The Need For Business Activity



The main aim is for a business to locate in a place where production is cheapest and where they can generate the most income. Those who trade over the internet can be more flexible about location.

Important factors:

  • Communication links - established telephone, internet, and postal services
  • Transport - access to necessary transport links: e.g sea ports, airports, road and rail links. Easier to import and export resources and goods
  • Location of raw materials -  lower transport costs if raw materials are sourced nearby (e.g quarries). Important for bulk-reducing firms
  • Labour supply - high levels of unemployment can keep wages low and government subsidies could be available
  • Economies of concentration - If there are similar businesses nearby, skilled labour will be easier to find. Being near competitors mean there should be local suppliers and customers in the local area
  • Location of the market - Important for bulk-increasing firms: cheaper to locate closer to customers. Some services benefit from locating close to customers (e.g dentists)
  • Government policy - In areas of high unemployment, the government might give subsidies or tax breaks to firms locating there. Governments often pay multinationals to locate in their country
  • Industrial inertia - Firms may want to stay in a place they have stayed in for a long time. High costs of relocation could enforce this decision.
  • Climate - important in agriculture. Could affect quality of goods.
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External expansion/integration can either be:
A merger- when two firms agree to join together
A takeover- when one firm buys another (sometimes hostile and lead to redundancies)

  • Horizontal integration: two competitors join together: two businesses that make the same product at the stame stage of the production chain
    + Lateral integration: related businesses at the same level of production (e.g. brewery and fizzy drinks)
    Benefits from economies of scale
    Bigger market share
    Less competitors
    Reduced choice for consumers may lead to a monopoly 
  • Forward vertical integration: When a firm joins with another business closer to the customer in the production chain
    Control over sales outlets
    Greater access to customers
    May lead to higher prices 
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Growth can be measured by:

  • Sales turnover or revenue
  • Number of employees
  • Share capital (number of shares*price of each share
  • Market share
  • Number of outlets

Reasons for growth:

  • Benefit from economies of scale
  • Diversification/survival
  • Market share
  • Financial support - easier to survive cash flow problems
  • Personal vanity - owners enjoy power and status

Problems of growth:

  • Disagreements between objectives
  • Integration is expensive
  • Job losses and insecurity
  • Internal growth can take a long time 

Methods of organic growth

  • Sell current product to new markets
  • Produce more of the same products for existing markets
  • Line extension: produce different products for existing markets
  • Diversification: produce new products into new markets
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Business Ownership

Sole Proprietor - owned and controlled by one person: usually individuals who provide a specialist service e.g hairdressing

  • Very easy and cheap to set up- few forms
  • Your own boss- freedom to make own decisions
  • Control where the profit goes
  • Financial information kept private
  • Unlimited liability - personal posessions at risk if you get into debt
  • Long hours, all responsibilty and no continuity
  • Difficult to benefit from economies of scale and raise finance
  • Unincorporated - business not legally separate from its owner (e.g. can be sued personally)

Partnership - controlled and financed by 2 -20 people: found in accountancy and solicitor companies.
Equal say in decisions and equal share of profits (unless they have a deed of partnership)

  • Shared work and responsibility
  • More ideas and shared experience
  • More capital into the business
  • Can lead to disputes
  • Unincorporated and unlimited liability
  • Difficult to benefit from economies of scale and raise finance
  • Each partner legally responsible for the rest
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More Integration Methods

  • Backward vertical integration: When a firm joins with another business closer to the supplier in the production chain
    Control over supply of components or raw materials
    May lead to less variety of goods available for consumers or other businesses 
  • Conglomerate integration: when two firms with no relation join together, at any level of production
    Diversifies into new markets
    Reduces risk, and dependency on one product or service area
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Business Ownership (2)

Differences of limited companies:

  • Incorporated - has a seperate legal identity from the owner
  • Limited liability - only responsible for amount of money invested in business
  • Memorandum of Association
  • Article of Assosciation
  • Owned by shareholders

