AQA GCSE Business PDF Companion

AQA GCSE Business CONTENTS Section Title Page 3.1 Business in the Real World 4 The purpose and nature of business Business ownership...

AQA GCSE Business CONTENTS Section Title Page 3.1 Business in the Real World 4 The purpose and nature of business Business ownership Setting business aims and objectives Stakeholders Business location Business planning Expanding a business 3.2 Influences on Business 37 Technology Ethical and environmental considerations The economic climate on business Globalisation Legislation Competitive environment 3.3 Business Operations 62 Production Processes The role of procurement The concept of quality Good customer service 3.4 Human Resources 80 Organisational structures Recruitment and selection of employees Motivating employees Training 3.5 Marketing 105 Identifying and understanding customers Segmentation The purpose and methods of market research Elements of the marketing mix © Tutor2u (www.tutor2u.net) 2017 Page |2 AQA GCSE Business Section Title Page 3.6 Finance 140 Sources of finance Cash flow Financial terms and calculations Analysing the financial performance of business Glossary 172 © Tutor2u (www.tutor2u.net) 2017 Page |3 AQA GCSE Business Section 1 Business in the real world Topic overview Although this is a separate topic, students need to relate these concepts to the four functional areas of business, business operations, human resources, marketing and finance. Section Key things to learn The purpose and What a business is and the reasons why a business is set up nature of Functions of business businesses Type of business Goods and services Needs and wants Factors of production: land, labour, capital and enterprise Opportunity cost Business sectors: primary, secondary and tertiary Enterprise and the role of entrepreneurs in starting businesses Objectives, characteristics and skills of successful entrepreneurs Dynamic nature of business and its changing environment: technology, the economy, legislation and environmental considerations. Business ownership The different options for a start-up and established businesses Sole traders, partnerships, private limited companies, public companies, not- for-profit organisations Advantages and disadvantages of each legal structure Importance of limited liability Setting business Common aims and objectives aims and objectives How objectives help management run the business Relationships between business objectives and business operation Choice of business objectives and why they change Non-financial objectives Stakeholders Who stakeholders are Stakeholder objectives and relationship to business operation Stakeholder conflict Business location Factors that influence where a business is located Business planning Purpose of business planning Main sections of a start-up business plan Benefits and drawbacks of business planning Difference between variable, fixed and total costs Concepts of revenue, costs, profit and loss Expanding a Why businesses grow business Internal and external methods of growth Economies and diseconomies of scale Calculation of average unit costs and importance of this calculation © Tutor2u (www.tutor2u.net) 2017 Page |4 AQA GCSE Business What is a business? Businesses - goods and services We are surrounded by businesses. We come into contact with them every day. But what, exactly, is a business? A business can be defined as: An organisation that exists to produce goods and services on a commercial basis to customers What are goods and services? Goods are actual objects. They can be touched, felt and held. They are produced and consumed. In a home you will see dozens of examples, from the microwave, to the ready- meals in the freezer, to the flat-screen television and the latest smart phone or games console. Some businesses will be involved in distributing goods so that they can be consumed more easily. These include shops and warehouses. Services are activities. They are provided for you by other people or businesses. When you book a holiday, visit the hairdresser, eat in a restaurant or visit the cinema, you are consuming one or more services. You cannot touch or hold a service. A service cannot be stored. In the UK most businesses provide a service rather than make goods. That is particularly true of the small business sector. Businesses – need, wants and opportunity cost Needs are those goods and services that we have to consume if we are to live. These include food, shelter and warmth. Wants are goods and services that we would like, but do not have to consume in order to survive. These include holidays, smartphones, entertainment and other luxuries that we may like, but do not need. Some goods and services can include both needs and wants. We might need a car, so we can work to get the food we need to survive. But we might want a car that has a fast engine and a sunroof, so we can enjoy days out, holidays and look good. We cannot have everything we want, so consumers have to make choices. If we make one choice of what to consume, this may mean giving up the consumption of other goods or services. If you choose to buy some new clothes, this may mean giving up the purchase of a new phone. This is known as the opportunity cost. © Tutor2u (www.tutor2u.net) 2017 Page |5 AQA GCSE Business Opportunity cost is measuring the cost of what you purchase in terms of the alternative that you have given up. The opportunity cost of going to a concert could be the shoes that you now cannot afford to buy, if you purchase the concert tickets. Businesses – starting up There are two main reasons why businesses are started that are explained in the table: Reason Explanation Making a profit A business sees an opportunity to make a profit by providing a good or a service. These goods and services will be sold for more than they cost to provide, so a profit will be made for the owners. For example: most businesses aim to make a profit. These could be small local firms, such as a window cleaning business, or very large multinational banks and oil companies. Benefiting others Some businesses will produce goods or services that will benefit others. Profit is not the reason why the business exists. Any profit the organisation makes will be used for the benefit of consumers, employees or the wider community and not for the owners. For example: running a non-profit making local community shop. It employs local people and provides a delivery service of its products to those who have no transport or find it difficult to leave their own homes. Often businesses are started because there is a gap in the market. This leads to an opportunity to fulfil a want or need that is not currently being met. This makes it more likely that the business will be successful and ultimately make a profit. Types of business Some businesses produce goods and some produce services. There are three different types of businesses, primary, secondary and tertiary. These are sometimes known as the different business sectors. A brief summary is given in the table. Type of business Description Examples Primary These businesses produce raw Farming, mining, oil exploration, fishing. materials which are extracted from nature. Secondary These businesses manufacture goods Car manufacturing, steel, chemicals, which are made from raw materials clothing maker, builders. and turned into finished goods. This sector also includes firms involved in construction. Tertiary These businesses provide services. Shops, transport, hairdressing, banking, This sector will also include entertainment. businesses involved in the distribution process. © Tutor2u (www.tutor2u.net) 2017 Page |6 AQA GCSE Business Factors of production In order to produce goods and services, businesses need different inputs that go into making what it is they are producing. There are four factors of production; land, labour, capital and enterprise. Their importance will vary depending on the good or service that the business is making or providing. A brief description of each factor is given in the table. Factor of production Description Land This is not only the land where the business is based, but also includes the natural resources on, or under, that land. This is very important for businesses in the primary sector. Labour These are all the people working in the business including the managers. They are important in all businesses, but are most important in the service sector. Capital This refers to the buildings and machinery needed by the business. This is very important for manufacturing businesses, especially as new technology means these businesses now need less people. Enterprise These are the entrepreneurs who set up the businesses, organise the factors of production and take the risks involved in running the business. © Tutor2u (www.tutor2u.net) 2017 Page |7 AQA GCSE Business What is enterprise? The meaning of enterprise The term “enterprise” has two common meanings. Firstly, an enterprise is simply another name for a business. You will often come across the use of the word when reading about start-ups and other businesses…“Richard Branson’s enterprise” or “Julie set up her successful enterprise after leaving teaching”. Secondly, and perhaps more importantly, the word enterprise describes the actions of someone who takes a risk by setting up, investing in and running a business. Someone who shows enterprise by setting up a business is called an “entrepreneur”. What is an entrepreneur? There are many definitions of what is meant by an entrepreneur, but they tend to say the same thing, which is that an entrepreneur is… “someone who takes a calculated risk through starting a business.” An entrepreneur is someone who is enterprising. In other words they: take the initiative in trying to exploit a business opportunity take time to understand and calculate the risks involved make an investment, often of their own money, to set up the business go ahead, despite the risk that the business venture might fail © Tutor2u (www.tutor2u.net) 2017 Page |8 AQA GCSE Business Reasons for starting a business An entrepreneur will have many different reasons for starting a business and these will vary between different entrepreneurs. These are described in the table. Financial objectives Making a profit – this is achieved through creating more revenue than the costs involved