GCSE Business Studies 0450
Business Studies – 1.1 Business Activity
- Understand the purpose of business activity
- Specialisation and Division of Labour
- The concept of adding value and the economic problem (scarcity)
- The Dynamic Nature of Business and the Role of Entrepreneurs
Purpose of business activity
The purpose of business activity can be defined as the production of goods and services to meet the needs and wants of people. Without businesses, the economy will not function. Its purpose is to identify and satisfy the needs and wants of the people with the overall aim of earning profit. To produce goods and services the business will be using scarce (limited) resources.
Factors of production
Businesses are established when entrepreneurs combine factors of production to produce a product or service. These four factors are:
1). Land 2).Labour 3).Capital 4).Enterprise
All businesses use four factors of production, even highly technological businesses require land as this includes all natural resources such as the oil needed for energy.
The Economic Problem
Needs are products or services essential for living such as food and water. Wants are products and services people would like to have but are not essential for living. Wants are unlimited.
The economic problem – exists because people have unlimited wants but limited resources to produce the products and services to satisfy those wants. This creates scarcity.
Consumer goods are tangible (touchable) products which are sold to the general public. This includes durable and non-durable goods.
Capital goods are physical products, manufactured specifically to be sold to other (B2B) businesses for the production of other goods and services like commercial aeroplanes.
Durable goods such as machinery, garments and mobiles can last for a long time while non-durable goods such as edible products.
The Economic Problem
People have unlimited needs and wants however, resources on our planet are limited. This scarcity of resources means that people do not have enough income, time or money to satisfy every desire. Faced with this problem of scarcity, people, businesses and governments must make a choice. Businesses must choose whether to use labour or capital to produce their products. The business must also choose the types of goods to produce. When something else is chosen, it means something else is given up (sacrificed). This choice leads to opportunity cost.
Opportunity Cost is the next best choice given up in favour of the alternative chosen. If a business has a choice of purchasing new machinery or new premises. If the business chooses to buy new machinery, then the premises will become the opportunity cost.
Specialisation and Division of Labour
Due to the limited resources on our planet, we need to use them in the most efficient way possible. Therefore, we use specialisation methods to produce products and services as fast and efficiently as possible (costs less, earns more profit). Specialisation occurs in business when employees and businesses focus on what they are best at. Dividing employee tasks they are best at will allow them to produce more, faster with less waste. Division of labour is when the production processes are split into different tasks, each done by one person or machine.
Disadvantages of Specialisation
- Boredom lowers employee motivation
- No flexibility workers do one task well
- The production process could stop when absent
- Breakdown of a machine affects all stages of production
- Using automation may lead to unemployment
Advantages of Specialisation
- Specialised employees increase efficiency and output.
- Less time is wasted switching between employees.
- Work can be automated and machines can operate 24/7.
- Repeating work makes employees skilled in that task.
- Businesses can gain economies of scale
Services are non-tangible (untouchable) and provided to satisfy the wants of people. Commercial services include banking, insurance, and transportation which are done on a large scale. Personal services are one-to-one services such as hairdressing, teaching and legal advice.
Specialisation occurs in business when employees and businesses focus on what they are best at. Dividing the employee tasks into what each employee does well.
One advantage of a business using specialisation is an increase in production because employees only perform tasks they are good at. This means that the business can be more competitive as output increases.
One disadvantage of specialisation is that employees can get bored from doing repetitive tasks. This can result in employees leaving and lacking motivation.
In conclusion, I think using specialisation will work well in some businesses like factories where employees can easily be trained to be good at one task. However, this depends on the type of business and tasks. Specialisation in my opinion is unlikely to work as well for a game designing company as it would in a factory.
The concept of adding value
Businesses create value by increasing the difference between the cost of bought-in materials and the price the finished goods are sold. There are different ways through which businesses can add value to their products and services.
Creating a brand as consumers are prepared to pay more for branded products.
Advertising can create strong brand loyalty among customers.
Customised services or better quality personalised services.
Additional features or functionality can make the consumers pay extra.
Offering convenience, for example, free home delivery or fast food.
Added value is the difference between the cost of making a product and the price the business sells it at.
Added value = Selling Price – Total Cost.
Added value is NOT the same as profit.
Methods to increase added value include:
Designing – innovative products – Apple
Quality and Efficiency – Reputation of Mercedes
Marketing – Building a strong brand – Nike
Convenience – Delivery services – Grab.
The Role of Entrepreneurs
An entrepreneur is an individual who takes the risk of starting a business. Entrepreneurs bring together the factors of production to produce goods and services. It is important to understand the benefits that entrepreneurs bring to countries when there is an increase in businesses being started. There are challenges to being an entrepreneur such as competition, identifying successful opportunities, sourcing capital and then building a customer base. Not only do they have to face these challenges but they must also possess characteristics to become successful. Two important characteristics are the willingness to take a risk and not give up (resilience).
