Nature of Business Flashcards
1
Q
Define the Nature of a Business
A
the organised effort of an individual to produce and sell, for a profit, the products (goods and services) that satisfy individuals needs and wants.
2
Q
Define Goods/Services
A
GOODS - tangible objects that satisfy peoples wants e.g. food, clothes, toys
SERVICE - an action someone does for another e.g. haircut, medical check up
3
Q
Functions of a Business (poppy eats in class illegally every Wednesday Q)
A
Profit Employment Incomes Choices Innovations Entrepreneurship & Risk Wealth Quality of Life
4
Q
Profit
A
return or reward a business receives from consumers producing products
5
Q
Employment
A
the state of having paid work
6
Q
Income
A
money received for providing labour
7
Q
Choices
A
selecting among alternatives, freedom of choice
8
Q
Innovations
A
the creation of new and interesting products/services
9
Q
Entrepreneurship
A
opportunity to turn ideas and passions into livelihood
10
Q
Risk
A
possibility of loss
11
Q
Wealth
A
high levels of economic growth and activity
12
Q
Quality of Life
A
standards of living/overall wellbeing of an individual
13
Q
How is Wealth Distributed?
A
- Government’s = income tax, payroll tax, GST
- Business owners/share holds = dividends
- Employees = salaries, wages, extra benefits
- Lenders = loan repayments
- Business itself = depreciation, retained profits
14
Q
What determines the size of a business? (quantitative measures)
A
- Number of employees
- Number of owners of the business
- Market share – proportion of total market sales
- Type of Legal structure
15
Q
What determines the size of a business (qualitative measures) Small or medium if:
A
- Owner makes management decisions
- Owner provides finance
- Business has little control within the market
- Independently owned and operated
- Locally based
16
Q
SIZE OF BUSINESSES (micro, small, medium, large)
A
Micro business: fewer than five employees
Small business : 5–19 employees
Medium business : 20–199 employees
Large business :200 or more employees
17
Q
Classification of a business by geographical spread
A
- Local = serves surrounding area (suburb or town) e.g. cornerstone, newsagent
- National = operates in one country e.g. coles, sportsgirl
- Global = multinational corporation: branches in many countries e.g. Westfield, McDonalds
18
Q
Primary Sector
A
Primary (1st on land aboriginal) collection of natural resources essential in providing food requirements e.g. mining/fishing
19
Q
Secondary Sector
A
Secondary: (2 step progress – raw in, product out) taking raw materials and processing them into semi/finished product e.g. manufacturer
20
Q
Tertiary Sector
A
Tertiary: people performing services for others e.g. retailers/dentists
21
Q
Quaternary Sector
A
Quaternary: services involving the transfer and processing of information and knowledge e.g. education/finance/property
22
Q
Quinary Sector
A
Quinary (Quin mothers name – home mum job) all services traditionally performed in the home e.g. hospitality/childcare/health/cleaning
23
Q
External influences contributing to growth of industries (M and T)
A
Increased mechanical equipment = decrease employees in the primary industry
Technology increased = decreased employment in secondary industry factory work
24
Q
Sole trader
A
owned and operated by only one person
25
Partnership
owned and operated by between 2-20 people
26
Private company
(proprietary PTY LTD) incorporated business, usually 2-50 private shareholders
27
Public company
(limited or LTD in name) listed on the Australian securities exchange, general public can buy and sell shares e.g. Woolworths
28
Unincorporated
(sole trader and partnership) = business has no separate legal existence from its owner/s, if the owner dies so does the establishment
29
Incorporated
(public and private company) = separate legal entity from the owner/s
Incorporation = a process a business goes through to become a separate legal entity
30
What is a Government Enterprise?
Government enterprises are government-owned and operated businesses that provide essential community services such as health, education e.g. Sydney trains and Australian Post
31
Unlimited Liability
Occurs when the business owner is personally responsible for all the business debt. (unincorporated businesses)
32
Limited Liability
Means you don't face much personal financial risk for debts of your business (incorporated businesses)
33
Limited Partnership
silent partners contributing financially but take no part in the running of the business.
