Business 9609

Revision notes with

Sir Muzammil Ameer
UNIT 1: Business and its environment
SIR MUZAMMIL BUSINESS SCHOOL
 Purpose of Business activity

Business activity means to produce goods and services as required by customers to use
factors of production
Its main purpose is to
 Earn profit
Explain one purpose of business activity [3]
(Business activity helps to earn profit as in business activity a business produces goods
and services that are required by customers so it sells to those customers more than
its cost price and earns profit) 3 marks
 Satisfy the needs and wants of customers
 Factors of production

Resources (input) needed for business activity to produce goods and services
 Land (natural resources

 Labour (human power)

 Capital (machinery, investment)

 Enterprise (a business that combines other 3 factors of production given above)

 Adding value and ways to increase value added

 It is the difference between the cost of

material bought and the selling price of
finished goods

 It can be increased by reducing the cost to

find low price suppliers or increasing the
selling price with an attractive
advertisement, USP, etc.
 Opportunity cost

It is the benefit of one option

being forgone by choosing
another option
 Dynamic business environment

Business environment is dynamic in that it keeps on changing

whether in terms of technological improvements, shifts in
consumer preferences, or entry of new competition in a market.
Changes can be mainly economical changes, legal changes,
technological changes, etc. If any business will not dynamically
behave, it may face many difficulties from the consumer
behavior
 Reasons for businesses to succeed or fail

 Capital
 Skilled workforce
 Competition
 Planning
Analysis one reason why a new business may fail [5]
A business may fail because of a lack of capital because capital helps in paying daily
routine expenses or invests in new technology, particularly for a new business with less
revenue at the start so because of less capital, the business is unable to meet necessary
expenses for example, payment of wages to workers, this may lead to high labor
turnover as workers may not ready to work without salaries so, therefore, it may stop
operations of business activity resulting high costs to operate without less revenue
 Differences between local, national,
international and multinational businesses
Local businesses
 Operate in a small & well-defined part of the country
 No attempt to expand to across the whole country
 Small construction businesses, Hair Salons, Family Businesses
National Businesses
 Branches & operations across the country
 No attempt to expand to other countries
 Large car dealerships, Retail shops, National banking firms
International businesses or Multinational businesses
 Operate in more than one country
 Differences can be in currency, distance, legal, and culture
 Entrepreneurs and qualities

A person who takes the risk to start a new business with his/her available resources
Qualities of a Successful entrepreneurs
 Hardworking
 Creative
 Leadership skills
Analyse one quality of a successful entrepreneur [5]

An entrepreneur should be creative because creativity can bring new ideas in a highly
competitive market where it operates so new ideas may lead to making it distinctive from
other businesses therefore it can gain more success for example IKEA a large furniture
manufacturer is more successful because of its creative designs
 Intrapreneurs and qualities

An intrapreneur is an employee who

is tasked with developing an
innovative idea or project within a
company.
Qualities of a successful intrapreneur
 Innovative
 Creative
 Role of entrepreneurship in creating and starting up a
business

 Identify market needs

 Make a business plan

 Allocate resources
 Role of intrapreneurship in the ongoing success of a
business

Intrapreneurship involves an employee developing new

ideas or products within an existing company
 New ideas so bring innovations

 Creative tasks in performance

 Barriers to entrepreneurship

 Risks of failure
 Lack of capital
 High competition
Analyse one barrier to entrepreneurship [5]
 One barrier can be a lack of capital because not
everyone has enough money to start a new business
and also very less options for borrowing are available
for a new person as no one wants to put his money at
risk so this may lead to starting a new business only
for those people who have own investment therefore
very rare people takes the risk to start their own
business with their own investment
 Business risk and uncertainty

 Anything that threatens a company's ability to

achieve its financial goals is considered a business
risk. The sources of business risk can be changes in
consumer taste and demand, the state of the overall
economy, and government rules and regulations etc.
 In business, uncertainty occurs when there is a lack
of information, making the future hard to predict.
 The main difference between risk and
uncertainty is that risk is measurable while
uncertainty is not measurable or predictable.
Uncertainty is not yet a risk. All risks are uncertain,
but not all uncertainties are risks
 Role of business enterprise in development of a country

