Unit 1.4 Making the business effective


What is limited liability?

Limited liability: the level of risk is limited to the amount of money that has been invested in the business or promised as an investment. You are are not responsible for the debt of the business.

  • Setting up and running a business involves risk. An entrepreneur and other investor will have risked their money to help establish the business.
  • Limited liability exists when an entrepreneur's risk is limited to the amount they have actually invested or promised to invest. This means that their personal assets cannot be used to pay the business's debts.
  • Businesses that have limited liability are known to be incorporated (a business that is registered as a company). This is seen less risky to the investor.
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What is unlimited liability?

Unlimited liability: the level of risk goes beyond the amount invested, so the personal assets of the business owner can be used to pay off the business's debts. Treating the business and the individual owner as inseparable, therefore making the individual responsible for all the debts of a failed business.

  • Unlimited liability exists when an entrepreneur's risk includes their own personal assets, such as their house and car.
  • This means that if the debts of a business cannot be covered by the business's assets, the entrepreneur will have to use their own assets to pay their debts. Businesses that have unlimited liability are known as unicorportated (a business that is not registered as a company).
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What is Private limited company?

Private Limited Company: an incorporated business that is owned by shareholders that have a limited liability. E.g. Eddie Stobart

Shareholders: investors who are part-owners of the company. They invest in the business in return for a share of the profits.

The shareholders must be known to the entrepreneur, so they usually would be family, friends or business contacts. At the annual general meeting (AGM) all shareholders are invited to vote on important decisions. The number of votes held by each shareholder is determined by the number of shares that they hold.

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Advantages of private limited company

  • The owners have limited liability.
  • The term 'Ltd' after the business's name may make it appear to be a bigger or more long-established business.
  • Can be easier to raise finance to establish or grow the business.
  • The business continues to trade even if the shareholders change.
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Disadvantages of private limited company

  • More complex to set up than a sole trader or partnership.
  • There may be disagreements between shareholders.
  • The business's financial information is published.
  • More requirements to report information to organisations such as HMRC and Companies House.
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What is a sole trader?

Sole trader: a type of unincorporated business that is just owned by one person. It uses unlimited liability. E.g. plumbers, electricians, cleaners.

  • Although the entrepreneur is the only owner this doesn't mean they cannot employ the help of the others such as specialists. For example, a web designer or accountant. They may need employ part-time staff, to help with the day-to-day runnning of the business.
  • The only logical reason for ingoring limited liability is that there is no realistic possibility of debts buliding up. For example, a sole trader, such as if the business is a market stall, the goods are brought for cash in the morning and sold out in the afternoon, it's hard to see how debts would build up. So why bother with the cost and paperwork involved in setting up a limited company?
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Advantages of sole trader

The sole trader makes all the decisions by themselves; they have complete control of the business.

  • Is quick and doesn't lead to disagreements.
  • Quick and easy to set up.
  • The sole trader keeps all the profits.
  • Financial information is kept private.
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Disadvantages of sole trader

  • The sole trader has unlimited liability.
  • It may be difficult to raise enough money to establish or grow the business,
  • Puts alot of pressure and responsibility on just one person.
  • Can be difficult to run if the owner is ill and takes time off.
  • Lack of capital (money to start the business) without the financial support of other individuals.
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Why is sole trader popular?

Sole traders are often seen as the easiest way of setting up a business as there are no legal requirements - an entrepreneur can just start trading. For this reason, they are popular type of business for small businesses such as florists, mechanics and market traders.

The business's financial information is not published, but the sole trader must declare their earnings to Her Majesty's Revenue and Customs (HMRC) as they have to pay income tax on the profits of the business.

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What is partnership?

Partnership: a business that is owned by a group of two or more people who share the financial risk, the decision-making and the profits. E.g. doctors, lawyers or dentists.

