Business Chapter 1

Use the term to learn definition.

What is a business?

An organization that aims to meet the needs and wants of individuals (or organizations) through:

• producing/extracting raw material

• creating a product

• providing a service

What are the resource inputs for businesses?

Human: The right quality and quantity of people. Required by all businesses, even if it’s only 1 person. Some businesses require many people with different skillsets.

Physical: The right quality and quantity of materials, machinery, and land space. Even online/internet businesses require a computer.

Financial: The right quantity of cash and other forms of finance.

Enterprise: Least tangible- The business idea and determination to turn that idea into a functioning, thriving business. AKA entrepreneurship, exists in even small businesses.

What are the production processes for businesses?

Capital-Intensive: Large proportion of land or machinery relative to other inputs. These may have proprietary/special qualities, or cost a great deal due to scale of operation.

Labour-Intensive: Large proportion of labour relative to other inputs. Can be at any skill level.

What are the product outputs for businesses?

Goods: Tangible products that we can physically take home. Primary or secondary sector.

Services: Intangible, can’t be physically taken home. Retail sales are a service - provides ‘service’ of having an array of products for consumers to purchase.

What are the 4 business functions?

HR: Ensuring appropriate people are employed and suitably rewarded. Done through recruiting people, training them, dismissing them, and determining appropriate compensation.

Finance & Accounts: Ensuring appropriate funds are made available. Done through forecasting requirements, keeping records, procuring financial resources, and ensuring proper payments.

Marketing: Ensures that what the business provides is desired by a sufficient number of people for profitable operations. Done through strategies to promote, price, package, and distribute.

Operations Management: Ensures that appropriate processes are used to make something of desired quality. Done through controlling quantity and flow of stock, determining ways of prod., and looking for more efficient ways to prod.

What are the 4 sectors of the economy?

Primary: Engaged in extraction or production of raw materials.

Secondary: Engaged in production of finished good through manufacturing.

Tertiary: Engaged in the delivery of services

Quaternary: Engaged in the production, processing, and transmission of information - subset of tertiary.

What are the reasons/opportunities to start a business?

Sharing an Idea: Really believe in something, want to share it with others.

Challenge: Want to see if they can ‘make it’.

Rewards: Get to keep more rewards to oneself.

Interest: People with a passion for something who just want to keep doing what they enjoy.

Finding a Gap: Untapped opportunity to gain ‘first-mover advantage’.

Independence: Being your own boss and not working by someone else’s rules.

Necessity: Individuals whose positions were made redundant or who could not find work.

What are the steps for a start-up?

1. Organizing the basics

2. Researching the market

3. Planning the business

4. Establishing legal requirements

5. Raising the finance

6. Testing the market

What are the challenges a business may face?

Business Plan: Did not convince, vague or contradictory goals

Finance: Accounts were not kept properly (cash flow); raising start-up capital / med-long term finance was difficult

Legal Requirements: Labour laws ; registration was difficult ; tax obligations

Market: Launch failed ; inconclusive pilot ; limited success

Organization: Inappropriate location ; structure didn’t work ; unreliable supplies

Market Research: Poor or inappropriate ; test was too optimistic ; weak channels of communication

What is the difference between public and private sectors?

Public Sector: Owned and/or operated by the government. Ex. utilities, telecommunications, etc.

Private Sector: Not controlled by government, managed by other individuals and companies. Most are for-profit.

What is a sole trader? Give 3 features, 3 adv. and 3 disadv.

A sole trader is a business owned and operated by one person, with no legal distinction between the business and owner. Sometimes, sole traders want to stay small because they have a niche in the market.

Features:

• Unlimited Liability - No legal distinction between business and owner, so owner is liable for all debts.

• Limited Finance - Personal savings or loans from family, friends, or bank. Financial institutions may be reluctant to lend because of high failure rate.

• Privacy and Limited Accountability - Don’t have to declare finances to anyone except tax authorities and possibly lenders/lessors.

Advantages:

• All profits belong to the sole trader

• Flexibility in terms of working hours, products, decisions, etc.

• Minimal legal formalities in terms of setting up.

Disadvantages:

• May be stressful, leading to poor decision making. Particularly caused by lack of time and competition from established businesses.

• Lack of continuity as business dies with owner.

• Unlimited liability for any debts the business incurs.

What is a partnership? Give 3 features, 3 adv. and 3 disadv.

A partnership is a business owned and operated by two or more people, with no legal distinction between the business and the owners.

Features:

• Managed by the Partners: Partners each have a percentage ownership. Since decisions are made jointly, getting agreement is harder as the number of partners increases.

• Unlimited Liability: No legal distinction between business and owners, so all partners are liable for all debts.

• Profits aren’t always shared Equally: Paid out based on % ownership of the business. In cases with sleeping partners, the active partners may have a fixed drawing, after which the rest is distributed based on %.

