Business Studies

Notes

 Needs – Goods or services that are essential for living. These can things such
as water, basic food and clothing.
 Wants – Goods and services that people would like to have but are not
essential for living. For example, brand name clothing, expensive food and
luxury cars.
 Scarcity (The economic problem) – Unlimited wants but not enough products.
The cause of scarcity is because of not enough factors of production, the 4
factors of production are…

1.  Land – Natural resources from nature such as trees, forests and oil
2. Labour – Number of workers available to make products
3. Capital – Money required for a business to produce items this includes
machinery, robots etc…
4. Enterprise – Entrepreneurs with skills required to create a business.

 Opportunity Cost – A benefit/value that must be given up in order to achieve

something else. For example, if a bakery spends money on a new oven, the
opportunity cost of the oven could be a new refrigerator to store cakes.

 Specialisation – Workers/machines specialises in some part of the production

process. For example, At a car factory, some workers cuts metal parts, another
worker assembles the product and another paints the car. Specialisation can
help cut costs and create higher quality products.

 Division of labour – Production process has been divided into different tasks
for a specialised worker to work on. e.g. painting cars at a car factory.

Advantages of division of labour are

 Increased efficiency because the worker does the same task over and over
again.
 Workers don’t waste time moving from one task to another.

Disadvantages

 Workers may become bored doing the same task which results in decreased
efficiency
 Production may stop if one worker doesn’t do job

 
  Added Value = Selling price of the product – Cost price (materials etc…)  Value
added is the difference between the selling price of a product and the cost to
produce it.

Added value can be increased by either charging higher prices for the same product or
by reducing the cost of a product by lowering quality e.g. using cheaper materials.

Economic Sectors

 Primary Sector – Extracts and uses the natural resources from the earth. e.g.
Fishing, farming

 Secondary Sector – Manufacture goods using raw materials from primary

sector. e.g. Car manufacturers and other factories

 Tertiary Sector – Provides service to consumers and other sectors of the

industry e.g. Restaurants, car showroom, travel agent

Importance of economic sector

 The sector with the most workers is the most important in a country.

or

 The sector with most valuable goods/service is the most important in a

country.

Changes in sector importance

 De-industrialisation – when manufacturing sector becomes less important in a

country.

Why the importance of sectors changes?

 Primary sector resources get used up e.g. overfishing, deforestation.

 Factory costs (usually wages) are too high e.g. wages in China/India are
cheaper
 People spend more on the tertiary sector as they become wealthier. e.g. more
restaurants, travel agents
Mixed Economy

 Private Sector – Businesses not owned by the government but by private

individuals. (Goal = Profit)

Advantages 

High efficiency and lower costs

Competition is encouraged (prices will be lower)

Disadvantages

Some services may be closed (run out of money)

Workers may lose jobs to improve efficiency/cut cost (private sector business does not
care about employment rates in countries)

 Public Sector – Government/State owned businesses. (Goal = non-profit,

service for all citizens) e.g. Electricity, police, public transit

Advantages

Business is funded by government

Encourage more jobs

Disadvantages

Low efficiency

No competition between businesses

Enterprise and entrepreneurship
Entrepreneur – A person who organises, and operates a business.

Characteristics of successful entrepreneurs

 Hard working – Long hours of work are needed to become successful

 Risk taker – Entrepreneurs never know if business idea will succeed
 Creative – Business ideas different from competitors
 Self-confident – Necessary to convince banks and investors.
 Effective communicator – Talk clearly to banks, customers, employees about
business.

Business Plan – Document with important information about your business e.g. Business
objective, operations, finance, owners

Business plan is needed to

 Apply for bank loans

 Plan business to reduce risk of failure

Business plan includes 

 Products and services that you will sell

 Costs of your business
 Location of the business
 What do I need to operate my business e.g. Machines, employees

Governments supports new businesses because

 New businesses creates jobs (reduce unemployment)

 Increased competition (Businesses competing with each other means prices
may be lowered)
 Business may grow larger and contribute to the country

Government supports new businesses by

 Loans at low interest rates

 Land to set up businesses at low costs
 Grants (money) to train employees
 Use research facilities at public universities
 Business advice from experts
Methods of measuring size of a business

 Number of employees – Easy to calculate and compare with competitors.

