SECTION 1 UNDERSTANDING BUSINESS ACTIVITY

• 1. BUSINESS ACTIVITY• 2. CLASSIFICATION OF BUSINESS• 3. ENTERPRISE, BUSINESS GROWTH AND SIZE• 4. TYPES OF BUSINESS ORGANISATION• 5. BUSINESS OBJECTIVES AND STAKEHOLDER OBJECTIVES

1. BUSINESS ACTIVITYNEED: a good or service essential for living.WANT: a good or service which people would like to have (not essential)ECONOMIC PROBLEM: There exist unlimited wants and limited resources to produce goods and services to satisfy those wants. The consequence of this economic problem is SCARCITY.

SCARCITY: Lack of sufficient products to fulfil the total wants of the population.

FACTORS OF PRODUCTION: Resources needed to produce goods or services, and are relimited in supply.• LAND: natural resources provided by nature (fields, forests, oil, gas, metals and other

mineral resources)• LABOUR: number of people available to make products• CAPITAL: finance, machinery and equipment needed for the manufacture of goods.• ENTERPRISE: skill and risk-taking ability of the person who brings the other

resources or factors of production together to produce a good or service (owner: entrepreneur)

As resources are limited we need to choose what to produce and what to buy. All choices involve giving up something, which leads to OPPORTUNITY COST, that is to say, the next best alternative given up by choosing another item.

SPECIALISATION: It occurs when people and businesses concentrate on what they are best at. It is now very common because: * specialized machinery and technology are widely available; * increasing competition forces businesses to keep costs low; and * people recognize that specialization brings higher living standards.DIVISION OF LABOUR: It is when the production process is split up into different tasks and each worker performs one of these tasks. (It is a form of specialisation). Its advantages are that * workers are trained in one tasks, so they are more efficient; and * less time is wasted moving from one workbench to the other. Its disadvantages are that * workers can become bored and therefore inefficient; and * if one worker is absent and no one else can do the job, production might be stopped.

The purpose of businesses is to combine the factors of production to make products which will satisfy people’s wants.

ADDED VALUE: It is the difference between the selling price and the price of bought of in materials and components. If value is not added to the materials and components other costs cannot be paid for and no profit will be made. Added value is NOT the same as PROFIT.

Importance of added value:Sales revenue is greater than the cost of materials. This means that the business can pay other costs such as labour costs, management expenses and advertising costs; and it may be able to make a profit if these other costs total less that the added value.

How to increase added value?• Increase the selling price, but keeping costs the same. (customers may not be willing

to pay more)• Reduce the cost of materials, but keep the price the same. (customers may not want to

buy lower quality prod

2. CLASSIFICATION OF BUSINESSESSTAGES OF ECONOMIC ACTIVITY:• PRIMARY: The industry extracts and uses natural resources of the earth to produce

raw materials used by other businesses. (usually developing countries)• SECONDARY: The industry manufactures goods using the raw materials provided

by the primary sector. (usually developed countries)• TERTIARY: The industry provides services to consumers and other sectors of

industry. (usually most developed countries)

INDUSTRIALISATION: It occurs when there is a decline in the importance of the primary sector of industry. Importance is not given to natural resources, but to production.DE-INDUSTRIALISATION: It occurs when there is a decline in the importance of the secondary manufacturing sector of industry in a country. Importance is not given to production but to services.

This occurs because sources become depleted; most developed economies lose competitiveness; and as a country’s total wealth increases and living standards rise, consumers tend to spend a higher proportion of their incomes on services.

MIXED ECONOMIES: Include both a private and a public sector. • PRIVATE SECTOR: Businesses not owned by the government. They will make their

own decisions about what to produce, how and at what price.• PUBLIC SECTOR: Businesses owned by the government, or state-owned and

controlled businesses and organisations. The government or other public authority makes decisions about what to produce and how much to charge. The money for these comes from the taxpayers. (health, education, defence, public transport, water supply, electricity, etc).

PRIVATISATION: When public sector businesses are sold to private sector businesses. This is mainly done because the private sector is more efficient and has more capital to invest. Competition between private sector businesses can improve quality. However, private sector businesses might make more workers unemployed, and are less likely to focus on social objectives.

3. ENTERPRISE, BUSINESS GROWTH AND SIZEENTREPRENEUR: person who organises, operates and takes the risk for a new business venture.

CHARACTERISTICS: * Hard working; * Risk taker; * Creative; * Optimistic; * Self-confident; * Innovative; * Independent; and * Effective Communicator.REASONS WHY GOVERNMENTS SUPPORT BUSINESS START-UPS• To reduce unemployment• To increase competition• To increase output• To benefit society (social enterprises)• To grow furtherKIND OF SUPPORT GIVEN• Business ideas and help; * Premises; * Finance; * Labour; * Research; * among

others.BUSINESS PLAN: Document containing the business objectives and important details about operations, finance and owners of the new business.