 Employment opportunities
 Increase GDP
 Increase the income of the government

Analyse one role of business enterprise in the development of a country [5]

 One role can be they reduce unemployment in the country because each
business needs manpower for operating it so people get jobs in the different
positions of the business as per their skills. This lead to improve living
standard and can meet their financial needs therefore government saves its
unemployment costs to pay any unemployed people
 Business plan

 A document that shows the goals or aims of the business

and the ways how to achieve these aims or goals
Key elements of business plans
 Business aims or objectives
 Production details
 Financial forecasting
 Marketing details
 Benefits and limitations of Business plan

 A Helps in getting loans

 Better planning of resources
ˣ No flexibility
ˣ Not considering external environment

Analyse one benefit of having a business plan [5]

A business plan enables one to take a loan from a bank because it will show
the financial forecasting details about revenue, expenses and profit of that
business, so this will lead to taking a quick decision from the bank that either
that business is able to pay back or not therefore easy to attract investors if
there are clear objectives and its planning to achieve them
 Sectors of the economy
 Primary sector
It includes such businesses that involve extracting and managing raw materials for production. For
example, mining, drilling, foresting
 Secondary sector
It includes such businesses that take raw materials from primary sectors and convert them into
finished goods. For example, construction, processing, and manufacturing industries
 Tertiary sector
It includes such businesses that provide many services to manufacturers and consumer in the
distribution of goods and services. For example, banking. Insurance, communication, transport
businesses
 Quaternary sector
It is the sector of mind, knowledge, and skill. It creates value for society from technology applications
or human creativity. For example, AI, 3D printing, software’s etc.
 Public and private sector businesses

 Public sector includes such businesses that are owned and

controlled by the government. Their main aim is not to earn
profit. Government hospitals, schools, etc.
 Private sector includes businesses owned and controlled by
private individuals whose main aim is to earn profit. Private
airline companies or banks
 Reasons for changing relative importance of primary,
secondary and tertiary sectors

 More disposable income so a rise in the demand for

services
 More employment opportunities
 Development of new technologies and services
 Industrialization
 Demographic changes
 Deindustrialization
 Consequences of the changing relative importance of
these sectors

 Jobs replaced with machinery

 More output

 Service and technological sectors have increased

 Sole trader, advantages and disadvantages

An unlimited liability business that is owned and controlled by a

single person. All profit belongs to him
 Freedom in decision making
 No legal formalities
× Lack of capital
× Unlimited liability
 Partnership , advantages and disadvantages

An unlimited liability business that is owned and controlled by

more than one person. All profit is distributed between partners
 Responsibilities/workload can be shared
 More funds available as compared to sole trader
 No legal formalities
× Conflict in decision making
× Unlimited liability
 Private (Ltd) , advantages and disadvantages

A limited liability business whose shares are only available to

friends and family members. It is not listed in stock exchange
 Limited liability so attracts investors
 Can manage finance quickly
× Legal formalities
× Restricted not to sell shares to the public for finance
× Disclose accounts to the government
 PLC , advantages and disadvantages

A limited liability business whose shares can be issued on the

stock exchange to raise finance from the public usually called
shareholders. For example Google, Apple
 Limited liability so attracts investors
 Can manage finance quickly
× Legal formalities
× Disclose accounts to the government so no secrecy
 Franchise , advantages and disadvantages

A business that makes an agreement to use the name, logo, or trading practice of an already available
established successful business in the market against the payment of a license fee. The person who pays
the license fee is known as a franchisee and the person allows to use its business name is knowns franchisor
Advantages and disadvantages to franchisee
 More chances of success
 Advertisement cost saved
× License fees so high capital cost
× No freedom in decision making
Advantages and disadvantages to the franchisor
 License fee
 Expansion of business without investment
× More supervision needed
× Bad image of one franchise can damage a business reputation
 Co-operatives , advantages and disadvantages

