Chapter (1) Business Activities

Business
An organization which produces goods and services. Businesses have to satisfied people’s
needs and wants.
Goods physical products like a mobile phone, a pair of shoes
Services non-physical products like banking, waste disposal
Needs basis requirements for human survival eg water, food, education
Wants people’s desires for goods and services. Eg luxury
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Advantages of Business activities (External benefit) (EB)
1.production of goods and services --- satisfied N& W --- improve SOL
2.employment of workers ---- increase in income --- D for g &s ---- improve quality of life
3.paying tax to the government --- can spend more on I/ H/E ---- improve country status
4.research into new products
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Sector 1) Public sector own and run by the central Gov
Gov: make decision and control;
Provide goods ----called Public Corporation
Provide services Eg: health care, education,
postal services

Public corporation (main features)

a state- owned public enterprise / nationalized industry
It is accountable to a government
May act in the public interest(benefit). (less profit motive)
There are no shareholders

2)Private sector not own and run by government

own by individual or group of individuals

(i)Non-profit making organization (no profit motive)

Aim to meet the needs & wants of their members
Eg charities, Pressure group, Trade union

(ii)Profit making organization (Business /firms)

(1)Sole trader
(2)Partnership
(3)Company

Private limited company Public limited company

(Ltd) (Plc)

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 Types of business
Private sector’s business organisation
1)Unincorporated business
where there is no legal difference between the owner and the business.
Eg sole trader, partnership

2)Incorporated business
Where the business has a separate legal identity from that of its owners.
Eg company

Unlimited liability
Where the owner of a business is personally liable for all business debts.
Risk of owner will be high.
Eg sole trader, partnership

Limited liability
Where a business owner is only liable for the original amount of money invested in the
business.
Risk of owner will be lower. willing to invest more.
Eg company
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1)Sole trader or sole proprietor
Unincorporated business
A business owned by a single person

Advantages
1.Independent ------ owner has complete control --- not answerable to anybody else.
2.Can offer a personal service ----because they are small ---- can provide personal service
eg credit -----customer satisfaction -----loyalty ---- improve image and reputation.
3.All profit is kept by owner ---- can get large amount of money --- worth creation/ can expand
4. Business can be based on the interests or skills of the owner-rather than working as an
employee for a larger firm.
5.May qualify for government help

Disadvantages
1.Have unlimited liability ---- def:
2.May difficult to raise finances ----only rely on owner saving --- lower ---not enough for
expansion ---- delay expansion and growth.
3.give up economies of scale --- SME --- may be high average cost --- P or P
No continuity ---- the business dies with the owner
Often faces intense competition from bigger firms.
Owner is unable to specialize in areas of the business that are most interesting – is responsible
for all aspects of management.

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(2) Partnership
A business formed by two or more people to carry on a business together, with shared capital
investment and , usually, share responsibility.
(owned by between 2 and 20 people.)

Deed of partnership
A binding legal document which states the formal rights of partners

Limited partnership
Where some partners provide capital but take no part in the management of the business.
Such partner will have limited liability and is called a sleeping partner

Advantages
1.More capital ---- more investment --- can make expansion ---- growth (become larger)
2.More expertise ------Partners can specialize in their area of expertise --- can provide more
services ----- customer satisfaction.
3.The burden of running a business is shared --- if making loss --- amount of loss for each ---
each suffer low burden.
4.Easy to set up and run ---- no legal formalities than corporate organization.

Disadvantages
1.Disagreement between partners ----- conflict occur --- firm may fall out.
2.Lack of independence -----A sole trader, taking on partners, will lose independence of
decision-making ---- Any partner’s decision is legally binding on all.
3.Profit has to be shared ---- so, each individual can get lower profit.
4.Have unlimited liability (with some exceptions -- Limited partnership)
5.Lack of continuity --- partnership ceases if one partner dies.

Recommendation
In order to reduce the disagreement between partners ---- firms should make Deed of partnership.
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Factors to be consider “ Partner A” whether or not to leave the partnership
Will he get his investment back and can invest in alternative.
Effect on the business.

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(3) Company
Shareholders
The owners of a limited company.
They buy shares which represent part ownership of a company
Shareholders have dividend right and voting right at AGM.
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Share
A certificate confirming part ownership of a company and entitling the shareholder owner to
dividends and certain shareholder rights.
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Flotation
The process of a company “going public” . ( Ltd -------- Plc )
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Prospectus
A detailed document issued by the directors of a company when they are converting it to
public limited company status. It is an invitation to general public to buy shares in the newly
formed plc.
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Stock market
A market for shares in Plcs
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Private limited company (Ltd)
Incorporated business which has a separate legal identity form that of its owners.
can sell shares to friends and relatives.
A small to medium – sized business

Advantages of Ltd
1.Shareholders have limited liability
2.More capital can be raised --- can sell shares to F & R --- more capital --- more investment ---
can expand --- become larger
3.Contiuty ---- Business continues if a shareholder dies because of Company has separate legal
identity
4.separate legal identity from owner --- in case the business gets sued.
5.Control cannot be lost to outsiders because original owner is still often able to retain control.

