Unit 1 - 1.1, 1.2

Business

The organization of human, physical and financial resources to produce goods or services that meet customer needs while adding value

The aim of a business

To satisfy the needs and desires of their customers by selling a good or providing a service

Factors of Production

• Resources used in the production process

• Land

  • The natural resources used in the production of a product

  • E x : Good, water, physical land, fish, metal ores, minerals

• Capital

  • The money and equipment used to produce the product, including non-natural resources

  • E x : Tools, equipment, machinery, vehicles, buildings

• Labour

  • Physical human effort and psychological intellect used in the production process, hence the employees themselves.

• Enterprise

  • An individual with the necessary skills and ability to take risks in organizing the previous three to generate profitable output

Transformation (adding value)

• The process of creating a product that is worth more than the costs of the inputs used

• Value added is measured as the difference between the costs of the inputs and the price of the final output

Outputs

• Goods

  • Tangible physical items capable of being stored

• Services

  • Intangible items that cannot be stored and are given to customers when needed

• By-products

• Combined (Good + Service)

Primary Sector

• Businesses in the first stage of production involved in extraction, harvesting, and conversion of natural resources

• Relatively low value added in this sector

• E x : Fishing, forestry, mining

Secondary Sector

• Businesses involved in the processing of raw materials into finished and usable products or inputs for other businesses

• E x : Car making, construction, breweries, aerospace, engineering

Tertiary sector

• Businesses that focus on providing a service to consumers and other businesses

• – High value is added in this section

• EX: Banking, insurance, security, catering, education, healthcare, retail, transportation, news media, law, leisure, tourism, entertainment

Quaternary sector

• Businesses involved in the creation or sharing of knowledge or information

• High value is added

Entrepreneur

Someone who takes the financial risk of starting and managing a new business in return for a profit. They are usually self-employed.

Challenges for starting up a business AO2

• Lack of experience in all the different areas of a business:

  • Poor marketing

  • Poor hiring

  • Lack of cash flow

  • Poor pricing

• Difficulties raising money to set up and expand

  • Businesses are at a high risk in their early stages

  • Entrepreneurs may have to use their own funds, which can be limited

  • Can restrict the options when developing and launching the product

• Difficulties in building brand awareness

  • New products must compete with well-established brands

  • Difficult to attract the attention of intermediaries (e.g. retailers) and customers

  • New products may not get shelf space as they are risky

• Lack of market power

  • Customers may feel they have the power to delay payments

  • Suppliers may be worried about getting paid, may insist on early or advance payments

• Legal problems, e.g. copyright and patent problems

• External influences

Opportunities for starting up a business

• Social change

  • EX: An ageing population brings forth the opportunity to start up businesses taking care of the elderly

• Technological change

  • EX: An increased demand for EVs may inspire startups in the automotive industry

• Economic change

  • EX: Growth in an economy can lead to more consumer spending

    • Creates new markets & opportunities for new businesses

• Environmental change

  • EX: Growing concern regarding the environment can inspire startups linked to sustainability

• Political change

  • Ex: A decision to join a trading union with another country

  • Start-ups in tourism or export

• Legal change

  • Ex: Fewer regulations → reduced costs of selling up a business

• Ethical change

  • Ex: Growing interest in the values of a brand

  • Opportunities to start up businesses with a strong ethical stance

Nationalization

Occurs when a government takes ownership of a business from the private sector into the public sector.

Privatization

Occurs when a government transfers ownership of a business from the public sector to the private sector.

Public sector business

• A business organization which is owned and controlled by the government.

• These organizations may have strategic importance to the country (e.g. defence).

• They may provide essential services which the government wants to ensure everyone has access to (e.g. energy).

• They may provide merit goods, which are goods or services that private individuals undertake and thus do not consume enough of.

Private sector businesses

• Organizations that are owned and controlled by individuals rather than the government.

• These businesses are either run to make a profit or have profit and social objectives as dual purposes.

Shareholder

Persons or organizations that own a part of a company. Each share represents a part ownership of the business

Limited liability

Investors can only lose the money they have invested in a business in case of bankruptcy the investors’ personal possessions are safe, limiting their risk.

Unlimited liability

Occurs when an individual or group of individuals is personally responsible for all the actions of their business. If the business has financial problems, investors could lose their personal assets

Dividend

Money that is paid out of profits to shareholders. They are a reward to the owners of a business

Social enterprises

Businesses that set out to solve a social or environmental problem

For-profit social enterprise/private sector social enterprise

• Business that makes revenue and profits but also has a social and/or environmental objectives as part of its business model

• A private sector social enterprise is a type of for-profit social enterprise.

Advantages of Social Enterprises

• Can generate profit while also contributing to society

• Self-sustaining

  • Don’t need to depend on donations or taxpayer money

• Employees may be more motivated as they feel they are working towards a greater purpose

Disadvantages of Social Enterprises

• Funding

  • Investors may receive lower returns due to the social aspect within distributing profit.

