Business Studies Unit 1

Spotting a business opportunity

Business - An organisation involved in the production of a good, or provision of a service.

A business exists to satisfy peoples needs and wants by selling goods and services with the aim of making
a profit.

Goods - Physical items that are tangible. i.e. a can of baked beans, a litre of petrol, a Nintendo Wii, etc.
Services - non-physical items that are intangible. i.e. a haircut, a bus journey, a lesson in a classroom, a
consultation with a doctor

Needs - Essential
Wants - Desirable

Production -The transformation of resources into finished goods or services. i.e. Raw materials, labor,
equipment, machinery, energy, premises, money, expertise.

Production takes place when a business takes INPUT, carries out a PROCESS, and produces an OUTPUT.

Inputs - the resources used for production

- The resources that go into the production process is known as the Factors of Production.
Processes - The methods used to convert the raw materials into finished products
- This involves labour, machinery, equipment, etc.
Outputs - The finished good or service
- The outputs of the transformation process make up the three industry sectors

Factors of production:

Land - This includes all natural and mineral resources

I.E. wood, metal, coal, vegetable, fish etc.
Labour - This includes the physical and mental efforts provided by people
I.E. employees
Capital - These are used to produce goods and services
I.E. machinery, computer systems, shops, factories, cars, lorries, shelves
Enterprise - The act of bringing together the other factors of production to create new goods and services
I.E. decisions, finance, risks, management

Primary - Extraction of natural resources

I.E. Fishing, Mining, Forestry and Farming
Secondary - Transforming raw materials into good or services
I.E. Production in factories
Tertiary - Sales of finished goods and provision of service
I.E. Retail, Restaurants, Hairdresser, Police and NHS
Market A place where buyers and sellers come together to exchange goods and services.

Customer needs - The wants and desires of buyers of a product or the customers of a business.

Market Research - Collecting information about customers' needs and wants before the development of a
new product or service.

+ves -ves
Prevents waste of resources such as money and Data can be inaccurate, bias and out-dated.
time.

Primary (Field Research) - The collection of first-hand information specific to your needs. i.e.
Questionnaires, Observations.

+ves -ves
- Accurate - Expensive
- Up-to-date - Time consuming

Reliable Bias information

Secondary (Desk Research) - The collection of second hand information that someone else collected for a
different purpose. i.e. Internet, Magazines.

+ves -ves
- Cheap - Could be old
- Quick - Could be biased
- Data based on actual sales - Reports are expensive

Quantitative - The collection of information about the market based on numbers and fact which can be
measured. OBJECTIVE (Closed Qs).

+ves -ves
Can be used to identify trends and predict new Results can be bias due to the type of research
ones used

Qualitative - The collection of information about the market based on subjective factors such as opinions
and reasons. SUBJECTIVE (Open Qs).

+ves -ves
Can be used to attract new potential customers Expensive and Time-consuming
Market mapping A diagram that shows the range of possible positions for two features of a product,
such as low to high price and low to high quality.

Market mapping helps businesses to

identify gaps in the market
identify their closest rivals
reposition themselves in a market
discover the publics view about a
brand

Market segmentation - A way of classifying customers and potential customers into target groups.

Geographic Involves looking at the region customers live in and its nature. This is used in large or
culturally diverse markets where buying is influenced by region. i.e. urban, rural, coastal

Demographic -
Age
Gender
Social class
Residential

Social Class -

A Upper class professionals e.g. lawyers, accountants

B Middle class other professional e.g. teachers, nurses

C1 Lower middle-class skilled non-manual workers e.g. police, clerical staff

C2 Skilled working class trained skilled workers e.g. plumbers, electricians
D Working class - unskilled manual workers e.g. labourers, farm workers
E Unskilled/unemployed - those on state benefits e.g. pensioners, unemployed

Psychographic & Behavioural -

Lifestyle
Attitude
Hobbies & Interest
Social Activities
 Market Segmentation
+ves -ves
Create loyalty It can be difficult to identify segments
Understand customers better The segment may change
Focus promotion and advertising May ignore potential customers

Competition - A rivalry amongst organizations that offers similar product in the market.

