Understanding Business Activity

Business Activity:

Specialisation: The best way to use finite resources

Specialisation occurs when people focus on one task, the one their
best at.
Division of labour is a way of working, where the production process is
divided and each person does only one activity.
Advantages of specialisation and division of labour:
 Workers become faster, leading to a better efficiency and
productivity
 Workers become better at doing the task, so the quality of the
output is better
 An increase in efficiency usually leads to economies of scale
 Workers become more skilled
Disadvantages of specialisation and division of labour:
 Repetitive tasks create boredom and decrease motivation
 If a worker is not present, the production chain may be stopped
 Skilled workers demand higher wages, and hiring new ones will
become more expensive and add training costs

Purpose of Business Activity

The purpose of business activity is to combine scarce resources to
produce goods and services to satisfy people's needs and wants while
employing people.

Added Value
Added value is the difference between the final price and the initial
cost of raw materials. The added value is the value of the change in the
material to a finished product. It would be the difference between a log and
a piece of furniture.
It is NOT profit because it doesn’t take into account other costs like
wages, bills and machinery.

Increasing the added value of the product can:

 Generate a profit if the other costs add up to less than the added
value.
 But, make consumers less willing to purchase the product

1
To increase added value, a business can:

 Increase the selling price

 Decrease the cost of raw materials and keep the price the same

Classification of Businesses

Stages of Economic Activity:

Business can be classified into three sectors:
 Primary: Industries extract the resources from the earth and
prepare raw materials for other businesses to use. In developing
countries, this is the most common industry because
industrialisation isn’t advanced yet.
 Secondary: In this sector, the businesses manufacture goods
using raw materials prepared by the primary sector.
 Tertiary: The industry provides services to the consumers. This is
the most common industry in developed countries.
De-industrialisation happens when the secondary sector loses importance in
an economy.

Reasons for changes in the relative importance of the sectors over time :
 When sources of primary resources become depleted
 Developed countries lose competitiveness in the secondary
sector to recently industrialized countries
 Due to an increase in living standards, people are spending more
on the tertiary sector than manufactured goods.

Mixed Economy:
A mixed economy works both with the private and public sector:
 Private sector: The individuals and firms decide what, how and
for whom to produce. Their main aim is to generate a profit.
 Public sector: The government decides what to what, how and for
whom to produce. The main aim of the public sector is to provide
services to the citizens.
Privatisation occurs when a state-owned company is sold to the private
sector.

Advantages of privatisation :
 Costs will be controlled because the aim is to generate a profit
 Capital will be better managed
 Competition between firms will increase the quality of the
product

Disadvantages of privatisation :

2
  Increase of unemployment because the private sector cuts costs
 Will not focus on welfare of the community if this doesn’t
generate a profit

Enterprise, business growth and size

Entrepreneurs:
An entrepreneur is a person who organises, operates and takes risks to
make a business better.

Characteristics of a successful entrepreneur :

 Hard-working
 Risk taker
 Innovative
 Creative
 Independent
 Optimistic
 Self-confident
 Effective Communicator

Advantages of being an entrepreneur :

 Able to choose how to use time and money
 Able to make something of their interest
 Able to put their own ideas into practice
 If it is successful, profits will be high
 No need to share profits with anyone
 Earn more than a regular employee

Disadvantages of being an entrepreneur :

 They will have to use their own money, savings or find alternative
sources of finance, which can be time-consuming
 Opportunity cost of being a regularly paid employee
 It is risky because many new enterprises fail
 At first, they don’t have the full knowledge on how the things
work

Business Plans
A business plan is a document that contains the main objectives of
the business, financial information and information on the owners.
Contents of a business plan:
 Description of the product
 Goods or services they provide
 Location and how the products reach customers
 Financial information
 Organisation of the business

3
  Business strategy
 The market of the product
They are useful because:
 Banks require a business plan to lend money
 It helps the entrepreneur plan ahead, reducing the risk for
mistakes

Government Support for Start-ups

Governments support entrepreneurs because they help:
 Reduce unemployment
 Increase competition
 Increase output
 Benefit society
 Increase economic growth
How does the government help entrepreneurs:
 Business ideas and helps in training programs
 Loans and grants for new businesses
 Grants for organisations that provide training to entrepreneurs
 Research facilities in universities

Business Size
Why is it beneficial to compare business size :
 Investors to decide in which companies and how much to invest
 Banks to know who and how much to lend
 Government to decide tax progressions
 Competitors to know how the market is going
 Employees to know how much workforce is needed

