Understanding Business Activity
What is a business?
A business is an organization that makes a profit by providing a product or service for the consumer's needs and wants. By doing so, they help to maintain and improve our standard of living. They combine resources such as labor, finance and equipment to produce outputs. The outputs of one business often becomes the inputs of another, thus a value chain is created:
business → employment → money → improved quality of living → spending money → business
What does business provide to our society?
Business provides:
- goods and services - these are provided for the community as well as other businesses
- profit - the company profits can be contributed to the owner as well as the community
- employment - small businesses are still large contributors
- choice - choice encourages businesses to provide goods and services at the lowest possible price and/or the highest quality
- wealth - for owners and the community
- improved quality of life - e.g. medicines have improved our daily lives
- income - for employers and employees; this contributes to economic growth
- entrepreneurship - an entrepreneur is someone who develops ideas and is willing to take a calculated risk by turning that idea into a business
- innovation - businesses must innovate in order to remain competitive
Case Study - Apple Inc.
Steve Jobs and Steve Wozniak were the entrepreneurs who started Apple - Jobs had to sell his car and borrow money to create the first Apple motherboard in his parents' garage. Even though Apple started with personal computers, they have evolved into the smartphone and tablet markets. Everybody copied their first big innovation of the touchscreen, which gives consumers a choice between products, as Apple products are generally more expensive than those of, say, Samsung. Today, Apple has reached a cult-like status which means that people will be loyal to the product regardless of the quality. Apple also employs thousands of people around the world, which fuels the ongoing cycle of economic growth and continues to gain them profits.
Steve Jobs and Steve Wozniak were the entrepreneurs who started Apple - Jobs had to sell his car and borrow money to create the first Apple motherboard in his parents' garage. Even though Apple started with personal computers, they have evolved into the smartphone and tablet markets. Everybody copied their first big innovation of the touchscreen, which gives consumers a choice between products, as Apple products are generally more expensive than those of, say, Samsung. Today, Apple has reached a cult-like status which means that people will be loyal to the product regardless of the quality. Apple also employs thousands of people around the world, which fuels the ongoing cycle of economic growth and continues to gain them profits.
Business Activity
Needs and wants
Needs are essential goods or services necessary for living. They satisfy the basic things for life. These include food and water.
Wants are non-essential goods or services that people would like to have. These include products like phones.
Needs are essential goods or services necessary for living. They satisfy the basic things for life. These include food and water.
Wants are non-essential goods or services that people would like to have. These include products like phones.
The factors of production
Each of the factors of production are paid for by a business. They include:
Each of the factors of production are paid for by a business. They include:
- capital - finance, machinery, equipment
- enterprise - entrepreneurs like Steve Jobs
- land - farmland, oil rigs, factory space
- labor - production line, manual labor
The economic problem
factors of production = limited resources → economic problem → unlimited wants → scarcity → choice
The economic problem is that there are too few factors of production which leads to limited goods and services to satisfy unlimited wants.
factors of production = limited resources → economic problem → unlimited wants → scarcity → choice
The economic problem is that there are too few factors of production which leads to limited goods and services to satisfy unlimited wants.
Production (in the past)
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Production (present day)
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Making the best of limited resources
Business are able to make the best of limited resources. The word 'resources' does not just mean things needed to make the product, it can also refer to the people who put the product together (i.e. human resources). Business can:
Business are able to make the best of limited resources. The word 'resources' does not just mean things needed to make the product, it can also refer to the people who put the product together (i.e. human resources). Business can:
- specialize - professionals can be assigned to specific jobs that they have been trained for
- divide labor - if the job is divided between many people it means that production is faster
- make workers perform one task each - if a worker only does one task all the time, they will get better at it
- use the production line - an ongoing cycle of production
Why is business activity needed?
Business activity is needed to satisfy the unlimited wants of consumers. However, resources are in limited supply so there is a limited amount of goods and services that can be created using the factors of production. This scarcity of products gives customers an opportunity to choose which product to buy.
Business activity is needed to satisfy the unlimited wants of consumers. However, resources are in limited supply so there is a limited amount of goods and services that can be created using the factors of production. This scarcity of products gives customers an opportunity to choose which product to buy.
Classification of products
Products can be goods or services. Good are tangible items that can be touched and seen, for example, cars. Services are sold or provided by companies and are not tangible, for example, insurance.
