Nature of Business Exam Notes Term 1 Flashcards
Business
is an organisation of people that produces goods and services to sell at a profit, to satisfy the needs and wants of individuals
Production
refers to those activities taken by the business to combine or transform resources into products to satisfy customers’ needs and wants.
Inputs & the types
are the resources used by a business in its production process
- Human Resources
- Physical Resources
- Informational Resources
- Financial Resources
Human resources
these are the employees of the business and are generally its most important asset.
Physical resources
include equipment, machinery, buildings and raw materials
Information resources
these include the knowledge and data required by the business such as market research, sales reports, economic forecasts and legal advice
Financial resources
are the funds needed to obtain materials, capital, labour
Production or the production process
involves transformation of inputs into outputs, or the combination of resources to produce products for sale.
Outputs
are the range of products that are ready for customers to buy and use.
Intermediate or semi-finished products
these products usually require further processing and are often purchased by other businesses for use in their production processes eg. nuts and bolts (for furniture making), zippers and buttons (for clothing manufacture).
Entrepreneur
someone who takes a risk and spends time, effort and money turning a new business idea into a business reality
Purpose of a Bussiness
profit, employment, income, choice, innovation, entrepreneurship and risk, wealth and quality of life (PIECE/WIC)
How businesses can be classified
- By industry
- By size (number of employees)
- By sector
- By geological spread (location)
- By leadership (type of ownership)
Primary Industry
production processes directly related to natural resources. Examples – farming (eg. growing crops and grazing animals), mining, fishing, forestry
Secondary Industry (manufacturing)
businesses that transform raw materials (from primary industry businesses) into finished and semi-finished products. Examples – food manufacturers, car manufacturers, furniture manufacturers
Tertiary Industry
businesses that perform a service for other people (they transfer people and goods). Examples – retailers. Most businesses today are classified as tertiary.
- Quaternary
- Quinary
Quaternary Industry (part of the tertiary industry)
service businesses that transfer and process information and knowledge. Examples – computing, finance, education
Quinary Industry (part of the tertiary industry)
businesses that provide services that are traditionally performed at home. Examples – child care, hospitality (hotels, cafes and restaurants), tourism, arts and crafts.
SMEs (Small Medium Enterprises)
are defined or described according to a number of features (see below). Most businesses in Australia (over 90%) are SMEs
Public business enterprises (Government Business Enterprises – GBEs or Government Enterprises):
are owned and operated by Governments. Examples – Sydney Water, State Rail Authority. This is the public sector
Micro businesses = ?
Small Business = ?
Medium Business = ?
Large Business = ?
Micro businesses = < 5 people (including the owner) or non employing businesses
Small Business = 5-19 employees
Medium Business = 20-200 employees
Large Business = 200+
Private business enterprises:
owned and operated by private individuals or groups of individuals. This is the private sector. Most businesses are privately owned
Domestic businesses:
These businesses produce and sell products in one country only. Domestic businesses may have operations, products and customers across a country (national) or may be very localised (local). Many SMEs operate in a single neighbourhood, suburb, town or city.
Global businesses:
These international businesses operate across national borders, with operations and/or customers in a number of countries. Global businesses are often referred to as Multinationals or Transnationals.
Multinational business:
An international business with a home base (and ownership) in one country and a number of business operations in other countries.
Transnational Corporation (TNC):
An international business with ownership, operations, products and customers in a number of countries.
Unincorporated businesses
are NOT companies – the business and its owners are together as a single entity – if the owner dies, the business ends.
Examples – sole trader, partnership
Sole Trader
- 1 owner
- Unlimited liability
- Must register business name if business name is different to owners name.
- The profits of the b. are NOT taxed but the owner pays tax (i.e. income tax) on the wages/salaries they pay themselves for running the b.
Unlimited Liability
the business and the owner are the same legal entity, the owner is personally responsible for all business debts (and may have to sell personal assets to pay business debts)
/ all partners share liability for business debts
Partnership
- 2-20 owners (called partners)
- Unlimited liability (all partners share liability for business debts)
- Register business name – as for sole trader
- A partnership agreement is not compulsory but is a good idea – to set out details of ownership, partners responsibilities, profit sharing, decision making, problem-solving, sale of ownership.
-The profits of the b. are NOT taxed but the owner(s) pay tax on their wages/salaries.
Incorporated businesses:
are companies – the business and its owners are separate legal entities – the business exists as a separate body and continues even if owners change.
Examples – private company, public company, cooperative
Private Company
- 1-50 owners (called shareholders)
- Business name includes Pty Ltd (Proprietary Limited = ownership is limited)
- Limited liability
- Shares bought and sold by shareholder agreement
- Business name registration and company registration
Public Company
- At least 1 owner, no maximum (called shareholders)
- Business name includes Ltd (liability is limited)
- Limited liability
- Listed on Australian Securities Exchange (ASX) – shares bought and sold to the public
- Prospectus must be issued for sale of shares
- Must publish annual reports indicating profitability of the b.