Analyzing the competition -

Product range - Group of similar products
Brand image - Idea and impression that customers whether good or bad
Quality - Good standards
Design - Size, colour, shape should be attractive
Price - Value for money - not cheap

Product Range - Similar products produced by a business that compete with one another, usually targeted
at different segments of the market.
Product Mix - The entire group of different products a firm produces. Targeted at a wide range of target
group.

Competitive advantage - When a business performs better than their rivals for that industry. This is
measured by the number of sales made or profit gained.

Competitive advantage can be achieved through

Cost - business that have efficient operations can provide low cost value to consumers.
Differentiation - business that create unique designs and performance compared to their
rivals will stand out.
Marketing - businesses that are intelligent in marketing create a lasting impression.

Added value - The increased worth that a business creates for a product; it is the difference between
what a business pays for the product and the price that it can charge for the product/service.

Calculating added value:

AV = value of output (selling price) minus value of input (cost of resources)

Added value is important to businesses because it allows them to:

make a profit
survive in the market

Adding Value:
Quality
Design
Brand
Packaging
USP

USP (Unique selling point) - A characteristic of a product that makes it different from other similar
products being sold in the market.
Franchise - Proven and successful business idea.
Franchisor - The owner of the franchise.
Franchisee - The person or company who has paid to become the franchise.

A franchise is an agreement where a franchisor sells the rights to its products or services to a franchisee,
allowing it to trade using the brand name and business format in return for an initial fee and percentage
royalties on sales.

The Franchisor provides:

the rights to their intellectual property forming a franchise agreement
start-up package, giving help/support, equipment, financial advice and training
all supplies
marketing support

In return the Franchisee pays:

initial start-up fee which is often a large amount
a percentage of sales revenue in royalties
a mark-up on supplies
one-off fees for training

A large degree of the franchise is controlled by the franchisor.

i.e. advertising, supplies, equipment, training
The finance comes from the franchisee.
i.e. owner capital, friends and family, bank loans, sales of shares
Franchisees are responsible for their own debts. If they have limited liability the personal
wealth is not at risk
Franchisees keep their profit but must give royalties to franchisor.
Royalties are calculated through percentages.

Aim of franchises:
Growth and expansion - Become bigger and more successful
Profit - Ultimately to make money
Maximising share - Be superior than competitors

Franchisor
+ves -ves
Minimises risk Failure is franchisees Franchises can fail not because of market
responsibility conditions but because of franchisee
incompetence
Rapid way of expanding the business Actions of franchisee can tarnish the brand image
Can concentrate on strategic issues rather than
operational issues
 Franchisee
+ves
Established brand and proven business idea
Least amount of RISK for a business start-up
Franchisor provides advice, support, training
-ves
Must pay a fee to buy the lease before the
business has begun trading
Must pay a regular royalty even if you dont
make a profit
Dont have total freedom to make decisions as
franchiser retains a lot of control over the
business
Showing Enterprise

Enterprise - A new business in the market place providing new products or services to consumers.

Entrepreneur - The person who starts the business with an idea and is willing to take risks to make it
successful.

Characteristics of a successful entrepreneur:

Vision, Creativity & Innovation
Hardworking, Determination & Persistence
Confident, Passionate & Self Motivated
Relevant Skills, Knowledge & Expertise
Ambitious & Risk Taking

Deliberate creativity - The intentional creation of new ideas.

Lateral thinking - Thinking outside of the box.

Blue Skies Thinking Techniques which encourages participants to think of as many ideas as possible
about an issue or a problem.

Thinking Hats - Technique to help focus and organise ideas.

Competitive advantage - When a business can perform better than its rival in the market.

A business can achieve competitive advantage by having better:

quality product than their rival businesses
production method which lowers their cost
customer service creating loyalty

Sources of business ideas:

Brainstorming
Observations
Business experience
Spotting trends

Invention - The discovery of new processes and potential new products, typically after a period of
research.

Innovation - The process of transforming inventions into products that can be sold to customers.

