Understanding Business Activity

It's business as usual at a London Underground terminal

The economic problem

Need: A good or service essential for living e.g. water, food and shelter.

Want: A good or service that people would like to have, but not required for living e.g. cars and movies.

Scarcity: Is the basic economic problem. It states that there are unlimited wants but limited resources to produce goods and services to satisfy those wants.

Opportunity cost

Is the next best alternative forgone when choosing another item? Due to scarcity, people are often forced to make choices. When a government is left with the choice of building an airport or a hospital, they have to decide on one. If they choose the hospital, then the benefits of the airport become the opportunity cost.

Factors of Production

Are resources required to produce goods or services? There are 4 categories:

Land: The natural resources that can be obtained from nature, such as minerals, forests, oil, and gas.
Labour: The physical and mental efforts put in by workers in the production process. The reward is a wage/salary.
Capital: The finance, machinery, and equipment needed to produce goods. The reward is interest received on the capital.
Enterprise: The risk-taking ability of the person who combines the factors of production to produce a good or service. The reward is profit.

Specialization

people wearing surgical clothes inside operating room — Doctors are a typical example of specialised labour; they spend decades studying and practicing.

It is when a person or organisation concentrates on a task they are best at. The tasks are divided among people who are skilled and efficient at them. Division of labour is a form of specialisation.

Advantages	Disadvantages
Increase in efficiency	Can get monotonous for workers since they are doing the same job.
Production is faster. Time and energy are saved.	Higher labour turnover due to workers demanding higher salaries due to their importance in production.
Quicker to train labourers, as they focus on one task only.	Over-dependency. If a worker is absent, the production process may halt since nobody else may be able to do the task.
Skill development.

Purpose of Business activity

A business is an organisation that uses all the factors of production to produce a good or service that satisfies human wants and needs. Businesses aim to solve scarcity by using scarce resources to produce and sell goods and services that consumers need and want.

Added Value

It is the difference between the cost of materials and the selling price of the product. Every business wants to add value to their products to ensure higher profits. Added value is increased by:

Reducing the cost of Materials.
Increasing selling price.

However, reducing the cost of materials may create poor-quality products and only lower the value of the product since people may not buy it. If prices are raised, customers may be lost since they will turn to cheaper products.

However, there are new ways to add value:

Branding.
Adding Special Features.
Provide premium services.

Primary sector

two trucks on plant field — Harvesting the produce

This is the extraction and usage of natural resources. Businesses in the primary sector may include agriculture, mining, fishing, or oil drilling.

Secondary sector

person holding stainless steel tray with brown and black beads — Coffee being processed

This is the manufacturing of goods using the resources from the primary sector. Businesses in the secondary sector may include food processing, cloth production, automobile manufacturing, or steel industries.

Tertiary sector

three person holding beverage cups — People enjoying Coffee at a Café

This sector provides service to the economy. Businesses in the tertiary sector may include cafes, hotels, travel agencies, hair salons, etc.

Industrialization: This is when an increase in the manufacturing sector occurs

Deindustrialization: This is when an increase in the tertiary sector occurs while a decline in the manufacturing sector happens. This is due to the growing incomes of consumers, which increases the demand for more services.

Public & Private sectors

The private sector is where private individuals own and run business ventures. They aim to make a profit, and the individual handles all costs and risks.

The public sector is where the government owns and runs business ventures. They aim to give back to society. They don’t work to earn a profit, and funds come from tax-paying citizens.

A mixed economy is one where both the public and private sector exists.

Entrepreneurship

Two women setting at a table working — Entrepreneurs working on their projects

An entrepreneur is a person who organizes, operates, and takes risks for a new business venture. The entrepreneur brings together the factors of production to produce goods or services. Characteristics include:

Risk taker.
Creative.
Hard-working.
Effective communicator.

