment 
• Low levels of spending

Stakeholders

Stakeholders are people or groups who have an interest in the activities of a business

Example of Stakeholders of a high school-

• Local Authority
• Teachers
• Other staff
• Governors
• Parents
• Pupils
• Local Residents
• Local Businesses

Stakeholders

Bigger businesses tend to have more stakeholders than smaller businesses

Two types-

Internal Stakeholders

• People who work for the business. Are inside the business and involved daily

External Stakeholders

• People who do not work for the business and are not involved in day to day running of the business, they're outside the business

Stakeholders

Primary Stakeholders -

People who can help the business to succeed. Usually include the internal stakeholders:

• Owners/Shareholders
• Employees
• Customers

Secondary Stakeholders -

People who see themselves as stakeholders even if the business doesn't. Usually external stakeholders:

• Local Residents
• Local Government 
• Pressure Groups