Scarcity– Unlimited wants but not enough products.
Factors of production
Land – Natural resources from nature such as trees, forests and oil
Labour – Number of workers available to make products.
Capital – Money required for a business to produce items.
Enterprise – Entrepreneurs with skills required to create a business.
Opportunity Cost – A certain value that must be given up achieving something else.
Specialisation – Workers/machines specialises in some part of the production process.
Economic Sectors
- PrimarySector – Extracts and uses the natural resources from the earth. e.g. Fishing, farming
- SecondarySector – Manufacture goods using raw materials from primary sector. e.g. Car manufacturers and other factories
- TertiarySector – Provides service to consumers and other sectors of the industry e.g. Restaurants, car showroom, travel agent
De-industrialisation – when manufacturing sector becomes less important in a country.
Private Sector
Advantages
- High efficiency and lower costs
- Competition is encouraged (prices will be lower)
Disadvantages
Some services may be closed (run out of money)
Workers may lose jobs to improve efficiency/cut cost
Public Sector
Advantages
Business is funded by government
Encourage more jobs
Disadvantages
- Low efficiency
- No competition between businesses
Business Plan – Document with important information about your business
Apply for bank loans
Plan business to reduce risk of failure
Methods and problems of measuring business size
Number of employees
Value of output
Value of sales
Value of capital employed
Business growth
- Increased chances of higher profit
- Better status and prestige of the owners and employees
- Lower average cost(more negotiating power)
- Increased control of the market
Internal Growth – Business grows by itself
External Growth – Take-over or merger with another business.
Horizontal integration – Firms in the same industry at the same stage of production merges.
Vertical integration – Business expands by merging with another business in another stage of production.
Why some businesses fail
Poor management
Failure to plan for change
Poor financial management
Over expansion
Start-up risk
Unlimited Liability – Owners are held liable for the business. If the business goes in debt, the owner needs to pay back with their own money.
Limited Liability – Opposite of Unlimited liability, If a business fails, the owners only lose what they invested
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Main forms of business organisations
Sole Trader – Owned and operated by one person.
Advantages
Cheap and easy to start up
Full control of your own business
Disadvantages
- Unlimited Liability
- Less money / difficult to expand
Partnership – Similar to a sole trader but there are 2 or more owners.
Advantages
2 Owners mean that more money can be invested
Less work since tasks can be done by 2 owners.
Disadvantages
- Unlimited Liability
- There can be disagreement between the 2 owners.
Private limited company (LTD) – Owned by shareholders.
Advantages
- Limited Liability
Cheaper to set up than public limited companies
Disadvantages
- Slower to start up (many legal documents need to be signed)
- Shares can only be sold to family and friends
Shareholders – Owners of a limited company, they buy shares which represent the percentage they own
Public limited company (PLC) – Similar to a private limited company but shares can be sold to the public.
Advantages
Limited Liability
Shares can be sold to the general public
Company can grow and expand quickly
Disadvantages
- Complicated legal documents
- Expensive to start up
- Original owners of the business may lose control of the company
Annual General Meeting (AGM) – Meeting that must be held every year for shareholders
Franchisor – Company that owns the original business, Franchisors sell the franchise to a franchisee
Advantages
Make money from selling the business’ name to franchisee
Quick growth of the brand
Disadvantages
- bad reputation will affect the whole franchise
- Profit from franchised stores are kept by the franchisee
Franchisee – Someone who buys a franchise from the franchisor to use the brand name
Joint Ventures – 2 or more businesses start a new project together.
Advantages
Costs can be shared amongst the companies
Knowledge and skills from more than one company
Disadvantages
Profit is shared
Businesses may disagree with each other.
Communication
Poor internal communication leads to –
- Workers don’t understand what they must do
- Poor motivation
- Wastage (e.g. 2 employees do the wrong task because of wrong instructions)
Poor external communication leads to –
Unhappy customers (leads to fewer sales)
Bad business reputation (lower sales)
Problems with suppliers/customers due to incorrect information (e.g. wrong supplies being delivered)
Recruitment
Job Analysis – A study of the tasks and activities to be carried out by the new employee
Job Specifications – The qualifications and qualities necessary to perform the job
Internal Recruitment
Advantages
- Saves time and money – Don’t need to spend money on advertising the job vacancy
- Applicants ‘know’ the firm
Motivates other workers (chance for them to get promoted)
Disadvantages
- Applicants may not bring in new ideas
Promoting an employee may make other employees jealous and demotivated
External Recruitment
Advantages
- New ideas from new workers
- More likely to hire someone who matches job specification
Disadvantages
- Expensive – need to advertise job
- Demotivating for internal candidates
Training
Induction training
Advantages
- Helps new employee settle in
- Health and safety training may be required
Disadvantages
- Time consuming (delays the start of employee’s work)
- Wages are paid but no work has been done by the employee
On the job training
Advantages
- Training is cheap
- Work can be done while training
Disadvantages
- The trainer will not be getting work done.
- Training won’t be effective if the trainer is bad
Organisation and management
Chain of Command – is how the power and authority is passed down from the top of the organisation (managers) to lower employees
Span of Control – The number of employees working directly under a manager.
Leadership styles
Autocratic – Leader is in charge and gives orders to employees
Democratic – Other employees involved in decision making
Laissez-Faire – “let it be” Leader sets objectives and employees makes decision and organise their own work.
