Business Studies

Business Activity

A need is a good or service essential for living.

A want is a good or service which people would like to have, but which is not essential for
living. People's wants are unlimited.

The economic problem - there exist unlimited wants but limited resources to produce the
goods and services to satisfy those wants. This creates scarcity.

Factors of production are those resources needed to produce goods or services. There
are four factors of production and they are in limited supply.

Land this term is used to cover all of the natural resources provided by nature and includes
fields and forests, oil, gas, metals and other mineral resources.

Labour this is the number of people available to make products.

Capital - this is the finance, machinery and equipment needed for the manufacture of goods.

Enterprise - this is the skill and risk-taking ability of a person who brings the other resources
or factors of production together to produce a good or service. For example, the owner of a
business. These people are called entrepreneurs.

Scarcity is the lack of sufficient products to fulfil the total wants of the population.
Opportunity cost is the next best alternative given up by choosing another item.

Specialisation occurs when people and businesses concentrate on what they are best at.

Specialisation is now very common because:

●​ specialised machinery and technology are now widely available

●​ increasing competition means that businesses have to keep costs low
●​ most people recognise that higher living standards can result from being specialised.

Division of labour 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.

Businesses combine factors of production to make products (goods and services) which
satisfy people's wants.

The Purpose of Business

Based on the provided text, the purpose of business can be summarized as:

1. Combining Scarce Resources

Businesses combine the four factors of production (land, labor, capital, and enterprise) to
create goods and services.

2. Satisfying Needs and Wants

They produce goods (physical items) and services (intangible activities) to meet the
unlimited wants and needs of the population.

3. Addressing Scarcity through Specialisation

Businesses specialize in specific products or services to use resources more efficiently and
improve productivity.

4. Facilitating Trade and Exchange

By creating specialized goods, businesses enable trade, allowing people to access a wide
range of products beyond what they could produce themselves.

5. Creating Employment Opportunities

Businesses provide jobs, paying wages that allow individuals to purchase goods and
services, thus sustaining economic activity.

Added value is the difference between the selling price of a product and the cost of bought
in materials and components.

If value is not added to the materials and components that a business buys in then:
●​ other costs cannot be paid for
●​ no profit will be made.
Example:

●​ The selling price of a newly built house is $100 000.

●​ The value of the bought in bricks, cement, wood and other materials was $15000.
●​ The added value of the building firm was $85 000.
●​ This is not profit - out of this the builder must pay wages and other costs too.

Why is added value important?

Added value is important because sales revenue is greater than the cost of materials bought
in by the business. This means the business:

●​ can pay other costs such as labour costs, management expenses and costs such as
advertising and power
●​ may be able to make a profit if these other costs total less than the added value.

How could a business increase added value?

There are two main ways in which a business can try to increase its added value.

1.​ Increase selling price but keep the cost of materials the same. If consumers are
convinced by this then they might be prepared to pay higher prices and buy the same
quantity as before the price rise. A jewellery shop could employ very experienced
and knowledgeable sales staff, decorate the shop in a very up-market way and use
high quality packaging.
2.​ Reduce the cost of materials but keep the price the same. A building firm could use
cheaper wood, bricks and other materials when constructing a home or shop. If the
price charged to customers stays the same then a higher added value will be made.

Classification
The primary sector of industry extracts and uses the natural resources of the earth to
produce raw materials used by other businesses. E.g: Raw cotton, forest, etc

The secondary sector of industry manufactures goods using the raw materials provided by
the primary sector. E.g: Cotton yarn, wood, etc

The tertiary sector of industry provides services to consumers and the other sectors of
industry. E.g: Cotton clothing, wooden furniture, etc
De-industrialisation occurs when there is a decline in the importance of the secondary,
manufacturing sector of industry in a country.

A mixed economy has both a private sector and a public (state) sector.

Private sector - businesses not owned by the government.

Public sector - businesses owned by the government.