34
Privatisation
the process of transferring the ownership of a government business to the private sector.
35
Factors influencing choice of legal structure
Size – as sales increase, business operations grow to meet higher customer demand = selection of a more appropriate legal e.g. sole trader to partnership
Ownership – variations of control/responsibility e.g. complete control = sole trader
Finance – business expands = more finance. e.g. sole traders and partnerships are exposed to risk with few business assets = may need investments.
36
Considerations when choosing legal sturcture
- Legal liability – can you afford the risk?
- Tax implications – what amount and type of tax do you want to pay?
- Cost and complexity of formation – do you have time for administrative requirements & can you afford extra costs?
- Control – what level of control do you want over the business?
- Future needs – what do you want to happen to the business when you’re no longer around?
37
What is Franchising?
the practice of using another business’s successful business model - purchasing the right to operate a business using their name and their products
38
Franchisor VS Franchisee
Franchisor = person who sells the business model
Franchisee = person who purchases the right to use the model
39
Business Environment
the surrounding conditions in which business operates constantly changing
40
Influences in the Business Environment: EXTERNAL AND INTERNAL
EXTERNAL: MC PIGS LEFT (markets, competition, political, institutional, geographical, social, legal, economical, financial, technological)
INTERNAL: MR PLC (management, resource management, products, location, business culture)
41
External influence of Markets
- globalisation has allowed for labour and finance to move more freely
- capital is more mobile, flows relatively easy between countries, international flows have expanded, easier to access overseas share markets
Labour Markets due to political barriers, the flow of people within countries is more restricted due to large numbers of skilled migrant workers coming in to fill job vacancies.
- Consumer markets – countries are achieving cost savings by specializing in products they can produce efficiently, results in cheaper prices on world market thus generates increased sales.
- Improved technology and communications; reaching larger markets and take advantage of economies on a scale
42
Aim of the external influence: Competition
Aim: to achieve a sustainable competitive advantage over competitors in order to achieve greater market share - capture a larger portion of the market
Sustainable competitive advantage = ability of a business to develop strategies that will ensure it has an ‘edge’ over its competitors for a long period of time.
43
Types of Market Concentration (number of competitors that exist within a specific industry)
Monopoly = complete concentration by 1 business in the industry e.g. Sydney trains
Oligopoly = small number of larger businesses have greater control over market e.g. banks, car manufacturers
Monopolistic competition = has lots of small sellers, entry is easy; the product is differentiated, with each seller producing their own brand of the product
Basically, large number of small sellers in a particular market e.g. local retailing shops, clothing manufacturers
Perfect competition = number of small business selling same products e.g. fruit and vegetable growers
44
Ease of entry
the ability to establish a business within a particular industry
45
Local and foreign competitors
local (same market), foreign (oversees/offshore) influence by shape/change product lines, marketing strategies, price etc.
46
Marketing strategies/measures taken by competitors depend on:
E.g. media, flyers, word of mouth etc.
- size of market (number of existing and potential customers)
- size of business (larger = more likely to have a range of strategies)
- number of competitors (more competitors = greater need for marketing)
- nature of the product (type of product and whether it requires extensive marketing)
47
Political External Influence:
Derived from state and federal government policies and include free trade policies and the process of deregulation
- Goods and services tax (GST) 10%
- Deregulation – removal of government regulation from industry - aim of increasing efficiency and improving competition
- Privatisation – process of transferring the ownership of a government business to the private sector
48
Institutional External Influence
Government – Federal, state and local - each imposes a range of regulations to standardize and protect their dealings with consumers/competitions.
```
Federal = taxes e.g. GST and personal income tax, legislation e.g. minimum wages and unfair dismissal, superannuation
State = taxes, pollution and fair-trading practices
Local = taxes e.g. rates, legislation e.g. zoning regulations, parking
```
49
Under Institutional Influence: Regulatory Bodies =
are functions to monitor and review the actions of businesses to ensure they conduct themselves fairly in relation to consumers and community
E.g. NSW FAIR TRADING, AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
50
Geographical External Influence
- the process of globalisation (process that sees people, goods, money and ideas moving around the world faster and cheaper) – alters shape of world markets and nature of businesses
- changing demographic factors
- environmental sustainability (minimal waste/reducing C02 footprint)
- workplace diversity (respect for varied ethnicities, ages, nationalities)
51
Social External Influence
- Responses to challenges in taste, fashion and culture > leads to sales and profit opportunities and growth
- Failure to do so can threaten business stability and viability
- e.g. awareness of environment, desire for family-friendly workplaces, workplace diversity catering (age, gender, language etc.)