Private limited companies/LTD - Shares only sold if all shareholders agree

  • Limited liability and incorporated
  • Continuity
  • Not as expensive or complex to set up as a plc
  • More expensive than unlimited companies
  • Financial information is published

Public limited companies/PLC - Shares sold on stock exchange. Generally when firms want to expand

  • Limited liability and incorporated
  • Economies of scale
  • Most capital
  • Easy to expand and diversify
  • Little control for shareholders
  • Easy to take over
  • Very expensive to set up (at least £50,000 capital) 
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Specialisation and interdependence

Specialisation: division of labour, so workers are divided up and each given a specific job.
It is done to improve efficiency and productivity of a firm.

  • Workers play to their strengths
  • Skills are improved
  • Complex production techniques become simple tasks, which employees can then specialise in
  • Workers become efficient at their job
  • Low job satisfaction - no variation as workers must do the same thing they specialise in
    Therefore poor quality products, absenteeism and frequent industrial action.
  • Problems with one group can affect whole production of the firm 
  • Workers can become over-specialised

Firms are interdependent with businesses in the same production chain in different sectors, for raw materials, components, or distribution. 
Some stages of production add value to the product. Others provide vital services.
e.g. There are issues in the oil extracting industry. This affects the nightclub that uses the CDs made from this oil. 

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Changes in the Chain of Production

The tertiary sector is now the largest in the UK

  1. As families become wealthier (usually two parents now work), they tend to spend more money on services: disposable income
  2. Secondary sector has shrunk - producing goods abroad is cheaper than in the UK
  3. Primary sector has shrunk - running out of raw materials and land for farming
  4. Primary sector has shrunk - people want a greater range of products; some of these cannot be grown in the UK
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S- SPECIFIC - Precise description and is specific to what is needed

M- MEASURABLE - Based on performance criteria- can judge whether or not the objective has been achieved

A- ACHIEVABLE/AGREED - Within the reach of company and emplyees / all staff involved in discussing and agreeing an aim

R- RELEVANT - Relevant to needs of the company

T- TIME SPECIFIC - The target should be specified to be met within a period of time

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Why do firms set aims?

  • To provide a clear target for the business to reach
  • Stops the business just 'drifting along'
  • To provide a focus for decision making
  • Clarity about what exactly what it is that they need to do
  • To assure stakeholders they are working towards objectives relevant to them
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Why do objectives change over time?

  • Because it has been achieved (e.g. the aim of survival in the first year might change to profit in the next)
  • It may become impossible to achieve, such as changes in the market
  • The competitive environment might change
  • Changes in the economy might affect disposable income in the local community
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Social enterprise

  • Not-for-profit
  • Proper business that makes its money in a socially responsible way
  • Some entrepreneurs make a good profit themselves though their business model is designed to benefit others
  • Use business principles to achieve social aims
  • Directly involved in producing goods or providing services
  • Has social aims and ethical values
  • Self-sustaining and does not rely on donations to survive
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The Chain of Production

The various stages, from raw materials to the finished product, which goods pass through before they are sold to the customer.

  1. Primary sector- produces raw materials: natural resources used to produce goods or services
    Extracted like coal, grown like crops, collected like fish
    e.g The raw material, oil, is extracted from the sea 
  2. Secondary sector- manufatures finished goods: processing raw materials into finished goods
    Can be manufactured or assembled
    Capital goods used to make other goods or provide services (e.g. welding equipment)
    Consumer goods go straight to the final consumer
    - consumables- get used up (e.g. pencils)
    - consumer durables- last a longer time (e.g. TVs)
    e.g. The raw materal, oil, is processed into the finished good, a CD. This is a consumer durable good.
  3. Tertiary sector- provides a service: provided for the benefit of others
    Includes transport, advertising, warehousing, and selling.
    e.g. The finished good, the CD, is used at a nightclub to provide a service.  
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Why do businesses exist?

  • To provide goods and services
  • As a source of employment for the owners
  • To generate profit for the owners
  • To provide help and support to people (e.g charities and social enterprises)
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