  • Traditionally, partnerships have had unlimited liability but it's now possible to set up a limited liability partnership. 
  • A partnership is set up using a deed of partnership. This legal document outlines who the partners are, the amount invested by each partner, how profits will be shared, the voting rights of each partner and also the actions to be taken if the partner wishes to leave or they want to bring in a new partner.
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Advantages of partnership

  • The business owners may have a wider expertise and can share ideas and decision-making.
  • The risk is shared.
  • The business's financial information is kept private
  • Easy to set up.
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Disadvantages of partnership

  • Decisions made by one partner can affect all partners.
  • If a partner leaves, the business is no longer exists.
  • The profits are shared.
  • There may be disagreements between partners. 
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What is a Franchise, Franchisor and Franchisee?

Franchise: when one business gives another business permission to sell its good and services using its name. E.g. MacDonald's and Starbucks.

Franchisor: an established business that gives permission to an entrepreneur to trade using its name and products.

Franchisee: an entrepreneur who pays a fee to trade using the name and products of an established business.

Royalities: percentage of sales revenue to paid to the overall franchise owner.

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What is the relationship between them?

  • As the franchisor's business is already established and successful, starting up a franchise is seen less risky than setting up independently.
  • The franchisor provides help and support to the franchisee while they are setting up and on an ongoing basis, usually training for the entrepreneur and their employees.
  • The franchisor makes key decisions, such as choosing suppilers, setting prices, deciding what goods or services are offered, setting wages and determining uniforms
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Advantages of Franchising

  • Lower risk than setting up independently as the acquired business is already successful
  • As the products and methods of working have been pre-tested, the chances of making a mistake is lower; therefore the failure rate of franchise start-ups is also lower. This means that the bank is much more willing to lend a franchise start-up than a brand new independant business.
  • An individual outlet could never afford image buliding advertsing; being part of Subway and McDonald's, for example, enables the franchise operation to benefit from major marketing campaigns.
  • Support and training is provided by the franchisor, for example, making a milkshake, how to clean the equipment, and so on. 
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Disadvantages of Franchising

  • When buying into a franchise the buyer is bound by the rules of the franchise owner so franchisees cannot make independant decisions.
  • Royalty payments of as much as 8% of revenue is comman. A typical franchise outlet might have an annual sales figure of about £300,000, so an annual payment of £24,000 is being made. That might not be much when things are going well, but in 2015 and 2016 sales at US Subway outlets fell by 10%. It would be very annoying to pay a large sum of royalities when sales and profits are declining.
  • Brand reputation can be damaged by if they don't maintain standards.
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What factors influence a business location?

Choosing the correct location is an important decision for any business. A poor choice of location could result in the failure of a business, especially when the business is newly established.  If customers struggle to get to the business or potential customers don't know about it because it's not in a convenient or visible location, the business will not do well. The choice of location will also have a major impact on the business's costs. For example, premises on a busy street in a city centre will be a lot more expensive than premises on the outskirts of a town or city. 

Proximity means nearness to something. A business may want to be close to or far away from the following key factors: market, labour, materials and competitors. These choices depend on the business's activities, so the decisions may vary widely for different kinds of businesses.

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Proximity to market

Proximity: how close the business is to customers. The importance of promixity to market will depend on how important convenience is to the customer.

For example, a customer is unlikely to travel a long way to buy fish and chips or a daily newspaper. Businesses selling these products need to be close to their market. However, a customer is more likely to travel further for more specialist products such as wedding dresses or custom-built cars.

Before, choosing to set up in a particular location, a business may look at the footfall (the number of people passing a particular location) of the location or research the demographics (the characteristics of the population, such as gender, age, religion and wealth).

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Proximity to labour

A business may want to locate itself in an area where there is plenty of labour (a lot of potential workers). 'Labour' can include the number of workers in an area and the availability of workers with the right skills in that area. Certain parts of the UK are associated with highly skilled worker in certain field or industries. For example, a technology company may choose to locate close to the M25 around London, where there are plently of workers with technology skills. The availability of workers in a certain area may also affect the wages that a business will need to pay. For example, if a business needs to recruit a large number of unskilled workers, they may choose to locate in an area with high unemployment, as this area should contain a large number of workers willing to work for the National Living Wage (the minimum amoount that a business is legally allowed to pay its employees). This would help keep the costs down.