Products can be goods or services. Good are tangible items that can be touched and seen, for example, cars. Services are sold or provided by companies and are not tangible, for example, insurance.
Business objectives
Business aims
- to make a profit
- to increase added value
- to expand
- to achieve business survival
- to provide a good or a service
Value added
The difference between the selling price of a product or service and the cost of bought in materials and components. Value is added to materials and components by working on them and turning them into much more expensive finished articles. For example, a chocolate maker could wrap chocolates in more expensive looking boxes in order to sell them at a higher price. The equation for value added is the selling price minus the cost of the materials and components.
The difference between the selling price of a product or service and the cost of bought in materials and components. Value is added to materials and components by working on them and turning them into much more expensive finished articles. For example, a chocolate maker could wrap chocolates in more expensive looking boxes in order to sell them at a higher price. The equation for value added is the selling price minus the cost of the materials and components.
Conflict in business
The different stakeholders in a business have different ideas about what the business should focus on. The director of a business is concerned with growth and profits, whereas the workers are focused on their specific jobs. The local community will worry about the effect of the business on their environment and the jobs that it provides. The consumers of a business focus on the price and quality of the product.
The different stakeholders in a business have different ideas about what the business should focus on. The director of a business is concerned with growth and profits, whereas the workers are focused on their specific jobs. The local community will worry about the effect of the business on their environment and the jobs that it provides. The consumers of a business focus on the price and quality of the product.
Groups involved in business
Stakeholder group
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Main features
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Likely aims
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Workers
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Managers
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Customers
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Government
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Community
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Sectors of business activity
Definitions
- Industry is the manufacturing of a good or service within a category
- Economy is the system of production and management of material wealth
Sectors
- Businesses in the primary sector gather the raw materials needed to make a product, like mines and farms.
- Businesses in the secondary sector make the products using the raw materials, for example, factories.
- Businesses in the tertiary sector sell the products to consumers, for example, retail stores.
Sectors of industry
Public sector
These are organizations owned by the local or national government. Profits are used within the organization to improve it. Some examples include government run hospitals and schools.
These are organizations owned by the local or national government. Profits are used within the organization to improve it. Some examples include government run hospitals and schools.
Private sector
These are businesses that are owned by individuals who keep any profits. Privatization is when governments sell off businesses they previously owned to new owners in the private sector.
These are businesses that are owned by individuals who keep any profits. Privatization is when governments sell off businesses they previously owned to new owners in the private sector.
Types of economy
Free market economies
Where the types of businesses and products are dependent on the people's demands for them. They consist of resources that are privately owned and the price is set by supply and demand. Customers are free to choose what they want to buy and prices are kept low because there are many businesses competing, but there is no government control over the businesses and everything is privatized.
Where the types of businesses and products are dependent on the people's demands for them. They consist of resources that are privately owned and the price is set by supply and demand. Customers are free to choose what they want to buy and prices are kept low because there are many businesses competing, but there is no government control over the businesses and everything is privatized.
Planned economies
Where the types of businesses and products are controlled from a central point. Resources are government owned and the state controls what is made and how much. This leads to very little choice for consumers. Government control prevents any waste that results from competition between businesses and there is work for everybody and their basic needs are met, but there are no luxury items and the lack of profit leads to low efficiency.
Where the types of businesses and products are controlled from a central point. Resources are government owned and the state controls what is made and how much. This leads to very little choice for consumers. Government control prevents any waste that results from competition between businesses and there is work for everybody and their basic needs are met, but there are no luxury items and the lack of profit leads to low efficiency.
Mixed economies
Most economies in the world are mixed, some more than others. They consist of a mixture of free market and planned economic conditions. Laws and taxes are the main advantages and disadvantages of this type of economy.
Most economies in the world are mixed, some more than others. They consist of a mixture of free market and planned economic conditions. Laws and taxes are the main advantages and disadvantages of this type of economy.
Business integration
How do businesses grow?
Businesses can grow internally or externally. Internal growth is when a business expands its existing operations, for example, by opening new branches, new shops or new factories. This method of growth is quite slow and expensive.
External growth is when a business expands by integrating with another business. This could be by buying another business out (the purchase of one firm by another), purchasing more than 50% of another business' share, or merging with another business (two or more companies agreeing to unite and become one company.