Role of businesses in developing a country
- Businesses provide employment
- They pay taxes (Income Tax and Corporation Tax)
- They increase the GDP of the country
- They satisfy the needs and wants of the people
- Businesses bring foreign currency if products are exported
- Reduce poverty levels and increase living standards
Characteristics of successful entrepreneurs
1). Risk taker and resilience
2). Positive attitude
3). Self-motivated
4). Innovative and resourceful
5). Hard-working and dependable
6). Good communication skills
7). Creative with good problem-solving
Classification of business
Making a product and supplying it to customers involves businesses in all three sectors of the industry. For example, producing a cake.
- A farmer growing wheat (primary)
- A miller turning wheat into flour (secondary)
- The bakery makes flour into a cake (secondary)
- A shop that sells the cake to customers (tertiary)
- Transport from the farmer, miller and bakery (tertiary)
Sectors of industry
Businesses can be classified into four different sectors of industry which are primary, secondary, tertiary and quaternary. These are also known as stages of economic activity.
The importance of business classification
Over time, each sector within a country’s economy is likely to change.
Chain of Production
The chain of production begins with the raw materials and ends with the finished product arriving to the consumer. The chain of production demonstrates how businesses are interdependent because businesses rely on other businesses in different sectors for raw materials, components or distribution.
De-industrialisation
De-industrialisation happens when there is a decline in the secondary sector within a country. This usually results in a growing tertiary sector as countries become more developed.
Mixed Economy
Mixed economies are countries that have both private and public sectors. Nearly all countries have public and privately owned sectors within their economy. The privately owned sector is made up of all businesses owned by private individuals. The public sector is owned and controlled by the government and paid for by taxpayer money.
Enterprise and Business Growth
External (inorganic) business growth
Businesses can grow externally (inorganic) or internally (organic). When businesses grow externally it is done by buying or taking over another business. This external growth is also known as inorganic growth. It is important to understand that external growth is much riskier than slowly growing a business from within. This is because when a business buys another business it may not have the experience or be fully prepared to manage another business.
Internal (organic) business growth
Internal growth is considered a safer way for a business to grow over a longer period. When a business grows internally it is usually done by increasing sales, increasing production to allow the business to expand.
Exam tip
Make sure you know how to measure the size of a business. This will help you understand how a business can grow. External growth can lead to business failure due to the business expanding too rapidly and could result in a wide range of problems. Can you think of a few examples?
What a business needs to succeed
Labour skilled or unskilled employees
Land includes buildings and renewable or non-renewable resources
Capital money needed to buy factories and machinery
Customers to purchase the products.
Suppliers for raw materials or other services
Government to provide roads, schools, law and order
The Dynamic Nature of Business
The business environment is dynamic (ever-changing) and businesses must adapt to the challenges and formulate strategies to cope with these challenges.
The business environment is divided into the internal and external environment. The internal environment refers to the operating environment of the business such as the business’s organisational structure, leadership and management style, resources, vision, mission, and organisational culture. The internal environment is within the control of the business. The external environment is divided into the market and macroeconomic environment. The external environment provides challenges because it’s not in the control of a business. This environment is dynamic due to the ever-changing physical environment which includes competition, global, international, political environment, and economic environment. Businesses conduct a PEST analysis to help manage the impacts of the external environment
Reasons for business failure
Many small businesses will fail within the first two years of trading. The reasons for this are as follows:
- Lack of experience
- Insufficient capital (money)
- Poor location
- Poor credit (lack of credit rating)
- Poor inventory or cashflow management
- Personal use of business funds
Types of Businesses
Exam Tip [Application]
Remember application is not the name of the business. You should find something unique to that business for context [app] marks
Public Limited Companies (PLCs) have a separate legal identity as the business has limited liability. Public Limited Companies can also sell shares offered for sale to the general public. PLC’s are listed on the stock market.
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The members jointly own cooperatives for their mutual benefit. A common phrase to help remember cooperatives is ‘by the people, for the people’. Cooperatives started with framers coming together. Members have a vote in how the business is run and profits are shared among members.
Cooperatives can benefit from buying in bulk due to members coming together. This can help cooperatives to take advantage of economies of scale.
Often members have higher levels of motivation as they benefit from shared profits. Members also take part in decision-making as they have voting rights which can lead to additional problem solving.
Cooperatives could lack management experience unless managers are hired.
Social enterprises have three objectives, social, economic and environmental. This is known as the triple bottom line.