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Proximity to materials

A business may locate itself as close as possible to the raw materials that it uses to produce its finished products.

For example, there are a lot commercial orchards that grow apples and similar fruits in the south-west areas of the UK, where the climate is suitable for this crop. Apple juice and cider producers also choose to locate in these areas in order to be close to these orchards, which are the source of their raw materials.

Often, businesses need to choose between locating close to the raw materials and locating close to their market. Their decision depends on whether the business's products are bulk-gaining or bulk-reducing. 

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Proximity to materials

For example, huge quantities of iron ore and in many countries coal is required to make steel.The volume of sheet steel produced is far smaller and therfore cheaper to transport. So steel is made close to where the materials are mined, or close to the habour where the supply ships arrive. It is more cost effective to be near the materials than near to the market.

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What is bulk-gaining product?

Bulk gaining product; an end product that is bigger than the raw materials used to make it such as a bicycle. It's more difficult or expensive to transport, which means it's more sensible for the business to locate close to the market in order to reduce transportation costs.

For example, a manfacturer of soft drinks may have bottling plants across the UK, as it is cheaper to transport the favoured syrups and then add water at a location much closer to the market than it would be to distribute the finished bottles of drinks. 

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What is bulk-reducing product?

A bulk-reducing product: a product that is smaller than the raw materials it uses, such as paper.

For example, a wholesale fish distributor would not transport a whole fish to a factory that manufactures fish fingers, as much of the raw material, such as the skin and bones, would be disposed of as soon as it reached the factory. Instead, it is more efficient to dispose of the waste as close as possible to the source as possible to the source of the raw material. This will avoid wasting money by unnecessarily transporting it.

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Proximity to competitors

Some businesses choose to locate themselves away from their competitors; effectively being the only supplier to customers in a local area.

A business selling a convenience good, such as newsagent's, is unlikely to locate close to its competitors as it would probably spilt the local customers between two businesses, reducing the number of their potential customers. In the other hand, if the business sells what is known as a shopping good (a product that a customer takes time to consider before purchasing, by looking at and weighing up a number of options before choosing one), they might want to be close to competitors. 

This is true for a range of businesses especially in cities it's easy to see particular types of businesses grouping together, e.g in an area with lots of restraunts or clothes shops.

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Nature of business activity

The location chosen by a business may be partly determined by what the business does on a day-to-day basis. Business activity that could have an impact on choice of location:

  • Businesses that import or export goods that locate close to a seaport or airport.
  • Businesses that distribute goods around the UK that locate in the centre of the UK with easy access to major roads and motorways.
  • Agriculture businesses that need a certain type of topography (the physical characteristics of a landscape, such as being flat or hilly), climate or soil in order to grow particular crops or animals.
  • tourists-related business such as bed and breakfasts, souvenir shops or attractions that attact a large number of tourists.
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Nature of business activity

  • Specialist support services or providers of raw materials that locate in an area containing businesses that will buy their product, such as a producer of car headlights locating in an area containing businesses that will buy their products, such as a producer of car highlights locating in an area containing car factories.
  • Businesses in industries traditionally associated with certain areas that choose to locate in these areas, such as cotten mills in Lancashire or boot and shoe manufacturers in Northampton, where luxury shoemakers Crokket & Jones still manufacture their products.


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Nature of business activity

However, some business location decisions are based on personal preference or inertia (a tendency to keep things as they are rather than change). Inertia is when a business is located in a certain area because that is where it was first set up, possibly the entrepreneur's home town. The business stays in that location not because of any particular change or benefit but just because it's easier.

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The impact of the internet on location decisions

The intenet has led to buyers and sellers being able to trade online. This means that there is no need for fied premises. This can benefit start-up businesses in particular, as it provides a lower cost option than having to buy or rent, insure and furish premises.

It is not even necessary for the business to have its own website. Some businesses start trading using the platforms provided by other businesses, such as eBay or notonthehighstreet.com.

When buyers and sellers trade in a virtual location, this is called e-commerce. Increasingly, businesses are using e-commerce (using the internet to carry out business transactions) and m-commerce (using moblie technologies such as smartphones and tablets to carry business transactions) as a cost-effective way of attracting customers.