in running the business. Alternatively a profit could be made from selling the business or business idea to another business for a lot of money. Investing money – some entrepreneurs have a sum of money, which they have gained through redundancy or inheritance, and they want it to provide a return to them i.e. they would like to use the money to make more money in the future. Non-financial Work-life balance – entrepreneurs can have more choice over what objectives work they do and when they do it. They can often run their business from home, giving them more freedom and flexibility. Skills and interests – entrepreneurs often have business ideas that are linked to their own skills or interests. This can be very motivating for the entrepreneur, as they will have a genuine passion for the business idea and therefore will be highly motivated to make the business succeed. Being their own boss – many entrepreneurs want to be independent to make their own decisions and not be part of a large organisation. Their current job might also be boring causing them to be unhappy with their existing situation. In recent years the media has glamourised the challenge of starting and growing a business. A quick search on Amazon.co.uk will display many books by entrepreneurs and other “business experts” describing “how I made my first million” etc. Television shows, such as Dragons Den and The Apprentice, have proved hugely popular by showing the challenges faced in setting up a business or gaining investment for a business idea. Entrepreneurs such as Lord Sugar, Sir Richard Branson and Sir James Dyson have earned enormous fortunes and provide inspiration for the next generation of budding business leaders. It is important, however, to realise that starting a business is rarely glamourous. In fact it is nearly always very hard work. For every success story, there are almost certainly many more business failures or businesses that do not meet the expectations of the people who set them up. Not surprisingly, much research has been done to examine the personality and other characteristics of successful entrepreneurs, to see if there is a guaranteed method or route to success. You will find many lists of “what is takes to be an entrepreneur”, but they tend to cover the same points. The following is a summary of the key findings: © Tutor2u (www.tutor2u.net) 2017 Page |9 AQA GCSE Business What makes a good entrepreneur? Successful entrepreneurs tend to have many of the following characteristics and skills: Innovative – entrepreneurs have lots of ideas and are passionate about their product or service. Risk-takers – they are prepared to take a calculated risk in order to maximise their rewards. Hard working – they are prepared to work long hours, especially in the early stages of the business. Organised – running a business can be very time consuming. They will know how to use their time, so that the business runs efficiently and effectively. Determined – they are able to handle problems and overcome hurdles. Setting up a business is difficult, as well as time-consuming. Persuasive – entrepreneurs are good at convincing other people and businesses about their idea, for example, persuading suppliers to supply their new business or convincing a potential employee to leave a current job and join the start-up, which could be seen as a very risky move. They are also good at persuading customers to buy their product or service. Leadership – an entrepreneur must be able to lead his or her own business. They must be willing and able to effectively perform more than one role. Lucky – every business needs some good luck e.g. being in the right place at the right time; however the more research, planning and preparation that goes into the business start-up, the more likely the business is to succeed. The important thing to remember about this list is that an entrepreneur is unlikely to possess all these characteristics! Anyone who starts a business has strengths and weaknesses. However, a successful entrepreneur would recognise where their weaknesses lie and take steps to address them, for example recruit someone with the right skills to support the entrepreneur in the business in this area. Businesses change Businesses are constantly faced with change. Some of these changes will be outside the control of the organisation. Successful businesses will be able to meet these changes and demonstrate flexibility in the way their business operates. Examples of external changes that businesses face include new legislation, changes in the economy, new technology, political events and even the weather. Successful businesses will adapt their products, their location and their staff as circumstances change. It is never possible for a business to stand still and those that try to, will generally fail. Section 2 considers this area in more detail. © Tutor2u (www.tutor2u.net) 2017 P a g e | 10 AQA GCSE Business Business ownership Introduction The vast majority of start-ups and small businesses in the UK choose to operate either as a sole trader or set up as a private limited company. A very small proportion of new businesses set up as a partnership and a small proportion of very large companies are public limited companies. We will look briefly at these forms of legal structure before considering the very important issue of limited liability. Sole traders Most businesses in the UK are small businesses, owned and operated by one person. In most cases, these businesses operate as a sole trader. Look at Yell.com or Yellow Pages (a local free business listing posted through your letterbox). You will see lots of examples of people operating as a sole trader in your area. Many traders in the service sector e.g. hairdressers, gardeners, plumbers and electricians, use the sole trader option, as do people who run part-time or seasonal businesses. A sole trader is a popular form of business organisation, as it is simple and cheap to set up and operate. Most importantly the sole trader gets to keep all the profits! The sole trader, also takes all the risk and has unlimited liability. This concept is explained further later in this section. Do not forget that a sole trader can and do employ other people to work in their business! Partnerships A partnership is formed where a business is started and owned by more than one person. Common examples of partnerships are doctors, solicitors or vets. A legal document called a Partnership Agreement is always recommended and sets out how the partnership is run, covering areas such as: How profits are to be shared How much each partner has to invest into the business How decisions are to be taken What happens if a partner wants to leave the partnership or dies The partners own the business and have unlimited liability. Private limited company (ltd) A company is formed when a business is set up to have a separate legal identity from its owners. In the vast majority of cases, the type of company created is a private limited company (ltd). These are very common and can include small and very large businesses. © Tutor2u (www.tutor2u.net) 2017 P a g e | 11 AQA GCSE Business There are many well-known examples of ltd companies, such as Iceland, Virgin, John Lewis and Clarks shoes. If a business becomes a private limited company, it can raise funds from investors, such as friends and family, but not from the general public, as its shares are not listed on the stock exchange. Every private limited company must have at least one shareholder. Any money raised from new shares is permanently invested in the business. In this type of business, the company's finances are separate from the personal finances of their owners. The owners are known as shareholders who each own shares in the company. They receive a share of the profits, known as a dividend, as a reward for being a shareholder. These are paid in proportion to the number of shares that they own. If the company goes bankrupt, shareholders are protected by limited liability. The business will be run by a Board of Directors, appointed by the shareholders. The shareholders may also act as the directors. The Board of Directors runs the company on a day-to-day basis and makes all the important decisions. Public limited company (plc) Most of the largest businesses in a country will be public limited companies. Famous examples of public limited companies in the UK include BP, Boots, Barclays and Marks and Spencer. Plcs are complicated and expensive to set up, but this type of company can raise large sums of money through listing its shares on the stock exchange. This makes it easier to value and to buy and sell shares in the company. The trading of shares in this way can however, make the company vulnerable to a possible takeover. This could mean that the original owners/shareholders of the company can lose control, if they end up holding less than 50% of the shares. For a plc the Board of Directors is, like a private limited company, appointed by the shareholders. There is however, more of a separation of roles between shareholders, directors and those who manage the company on a day-to-day basis. A plc must have a minimum of £50,000 share capital. Unlimited liability There is a big risk when operating as a sole trader or a partnership. It occurs because, in the eyes of the law, there is no difference between the person running the business and the business itself. When it comes to money owed by a business, the sole trader or partners have to use their own personal funds to pay these debts, if there is not enough money in the business to do so. The sole trader or the partners are, therefore, liable for any debts that the business incurs. This is called unlimited liability. As the sole trader or partner is personally responsible for any debts run up by the business, this means their home or other assets owned by the entrepreneur may be at risk if the business runs into trouble. This does happen and each year thousands of people become © Tutor2u (www.tutor2u.net) 2017 P a g e | 12 AQA GCSE Business personally bankrupt, many of them through failed businesses. Some businesses have however, a lower risk of failure, where the owner avoids running up debts through buying and selling in cash, meaning there is no need to borrow large amounts of money. Limited liability Shareholders may be