Topic 1 

Role of business 

• The nature of a business

• Producing goods and services

• Profit, employment, incomes, choice, innovation, entrepreneurship and risk, wealth and quality of life

Types of Businesses

• Classification of business

• Size - Small to medium enterprises, large 

• Geographical spread

• Industry - Primary, secondary, tertiary, quaternary, quinary

• Legal structure - Sole trader, partnership, private company, public company, government enterprise

• Factors influencing choice of legal structure 

• Size, ownership, finance

Influences in the business environment

• External influences - economic, financial, geographic, social, legal, political, institutional, technological, competitive situation, markets 

• Internal influences - Products, location, resources, management and business culture

• Stakeholders

• Stages of the business lifecycle 

• Establishment, growth, maturity, post maturity

• Factors which continue to business decline

• Voluntary and involuntary cessation

• Different methods available to cease a business

The nature of a business

Producing goods and services

One of the main reasons a business operates is to make a profit. The products a business produces is categorised into goods and services. 

• A good is an item that can be seen and touched (tangible)

• A service is an action that is performed by a person or machinery for someone else (Intangible) 

• A finished product is a good or service that is ready for customers to buy and use

The production of a good or service contains three distinct parts:

Inputs → Transformation process → Outputs

• It produces and sells that satisfy an individuals needs and wants

• Inputs - Land, capital, labour and enterprise

• Outputs - Goods and services

Profit, employment, incomes, choice, innovation, entrepreneurship and risk, wealth and quality of life

Businesses perform a number of social and economic roles in the Australian economy.

• The economic role of business looks at the financial impact that the activities of business have on various groups in the business environment

• The social role of business is mainly focused on the impact of business on the community

Profit

• Profit is what remains after all business expenses have been deducted from sales revenue 

• The chance of earning a profit encourages entrepreneurs to take the risk of opening a business 

Revenue - costs = Profit

Employment

• Businesses provide employment opportunities, which keeps the economy through the purchasing of products by customers

• The number of employees hired will depend on the nature of the work, the nature of the products sold and the environment 

Income

• Income is money received by an employee for providing their labour/work

• Employees provide their labour and in return, they receive an income in the form of a wage or salary

• When a company has many owners they are called shareholders and when the company makes a profit this is divided between them. This is called a dividend

Choice

• Choice is the act of setting alternatives 

• Customers are given product variety at competitive prices

Innovation

• Innovation is a new or improved product or service

• Businesses use innovation to maintain their competitive advantage by undertaking research and development 

• The main reason for this is so businesses can improve products, develop new products and improve production  

Entrepreneurship and Risk

• An entrepreneur is someone who transforms an original idea into a business

• Potential for loss if the business fails

• The greater the potential return, the greater the risk 

Wealth

• Wealth is the net amount a person or business own 

• Businesses create wealth for shareholders in the following ways:

• Lenders - loan repayments

• Business owners/shareholders - Profits or dividends

• Government - Taxes

• Employees - Salaries, wages, employee benefits

Quality of life

• The overall standard of living and wellbeing of an individual

• Businesses sell products that can impact a customers quality of life

• By employing people, a business is impacting an employees quality of life

Types of Businesses

Classification Of Business 

Size - Small to medium enterprises, large 

Micro business

• A business with 5 or fewer employees (also classified as a small business)

Small business

• Between 5 and 19 employees 

• Sole trader or partnership

• Small market share 

• Source of income comes from owners personal savings or a loan

Medium business

• Between 20 and 199 employees 

• Owned and operated by a few people/ private shareholders

• Partnership or private company

• Funding comes from private shareholders or owners savings

Large business

• 200+ employees

• Owned usually by thousands of public shareholders

• Public company

• Source of income comes from sales of shares, loans

• Large market share

Geographical spread (local, national, global)

Local

•  Businesses that have restricted geographic spread

• Serves the surrounding area.

• Tend to be small to medium in size

•  Eg. newsagent, local garden service, corner store

National

•  A business that operates within a country.

• Will have a greater range of products and services in a wider area.

