Unit 1

Business

The role of a business is to combine human, physical and financial resources to create goods and services, usually with the aim of making profit

Capital goods

Physical goods that are used in an industry to make other goods and services such as machines and equipment

Business Objectives

It may vary depending on the type of business and the situation is in

• Profit

• Increase added value

• Growth

• Survival

• Service to the community

Business activity / Factors of production

Inputs - Resources that a business uses in the production process

Processes/Production - Turning the inputs into manufactured foods or the providing of services

Outputs - To outputs or provision of final goods or services

Examples of input resources

• Raw materials

• Human resources (labour)

• Capital

Functions of a business

• Human resources

• Finance and accounts

• Marketing

• Operations

Human resources

• Manages the workforce of the business

• Deals with: workforce planning, recruitment, training, appraisal, dismissals and redundancies and outsourcing human resource strategies

Appraisal

A formal assessment or valuation

Redundancies

The state of being unemployed because there is no more work available

Finance and accounts

• Manages the organisation’s money and assets

• Deals with: reporting and recording financial records, abiding by legal requirements (e.g. tax), produces final accounts

Marketing

• Identifies and satisfies the needs and wants of customers

• In charge of ensuring that a business’ products sell

• Deals with: market research, test marketing, advertising and branding

Operations

• Converts raw materials and components into finished goods

• For a service, it can be the process of giving that service

• Deals with: research and development, delivery, stock management, etc

Business sectors

• Primary

• Secondary

• Tertiary

• Quaternary

Primary sector

The extraction and harvesting of natural materials which is regulated and protected by the government

Primary sector examples

Mining, agriculture, livestock, drilling etc

Secondary sector

Manufacturing and construction of products by transforming the raw materials produced in the primary sector

Economically developed countries tend to dominate this sector

Secondary sector examples

Clothing production, car manufacturing, etc

Tertiary sector

Provides service and retail to the general population

The selling of goods and products from the primary and secondary sectors and the sale of services and skills

Tertiary sector examples

Healthcare, transportation, sales, retail, maintenance, etc,

Quaternary sector

A subcategory of the tertiary sector

Intellectual and knowledge based services involving complex processing and handling of information

Quaternary sector examples

IT specialist, scientific research, consultancy, etc.

Sectoral Change

Primary → Secondary → Tertiary → Quaternary

The importance of each sector in countries economic structure changes over time

Industrialisation

The growing importance of the secondary sector manufacturing industries in developing countries

De-industrialisation

In developed economies the situation is reversed. These is a general decline in the importance of secondary sector activity and an increase in the tertiary sector.

Reasons for sectoral change

• Higher household income

• More leisure time

• Greater focus on customer service

• Increasing reliance on suppport service

Entrepreneur

An individual who sets up and manages a business, while taking on financial risks in doing so

Intrapreneur

an employee who is tasked with developing new and innovative ideas or projects within a business

Entrepreneur qualities/features

• Founders/owners

• Takes great risks

• Rewarded with profit

• Any failure leads to personal costs

• Visionary

• Responsibility for the work-force

• Provides sufficient resources

Intrapreneur qualities/features

• Employees of the business

• Uses resources of the company

• Risks may vary but less than entrepreneur

• Rewarded with a paycheck

• Failure is absorbed by the business

• Innovative

• Accountable to the owner

• Dependent on other employees or the business

Reasons for starting up a business

• Profit

• Fame

• Growth

• Transfer and inheritance

• Challenge

• Autonomy

• Security

• Hobbies

Autonomy

A business is the freedom that managers provide their staff to make choices and accomplish specific goals

Factors to consider when starting up a business

• Business idea

• Sources of finance

• Human resources

• Enterprise

• Fixed assets

• Suppliers

• Customers

• Marketing

• Legal issues

• Market opportunities

Internal problems that a new business might face

• Lack of finance

• Cash of problems

• Marketing problems

• Poor location

• Internal legalities

• Production problems

• High production costs

• Workforce management problems

External problems that a new business might face

• Competition in the area

• Economic recession

• External legalities

• Terrorists

• Politics or government

• National calamities

• Limited resources

• Changes in the business/market environment

Elements of a business plan

• Business

• Product

• Market

• Finance

• Personnel

• Marketing

Business plan

• Report detailing aims and objectives of a business

• Planning tool that serves as a blueprint to address the issues of a start-up business

• Meant for investors/banks to help them decide on whether to invest/approve loans

Public sector

• Owned by the government

• Provides essential goods and services that would be otherwise inefficiently provided by the private sector

• Organisations which are wholly owned by the government are state-owned enterprises

• Examples: electricity and water companies, public hospitals, etc

Private sector

• Owned and controlled by private individuals

• Can be owned by one person or by many

• Aim to make profit

• Examples: H&M, Walmart

Unincorporated businesses

Businesses where there is no legal distinction between the owner of the business and the business itself. everything is carried out in the name of the owners.