Cooperative
- Made up of a group of people with a common interest or purpose
Consumer coop. – to purchase products for members
Producer coop. – to sell products for members
Financial coop. – to provide financial services for members - Minimum of 7 members
- Limited liability
Limited liability:
shareholders’ responsibility for company debts is limited to the amount he/she has paid for shares
The internal business environment (or micro environment):
includes those things that the business has some control over, such as:- employees, managers, legal structure, production methods, goals and objectives, resources used, shareholders
The external business environment (or macro environment):
things that the business cannot control, such as:- economic conditions, government laws and policies, competitors, technology, international influences, geographical influences, political structures, social attitudes
External influences –
economic, financial, geographic, social, legal, political, institutional, technological, competitive situation, markets (GLFPEST/CIM)
Economic (business) cycles
fluctuations in the general level of economic activity (spending by individuals and businesses). Over time, there are periods of growth (“boom”) and periods of decline (recession or “bust”). These periods are influenced by a number of factors including government policy, consumer and business confidence, and overseas influences.
The government’s main economic aims are:
- Economic growth – more goods and services produced in the economy.
- Low inflation – prices that are not rising too fast.
- Low unemployment – as many people employed as possible.
Monetary Policy
the Reserve Bank (Australia’s central bank) will increase interest rates to slow consumer and business spending and slow economic activity, or decrease interest rates to encourage consumer and business spending and increase economic activity.
Fiscal Policy
the Federal Government will use its annual (yearly) budget to change its tax revenue or spending to influence economic activity. Increased taxes will reduce the amount consumers and businesses have. This will have a negative effect on economic activity. Increased government spending will benefit businesses as they are employed to provide government services. This will have a positive effect on economic activity.
Microeconomic Reforms
refer to government actions to influence specific economic/business areas such as: competition, taxation (eg. the Goods and Services Tax – GST), wages and working conditions (eg. paid parental leave).
Regulatory Bodies
Fair Work Commission (Federal) - covers all aspects of workplace relations – contracts and agreements, minimum pay and conditions, negotiations and disputes.
Office of Fair Trading (NSW) – covers consumer protection, business licenses, business names, product safety, conditions of contracts with tradespeople (eg. plumbers, electricians).
ASIC = Australian Securities and Investment Commission (Federal) – covers companies, industry standards, codes of practice, consumer protection (financial services).
ACCC = Australian Competition and Consumer Commission (Federal) – covers unfair business practices related to competition, prices, product safety, advertising, consumer protection.
ATO = Australian Tax Office (Federal) – enforces tax laws.
Department of Environment and Conservation (NSW) – covers pollution, waste disposal, protection of environments.
Deregulation
(decrease in government regulation and control) in some industries (eg. airline industry and banking/finance sector) has occurred to reduce restrictive trade practices, encourage competition and increase efficiency
Changing Consumer tastes are the result of:
Changing fashions, healthy lifestyles, more informed consumers, increased incomes & better standards of living, changing roles of women, new tech, multiculturalism, an aging population, global consumption
Changes in Business Practices
- family-friendly workplaces
- tolerance in the workplace
- affirmative action
- community contributions
- environmental & social responsibility
Market influences:
- Increased competition
- Increased outsourcing
- Changing consumer tastes
- Globalisation
- Downsizing
5 Elements that control a competitive situation
- Number of competitors
- Ease of entry
- Local & foreign competitors
- Marketing strategies
- Substitutions
4 main types of market concentration & what each means
(1) monopoly – 1 business, no competitors, eg. Australia Post,
(2) oligopoly – a few large businesses, eg. banks,
(3) monopolistic competition – large number of businesses, product differentiation, eg. retailing,
(4) perfect competition – large number of small businesses, similar products, eg. fruit and vegetable growers.
Features that determine geographical influence
Location & Demographic
New Tech Business’s use:
Communications technology – EDI - email, mobile phones, smart phones, teleconferencing, web sites, facebook, google, skype, twitter.
Internet applications - E-Commerce (buying and selling online).
Improved communications with other businesses (B2B) and suppliers (Just In Time stock management).
More advanced production processes – eg. Robotics.
Sales, purchases & payments transactions – online marketing and sales (e-tailers), EFTPOS, online banking.
Changes Developing Tech has made in Businesses
Increased efficiency and productivity → Reduced costs of production.
Changed workplace practices (new methods).
New products and innovation of existing products.
Increased availability of goods and services.
Improved quality and cheaper prices.
Greater satisfaction of consumer needs and wants.