•  Eg. Coles, bunnings, fitness first

Global

• Large company with branches in different countries

•  Called a Multinational corporation

• Eg. Nike, Apple, Mcdonalds 

Industry - Primary, secondary, tertiary, quaternary, quinary

Primary 

• Includes businesses that produce or extract raw materials or natural resources

• Eg. Mining, farming, fishing

Secondary

• Includes businesses that take raw materials from the primary industry and manufacture them into a semi finished product or a finished product

• Eg. wheat made into flour (semi finished product) and flour made into bread (finished product)

Tertiary 

• Includes businesses that provide a service to consumers, particularly the selling and distribution of goods and services

• Eg. retailers, hairdressers

Quaternary

• Businesses that transfer and process information and knowledge 

• Eg. education, finance, accounting 

Quinary

• Businesses that provide a service that has been previously performed in the home 

• Eg.  car wash, cleaners, childcare

Legal structure - Sole trader, partnership, private company, public company, government enterprise

• Unincorporated: the business has no legal existence from its owners and will be either a sole trader or partnership

• Incorporated: Refers to when the business exists in its separate legal entity from the owners

Sole trader 

Partnership 

Private company

Public company

Government enterprise

• A business that acts on or behalf of the government 

• Considered to be a public business

Factors influencing choice of legal structure

Size, ownership, finance

Size

• Most businesses start as a small or micro business annd work up to a bigger business. They would start as a sole trader or partnership 

• Business increase to keep up with sales growth 

• As businesses grow, they tend to need more finance and look towards investors

Ownership

• If a business owner wants full control, they will become a sole trader

• In a partnership or private company, the ownership is shared

• In a public company, ownership is shared across shareholders

Finance

• Sole traders and partnerships find it hard to finance their businesses, they get funding from personal savings or banks

• Businesses will undergo corporation to get access to a greater pool of finance. They have higher chances of getting investors and gain limited liability

Influences in the business environment

External influences - economic, financial, geographic, social, legal, political, institutional, technological, competitive situation, markets

External influence: Businesses have no control and must adapt to

Economic

• Related to economic activity which impacts what businesses and consumers will spend on 

• The level of economic activity fluctuates over time through booms and troughs

• When economic problems occur both nationally and globally, consumers and business owners become more cautious about spending and investment decisions

• The economic cycle (business cycle) refers to the period of growth and recessions that occur as a result of fluctuations in the general level of economic activity

Government Policies 

Monetary policy 

• Actions taken by the Reserve Bank of Australia to control the level of interest rates in the Australian economy 

• Higher interest rates will lower demand for goods and services (people are spending more on loans so will have less money left over)

• Lower interest rates will lead to higher demand for goods and services (Cheap to pay back loans therefore more money to spend)

Fiscal policy

• How the government uses spending and taxation to influence economic activity

• During downswings/recessions, the government will spend more and reduce taxes so that people will be able to afford things, stimulating business

• During expansions/booms, The government will spend less and increase taxes to avoid inflation, causing demand to fall

Financial 

• Businesses will use equity finance when available as it is cheaper, however they will often require debt finance, paying it back with interest

Equity finance: the owner contributing funds or selling shares to new owners 

Debt finance: borrowing capital from outside sources e.g. banks 

• High interest rates will mean businesses are less likely to borrow money 

• Low interest rates will mean businesses are more likely to borrow money

Geographic

• Refers to the effects of climate, natural resources, topography, physical infrastructure, and location of a business

•  Australia is located in the Asia Pacific region and the economic growth of Asian nations has allowed opportunities for the Australian market to expand

Location - Where a place is

Demographics - The qualities of a group such as age, gender, income 

Globalisation - The process that sees people, goods, money and ideas moving around the world faster and more cheaply than before

impacts of globalisation:

• Increased competition - continually improve products to be competitive

• Expanded markets - business can global and grow

• Greater customer expectation - expectations are greater, need to meet demands

• Economies of scale - more efficient, profitable, competitive

• Location flexibility - take advantages of lower costs = increased profit

• Cheaper materials - lower costs = greater revenue

• Diversification - diversify risks across businesses

• Access to better labour - have a pool of talent = improve business performance

Social

• The attitudes, beliefs and values of society 

• Society expects businesses to contribute to the communities quality of life

• Businesses need to me aware of society’s needs, opinions and attitudes, acting accordingly

The main social changes in Australia are:

• Concern for the environment 

• Desire to provide family friendly work environments 

• Catering for diversity and accommodating specific needs 

Legal 

• Government regulation in the form of laws aims to promote fair conduct by businesses and aim to protect society and the economy 

• Society expects business owners to follow the laws of the country

• Must comply with federal, state, and local governments

• failure → fines, penalties, damage to brand

• E.g of laws businesses have to follow is the competition and consumer act

Political

• Major political change can result from an election, leading to business uncertainty or business confidence 

Current political issues affecting businesses:

• Taxation: GST, company tax cuts, tax incentives 

• Social reforms: paid parental leave, equal pay

• Environmental management: banning plastic bags

Institutional 

Government:

Regulatory bodies:

• set up to monitor and review the actions of businesses and consumers in relation to certain issues (such as advertising) and the appropriate legislation