individuals or other companies. They are not responsible for the company's debts. Shareholders may only lose the money they have invested in the company if a business goes bankrupt, to help pay off any outstanding debts or liabilities. This means that the liability of shareholders is limited to the value of their investment into the company’s shares. This concept is called limited liability. It costs very little to set up a business as a private limited company and it can also be set up quite quickly. This is why a private limited company is a popular choice for many new businesses as a form of legal structure. The huge benefit of limited liability is also another major reason why entrepreneurs choose this type of ownership. Remember: LIMITED LIABILITY is only a benefit to private and public limited companies. Sole traders and partnerships do not benefit from this. They have UNLIMITED LIABILITY. This is a common area of confusion, which needs revising carefully. Comparing limited companies with sole traders and partnerships The main differences between the different types of business ownership can be summarised as follows: Advantages Disadvantages  Full personal liability i.e. Sole trader  Quick and easy to set up – the “unlimited liability” business can always be  Harder to raise finance – sole transferred to a limited traders often have limited funds company once launched of their own and few assets  Simple to run – owner has against which to raise loans complete control over decision-  The business is the owner – the making business suffers if the owner  Decision-making is quick, becomes ill, loses interest etc important in changing, fast  Limited life as the business is moving markets with lots of the owner – lack of continuity competition  Stressful – long hours, no  Owner gets to keep all the division of labour, no support profits with decision-making  Minimal paperwork © Tutor2u (www.tutor2u.net) 2017 P a g e | 13 AQA GCSE Business Advantages Disadvantages Partnership  Quite simple for two or more  Unlimited liability people to form a business  Partners have to live with together decisions of others; a poor  Minimal paperwork once decision by one partner Partnership Agreement set up damages the interests of the  Partners can provide specialist other partners knowledge and skills  Decision-making can take  Jobs can be shared, so less longer, as disagreements can stressful than operating as a occur sole trader  Harder to raise finance than a  Greater potential to raise company finance, as each partner  Short life, as if one partner provides investment leaves or dies the partnership  Any losses will be shared ends  Profits have to be shared  Shareholders have to agree Private  Limited liability - protects the about how profits are Limited personal wealth of the distributed company shareholders  Greater administrative costs  Easier to raise finance as can sell than setting up as a sole trader shares or partnership  Stable form of structure – the  Finance limited to “friends and company continues to exist family” even when shareholders change  Less privacy - public disclosure  Original owners are likely to of company information, but retain control not as extreme as for a plc  Directors’ legal duties are stricter  Shareholders have to agree Public Limited  Limited liability – protects the about how profits are Company personal wealth of the distributed shareholders  Greater administrative costs  Can raise large sums of finance  Finance can be limited by stock via the stock exchange, which is market valuation of company permanently invested  Public can see company  Stable form of structure – information and accounts business continues to exist even  Risk of company being taken when shareholders change over  Firm is more prestigious  Separation of ownership and control © Tutor2u (www.tutor2u.net) 2017 P a g e | 14 AQA GCSE Business Choosing the most suitable legal structure for a business There will be several factors that will influence the type of structure chosen by a business: Size of business – start-up businesses often start as sole traders or partnerships, as they are easier and quicker to set up compared to a Ltd. There is less paperwork involved. Type of business – some business structures relate to the type of product or service provided. If specialist expertise is involved such as doctors, vets or lawyers they are more likely to be partnerships than sole traders. If risks are involved, they are more likely to become a private limited company. Lender requirements – if a bank loan is needed to start a business, the bank may prefer a small business to be set up a sole trader or partnership, to make sure they can be paid back by the individuals if the business fails. Investment protection – a private limited company may be chosen, so the investors in a new business or an expanding business can be protected by limited liability. Control – the owner, as a sole trader, or a shareholder, holding the majority of shares in a company, has total control of the business. This is shared in a partnership and at risk in a company with a minority shareholding. Growth – a large business (with over £50,000 of capital) might require significant funds that they cannot find themselves. Becoming a public limited company allows them to attract a large amount of finance from a large number of shareholders without the requirement to pay it back. Not-for-profit organisations These include community and other voluntary organisations, as well as charities. They are often set up as companies or social enterprises, with any surplus money made through their activities being used to help meet the organisation’s aims and objectives. There are many different types of non-profit making organisations. Local clubs and societies with very low revenue are examples. There are also, however, many large national organisations, such as charities, with considerable income and costs. Legal obligations for non-profit making organisations Like any business, not-for-profit organisations must ensure that they meet their legal requirements. These obligations include having correct legal contracts e.g. for premises, having valid insurance, keeping and being able to produce valid financial records and accounts for tax purposes. They must also use correct banking and loan procedures for the organisation. To be classed as a social enterprise, at least 50% of the organisation’s surplus money made must be reinvested back into the enterprise or into activities to help satisfy the social need that the social enterprise is attempting to meet. © Tutor2u (www.tutor2u.net) 2017 P a g e | 15 AQA GCSE Business Setting business aims and objectives Introduction Different businesses may well have different aims and objectives. Before we consider the reasons for setting and changing business aims and objectives, we should firstly consider what these aims and objectives might be. Businesses aims and objectives Survival – over half of new businesses fail within five years and many new businesses do not survive much beyond their launch. Often entrepreneurs discover that their business idea was not as good as they originally thought and therefore the business cannot run profitably or it runs out of cash. Changes in the business environment also may make it harder for a business to be successful. The first priority of a business is always to survive. Profit maximisation – profit is the main objective for most businesses. This is the reward to the entrepreneur for their hard work and the risks undertaken, often with their own money. Ideally, the profit earned is sufficient to provide the entrepreneur with enough income to live on. Profits may also be kept in the business to allow it to expand or develop further. Other objectives businesses may have which are linked to profit maximisation are increasing revenue or decreasing costs. Another financial objective is personal wealth. Some entrepreneurs set this as a longer term objective. They aim to build a valuable business that can substantially increase their future wealth. Sales maximisation/market share – some businesses will be more concerned with increasing market share or becoming the market leader. They may accept lower profits in the short term in order to increase their sales. This is more common with large companies. Share value – shareholders in a company will be interested in how much their dividend payment will be; their reward for becoming a shareholder in a company in the first place. Dividends are the proportion of the company’s profits that are given out or distributed to shareholders. Shareholders will also be interested in the share price, as this will show the value of their shares in the company if they wish to sell them for a profit in the future. Quality – not all objectives are financial. Some businesses pride themselves on providing a quality service or selling quality products. These businesses might also aim to increase customer satisfaction, which may increase their sales and profits in the long term. Growth – not all businesses want to grow, but most do. This means that they can increase their profits and the value of the business. It is important however, that business growth is not undertaken too quickly or too soon. Survival may be more important for a new business, rather than opening another branch of a business a © Tutor2u (www.tutor2u.net) 2017 P a g e | 16 AQA GCSE Business few months after launching which could drain cash flow and threaten the existence of the business altogether. Business growth can be achieved through expanding within the home or domestic country of where the business first started or it can be achieved through international growth, by expanding into different countries, although this can cause problems for many different types of business, such as adapting to differences in cultures between countries successfully. Social responsibilities – increasingly businesses are aware of their responsibilities to the society in which they operate. These may be related to the environment or having correct ethical behaviour e.g. not using cheap labour. Not-for-profit organisations will have aims and objectives related to their particular reason for being set up, e.g. raising money for a charitable concern or providing jobs for local unemployed adults. The role of