52
Legal External Influence
- Essential to have working knowledge of the laws that will affect a business' oppositions (so they avoid penalties)
- must understand and accept the legal responsibilities they owe to all stakeholders
- Compliance can be costly and time consuming, penalties can be imposed for non-compliance
E.g. competitors and consumer act 2010 (Cwth)
- Aims to promote fair and competitive behaviours in market place and acts to protect customers against unfair and unlawful practices
53
Economical External Influence
Economic cycles = periods of growth (boom) and recession (bust) resulting from fluctuations in the general level of economic activity (highs and lows)
information on economic growth, inflation, trends, average earning and unemployment rates allow businesses to predict possible threats and opportunities
> Peak = wages and salaries at high levels, salaries and profits at high levels, low unemployment, inflation may increase (value of money), increase in consumer spending
> Recession = decrease in consumer spending and business investments, sales and profits falling and unemployment rising
> Trough = wages and salaries at low, sales and profits at lowest, consumer spending at lowest, high level of unemployment, inflation may stable/fall
> Recovery = increase in consumer spending, business investment increases, sales and profits rising, unemployment rate falling
54
Financial External Influence
Deregulation results in more flexible, market-orientated approach across financial sector
Main source of finance is debt finance (influenced by level of interest rates)
Rates increase – business becomes more cautious in relation to taking on extra debt
55
Technological External Influence
- Can increase business productivity and communications
- Business that want to be locally, nationally or globally competitive must adopt the appropriate technology
- Technology reduces costs and physical labour (workers)
- Replacing workers with robots = higher rate of unemployment
56
Internal Influence: Management
Flatter organisation structures result from > advances in technology and pressure on business from increased competition due to globalization
> Flatter = emphasises on teamwork and responsibility (able to adopt to change quickly)
> Traditional = (hierarchical) autocratic, task centered, power not shared (exclusive), division of labor
> New structure = people centered, flexible, decentralized, democratic, inclusive, forward thinking, equal power sharing (inclusive). Greater individual responsibility and easier to make business decisions
- Structure based upon size and main activity of business
57
Internal Influence: Resource Management
(HIPF)
> Human – employees – most important asset
> Information – knowledge and date required by the business e.g. market research, sales reports, legal advice
> Physical – equipment, machinery, buildings and raw materials
> Financial – funds they use to meet obligations to creditors
58
Internal Influence: Product
Type of goods and services produced – affects internal operations.
Range – larger the number, the more internal impact it will have on expanding operations and internal structures to accommodate
> Product influence – reflected in type of business (service, manufacturer or retailer)
> Size of business – based on goods/services produces, level of technology utilized and volume of goods/services produces
59
Internal Influence: Location
- Good location = higher levels of sales and profits
- Complementary businesses = businesses that sell a similar range of goods/services
- Visibility – effort to find business
- Proximity to suppliers – size and quantity of raw materials needed for production
- Proximity to support – assistance in core operations e.g. accountant, solicitor
- Proximity to customers – convenience, “prime spots”
- Cost – leasing or purchasing
60
Internal Influence: Business Culture
Can be seen as the Informal rules that guide how people in an organisation behave e.g language staff use and the dress code.