Social Enterprises can benefit from their Unique Selling Point of being social and environmental. Social Enterprises can come up with innovative solutions to problems, they also use capital generated by selling a product or service to achieve their social objective. As a result, they not not rely on donations such as charities.
It can be challenging to show accountability and viability of the social business models due to the small number of successful social enterprises. Social enterprises could get stuck due to a lack of investors to grow the business further.
Joint Ventures
A Joint Venture is where two or more businesses share resources and costs in starting a new project. SonyEricson is a good example of a Joint Venture between Sony and Ericson to develop a smartphone.
Sole traders are businesses owned and managed by one person. Sole traders have unlimited liability.
One advantage is that a sole trader can keep all the profits. This means that a sole trader does not need to share any of the profit. As a result, sole traders have full control of the business.
One disadvantage of being a sole trader is unlimited liability. This means that sole traders are liable for the debts of the business. As a result, a sole trader can lose their personal assets.
In conclusion, I think it will only be a good idea to operate as a sole trader if the business is not going to have debts. Later when the business grows and takes on debts it will be better to register as a Private Limited Company to gain limited liability.
Partnerships consist of 2 to a maximum of 20 partners. It’s important to note that partnerships have unlimited liability.
One advantage is that each partner can bring additional resources into the business such as skill or capital.
One disadvantage of being in a partnership is unlimited liability. This means that partnerships are liable for the debts of the business. As a result, partners can lose their personal assets.
A second disadvantage of partnership is that disagreements can occur.
Private Limited Companies are businesses owned by shareholders. They are incorporated which means Private Limited Companies have limited liability. The shares are not available to the general public.
Private Limited Companies (Ltd’s) can raise more start-up capital by selling shares privately and have limited liability. This means if the business fails the shareholders are not personally liable for the debts of the company they can only lose what they invested in the business.
Private Limited Companies (Ltds) cannot sell shares publically on the stock market and it takes longer to set up. There is also a small cost involved in setting up a Private Limited Company. Need to register with Companies House to become incorporated.
Franchises are businesses that allow others to use their brand names, promotional logos and trading methods. The franchisee buys the licence to operate this business from the franchisor.
- For the franchisee training for staff and management is provided by the franchisor.
- The chance of business failure is reduced because the brand is known and the business model has been tested.
- Enables quicker geographical growth for the franchisor.
- Capital investment by franchisees is an important source of growth finance for the franchisor.
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The franchisee agrees to pay for the licence to use the franchisor brand and also a percentage of the profit or sales revenue. As a franchisee, the owner does not have control over the product or service on offer. Rules set by the franchisor must be followed.
- The franchise may offer a sub-standard service/product that affects the brand name of the franchisor.
- Requires investment in resources to control and monitor the operations of franchisees.
Non-profit or not-for-profit are the same as charities.
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Business Stakeholders
A good starting point is to understand that internal stakeholders are the people within the business. Often students miss out on understanding that in a Public Limited Company, the shareholders are also owners. Each of the stakeholder groups wants different things. For example, within a business, the employees are likely to want higher wages or salaries and the owners want more profit. This is known as a stakeholder conflict. If the owner pays employees more the owner will make less profit due to the increased cost of labour.
Internal Stakeholders
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External Stakeholders
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There are many more external stakeholder groups compared to internal ones. The reason for this is that many different groups of people outside the business are affected by the actions of a business. For example, building a new block of offices in a small local community the community is likely to be impacted in many ways. Negative impacts could include increased noise pollution, traffic and increased competition for other local businesses. The positive impacts can include increasing employment in the local community resulting in the community becoming more attractive to other investors and home buyers which could lead to lowering the unemployment rate within the community. This also allows other businesses to grow as the money from paying local employee salaries will likely be spent in other local businesses. It’s important to consider the conflicts between the various stakeholder groups.
Business Objectives
Businesses have different objectives based on the type of business as the business grows the objectives will likely change. Business objectives are measurable targets of how to achieve the business aims. Business objectives are more specific and quantifiable aims, designed to assist in the achievement of the goals identified in the mission statement. Objectives should be SMART to make them more effective and provide a means to measure progress.
Definition of objectives
Business objectives are the aims and targets that a business works towards achieving. Objectives motivate employees and allow the business to measure success based on how likely the business is to achieve its objectives.
Setting objectives increases motivation as employees and managers now have clear targets to work towards. Decision-making will be easier and less time-consuming as there are clear targets to base decisions on. Decisions made will help towards achieving business objectives. Setting objectives reduces conflicts and helps the business towards achieving a shared goal. Managers can use objectives to measure the performance of the business.
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Exam Practice: Try to answer these questions before checking your answer.
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