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Benefits of e-commerce

Benefits of e-commerce include:

  • Lower operating costs, such as not needing retail premises or staff.
  • Ability to reach a wider audience. 
  • Ability to trade 24 hours a day, 7 days a week.
  • Ability to respond to changing consumer buying habits, such as by making a website moblie-friendly to allow purchases from moblie devices.

Many business use a multi-channel (using a number of methods to reach the customer, including physical stores and e-commerce) approach to reach their customers.

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The marketing mix

The marketing mix is the combination of the four 'P' of marketing: price, product, promotion and place. Marketing means understanding and communicating with customers so effectively that they want to buy from you.

A business uses the marketing mix to understand the needs and expections of existing customers and potential new customers. It's important that the four elements of the marketing mix complement each other and work together, rather than contradicting each other. For example, a product that is of relatively low quality is unlikely to succeed if it has a high retail price.

For example, Apple designs products that fits modern lifestyles and enhances the customer's personal image. Therefore more people are willing to pay a high price for the product.

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Price: the amount need to be paid customers for goods and services. 

If the price is high, there is a fewer demand for it as few can afford it. But the prices can be set high if customers are willing and able to pay that high price. In many cases, having a low price may be crucial to achieving high sales as it increase demand however if the price is too low people may think that the quality is cheap.

Factors influencing price includes:

  • the amount of competition from other businesses
  • customers' opinions about the product's value
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What is cost plus pricing?

Cost plus pricing: a percentage that is added to the cost of the product to profit, to establish a selling price.

Cost plus pricing = cost producing goods (raw materials, labour, power) + % of profit

High market = high demand and high value for product e.g. designer clothes.

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What is psychological pricing?

Psychological pricing: gives the illusion that the products cost less.

Prices that are deliberately set below the 'trigger' price e.g. £9.99.

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Product: is the good or service that the business is offering for sale.

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What is product range?

Product range: is a set of variations on a specific product made to appeal to different market segments.

Companies that offer a product range work on variations of a theme. The company specialises in a type of product or service, but offers additions or alternations to suit different types of customers.

When a company develops a strong core product line, the product range allows the comapny to focus on those products lines while still offering enough variety in size, colour, taste or functionality to appeal to wider range of potential customers.

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Product range examples

Product ranges demonstrate how companies can offer alneratives to their core product, such as Kellogg's makes both: Frosted Flakes cereal for children and Special K for health-conscious consumers.

Small businesses can follow the example by offering a product range in their speciality items. For example, a small family restaurant can offer a kid's menu, a lunch menu and a dinner menu of the same dishes. Each dish may have different seasonings and different portion sizes, but the core product remains the same.

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What is product mix?

Product mix: is a variety of product types sold in by one company.

Businesses do this depending on the trends in the market and to also stay competitive e.g. Samsung.

A product mix brings several different product lines to the marketplace. The primary advantage is that it provides the company with additional opportunities to reach customers. 

Most of the products in the product mix is related, so customers that choose an item from one product line will also consider selecting an item from a related product line, such as from a company that sells soaps, shaving creams and razors under the same brand.

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Product mix examples

Companies can earn loyality with a strong product mix. When a customer trusts one item from a brand, that customer is more likely to trust a different product from the same brand.

For example, a manfacturer of an athletic apparel can encourage customers to buy its shoes, socks, workout wear, baseball caps and golf shirts.

A small business that makes kitchen equipment can diversify its product mix by including cooking pots, frying pans, carving knives and cutting boards.

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How are products different?

  • Name
  • Design
  • Ingrediants
  • Packaging 
  • Price
  • Target market
  • Quality
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Differentiation and USPs

This means making the product different from its competitorsProduct differentiation can be achieved through:

  • Distinctive design– e.g. Dyson; Apple iPod
  • Branding - e.g. Nike, Reebok
  • Performance - e.g. Mercedes, BMW
  • A Unique selling point: is a feature or benefir that separates a product from it's competitors. E.g lower price, smaller versions of the product, different colour and design range of products.
  • If a business doesn't have USP it will struggles to make the product attractive to customers.
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Place: where a product is being sold and how the product is delivered to the consumer such as:

  • Online
  • Through a retailer
  • Directly from the manufacturer

Places can also be used to refer to the route that a product takes to get from the manufacturer to the end customer.