Disadvantages of Ltd
1.Not confidential ----Financial information has to be made public.
2.Time taken to set up ----Cost money (cost of conversion)
3.Profit are shared between more members --- so, each can get less amount of profit.
4.Take time to transfer share to new owner
5.Cannot raise huge amounts of money like Plc.

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Public limited company
Incorporated business which has a separate legal identity form that of its owners.
Shares can be openly bought and sold to general public on the stock exchange market.

Advantages of Plc
1.Large amounts of capital can be raised --- can sell share to general public --- more capital ----
more investment ---- expansion ---- become larger
2.Plc can exploit economies of scale --- being of they are large firm --- gain EOS ---- average
cost decline ------ P or P
3.Shares can be bought and sold very easily at stock market
May have a very high profile in the media
Shareholders have limited liability
May be able to dominant the market

Disadvantages of Plc
1.Expensive --- Setting up costs can be very expensive ---- P or P
2.chance of takeover by rival firms --- Outsiders can take control by buying shares
3.Not confidential ---- More financial information has to be made public
May be more remote from customers
More regulatory control due to Company Act --- more complex legal process.
Managers may take control rather than owners.

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Co-operatives
Groups of people who agree to work together and pool their resources (LLKE).
Are joint ownership orgainisation.

( owned by workers / members , producer)

Producer co-operatives common in agriculture in developing countries.

Types
1.Producer co-operatives (worker co-operatives)
Groups of workers who design and produce products and controlled by their workers

2.Retail co-operatives (consumer co-operatives)

Have the aim of providing their members (consumers) with good quality consumer goods and
services at reasonable prices

Common features
1.All members have one vote
2.All members help in the running of the business (help each other)
3. The profits are shared equally amongst members

Advantages
1.Equity ---- Members/ users are involved and have a opportunity to direct and control the
business. (no one has high bargaining power)
2. increased motivation ---- Shared profit between workers equally, so increase in
motivation.(there is no sense of resentment)
Resources are pooled for mutual gain
Increase purchasing power with suppliers
Increased marketing power ---- joint advertising.
More consumer power --- less social / environmental damage.

Disadvantages
1. inefficiency --- role of manager unclear and complex decision
2.Chance of takeover by large firms --- have insufficient skill to run

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Franchise
Where a business (the franchisor) allows another operator (the franchisees) to take under their
name.
Franchisees pay fees to the franchisor.
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Advantages to franchisor
1.Fast method of growth --- not need for market research--- time save / cost save
2.Cheap method of growth --- no capital requirement --- initial cost may be lower.
3.Risk may be lower ---- Franchisees take some of the risk. (risk of failure)
4.Franchisee more motivated than employees --- (Franchisee is also owner of the firm)

Disadvantages
1.need to share profit ---- Potential profit is shared with franchisee --- can get lower amount of
profit
2.may damage brand’s reputation --- due to Poor performance of franchisees --- damage firm’s
reputation.
3.Cost of support may be high ---- cost of support for franchisees may be high --- can get lower
profit
Franchisees may get merchandise from elsewhere
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Advantages to franchisee
1.Less risk ---- Product --- tried and tested idea is used / famous – risk of failure lower.
2.Back-up support is given --- makes less mistakes in the business (decisions such as the policies
for diversity and equality)
3.Set up cost are predictable --- can estimate the amount of initial investment ---- reduce
financial difficulties.
National marketing may be organized (access to local marketing)

Disadvantages
1.Profit is shared with the franchisor ---- amount of profit received may be lower.
2.Lack of independence --- strict operating rule must be applied. (clash of ideas)
3.Can be expensive way to start a business. --- Up-front costs (initial set up cost) to purchase the
franchise/ royalty fees may be a drain on firm cash flow)
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Joint venture
Where two or more companies share the cost, responsibility and profits from a business
venture.
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Holdings company
A business organization that owns and controls a number of separate businesses, but does not
unite them into one unified company.

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 Location decision

Decision (when)
- To start the business
- To expand the business --- existing place not sufficient
- Relocation
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Factors affecting business location
1)Cost of premises or land --- must be affordable / acceptable ---- if high --- less Profit (making
loss) / raise the Price
2)Cost and availability of labour --- should be low wages and salaries
(for factory) Meet the Quantity and Quality of Labour
3)Transport ---- should be smooth --- on time delivery ---- satisfaction --- loyalty --- image
increased.
4)Proximity to the market (close to their customers) (for Retail / Service organization )----
can access large number of customers ---- increased in sales and profit
5)Government constraints and opportunities (eg regional policy) ---- Gov: will reduce tax /
provide subsidies ---- cost of production decline
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Regional policy
Measures used by the government to attract businesses to “depress areas “ .
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Right location decision (Reasons)
1)close to the customer
2)cost of land
3)transportation

Go to other countries (consequences)

Advantages (Reason)
1)increased in Market share ---- local sales + Goble sales --- increased in sales --- increased in
profit --- can reinvest – become larger.
2)gain EOS ----can access cheap resource (LLK) --- average cost decline ---- can reduce the
price --- more competitive

Disadvantages
1)increased in competition ----there may be no: of seller high ---- need to reduce price (to
compete rival business ) ---- less profit.
2) increased in Risk --- require local knowledge and language problem/culture issue ---- can face
with difficulties

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