3.1 What is a Business

• Business


  Part of the economy that is not state controlled, and is run by individuals and companies, usually for profit
• Key business objectives


  • To make money
  • To provide a service
  • Provide employment opportunities
  • Fill a gap in the market
  • Help the community (social enterprise)
  • Be environmentally friendly
  • Improve existing products
  • Survive
• Mission Statement


  Provides the overriding goal of a business and the reason for its existence; and a strategic perspective for the business and a vision for the future
• Benefits of a good mission statement


  • Clarifies purpose and focus
  • Motivates staff and those interested in the business
  • Attracts people (such as investors) and resources
  • A good public relations tool
• Characteristics of a good mission statement

  • Contains a formulation of objectives that enables progress towards them to be measured
  • Differentiates the business from its competitors
  • Defines the markets or business in which the firm wants to operate
  • Is relevant to all major stakeholders – not just shareholders and managers
  • Excites, inspires, motivates, and guides – particularly important for employees
• Criticisms of mission statements

  • Not always supported by actions of the business
  • Often too vague and general
  • Views as a public relations exercise
  • Sometimes regarded cynically by employees
  • Not supported wholeheartedly by senior management
• Corporate aims and objectives

  • Mission statement – the overall reason for the business' existence
  • Corporate aims – the long term targets and plans to fulfil the mission statement
  • Corporate objectives – the medium to long term quantifiable targets to fulfil the mission statement
  • Corporate strategy – the actions to be taken by the business to achieve its objectives
• Types of business objectives

  • Ethical
  • Profit
  • Growth
  • Survival
  • Cash flow
  • Social
• Main functions of objectives

  • A clear statement of what needs to be achieved
  • Focus' on all activities of the business (marketing, operations, finance, human resources)
  • Provides targets for individual and group achievements
  • A means of measuring performance (business, departments, individual employees)
  • Provides a clear focus for decision making and a target to aim for
  • Provides criteria for evaluating performance
• Profit


  Revenue - total costs
• Importance of profit


  • Motivator
  • Further investment
  • Stakeholders
  • Finance
  • Success
  • Reward
• Private


  Part of the economy that is not state controlled, and is run by individuals and companies, usually for profit
• Public


  Businesses and organisations which are owned and run by the government
• Factors affecting choosing business forms


  • Finances (including sources of)
  • Size
  • Taxes
  • Profit (who shared with)
  • Risks
  • Ownership and control
  • Registrations and payment
  • Liability (limited and unlimited)
• Unlimited Liability


  Owners are personally responsible for the debts of the business. This means their personal possessions such as their cars etc would pay for debts should the business go bankrupt
• Limited Liability


  The business has its own legal identity
• Strengths of a sole trader


  • Don't need to register anywhere (only have to tell HMRC)
  • Owner keeps all of the profits
  • Can't sell shares so have complete control
  • Are their own boss – no arguments
• Weaknesses of a sole trader


  • Unlimited liability – can take personal possessions if the business goes into debt
  • Can't sell shares so no extra money Little start up capital to being with
• Strengths of a private limited company


  • Limited liability – can only take assets that belong to the business to pay off debts
  • Own legal structure
  • Can use lots of ways to raise finance
• Weaknesses of a private limited company


  • Profits must be shared with the shareholders in the form of dividends
  • Corporation tax
  • Have to pay to register the business
• Strengths of a public limited company


  • Limited liability – can only take assets that belong to the business to pay off debts
  • Own legal structure
  • Can use all types to raise finance
• Weaknesses of a public limited company


  • Profit must be shared with the shareholders in the form of dividends
  • Corporation tax
  • £50,000 raised money to register with the Companies' House
• Shareholders


  They are the owners of a limited company and they gain their financial reward from share ownership in two ways: a share of the profits earned by the company – paid out as a dividend, and growth in the value of their shareholding (compared with the cost of buying the shares) – which is "realised" when the shareholder sells the shares to someone else
• Shareholders in public companies whose shares are traded on the Stock Exchange have a daily insight into the returns their investment is making: the share price indicates the market value of the business (share price x number of shares in issue), the latest share price can be shown as a multiple of the most recent annual earnings (or profits) per share, to show a valuation ratio known as the Price/Earnings ratio, the latest annual dividend can be compared with the share price to indicate an annual return ("dividend yield")
• Market Capitalisation


  This represents the total market value of the issued share capital of the company. = the current share value x the number of shares issued
• Factors that affect share price


  • Number of shares available
  • Business expansion
  • Investment
  • Publicity
  • E-commerce
  • A recession
• How ownership affects mission, objectives, decisions, and performance

  • Mission and Objectives – depending on business form: Sole trader – achieve a work life balance, PLC – pressure to maximise shareholder' return, NGO – focused on achieving social actions
  • Decision – who makes the decisions the speed these are made at: Sole Trader – make decisions quickly and autonomously, LTD – quickly consults shareholders, PLC – go through more steps e.g. call a meeting, NGO – consult members, difficult to co-ordinate
  • Performance - Measure success – financial, employee engagement, environmental record, Sole trader – judge themselves on performance, criticised same as PLC, Ownership affect – ability to employ specialist staff, access to finance, ability to maintain competitive advantage and embrace new tech
• How the external environment can affect costs and demand


  • Natural disasters
  • Interest rates
  • Availability of materials
  • Recession
  • Price of materials
• Components of the external environment


  • Market conditions and competition
  • Incomes
  • Interest rates
  • Demographic factors (eg trend, behaviours of people)
  • Environmental issues
• Current and changing conditions within the external environment have an impact upon a business. It can have a direct impact on their mission statement, aims, and objectives. The external environment helps us to understand choices that a business has made and helps a business make future decisions. It affects a firms costs and the demand for a product. Firms would increase the price in order to restore lost profit margins. Any factor that has the effect of increasing costs of a business could ultimately result in an increase in the price of a product set by the business
• Factors that affect demand

  • Price
  • Income
  • Substitutions
  • Supply
  • Market trends
  • Complimentary goods
  • Marketing and advertising
  • Seasons
  • Government actions and laws