UNDERSTADNING BUSINESS

• Factors of Production

  • Land
  • Labour
  • Capital
  • Enterprise
• Sectors of Industry


  • Primary
  • Secondary
  • Tertiary
  • Quartanery
• Sectors of Economy


  • Private
  • Public
  • Third
• Limited Companies


  • Owned by shareholders, controlled by board of directors, and financed mainly through selling shares
• PLC Advantages


  • Huge amount of finance can be raised by selling shares
  • Limited liability
  • PLC dominates the market
  • Easy to borrow money due to their large size
• PLC Disadvantages


  • Set up costs may be high
  • No control over who buys the shares
  • Must publish annual accounts
  • Must abide by the companies act
• LTD Advantages


  • Control of company not lost to outsiders
  • More finance can be raised by shareholders
  • BOD brings significant experience to aid decision making
  • Limited liability
• LTD Disadvantages


  • Profits shared amongst all shareholders
  • Shares cant be sold to general public
  • Must abide by the Companies Act
• Franchise


  A business agreement that allows the use of an established business brand name to sell their products/services
• Franchisor Advantages

  • Fast method of expanding without heavy investment
  • Provides a steady cash flow from royalty payments
  • Shared risk between Franchisor and Franchisee
• Franchisor Disadvantages


  • Only receives a share of the profits
  • Poor franchisee can damage company reputation
  • A weak franchisee may not return much profit
• Franchise Advantages


  • Reduced marketing costs
  • Reduced risk as the brand is already established
  • Franchiser may produce training and administration duties
• Franchise Disadvantages

  • Products, prices and layout of store may be dictated - creativity is stifled
  • A royalty payment must be paid (often a % of revenue)
  • Initial cost is expensive
• Multinational

  A business that has branches (called subsidiaries) in more than one country
• Multinational Advantages


  • Increases market share - more sales/profits should be made
  • Grants can be issued by governments to locate in their country
  • Wages and raw material costs are lower in some countries
  • Business can avoid tax or trade barriers (some countries pay more corporation tax)
• Multinational Disadvantages

  • Language barriers can slow down communication
  • Cultural differences can affect production e.g. siestas in Spain
  • Exchange rates can affect purchasing and paying expenses in different countries
  • Time differences can hinder communication between branches
• Internal Organic Growth

  The business grows on their own without getting involved with other organisations
• Methods of Internal Organic Growth

  • Launching new products
  • Opening new branches
  • Introducing e-commerce
  • Hiring more staff
  • Invest in new technology
• Justification for Internal Organic Growth

  • Can meet the needs of different market segments
  • Can reach new markets by opening up in new locations
  • Can trade 24/7 to a global market
  • Will improve sales, make better decisions and develop more products
  • Can increase productivity
• Diversification


  This is when products are launched across different markets
• Diversification Advantages


  • Increases potential customers
  • Attracts new market segments
  • Spreads risk
  • Brand is already well known – easier to launch new products
• Diversification Disadvantages


  • More machinery and equipment required – can be expensive
  • If one product gets a bad name, the brand will be tarnished
• Horizontal Integration

  When two businesses from the same sector of industry become one business
• Horizontal Integration Advantages


  • The new, larger business can dominate the market as competition will be reduced
  • The new business can benefit from economies of scale
  • Due to reduced competition, the business can raise prices, increasing profits
• Horizontal Integration Disadvantages


  • The merger/takeover may breach EU competition rules
  • Quality may suffer due to lack of competition
  • Customers may have to pay higher prices for the same goods
• Forward Vertical Integration


  When a business merges or takes over a business in a later sector of industry (usually a customer)
• Forward Vertical Integration Advantages

  • The business can control supply of its products and could decide not to supply to competition
  • It can increase profits by 'cutting out the middle man' and adding value itself
• Forward Vertical Integration Disadvantages

  • Company may be incapable of managing new activities efficiently, meaning higher costs
  • Focusing on new activities can adversely affect core activities
  • Monopolising markets may have legal repercussions
• Backwards Vertical Integration


  When a business merges or takes over a business earlier sector of industry (usually a supplier)
• Backwards Vertical Integration Advantages

  • Guaranteed and timely supply of inventory (stock)
  • No need to pay a supplier its marked up prices so inventory is cheaper
  • Quality of supplies can be strictly controlled
• Backwards Vertical Integration Disadvantages

  • Company may be incapable of managing new activities efficiently, meaning higher costs
  • Focusing on new activities can adversely affect core activities
  • Monopolising markets may have legal repercussions
• Lateral Integration


  When a business acquires or merges with a business that is in the same industry but does not provide the exact same product
• Lateral Integration Advantages


  • The business can target new markets - increase sales
  • New products can compliment existing ones
• Lateral Integration Disadvantages


  • The lack of knowledge in a different market may affect the performance
  • It may adversely affect core activities
• Conglomeration


  When businesses in different markets join together whose activities are totally unrelated
• Conglomeration Advantages

  • Spreads risk – if one market fails, the business can focus on the more profitable areas
  • Can overcome seasonal fluctuations
  • Business is larger – more financially secure
  • Gains the customers and sales of the acquired business
• Conglomeration Disadvantages


  • Lack of knowledge may affect performance
  • Having too many products across different markets can cause the company to lose focus on core activities, impacting on other products
  • The business may become too large and difficult to manage
• Merger

  When one firm combines with another
• Merger Advantages

  • Market share and resources are shared, which can spread the risk of failure and increase profits
  • Economies of scale can be achieved
  • Each business can bring different areas of expertise to the merger
  • Unlike a takeover, jobs are more likely to be spared in both businesses
• Merger Disadvantages

  • Customers may dislike the changes a merger may bring e.g. new logo as the familiarity of the previous business is lost
  • Marketing campaigns to inform customers of changes can be expensive
  • Can be bad for customers as less competition will mean higher prices