Four elements shared by the members of the business culture:
> Values = basic beliefs shared amongst people in the business e.g. honesty, hard work
Symbols = events or objects believed to be important e.g. training programs
> Rituals, rights and celebrations = routine behaviours patterns in the culture e.g. social gatherings, employee of the month
> Heroes = successful employees who reflect the values of the business e.g. employee of the month
- Formal business structure = Emphasises cooperation and accountability with respect and loyalty for superiors and their decisions
- Less formal business structures = tend to be more flexible, innovative and often have a risk-taking business culture
61
Who are Stakeholders?
any group or individual who has an interest in or is affected by the activities of a business
62
Stakeholders (SCEEMS)
```
o Shareholders
o Consumers
o Employees
o Environment
o Managers
o Society
```
63
Shareholders role as a stakeholder:
- Partial owners
- Direct influence on business (voting rights)
- Receive profits in dividends
- Influence managers decisions
64
Consumers role as a stakeholder:
- Aim to satisfy
- No customer base – not able to survive
- Increased pressure on business
- Businesses must recognise and assess changes in customer taste
65
Environments role as a stakeholder:
- Places pressure to adopt sustainable operation practices
66
Employees role as a stakeholder:
- Vital as they produce and manufacture the product sold
- Quality of product depends on employee’s skill and commitment to process
- Need a safe and psychologically rewarding work environment; respect differences and concerned for employees’ goals and welfare
67
Managers role as a stakeholder:
- Responsibility of running a profitable and successful organisation
- Adequate resourcing levels, clear lines of communication and delegation of authority are necessary precondition for successful management
- Approach of leadership style can have major influence on the employees and their productivity – affect the culture and can impact on employees’ morals
68
Societies role as a stakeholder
- Expect organisations to show concern for the environment e.g. waste disposal, pollution, carbon emissions etc.
- Socially responsible businesses will participate in a range of community projects and activities
69
Advantages AND Disadvantages of: Sole Trader
ADV
- low cost of entry
- complete control
- less costly to operate
- no partner disputes
- owners right to keep all profits
- no tax on profits, only personal income
DIS
- personal liability for business debts
- end of business when owner dies
- difficult to operate if sick
- need to carry all losses
- burden of management
- need to perform wide variety of tasks
70
Advantages AND Disadvantages of: Partnership
ADV
- low start up costs
- less costly to operate than a company
- shared responsibility and workload
- pooled funds and talent
- no taxes on profits, only personal income
- on death, one partner can keep the business running
DIS
- personal unlimited liability
- liability for all debts including partners
- possibility of disputes
- difficulty finding a suitable partner
71
Advantages AND Disadvantages of a: Company
ADV
- easier to attract public finance ( e.g. shareholders)
- limited liability > separate legal entity
- ownership can be transferred easily
- experienced management
- greater spread of risk (more unlikely)
- growth potential
- enjoys a long life > perpetual succession
DIS
- cost of formation
- double taxation (personal and company)
- personal liability for business debts
- public disclosure (reporting of certain information)
- becomes too large resulting in inefficiencies
72
Advantages AND Disadvantages of: starting a business from scratch
ADV
- owner has the freedom to set business up how they want
- owner is able to determine the pace of growth and change
- if funds are limited, you can begin on a smaller scale
DIS
- high chance of risk
- difficult to secure finance
- timely to set up, create procedures, develop a customer base, employ and train staff etc.
- if start up period is slow, the business may not generate profits for some time.
73
Advantages AND Disadvantages of: buying an existing business
ADV
- sales to existing customers will generate instant income
- good business history increases likelihood of business success
- stock already acquired and ready for sale
- seller may offer advice and training
- equipment already available
- existing employees can provide valuable assistance
DIS
- existing images and policies of the business may be hard to change > especially if bad reputation
- success of the business may be due to previous owners contacts and personality therefore lost when they leave
- may be hidden problems
- some employees may resent change to business operations
74
Advantages AND Disadvantages of: buying a franchise
ADV
- immediate benefit is derived from franchisers goodwill > name is already established
- franchisor provides training and management backup
- Franchisee can succeed despite having limited experience
- equipment and premises design are established and already operational
- well planned advertising exists already
- business plans and methods proven to work already exist
DIS
- franchisor controls operations with little scope for franchisee individuality
- profits must be shared with franchisor
- franchisee often required to purchase stock from franchisor so cannot shop around for cheaper supplies
- contracts may be biased in favour of the franchisor
- franchisee shares burdens of the franchisors business mistakes