However, some businesses can produce higher output with fewer employees.
e.g. Some factories uses machines.

 Value of output  – Easy to calculate and compare with competitors. However,

some businesses may be very small but producing very expensive products
such as brand name clothing while a very large factory may be producing cheap
clothing.

 Value of sales – Easy to calculate and compare with other businesses.

However, value may be different for businesses for example, a sports car
dealer may sell 2 cars a day while a normal car dealer e.g. Toyota may sell 20
cars a day.

 Value of capital employed – Simple to compare with other businesses.

However, this method is inaccurate because different factories will use
different types of capital e.g. A factory may use expensive machinery and
another may depend on employees.

There is no perfect way to compare businesses. Every business is different.

Why some businesses grow and other remain small

Why do businesses grow?

 Increased chances of higher profit

 Better status and prestige of the owners and employees
 Lower average cost (more negotiating power)
 Increased control of the market

Ways businesses can grow

 Internal Growth – Business grows by itself (Business gets larger as profit

increases e.g. more customers)
 External Growth – Take-over or merger with another business.

1. Horizontal integration – Firms in the same industry at the same stage of

production merges. e.g. 2 Bakeries merging to form a larger business
 2. Vertical integration – Business expands by merging with another business in
another stage of production. There are 2 types of vertical integration.
Backwards and fowards. Backward vertial integration is when a business
merges with another business in the previous stage of production for example,
Bakery merges with wheat farm. Foward is when a business merges with a
business in the next stage of production e.g. Sugar farm merges with candy
factory.

Advantage of vertical integration is to have more control over distribution of goods and
services.

Conglomerate merger – Two businesses in a completely different industry combine to

form a new business. e.g. Insurance company buys an advertising agency.

Joint Ventures – Two or more business agree to start a new project together.

Problems of business growth

 Large businesses are difficult to control. Solution – Operate in business in small

parts.
 Costs of expansion are high. Solution – Expand slowly
 There can be poor communication in large businesses. Solution – use
technology to communicate e.g. email. Operate the business in small parts.

Why do some businesses remain small?

 Type of industry e.g. hair salons stay small because of the connection with
their customers, if they grow too large they won’t be able to offer personal
service to their regular customers.
 Market size Some businesses such as stores in small towns are likely to remain
small due to the limited amount of customers. Businesses that produce
specialised goods such as brand name clothing or luxury cars are also likely to
remain small.
 Owner’s objective Some owners want to keep their businesses small to keep
full control and know all their employees and customers. Running a large
business can become stressful.

Why some businesses fail

 Poor management – Many businesses fail due to poor management from lack
of experience by the managers.
  Failure to plan for change – The business environment is constantly changing,
Businesses need to change to keep up with technology.
 Poor financial management – Shortage of money means that the businesses
cannot be operated. Businesses needs to always make sure they have enough
money
 Over expansion – Some businesses expand too quickly and not have enough
money to operate.
 Startup risk – Starting up a new business is always risky, entrepreneurs may
lack experience and not be able to compete with larger businesses.

Main features of different forms of business organization

Unincorporated Business – A business that does not have a separate legal identity from
its owner(s) e.g. If the business is sued, the owner is responsible and may need to cover
the cost with their own personal money.

Incorporated Business – Business that has a separate legal identity from its owner(s) e.g.
If the business goes bankrupt, the owners won’t be held responsible and only lose the
money they invested.

Unlimited Liability – (Owners are held liable for the business. If the business goes in
debt, the owner needs to pay back with their own money.

