WHAT IS A BUSINESS Flashcards
WHAT IS A BUSINESS
A business can be defined as a decision-making organization established to produce goods and/or provide services to satisfy the needs and desires of their customers (individuals or governments). Usually in return for a profit. Goods are physical products, and services are intangible products.
Specifically, services are:
- Intangible – Unlike goods, services are not physical in their nature.
- Inseparable – The service received is attached to the people who deliver the service and the processes used to deliver the service.
- Perishable – Services do not last but are usually consumed at the time of purchase.
- Variable – services are heterogeneous, each customer experience is unique.
factors of production
- Land – These are natural resources needed to produce goods and services. Examples include water, animals, sand, minerals, etc. Hence, these are sometimes referred to as physical resources.
- Labour – This refers to human effort used to produce goods and services. Hence, this is often referred to as human resources.
- Capital – This refers to non-natural (or manufactured) resources used in the production process. Examples include tools, machinery, motor vehicles, physical premises, and infrastructure. As these are all funded by money, capital resources are sometimes referred to as financial resources.
- Entrepreneurship – This refers to the knowledge, skills and experiences of individuals who have the capability to manage the overall production process. Entrepreneurs have the ability and willingness to take risks to produce goods and provide services to customers.
HUMAN RESOURCES
Human resources (HR) are the function that handles all aspects relate to the workforce. It involves all aspects of business operations related to staff within an organization.
The HR Department must also comply with legal aspects of the external business environment. It must observe different labor laws in all the countries it operates in. Examples include laws about: minimum wages, working hours, gender equality, equal opportunities, and anti-discrimination.
FINANCE AND ACCOUNTS
The finance and accounts function of an organization refers to the responsibility for ensuring that the business has sufficient funds to conduct its daily operations. Essentially, the finance and accounts department are responsible for managing the organization’s money and maintaining accurate accounts (financial records) of the firm’s funds.
MARKETING
Marketing is about identifying the needs and wants of customers so that the business can provide goods and services to meet these requirements and desires, usually in a profitable way. Marketing activities include:
* Market research to discover the products that customers want, in an ever-changing and dynamic business environment
* Determining appropriate pricing methods to sell the products
* Promotion to inform and persuade customers about buying the products
* Distributing the products to customers efficiently.
OPERATIONS MANAGEMENT (PRODUCTION)
Operations is the process of making goods and providing services from the available resources of a business. It involves ensuring that goods and services meet production targets, deadlines, and certain quality standards. All four of these functions of a business are interdependent, depend and are reliant upon one another.
Why do business create new products?
Businesses produce new goods and services for numerous reasons including new tastes and preferences of customers, changes in technology, and some goods and services becoming obsolete. To stay competitive businesses may also introduce new goods or services or adapt existing products to fill gaps in the market.
ADDING VALUE
Adding value is the process of producing a particular good or service that is worth more than the cost of the resources used to produce it. Businesses aim to combine the various human, physical and financial resources to create goods and services that add value to a good or service. This will help the organization to be competitive and, ultimately, to earn profit.
THE PRIMARY SECTOR (AO2)
The primary sector (also known as extractive production) refers to business activity involved with the extraction of natural resources. Examples of primary sector output include: Agricultural farming (crops), Extraction of oil and gas, Hunting, Fishing, etc.
Primary sector output is the predominant sector in less economically developed countries (LEDCs).
The added value of primary sector output is relatively low. For example, raw materials such used to manufacture a smartphone costs far less than the final product sold to consumers. Hence, workers in the primary sector are typically paid less than those in the secondary or tertiary sector.
THE SECONDARY SECTOR
The secondary sector refers to business activity involved with the manufacturing or construction of finished products. It encompasses transforming primary sector output into finished goods, ready for sale or use by the consumer. It also includes businesses that are involved in transforming other secondary sector output into finished goods, such as assembling the component parts of motor vehicles, laptops, or smartphones.
Secondary sector output is the predominant sector in economically developing countries (or middle-income economies). However, in many high-income countries, the mass use of high-tech mechanization and automation has also caused unemployment in some industries. Many economists argue that the secondary sector is the “engine of growth”, signifying the importance of manufacturing and construction for a country’s economic growth.
