Why businesses exist and common business objectives 1

Learning outcomes Understanding the nature and purpose of business: What you need to know: • Why businesses exist • Common business objectives 2

Why do businesses exist? • Businesses create employment − 30. 61 million people were in employment in September 2014, the highest rate since 2008. Unemployment was at 2. 02 million. Employed workers pay income tax, claim less benefits and are able to purchase more goods and services to stimulate economic growth • Businesses create wealth – not only do businesses pay workers, they also pay corporation tax which can be used by the government to pay for public services such as hospitals and schools • Businesses create new products and services e. g. pharmaceuticals to cure illnesses or green technology to solve environmental issues • Businesses can enhance a country's reputation e. g. the UK’s music and film industry or the French wine industry 3

What does a business do? Production: The process whereby resources (factors of production) are converted into product that is intended to satisfy the requirements of potential customers. The output of the production process may be a service (e. g. a haircut) or a finished good (e. g. a toy). Inputs Transformation process which adds value Outputs Transformation process: The conversion of a firm’s inputs into outputs that reach the customer and adds value. 4

Adding value • The process of increasing the worth of resources by modifying them. • It can be calculated by the following formula: Added value = selling price – the cost of bought in materials, components and services • Firms add value through manufacturing the goods or providing the service but also through all of the other activities they undertake such as customer service, after-sale service, their branding which can be established over many years and by having a unique selling point (USP). USP: A feature of a product or service that allows it to be differentiated from other products. 5

The factors of production The resources which are needed in the process of turning inputs into outputs and adding value: • Capital - Goods that are made in order to produce other goods and services, e. g. machinery, lorries, computer systems, shops • Enterprise - The act of bringing the other factors of production together to create goods and services; making decisions and providing the finance. • Land - All the natural resources that can be used for production, e. g. coal, oil, livestock • Labour - Describes the physical and mental effort involved in production, e. g. manual effort in producing finished goods or individuals providing a service i. e. accountant They can be remembered using the acronym CELL 6

Types of business There were an estimated 4. 9 million private sector businesses in the UK at the start of 2013. Of these businesses, 99. 9 per cent are SMEs employing an estimated total of 14. 4 million people. Business can be categorised into the sectors of the economy they are in based on their main form of operation. The three sectors are: • Primary – the extraction of raw materials from the earth, e. g. farming, fishing, mining, oil extraction, forestry • Secondary – transforming or refining the raw materials, e. g. manufacturing, construction, oil refining, energy firms • Tertiary – the service industry, e. g. retail, restaurants, hotels, transportation, financial services, health industry and education 7

Types of business Some of these businesses will sell directly to consumers (business to consumer − B 2 C) and some will sell to business (business to business − B 2 B). The type of business will influence all actions, from how it manages its staff to how it promotes and deals with its customers. Task: Give two examples of businesses in the primary sector, secondary sector and tertiary sector. 8

Common business objectives • Survival – During the early years of trading or during difficult economic or market conditions. • Break even – Ensuring all costs are covered by the firm’s revenue. • Sales growth and maximisation • Profit growth and/or maximisation • Growth and expansion – Nationally through increases in store numbers, product lines, workforce, etc. or internationally by operating in more countries. • Reducing risk – By releasing more products or operating in more countries. • Diversification – Establishing a USP, launching new products in new markets. 9

Common business objectives • Improving cash flow and liquidity – Ensuring cash inflows exceed outflows so short-terms bills can be paid (Liquidity: the ability to pay short-term debts) • Increasing market share • Increasing shareholder value – Better return on investment. • Maximising customer satisfaction • Social and ethical objectives – Better ethics, environmental considerations, contributing positively to society. • Staff retention, engagement, motivation and morale 10