Ways of measuring business size :

 Number of people employed is accessible to calculate but some
firms are capital intensive and don’t hire many people
 Number of units sold is useful for some industries, but it doesn’t
take into account the selling price
 Total value of sales is useful for retail businesses, but the prices
of different markets are very different
 Capital employed is useful for factories for example, but it isn’t
effective for labour intensive businesses
 Market share is a good way of measuring competitiveness but in
a very big market, the company may be very big, and the
percentage still be very small
Capital employed refers to the total value of capital used by the business
No method of measuring business size is correct, because they all measure
different things, so businesses choose the one, or ones, they think is best.

4
Business Growth
Benefits of expansion for a business :
 Possibility of higher profits for the owners
 Possibility of higher wages/salaries for workers, making them
more motivated
 Higher prestige for owners
 Possibility of lower costs of production
 Owning a larger market share
Business can get bigger with an internal or external expansion.
Internal expansion occurs when the business expands their activities without
involving another company, like investing in more capital, buying another
store, or hiring new employees.
External expansion occurs when the company takes over or merges with
another company.
There are four types of external expansion:

Horizontal:

This occurs when a business takes over another in the same market.
 It reduces the number of competitors
 They now have a bigger market share
 There is an opportunity for economies of scale
 Diseconomies of scale might occur if the company becomes too
big

Vertical Forward Integration :

This occurs when the company takes over a company from the same chain
of production, in the next stage of production.
 The initial company has an assured outlet
 They absorb the profit made by the retailer
 They get to know directly the consumer needs

Vertical Backward Integration :

This occurs when a company takes over another in the previous stage of
production.
 They now have an assured supply of products
 They absorb the profit of suppliers
 They can control the costs of production for the supplier
 They can prevent the supplier from selling materials to
competitors

Conglomerate :
A firm taking over a company in another industry
 Transferring ideas can help the business

5
  Diversifying risk in case a business goes wrong

Disadvantages of business growth :

 Communication becomes more complicated
 Control and organization become more complicated
 Merging with another business can generate conflicts in
management
 Expansion costs are high, and it can lead to a financial problem

Why some businesses remain small :

 Size of the market
 Owner´s interests
 Capital costs are high
 Cost of new technology is high

Why businesses fail

 Lack of management skills and poor decision making
 Financial problems and liquidity issues
 Over-expansion leading to diseconomies of scale
 Very high competition
 Failure to plan for the ever-changing environment

Legal Identity

An unincorporated business is a business where the legal identity of

the business is the same as the owner´s, so this leads to unlimited liability,
which means that in case the business needs to repay debts, the owner is
held accountable and can lose their savings. It is a very risky situation.
An incorporated business has its own legal identity, and therefor
limited liability. In this case, the owners can only lose money for the amount
they have invested in the company. It is much less risky.

Sole Trader
It is a business owned and operated by just one person. It is a form of
unincorporated business.

Advantages :
 Flexible working hours
 Easy to set up
 All profit goes to the owner
 Can attend fast the needs and wants of customers directly
 Complete secrecy in business matters
 Complete control of the business

Disadvantages :
 Decisions can be hard to make

6
  May not have the skills to run a business
 Funding can be a problem
 Unlimited liability
 Difficult to compete with larger firms
 May have to work long hours

Partnerships
A form of business where to or more people decide to set up a
business together. It can be set up by creating a partnership deal. It is a
form of unincorporated business.
The deal of partnership is a contract or legal agreement between the
owners of the business. It is not essential but recommended.

Contents of the deal of partnership :

 Amount of capital provided by everybody
 How profit will be divided
 What tasks does everyone have to perform
 How long the partnership will last
 Arrangements for cases absence or retirement from the
partnership

Advantages :
 Easy to set up
 Easier decision-making
 Greater funding
 Workload is divided among more people

Disadvantages :
 Decisions could be hard to make
 If a partner leaves, the partnership is over
 Funding can still be difficult
 Unlimited liability
 Profits need to be shared

Private Limited Company (Ltd)

A form of business where the shareholders are owners but cannot sell
shares to the public.
A shareholder is an owner of a limited company, where the share
represents the part-ownership they are entitled to.
An article of association contains the rules for owning shares of the
company. It is also present in PLCs.
A memorandum of association contains vital information about the
company. It is also present in PLCs.