Business plan

The Business Model Canvas - by Stretegyzer

A document that contains the business objectives and important details, such as the owners of the business. It details the target market, financial forecast, and requirements needed to operate the business. There are many benefits of a business plan, such as:

Reduces risks. The owners will find it much easier to run the business due to all the details being available.
It helps get a loan more easily. A business plan can help persuade banks to get a loan.
It helps motivate employees. The business objectives being available for the employees can motivate them to achieve them.

Government support for business Startups

man in black framed sunglasses holding fan of white and gray striped cards — Governments love to make it rain on Startups

Governments all around the world have programs to help start-ups. The most common reasons why they do is are:

Provide employment. This reduces unemployment and increases living standards.
Contribute to growth. This can help increase GDP.
Contribute to the exports. If they become successful, they can contribute to the country’s total exports.
Introduce fresh ideas and technologies. They can help businesses and the industry with new innovative ideas.

Governments support business start-ups by

Giving tax breaks. Governments can withdraw or lower taxation for new firms for a certain period of time.
Give grants for capital. Provide financial aid to new firms for investment.
Organise advice. Governments can help provide business advice to potential entrepreneurs, such as legal advice.
Give grants for training. Provide financial aid for workforce training.

Measuring Business size

worms-eye-view of buildings during daytime — In business, size does matter

Business size can be measured by:

Number of employees: Larger firms have a larger workforce employed.
Value of output: Larger firms are likely to produce more than smaller ones.
Value of capital employed: Larger businesses are likely to employ much more capital than smaller ones.

Business growth

There are two types of growth a business can implement:

Internal growth: Where the business expands its existing operations. This is slow but easier to manage.
External growth: Where the business takes over or merges with another business

Other key terms:

Merger: When the two owners of the businesses agree to join firms to make one business.
Takeover: When one business buys out the other business.

Types of external growth

Horizontal integration: This is when one firm merges with another one in the same industry at the same stage of production. Advantages include:

Greater market share.
Economies of scale are used.
Reduces competitors.

Vertical integration: This is when one firm merges with another firm in the same industry but at a different stage of production. There are two types of vertical integration:

Backward vertical integration: When one firm merges with another firm in the same industry but at an earlier stage. Advantages include:
- Assured supply of materials.
- Profit margin of supplying firm is absorbed.
- Supplying firms can now be prevented from supplying to competitors.
Forward vertical integration: When one firm merges with another firm in the same industry but at a later stage. Advantages include:
- Assured outlet for products.
- Profit margin of retailer is absorbed.
- Retailers can be prevented from selling competitor goods.

Conglomerate integration/Diversification: When one firm merges with another firm in a completely different industry. Advantages include:

Businesses have activities in more than one country, which spreads its risks.
Transfer of ideas could occur, which can improve the quality and demand for the two products.

Disadvantages of Growth

Lack of funds. Growth requires a lot of capital.
Lack of expertise. Growth is a long and difficult process.
Difficult to control staff. The staff grows as a business grows, making it harder to control, coordinate, and communicate with everyone.

Why Businesses Stay Small

man in white dress shirt cutting hair of man

Type of industry. Hairdressers give personal service and therefore can’t grow.
Market size. If the total customers are small, there is no need to grow.
Owners’ objectives. Not all owners want to increase the size of their firms. Some prefer keeping their business small for:
- Personal contact with customers.
- Flexibility in controlling and running the business.
- More control over decision-making.
- Less stressful.

Why Businesses fail

a group of electronic devices — Ever seen these before? They were a thing of the past. At the time, companies that didn't change to selling CDs and DVDs instead, failed.

Failure to plan for change: The demands of customers keep changing. This means firms must be ready to change to meet the demands of their customers. Failure to do so results in customer loss.
Poor management: Lack of experience and planning leads to bad decision-making. Mistakes such as location and suppliers can cause failure.
Over-expansion: This increases costs if the business expands too quickly. Managing employees gets out of control.
Poor financial management: If the owner does not know how to manage finances properly, cash shortages can occur. A poor cash flow will cause the business to fail.