 Members-owned organizations where each member has

one voting right for the selection of governing body. For
example, agriculture cooperatives of farmers, retailers’
cooperatives, housing cooperatives
 there are equal voting rights for members so encourages all
 this structure encourages member contribution and shared
responsibility
 liability for members is limited
 there is no limit on the number of members
× Underinvestment is a significant challenge that cooperatives
face
× Slow decisions come out of cooperatives
 Joint ventures , advantages and disadvantages

 An agreement between two businesses that share costs, expertise and

finance to start a new business. In such agreement, an international
business enters into an international market with the joint venture of any
local business to get knowledge of its market.
 Costs is shared
 Expertise is shared
 Market knowledge is shared
× Conflicts in decisions
× Culture differences
 Social enterprise and its objectives

 A private business seeks to earn profit from its business

activity but its main objective is to provide benefit to society
with its available profit.
Triple bottom line objectives
 These are three major objectives of social enterprise
 Economic objective (earns profit for the society), Social
objective (provides jobs to the disadvantaged community),
and Environmental objectives (use sustainability in the
production process)
 Limited liability and unlimited liability concept

Unlimited liability
 A feature in an unincorporated business where the personal assets of owners are
at risk if that business faces losses. They have to sell their personal assets to
cover the business’s liability in the case of liquidation. Sole traders and
partnership businesses are unlimited liability businesses
Limited liability
 A feature in an incorporated business where the personal assets of owners are
not at risk if that business faces losses. Their personal assets are protected to
cover any business’s liability in the case of liquidation. Private limited companies
and public limited companies are limited liability businesses. It attracts investors to
invest more because of the financial protection of personal assets
 Changing of business structure

Sole trader to partnership

 Responsibilities/workload can be shared
 Profit is shared so less income
Sole trader to a private limited company
 Limited liability
 Workload can be shared
× Profit is shared
× Legal formalities
 Ways to measure business size

 Number of employees
 Value of sales
 Value of capital employed
 Market share
 Marketcapitalization (total value of the company in the stock
market. It is calculated by no. of shares x share price
 Small businesses, advantages and disadvantages

 Small businesses refer to businesses with small operating sizes. There are several
criteria for categorizing companies based on their business size, including the number of
employees, income, invested capital, market capitalization, and output volume
Advantages and disadvantages of being a small business
 Easy to manage
 Close contact with customers
× Lack of finance
× Risk as low revenue
× Uncertainty about future
× Possible lack of guidance
 Role of small businesses in the economy

 Jobs created
 Increased GDP
 Pay taxes to increase government income
 An integral part of large industries
 Provides raw materials to large industries
Family-owned business, advantages and disadvantages

 Strong commitment
 Loyalty
 A certain comfort in working together
× Lack of skills
× Family conflicts
× Favoritism in promoting staff
 Reasons for Business growth

 Increased profit
 Increased market share
 Risk spread
Analyse one reason why a business wants to grow [5]
One reason can be to increase profit because growing a business can
increase its revenue to attract more customers which may lead to
covering its expenses leading to more profit, therefore, this profit can
be used for its expansion which may result in to increase in market
share and can become the market leader
 Types of Business growth

 Internal growth (organic growth)

 External growth
 Internal growth vs. external growth

 Internal growth occurs when a business opens its new branch,

office, or factory at some other location by using its available
resources.