Patent - An official document granting the holder the right to be the only user or producer of a newly
invented product or process for a specified period

Trademark Legal protection for signs and symbols which distinguish its brands from those of its
competitors.

Copyright - Legal protection against copying for authors, composers and artists
 Internal Risk Factor External Risks Factor

Lack of market research Change in fashion and trend

Poor decisions and management Economic recession
Hiring the wrong people Competitor behavior

Calculated risk - Putting a numerical value or probability on the risk. It is the chance of something negative
happening.

Key points on minimizing risks:

Dont assume that if a venture is risky it should be abandoned!
Risk is an important factor associated with any start-up, in fact risk is what motivates most
entrepreneurs to succeed.
Most entrepreneurs are happy to take risks if the rewards are deemed great enough.
Putting a business idea into practice

Aim - overall long term goals that we want to achieve

Objective - measurable targets you set yourself to which helps achieve your goal

Financial Objectives:

Non-Financial Objectives:

How objectives change:

Market - Changes in the MARKET influences objectives.
Economy - Changes in ECONOMY influences objectives.
Growth - Growth in a business influences objectives.

Start-up costs - The costs incurred to set the business up before trading.
Premises, vehicle, machinery known as capital expenditure.

Operating costs (running costs) - The costs incurred by the business to keep the business running.
Stock, material, labour, utilities

Operating Costs are split into two:

Variable cost (Direct cost) - Operating cost that CHANGE depending on the number of output produce by
the business. i.e. Wages

Fixed cost (Indirect cost) - Operating cost that REMAIN the same regardless on the number of output
produced by the business. i.e. Rent
REVENUE - The income received from an organisations activities.
Total Revenue = Price per unit X Quantity of units sold

COST - The expenditure a business incurs as part of its trading.

PROFIT - The difference between the income of a business and its total cost.
Profit = Total revenue Total cost

Total cost = Variable cost + Fixed cost

Average cost of producing one unit:

FC + (VC * Output) = Total costs
Total costs/output = cost per unit

Cash flow forecast - A prediction of how cash will flow in and out of a business over a period of time.

Problems that could occur if the business does not have enough money:
Business is unable to pay bills and staff
Suppliers stop delivering as they have not been paid
Business may be taken to court because they cant pay creditors
Business becomes insolvent

Cash Flow

Opening balance - How much cash business has at start of time (*previous months closing)
balance
Closing balance - How much money is left at end of month (net cash flow + opening balance)
Cash inflows or receipts - How much cash is coming into a business
Cash outflows or payments - How much cash is going out of a business (Fixed and variable costs)
Net Cash Flow (NCF) = Total cash inflow total cash outflow

Inflows - Sales, grants from the government, capital from the sale of machinery, loans

Outflows - Wages and salaries, raw materials, utilities, rent, interest on loans, tax, equipment

Business Plan A document setting out the business idea and showing how it is to be financed, marketed
and put into practice.

Purpose of a business plan:

- Cover all aspects of the business
Design, production, cost, marketing etc.
- Raising finance
Banks are more likely to give you credit for start-ups
- Comparison
Business can compare actual operation to the forecast. Highlight problems and rectify.
Content of a business plan:
Executive Summary Objectives
Opportunity The market
Personnel Operations
Financial forecast Sources of finance
Marketing SWOT Analysis

Businesses need finance for:

Start-Ups - Assets such as buildings, machinery, vehicle and materials

Everyday Expense - Utilities, pay wages and supplies
Growth & Expansion - Bigger premises, marketing and better equipment
Unexpected Circumstances - Large orders, creditors/customers not paying, no sales due to economy
and maintenance repairs

Internal Sources of Finance Finance which is obtained within the business. I.E Retained profit, sale of
assets, Owners funds.

External sources of finance - Finance which is obtained from outside the business. I.E. Bank loans, share
capital, Bank overdrafts.
Making the start-up effective

Customer focus:
Identifying needs - Researching to find out what customers want through market research
Anticipating needs - Predicting what customers want by analysing sales forecast
Meeting customer needs - Providing what the customer wants to keep them satisfied and loyal

Three sectors in the UK economy:

Private To make a profit
Public To provide a service
Voluntary To help people in need; they rely on donations

Mixed economies have both public and private sectors.