objectives in setting up and running a business Objectives provide direction for all businesses. Without clear objectives, a business may provide goods and services that are not appropriate to why the business was set up. This may result in the business not being successful. Having objectives just written down however, is not enough to ensure business success. In order for objectives to be effective, they must be implemented and monitored over time. Some of the benefits to a business of having clear objectives are as follows: Reason Explanation Direction Clear objectives will allow a business to decide on the direction it should take, for example, whether it should expand or not, whether it should change its target market or perhaps increase or decrease its range of products or services. Focus for employees It is important that all employees are aware of the business’s objectives and that they are attempting to follow and meet them. If all employees are working together in the same direction, this will increase efficiency. Allows planning The overall firm’s strategy, what it plans to do in the future, will be in its business plan. Having clear objectives will allow consistent planning for the business as a whole and any departments within the business. The plan will be designed so that the business objectives can be met. © Tutor2u (www.tutor2u.net) 2017 P a g e | 17 AQA GCSE Business Reason Explanation Having business objectives allows a business to measure its Measurement of success success. In other words, through a business reviewing its objectives, it would be able to see if it had achieved them or not or whether it was on the way to achieving them. This means that the business can then correct or change its business strategy if it is not working. A business might also need to change its business objectives if they are proving impossible to meet or if they are being achieved too easily. The ability to measure success is much easier to carry out for financial objectives, which are easily quantifiable, rather than non-financial objectives, such as “being more ethical” or “increasing customer satisfaction” which are very difficult to measure. Changing objectives There can be various reasons for businesses to change their objectives. A good way of dividing these is into internal reasons – ones that a business can control – and external reasons – changes that are required because of events that are outside of a business’s control. Internal reasons – these could come about because a business has achieved one objective and now needs another one, for example, a firm has survived for a year and now wants to increase profits. Another example is that a company has the biggest market share in the UK and now wants to expand internationally, so that it can gain more customers, sales and profits. Changes to objectives can also be due to a change in the views or requirements of the owners/shareholders or the Board of Directors. For example, an objective of a business might originally have been to become the market leader or the dominant firm in an industry. This might lead to a policy of low prices and sales maximisation. Once this objective has been achieved, it may change its objective to remaining market leader, which might then lead to strategies such as new product or market development, in other words launching new products into an existing market that the business already operates in or launching existing products into new markets. External reasons – a new competitor may cause objectives to change from profit maximisation to survival. A change in the economic environment, for example growth in an economy, might lead businesses to seek expansion. Technological change may also result in © Tutor2u (www.tutor2u.net) 2017 P a g e | 18 AQA GCSE Business a firm changing its objectives, particularly if a rival business brings out a new piece of technology before it does! It is a lot easier for a small business to change its objectives. Large companies may have to consult shareholders, if their changes are very significant. They are also more likely to have much higher initial costs if they are to change objectives e.g. deciding to reduce operating costs through moving production to a different country. Non-financial objectives Although most businesses will be focussed on financial objectives, there are many other priorities that will exist for a business. Providing a high quality service will be important for many. The John Lewis Partnership has a clear focus and is well-known for looking after its employees. This will also be an important objective for many other businesses, as this means that employees stay loyal to the firm, which leads to a reduction in recruitment and selection costs. It is therefore important to remember that success can be measured in many ways not just through a business reviewing its profit objectives. This can be seen clearly through not-for- profit organisations. Not-for-profit organisations aims and objectives will normally relate to the cause that they have been set up to support, for example certain charities or social enterprise objectives will focus on reducing the number of homeless in the local area or improving local play facilities for young children in the community. In many cases these objectives will link to or be consistent with financial objectives. In other cases, however, objectives, such as improving quality, might conflict with others such as increasing profit. This is because improving quality will tend to lead to an increase in costs, which restricts profits. However, in this situation, it can be argued that better quality will lead to brand loyalty and the ability of the business to increase its selling prices. This could ultimately lead to an increase in profit, as the increase in revenue could more than cover the increase in costs that the raise in quality would cause. Overall, businesses, in setting and using objectives, will prioritise what is most important to their individual organisation and its owners/shareholders and measure their success through the review of the objectives that are most relevant to them. © Tutor2u (www.tutor2u.net) 2017 P a g e | 19 AQA GCSE Business Stakeholders Main stakeholders in a business A stakeholder is anyone who has an interest in the activities and decision making of a business. Stakeholders include: Shareholders or business owners Managers and employees Customers Suppliers Banks and other finance providers Government Local community Competitors Pressure Group Various factors affect how many stakeholders a business has and the strength of their interest and influence on the business. These factors include: The size and scale of the business: for example, a small, sole-trader service business will have relatively few stakeholders. Contrast this with a much larger, complex business like a national supermarket chain, which has thousands of employees operating in numerous locations and is an important customer to hundreds of suppliers. The nature of the product or service: some products are more likely to attract the attention of stakeholders. For example, a manufacturing business that has high levels of carbon emissions or waste packaging will be scrutinised much more closely than a simple service business. The local community will have a greater interest in a business that is a major local employer than in a one-man band. © Tutor2u (www.tutor2u.net) 2017 P a g e | 20 AQA GCSE Business Objectives of business stakeholders The main objectives of each main stakeholder group will not always be the same as the objectives the business sets for itself. The objectives of the more important stakeholders to a business can be summarised as follows: Stakeholder Mainly interested in… Shareholders Good return on their investment /owners High level of profits and dividends Success and growth of the business Proper running of the business (if shareholders are not directly involved in the day-to-day running of the company) Managers and Rewards, including maximising basic pay and other financial incentives employees Job security and good working conditions Promotion opportunities Job satisfaction and status through high levels of motivation, interesting roles and responsibilities Success of the business Customers Value for money Product quality that meets their specific needs Appropriate levels of customer service Suppliers Fair or high prices and prompt payments Continued profitable trade with the business Financial stability – can its customers pay its bills? Banks and other Profitability and cash flow for the bank finance providers Low risk that the business will not be able to repay finance provided Growth in profits and value of the business Government Prompt and correct collection and payment of taxes , for example VAT, income tax Creating jobs e.g. through businesses succeeding and growing Compliance with business legislation, for example health and safety, minimum wage/national living wage compliance, consumer protection, fair trading, environmental protection Local community Success of the business – particularly creating and retaining jobs Compliance with local laws and regulations, for example noise, pollution Competitors Profitability and success for their own business An increase in market share Pressure Groups These could include trade unions and environmental groups. Best deal for their members, for example trade unions will push for higher wages, environmental groups will want safeguards to prevent business activity damaging the environment © Tutor2u (www.tutor2u.net) 2017 P a g e | 21 AQA GCSE Business Impact and influence of stakeholders on a business The objectives of the stakeholders will determine their behaviour towards the business. For example, employees are likely to have regular meetings with the business managers to try and influence improved pay and conditions. The impact they have however, will depend on their power. Are the workers easy to replace? Is the business making enough profit to be able to afford a pay increase? The local community might not like the business increasing production to working 24 hours a day 7 days a week, but they may not be able to influence the business owners, because they have no or very little power to do so. So, the impact and influence that stakeholders have on a business and