business costs

Start up costs - barriers of entry, legal permits, staff employment, manufacturing machinery, premises, etc.

Running costs are different to start up costs, as start up costs are a one off payment when opening a business, where as running costs are the recurring costs throughout a businesses lifetime, such as, electric bills, heating bills, staff wages, fuel costs.

Direct costs = direct materials e.g. engine parts,  direct labour e.g. wages paid to employees on the production line

Indirect costs = Indirect labour costs, e.g. management salaries and wages paid to security staff,  administration and distribution

Oppurtunity costs = values a product in what has been given up to obtain it.

total costs = fixed costs + variable costs

fixed costs will not vary when a business alters its levels of output e.g. rent

variable costs alter directly with the level of a firms output e.g. expenditure on fuel

semi variable costs have fixed and variable elements e.g. telephone costs

Competition

Perfect competition - these markets have many small firms producing virtually identical products at very similar prices.

Imperfect competition - is the opposite to perfect competition and is when one firm dominates the market and can influence the suppliers and pricing strategies, examples of this can include Monopoly.

Their are a number of benefits of a perfectly competitive market for the consumer, as with the high levels of competition a number of pricing strategies will be employed as well as special offers, this will in turn provide more value for money for the consumer.

Oligopoly - is a market structure with few firms in a market, all of whom consider rivals' reactions before introducing new policies.

Monopoly - is a theoretical market situation where a single producer supplies a particular market

Cartel - operates when a group of producers collude to set prices and (Sometimes) to share out markets. Cartels are illegal in most countries.

Market leader - The company or brand with the largest share in the market.

Barriers of entry are obstacles that make it difficult to enter a specific market, for example, this can include government regulation,  a monopolised market, start up costs, supplier loyalties

Barriers of exit are obstacles that a firm must over come to leave a market, for example, this can include high redundancy cost, closure costs, contracts with suppliers, high investment in non transferable fixed assets (such as machinery that is manufactured for one specific task)

Large businesses can greater influence there suppliers, as if the business is substantially larger than the other competition it can demand preferable treatment by receiving there deliveries first of being able to choose from a bigger selection as they are spending the most money.

What possible side affects are their of a business growing larger?

• risk, of potential spending money expanding the business, however sales do not increase
• sacrifice profits to gain more control of the market.
• they may cut prices to sell more, reducing profits
• expenditure on more equipment and facilities 

Limit price? a limit price is a price set by the monopolist to discourage entry in to a market, the limit price is often lower than the average price of production, or just low enough to make entering non profitable, limit pricing is illegal in most countries.

Contest ability? a perfectly contestable market has three main features

1. No barriers of entry of exit
2. No sunk costs
3. Access to the same level of technology

Brand proliferation?  is when a firm puts out new brand names under the same product lines, by doing this you can compete with more expensive or less expensive products in the market without damaging your brand name.

Highlight the advantages and disadvantages of a monopoly to stakeholders

advantages 

• Market leader sets the trend 
• if a chain of a monopoly opens in an area it can bring business to that area
• provide jobs
• high expenditure to the government in taxes

Disadvantages

• can become to big and discourage sales in local shops
• can pollute the environment
• can push other local firms out of the market

Monopsony power? this is a market where one buyer faces many sellers, it is an example of imperfect competition, the monoponist can dictate terms to its suppliers as it is the sole trader in the market.

Marketing Mix

1. Price - how much are customers charged for the product and what are the terms of payment?
2. Product - this term includes the features of the product, such as design, quality, reliability, features and functions.
3. Place - this is the way the product is distributed. Is the product sold direct to the customer or through retail outlets?
4. Promotion - is the way in which the firm communicates information about the product to the customer. For example, it may use advertisement or a sales force, promotion also includes the image customers have of the product.

Price war - is a term used to identify a state of intense competition, usually followed by a series of price reduction strategies. e.g. the supermarket price wars.

Competition through the use of loyalty schemes - loyalty schemes are designed to employ customer satisfaction and are in the main developed to keep a sustained customer base by offering rewards e.g. club card points from Tesco which offers reduced sales on certain products.

Tale-overs and Mergers - combine two previously separate firms into a single legal entity. These can create monopolies with the power to exploit customers.

Special offers - are when a firm offers a product at a price for a limited amount of time, in order to gain interest from the consumer and hopefully create an awareness of the product and get people to buy it more often when it goes back to its normal price.