Types of unincorporated businesses

• Sole trader

• Partnerships

Types of incorporated businesses

• Private limited companies

• Public limited companies

Incorporated businesses

Businesses that have a seperate legal entity from their owners

Sole trader

An individual who runs and own their own business

Sole traders features

• Unincorporated

• Individual who owns a personal business

• Completely owned and controlled by just one person

• Responsible for success and failure

• May work alone or employ others

• Startup capital usually includes personal savings and borrowing

• Simplest form of business

Sole trader advantages

• Fewer legal formalities

• Profit goes directly to owner

• Autonomy

• Personalised service

• Privacy of financial accounts

• Setup costs and inexpensive and time-saving

• Less restrictions and easy decision-making

Sole trader disadvantages

• Unlimited liability (unincorporated)

• Limited sources of finance

• Hard to obtain bank loans

• High risk

• Workload and stress

• Limited economies of scales

• Lack of continuity

• All the income tax is shouldered by one man

Partnership

A business owned by multiple people (at least two)

Partnership features

• Unincorporated

• Ordinary partnerships have a maximum of 2-20 people

• At least one partner must have unlimited liability

• Has a partner agreeement that outlines each partners’ responsibility

• Turns into a corporation if there’s more than 15 partners and will pay corporate tax

• Each person contributes money and resources, as well as sharing the responsibilities of managing a business

• Can involve the presence of “silent” or “sleeping” partners, who do not make decisions, merely giving money to the business and earning profit

Partnership advantages

• Set ups are inexpensive and quick

• Financial strength (more partners eans more personal funds)

• Specialisation and division of labour due to multiple people

• Financial privacy (no need to public accounts)

• Liability is spread around

• Range of skills

• Higher capital

Partnership disdvantages

• Unlimited liability (unincorporated)

• Prolonged and slower decision making

• Lack of harmony

• Profits must be shared among multiple partners

Private limited company (Ltd.)

A business that cannot raise share capital from the general public, the shares are sold to private family members, friends, etc.

Private limited company features

• Incorporated

• Registered at the Securities and Exchange Commision (SEC)

• Examples: IKEA, Lego, Rolex, Chanel, etc.

Private limited company advantages

• Limited liability

• No limit on the number of owners

• Shares can only be sold privately

• Better decision making

• Easier to raise additional funds

• Higher capital

• Higher capacity for expansion

Private limited company disadvantages

• Profits have to be shared among much larger numbers of members

• Setting up a business takes time and it’s costly

• The company’s financial accounts are public

• No member has full control of the company

• Not allowed to sell their shares to the public

• More restrictions

• Corporate taxes (higher)

Public limited company (PLC)

Often are big, multinational companies boasting large numbers of employees that can advertise and sell their shares to the general public via the stock exchange

Public limited company features

• Incorporated

• Company whose shares are listed on a stock exchange and can be freely bought and sold by anyone

• Required by law to publish their complete and true financial position

• Must conduct shareholders’ meetings

• An Ltd. can convert to PLC by offering stock market flotation or an initial public offering (IPO)

• Examples: China mobile, HSBC, Samsung, Nike, etc.

Flotation

The process of convert a Private Limited Company to a Public one by issuing shares available for the public to purchase. This process is known as an initial public offering (IPO). It allows companies to obtain financing extrnally instead of usinf retained profit to fund.

Public limited company advantages

• Shares an be sold to the public

• Efficienct sources of finance are more available (bank loans)

• Limited liability

• Possibility of market dominance

• Economies of scales

• Tax benefits

• More capital raised by selling stock

• Continuity after death, freely transferable

• Higher capacity for expansion

Public limited company disadvantages

• Takes time due to bureaucraticnature of big companies

• Communication issues due to size

• Final accounts are public

• Less able to offer personal services to customers

• Compliance costs

• Loss of control

• Possibility of a hostile take-over through shares, control can change unexpectedly and be lost by the original owner

• Corporate tax

• Much more restrictions

Social enterprise

• Revenue generating businesses with social objectives at the centre of business operations. These run according to business principles but do not aim at making profit

• Their surpluses from trading may be shared with employeees and customers, pass onto a third party, used to buy resources, raise finance, employ staff, etc.

Cooperatives

An autonomous organisation of people united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise

Cooperatives features

• The common goal is to create value for the members by engaging in socially responsible business activities

• All employees have a vote

• Profit earned is shared between members

Cooperatives advantages

• More incentive to work

• Employees have decision-making power

• Social benefits (CSR)

• Public support

• Shareholders must help run the organisation, work is more spread out

• Equal voting rights/power among all shareholders

Cooperatives disadvantages

• Disincentive effects

• Limited sources of finance

• Slower decision making

• Limited promotional opportunities

• Less profit for each shareholder as it is spread among many members

Microfinance providers

A financial service aimed at financing disadvantaged members of society and helping to stop the poverty cycle

• Examples: small businesses, women, minority groupds, low-income individuals, unemployed, etc

Microfinance providers advantages

• Disadvantaged people have access to this

• Job creation

• Social well-being incentives

Microfinance providers disadvantages

• Immortality (benefit from the poor/unemployed)

• Limited finance

• Limited eligibility (not everyone qualifies)

Public-private partnerships

When the government works together with the private sector to jointly provide certain goods or services

Public ones are sold off or transferred to the private sector

Public-private partnership advantages

• Incentivized to be more efficient and productive

• Government can focus on other projects and infrastructure

• Enjoy the skills and talents of the private sector (can lead to increased efficiency and productivity)

Public-private partnership disadvantages

• Services provided would be more expensive

• Prices goes up, government has to subsidize (increase in taxes)

• Aim of profit may lead to cost cutting, lower quality, higher prices

Non-profit social enterprise

Businesses run in a commercial manner but without profit being the main goal. These companies use surplus revenues to achieve social goals.