its decisions is determined by the power of the stakeholders and the circumstances in which the business operates. Why might the objectives of stakeholders be in conflict? Many business objectives are shared by a broad range of stakeholders. For example, an objective for a business start-up of achieving survival would be supported by nearly all the stakeholders. Other than its competitors, it is unlikely to be in anyone’s interest for a business to fail. However, once a business becomes better established and larger, then potential conflicts begin to arise. Let’s look at two examples in a little detail: Business expansion versus higher short-term profit: An objective of increasing the size and scale of a business might be supported by managers, employees, suppliers and the local community – largely for the extra jobs and sales that expansion would bring. However, an expansion is often associated with increased costs in the short-term, for example extra marketing spending, new locations opened, more production capacity added. This might result in lower overall profits in the short-term, which may cause conflict with the business shareholders or owners. In the longer-term, however, most business owners will be in support of expansion, particularly if it increases the overall value of the business. Job losses versus keeping jobs This was a big issue for many businesses during the recent economic downturn. In order to reduce costs and not spend cash, business managers made redundancies amongst their workforce or introduced other measures like short-time working to reduce wage costs. This will have been supported by business owners and managers. However, it created a potential conflict with stakeholders such as employees (who were directly affected), the local community (affected by local job losses) and suppliers (which suffered from a reduction in business). © Tutor2u (www.tutor2u.net) 2017 P a g e | 22 AQA GCSE Business Causes of conflicts between stakeholders “Short-term” thinking by managers who want to maximise profits today, may discourage important long-term investment in the business which would increase owners profits in the long run Investing in new machinery to achieve better efficiency to raise profits for the owners, may result in job losses Extending products into mass markets to increase sales and profits for shareholders may result in lower quality standards for consumers © Tutor2u (www.tutor2u.net) 2017 P a g e | 23 AQA GCSE Business Business location Introduction Where to locate is an important decision for all organisations. This is especially true however, for a new business. Should it be based at home or located in a nearby office, shop or industrial unit? Location is also important for existing or growing businesses. Should they stay where they are? Do they need bigger premises? Would it be an advantage to relocate to somewhere else, either in this country or to a different country? Can the business use modern technology to create a “virtual business,” so that its employees are all working from home? Not every kind of start-up business can be based at home. For a new shop, for example, a good location is very important. One of the most important considerations about location for any business will be cost. A start-up business is likely to have limited financial resources and therefore will want to minimise its set-up costs, whereas an existing business is likely to have competitors and will want to keep costs low, in order for it to have the opportunity to compete more effectively on price. Having premises will mean that a business will have to pay rent, rates, insurance and many other ongoing costs, as well as the rental deposit or purchase costs. Other factors determining location Whatever the business, there are several other factors, in addition to cost, that influence the choice of location. These are: Raw materials The business may depend on supplies of a particular raw material, so costs will be lower if the business is located near the supplier, for example where the raw material is grown or where a distributor is based. This factor tends to be more important for primary and manufacturing businesses, rather than businesses in the tertiary (service) sector. Labour When a start-up business needs to hire employees then access to a reliable supply of skilled staff will be important. Businesses that are labour- intensive often look to locate in areas of traditionally low wages or higher unemployment, although this will depend on the skill level that the business needs and the availability of this type of worker. This factor is important for all businesses, but may be less significant if the business uses a lot of machinery. Market - customers Businesses may need to be located near particular centres of population. and population For example, if the product is targeted at a particular type of customer, for example older-aged people, then it is important to be located where they live. This is particularly important for businesses in the tertiary sector, as they provide a service. © Tutor2u (www.tutor2u.net) 2017 P a g e | 24 AQA GCSE Business Government This may be available to set up in a particular location. These “assisted assistance areas” are considered to be the poorer parts of the country and may have less wealthy customers. They may however, have cheaper labour available. Assistance may come in the form of grants, loans, reduced tax burdens or use of government owned buildings. Communications This includes transport facilities (road, rail, air), as well as information and infrastructure. Transport links are particularly important if the business delivers products, uses a sales force or depends on imports and exports to function. Information technology is less of an issue these days, as even new businesses can normally have fast and reliable broadband internet connections. Competition All businesses need to be aware of where their competitors are based when deciding on their own business location. This is particularly important if the business is providing a service. If a new business sees a “gap in the market” where there is no competitor, this might be a good reason to locate there. However, this might mean that this is not a profitable location for any business. In some cases it may be of benefit to be near a competitor, as customers may come to the competitor but see another business that is nearby. This can be seen with the popularity of retailers located in retail parks or clothing stores being clustered together in shopping centres. There is no magic formula which can be applied in deciding the most important factors in choosing a location. Sometimes the convenience of the location for the entrepreneur will be more important than even cost considerations. The type of business (primary, secondary or tertiary) will also be important, but the short and long term objectives of the business should also be considered, for example, will a manufacturing business have enough room to expand if it needs to increase production in the future? © Tutor2u (www.tutor2u.net) 2017 P a g e | 25 AQA GCSE Business Business planning Introduction In order to be successful, businesses will need to plan. In most cases, this will be through the creation of a business plan. A well-used and famous saying is “failing to plan is planning to fail”. What is a business plan? A business plan is a written document that describes a business, its objectives, its strategies, the market it is in and its financial forecasts. The business plan has many functions, from securing external funding to measuring success within the business. Although a start-up business will need a business plan, the existence of such a document will also be important for an existing business. In this case the plan might be for a longer period and will need to be reviewed on a regular basis. The purpose of business planning The main reasons why a start-up business should produce a business plan are: Provides a focus on the business ideas - is it really a good one, and why? Producing a document helps clarify thoughts and identify gaps in information The plan provides a logical structure to thinking about the business It encourages the business entrepreneur to focus on what the business is really about and how customers and finance-providers can be convinced to buy and lend the business money It helps test the financial viability of the idea - can the business achieve the required level of profitability and not run out of cash? The plan provides something which can be used to measure actual performance A business plan is essential to raising finance from outside providers, such as investors and banks In addition, existing businesses will use this process to: review their current performance allows business objectives to be modified if required allows departments of the business to produce their own plans, for example marketing plan, human resources plan. These plans will guide their policies, resource requirements and departmental operations update their current business strategy or plans for the future, based on their current performance, changes to the business environment, over which they have little control, and revised objectives © Tutor2u (www.tutor2u.net) 2017 P a g e | 26 AQA GCSE Business overall it will help the business make informed decisions Information that should be included in a business plan A simple business plan is suitable for a start-up business and is written by the entrepreneur. It summarises the key aims and targets of the business and the actions required to achieve them. The plan will include areas such as: The idea - a simple description of the proposed business Where the idea came from and why it is a good one Objectives and key targets for the business - sales, profit, growth (gives a sense of direction for the business) ideally for the next 3-4 years Finance required - how much from the owners, how much to be loaned over how loan and from whom Market overview – results of market research, main segments, market size (value, quantity), growth, market shares of main competitors (if known) How the business will operate (location, premises, staff, distribution methods) Cash flow forecast (important to ensure the business does not run out of cash) Forecast revenue, costs and profits For a large or growing