Employer Associations
represent and assist employers – information and advice
Trade and Industry Associations
represent large groups of businesses and lobby governments on certain issues
Trade unions (Employee Associations)
Represent, advise and assist employees on improving pay and working conditions. Organise industrial action taken by employees (eg. Strikes)
Membership has decreased due to new laws and workplace agreements, changes to patterns of work (more part time, casual work).
Australian Securities Exchange (ASX)
Provides guidelines for listed (public) companies. Marketplace for purchase and sale of shares.
Consumer Associations
The Australian Consumers Association (ACA) provides advice & information on G & S, and lobbies govts & companies on specific consumer issues.
Product Influences
The types of goods and services produced by the business: some businesses (e.g. mining companies) require many raw materials and large scale capital equipment meaning there needs to be procedures in place to organize production, whereas other businesses such as a home based cleaning service would have much simpler procedures.
The range of goods and services refers to the number produced by the business: companies such as Coca Cola have continually expanded their product range and this has resulted in internal changes to operations and management of the business.
The size of a business: the larger the business the more goods and services produced, which in turn will influence the internal operations of a business. For example, a small local café would operate very differently to a Mc Donalds restaurant.
The type of business (service, manufacturer or retailer): for example, the product influences of a clothing manufacturer are different to that of a clothing retailer.
Factors of Location as an influence
Closeness (proximity) to customers. Retailers need a flow of people walking past (“passing trade”) or a convenient location – eg. newsagency, video hire. (eg. fresh foods).
Closeness to suppliers of inputs. Manufacturers with bulky raw materials may locate near suppliers to reduce costs – eg. steel manufacturer.
Closeness to support services. Many small service businesses (accountant, solicitor) locate near businesses that provide them with support services (printing, communications, advertising, couriers) – this is less important now due to improved technology (fax, mobile phones, email, Internet).
Cost – “prime shopping areas” or CBD locations can be expensive. Many retail businesses cannot avoid high cost locations. For many service businesses who communicate with customers by phone or the Internet location is not important.
Visibility – “being seen”. High visibility is important to many retail and service businesses – eg. clothing shops, cafes, hairdressers.
Proximity to competitors. Some locations are known for particular products and attract large numbers of customers – eg. King Street, Newtown or Chinatown are well known “eat streets”
For many businesses a physical location is unimportant – many small service businesses operate from a home office with a PC and a mobile phone – eg. home services (cleaning, babysitting services), building and construction services.
Stages of the Business Life Cycle
Stage 1:Establishment.
Stage 2:Growth.
Stage 3:Maturity.
Stage 4:Post Maturity (Renewal or decline).
Establishment
This is the beginning of a new business and is often called “start up”. The business is new to the market and the main aim is to build a good business foundation – enough sales to create revenue to pay expenses and create a positive cash flow. The risk of failure at this stage is quite high.
Growth
The business is now more complex - greater organisation and long-term planning is needed, there are increased management roles in operations, employment relations, marketing and finance, and a greater understanding of the business environment is required.
Expansion of a business may occur as the result of:
A merger – two businesses agree to combine resources and form a new organisation
A takeover – one business takes control of ownership of another business
Vertical integration – a business buys another step in the production process (a supplier or a business its sells its product to). Backward vertical integration is integration with a suppliers business eg. a bakery buys a flour mill that supplies its flour. Forward vertical integration is buying a customers business eg. a bakery buys a supermarket that sells its bread.
Horizontal integration – a business integrates with another business selling the same or similar products eg. two bakeries merge.
Diversification – a business merges with another business in a completely different industry eg. a bakery merges with a furniture manufacturer.
Maturity
This is a time when growth slows down. Market share may decrease as new competitors enter the market and some customers are lost. Owners, managers and workers may lose the enthusiasm and energy of earlier times. There is a need for rethinking business operations to ensure survival.
Post-Maturity possibilities
Renewal
Steady State
Decline
Renewal
investment of more time, effort and capital to create new directions for the business – new products (goods/services) or new product features, changes to price or distribution strategies, new and different promotions
Steady State
the main effort is in maintaining sales and profits, and encouraging continued customer loyalty
Decline
the business moves towards cessation – due to loss of competitive advantage, falling sales, market share and profits, and increased difficulty covering expenses and debts
Voluntary Cessation
may occur because owner/s want to retire, change lifestyle. Business assets are sold, creditors paid and the business closes down. If the business is failing, owners may decide to cease business operations.
Involuntary cessation & the 3 types
occurs when creditors force owner/s to cease trading because the business cannot pay debts.
- Liquidation – sale of assets (converted to cash) to pay creditors
- Administration/Receivership – an “administrator” is appointed to operate the business in order to “trade the business out of debt”. If this is successful, the business will continue. If not, liquidation is the next step.
- Bankruptcy – a declaration that a person or business cannot pay debts. A bankruptcy order (through the courts) orders money owed to the business collected and assets sold – money is then divided between creditors.