THE TERTIARY SECTOR
The tertiary sector refers business activity that involves providing services to customers. Tertiary sector output is the predominant sector in economically developed countries (or high-income economies). Examples of tertiary sector business activities include: Advertising, Banking, Catering, health care, etc.
The added value of tertiary sector output is very high. In general, as an economy grows and develops, the significant of the primary sector diminishes (in terms of output and employment), whereas the importance of the tertiary sector becomes more prominent.
THE QUATERNARY SECTOR
The quaternary sector refers to business activity involving the creation or sharing of knowledge and information. Businesses operating in these knowledge-based industries deal with digital information, communication technology, research and development (R&D), and other high-level services. Examples: Tertiary and higher education, Information, and communications technology (ICT), Market research firms, etc.
The added value is extremely high in the quaternary sector. The quaternary sector is a relatively new categorization, due to the significant shift in advanced technologies. It also requires a highly educated population, yet most of the world’s population do not progress to further or higher education.
ENTREPENEURSHIP
Entrepreneurship describes the traits of individuals who run their own business(es). The entrepreneur is both willing and able to take calculated risks by investing in a business start-up or commercial initiative. They are often described as visionaries.
A visionary is an entrepreneur who has the foresight and driving force behind an organization’s growth and development. S/he can see market changes and trends before they happen or materialize, or even set the trends themselves. Entrepreneurs are typically self-employed or hold the position of CEO of an organization.
The economic success of a nation is largely dependent on the entrepreneurial spirit within the country. An entrepreneurial culture encourages risk taking in the pursuit of profit. Entrepreneurs also create jobs in the economy, thereby further contributing to the wealth of the country.
TRAITS OF AN ENTREPENEUR
- Creativity
- Decisiveness
- Drive (motivation)
- Effective communicator
- Flexibility and open-mindedness
- Leadership
- Planner
- Risk tolerance
- Risk management
- Teamwork
- Time management
- Vision
RISER:
- Risk taker (willing to take calculated business risks)
- Innovative (creative / original thinking)
- Strategist (strategic thinking)
- Enthusiastic (passion / energetic / drive)
- Resilient (ability to accept constructive feedback and setbacks).
CHALLENGES FOR STARTING UP A BUSINESS
All businesses face challenges when they are first set up. Even highly successful large multinational companies once struggled. Challenges that new businesses may encounter include the following:
Lack of finance : Many new businesses lack the necessary finance to run the business on a daily basis (such as paying wages and utility bills). Financial challenges are a major problem for many start-up businesses. In some cases, the lack of sufficient working capital can lead to bankruptcies.
Lack of market research: The key to a successful business is having a commercially viable idea. However, what entrepreneurs think may be a good idea may not materialize due to the lack of effective market research.
Poor marketing strategy: Another related challenge is that new businesses have limited marketing budgets available for promoting and advertising their products. No matter how good an idea might be or how competitively priced it is, customers will not buy it if they are not informed that it exists.
Limited human resources: Newly established businesses often find it difficult to attract suitable skilled and experienced staff. Without a well-established business model or corporate image, new firms can struggle to recruit the necessary human resources for its operations.
Long hours: Similarly, a common challenge for many new businesses is that the owner(s) often think they can do everything themselves, partly to help keep costs low. However, this if not likely to lead to long-term success for the business. For example, the entrepreneur may spend many hours after the close of business to work on the firm’s financial accounts. It is common for self-employed people to work significantly longer hours than if they were employed by someone else.
Lack of knowledge, skills, and experiences: Too often, new entrepreneurs do not have sufficient knowledge, skills or experience in the industry they are entering. For example, they may lack knowledge of their target market, competitors and market trends. Finally, inexperienced entrepreneurs may lack the experience to make effective strategic decisions. Ultimately, all of this results in the business making huge losses.
OPPROTUNITIES FOR STARTING UP A BUSINESS
There are many interrelated opportunities why people start their own businesses or an enterprise. These reasons include:
Money – Perhaps the key driving force for a person to start their own business is the ambition or motivation to earn profit for themselves. A firm earns profit by selling its products at a price that is higher than its production costs. The owner get to keep the profit as a reward for risk-taking and their entrepreneurship talents.