business the same basic structure will apply, but there will be more detail. In this case, a large business plan will often be drawn up for three to five years. © Tutor2u (www.tutor2u.net) 2017 P a g e | 27 AQA GCSE Business Advantages and disadvantages of business planning Although it would seem essential that all businesses should plan, in reality there are many cases where firms will not have a business plan at all. In these situations, the planning process will not be detailed and decisions will be often made on the spot when they need to be taken. These businesses will rely on “gut instinct” and “experience” to succeed – although many will fail. A summary of the benefits and drawbacks of having a formal business plan is provided in the table: Advantages Disadvantages  Having a plan does not guarantee that  Allows entrepreneurs and existing it is used or that the firm will succeed. businesses to review their ideas and to The plan may be poor quality, due to a see whether they will provide a lack of experience by the people who profitable future wrote it  Reduces risk by providing a guide for  Any plan will require constantly the business as to what needs doing updating, as internal and external and when circumstances change  Allows the business to review its  Producing and reviewing a plan on a progress compared to the plan and regular basis requires time and effort make changes if required which may be expensive, especially for  Will help to ensure finance is available, small businesses for example getting a bank loan, as  Can cause new opportunities to be lenders will see a business is organised missed, if they are not in the plan Costs, revenue and profit One of the key parts of the business plan will be the financial section. This will identify and review business costs (fixed costs, variable costs and total costs), revenue and profit. There will be forecast data for a number of years. More details of these crucial business concepts are included in section 6 which relates to business finance. © Tutor2u (www.tutor2u.net) 2017 P a g e | 28 AQA GCSE Business Expanding a business Introduction Most business want to expand – to grow sales, increase profits, add new locations and take on more staff. However, expansion is not always easy; it may be risky and it might not be the correct option for some businesses. Expansion can be measured in different ways, some of which are considered below: Sales Profits Capital invested Output How many employees work for the business Number of outlets or locations Value of the business Market share A useful way to compare and contrast the options for business expansion is to think in terms of organic (internal) and external growth. Some businesses will just use one of these options, some will use both. Organic growth Organic growth can be defined as: “expansion from within a business by expanding the number and/or range of products and/or locations” Organic growth builds on the business’s own capabilities and resources. For most businesses, this is the only expansion method used. Organic growth involves approaches such as: - Designing and developing new product ranges - Implementing marketing plans to launch existing products directly into new markets, for example exporting. This can be linked to an introduction or development of e- commerce - Opening new business locations – either in the domestic market or overseas. This can be achieved through franchising - Investing in research and development to support new product development - Investing in additional production capacity or new technology to allow increased output and sales volumes - Outsourcing by using other businesses to contribute to increased production by making goods on behalf of the business - Training employees to help them acquire new skills and address new technology © Tutor2u (www.tutor2u.net) 2017 P a g e | 29 AQA GCSE Business Business case studies Just Eat was set up in 2001 and has grown rapidly. It is now the world’s leading marketplace for online food delivery, operating in 12 countries. They provide a service linking the consumer with local take away delivery Just Eat food outlets, serving everything from pizza to sushi and burgers to burritos. This has resulted in consumers being able to order on-line from their favourite local take-away, even if it is a small sole trader business! The ability to order on-line provides a clear example of organic growth through e-commerce. Cadbury’s do not mould and package all of their finished products themselves. They outsource production of certain product lines, particularly seasonal products such as Easter eggs, to carefully chosen Cadbury’s outsourcing partners. This is due to Cadbury not having the capacity to produce and store the high volume of Easter eggs that are demanded each year. This highlights how organic growth can be achieved through outsourcing, as it allows a business to expand, in this instance, production, without the business taking on the cost and risk of expanding themselves. Hotel chains, such as Premier Inn, continue to report strong growth which Premier is spreading from London to other UK cities, such as Birmingham, Leeds and Edinburgh. Demand has increased from both the business and leisure Inn sectors throughout the UK and investment in new hotels and hotel refurbishments is at record levels. This shows a clear example of organic expansion through the opening up of new hotels. Keep a look out for these kinds of business stories and other individual business case studies. Add them to your notes. Has the business achieved organic growth by adding new products, expanding into new geographical areas or increasing its share of the market? Advantages and disadvantages of organic growth What are the advantages and disadvantages of organic growth? Here is a summary: Advantages Disadvantages  Less risky than taking over other  Growth achieved may be dependent on the businesses growth of the overall market  Can be financed through internal  Harder to build market share if the business funds, for example retained profits is already a leader  Builds on a strengths of the business,  Slow growth – shareholders may prefer for example brands, customers more rapid growth  Outsourcing means growth can be  Outsourcing risks quality not being as good achieved without costly new as the original firm’s produced goods, with investment possible delays through additional distribution  © Tutor2u (www.tutor2u.net) 2017 P a g e | 30 AQA GCSE Business Advantages Disadvantages  Allows the business to grow at a more  Franchises can be hard to manage steady rate effectively  Growth through e-commerce allows  Investing in sophisticated e-commerce businesses to access potential systems can be expensive; customers may customers 24/7, without the need to expect free delivery; the business would open up in potentially expensive need to be set up to deal with the locations near to where customers are processing of returns based Franchising The use of franchising is a popular method of organic growth, particularly for businesses operating in the service sector, which want to expand into more locations in order to build sales and profits substantially. The basic idea for a franchise is this. A franchisor grants a licence, the franchise, to another business, the franchisee to allow it to trade using the brand or business format. There will be restrictions on the franchisee regarding its products or services and its sources of materials, but it is a low risk and relatively low cost of option that does allow a franchisee to have some independence and freedom. Remember that the franchisor is in charge - the franchisor is the original owner of the business idea. Franchises are a significant and increasing part of business life in the UK. Based on the BFA/NatWest franchise survey (2015) here are some quick statistics that illustrate that: Percentage of units profitable (including new businesses): 97% Franchises generated annual sales of £15.1 billion in the UK in 2015, selling through 44,200 franchised outlets, employing 621,000 people There are over 901 different franchisor brands in the UK, with new franchise ideas becoming available every year Average turnover or revenue continues to rise; in 2015 over half had an annual turnover of more than £250,000 Start-up costs may not be too expensive and can be as little as £10,000 and are typically about £50,000 In 2015, over 97% of franchises, including new businesses, were profitable Franchises are particularly popular in the service (tertiary) sector. Franchises offering property services, for example estate agency, cleaning, gardening etc are the most popular © Tutor2u (www.tutor2u.net) 2017 P a g e | 31 AQA GCSE Business Growth through franchising If a business wants to grow rapidly without the trouble of running the new businesses, then selling franchises might be a good option. The franchisor is able to expand nationwide or internationally, without having to invest in staff or premises. This method is particularly popular in the fast food industry, where often over 50% of outlets are operating as franchises. There are arguments for and against this as a growth strategy for a franchisor and these are summarised here: Advantages to the franchisor Disadvantages for the franchisor  The franchisor still controls key aspects  There is some loss of control, as the of the brand and operation franchisee runs the business on a day-to- day basis  Less finance is required to expand as the  It may be difficult to recruit good franchisee provides most of the capital franchisees who may prefer being needed employed as a manager, rather than running a franchise business  Little or no involvement in the day-to-day  If too many franchisees are sold then running of the franchise, freeing up time they may be located too close to each and resource , for example the franchisee other, which will make the franchises would be concerned with finding staff to harder to sell. run the operation, rather than the franchisor  The franchisees provide the  Reputation of the franchise and the entrepreneurial effort and energy brand is in the hands of the franchisee. required to make each location succeed Poor decision-making could lead to the franchise gaining a poor reputation in its market  Better able to expand into multiple  The franchisee