• Independence• Own ideas into practice• Famous and successful• Profitable and higher income tan working as

employee• Make use of personal interests

• Too risky• Own capital invested, plus other possible

sources of finance• Lack of knowledge and experience at the

beginning• Opportunity cost – lost income from not being

an employee of other business.

ITEMS CONSIDERED IN A BUSINESS PLAN: • Products or services intended to be provided and consumers aimed at.• Main costs and if enough products will be sold to cover said costs.• Location• Machinery and employees required

COMPARING THE SIZE OF BUSINESSES IN DIFFERENT WAYS:• Number of employees: Easy to calculate and to compare with other businesses.

However, it is difficult in case of automated factories, or part-time workers.• Value of output: Useful to compare size in the same industry, mainly manufacturing.

However, a company may have a high value of output but not a high value of sales if some goods are not sold.

• Value of sales: Often used when comparing the size of retailing businesses, especially retailers selling similar products. However, it could be misleading when comparing the size of businesses selling different products.

• Value of capital employed: It means the total value of capital invested into the business. However, there is no perfect way of comparing the size of a business, and it is common to use more than one method and compare the results.

WHO MAY BENEFIT FROM COMPARING BUSINESS SIZE?Investors, governments, banks, workers and competitors.

WHY TO GROW?• Higher profits for the owners• More status and prestige• Lower average costs• Larger share of its market

WHY TO STAY SMALL?• Type of industry the business

operates in (hairdressers, car repairs, caterings, etc)

• Market size (rural areas or specialised shops)

• Owner’s objectives (owners want to keep control of their staff and customers and to avoid stress)

Growth may be INTERNAL or EXTERNALINTERNAL: when a business expands its existing operations.EXTERNAL: when a business TAKES OVER or MERGES with another business, often called INTEGRATION.INTEGRATION may be vertical or horizontal. Vertical means in the same industry but at a different stage of production. Therefore, we can talk about FORWARD or BACKWARD integration. Horizontal means same industry and at the same stage of production. A Conglomerate, also known as diversification, means two firms from completely different industries.TAKE OVER/ACQUISITION: one business buys out the owners of another business which becomes part of the “predator” business.MERGER: two owners of two businesses agree to join their firms together to make one business. PROBLEMS OF BUSINESS GROWTH: Larger businesses are: * difficult to control; * lead to poor communication; * expensive to expand; and * difficult to integrate with another business.

• Poor management: Lack of experience can lead to bad decisions, as well as being reluctant to hire professional managers.

• Failure to plan for change: New technology, powerful competitors and major economic changes should be taken into account, among others.

• Poor financial management: Shortage of cash means that costs cannot be covered.

• Over-expansion: Some businesses expand too quickly.

• Risks of new business start-ups: Many new businesses fail due to lack of financial and other resources, poor planning and inadequate research. New businesses are more likely to fail than existing, well-established ones.

4. TYPES OF BUSINESS ORGANISATIONPRIVATE SECTOR:• SOLE TRADERS: Business owned by one person

• PARTNERSHIP: Two or more people agree jointly to own a business. In some countries there is a maximum limit of partners who contribute the capital of the business and share profits.

PARTNERSHIP AGREEMENT: Written and legal agreement between partners; not essential but recommended.

• You are your own boss and have complete control

• No need to consult before a decision• Freedom to choose holidays and working hours• All the profit for the owner, so it has an

incentive• Complete secrecy• Few legal requirements (name, anual accounts

to the Tax Office, etc)

• Unlimited liability (responsible with your own possessions)

• Limited sources of finance available• No one to discuss business matters with• Capital for expansion is restricted so it is

likely to remain small• No continuity after death• No one to take control if you are ill or on

holidays

• Easily set up• More capital invested, therefore expansion

allowed• Shared responsibilities and tasks shared

among partners• Both partners are motivated because they

benefit from profits and share losses

• Unlimited liability• No separate legal identity, that is to say, no

continuity after death• Business growth is limited because number of

partners is limited• Risk of inefficiency of partners

• LIMITED PARTNERSHIPS (LLP): It exists just in some countries. It offers partners limited liability but shares cannot be bought and sold. It is a separate legal unit, so it exists after a partner’s death.

• PRIVATE LIMITED COMPANIES: Similar to a partnership, but it is a separate legal unit from its owners.

• PUBLIC LIMITED COMPANIES: Usually suitable for large businesses. They are NOT in the public sector, NOT owned by the government but by private individuals.

ANNUAL GENERAL MEETING (AGM): legal requirement; shareholders may vote who they want in the Board of Directors for the coming year. DIVIDENS: payments made to shareholders from the profits of the company.