Which business activities are usually in the public sector?

●​ health
●​ education
●​ defence
●​ public transport
●​ water supply
●​ electricity supply.

Enterprise, business growth and size

Entrepreneur is a person who organises, operates and takes the risk for a new business
venture.
Why governments support business start-ups

• Reduce unemployment - new businesses will often create jobs to help reduce
unemployment.

• Increase competition - new businesses give consumers more choice and compete with
already established businesses.

• Increase output - the economy benefits from increased output of goods and services.

• Benefit society - entrepreneurs may create social enterprises which offer benefits to society
other than jobs and profit (for example, supporting disadvantaged groups in society).

• Can grow further - all large businesses were small once! By supporting today's new firms
the government may be helping some firms that grow to become very large and important in
the future.
A business plan is a document containing the business objectives and important details
about the operations, finance and owners of the new business.

Importance of Comparing Business Sizes

1. Who finds it useful?

Investors: To decide where to invest their money.

Governments: Different tax rates often apply to small and large businesses.

Competitors: To evaluate their size and importance relative to other firms.

Workers: To estimate the size of the workforce.

Banks: To assess the significance of a loan relative to a business’s size.

Methods of Measuring Business Size

Number of Employees

Advantages: Easy to calculate and compare across businesses.

Limitations:

Automated, capital-intensive firms may have few employees but high output.

Counting part-time employees can complicate calculations.

Value of Output

Advantages: Useful for comparing manufacturing businesses in the same industry.

Limitations:

High output does not always correlate with business size using other measures.

Unfinished or unsold goods can distort output figures.

Value of Sales

Advantages: Commonly used for retail businesses, especially those selling similar products.

Limitations:

Can be misleading when comparing businesses with very different product types or price
points.

Value of Capital Employed

Advantages: Reflects the amount invested in the business.

Limitations:

Labour-intensive firms with minimal capital investment might appear smaller despite
employing many workers.

Why do owners often want their businesses to grow?

●​ the possibility of higher profits for the owners
●​ more status and prestige for the owners and managers - higher salaries are often
paid to managers who control the bigger firms
●​ lower average costs
●​ larger share of its market the proportion of total market sales it makes is greater.
●​ This gives a business more influence when dealing with suppliers and distributors
and consumers are often attracted to the 'big names' in an industry.

Internal growth occurs when a business expands its existing operations.

External growth is when a business takes over or merges with another business. It is often
called integration as one firm is integrated into another one.

A merger is when the owners of two businesses agree to join their firms together to make
one business.

A takeover or acquisition is when one business buys out the owners of another business
which then becomes part of the 'predator' business (the firm which has taken it over).

Horizontal integration is when one firm merges with or takes over another one in the same
industry at the same stage of production.
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.

Conglomerate integration is when one firm merges with or takes over a firm in a completely
different industry. This is also known as diversification.

The likely benefits of integration

Horizontal integration

• The merger reduces the number of competitors petitors in the industry.

• There are opportunities for economies of scale (see Chapter 18).

The combined business will have a bigger share of the total market than either firm before
the integration.

Forward vertical integration

For example, a car manufacturer takes over a car retailing business.

The merger gives an assured outlet for their product.

• The profit margin made by the retailer is absorbed by the expanded business.

• The retailer could be prevented from selling competing makes of car.

• Information about consumer needs and preferences can now be obtained directly by the
manufacturer.

Backward vertical integration

For example, a car manufacturer takes over a firm supplying car body panels.

• The merger gives an assured supply of important components.

• The profit margin of the supplier is absorbed by the expanded business.

• The supplier could be prevented from supplying other manufacturers.

• Costs of components and supplies for the manufacturer could be controlled.

Conglomerate integration

• The business now has activities in more than one industry. This means that the business
has diversified its activities and this will spread the risks taken by the business.
• There might be a transfer of ideas between the different sections of the business even
though they operate in different industries.

