The Nature of Business

The Role of Business

Organise resources to produce goods and services for sale for profit, to satisfy the needs and wants of society.

Organise resources

Choosing and using a variety of financial, physical, human and informational resources.

Production

Activities that combine inputs and transformation processes to create value-added outputs.

Goods

Physical objects such as clothes or shoes. They are tangible.

Products

Goods and services

Services

Things done for you by others because you lack the time, expertise or both. They are intangible.

Revenue

The money that a business receives as payment for selling its products to customers.

Sale

Customers voluntarily exchanging money to purchase goods and services produced by a business.

Expenses

The costs of operating a business

Profit

The difference between revenue and expenses. Maximising revenue and minimising expenses helps to maximise profit.

Needs

Basic requirements for human survival such as food, water, shelter, relationships.

Wants

Things that improve quality of life and make existence more comfortable.

Society

The aggregate of all people living in a community, region, nation, or across the globe.

Operations

The part of the business that turns inputs into outputs

Marketing

The part of the business that helps bring customers and the business together.

Finance

The part of the business that manages financial resources.

Human resources

The part of the business that manages the acquisition, training, development and separation of employees and other forms of labour.

Other functions of business

employment, income, innovation, entrepreneurship, wealth, quality of life and choice.

Business classification

Businesses can be classified by Industry Sector, Size, Geographical Spread, Legal Structure

Industry Sector

Primary

Secondary

Tertiary

Quaternary

Quinary

Size

Conglomerate, large, medium, small, micro

Geographical Spread

Local, Regional, National, Global, Niche

Niche business

A business that serves a small, narrow market, but not necessarily in the one location.

Legal structure

Sole Trader

Partnership

Private company

Public company

Government Business Enterprise

Sole trader

One person owns and operates the business.

Partnership

Usually 2-20 partners own and operate a business.

Public company

A company that has floated shares in the stock market. Shareholders have ownership of the company.

Has Ltd after its name.

Private company

Can have a maximum of 50 shareholders. Shares are not floated in the market, people have to be granted permission from the owners to purchase shares.

Has Pty Ltd after its name.

Government business enterprise

A company whose only shareholder is the Government.

For example Australia Post.

Unincorporated

Where the business and the owner are one entity. All legal and financial liabilities of the business are the responsibility of the owner(s). Unlimited liability.

Incorporated

The process companies go through to become separate legal entities from their owners. This limits liabilities to invested money. Limited liability.

Primary Industry

Extracts products from the earth and processes them into raw materials

Eg Farming, mining, fishing, forestry.

Secondary Industry

Manufactures intermediate goods or finished products using raw materials and other intermediate products.

Eg Flour mill (intermediate good)

Eg Furniture (finished product)

Tertiary Industry

Provides a service to general population and to businesses.

Retailers, wholesalers and transport/distribution businesses.

Health services, emergency services, construction.

Quaternary Industry

Services that involve the transfer and processing of information and knowledge.

Eg, finance, technology, media, education, legal services and advertising.

Quinary Industry

Domestic activities and services traditionally done at home.

Eg Hospitality/Restaurants, Travel, Child care, aged care, cleaning/gardening.

Multinational Conglomerate

Massive company, often global in scope, operating a collection of smaller companies that provide it with a range of goods and services to sell in a variety of markets.

Eg Unilever

Eg Google

Number of employees in a large business

200+ employees

Number of employees in a medium businesses

20-199 employees

Number of employees in a small business

Less than 20 employees

Number of employees in a micro business

Less than 5

Factors influencing choice of legal structure

- Size of Business

- Ownership and Control

- Finance needed

Size of business (Influences on legal structure)

As sales increase and business operations grow, the owner may need to change its business structure to minimise tax, protect owner assets, gain expertise.

Finance needed (influences on legal structure)

When a business expands it will need injections of money. Money can be obtained from debt, new owners, venture capital or floating shares in the market.

Ownership and Control (influences on legal structure)

The legal structure of the business will depend on how much control the owner wants over the business.

Business Environment

the surrounding conditions in which the business operates. It can be divided into internal and external factors.

External environment

Includes those factors over which the business has very little control.

Internal environment

Includes those factors over which the business has some degree of control.

External influences

Economic, financial, social, legal, political, institutional, technological, competitive situation and changes in the market.

Economic cycles

Are the periods of expansion (boom) and contraction (recessions/depressions) that occur as a result of fluctuations in economic activity.

Characteristics of an expansion period

Higher levels of employment, wages increase, consumer spending increases, inflation may increase.

Eg Growth of China on Australian exports.

Characteristics of a contraction period

Unemployment levels rise, wages stagnant, level of spending decreases, inflation may remain stable or fall.

Eg Global financial crisis and the Covid19

Discretionary income

Household spending after all necessities have been paid for. This type of spending falls during contractions and grows during expansions.