Non-Government Organisation (NGOs)

Non-profit social enterprise that operates in the private sector (it is not owned or controlled by the government). It is set up to benefit society.

Non-profit organisations (NPO) features

• Does not divide its funds between owners

• Aim is to raise funds and use it for their beneficiaries

• Example: service organisations or charities like Bantay Bata, PGH, PCSO

Non-Government Organisation (NGOs) features

• Exist in the private sector

• Participate in humanitarian projects, education projects, etc

• Example: WWF, UNESCO, Red Cross

Charities

Provides voluntary support for good causes (from society’s point of view) such as the protection of children, animals and the natural environment. Reliant on donors, endorsements, promotion, etc.

Charities features

• A non-profit organisation that is exempt from taxes

• Deploys its resources for charitable purposes

• May raise funds to reduce poverty or to reduce environmental problems

• Examples: Caritas Manila, Pondo ng Pinoy

Charities advantages

• Social benefits

• Tax exemptions

• Tax incentives for donors

• Limited liability

• Public recognition and trust

• Awareness of social issues

Charities disadvantages

• Bureaucracy

• Disincentive effects

• Charity fraud

• Inefficiencies

• Limited sources of finance

Pressure groups

Organised groups of people who actively work together to promote and defend their common issue/interest. They aim to bring about change.

Pressure groups features

• Organised grou[s that do not run for election

• Advocate certain interests such as environment, sexuality, religion, rights, etc

• Seeks to influence the public or private sector for certain causes

• Example: PETA, Greenpeace, Church, LGBT

Vision statement

Specifies the long term operations of a business, where it ultimately wants to be. It often describes how the organisation wants to be perceived. They aim to influence consumers’ perception of the business

• “Where do we want to be?”

Mission statement

A statement of the underlying purpose of the organisation’s existance and its core values.

• “How do we get there?”

Aims

Long-term goals of what the company wants to be, often the same as the overall vision and mission statement and describes the businesses’ reasons for being made

• Example: To be the most successful independent coffee shop chain in the country

Objectives

Shorter term goals that are specific and measurable

Three levels of objectives

• Strategic objectives

• Tactical objectives

• Operational objectives

Strategic objectives

• The senior leadership sets the long-term goals

• Determines the actions necessary to achieve the goals and mobilises resources to execute the actions

• Affects: Whole company

• “How will the goals/arims be achieved by the resources?”

Tactical objectives

• Middle management develops medium-term action plans to achieve the stategic objectives of an organisation

• Affects: Departments

Operational objectives

• Lower-management develops short-term, day-to-day action plans to achieve the tactical objectives of the organisation as efficiently as possible

• Affects: Teams

Changing objectives

Companies change objectives when responding to internal and external changes

Internal factors to changing objectives

• Corporate culture

• Type and size of organisation

• Age of organisation

• Financial status

• Risk profile of shareholders

• Private/Public sector

  • Private = Profit

  • Public = Service

External factors to changing objectives

• State of economy

• Government constraints

• Presence and power of pressure groups

Corporate social responsibility (CSR)

The consideration of ethical and environmental issues relating the business activity, towards all stakeholders and not just to owners and shareholders

• Example: The treatment of employes or how local communities would react to new projects

Corporate social responsibility aims

• Treat customers and suppliers fairly and equally

• Compete fairly

  • Example: Not engaging in predatory pricing

• Treat the workforce with dignity and listening carefully to their needs

Corporate social responsibility benefits

• Better employee recruitment and retention

  • Sense of value/reputation

• Boosts company’s image/reputation

• Risk management against scandals, accidents, etc

  • Appeases pressure groups

• Brand differentiation and smoother operations

• Customer loyalty & goodwill

Corporate social responsibility disincentives

• High compliance costs can lower profits

• Forced to use materials that are specialised and may reduce profit

• Ethics are not universal or unchanging anyway

• Lower profits may decrease personal bonuses which may lead to greediness

• Attitudes change over time, acceptable practices before are unacceptable today

Purpose of ethical objectives

• Altruistic attitude

• Strategic attitude

• Self-interest attitude

Altruistic attitude

The company genuinely does it for social benefits, they actually care about the impact of the company

Strategic attitude

Business that only is socially responsible if such actions help them to become more profitable

Self-interest attitude

The belief that it is the government’s job to protect society

SWOT Analysis

A qualitative way to identify key internal strengths & weaknesses and external opportunities & threats, seen as important to achieving an objective