Public Controlled by an induvial
Private Controlled by the government

In private sectors, there are two ownerships:

Sole trader The only owner of a business, having unlimited liability (LTD).

Partnership Having more than one owner of a business, having limited liability (PLC).

Liability - When someone or something is accountable for something.

Limited Liability When shareholders of a company are not personally accountable for the debts of the
company; the most they can lose is the value of their investment in the shares of the company.

Unlimited Liability - A legal obligation on the owner of a business to settle (pay off) all debts of the
business. In law, there is no distinction between what the business owes and owns and what the business
owns and owes.

Sole Trader
+ves -ves
Makes all the decisions Unlimited liability
Keeps all the profit Limited opportunity for expansion
Simple management structure Pressure and stress

Partnership
+ves -ves
The partners can share the workload Profits must be shared
More than one person investing money in the Partners may disagree on how to run the
business. Extra partners = extra capital. business.
New Partners - New Ideas. Decision making more complex.
There are two types of limited companies:
Public Limited Company (LTD) - Can only sell shares privately to friends, family and employees. (Min. 2
owners & 1 director)
Private Limited Company (PLC) - Can sell shares to the public though the Stock Exchange. (7 owners & 2
directors)

Taxes that must be paid:

Corporation Tax - Like Income Tax
Tax on Dividends - Dividends is a form of income so shareholders must pay income tax on the dividends.
Capital Gains - If shares were bought cheaper than usual then they have made capital gains and must
pay capital gains tax.

Limited Companies
+ves -ves
Finance is easier to raise Expensive to set up - legal paperwork
Shares are easier to buy and sell Share prices fluctuate depending on economy
Limited Liability Share profits dividends paid to shareholders

Start- up Legal Issues:

Direct and Indirect Tax:

Income tax - A tax on the value of income earned by workers; this includes sole traders who must pay
income tax on their net earnings.

Income Tax is used for healthcare, transport, education etc.

Value Added Tax (VAT) - A tax on consumer spending and collected on most business transactions and
imports

There are three VAT rate:

Recruitment Process:
Job Description:

This tells the candidates what is expected in the job and helps the firm to identify the qualities needed in
the individual to be selected for the job. - Simply describes the duties of the potential worker

The job description should include:

Job title, specific duties and other responsibilities.
Purpose of the job incl. main duties and tasks
Location of job
Hours of work incl. rate of pay
Working conditions incl. other responsibilities

Person Specification:

These factors are ranked as either essential or desirable to the job and applicants are judged against them
during the interview. - Person specification is the type of person that the firm is looking for.

Person specifications should include details of :

Skills, aptitude and knowledge
Qualifications and experience
Personal qualities and interests
Physical requirements

An application form provides information in a standard format and allows information to be collected in a
systematic way which makes it easier for the business to assess.

CVs include:

Personal Details
Education
Qualifications and Training
Current Employment
Previous Employment
Hobbies and Interests

Training:
Training is often a response to some sort of change, whether internal or external. Possible changes are:
Induction
The development or introduction of new products or technology
Restructuring of the firm
Changes to procedures, including improvements to customer service
High labour turnover
Induction Training:
Induction training is education for new employees learn about the business and the job hired to do.
The aim is to help new employees settle in quickly in order they reach the level of performance expected
of experienced workers.

On-the-Job Training:
Employee learns about the job by observing others or being trained to use a piece of equipment by senior
staff.
Cheaper
Quality of training short cuts
Off-the-Job Training:
Employees are sent to training centres to learn more about the job or to learn to use a new piece of
equipment.
Quality of training trained experts
Expensive

Training
+ves -ves
Increases level of performance quickly Expensive
Employees have necessary skills, knowledge and Workers must still be paid
qualification
Develops commitment, motivation and job Workers arent producing anything
satisfaction

Motivation:

Motivation - The causes of peoples actions - why people behave as they do.