Limited Liability – (Opposite of Unlimited liability, If a business fails, the owners only
lose what they invested)

Main forms of business organisations

Unincorporated Businesses

Sole Trader – Owned and operated by one person.

Advantages
  Cheap and easy to startup
 Full control of your own business

Disadvantages

 Unlimited Liability
 If the owner dies, the business no longer exists
 Less money / difficult to expand business

Partnership – Similar to a sole trader but there are 2 owners.

Advantages

 2 Owners mean that more money can be invested

 Less work since tasks can be done by 2 owners.
 Losses can be distributed among the 2 owners

Disadvantages

 Unlimited Liability
 If one owner dies/quits, the business no longer legally exists.
 There can be disagreement between the 2 owners.

Incorporated Businesses

Private limited company (LTD) – Owned by shareholders.

Advantages

 Limited Liability to all shareholders

 Capital can be invested by many shareholders
 Cheaper to set up than public limited companies
 Continuity of existence – If the business owner dies, the business still exists.

Disadvantages

 Slower to startup (many legal documents needs to be signed)

 Shares can only be sold to family and friends
  Other shareholders need to agree before shares can be sold

 Public limited company (PLC) – Similar to a private limited company but shares
can be sold to the public. Great for large companies.

Advantages

 Limited Liability
 Shares can be sold to the general public without permission (Capital (Money)
can be raised quickly)
 Continuity of existence
 Company can grow and expand quickly

Disadvantages

 Complicated legal documents (Wastes money and time)

 Expensive to start up
 Company can grow large very quickly which will be difficult to control
 Original owners of the business may lose control of the company
 Shareholders may vote who manages the business in AGM (loss of control)

Annual General Meeting (AGM) – Meeting that must be held every year for shareholders
to vote for the company’s next directors.

Shareholders – Owners of a limited company, they buy shares which represent the
percentage they own of the company.

Franchising
Franchisor – Company that owns the original business, Franchisors sell the franchise to a
franchisee

Advantages

 Make money from selling the business’ name to franchisee

 Quick growth of the brand
 Operation of the business is the franchisee’ responsibility

Disadvantages
  If one franchisee has a bad reputation, the entire franchise will be effected e.g.
If one Macdonalds store served bad food, all the other Macdonald stores will
have a bad reputation.
 Profit from franchised stores are kept by the franchisee

Franchisee – Someone who buys a franchise from the franchisor to use the brand name

Advantages

 Less chances of failure since the business is well known.

 Most of the advertisements are paid by the franchisor
 Less decision making is required from the franchisee e.g. food recipe is already
planned from franchisor
 Staff training may be provided from franchisor

Disadvantages

 Franchisee won’t be able to make own decisions e.g. come up with own menu
 Franchisee needs to pay the franchisor to use brand name

Joint Ventures – 2 or more businesses start a new project together.

Advantages

 Costs can be shared amongst the companies

 Knowledge and skills from more than one company
 Risks are shared (If the project fails)

Disadvantages

 Profit is shared
 Businesses may disagree with each other.
Businesses can have several objectives – and the importance of these can change
Business objective - a target that a business works towards.

Why are objectives important for a business?

 They act as a motivator as they give managers and workers a target to move
towards
 Helps with decision making (managers will know what is better for the business
to reach its target)
 Can make the entire business work toward a goal
 Managers can see if the business has achieved its goals or not.

Objectives that businesses set

Businesses often set multiple objectives which can change over time

 Business survival – This is common for new businesses and businesses in bad
economic times
 Profit – Businesses want to maximise profit.
 Growth – Businesses may want to grow for various reasons. Common reasons
for business growth is to obtain a higher market share, increase jobs etc…
 Return to shareholders – incorporated businesses (Private and public limited
companies) are owned by shareholders. There are 2 main ways to return to
share holders 1.Businesses profits can be paid to shareholders as dividends and
increasing share price will keep the shareholders happy so managers won’t be
voted out.
 Market share – Businesses want to obtain a higher market share. The
advantages of this is to make the business more well known. With a higher
market share, the businesses may also be able to negotiate lower costs from
suppliers (economies of scale)
 Providing a service to society – Social enterprises are privately owned
businesses that focus on  1. providing a service to society such as providing
jobs to disabled or homeless people or  2. Protecting the environment.

