Understanding business activity

Shops competing on a high street: businesses make goods and services to meet people's wants.

Businesses make goods and services to meet people's needs and wants

A business 企业 is an organisation that makes goods 商品 or provides services 服务 for customers 顾客.

• Goods are physical things you can touch — bread, phones, cars.
• Services are useful actions done for you — a haircut, a bus ride, a doctor's visit.

The purpose of business activity is to use resources 资源 to make goods and services, so that people's needs 需要 and wants 欲望 are met.

• Needs are things you must have to live: food, water, shelter, clothes.
• Wants are things you would like but can live without: a holiday, a games console.

Factors of production

To produce anything, a business brings together four factors of production 生产要素 — the resources needed to make goods and services.

The four factors of production are combined to make goods and services

The economic problem

People's needs and wants are unlimited. But resources are scarce 稀缺 — there are not enough of them for everything. This is the economic problem 经济问题.

Because resources are scarce, you must always choose. You cannot have everything.

Opportunity cost

When you choose one thing, you give up the next best thing. The opportunity cost 机会成本 is the next best choice you give up.

Example: a business has some money and spends it on a new machine. Now it cannot also spend that money on a bigger shop. The bigger shop is the opportunity cost.

The opportunity cost is the next best choice you give up

Added value

Added value 增值 is the difference between the price a business sells a product for and the cost of the raw materials 原材料 bought in to make it.

Added value is the selling price minus the cost of bought-in materials

A business can increase added value by:

• raising the price, often through a strong brand 品牌 or better design,
• lowering the cost of materials, for example by finding cheaper suppliers,
• improving the product so customers will pay more.

Worked example. A furniture maker buys the wood and fabric for a chair for £40 and sells the chair for £110. The factory rent is £6,000 a month. Find the added value per chair.

The rent is a deliberate distractor. Added value counts only the cost of the bought-in materials, so rent, wages and other running costs stay out of it - they matter for profit, not for added value. Subtract only what was bought in to make the product, and never treat added value as if it were profit.

Why businesses succeed or fail

A business is more likely to succeed when it has:

• good management 管理 — skilled leaders who plan well,
• enough finance 资金 — money to pay bills while it grows,
• a product customers want, and an edge over the competition 竞争 (the other businesses selling similar things).

A business may fail and close down when it runs out of cash, manages money badly, or cannot compete. Weak management and poor cash control are the most common causes.

The three sectors

We sort all business activity into three groups, by how far the work is from the final customer.

Business activity runs from the primary sector through to the tertiary sector

How the sectors change

The importance of each sector changes as a country grows richer.

• In a developing economy 发展中经济体 (a poorer country building up its industry), the primary sector is often large — many people farm.
• As the country grows, the secondary sector grows too.
• In a developed economy 发达经济体 (a rich, industrialised country), most people work in the tertiary sector.

De-industrialisation 去工业化 is when the secondary sector shrinks and the tertiary sector grows. This has happened in many developed economies as factories move abroad.

Private sector and public sector

The private sector 私营部门 is made up of businesses owned by private people and groups. Most aim to make a profit 利润. The public sector 公共部门 is made up of organisations owned by the government, which aim to provide a service to the public.

The entrepreneur

An entrepreneur 企业家 is a person who sets up a business and takes the risk of running it. Successful entrepreneurs usually:

• are willing to take risk 风险 — to risk their own money on a new idea,
• work hard and do not give up,
• are innovative 创新 — full of new ideas,
• are confident and good at making decisions,
• are well organised, able to manage time, money and people.

What successful entrepreneurs are usually like

The business plan

A business plan 商业计划书 is a document that describes the business and its future. It usually contains the business idea and objectives, the product, the market 市场 it will sell to, who will run it, and a plan for the money.

A business plan has two main uses:

• it makes the owner think carefully and plan ahead,
• it helps the business raise finance 筹集资金 — banks and investors want to see a plan before they lend or invest.

Government support for start-ups

A start-up 初创企业 is a brand-new business. New businesses create jobs and help the economy grow, so governments often support them with:

• grants 补助金 — money given that does not have to be paid back,
• low-interest loans 贷款 — money lent on easy terms,
• training and advice for new owners,
• lower taxes in the first years.

Measuring the size of a business

You can measure how big a business is in several ways. Each one has a weakness.

Staying small or growing

Some businesses stay small on purpose: the owner wants to keep control, the market is small, or the product is specialised.

Businesses that want to grow bigger — to achieve growth 增长 — can do it in two ways.