Long-chain distribution: is when a product passes through every intermediary from manfacturer to consumer.

Intermediary: any person or organisation that provides a 'link' in the distribution chain.

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Chain of distribution

Image result for Chain of distribution gcse Edexcel

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Promotion: is to raise awarenesss of a product or business through adverting to make customers aware of its products and to encourage customers to buy them such as:

  • Offering discounts.
  • Television or billboard advertising.
  • Using social media such as Facebook and Twitter.
  • Sponsoring people or organisations, such as sports teams or individual athletes.
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Examples of promotion

Adverting: raises awareness of a company and it's products.

Sales promotion: is a short-term method used to persuade people to buy a product.

Public relations: is the professional maintenance of a public image by an organistation or famous person. 

Sponsorship: is support given by a business to events, teams, individuals.

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Balancing the marketing mix

The 'competitive environment' refers to the number and relative power of businesses competing in one market. 

  • Changing product's price to match or  undercut (sell the same product for a lower price than competitors), careful not to result in price war (when competing businesses try to undercut each other by lowering prices. This leades to an ongoing battle where only the customer benefits, not the businesses).
  • Increasing the number of places where the products are available to the customer to maintain or increase market share (the percentage of total sales of a product in a market taken by one business in that market).
  • Undertaking promotional activites to boost brand awareness in order to encorage more brand loyalty.
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Changing consumer needs on the marketing mix

Businesses respond to changing consumer needs by adapting aspects of their marketing mix.

  • Many businesses introduced e-commerce to meet consumers' need for the increased convenience of the internet shopping.
  • Chaning prices in responce to economic conditions, such as customers reducing the amount that they spend during a recession (a period of economic decline characterised by the fact that the economy has failed to grow for 6 consecutive months).
  • Opening more small local stores to make more products more easily accessible to consumers who do not own cars.
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The impact of technology on the marketing mix

Constant change in technology create both opportunities and threats for businesses. Businesses need to respond to these changes in order to remain competitive. This will have an impact on the marketing mix. For example, a business may change its promotional mix (the combination of promotional activities that a business uses to make customers aware of a product, with the aim of increased sales) to use increasingly popular uses of technology.

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Examples of uses of technology

  • Introducing e-commerce or m-commerce to meet customer needs.
  • Using more digital communication such as blogging and social media activity to promote products and keep customers interested in the brand.
  • Changing aspects of product design by incorporating new technologies into the product.
  • Lowering prices due to the savings made by using efficient technologies in the production process.
  • Changing prices as a result of a greater availability of information to customers, such as through price comparion websites.
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The role and importance of a business plan

Business plan: is a detailed document setting out the marketing and financial thinking behind a proposed new business.

A business plan should outline the details of an entrepreneur's idea, the financial forecasts for the new business and how the entrepreneur will set up the business. The process of writing a business plan encourages the entrepreneur to collect all the relvent information together and think through each step before they start trading. Once, the business is up and running, it helps the entrepreneur to never lose sight of what he/she is trying to achieve.

The business plan can be shared with external parties, such as banks who will more likely to offer a loan or potential investors which can persuade them to invest in the business.

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Advantages of a business plan

  • Clarify your vision and helps decide whether to go with the idea or not.
  • Determine if your product or service has sufficient market to support it and whether or not it will be profitable.
  • Estimate start-up costs and how much you'll need to invest.
  • Convince investors and lenders to fund your business.
  • Define your target market.
  • Establish or revaluate your competitive position within the marketplace.
  • Define corporate objectives and programs to achieve those objectives.
  • Help your business make money from the start by developing effective operational strategies.
  • Understand the risks involved and anticipating potential problems so that you can solve them.
  • Set a value on a business for sale or for legal purposes.
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