Business objectives are likely to change over time. For example, A new business has
survived a few years so the managers decide to change the objective to maximising
profit.
The role of stakeholder groups involved in business activity
Stakeholder – A person or group with a direct interest in the performance and activities
of a business.

List of stakeholder groups

Internal stakeholders

 Owners – These are people who invested and set up the business. Objective
= Profit so they make money from the business.

 Workers – Employees of the business.  Objective = Payment for their work,

job promotion (increased salary), job security.

 Managers – Employees that control other workers. Objective = Higher salary,

job security, Successful company means better status.

External 

 Consumers – Customers who buy goods and services from the

business. Objective = Good products from business, reliable service and
maintenance from the company.

 Government –  Responsible for the economy of the country, laws to protect

customers and employees. Objective = Successful business means more jobs
(less unemployment), Tax paid by the business and the business’ contribution
to the country’s output.

 Community – Interested in how the business affects the local community, e,g,
employment, environment. Objective = Jobs for people, environmentally
friendly business, safe products for the customers.

 Bank – Lend money for the business to startup. Objective = Wants the

business to have enough money to pay them back.

These stakeholder objectives may conflict for example, 

 Managers of a business want to build a factory in an area however the local

community are against this as it may cause pollution and noise in the area.
 Owners want to use cheaper low-quality materials to lower product costs and
increase profits however consumers are against this as the quality of the
products they are buying will be lowered.
 Demonstrate an awareness of the differences in the aims and objectives of private
sector and public sector enterprises
Private sector business objectives

 Business survival
 Profit
 Growth
 Returns to shareholders
 Market share
 Service to society

Public sector business objectives

 Provide service to the public

 Increase living standards of the public e.g. health care, education
 Increase jobs to lower unemployment in the country

Draw, interpret and understand simple organisational charts

Definition of Organisation Structure

Organisation structure refers to how responsibility and authority is shared in a business

organisation. 

This is often displayed in the form of an organisational chart. The 2 common type of
charts are

 Tall organisational charts – These have a long chain of command and a small
span of control
 Flat organisational charts – Short chain of command, wide span of control

Advantages of an organisational chart 

 Shows how everybody is linked together in a business

 Lines of communication are clear
 Motivational as employees can see where they belong and can plan their
career paths
Chain of Command – is how the power and authority is passed down from the top of the
organisation (managers) to lower employees

Span of Control – The number of employees working directly under a manager.

Levels of Hierarchy – Number of layers in an organisation structure

Advantages of short chain of command

 Faster communication – Communication is quicker and more accurate since it

is passed on by fewer people.
 Stronger relationship between high-level managers and employees – This is
because there are fewer levels between managers and employees.
 Each manager is responsible for more employees – This encourages them to
delegate (pass down) more work to employees.

De-layering – removing an entire row of management

The role of management

Roles of managers in a business.

1. Planning

 Set goals for the future of the organisation.

 Give the business a sense of direction and purpose (e.g. we will aim to increase
sales by 10% by next year.)
2. Organising

 Organising of people and resources so that the business operates efficiently

(Managers can’t do everything, they must delegate tasks to other employees)

3. Coordinating

 Making sure all departments are working together to achieve the overall
objectives and plans of the organisation. (e.g. Manager makes sure marketing
and operations department work together to plan for a new product launch)

4. Commanding

 Guiding, leading and supervising of employees in the organisation. (Managers

need to make sure that employees are doing their work!)

5. Controlling

 This involves monitoring performance to ensure that objectives will be met.