Advantages:

• Bring more expertise than one person can because they have different skills. Helps with specialization and division of labour.

• Have greater stability and lower risk because they have more access to finance than sole traders.

• Can help in emergencies and have more chance of continuity.

Disadvantages:

• Each partner has unlimited liability, even to actions of the other partner. Exception only if declared ‘limited liability’ to a specific partner in deed of partnership - comes with limited control.

• Have less access to loans from banks & institutions than corporations.

• Partners can disagree, which at its worse can lead to dissolution of partnership and business.

What are the advantages and disadvantages of being a shareholder?

Advantages:

• Price of share may increase in value if the company is performing well.

• The company issues part of the profits as dividends - usually more in larger companies.

• Shareholders have limited liability - cannot lose any more than they invested.

Disadvantages:

• Price of share may decrease in value if the company is not performing well.

• The company may choose not to issue dividends.

• Owning shares may not mean that an individual has any meaningful say in decisions about the business.

What is the difference between a privately and publicly held company?

Privately-Held: Can only sell shares to people known to the owners (family/friends). Less reporting requirements and more control.

Publicly-Held: Offers shares on stock exchange. Loses some privacy, however, allows for large amounts of finance.

What are the features of a company?

• Limited Liability: Business and owner are legally separate. Shareholders are not liable for any more than their investment.

• Formation Recorded and Public:

  • Memorandum of Association: Characteristics & external activities. Ex. objectives, initial share capital required.

  • Articles of Association: Internal regulation. Ex. organization of executives and their responsibilities, rights and responsibilities of shareholders.

• High Level of Accountability: Have to publish audited annual company reports, host an annual general meeting (AGM) for all shareholders, and an extraordinary general meeting (EGM) if called by shareholders.

What are the advantages and disadvantages of companies?

Advantages:

• Finance is more readily available as they’re seen to be more stable and have less risk.

• Businesses have continuity as they wont die if shareholders die or sell their shells, Can go bankrupt and be liquidated though.

• Possibilities for expansion as they last longer and have more access to finance.

• Have an established organizational structure, allowing for long lasting relationships with customers and suppliers.

Disadvantages:

• Can take time, effort, and cost a lot of money because of legal requirements.

• Stock market isn’t stable - might not sell enough shares or raise enough money. Share prices may drop due to external factors.

• Owners risk partial or complete loss of the business as they cannot decide who buys the shares. Even if they retain 51%, they still have to answer to the other shareholders.

• There is a loss of privacy, particularly for public companies as they have to publish their accounts.

What is a social enterprise? What is the difference between a for-profit and non-profit one?

A social enterprise is a business that advances a social purpose in a financially sustainable way. They have business models and reinvest into the business without depending on philanthropy.

A for-profit social enterprise often earns a profit which may be distributed to the owners. A non-profit does not aim to make any profit whatsoever. They earn a surplus that is reinvested into the business.

What are the features, advantages, and disadvantages of a for-profit social enterprise?

Features:

• Profit is important, but social aims take precedence. The business aims to earn enough to sustain itself, not to maximize profits.

• There’s a high degree of collaboration between the business and local community.

• They are more democratic than other for-profit organizations. Decision making is generally more transparent and consultative, aligning with aims of doing good.

Advantages:

• They achieve a favorable legal status, as businesses can do good for society without being accountable to shareholders with traditional business interests.

• There is a strong sense of communal identity as employees and stakeholders have a common purpose.

• The stakeholder community directly gets benefitted, reducing problems in the community.

Disadvantages:

• Being consultative and transparent makes decision making complex and time-consuming, which can reduce effectiveness of the business.

• Capital may be insufficient for growth as FPSEs generally don’t have large profits.

• The overall financial strength will be low as they try to keep products and services as inexpensive as possible.

What is a cooperative?

A cooperative is a social enterprise where the business is owned and run by the members. This can exist in the forms of financial, housing, workers, producers, and consumer cooperatives.

What are the features, advantages, and disadvantages of a non-profit social enterprise?

Features:

• Profits are not generated. The business may have surpluses, which they reinvest to advance the social purpose.

• Donations are very important as they can’t rely on government funding or other forms of income.

• There is unclear ownership and control, especially when it comes to compensation.

Advantages:

• They help people in need in different situations and aspects of life, making them valuable to the community.

• They can foster a philanthropic spirit as people feel good about helping each other.

• They can foster informed decisions in the community about resource distribution and can share better information about local and distant problems.

Disadvantages:

• Intense lobbying can lead to socially undesirable goods and outcomes. For example, the National Rifle Association and Gun Owners of America leading to more violence.

• Sometimes, employees may have passions that ill serve the organization. For example, Greenpeace acting as pirates on whaling ships.

• Funding can be irregular as they rely on donations, posing problems during recessions.