Autonomy – Many people set up their own business to be their own boss, rather than working for someone else. Some people do not like to work for other people and prefer the autonomy that comes with being an entrepreneur. There is a great sense of satisfaction in being the “boss”. The autonomy of being your own boss also speeds up decision-making.
Challenges – Some people are driven by personal challenges. They enjoy the satisfaction of achieving what they perceive to be greatness.
Passions - Some entrepreneurs want to pursue their personal passion/interest and turn it into a business opportunity. For such entrepreneurs, the aim of starting their own business is not always to earn a profit.
Family ties – For some entrepreneurs, running their own business is part of a family tradition.
Unfilled market opportunities - Some entrepreneurs spot an unfilled gap in the market for a certain type of good or service, so start their own business.
Making a difference – Finally, some people start their own enterprises in order to be able to make a difference to others. Examples include providing a service to the local community such as a medical clinic, a day-care centre, or nursing home for the elderly.
PRIVATE SECTOR
The private sector of the economy consists of businesses owned and run by private individuals and organizations that usually, but not always, aim to earn a profit. They operate independently of the government, although need to operate within the rules and regulations in the country. Examples of private sector businesses:
* Sole traders
* Partnerships
* Privately held companies
* Publicly held companies
* Social enterprises, including cooperatives and non-governmental organizations
* Multinational corporations (MNCs)
PUBLIC SECTOR
Business organizations that operate in the public sector consist of those controlled by a regional and/or national government, with the main aim being to provide essential goods and services for the public. Such businesses can, but do not always, directly charge customers for such services. In some cases, such as government housing or state-funded education, the service is provided by and/or funded by the government.
Examples of such goods and services deemed to be of benefit to society, but would be underprovided without the public sector, include:
* Infrastructure (such as communication networks, transportation networks, road and highway networks, waste disposable systems, and flood control systems)
* Health care services
* Education
* National defence (national security)
SOLE TRADERS
A sole trader is a commercial for-profit business owned by a single person. Although this person can employ as many people as needed, the sole trader is the only owner of the business.
Advantages of sole traders / sole proprietors:
- It is the quickest and easiest type of business to set up. Sole traders can avoid complicated and costly set-up procedures.
- The owner receives all the profits if the business succeeds.
- Sole traders are likely to be highly motivated as the owners have a sense of achievement from running their own business and can keep all the profits made.
- The owner has complete control without having to consult with or be accountable to others.
- The owner does not have to consult anyone else and seek their permission to execute a decision.
- The sole trader enjoys privacy as it only needs to publish its financial accounts to the tax authorities.
- The owner can benefit from tax advantages. As a small business, many sole traders work from home, so can claim tax concessions by using part of their home for business purposes.
Disadvantages of sole traders / sole proprietors
- The finance to set up and run the business is generally provided by the owner (from personal savings) as s/he cannot easily access external sources of finance.
- The sole trader accepts all the risks of owning and running their own business, including any losses made or even the collapse of the organization.
- The workload for a sole trader can be extremely high. There is no one else to share ideas or to ask questions, so all pressures, burdens and responsibilities fall on the owner. This means the sole trader often must work very long hours.
- Legally, a sole trader is treated as the same legal entity as the business, it is an unincorporated business. This means the sole trader has unlimited liability so is responsible for any debt owed to other individuals or organizations, even if this requires the owner to pay the debts from their personal belongings.
- There is a lack of continuity in the operations of the business if the owner is unwell, wishes to take a holiday or wants to retire. The latter is a main reason why many sole trader businesses struggle to continue.
- As sole proprietorships are usually small businesses (such as a small convenience store owner), they are unlikely to be able to gain any economies of scale. This means sole traders pay more for their goods, their prices charged to customers also tend to be higher.
- Since access to external finance is difficult for most sold traders (because they represent a high degree of risk), expansion of the business is difficult.
PARTNERSHIP
A partnership is a commercial business that strives to earn a profit for its owners. It is owned by two or more people.
For an ordinary partnership, the maximum number of partners is usually capped at 20 owners, although this does vary from one country to another. Highly specialized professional service providers (such as doctors, solicitors, dentists, and accountants) are usually set up as partnerships. Many family-run businesses are also established as partnerships. The owners of a partnership are called partners.