Product extension strategies - a firm may try to prevent sales from decline by using these...

• increasing the use of the product
• encouraging the use of the product on more occasions
• reducing the price
• adapting the product
• introducing promotional offers
• changing the name of the product.

Profits

A profit occurs when the value of a firms sales is greater than the costs.  Profits are important to businesses as they can provide the opportunity for expansion and is vital for growth.  Profit can be used to reward owners and reinvest in to the firm.  

Profit = total revenue - total costs

Revenues are the earnings or income generated by a firm as a result of its trading activities

revenue = quantity sold x average selling price

Financial considerations a business might have...  Running costs, direct costs, indirect costs, opportunity costs, fixed costs, business costs, variable costs

distributing profits can prove difficult as it is important to keep the balance between short term and long term goals, distributing a high proportion of profits may keep shareholders happy in the short term, but might not be in the interests of those looking for a long term investment.

Stakeholders & Shareholders

A stakeholder is an individual or group which is affected by the actions of a business.


Internal stakeholders are people who are already committed to serving your company, such as...

• board members
• staff
• volunteers
• former staff

External stakeholders are people who are impacted by your organization, such as...

• clients
• local community
• leaders of non-profit organisations such as green peace

Employees can impact upon the business as their productivity will increase if they are motivated through the firm recognising the needs and wants of these stakeholders.

The local community can impact upon the business as without their support the business could fail due to lack of customers, and without their support the brand name could be damaged.

Suppliers can impact greatly on a business and it is important to keep good relations with this stakeholder as they provide the business with the materials needed to succeed.

A shareholder is an owner of an organisation.  There are different types of shares but an 'ordinary' shareholder has one vote per share and receives a dividend if it is paid each year.

Many companies pay more attention to their shareholders rather than their stakeholders as a shareholder has put money in to the business and can influence the policy of the business.

A dividend is a reward paid by the company to its shareholders.

Growing Markets

Why would a business want to enter a growing market?

A business would want to enter a growing market as their is less competition for consumers between firms, also their are more opportunities for growth and profit due to higher demands, and a greater chance for expansion.

Market segments:

an identifiable group with similar needs and wants within a market.  market segments have an impact on businesses as if firms can identify particular segments they can target these and adjust their market accordingly to tailor for their needs and increase customer loyalty and profits.

Mass & Niche Markets:

A mass market is a market that appeals to the majority, and has a large customer base, examples can include supermarket chains such as Tesco.  Apart from this Niche markets can be described as markets that target a specific audience and offer specialized services such as JCB work clothing which is specifically designed for builders.  Niche markets can be at a higher price but are generally good quality and offer specific equipment.

Primary and Secondary re-search:

Primary re-search (field re-search) involves gathering and analysing data which has been collected for the first time.

Advantages:

• up to date
• specific to the firms needs

Disadvantages:

• may be expensive to collect
• not available immediately as it takes time to collect

Secondary research (desk re-search) involves gathering and analysing data which has already been gathered.

Advantages:

• normally cheaper than primary research
• quicker to gather than primary research

Disadvantages

• may be out of date or in an inappropriate format
• available to other firms; may be very general

Why do firms conduct market research?

Market research can be used to help firms...

• when considering the launch of a new product, a firm may want to know the size of a market
• information on customers views on an advertisement before launching can help to make sure that the 'right' advertisements are used.
• to assess how a product is doing, a firm may want to measure its sales.

Qualitative and Quantitative research:

Quantitative research is based on relatively large samples and is statistically valid.  It is used to show what has happened in a market and is expressed in numerical terms e.g. sales have increased b 45% £12 million

Qualitative research is based on the opinions of a small focus group - it aims to understand why customers behave in certain ways or what they think of a product.  Rather than focusing on what happened it focuses on why it happened.

A sample:  is a small number of people or items which is meant to represent the target population

A confidence level:  is a measure of the reliability of the findings of primary research.

Markets

What is a market?

A market is any place where buyers and sellers meet to trade products - it could be a high street shop or a web site.


What is the effect of the size of a market?


The size of a market influence the nature of the product and the target audience, as well as the amount a business sells.


Geographical markets:


Where the customer and firm can meet to exchange goods at a price, thus the market brings together buyers and sellers such as retail stores in high streets where the customer knows where to find the shop.


Non - Geographical markets:


Where products are sold without buyers and sellers meeting, modern forms of communication have replaced face-to-face communication in traditional markets such as purchasing items on the internet.