• Greenwashing

  • There may be a risk that the business may not be genuinely contributing to social/environmental goals.

• Challenges with staying true to the business’s social aims as it grows.

Cooperative

•  type of for-profit social enterprise that is owned and run by and for its members, who each have the power of one vote.

• Types of cooperatives:

  • Employee cooperative

    • Owned by employees

  • Producer cooperative

  • Community cooperative

    • Owned by members of the community

Non-profit social enterprise

Private sector businesses that are not for the purpose of making profit but to benefit society

Non-governmental organizations (NGOs)

• Non-profit social enterprises that promote a particular cause. They generally operate in the private sector.

• Funded by:

  • Donations

  • Sale of goods services

  • Government grants

Sole Traders

• An individual who owns and controls their business.

• They take all the risk

• They keep all the profit

• They may hire employees

• They are unincorporated

• They have unlimited liability

• E.g., Hairdressers, Restaurants, Plumbers

Advantages of Sole Traders

• Can set up the business easily and quickly

• Can keep all the profit

• Independence – owners can manage themselves

• Direct contact with the market demand and can respond quickly

• No report of financial statements to the public

  • More privacy

• Quicker decision making

  • No time taken to sort out disagreements

Disadvantages of Sole Traders

• Unlimited liability

  • losses will have to be paid out of pocket

• Limited sources of finance

  • Banks are unlikely to lend money to sole traders

    • when they do it will be with high levels of interest

• High risk of failure

  • Due to inability to cover unexpected costs, lack of specialization or expertise in all required areas

• All aspects of the business must be handled by the owner

• No economies of scale

  • Not enough room for significant changes in production

• Lack of continuity

  • If sick, no income

Partnership

Two or more people combine to form a business. They may combine their finances, run the business together, as well as share the profit.

Deed of partnership includes

• How much start-up capital each partner puts in

• How the profit is distributed

• How much each partner will be paid

• How a partner may leave

Advantages of Partnership

• Easy to set up, only a deed of partnership is required

• Better financial strength than a sole trader

  • Start-up capital combined

  • Two people would share the loss

• Division of Labour

  • Each owner specializes in what they are good at

• No report of financial statements to the public

  • More privacy

Disadvantages of Partnership

• Unlimited liability

• Prolonged decision making process frequent disagreements or conflicts

  • Due to joint legal and financial accountability

• Lade of continuity

Incorporation

• The process of the company and its owner(s) becoming separate legal identities ­­­— the company itself can own assets, incur debts, enter into contracts, be sued, or sue others independent of its owner(s)

• The company has limited liability

  • If the company goes bankrupt, owners can only lose their initial investment in the company

• The company is owned by shareholders

  • Shareholders are entitled to dividends and voting at the Annual General Meeting

  • A board of directors (elected by the shareholders) will run the company

  • Continuity ownership is passed on through the transferring of shares

Privately-Held Company

• Limited-liability companies whose shares cannot be sold on the open market

• Shares can only be sold with the agreement of other shareholders

• Mostly small to medium-sized company

• Common legal forms:

  • Ltd.(UK)

  • inc.(US)

  • GmbH(Germany)

Advantages of Private Held Companies

• Easier to raise finance

  • Banks are more likely to lend money to a company than an unincorporated business

• Limited liability

• Continuity

• Economies of scale possible as the rate of production can be higher—move room for change in production method

• Division of labour

  • As the company is not only managed by owners—higher productivity

• Tax benefit

  • Corporate tax is lower than tax on an unincorporated business

• Disclosure of information

Disadvantages of Private Held Companies

• Bureaucracy

  • Lots of paperwork

• Compliance costs

  • Must hire accountants, lawyers and auditors

• Loss of control

  • Shareholders have a say in how the entrepreneur runs their business

• Limited Funding

  • Shares cannot be sold to the general public

• Disclosure of information

  • Registered companies have to submit audited financial statements

Publicly-Held Companies

• A publicly-held company sells a percentage of its shares to the public.

• ITis incorporated

• Limited liability

• Owned by shareholders

• Shares can be bought freely on the stock market

  • Shares are quoted on the stock exchange

  • Anyone can buy or sell shares easily

• Ownership is often split across many people who are often not linked to the company

• Common legal forms

  • Ltd or PLC (UK)

  • Inc. or Corp (US)

  • AG (Germany)

Advantages of Publicly-Held Companies

• Limited Liability

• Can raise large amount of capital

  • The company issues new shares when they do the IPO

  • New shareholders, BOT

• Can be divided into two groups:

  • Legy for smartness to make shines

    • Makes shaves more attractive

  • Specialization

    • Company can hire specialist managers in each department

• The company then must prepares the most likely be to earn profits and dividends

Disadvantages of Publicly-Held Companies

• Lacks privacy

  • The business must provide financial statements to the public.

• Costly legal requirements

• Short-termism of shareholders

  • Since shareholders are less personally acquainted with the company that may disclose all work life, in relation to the public