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«Unit 2: BUSINESS AND PEOPLE (Exam = 1 hour) Unit 3: PRODUCTION, FINANCE AND THE EXTERNAL BUSINESS ENVIRONMENT (Exam = 1.5 hours – Case Study) This ...»

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Unit 2: BUSINESS AND PEOPLE (Exam = 1 hour)


BUSINESS ENVIRONMENT (Exam = 1.5 hours – Case


This revision book is split into the two units. A glossary

of key terms for unit 3 is at the end of the booklet. You

will also be provided with some model answers for unit 3

at a later date.

A copy of the diagnostic that you completed in class has

been included for your own use.

This revision guide has been written by the Business Studies Department – St Crispin’s School.

Unit 2: Business and People


Unincorporated business = sole traders and partnerships Incorporated business = limited companies Other types of business organisations = franchises, multinationals, public corporations, charities (not-for- profit organisations), co-operatives Sole traders (sole proprietors) A sole trader describes any business that is owned and controlled by one person - although they may employ workers. Individuals who provide a specialist service like plumbers, hairdressers or photographers are often sole traders.

Sole traders do not have a separate legal existence from the business. In the eyes of the law, the business and the owner are the same. As a result, the owner is personally liable for the firm's debts and may have to pay for losses made by the business out of their own pocket. This is called unlimited liability.

Advantages  It is easy to set up as no formal legal paperwork is required.

 Generally, only a small amount of capital needs to be invested, which reduces the initial start-up cost.

 As the only owner, the entrepreneur can make decisions without consulting anyone else.

Disadvantages  The sole trader has no one to share the responsibility of running the business with. A good hairdresser, for example, may not be very good at handling the accounts.

 Sole traders often work long hours. They may find it difficult to take holidays or time off if they are ill.

 They face unlimited liability if the business fails.

Partnerships – Between 2 and 20 partners In case disagreements between partners occur is is a good idea for a DEED OF PARTNERSHIP to be drawn up.

This is a legal document stating the responsibilities of partners, for example, how profits and losses are to be shared; how the business is to operate.

Dental surgeries are often partnerships Doctors, dentists and solicitors are typical examples of professionals who may go into partnership together and can benefit from shared expertise. One advantage of partnership is that there is someone to consult on business decisions.

The main disadvantage of a partnership comes from shared responsibility. Disputes can arise over decisions that have to be made, or about the effort one partner is putting into the firm compared with another. Like a sole trader, partners have unlimited liability.

FRANCHISES An entrepreneur can opt to set up a new independent business and try to win customers.

An alternative is to buy into an existing business and acquire the right to use an existing business idea. This is called franchising.

A franchise is a joint venture between:

 A franchisee, who buys the right from a franchisor to copy a business format.

 And a franchisor, who sells the right to use a business idea in a particular location.

Many well-known high street opticians and burger bars are franchises.

Opening a franchise is usually less risky than setting up as an independent retailer. The franchisee is adopting a proven business model and selling a well-known product in a new local branch. However, the independent retailer will have less control and will have to pay part of it’s profit to the franchisor as a ROYALTY PAYMENT.

CO-OPERATIVES A cooperative may also be defined as a business owned and controlled equally by the people who use its services or by the people who work there.

Everyone has an equal say in the business no matter how many shares they own. It is therefore very democratic.

For worker co-ops the profit is split between the workers and this can be very motivating as the profit goes only to workers and not to any other shareholders.


An organisation owned by the government, eg Post Office, BBC. The main objective would be to provide a good service for customers and NOT to make a profit.


Companies that operate in several countries are called multinational corporations (MNCs) The US fast-food chain McDonald's is a large MNC - it has nearly 30,000 restaurants in 119 countries.

Advantages enjoyed by multinationals;

–  –  –

A limited company has special status in the eyes of the law. These types of company are incorporated, which means they have their own legal identity and can sue or own assets in their own right. The ownership of a limited company is divided up into equal parts called shares. Whoever owns one or more of these is called a shareholder.

Shareholders receive dividends which are part of the profit Because limited companies have their own legal identity, their owners are not personally

–  –  –

A major disadvantage however, is that financial information can be obtained by anyone.

Also to form a limited company can be time consuming. Limited companies pay corporation tax on their profits.

There are two main types of limited company:

 A private limited company (ltd) is often a small business such as an independent retailer in a market town. Shares do not trade on the stock exchange. Shareholders are usually family and friends. Therefore there is no risk of a takeover as all shareholders have to agree if they want to sell their shares. However, because small number of shares are sold less finance can be raised.

 A public limited company (plc) is usually a large, well-known business. This could be a manufacturer or a chain of retailers with branches in most city centres. Shares trade on the stock exchange so lots of CAPITAL can be raised to invest into the business and help it to grow. However, anyone can buy shares and if another company buys over 50% of the shares they can takeover the control of the company. This is because 1 share = 1 vote. For a ltd company to change to a plc at least £50,000 worth of shares must be sold.

Unlike a sole trader or a partnership, the owners (shareholders) of a plc are not necessarily involved in running the business, unless they have been elected to the Board of Directors.