Why new businesses are likely to fail

Lack of experience: Firms can get kicked out of the market easily.
New to the market: New firms may not understand the market trends that existing competitors have mastered.
Not many sales: New firms can grow by increasing sales. If they’re not selling much, there is a greater risk of failing.
Lack of capital: Financial issues can quickly become the main issue of new firms if they are not careful with their cash flows. It is only after making a profit they can reinvest in the business.

Sole Trader

woman sitting in front of label container lot — An example of a sole trader- a local store owner

A business organization owned and controlled by one person.

Advantages	Disadvantages
Easy to set up. Few legal formalities involved. Low amount of capital needed.	Unlimited liability. All investments are at risk if debts are not paid off.
Full control. Decision-making is quick and easy.	Unincorporated. The business stops if the owner dies. There is no separate legal status.
Profit. All profit generated goes to the owner.	Lack of capital. There is little capital for growth and expansion so profit will be low.
Personal. There is direct contact with customers which can increase loyalty.	Full responsibility. The sole owner has to undertake all running activities, which puts on a large workload.

Partnership

two men facing each other while shake hands and smiling

An agreement between two or more people to own, finance, and run a business jointly. A partnership agreement is a legal document that all partners have to sign.

Advantages	Disadvantages
Easy to set up. There are few legal formalities involved.	Unlimited liability. All investments are at risk if debts are not paid off.
More capital. Partners can invest more capital compared with sole traders.	Conflict. Arguments may occur between partners when making decisions, which wastes time.
New skills and ideas. The partners may have creative ideas that the business can benefit from and profit.	If one partner is bad and lazy, profits can be affected which can annoy the other partner.
	Unincorporated. There is no separate legal status. Business ends if the owner dies.

Joint-Stock Companies

Private Limited Companies: One or more owners can sell shares to people known (Family & Friends).

Public Limited Companies: Two or more owners who can sell shares to any individual/organization through stock exchanges.

Advantages of Public LTC

Limited liability. Owners are responsible for their investments if debts are not paid off.
Incorporated. Businesses have separate legal statuses, which ensures continuity.
Easy to obtain capital. Selling shares can raise huge sums of capital.

Disadvantages of Public LTC

Accounts have to be public. This can make competitors learn secrets to increase profits.
AGM meetings have to occur. This is when shareholders choose a new board of directors. This is very expensive to hold.
Too many shares sold can cause owners to lose control of the company.
Managerial problems may occur due to the large size. Communication problems will slow down decision-making.

Advantages of Private LTC

Limited liability. Owners are responsible for their investments if debts are not paid off.
Incorporated. Businesses have separate legal statuses, which ensures continuity.
Easy to obtain capital. Selling shares can raise huge sums of capital.

Disadvantages of Private LTC

Accounts have to be public. This can make competitors learn secrets to increase profits.
AGM meetings have to occur. This is when shareholders choose a new board of directors. This is very expensive to hold.
Selling shares to the public is difficult. Legal documents are required to be able to do so.

Franchise

a mcdonald's sign with a cloudy sky in the background

This is when the owner of a business (FRANCHISOR) grants a licence to another person (FRANCHISEE) to use their business idea with the same brand logo, image etc

Advantages to the Franchisor	Disadvantages to the Franchisor
Management is responsible to the franchisee.	Profits need to be shared with the Franchisee.
Low cost of business expansion.	If one franchise fails, the reputation of the entire brand is affected.
Franchisees have a better understanding of the local tastes meaning they are able to sell appropriately.	Need to supply raw material and training to the Franchisee.

(Note: please scroll horizontally to see the full contents of the table)

Advantages to the Franchisee	Disadvantages to the Franchisee
Raw materials are paid for by the franchisor.	Need to pay licence to the franchisor to continue running the franchise.
Training is paid for by the franchisor.	No full control as they have to follow franchisor standards and rules.
If the Franchisor is a famous business, chances of failing are low.	Cost of setting up is not covered.