Businesses can grow internally or externally. Internal growth is when a business expands its existing operations, for example, by opening new branches, new shops or new factories. This method of growth is quite slow and expensive.
External growth is when a business expands by integrating with another business. This could be by buying another business out (the purchase of one firm by another), purchasing more than 50% of another business' share, or merging with another business (two or more companies agreeing to unite and become one company.
Horizontal integration
Horizontal integration is when one firm merges with or takes over another one in the same industry at the same stage of production. This minimizes competition and holds potential for economies of scale. Horizontally integrated businesses also have a larger share of their market. An example of horizontal integration would be if two coffee chains joined together, for example, Starbucks and Costa.
Horizontal integration is when one firm merges with or takes over another one in the same industry at the same stage of production. This minimizes competition and holds potential for economies of scale. Horizontally integrated businesses also have a larger share of their market. An example of horizontal integration would be if two coffee chains joined together, for example, Starbucks and Costa.
Vertical integration
Vertical integration is when one firm merges with or takes over another one in the same industry but at a different stage of production. Vertical integration can be forward or backward. Forward integration is when one business takes over another one which comes after it in the chain of production. An example would be if a coffee bean farmer took over Starbucks.
Backward integration is when one business takes over another one which comes before it in the chain of production. An example would be if McDonalds started buying cattle farms. This ensures supply.
Vertical integration is when one firm merges with or takes over another one in the same industry but at a different stage of production. Vertical integration can be forward or backward. Forward integration is when one business takes over another one which comes after it in the chain of production. An example would be if a coffee bean farmer took over Starbucks.
Backward integration is when one business takes over another one which comes before it in the chain of production. An example would be if McDonalds started buying cattle farms. This ensures supply.
Conglomerate integration
Conglomerate integration is when a firm takes over another one in a different industry at any stage of production. An example of this would be if Coca Cola bought a clothing store.
Conglomerate integration is when a firm takes over another one in a different industry at any stage of production. An example of this would be if Coca Cola bought a clothing store.
Business ownership in the private sector
Sole traders
Sole traders are owned, controlled and financed by one person. They are the smallest and most common type of business organization. They are easy to set up and few legal regulations are imposed upon sole traders. They don't require a lot of money to set up, but all the money needs to come from the owner and the are unincorporated, which means if the owner dies, the business dies with him. The owners also have unlimited liability - they are personally responsible for all the business' debts and lawsuits, so they may be forced to sell their personal assets like their house in order to pay off debts.
Sole traders are owned, controlled and financed by one person. They are the smallest and most common type of business organization. They are easy to set up and few legal regulations are imposed upon sole traders. They don't require a lot of money to set up, but all the money needs to come from the owner and the are unincorporated, which means if the owner dies, the business dies with him. The owners also have unlimited liability - they are personally responsible for all the business' debts and lawsuits, so they may be forced to sell their personal assets like their house in order to pay off debts.
Partnerships
Partnerships are owned, controlled and financed by two or more people. They are larger than sole traders and are also unincorporated with unlimited liability. There is more capital since the money is provided by the partners, who share responsibilities, decisions and losses. A partnership agreement may be used to create a partnership between the owners, but the partnership is dissolved if one partner leaves or dies and there are legal costs involved in creating a partnership agreement. There is also potential for conflict between the partners, and time is needed to consult other partners when making decisions.
Partnerships are owned, controlled and financed by two or more people. They are larger than sole traders and are also unincorporated with unlimited liability. There is more capital since the money is provided by the partners, who share responsibilities, decisions and losses. A partnership agreement may be used to create a partnership between the owners, but the partnership is dissolved if one partner leaves or dies and there are legal costs involved in creating a partnership agreement. There is also potential for conflict between the partners, and time is needed to consult other partners when making decisions.
Limited partnerships
These are usually known as limited liability partnerships, and they are similar to regular partnerships, except the business is offered limited liability, and if one of the partners leaves or dies, the business continues to exist.
These are usually known as limited liability partnerships, and they are similar to regular partnerships, except the business is offered limited liability, and if one of the partners leaves or dies, the business continues to exist.
Private limited company
A company that is a separate legal unit from its owners. This means that if the owner dies, the business continues to exist and the company has limited liability. However, there are legal formalities involved when setting up and running a private limited company. Also, shares cannot be sold to the public, only to the owner's family, friends, relatives or employees.