Eg. Travel, luxuries, restraurants.

Substitute discretionary spending

During contractions, households may forgo some goods and services and seek cheaper alternatives.

Eg renovations instead of full house builds, fast food instead of restaurants, new makeup instead of beauty therapists.

Financial Deregulation

Is the removal of government regulation from industry, with the aim of increasing efficiency and improving competition.

Eg Lowering tariffs, allowing non-bank lenders

Geographical influences

relate to Australia's location in Asia-Pacific region, Globalisation and Demographics.

Globalisation

The process where people, goods, money and ideas move around the world faster, in greater volume and more cheaply than before.

Demographics

Features of a population such as age, sex, income, cultural background and family.

Social Influences

Changes in society's organisation and preferences.

Eg environmental awareness, time-poor consumers, work-life balance.

Legal Influences

laws on taxation, industrial relations, occupational health and safety, equal employment opportunity, anti-discrimination and protection of the environment.

ACCC

Australian Competition and Consumer Commission - a government body that monitors prices set by sellers and promotes competition.

Political influences

Government policies have a considerable impact on the business environment.

Institutional influences

Government, regulatory bodies and

other groups.

Regulations

Rules, laws or orders that businesses must follow.

Regulatory bodies

Fairwork Australia (Industrial relations)

The Australian Tax Office

Australian Securities and Investments Commission.

Australian Competition and Consumer Commission.

Levels of Government in Australia

Federal, state and local impose regulations.

Eg Taxes, employee entitlements, approve new developments.

ASIC

Australian Securities and Investments Commission. Regulates companies (public and private) and the Australian Stock Exchange.

Technological Influences

Increase in efficiency, productivity, innovation through new goods/services.

Competition

Number of competitors, Local and foreign Marketing, Ease of entry.

Internal influences

Things that can be controlled including the product, location, management, resources, business culture.

Product

Type and range of goods, services offered, packaging, branding. (Total product concept).

Location influence

Customer convenience, visibility, proximity to other businesses (suppliers, competitors), costs.

Resources

The things a business needs to produce goods and services - human resources, information resources, physical resources, financial resources.

Human resources

the employees of the business and people who regularly supply services. Employed full time, part-time, casual or as contractors.

Information resources

The knowledge, expertise, ideas and data required by the business.

Eg market research, sales reports, economic forecasts, technical material, legal advice, processes.

Physical resources

Include equipment, machinery, buildings and raw materials.

Financial resources

Funds the business uses to meet its obligations, including loans, lines of credit, owner's equity and retained profits.

Management influences

Levels of business structure, employee autonomy and managerial styles.

Business Culture

Refers to the values, ideas, expectations, beliefs and modelled behaviour shared by members of the organisation.

Explicit business culture

The official policies, goals, slogans and stated expectations of how people in the business behave.

Implicit business culture

The way values, attitudes and behaviours are acted out in the day to day running of the organisation.

Monopoly market conditions

Complete concentration by one firm in the industry.

Eg Australia post

Eg Bunnings (to an extent)

Oligopoly market conditions

Consists of a small number of large firms.

Eg Banks

Oil companies

Car manufacturers

Phone manufacturers

Duopoly

An oligopoly with two businesses dominating the market.

Eg Supermarkets - Coles/Woolworths

Eg Casinos - Crown Melbourne/Star Sydney

Monopolistic Competition

A large number of buyers with similar but slightly different needs/wants being served by a large number of sellers with similar but not identical products.

Shoes and clothing manufacturers

Local retailing

Ease of entry

Ability of a person to establish a business within an industry. This depends on the market concentration.

SWOT analysis

Strengths, Weakness, opportunities, threats in the business environment.

Business life cycle

The stages of growth and development a business can experience

Establishment

This stage generally has the highest level of risk, low sales revenue, poor cash flow and lowest market share.

Growth

This stage is characterised by dramatic growth in sales and market share, positive cash flow and an increase in marketing.

Vertical integration

When a business expands at different but related levels of production and marketing of a product.

Backward vertical integration

A business integrates with one of its suppliers e.g. a bakery acquiring a wheat farm

Forward vertical integration

A business integrates with a firm it sells to e.g. a bakery merging with a supermarket chain

Horizontal integration

Occurs when a business acquires or merges with another firm that makes and sells similar products e.g. a bakery merging with another bakery

Diversification

When a business acquires or merges with a business in a completely unrelated industry e.g. a bakery merges with a shoe store.

Maturity

In this stage, sales and revenue slow, expenses need to be controlled, competition increases and the business tries to maintain customers through brand loyalty.

Post maturity

A stage that has 3 options - renewal, steady state or decline (possible cessation/ closure)

Cessation

Closure of a business - can be voluntary or involuntary

Voluntary cessation

Occurs when the owner closes the business of their own accord

Involuntary cessation

Occurs when the owner is forced to close the business by its creditors