Motivating factors at work:

Reward
Recognition
Money
Opportunity

Benefits of motivating staff:

Happy staff leads to satisfied customer
Reduces absenteeism
Reduces labor turnover
Reduces costs
Methods to motivate employees:

Financial
Time Rates
Piecework
Performance Related Pay
Profit Sharing
Fringe Benefit

Non-Financial
Job Enrichment
Job Enlargement
Job Rotation
Empowering Employees
Working in Teams

Laws to protect staff:

Appointing & training staff

Workers CANNOT be discriminated on the basis of age, sex, race or disability.

Protection at work
People must be paid the same for doing the same job.
Wages must be paid regularly (as stated in their contact).
Staff must receive their holiday entitlement.

Leaving work
Protection against unfair dismissal.
Workers may also be entitled to a pension if they have made pension contributions.

Other rights
Small businesses can be more greatly affected by laws than larger firms. For example,
women are allowed time off to have children and their posts musts be held. This could
create difficulties for firms employing 2 or 3 people.

EU Law The Working Time Directive outlines the number of hours people can be expected to work over
a period of time.

Race Relations Act

Sex Discrimination Act
Disability Discrimination Act
Employment Equality (Age) Regulations
Equal Pay Act
Employment Protection Act
Commodities - Raw materials or natural resources. i.e. Coal, oil.

Commodity markets - Where buyers and sellers meet to exchange commodities

Supply - The amount that sellers are willing and able to sell at any given price
i.e. farmers supply wheat to make flour
Demand - The amount that buyers are willing and able to purchase at any given price
i.e. bakers demand flour to make bread

Shortage - When the demand for a good or service is greater than the supply.
This leads to a rise in price.
Surplus - When the demand for a good or service is less that the available supply.
This leads to a fall in price.

Equilibrium - Where the supply and demand line cross and are equal. This is the point where both sellers
and buyers are happy with the price and quantity.

Factors affecting demand:

Price
Changes in consumer income
Fashion, taste and preferences
Advertising and branding

Factors leading to a change in supply:

Changes in cost in production
Introduction to new technology
Indirect taxes
Understanding the economic context

Interest rate - the price of borrowing money.

Variable interest rate - Can change over the duration of a loan or period that savings are invested for
Fixed interest rate - Will stay the same for the length of the loan or the time your savings are invested.

Causes to change in interest rates:

- Supply and Demand
Whether banks are willing to supply borrowers with money and whether there is a
demand for borrowing.

If interest rates INCREASE then a business may:

Exchange rate - The price for buying foreign currency.

To change pounds into another currency MULTIPLY by the rate.

To change a foreign currency back into pounds DIVIDE by the rate.

Factors affecting demand for a currency:

Interest rates
The demand for exports
Inward foreign investment

Factors affecting supply for a currency:

Interest rates
The demand for imports
Outward foreign investment
 The Business Cycle:

Stages Key feature Likely effects by businesses

Recovery Increasing consumer spending Opportunity to increase prices

Production rises New businesses start
Investment increases

Boom Inflation increases Prices likely to rise

Some firms unable to satisfy Wage rise
demand Demand is expected to fall
Interest rates rise
Recession Demand is low Firms look for new markets
Investment falls Workers are laid off
Profits fall Many firms close
Slump Increasing number of Firms lower prices
bankruptcies Factories are closed
High unemployment Redundancies occur
Low levels of spending

Variables causing changes in the Business Cycle:

Business Investment
When the economy is expanding, sales and profit keep rising, so companies invest in new
plants and equipment, creating new jobs and more expansion. In contraction, the
opposite is true
Interest Rates and Credit
Low interest rates, companies make new investments, adding jobs. When interest rates
climb, investment dries up and less job growth
Consumer Expectations
Forecasts of an expanding economy fuels more spending, while fear of a recession
decreases consumer spending

Stakeholders - An individual or group of people that have an interest in a business.

Stakeholders - Have an interest in the business.

Shareholders - Own a share of the business.