A company that is a separate legal unit from its owners. This means that if the owner dies, the business continues to exist and the company has limited liability. However, there are legal formalities involved when setting up and running a private limited company. Also, shares cannot be sold to the public, only to the owner's family, friends, relatives or employees.
Public limited company
This form of business organization is most suitable for very large businesses. Even though the word public is in the name, these businesses are still in the private sector. They have limited liability and the business is a separate legal unit from the owner. They can sell shares to the public and there is no limit on the number of shareholders. However, they are difficult to control and manage and there are complicated legal formalities involved.
This form of business organization is most suitable for very large businesses. Even though the word public is in the name, these businesses are still in the private sector. They have limited liability and the business is a separate legal unit from the owner. They can sell shares to the public and there is no limit on the number of shareholders. However, they are difficult to control and manage and there are complicated legal formalities involved.
Converting from private to public
- A statement must be made in the Memorandum of Association that the company is now a public limited company
- A certain minimum value of shares must be issued
- Accounts must be laid out in a certain way and made available to members of the public
- The company applies to the Stock Exchange for a listing which means that it will be easy for shareholders to buy and sell shares. The Stock Exchange will look carefully at the accounts and the trading record of the company to ensure that it is not a poorly operated company.
- When these stages have been completed the company must issue a prospectus, an invitation to the public to buy shares in the company. It is a detailed document giving details of the company's past record and its plans for the future. The reasons for raising more capital and how it will be spent must be fully explained.
Franchising
A franchise is a business based upon the use of the brand names, promotional logos and trading methods of an existing successful business. The franchisee buys the license to operate this business from the franchisor. The franchisor benefits because somebody else is doing the hard work and is responsible for the business. However, if the franchisee is lazy and doesn't do his job well, it will negatively affect the business. The franchisee also keeps the profit from their outlet. The franchisee also benefits because everything is being supplied by the franchisor, who is also paying for advertising. Banks are also willing to lend to franchisees, but a license fee must be paid to the franchisor and perhaps a part of the year's profits. A good franchisee is somebody who is willing to follow orders, and perhaps a retired businessman as he will have all the knowledge of the day-to-day operations of businesses, therefore he will have a better chance of getting hired by the franchisor. If he is only running a small outlet store, he does not need to learn as much as he would need to if he were a college student, for example.
A franchise is a business based upon the use of the brand names, promotional logos and trading methods of an existing successful business. The franchisee buys the license to operate this business from the franchisor. The franchisor benefits because somebody else is doing the hard work and is responsible for the business. However, if the franchisee is lazy and doesn't do his job well, it will negatively affect the business. The franchisee also keeps the profit from their outlet. The franchisee also benefits because everything is being supplied by the franchisor, who is also paying for advertising. Banks are also willing to lend to franchisees, but a license fee must be paid to the franchisor and perhaps a part of the year's profits. A good franchisee is somebody who is willing to follow orders, and perhaps a retired businessman as he will have all the knowledge of the day-to-day operations of businesses, therefore he will have a better chance of getting hired by the franchisor. If he is only running a small outlet store, he does not need to learn as much as he would need to if he were a college student, for example.
Business ownership in the public sector
Public corporations
These are wholly owned by the state or central government. They were once owned by private individuals, but were purchased by the government. They aim to offer jobs and services in all parts of the country. The government can step in and nationalize the business if it is starting to collapse. Important public services such as TV and radio are usually offered by public corporations. However, there are no private shareholders who insist on profits and the employees think that the government will always help them if the business suffers a loss. There is also no competition: there is no reason for the government to increase efficiency and consumer choice. The government can also use public corporations for political reasons.
These are wholly owned by the state or central government. They were once owned by private individuals, but were purchased by the government. They aim to offer jobs and services in all parts of the country. The government can step in and nationalize the business if it is starting to collapse. Important public services such as TV and radio are usually offered by public corporations. However, there are no private shareholders who insist on profits and the employees think that the government will always help them if the business suffers a loss. There is also no competition: there is no reason for the government to increase efficiency and consumer choice. The government can also use public corporations for political reasons.
Joint ventures
Joint ventures are when two or more businesses work closely together on the same project.
Joint ventures are when two or more businesses work closely together on the same project.