• Internal growth 内部增长 (also called organic growth): the business grows by itself, by selling more, opening new branches, or adding new products. It is slower but lower-risk.
• External growth 外部增长: the business joins with another business. This is faster. It happens through a merger 合并 (two businesses agree to join into one) or a takeover 收购 (one business buys control of another).

External growth is classified by the kind of business that is joined.

Economies and diseconomies of scale

As a business grows, its cost per unit can fall. These savings are called economies of scale 规模经济.

If a business grows too big, the cost per unit can start to rise again. These are diseconomies of scale 规模不经济. They happen because communication 沟通 in a huge firm gets worse, workers feel less important and work less hard, and managers find the firm hard to control.

Average cost per unit falls (economies of scale) then rises (diseconomies of scale) as a firm grows

A company headquarters: businesses range from sole traders to giant public limited companies.

Liability

Liability 责任 means who must pay the debts 债务 if a business cannot pay them itself.

• With unlimited liability 无限责任, the owner is personally responsible for all the debts. If the business fails, the owner may lose personal things, like a house or car, to pay them.
• With limited liability 有限责任, the owner can only lose the money they put into the business. Their personal things are safe.

Incorporated and unincorporated

• An incorporated 法人 business has a separate legal identity from its owners. The business itself can own things and be taken to court. Its owners get limited liability. Companies are incorporated.
• An unincorporated 非法人 business is not separate from its owner in law. Sole traders and partnerships are unincorporated.

The four main types

A sole trader 独资企业 is a business owned by one person.

A partnership 合伙企业 is owned by two or more people who share the work, the decisions and the profit. They usually sign a written agreement.

A private limited company 私人有限公司 (often "Ltd") is owned by shareholders 股东, but its shares cannot be sold to the public. The owners are often family and friends.

A public limited company 公众有限公司 (often "plc") is a large company whose shares 股份 can be bought by the public on the stock exchange 证券交易所.

Shareholders may receive a share of the profit, called a dividend 股息.

Business types split by liability: unincorporated (unlimited) and incorporated (limited)

Other forms of organisation

• Franchise 特许经营: a person (the franchisee 加盟商) pays to use the name, products and methods of an existing successful business (the franchisor 授权商). The franchisee gets a known brand, training and lower risk, but must pay fees and a share of the profit and has less freedom. Many fast-food chains work this way.
• Joint venture 合资企业: two businesses agree to share the cost, risk and profit of one project, while staying separate companies.
• Social enterprise 社会企业: a business that trades to help society or the environment, not only to make profit. Most of its profit is put back into its social aims.

Public sector organisation

A public corporation 国有企业 is a business owned and run by the government, such as a national rail or postal service. Its aims include giving an important service to everyone, not only making a profit.

Business objectives

An objective 目标 is a goal that a business aims for. Common objectives are:

• survival 生存 — staying in business, especially when new or in hard times,
• profit — earning more than it spends; the main aim of most private firms,
• growth — getting bigger, to be safer and earn more,
• market share 市场份额 — the share of total sales in a market that one business holds,
• customer service 顾客服务 — keeping customers happy so they come back,
• social objectives — helping society or the environment 环境.

Objectives of a social enterprise

A social enterprise aims for three kinds of objective together:

• economic — earn enough money to survive and grow,
• social — help people, for example by giving jobs to those who find work hard to get,
• environmental — protect the planet, for example by cutting waste.

Stakeholders

A stakeholder 利益相关者 is any person or group that is affected by a business or has an interest in it.

Internal and external stakeholders all have an interest in the business

Why stakeholder objectives conflict

Stakeholders often want different things, so their objectives can conflict 冲突. A business cannot fully please everyone at once.

• Owners want higher profit, but employees want higher pay. Higher pay lowers profit.
• Owners want to cut costs, but the local community wants less pollution 污染. Cutting costs may create more pollution.
• Customers want low prices, but suppliers want to be paid more.

Good managers try to balance these different objectives.

• Added value = selling price − cost of bought-in materials. A business raises it with a strong brand, better design, or cheaper materials.
• Know the three sectors: primary (extracts raw materials), secondary (makes goods), tertiary (services). As a country develops, employment shifts from primary towards tertiary.
• Unlimited liability (sole traders, partnerships) puts the owner's personal things at risk; limited liability (Ltd, plc) limits any loss to the money invested.
• A stakeholder is anyone affected by the business, and their objectives often conflict — owners want profit, workers want higher pay, the community wants less pollution.
• Economies of scale cut the cost per unit as a firm grows; growing too big brings diseconomies of scale (cost per unit rises).