Advantages :

7
  Raise capital from the raise of shares
 Limited liability
 Separate legal identity
 Continuity if a member leaves

Disadvantages :
 Cannot sell shares to the public
 Hard to sell shares
 Lots of formalities
 Accounts must be available with the public
Public Limited Company (PLC)
It is a type of business where the shareholders are owners and shares
can be sold and bought on the stock market.
The annual general meeting (AGM) is a yearly meeting between the
shareholders who want to attend, which decide the board of directors for the
following year.
Dividends are payments made to shareholders for the investment
they have made in the company. The amount of money is proportional to
the share.

Advantages :
 Can sell to the public
 Rapid expansion is possible/can appoint specialist managers
 Limited liability
 Continuity if an owner quits

Disadvantages :
 Legal formalities
 All accounts need to be presented
 It is expensive to go public
 Separation of the owners from the directors

Franchise
A franchise is an agreement where a company is allowed to use the name
and brand of another to conduct its business.
The franchisee is the one that is given permission and must pay an initial
fee and a percentage of profits.
The franchisor is the one that gives the franchisee permission to use their
name and brand.

Advantages to Franchisee :
 Chances of failure decrease
 Banks are more willing to lend
 Franchisor trains employees
 Less decisions need to be made

8
  The franchisor takes charge of advertisement

Disadvantages to Franchisee :
 Less independence
 Cannot make special decisions that regard the location or the
customers special needs
 The franchisors can retire the license whenever they want

Advantages to Franchisor :
 Franchisee buys the license, so it is an injection of money to the
business
 Franchisee manages operations
 Franchisor is paid a percentage of earning yearly
 Expansion of the business is faster

Disadvantages to Franchisor :
 Training and some aspects of management are paid by the
franchisor
 Bad reputation for the brand if a branch is badly managed
 Franchisee keeps some profits

Joint venture
In a joint venture, two or more businesses work on the same project, while
sharing costs, risks and profit, but remaining independent.

Advantages :
 Sharing of costs
 Sharing of risks
 Knowledge can be shared

Disadvantages :
 Conflict in decision-making
 Different managing styles can conflict
 Profits must be shared if the project is successful

Public Corporations
It is a business run by the government where a board of directors and
objectives are set.

Advantages :
 Government ownership may be important in some sectors
 Make sure consumers are not taken advantage of
 Important for public services
 Reduce wasteful competitions
 Help stabilise dying businesses and create job opportunities

Disadvantages :

9
  Profit is not an important objective
 Managers can be over-reliant on the government
 It can be unfair to private businesses that don’t receive subsidies
 Lack of competition can decrease efficiency
 It can be used for political reasons and not be necessarily
efficient or necessary for it to be public.

Business Activities Objectives

Business objectives:
They are aims or targets that businesses have and which help them be
successful

Benefits of having business objectives :

 Having a clear goal improves motivation
 It helps in decision making
 It helps unite the company
 They are useful to compare how the company is going to the
objectives

Private sector business objectives :

 Business survival
 Making profit
 Paying to shareholders
 Market share
 Growth of business

Why business objectives can change :

 It will only work towards profit once it is well-established
 Once it got a good market share, it will return to shareholders
 A profit-making company hit with a crisis will have the temporary
goal of survival
 Spending patterns change
 New technologies
 New sources of competition

Social Objectives:
Objectives of a social enterprise :
A social enterprise is a business whose objectives are to improve the
community, and the profits are reinvested.
 Social: Provide jobs and help the local community
 Environmental: Protect the environment
 Profits: Make profits to help even more

Objectives of public sector businesses :

 Financial: Return money to the government or reinvest

10
  Quality: Provide a good quality product or service for the
community
 Social: Generate jobs or help the local community

Stakeholder objectives:
Stakeholders are people or groups with direct interest in the success of a
business. There are two types of stakeholder groups:
 Internal: They work in or own the company
 External: Are outside the business (consumers, government,
banks, suppliers, community, environmental groups and
competitors)

Objectives :
 Internal stakeholders: They want to earn a higher
salary/wage/profit or get more important
 Customers: A good service, good price, good value for money,
good design
 Government: Increasing taxes collected, generate jobs and have
economic growth
 Bank: Wants to earn an interest on loans
Some objectives are opposite, so the managers must decide which
ones to listen to. For example, do we want to pay the workers motivated
with a higher salary or keep consumers happy with low prices.

11