 External growth occurs when a business merges or buys another

business
 External growth

 Horizontal growth (when a business merges or buys another business at the same
stage of economic activity. For example, a bank buys another bank)
 Vertical growth (when a business buys or merges with another business at the next
stage of economic activity is known forward vertical growth and previous stage of
economic activity is known backward vertical growth. For example, a cinema buys
film production company is backward vertical and milk processing factory buys a
retail chain of milk supplier is forward vertical growth)
 Conglomerate diversification This growth occurs when a business buys or takes
over to very different nature business. For example, a banks buys a film production
business
 Friendly merger vs. unfriendly merger

In a friendly takeover, the target

company's management and board of
directors approve the takeover
proposal and help to implement it.
However, in a hostile (unfriendly)
takeover, the management and board
of directors of the targeted company
oppose the intended takeover
 Impact of merger on stakeholders

 Cost
reduction for customers in horizontal takeover because of
economies of scale (low cost advantage for large in size)

 Monopoly for customers to charge high price

 Job security for large in size

 Reasons why merger may not achieve objectives

 Culture differences

 Communication problems

 Unskilled management
 Joint venture vs. strategic alliance

 A joint venture refers to a business arrangement that involves two or

more businesses joins together to carry out a specific project or task.
For example, Google and NASA entered into a joint venture to create
Google Earth
 there is one key difference: With a strategic alliance, no new legal entity
is created. Strategic alliance involves some form of technology and/or
knowledge transfer in manufacturing, marketing, or R&D. for example,
making a regular contract with a supplier is a strategic alliance
 Business objectives and its importance

 A quantifiablegoal that businesses keep to achieve in the future is

known business objective and these must be SMART
Importance of business objectives
 Gives direction to work
 Helps in setting targets for departments, employees
 Evaluate performance for all
 Corporate social responsibility and its benefits

 It includes all such activities and decisions that shows positive

impacts on all stakeholders other than owners. A business consider
itself as a social responsible business
Benefits of implementing CSR
 Good reputation
 Marketing opportunities
 Attracts investors
 Relationship between MOST

 Mission statement is a written statement that shows the core aims or goals of the
business to its stakeholders. It shows the business philosophy to its stakeholders
 Objectives are quantifiable goals that a business sets to achieve in future
 Strategies are long term action plans to achieve any objective
 Tactics are short term plans used in business strategy

Relationship in MOST can be describes as first mission statement is made to show core
philosophy of business. To meet mission statement, a business sets its objectives to all
departments and individual level. Strategies are made to achieve objectives and tactics
are helpful to make strategy successful
 Reasons why objectives may change over time

 Previous objectives achieved

 External factors

 Government legislation
 Reasons for communication of objectives to workforce

 Objectives must be communicated to workforce and departments

so that they can set their targets and budgets to achieve objectives

 Payment system can be set on accomplishments of objectives for

workers.
 Business ethics and its influences on objectives and activities

It includes behavior of business with its stakeholders. It reflects the

personality of business and how it treats to its stakeholders
Ethical behavior helps to achieve objectives. In the long term, it
increases positive business image however, in the short run it
increases costs
Ethical behavioral prevents business for many activities. For example,
stop bribery to get government contract, stop child labor to save cost,
 Stakeholders

An individual or group of people who can be affected by any business

decision is stakeholder.
These can be
 Internal stakeholders
 External stakeholders
 Roles, rights and responsibilities of stakeholders

Roles refer to one's position as a stakeholder.

Rights are granted obligations that a business is supposed to provide
to each stakeholder
Responsibilities refer to the tasks and duties of their particular role
For example, role of a supplier is to provide raw material and his
responsibility is to provide it on time and right of supplier is to get
payment on time
 Impact of business decisions on stakeholders, and their reactions

 A business decision for expansion can affect its many stakeholders

either positively or negatively and their reaction can also be different

 Stakeholders aims are very important to be consider for business

decisions for example owner wants high profit so business decisions
might be expansion
 Reasons why a business needs to be accountable to its stakeholders

 Many stakeholders affect by many business decisions so it is

accountable for all to consider the aims of all.
Ways for accountability from a business to its stakeholders
 Hold AGM for its shareholders in the case of plc
 Provides salary on time to employees
 Pay on time to suppliers
 Conflict in stakeholders objectives

 Aims of many stakeholders conflict with each other for example

employees and owners etc.
How changing business objectives might affect its stakeholders
Effect on supplier
 A business may change its objectives over time for example a
business changes its objective from survival to expansion so it might
order more raw materials from suppliers
 Conclusion

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