Most partnerships are unincorporated businesses, so at least one of the owners must have unlimited liability. In practice, it is usual for all the partners to share responsibility for any liabilities made by the partnership. In some countries, it is possible to have a limited liability partnership (LLP). Setting up an LLP protects each individual partner from being responsible or liable for another partner’s misconduct or shortcomings.
Most partnerships sign a Partnership Agreement as this helps to resolve potential misunderstandings and disagreements. This formal contract between the partners outlines each of their responsibilities, voting rights, and how profits are to be shared between the owners.
Advantages of partnerships
- Partnerships can raise far more finance than sole traders, especially as there can be up to 20 partners. Silent partners or sleeping partners can provide additional capital without having any role in the actual running of the business.
- Having partners enables the firm to benefit from having more ideas and different skills and expertise.
- Partners can share the burden of their workload and responsibilities.
- Partnerships benefit from continuity as the partnership can remain in operation if a partner is unwell or wants to go on a family vacation.
- Partnerships can benefit from specialization and the division of labour.
- Business affairs of a partnership are kept confidential, so only the tax authorities need to know about the financial position of the partnership.
Disadvantages of partnership
- As the business has more than one owner, this can easily lead to disagreements and conflict between the owners, which can seriously damage the running of the partnership.
- Decision making is slower than with sole traders because there are more owners involved. This can also lead to disagreements and conflicts between the owners
- The profits made by a partnership must be shared between all the owners.
- In general, partners have unlimited liability so are liable for any debts, fines, penalties, or lawsuits against the business, even if these were caused by another partner in the firm. However, sleeping partners are exempt from unlimited liability.
- Compared to limited liability companies, access to finance is restricted to the finances available from the different partners in the firm. There is no maximum number of owners in limited liability companies, so they can raise finance through their shareholders.
- There is no continuity if a partner decides to leave the firm or if one of the partners die. This is because such cases would void the Deed of Partnership. There would be a time delay in setting up a new partnership agreement.
PRIVATELY HELD COMPANIES
Companies are commercial for-profit businesses owned by shareholders. Hence, the profits of a company belong to and are shared among the various owners. As incorporated businesses, the owners have limited liability. Limited liability protects shareholders who cannot lose more than the amount they invested in the business. This is because shareholders are not personally liable for the debts of the company should it go into debt or bankruptcy.
In legal terms, there is a divorce of ownership and control as the owners (shareholders) are treated as separate legal entities from those who control and run the business (the board of directors and CEO). It is the board of directors and the CEO (or managing director) who are responsible for the strategic direction of the company.
Features of privately held companies
- The shares of privately held companies cannot be advertised for sale nor sold via a stock exchange. Shares are not available on an open stock exchange.
- Most privately held companies (sometimes referred to as private limited companies) are small businesses, with shares typically owned by family, relatives, and friends.
- The company and its owners are separate legal entities, there is a legal divorce (separation) of ownership and control, with the owners (shareholders) appointing a board of directors to run the company on their behalf.
- Owners have limited liability, so if the business experiences a financial collapse, then the owners will only be liable for the capital they invested in the company.
- The number of shareholders in a privately held company may be limited.
- There is usually no legal requirement for the company to publish detailed financial accounts for the general public (this is only needed for corporate tax purposes).
Examples: Dyson, Mars, Deloitte, Dell, Ikea, etc.
Advantages of privately held companies
- There is better control of a privately rather than publicly held company, as shares in a privately held company cannot be bought or sold without the agreement of existing shareholders.
- Significantly more finance can be raised.
- Privately held companies have greater privacy compared to publicly held companies; the latter must make their final accounts available to the public.
- Shareholders have limited liability, so cannot lose more than what they invest in the company. Owners are protected against any misconduct or misjudgments of those who run the company.
- Unlike a sole trader or partnership, a privately held company can enjoy continuity in the event of the death of a major shareholder.
Disadvantages of privately held companies
- Privately held companies can only sell their shares to family, friends, and employees, with the approval of many existing shareholders. This can make it difficult to buy and sell shares in the company.
- They are more expensive to operate than a sole trader or partnership.
- A privately held company can become a target for a takeover by a larger company which purchases a majority stake, although other owners have to agree to the sale of the company.