Delegation – Passing down authority and responsibility to a subordinate (employee)

Advantages of delegation

 More time for manager to do other tasks

 More interesting and rewarding work for employee (motivational)
 Employee feels trusted (motivational)
 Trains employee to do important tasks.

The importance of a well-motivated workforce

Motivated worker – A hard working employee who works effectively for a business.

Why do people work?

 Money – People need money to buy food, water and other items they need to
live.
  Social needs – People just like us likes to feel part of a team, socialise and
make friends.
 Esteem needs – Feeling important, feeling that they are contributing to a
business.
 Job satisfaction – enjoyment from the work and achievements they
have accomplished.
 Security – Feeling of having a secure job with a stable income. (not likely to
lose job etc…)

Abraham Maslow’s hierarchy of needs

Abraham Maslow’s theory states that the more levels of needs achieved by the worker
= the higher motivated they will become. This also means that each level of motivation
must be achieved before an employee can move to the next level of motivation.

Criticisms

 These needs to not apply to all employees (all humans are different)
 Difficult for managers to determine which needs their employees need

F.W. Taylor’s theory

Employees are motivated by money.

More money = employees become more motivated

Criticisms

 Employees can be motivated by other factors not just money

  There is no guarantee that all employees will work harder if they are paid more
 There are many jobs where output cannot be measured easily (difficult to
determine if employee actually works hard)

Federick Herzberg’s theory

There are 2 factors Hygiene & Motivation factors. Workers expect hygiene factors to be
available to them otherwise they will become demotivated. Hygiene factors will not
motivate the workers only motivation factors will make the employees work harder.

Methods of motivation
3 Ways to motivate employees

 Financial rewards
 Non-financial rewards
 Job satisfaction

Financial Rewards

 Wages (time rate) – Payment for a period of time such as amount per hour e.g.
$10 per hour.

Cons –  Good & bad workers get paid the same, Recording every employee’s working
hours may be complicated, costs business to hire an employee to calculate each workers’
wage.

 Wages (piece rate) – Workers paid depending on quantity of product produced

e.g. $2 for every bicycle assembled.

Cons – Workers may rush and produced bad quality products, Workers that make slow
high-quality products will get paid less.

 Salaries – Employees paid monthly, often used to pay office workers.

Managers only need to calculate salaries once a month which uses less time.
Additional Payments (Money added to salaries)

 Commission – Sales staff are often paid a small percentage of the selling price
of the product they are selling e.g. If a car salesman sells a car, the salesman
might get 20% of the selling price of the car which is added to his salary.
 Profit sharing – Employees receive share of the company’s profit. This benefits
the company because employees will want the company to have a higher
profit.
 Bonus – Money paid to workers when they work well usually at the end of the
year.
 Performance related pay – Employee’s pay is linked to the effectiveness of
their work. This is often used with jobs where output cannot be easily
measured.
 Share ownership – Employees are given some of the company’s shares. This
makes them work hard as prices of shares may increase if the business is doing
well. + This also makes the employee feel that they are part of the company.

Non-Financial Rewards
Non-financial rewards given to employees are also called perks or fringe benefits.

Some examples include

 Health care paid by company

 Company cars
 Free trips / company holidays
 Employee of the month
 Free meals
 Discount on company’s products
 Free housing
 Children’s education fees paid by company

Job Satisfaction

 Pay
 Promotion
 Working conditions
 The work itself
 Status of the job

Ways to improve job satisfaction

 Job Rotation – Workers swap roles to do different tasks. This stops the
employee from getting bored.
 Job Enlargement – More extra tasks are given to the worker so they have a
variety of things to do. However, these tasks should not be more difficult. e.g.
supermarket cashier now adds price label on items.
 Job Enrichment – Adding tasks that require more skill and responsibility. e.g.
receptionist employed to greet clients now deal with telephone enquiries.
 Autonomous work groups & team working – Working in teams make
employees more interested in the tasks since they can organise themselves.