• E.g. Competition and consumer act, the fair work act, WHS act

Technological 

• Development in technology results in increased efficiency and productivity, leading to new products and innovation in existing products

• This increases competitive advantages over a range of markets

• If businesses are too slow to implement technology, they risk losing their competitive advantage 

Competitive situation 

• The competitive situation is influenced by the number of competitors and the ease of entry in which businesses can enter their market 

• Each business aims to achieve a sustainable competitive advantage over its competitors in order to capture a large portion or share of the market

Factors that influence the competitiveness of a business:

Number of competitors: The size and number of competitors that exist within an industry 

Ease of entry: The ease with which a business can enter particular markets, it depends on the number of competitors already in the industry 

Local and foreign competitors: Due to globalisation, there is an increase of competitors for markets 

Marketing strategies: When marketing, a business will consider the size of the marker, size of the business, number of competitors and the nature of the product 

Markets

• A market is the setting where items are exchanged

• Financial products are bought and sold across borders more readily due to technology

• The labour market has been globalised by migration and the tendency for business to favour outsourcing of manufacturing to low-wage economy

• Consumers now have access to goods and services across the globe and have greater levels of disposable income than ever before

Internal influences - Products, location, resources, management and business culture

Products 

• Product influences will impact the size of a business, the type of technology used and the type of business

• The types of goods and services produced will affect internal operations

• Goods - If the goods are large or require many raw material outputs, there will need to be structures in place in order to organise and monitor the processes involved in production 

• Services - usually require less space and will influence structure differently. Services tend to be consumed immediately and don’t need as much storage space

• Size will be based on the range and type of goods and services produced, the level of technology utilised and the volume of goods and services produced 

Location 

A good location is an asset as it will lead to high levels of sales and profits

• A bad location is a liability that positively affects sales and profits

• Choosing a location near a complementary business (one that sells similar goods and services) may be important to increase customer trade

•  A prime location is a combination of customer convenience and visibility

Factors to consider when choosing location:

• Visibility

•  Cost

•  Proximity to customers

•  Proximity to suppliers

• Proximity to support services

Resources 

• Resource quality and quantity will vary depending on demand

• Resources contribute to the cost of operation 

Resources include:

1. Human resources - Employees responsible for transforming inputs into finished good or service using expertise, skill and knowledge 

2. Information resources - Knowledge and data required by the business E.g. market research, sales reports, economic forecasts

3. Physical resources - Equipment, machinery, buildings and raw materials needed for production

4. Financial resources - Funds required for a business to access other resources and then produce and sell its goods and services

Management

• Managers need to adapt their style to changing situations and ensure the organisation structure of the business is met

• Developments in technology have changed management structures (they are less centralised) and can now adapt to meet changing market conditions.

Traditional organisational structures -

• Traditional hierarchical structure has many levels of management

New and emerging organisational structures -

• Flatter organisational structure has few/no levels of middle management - businesses can adapt quickly to changing consumer needs/market conditions and give greater responsibility to individuals in the business.

Business culture 

• Values, ideas, expectations and beliefs shared by the staff and managers of the business

• Revealed formally through policies, goals, slogans and informally through how staff dress, language used and how staff are treated

•  A well developed and strong culture increases the likelihood of success

Stakeholders 

Owners/shareholders

• Shareholders may include the owners of a business and the main responsibility of a business is to maximise the return of the shareholder's investment (ensure profit) in a sustainable way

• Businesses are obligated to hold annual general meetings (AGMs) at which shareholders can vote on key decisions

Managers

• Managers must give an honest and accurate account of their management of the business

• In return, businesses have to support the actions of the management through adequate resourcing levels, training, and development, clear lines of communication and delegation of authority

Employees

• Businesses must ensure employees have a safe and rewarding work environment

•  Employees who are encouraged become more valuable to themselves and the organisation

•  Employees need to be treated ethically and fairly. Their legal rights must always be honoured and respected

•  Businesses should provide training and promotional opportunities for employees

Customers

• Consumers are the lifeblood of any business and therefore the business must respect and satisfy its customer's needs and wants

• Legislation states that businesses must avoid misleading consumers and produce a good that is both fit for purpose and durable (accurate disclosure labelling)

• Better informed consumers and vigilant consumer groups like choice and ensure that most businesses avoid mistreatment and deception of customers. (ensure warranties and guarantees are honoured)

Society

•  Businesses need to obey the legislation and an increasingly conscious society expects businesses to give back to the community something in what they take out in generating profits.