Trade unions
Trade union – Group of workers who have joined together to ensure their interest are protected.
Improved conditions of employment
Improved work environment
Improved benefits
Improved job satisfaction
Motivating workers
People work for
- Money
- Social needs
- Esteem needs
- Job Satisfaction
- Security
3 Ways to motivate employees
Financial rewards
Non-financial rewards
Job satisfaction
Abraham Maslow’s hierarchy of needs
Abraham Maslow’s theory states that the more levels of needs achieved by the worker = the higher motivated they will become. This also means that each level of motivation must be achieved before an employee can move to the next level of motivation.
F.W. Taylor’s theory
Employees are motivated by money.
More money = employees become more motivated
Federick Herzberg’s theory
There are 2 factors Hygiene & Motivation factors. Workers expect hygiene factors to be available to them otherwise they will become demotivated. Hygiene factors will not motivate the workers only motivation factors will make the employees work harder.
Wages (piece rate) – Workers paid depending on quantity of product produced
Salaries – Employees paid monthly, often used to pay office workers. Managers only need to calculate salaries once a month which uses less time.
Ways to improve job satisfaction
- Job Rotation – Workers swap roles to do different tasks. This stops the employee from getting bored.
- Job Enlargement – More extra tasks are given to the worker so they have a variety of things to do. However, these tasks should not be more difficult. e.g. supermarket cashier now adds price label on items.
- Job Enrichment – Adding tasks that require more skill and responsibility. e.g. receptionist employed to greet clients now deal with telephone enquiries.
Marketing
Reasons to enter a new market
- Low trade barriers
- Home markets are saturated
- Other countries developing
Problems when entering a new market
High transport costs
Lack of knowledge
Trade barriers
Change in exchange rates
Marketing mix – The four P’s
- Product
- Place
- Price
- Promotion
Advertising
Informative advertising – Give audience detailed information about the product
Persuasive advertising – Tries to persuade audience that they need the product
Sales promotion – Special deals to attract customers short term.
Distribution channels
Pricing strategies
- Cost plus pricing
- Competitive pricing
- Penetration pricing
Promotional pricing
Product life cycle
Extending the product life cycle
Introduce new variations of the original product
Sell the product into new markets (e.g. distribute to other countries)
Increase and create new advertising campaigns
Lower the price
Make changes to the product
Market research
Ways of collecting primary research
- Questionnaires
- Focus groups
- Interviews
Observation
Examples of where secondary research
Departmental records
Newspaper
Internet
Reports
Statistics
Mass marketing – Aimed at the whole market
Niche Marketing – Tailoring product to a customer (small specialised market)
Costs
Examples of fixed cost – rents such as office space or land, insurance and employee salaries
Examples of variable cost – Materials used to produce product, wages of production workers
Average cost per product = Total cost / Number of products produced
Economies of scale – Factors that lead to a reduction in average cost as a business increase in size.
Purchasing economies – Large firms able to negotiate cheaper prices for raw materials (e.g. Coca-Cola buying large bulks of sugar from supplier )
Financial economies – Large firms able to negotiate cheaper finance deals (e.g. lower bank loans because banks view large businesses as less risky)
Managerial economies – Large businesses can afford to hire specialists to work for them. This increases efficiency.
Technical economies – Use of specialist machinery to produce large quantities of products. (Small businesses cannot afford this)
Marketing economies – 1. Buying own vehicle to distribute product 2. Advertising costs can be spread over a large number of products.
Location
factors for a Manufacturing business
Production methods
Close to raw materials
Government influence
Transport
Power
factors for a Retail business
Shoppers
Security/crime in the area
Nearby shops
Parking facilities must be close by
Clustering – Competitors in the same area attract consumers
Quality production
Quality control – Checking product quality at the end of the production process.
Gives competitive advantage
Encourages return purchases
Provides customers with information and builds consumer confidence in the brand
Reduces costs incurred in solving past sales problem (Customer refunds etc..)
Helps improve efficiency
Advantages of QC
Faults are found before product is sold to customers
Less training for the worker is required (compared to quality assurance)
Disadvantages of QC
- Hiring employee to check product costs money
- QC does not explain how fault occurred and can happen again.
- Fixing defected products cost money
Total Quality Management – Continuous improvement of products and processes by focusing on quality at each stage of production
Production of goods
Lean Production – Term for techniques used by businesses to cut down waste and increase efficiency.
Kaizen – Kaizen means continuous improvement by eliminating waste.
Methods of production
Job production
Batch production
Flow production
Income
Profit = Sales Revenue – Costs
Profit can be increased by
- Reducing costs
- Increasing sales revenue
Revenue – (Selling price x Quantity sold)
Gross profit – (Sales revenue – cost of sales)
Cost of sales – (aka Costs of goods sold) is the cost involved in selling a product – More details here
Net profit (Gross profit – expenses) This is the actual profit after subtracting the business’ operating expenses such as employee salaries & wages, taxes etc.
Retained profit (Profit kept by the business for its own use)
Cash flow – money going into and out of a business over a period of time
Cash flow cycle
Cash is needed by the business for operation -> Products are produced -> Products sold -> Customers pay cash to the business -> REPEAT
Net cash flow = Cash inflow – Cash outflow
Working capital – Capital (money) available for a business to pay for day to day operations
Working capital = current assets – current liabilities