What is an NGO? What makes one a charity?

A non-governmental organization (NGO) is a social enterprise not organized or run by the government. These can deal with single issues or a spectrum, and may or may not have political affiliations and aims.

A charity is a specific form of NGO aimed at providing as much relief as possible to those in need. They are different from NGOs as they are exempt from taxes, unlike NGOs and other businesses. These may be single-event charities or may focus on a single issue.

What are vision and mission statements? How are they different?

A vision statement is a philosophy, vision, or set of principles which steers the direction and behavior of an organization. Ambitious and future oriented, based on what the company would like to see itself as. Motivates employees and gives external stakeholders a sense of belief.

A mission statement states a company’s purpose and explains why the business exists. Indicates aims and values. Holds employees accountable and shows external stakeholders how successful the company is in achieving it’s vision.

A vision statement should never change as it shows the company’s core values. A mission statement may change because the external environment is dynamic.

What are aims and objectives of a business?

Aims: These are the long-term goals, they depict what the business wants to achieve in the future. The vision statement is a summary of aims.

Objectives: These are the medium- to short-term goals that clarify how the business will achieve its aims. The mission statement is a summary of objectives.

What are the 3 levels of objectives? What are ethical objectives?

The levels of objectives are:

• Strategic: AKA global objectives. Medium- to long-term, set by senior managers to guide company towards achieving aims.

  • Tactical: Medium- to short-term, set by middle managers to achieve strategic objectives.

    • Operational: Day-to-day objectives, set by floor managers or employees themselves to achieve tactical objectives.

Ethical Objectives: Goals based on established codes of behavior that, when met, allow businesses to provide environmental or social benefit, or at the very least, not harm society or the environment while making a profit.

What are SMART objectives?

• Specific- clear and well-defined

• Measurable- number, size, etc.

• Achievable- only motivational when achievable

• Relevant- actually of use to the person/business

• Time-Specific- Adequate time frame

What are the internal reasons for an organization to change objectives?

• Leadership: New leaders may have different leadership styles from their predecessors.

• HR: Industrial actions, ie. those taken by unions or other organized labour, for example can alter objectives all the way down the hierarchy.

• Organization: A merger or acquisition can cause the new org. to rethink its objectives. Internal pressures may also cause modifications to certain aspects.

• Product: Performance of product in marketplace could require changes, based on how it’s received.

• Operations: Innovating new products, developing better methods of production, even everyday reasons such as need for relocation.

• Finance: When circumstances of finance change, especially if they become lower/fewer.

What is CSR?

Corporate Social Responsibility is the view that companies should do more than just make money for shareholders. They should aim to do good for society by contributing to the economic, social, and environmental well-being.

Why do organizations set ethical objectives?

• To create a positive image, which helps attract new customers as well as build customer loyalty, as customers are more likely to return to a business they trust and respect.

• To develop a positive work environment, as well-motivated staff provide a competitive advantage and can help attract more employees.

• To reduce the risk of legal redress, as being unethical can cost the company money from dissatisfied customers and bad WOM. It can also be expensive and damage the firm’s reputation.

• To satisfy consumers’ growing expectations for ethical behavior, which is increasing because of awareness, particularly through the internet.

• To increase profits, as banks are less likely to lend to, and customers are less likely to come to dubious businesses.

What is the impact of ethical objectives on different stakeholders?

• Competitors- may have to respond to maintain market position.

• Suppliers- may have to respond to protect their orders if the business orders only from other ethical ones.

• Customers- more likely to trust the business and develop brand loyalty.

• Government- will create more recognition as they feel pressure from local and regional stakeholders.

What are stakeholders?

A stakeholder is a person or organization that affects or is affected by a business.

What are the 3 ways to classify stakeholders?

• Market vs. Non-Market: Market stakeholders have a commercial relationship with the business, ie. money changes hands. Non-market stakeholders don’t have a commercial relationship with the business.

• Primary vs. Secondary: Primary stakeholders are directly affected by the business, while secondary have an indirect relationship with it.

• Internal vs. External: Internal stakeholders work within the business while external stakeholders are outside it.

Grey areas exist in these classifications, such as an employee living in the community where a business is, or small shareholders in public companies.

What are some interests of internal stakeholders?

• Shareholders- return on investment.

• CEO- coordinating strategy, delivering profits and returns that satisfy shareholders.

• Senior and Middle Managers- strategic and tactical objectives respectively.

• Employees and their Unions- protecting their rights and working conditions.

What are some interests of external stakeholders?

• Government- how the organization operates in the business environment.

• Suppliers- maintaining a stable relationship.

• Customers and Consumers- focus on the best product to fit their needs.

• Local Community- impact of business in the local area- pollution, employment, etc.

• Financiers- return on their investments.

• Pressure Groups- impact of business on their area of concern.

• Media- impact of business in terms of news stories.