decides how fast the locations quickly business grows once the franchise has been awarded  Business benefits from several sources of  The franchisee takes a proportion of the finance from the franchisee, including revenue earned by the franchise royalty payments and franchise fees © Tutor2u (www.tutor2u.net) 2017 P a g e | 32 AQA GCSE Business External growth In order to speed up its growth, many businesses choose a strategy of external growth and expand through mergers or takeovers. Takeovers are where one business buys a controlling interest in another. For a company this would mean buying over half of the shares in that company. These might be agreed by the company being taken over, but in some cases they are not (known as a hostile takeover). The firm being taken over will cease to exist and its staff and resources will be owned by the business making the takeover. Mergers are where two businesses agree to join together to make a new business. Takeovers and mergers happen for many different reasons and the two firms involved may be competitors to each other, suppliers or customers to a business, or the businesses involved may have related (or unrelated) products and services. Advantages and disadvantages of external growth Of course, there are various advantages and disadvantages of growth, and specifically to external growth, that are summarised here: Overall advantages and disadvantages of growth: Advantages Disadvantages  Economies of scale which will decrease  Diseconomies of scale can occur if a the cost of producing each unit business becomes too large, resulting in an increase in the cost of producing one unit  Larger businesses may be able to raise  If a business grows too large or too money more easily and have more quickly it may become inefficient in buying power to get cheaper raw terms of management and worker materials motivation © Tutor2u (www.tutor2u.net) 2017 P a g e | 33 AQA GCSE Business Advantages and disadvantages of external growth through mergers and takeovers: Advantages Disadvantages  Reduced competition and increased  Resentment and clashes of culture may market share will allow a business to occur between different businesses, have more security and the ability to which may reduce the effectiveness of increase prices the merger or takeover  Risk is spread if products are different to  May need to make some workers the core product redundant, especially at management levels, which can reduce motivation  The two businesses may allow a transfer  The firm making the takeover may not of knowledge, skills and/or technology. have enough knowledge of the other Goods and services can be shared business to make the new business successful  Costs might be saved as the businesses  The cost savings may not be easy to might have duplicated facilities, for achieve, as staff will need to be made example headquarters, outlets in the redundant and premises and equipment same places sold Examples of mergers and takeovers As you look through the business media you should come across many examples of mergers and takeovers: Feb 2014 Facebook bought messaging app “WhatsApp” in a deal worth a total of $19bn (£11.4bn) in cash and shares. Facebook and WhatsApp has more than 450 million monthly users and is popular with people looking to avoid text messaging charges. WhatsApp WhatsApp gives Facebook Zuckerberg inroads into international markets and, as importantly, to a younger demographic. June 2016 Microsoft bought the business-focused social network LinkedIn for $26.2bn (£18.5bn) in cash, its biggest ever Microsoft and purchase. The takeover was agreed by both companies. Microsoft said that acquiring the LinkedIn network would give it LinkedIn a competitive advantage and fit well with its business-focused software, such as Office. March 2015 H.J. Heinz Co, famous for its ketchup and baked beans, merged with Kraft Foods, famous for macaroni and Heinz and Kraft cheese in a box, as well as brands such as Maxwell House Foods coffee. They create the third-largest US food company. The deal meant each share was exchanged for one share in the new combined company, plus a cash dividend of $16.50 per share. Heinz shareholders own 51% of the shares, Kraft shareholders the rest. © Tutor2u (www.tutor2u.net) 2017 P a g e | 34 AQA GCSE Business Economies of scale One of the main benefits of growth is to increase the efficiency of the firm. These benefits are known as economies of scale and mean that the average cost (or cost per unit) is reduced. It is worth remembering that the total costs or overall costs of the business do not decrease when a business grows in size, but the cost of making one unit can. The ability of a growing business to reduce its unit costs and benefit from economies of scale can be achieved in different ways. For example, an expanding business will have the ability to employ more specialist staff/managers, who will then make more effective decisions. Another is that this type of business would be able to benefit from more favourable interest rates with the bank, due to the business having more assets to secure against a loan. Two of the most important economies of scale that an expanding business will experience however, are purchasing and technical economies of scale. Purchasing economies of scale are when big businesses are able to negotiate discounts for buying large quantities or bulk-buying supplies of materials. This reduces the unit cost of each item purchased Technical economies of scale are gained by large-scale businesses, as they can afford to invest in expensive and specialist high output machinery for production, which would not be cost-efficient for a small business to purchase. This would then allow the business to produce far greater quantities from the machinery, resulting in the average unit cost of production decreasing Diseconomies of scale If a business grows too fast or becomes too large, then it may become less efficient as a result of diseconomies of scale. This means the average unit cost of making each item in the business will increase. Examples of different diseconomies of scale are described as follows: Communication might be more difficult in a big business, because the organisational structure becomes more complex and the chains of command longer. There may also be an increase in the number of locations a business operates in, both nationally and sometimes internationally. This can make decision-making slower and communication inaccurate Motivation might decrease in a growing business, as workers feel that managers and owners of the business are too remote and therefore do not value them. They may believe that their role is unimportant and this can lead to low morale, resulting in a possible decrease in productivity Coordination may also be more difficult in a large business. There may be different sites for different products or different functions of the business. Controlling and coordinating a large organisation might be difficult, resulting in the possible employment of more managers or a duplication of roles, which will increase costs © Tutor2u (www.tutor2u.net) 2017 P a g e | 35 AQA GCSE Business Average unit costs An average unit cost is the cost to the business of making one item. In order for a business to calculate this, it will need to divide the total costs of the business by its total output. Total costs = fixed costs + variable costs Average unit cost = total costs output This figure will change over time. If the average unit cost is increasing, this means the business is becoming less efficient, which may be caused by diseconomies of scale if the business is growing. Alternatively, if the average unit cost is decreasing, this means the business is becoming more efficient, which may be caused by the business experiencing and benefiting from economies of scale. Using average unit costs For any business, calculating average unit costs is one of the key measures that shows how well it is performing. A business will always want this figure to be as low as possible, as this will indicate that is operating efficiently. This will not guarantee however, that the business will make a profit, as goods produced still have to be sold! Example Output of bolts 1000 2000 3000 4000 5000 Total costs £100 £180 £210 £240 £325 Average unit cost 10p 9p 7p 6p 6.5p The table shows that as the output of bolts produced increases, the total costs of producing these bolts increases too. At the same time, the average unit cost of producing each bolt decreases up to a certain point, indicating that the business benefits from economies of scale. However, at an output level of 5,000 bolts, the average unit cost of making one bolt has increased, showing that the business is operating less efficiently and it is experiencing some diseconomies of scale. The best level for the business to operate at is when its average unit cost is at its lowest point, which in this case would be 4,000 units. © Tutor2u (www.tutor2u.net) 2017 P a g e | 36 AQA GCSE Business Section 2 Influences on business Topic overview Students need to be aware of how businesses are affected by external factors and how these influence the four functional areas of business, namely business operations, human resources, marketing and finance. There should also be consideration of how businesses will change in response to changes in these external factors. Section Key things to learn Technology The impact of changing use of ICT E commerce and how it allows access to wider markets Digital technology and digital communication Digital communication in relation to stakeholders Ethical and environmental Ethical behaviour considerations Ethical considerations versus profit Environmental considerations Costs and benefits of environmental responsibility Sustainability Economic climate How interest rate changes affect businesses How employment levels affect businesses Income levels and their effect on demand for products and services Globalisation How UK businesses compete internationally Exchange rates and their impact Legislation The impact of legislation on businesses Employment law Health and safety law Consumer law Competitive environment Market competition and its impact Uncertainty and risks © Tutor2u (www.tutor2u.net) 2017 P a g e | 37 AQA GCSE Business Technology Introduction In recent years there