How can the size of a market be measured?


The size of a market can be measured in terms of the number of items sold (volume) or the amount of sales in terms of pounds spent (value)


What impact does a large market share have on the business and their competitors?


firms with large market shares have great power over suppliers and distributors, they are likely to be able to demand preferential treatment and better rates, this means that the competition will have to settle for second best and not get an equal opportunity.

The Business Cycle

The business cycle describes the regular fluctuations in economic activity (and GDP) occurring over time

1.  Recovery or upswing - as the economy recovers form a slump, production and employment both increase. Firms begin to utilize idle resources, as business confidence increases, firms may invest in further fixed assets (e.g. factories) and employees find jobs more easily and wages increase.

2.  Boom - A boom follows with high levels of production and expenditure by firms, consumers and the government.  However, some sectors of the economy suffering during a boom period. Skilled workers become scarce and as the economy approaches maximum production shortages arise as insufficient raw materials and components exist to meet the demands.

3.  Downswing - incomes and outputs start to fall. rising prices of labour and materials increase costs of production.  In circumstances such as this, the UK government has raised interest rates to avoid inflation.  The level of productivity  in the economy may stagnate or even fall and the amount of spare capacities rise, some businesses fail and the level of bankruptcies are likely to rise.

4.  Slump - often follows a downswing, a slump sees production at its lowest, unemployment is high and increasing numbers of firms suffer insolvency.

GDP - gross domestic product - measures the value of a country's output over a period of time.  GDPmis dependent on the level of economic activity. Rising economic activity will cause a higher level of GDP.

Sole Traders: When an individual sets up a business on there own, e.g. plumbers, decorators, window cleaners, and hairdressers .  The people running these businesses work for themselves and remain responsible for the overall business and are actively involved in running it on a daily basis.

Advantages:

• makes own decisions which can be motivating
• can make decisions quickly and respond rapidly to changes in the market
• has direct contact with the market
• setting up is easy

Disadvantages

• limited sources of finance
• relies heavily on his or her ability to make decisions
• limited holidays
• unlimited liability

Private limited companies:  Has shareholders but its shares cannot be advertised or sold on the stock exchange.  the owners can place restrictions on who the shares are sold to in the future

Advantages:

• can control who shares are sold to - less chance of takeover
• decreased media attention, less likely to have to behave ethically
• less regulation

Disadvantages:

• less access to finance, shares are sold privately 
• less media attention - brand awareness

Public limited companies:  can advertise its shares and can sell them on the stock exchange,  shareholders in public companies can sell there shares to whoever they wish - this can pose a threat as rival companies could try and buy up the shares in a company in an attempt to gain control of it.

Advantages:

• more access to finance; sell shares to public
• more media attention; free publicity
• public assume plc are more successful than ltd

Disadvantages:

• subject to greater regulation e.g. have to include more information about their accounts
• more likely to have activities investigated by the media, may have to behave more ethically
• more vulnerable to takeover

Franchise:  is the practice of using another firms successful business model, taking a stake in the business, e.g. opening a McDonald's under a franchise and running the outlet

Advantages:

• doesn't have to take liability for faults, as they are a branch of a business. 
• has a prepared efficient business plan already
• provided with a successful business to run - less risk
• brand awareness

Disadvantages:

• a large percentage of profits has to be paid to the franchise
• running costs
• location

Partnership: when two or more people set up a business, and run it themselves

Advantages:

• more access to finance
• can take holidays as there is someone else to run the business
• if a partner dies business will not fail

Disadvantages:

• Less profits
• decisions take longer to make

Short, Medium and Long term Finance

Short term finance:  businesses may need short term finance to pay its bills and to keep its suppliers happy, cash flow can be slow if sales are low or customers are late on payments - therefore the business would be likely to be short of funds to purchase raw materials, pay wages and the bills.  possible sources of short term finance can include:  Trade credit, Overdrafts and Debt factoring.

Medium term finance:  is appropriate when funds are required for between 1 and 7 years, it is commonly used to replace some short term finance such as an overdraft that has been difficult to pay off.  Medium term finance can include:  Leasing, Overdrafts and Bank loans.

Long term finance:  If a business is looking to purchase major fixed assets or looking to expand by purchasing land or buildings - a source of long term finance will be required. A business can raise long term finance through: Reinvested profits, Mortgages, Share or equity capital or government grants.