Business Objectives When a sole trader sets up they may have some unstated aims or objectives - for example to survive for the first year. Other businesses may wish to state exactly what they are aiming to do, such as Amazon, the Internet CD and bookseller, who wants to “make history and have fun”.

Objectives give the business a clearly defined target. Plans can then be made to achieve these targets. This can motivate the employees. It also enables the business to measure the progress towards to its stated aims.

The main objectives that a business might have are:

Survival – a short term objective, probably for small business just starting out, or when a new firm enters the market or at a time of crisis.

Profit maximisation – try to make the most profit possible – most like to be the aim of the owners and shareholders.

Profit satisficing – try to make enough profit to keep the owners comfortable – probably the aim of smaller businesses whose owners do not want to work longer hours.

Sales growth – where the business tries to make as many sales as possible.

This may be because the managers believe that the survival of the business depends on being large. Large businesses can also benefit from economies of scale.

A business may find that some of their objectives conflict with one and other:

Growth versus profit: for example, achieving higher sales in the short term  (e.g. by cutting prices) will reduce short-term profit.

Short-term versus long-term: for example, a business may decide to accept  lower cash flows in the short-term whilst it invests heavily in new products or plant and equipment.

Large investors in the Stock Exchange are often accused of looking too  much at short-term objectives and company performance rather than investing in a business for the long-term.

Alternative Aims and Objectives Not all businesses seek profit or growth. Some organisations have alternative objectives.

Examples of other objectives:

Ethical and socially responsible objectives – organisations like the Co-op or the Body Shop have objectives which are based on their beliefs on how one should treat the environment and people who are less fortunate.

Public sector corporations are run to not only generate a profit but provide a service to the public. This service will need to meet the needs of the less

well off in society or help improve the ability of the economy to function:

e.g. cheap and accessible transport service.

Public sector organisations that monitor or control private sector activities have objectives that are to ensure that the business they are monitoring comply with the laws laid down.

Charities and voluntary organisations – their aims and objectives are led by the beliefs they stand for.

Changing Objectives

A business may change its objectives over time due to the following reasons:

A business may achieve an objective and will need to move onto another one (e.g.

survival in the first year may lead to an objective of increasing profit in the second year).

The competitive environment might change, with the launch of new products from competitors.

Technology might change product designs, so sales and production targets might need to change.

Primary Sector, Secondary Sector and Tertiary Sector Primary sector Produces raw materials, involves some sort of extraction e.g. mining, farming, fishing, chopping down trees Secondary Sector This is the manufacturing sector where raw materials are turned into finished goods for sale. E.g. Car factory or paper mill Tertiary Sector This is the retail and service businesses so all shops and people that offer services to others e.g. cleaners, gardeners, dog walkers etc. A service is something you cannot hold or touch e.g. insurance.

Decline of primary jobs  We are running out of natural resources, our coal and fish stocks are almost gone, so less miners and fishermen  We also cannot compete against cheap foreign imports so less farmers  We have more leisure time so need more entertainment e.g. cinema jobs Decline of Secondary jobs  We cannot compete against foreign imported made goods  We are facing a process of de-industrialisation as we become a less industrial nation and move toward knowledge work such as web design and money management  We are automating manufacture of goods such as robots to make cars, means less jobs for workers.

Decline of primary jobs  We are running out of natural resources, our coal and fish stocks are almost gone, so less miners and fishermen  We also cannot compete against cheap foreign imports so less farmers Location A business's location can make an important difference to its success. Choosing the right location means taking into account a number of factors.

The importance of location Being close to main roads can be an advantage for a business Location is the place where a firm decides to site its operations. Location decisions can have a big impact on costs and revenues.

A business needs to decide on the best location taking into account factors such


Customers - is the location convenient for customers?

 Staff - are there sufficient numbers of local staff with the right skills willing  to work at the right wage?

Support services - are there services offering specialist advice, training and  support?

Cost - how much will the premises cost? Those situated in prime locations (such  as city centres) are far more expensive to rent than edge-of-town premises.

–  –  –

Government and location The government offers grants and assistance to businesses that locate in areas

with high unemployment. Incentives include:

Grants to help with the cost of setting up a business. Grant money does not  need to be repaid.

Loans, which are repayable over many years at low rates of interest.

 Tax breaks, for example firms may be made exempt from paying business rates.

 Overseas location decisions Moving a business can have both advantages and disadvantages

Setting up a business overseas involves a number of challenges including:

Cultural and language barriers where managers are unfamiliar with local  customs.

Legal issues where local laws are different.

 Exchange rate issues. Unexpected changes in the value of sterling can have an  impact on prices, costs and profits.

Stakeholders What are stakeholders?

A stakeholder is anyone with an interest in a business. Stakeholders are individuals, groups or organisations that are affected by the activity of the

business. They include:

Owners who are interested in how much profit the business makes.

 Managers who are concerned about their salary.

 Workers who want to earn high wages and keep their jobs.

 Customers who want the business to produce quality products at reasonable  prices.

Suppliers who want the business to continue to buy their products.

 Lenders who want to be repaid on time and in full.

 The community which has a stake in the business as employers of local people.

 Business activity also affects the local environment. For example, noisy nighttime deliveries or a smelly factory would be unpopular with local residents.

Internal stakeholders are groups within a business - eg owners and workers.

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