has been a revolution in how businesses can benefit from new technology. The invention and widespread use of computers and mobile phones has allowed massive changes to the way businesses operate and how they communicate. It has also redefined markets for many businesses and how they conduct their buying and selling operations. Digital technology is an overall term used to include all aspects of computer use and can be applied to most areas of human life from its use in education and health, to its use by government and business. ICT and e-commerce Businesses have been using computers for over thirty years. Originally computers were used mainly for the storage of data and the production of documents, but as technology has developed, the amount of uses for information and communication technology (ICT) has increased to include stock control and production technologies, such as computer aided design (CAD) and computer aided manufacturing (CAM). The revolution in the use of computers has taken place since the invention of the worldwide web, which has allowed computers to be linked both nationally and internationally. Combined with the use and availability of mobile phones and smart phones, this has created a new digital world where businesses, customers and employees can all benefit from cheap and affordable technologies. In the last twenty years the buying and selling of goods through e-commerce has grown rapidly. This has included auction sites and internet retailers, as well as high street retailers developing internet sites. There have been many benefits of e-commerce to its users but one of the most important is it allows access to wider markets. This has continued to develop with more recent use of mobile smart phones for buying and selling through m- commerce. Businesses such as Amazon and EBay, are now worldwide internet retailers and have also increased the number and type of customers they sell to within the UK. Many customers will choose to shop on line from the comfort of their own home, as they either do not want the inconvenience or do not have the time to spend visiting shops to make the same purchase they could through using e-commerce. Other existing businesses, such as Tesco and easyJet, have also benefited from targeting a wider range of customers through adopting e-commerce into their business operations. Firms that have been slow to implement e-commerce, have often suffered from losing sales to competitors who took this leap early. This includes Morrisons, which started selling on- line in 2014 in comparison to Tesco.com, which was launched in 2000, as well as 74% of all small businesses. © Tutor2u (www.tutor2u.net) 2017 P a g e | 38 AQA GCSE Business Digital technology Digital technology is a very wide term. Businesses will use computer based tools, systems, devices and resources that generate, store or process data. They will also use digital communication. There are many aspects to digital technology including social media, online multimedia, productivity applications, cloud computing, e- commerce and communication. Digital communication is now in widespread use throughout the world. This includes all devices such as smart phones, tablets, desktops and video conferencing equipment. It has enormous applications. Digital communication can also happen through social media platforms. The use of digital communication and digital technology can be applied to all stakeholders. Some specific examples are as follows: Customers – ordering, invoicing or sending bills, customer service, advertising including the use of social media (Facebook, Twitter etc.) Suppliers – ordering, payments, product information Employees – payslips, job information, booking holidays, checking hours to be worked, emails and messaging to and from managers Shareholders – annual reports, dividend information and payments Managers – using software such as Skype, teleconferencing and web conferencing to communicate with other managers, customers and employees In addition e-mail could be used for communication to all stakeholders, to share relevant information that is appropriate to the individual stakeholder needs © Tutor2u (www.tutor2u.net) 2017 P a g e | 39 AQA GCSE Business Advantages and disadvantages of using digital communication Advantages Disadvantages  Cheap to operate and widely used.  May be unreliable and no guarantee that Messages and data can be transmitted messages will be received or accessed by quickly and is increasingly possible the person intended to receive them throughout the world  Data and messages can be stored  Can lead to communication overload as electronically, so saves cost of storage. more messages are created and more Can be saved digitally and backed up information received and sent. Important using cloud storage messages and emails may be lost or delayed  Possible to produce translated versions  Equipment may not work and not all using online applications places will be connected  Teleconferencing. videoconferencing and  Environmental and health concerns over web conferencing are possible which can electronic transmission produce considerable time and cost savings  High quality advertising and marketing  Lack of leisure time, as employees messages are possible through high expected to be available longer hours definition graphic and video images and when on holiday  Increase in teleworking, giving  Constant training requirement for staff to employers a greater pool of applicants to understand how to use digital recruit from, as there is less need for communication efficiently employees to live near to where the business is physically located How businesses are affected by digital technology Every business area can make use of digital technology. Ignoring the pace of change is not an option, even if in the short run it may be disruptive and expensive to make changes or adopt new technology in a business. If a firm does ignore the pace of change, the chances are its competitors will not, which will result in them becoming more efficient. Those using old technology will be left behind and may not survive. Recent business closures caused by this have included Blockbuster, HMV and Jessops, all of which failed to anticipate the impact of digital technology on their businesses. © Tutor2u (www.tutor2u.net) 2017 P a g e | 40 AQA GCSE Business Some examples of how digital technology can be used in a business are detailed here. Organisation – there have been massive changes to the way business administration operates through the use of ICT. This has included use of computers for communication, data storage and data retrieval. Remote or teleworking has become commonplace and the cost of administration has reduced considerably. Applications such as Skype, email and instant messaging allow easy communication to take place with remote workers. Finance – financial recording is now predominantly computer based with various software packages available. Digital applications are also used for electronic billing and payments. Many firms will also use programmes for financial modelling and monitoring linked to management information systems. Supermarkets can even see how future weather will affect their sales and then adjust their stock accordingly. Online customer payments can be received through electronic transfers as well as contactless payments all of which make it easier for the customer to pay and quicker for the business to be paid. Human Resources – most aspects of human resource work has benefited from the use of computers. In many businesses, the application process for a job vacancy is partly or fully completed on line and there is also widespread use of digital training (often undertaken at home through digital links). Marks and Spencer’s initial stages of the recruitment process for a customer assistant are all completed on-line. This allows the business to screen potential applicants to determine their suitability for a role within one of its stores, before the company invites a potential applicant into store for a role play interview. Production – as well as computer aided design (CAD) and computer aided manufacturing (CAM), other aspects of production have benefited from digital technology. Stock control can be fully automated and quality control is often linked with computer based monitoring. For example, in breweries technology will weigh each can of beer that is produced. Any can that is under filled will be separated, so that it is not packaged and sent off to supermarkets or wholesalers, the customers of the brewery. Marketing – this is through the use of e-commerce and websites. The marketing function will also make use of computers in terms of product design, advertising, social media and its use of customer databases (often linked to market research). For example, the growth of loyalty cards allows marketing departments and businesses to track customer shopping habits and send out promotions and information that directly relate to individual customer needs. In late 2015, M&S launched its own version of a loyalty card, the “Sparks” card, 18 years after the launch of the Boots advantage card, which launched in 2007. © Tutor2u (www.tutor2u.net) 2017 P a g e | 41 AQA GCSE Business Ethical considerations Introduction In recent years, business stakeholders have taken a much greater interest in the wider aspects of behaviour of business. These include consideration of ethics, the environment and issues to do with sustainability and global warming. Business ethics Business ethics is concerned as to whether businesses have morally correct behaviour. This can be applied to its relationship with suppliers, employees, customers, but will also be relevant to its relationship with the wider community. An ethical decision will be one that is based on what is morally right, rather than the most profitable option. Ethics should not be confused with the law. A decision might be unethical but legal, or ethical and illegal. Some examples of unethical business behaviour are given in the table, together with the impact that these decisions could have on the business itself: Stakeholder Example Effect/impact on the business Consumers Should a business charge very Businesses might get extra profits in the short high prices where consumers run, but its reputation might suffer and new have no choice