Reasons Why Some Businesses Stay Small

1. Type of Industry

Personal services or specialized products often suit small-scale operations.

Examples: Hairdressing, car repairs, window cleaning, convenience stores, plumbers,
catering.

Growth can hinder the close, personal service demanded by customers.

Low entry barriers lead to frequent competition, keeping firms small.

2. Market Size

Small markets limit growth opportunities, e.g., rural shops far from cities.

Specialized goods or services with limited customer appeal (e.g., luxury cars or fashion)
often result in small-scale businesses.

3. Owners' Objectives

Some owners prefer maintaining control over a small business.

They value personal relationships with staff and customers.

Avoiding the stress and complexities of running a larger firm is a common preference.

Why some businesses fail

●​ Poor management
●​ Failure to plan for change
●​ Poor financial management
●​ Over-expansion
●​ Risks of new business start-ups
Business objectives and stakeholder objectives

Business objectives are the aims or targets that a business works towards.

The benefits of setting objectives are:

• They give workers and managers a clear target to work towards and this helps motivate
people.

• Taking decisions will be focused on: 'Will it help achieve our objectives?"

• Clear and measurable objectives help unite the whole business towards the same goal.

• Business managers can compare how the business has performed with their objectives - to
see if they have been successful or not.

So setting objectives is very important for all businesses - small or large, newly formed or
well established.

What objectives do businesses set?

The most common objectives for businesses in the private sector are to achieve:
●​ business survival
●​ profitre
●​ turns to shareholders
●​ growth of the business
●​ market share
●​ service to the community.

Key Business Objectives

1. Survival

Crucial for new businesses or during economic recessions.

Threats like new competitors may lead to price reductions, even at the cost of lower profits.

2. Profit

Essential for:

Providing returns to owners for their capital and risk.

Funding further business investments.

Maximum profit isn't always pursued due to risks of losing customers or attracting
competitors.
A "satisfactory" profit level is often targeted to balance effort and tax liabilities.

3. Returns to Shareholders

Important for limited companies to retain shareholder confidence.

Achieved by:

Increasing profits and dividends paid to shareholders.

Raising share prices through plans for growth and future profitability.

4. Growth

Motivated by:

Greater job security for employees.

Higher salaries and status for managers.

Diversifying products and markets to reduce risks.

Increasing market share and benefiting from economies of scale.

Requires prioritizing customer satisfaction to sustain growth.

Market share is the proportion of total market sales achieved by one business.

Increased market share gives a business:

●​ Good publicity, as they could claim that they are becoming 'the most popular
●​ Increased influence over suppliers, as they will be very keen to sell to a business that
is becoming relatively larger than others in the industry
●​ Increased influence over customers (for example, in setting prices).

A social enterprise has social objectives as well as an aim to make a profit to reinvest back
into the business.

The people operating the social enterprise often set three objectives for their business:
 ●​ Social: to provide jobs and support for disadvantaged groups in society, such as the
disabled or homeless
●​ Environmental: to protect the environment
●​ Financial: to make a profit to invest back into the social enterprise to expand the
social work that it performs.

Why business objectives could change

1.​ A business set up recently has survived for three years and the owner now aims to
work towards higher profit.
2.​ A business has achieved higher market share and now has the objective of earning
higher returns for shareholders.
3.​ A profit-making business operates in a country facing a serious economic recession
so now has the short-term objective of survival.

Which stakeholder groups are involved in business activity?

The following groups of people are involved in business activity in one way or another, or are
affected by it:

●​ owners
●​ consumers
●​ workers
●​ government
●​ managers
●​ banks
●​ the whole community.

A stakeholder is any person or group with a direct interest in the performance and activities
of a business.
Objectives of public-sector businesses
●​ Financial: Meet profit targets set by government
●​ Service: Provide a service to the public and meet quality targets set by government.
●​ Social: Protect or create employment in certain areas