Joint Ventures

It is an agreement between two or more businesses to work together on a project.

Advantages	Disadvantages
Risks and costs are shared.	Different cultures and styles of leadership may affect decision-making.
Market and product knowledge of the area is known by one of the businesses.	Any mistakes will damage the businesses reputations.
The market potential is increased.

Public Sector Corporations

skyline photography of nuclear plant cooling tower blowing smokes under white and orange sky at daytime — A power plant is typically government run, and therefore a public sector company

Are businesses owned by the government and run by directors appointed by the government? They provide essential services such as water and electricity. They aim to:

Keep prices low to be affordable for everyone.
Provide job opportunities.
Offer a service to the public.

Advantages	Disadvantages
Reduces waste in an industry.	Motivation may not be high since profit is not an objective.
Provides essential services to the people.	No competition so no incentive to improve.
Some businesses are too important to be owned by an individual.	Businesses could be run for a political reason, to gain government popularity and support.

Business Objectives

These are aims and targets that a business works towards to help it run successfully. Benefits of setting objectives:

Increases motivation: Employees and managers now have clear targets to work towards.
Easier decision making: Less time is wasted as decisions will be taken in order to achieve business objectives.
Unites the business.

Objectives vary with different businesses. Businesses in the private sector hope to achieve these objectives:

Survival: New or small firms usually have survival as a primary objective. To achieve this, firms could decide to lower prices, which would mean sacrificing profits.
Profit: This is the income of a business from its activities after deducing total costs. Profit is required for further investment and payment of return to shareholders.
Growth: After survival, a business will aim to grow. A more significant business can ensure greater job security and salaries for employees. The business can also benefit from higher market share.
Market share: Increased market share can bring many benefits, such as increased customer loyalty and brand image.
Service to society: Social enterprises do not aim for profit but rather set economic objectives. They provide social, financial, and environmental aid. They help the underprivileged and unemployed.

Business objectives do not remain the same forever. If a firm is facing an economic recession, it may change its objective from profit to survival.

Stakeholders

pizza with berries — Stakeholders can be seen as pieces of a pizza pie. They are all directly affected by the activities of a business.

Are any person or group that is interested in or directly affected by the performance or activities of a business.

Stakeholder Group	Description	Objectives
Owners (Internal)	Risk takers of the business. They invest capital into the business.	Share of the profits to reinvest. Growth so the value of their investment increases.
Workers (Internal)	These are the people employed by the business and are directly involved in its activities.	Regular payment for the work done. Job security, they do not want to look for new jobs. Job satisfaction and motivation.
Managers (Internal)	Also employees but they control the work of others. In charge of making decisions.	High salaries due to the important work they do. Job security. Growth of the business so that they can control a bigger and well-known business.
Customers (External)	They purchase and consume goods making them important. Without enough, businesses will make losses and fail.	Safe and reliable products. Value for money. Well-designed products of good quality.
Government (External)	Protect workers and customers by passing laws. Responsible for the country’s economy.	Expect all firms to follow the law. Want businesses to succeed to improve employment and government revenue.
Community (External)	Greatly affected by business activity. Products are beneficial to them.	Products are socially responsible. Jobs for the working population.
Banks (External)	Provide finance for businesses.	Expect businesses to be able to pay interest and capital lent.

Public Sector Businesses

Government-owned and controlled businesses do not have the same objectives as those in the private sector. Objectives include:

Financial: Although they do not aim for profit, they still have to meet the profit targets that have been set. This is so reinvestments can be made.
Service: Provide a service to the community that is of high quality.
Social: Aid the community by providing employment, providing good quality goods and services at an affordable rate

Conflict Between Stakeholders

Workers will want higher salaries. However, shareholders will not like this as dividends will be less.
Owners may want to expand by building factories. However, the community will not like this due to pollution.
Managers may conclude a decision. However, employees may not like it because it is unethical or challenging to adapt to.