•  This may include addressing social injustices and advocating societal change. This area is often referred to as corporate social responsibility

Environment

•  Businesses need to adopt ethically sustainable operating practices to reduce the ecological foot-print

•  Over the last decade the business community has undertaken many initiatives to put the principle of sustainable development into practice

• These initiatives include water recycling, renewable energy usage, mitigation of air and land pollution.

Stages of the business lifecycle

Establishment,growth,maturity, post maturity

Establishment

• Occurs during the initial period in which a business is set up.

•  High set-up cost

• Low sales due to ensure customers

• Profits will be low and may even be negative

•  Businesses will rely on finance from owner's savings.

• Challenges include choosing the right staff, location, and government regulations.

Growth

• This is a stage of accelerating growth - there is an increase in sales revenue and customer awareness due to developing a customer base and reputation/loyalty

• The business may undertake development to improve product quality and develop new products

•  Due to the growth of the business it may need to seek financial management and long-term planning

•  The business must continue to improve its competitive edge

Maturity

•  A business enters the maturity stage when growth in its sales begins to level out.

• Present challenge - need to rethink to guarantee survival.

• Some reasons for this include:

• Increased competition - market saturation

•  A successful product being copied

•  Low interest in the product

•  Complacency by management and staff in operations and direction.

Post-maturity

• What happens in this stage depends on how the business has responded to the characteristics and challenges encountered in the growth and maturity stages

Possible outcomes in post-maturity include:

1. Steady-state

2. Renewal

3. Decline

Steady state

•  The business continues to operate at the level it has been during the maturity stage

•  Sales remain at the same level as maturity

•  The difference between maturity and steady state is that research and development is stopped

•  The business will eventually be forced out of this state

• Effective responses will lead the business into renewal

•  Ineffective responses will lead the business into decline

Renewal

•  A business enters renewal when it experiences increasing sales and profit.

•  A business can enter renewal by

•  Adding new products

•  Finding new users for their product

•  Entering previously untapped markets

•  The key to entering and remaining in renewal is meeting changing needs of customers.

• This requires the business to undertake market research to forecast future sales

Decline

•  A business enters decline when falling sales and profits ultimately lead to business failure.

• Management will need to decide if

○ The business can be saved - what can they do to turn it around

○ The business is doomed to fail - what can they try to save

• Factors that contribute to business decline

• Voluntary and involuntary

Factors which contribute to business decline

• Ignorance of existing competition / increased competition

•  Unfavourable economic conditions

•  Failure to properly price products

•  Uncontrolled growth

• Failure to adapt to change

•  Lack of management skills

•  Poor location

•  Lack of adequate cash flow

•  Failure to meet customer needs

•  Failure to plan

Internal reasons for business decline -

• Lack of management knowledge

• Inadequate planning

•  Lack of finance and poor cash flow

•  Poor location

External reasons for business decline -

• Unexpected competition

•  Government policies

• Natural disasters

Voluntary and involuntary cessation

Cessation = Ending

Voluntary Cessation

•  When the owner ceases to operate the business of their own accord. All assets of the business are sold

Why?

•  In most cases this is due to business failure - rising debts and negative cash flow

• In the case of a sole trader, this can be due to the owner wishing to retire, changes in lifestyle, or passing away.

Involuntary Cessation

• When the owner is forced to cease trading by the creditors of the business

Why?

• Creditors are concerned about the level of debt owed so they force the business owner to wind up the business.

Different methods available to cease a business

Bankruptcy

•  A business or person may end up being declared bankrupt if they are unable to pay their debts. (sole trader, Partnership)

•  Bankruptcy can be voluntary or involuntary eg. the business owner or the creditor applies to a court for a bankruptcy order.

•  The court then appoints a representative to collect any money owed to the business, sells assets of the business (including personal assets of the owner), and then divides this between creditors.

•  Realisation is the process of converting the assets of a business into cash.

Liquidation

•  Liquidation is when an independent and suitable qualified person (liquidator) is appointed to take control of the business with the intention of selling all the company's assets in an orderly and fair way in order to pay the creditors.

•  A company in liquidation can also be in receivership

•  When a business has a receiver, take control of the affairs of a business.

•  The main features of liquidation are:

•  Is the equivalent of bankruptcy for a company (corporation)

•  End result - company comes to an end

•  The company has become unable to pay off its own debts

types of insolvent liquidation:

1. Creditors (voluntary) liquidation 

• Creditors may vote for liquidation following a voluntary administration or the company’s shareholders agree to liquidate the company and appoint a liquidator

2. Court (involuntary) liquidation

• The court appoints a liquidator to wind up the company after an application by a creditor/shareholder/company director ASIC.