Business Revision Notes

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