• Shares can be sold to a large number of people (friends or relatives)

• More capital available to invest in the business

• Shareholders have limited liability, and therefore assume less risks

• People who start the company can keep control as long as they do not sell too many shares

• Many legal requirements to comply with (Articles of Association, Memorandum, etc)

• Shares cannot be transferred to anyone else without agreement of the other shareholders

• Shares may not be able to sell quickly• Accounts are less secret• Shares cannot be offered to the general public

• Limited liability for the shareholders• Incorporated business and separate legal unit,

therefore there is continuity after death of shareholders

• Opportunity to raise very large sums of capital to invest

• No restriction on the buying, selling or transfer of shares

• High status and therefore easier to attract suppliers and banks willing to lend money

• Complicated and time consuming legal formalities

• Many more regulations and controls • Some are too difficult to control and manage• Selling shares to the public is expensive;

specialists are required and commissions are paid

• Risk of losing control when it goes public

• JOINT VENTURES: Two or more businesses agree to start a new project together, sharing the capital, the risks and the profits.

• FRANCHISE: Business based upon the sue of the brand names, promotional logos and trading methods of an existing successful business. The FRANCHISEE buys the licence to operate this business from the FRANCHISOR.

• Sharing of costs• Local knowledge when joint venture company

is already based in the country• Risks are shared

• Profits have to be shared with a business partner

• Disagreements over important decisions might occur

• The two joint venture partners might have different ways of running a business

FRANSHISOR• Franchisee buys a licence to use brand name• Expansion is much faster• Management of outlet is the responsibility of

the franchisee• All products must be obtained from the

franchisorFRANCHISEE• Chances of failure are reduced• Franchisor pays advertising• Supplies obtained from the franchisor• Few decisions to make• Training for staff provided by the franchisor• Banks are willing to lend to franchisees due to

low risk

FRANCHISOR• Poor management of one franchised outlet

could lead to bad reputation for the whole business

• The franchisee keeps profits from the outlet

FRANCHISEE• Less independence than with operating a non-

franchised business• Unable to make decisions that would suit a

local area• Licence fee must be paid to the franchisor and

possibly a percentage of the annual turnover

PUBLIC SECTOR• PUBLIC CORPORATIONS: Wholly owned by the state or central government.

Usually businesses which have been nationalised.

Some of the public sector enterprises are free to the user and paid for out of local taxes, such as street lighting and schools. Other services are charged for and expected to break even at least. These might include street markets, swimming pools and theatres. If they do not cover their costs, a local government subsidy is usually provided.

• Some industries are considered so important that government ownership is thought to be essential (water supply, electricity)

• If industries are controlled by monopolies because it would be wasteful to have competitors, these natural monopolies are often owned by the government

• If the business is failing to collapse, the government can step in to nationalize it so as to keep it open and secure jobs

• Important public services are often in the public sector

• There are no private shareholders to insist on high profits and efficiency. Profit motive might not be as powerful as in private-sector industries

• Government subsidies can lead to inefficiency as managers think that toe government will always help them if the business makes a loss

• No close competition, therefore lack of incentive to increase efficiency

• Governments can use these businesses for political reasons

5. BUSINESS OBJECTIVES AND STAKEHOLDER OBJECTIVES

BUSINESS OBJECTIVES: Aims or targets that a business works towards. They help to make a business successful. Some of the benefits of setting them are: * give workers and managers a clear target and this helps to motivate people; * taking decisions will be focused on what will help to achieve the objectives; *everybody works towards the same aim; and * managers can compare how the business has performed. WHAT OBJECTIVES• SURVIVAL: When a business has recently been set up, or when there is recession,

the managers usually lower prices in order to survive, even though profits will be lower.

• PROFIT: These are needed to pay a return and to provide finance for further investment.

• RETURN TO SHAREHOLDERS: If shareholders receive a return, managers keep their jobs. Returns are higher if profit increases and if share price increases.

• GROWTH: This makes jobs more secure, increases salaries and status, generates a higher market share, provides costs advantages (economies of scale)

• MARKET SHARE: the proportion of total market sales achieved by one business (company/total x 100)

• SERVICE TO THE COMMUNITY: Social enterprises have other objectives apart from profit. These are: Social (jobs and support for disadvantaged groups), Environmental (protect the environment) and Financial (make a profit to invest back into the social enterprise to expand the social work that it performs).

WHY BUSINESS OBJECTIVES COULD CHANGE?• A business set up recently has survived and now the owner aims to have a higher

profit.• A business has achieved a higher market share and now it seeks to earn higher

returns for shareholders.• A profit-making business operates in a country facing a serious economic recession

so now has the short-term of survival.

STAKEHOLDERS: any person or group with a direct interest in the performance and activities of a business.• Owners: put capital; take a share of profits; are risk takers; may lose money

invested• Customers: important to every business, without them businesses fail• Workers: employed by the business, follow instructions, full or part time, may be

made redundant• Government: responsible for the economy of the country; pass laws to protect

workers and consumers• Managers: employees and control workers, take important decisions, responsible if

the business fail • Banks: provide finance for business operations• Whole community: businesses create jobs and allow workers to raise their living

standards