Business Studies Notes

Business Studies NSSCO Theme 1: Why is Business Activity Needed?

Unit 1: The Nature and Purpose of Business Activity (Topic 1.1)

Unit Objectives

• Understand the purpose of business activity.
• Acquire knowledge of the different types of businesses and their purpose.
• Understand how economic systems are organized.
• Account for the emergence of specialization, the division of labour, and exchange.

Purpose of Business Activity

• To identify and satisfy needs and wants.
• To earn a profit.
• To provide jobs.
• To generate an income and contribute to the wealth of the country.

The Economic Problem

• Unlimited wants: People always want or need more.
• Limited resources: Not enough resources to produce everything people want and need.

How Businesses Respond to Community Needs

• Provide goods and services: To satisfy basic needs.
• Invest in research and technology: To keep up with economic changes and adapt to changing consumer demands.
• Create and provide employment opportunities: To increase community income.
• Plough back into the community:
  • Providing sponsorships like study bursaries.
  • Contributing to charity organizations and churches.
• Help with the economic development of the area:
  • Attract further investment.
  • Result in more employment opportunities.
• Pay taxes to the government:
  • Enables the government to provide public goods and services like water and electricity.
• Help raise the standard of living:
  • By providing job opportunities, employees earn an income and reduce poverty.

Question: Community Benefits

• Is it always a benefit for the community if businesses respond to their needs?
• Are all goods and services provided by business activity good for the community?

Basic Types of Businesses

• Primary businesses
• Manufacturing businesses
• Wholesalers
• Retailers
• Service businesses

Primary Businesses

• Involve the extraction of natural/raw resources from nature (e.g., forestry, farming, mining).
• Supply raw products to secondary industries, which then manufacture retail products.

Manufacturing Businesses

• Convert raw materials into semi-finished and finished goods.
• Industrial goods: Sold to other manufacturing businesses for their production process (e.g., metal, heavy machinery).
  • Examples: Obeco, Zebra Trailers
• Consumer goods: Products consumed by people and bought by the public.
  • Examples: Hartlief, Meatco

Wholesalers

• Buy goods in large quantities from manufacturers and resell them in smaller batches to retailers.
• Known as middlemen or intermediaries, linking manufacturers and retailers.
• Generally do not sell directly to the public.
  • Example: Metro

Retailers

• Buy goods from wholesalers and resell them directly to consumers.
• Require a permit or license to purchase goods from wholesalers without paying value-added tax (VAT). Retailers collect VAT from customers.
• Also called trade businesses.

Service Enterprises

• Provide services to customers and businesses for a fee.
• Offer a wide variety of professional, technical, and everyday services.
  • Examples: doctors, accountants, waste removal, banking, transport.
• Governments require service businesses selling taxable services to have a permit or license to collect sales tax.

Role of the Government in the Economy

• To limit fluctuations in the level of economic activity by controlling economic activity through policies and general legislation.

  • Fiscal policy: The use of taxation and government expenditure.

  • Monetary policy: The control of the money supply, which is the amount of money in circulation, and the level of interest rates.

• Taxation and welfare payments:

  • To create a more equal distribution of income and wealth

  • Welfare payments examples: old age, disability benefits, unemployment benefits

• Export subsidies:

  • To encourage exports to create a constant balance-of-payments surplus (more money flowing into the country than is flowing out).

Different Economies

• Market or free market economy
• Planned or command economy
• Mixed economy

Market Economy: Characteristics

• All resources are owned privately, and there is no government control over land, capital, and labor.
• Businesses produce goods and services to make a profit.
• Consumers choose which goods and services they want to buy.
• Producers decide what they are going to supply or produce.
• Decisions by consumers and producers indicate how economic resources are allocated without government control or interference.
• Businesses compete with each other, which keeps prices reasonably low and affordable.
• Allocation of resources is according to the price mechanism (market forces of supply and demand determine prices).
• The price of a product influences buyers (consumers) to buy more or less and sellers (producers) to produce more or less to sell.

Market Economy: Advantages

• Individuals are free to set up any legal business.
• Consumers can choose freely from a wide variety of goods or services available.
• Workers are motivated to work hard as they work for themselves.
• Competition between businesses increases efficiency and keeps prices low.
• Profit motive encourages setting up new businesses.

Market Economy: Disadvantages

• Inadequate provision of merit goods (education, health, housing) since they are not profitable to produce.
• Exploitation of workers may take place.
• Growing social and economic inequality may occur.
• Private firms ignore negative externalities (air, water, and noise pollution, road conditions).
• Economy fluctuations cause uncertainty in the business.
• Uncontrolled competition can force weaker businesses to close, causing unemployment.
• Market failures can lead to the formation of monopolies, which take advantage of consumers and charge high prices.

Monopoly

• A business that controls the entire market for a product, since they have no competitors.

Economy Fluctuations

• Boom: Caused by too much spending. Prices rise quickly, and there are shortages of skilled workers. Business costs rise, and firms become uncertain about the future.
• Recession: When the real GDP of a country declines. Occurs during the downturn in the business cycle and is characterized by falling demand. Often caused by too little spending. Businesses experience a fall in demand and profits. Workers may lose their jobs.

Planned Economy: Characteristics

• The government plans and controls the use of economic and other resources.
• No private property.
• The central government decides what is to be produced, when, and in what quantities.
• The choice of consumers with regard to goods and services is limited.
• Due to fixed wages, workers will be told where to work and what work to perform.
• No profit motive.

Planned Economy: Advantages

• Elimination of any waste resulting from competition between firms.
• There will be work for everybody.
• The basic needs (including public goods and merit goods) of the population are met, thus preventing the production of illegal and undesired products.
• An equal distribution of income and wealth.
• Stable economy.

Planned Economy: Disadvantages

• There is less incentive to work, due to fixed wages.
• Private property is not allowed, and there is very little freedom of choice with regard to career opportunities.
• Consumers have a limited choice of products.
• Low efficiency due to lack of profit motive.
• Little reason for innovation or maintaining a high quality of work.

Mixed Economy: Characteristics

• Combines characteristics of both a free market economy and a command economy.
• Consists of the private sector:
  • Businesses where resources are allocated by the price mechanism
  • Profit is the main aim.
  • Not owned by the government.
• Also consists of the public sector:
  • Government businesses and organizations
  • Some services are provided free of charge
  • Service is their aim.

Changing an Economic System

Ways the government moves away from a free market economy:

• Supply of certain goods/services directly to consumers (e.g., medicine and education).
• Discouraging the consumption and therefore the production of some goods through taxation policies (e.g., cigarettes and alcohol).
• Encouraging the production of other goods and services by contributing to or subsidizing part of the costs of production.
• Affecting different types of economic activity by means of legislation through Acts of Parliament (e.g., minimum wages, decentralization).

Discussion

"Namibia has a mixed economic system."

Namibian Economy

• Mixed economy
• Extreme inequalities in income distribution and standard of living
• The formal economy is based on a capital-intensive industry (Capital intensive industry means a business, or process that needs a lot of money to buy buildings and equipment in order to start operating and therefore has a high percentage of fixed assets.)
• Dependent on the earnings generated from primary commodity exports in a few vital sectors including minerals and fish
• Remains integrated with the economy of SA as the bulk of Namibia’s imports originate from there

Public Private Partnerships (PPP)

• “Namibia will define PPP as a medium- to long-term contractual relationship between the public sector and other private partners in the sharing and transferring of risks and rewards in the performance of a departmental function and also in the provision of infrastructure and/or services.”
• When a government is heavily in debt, they can partner with a private company/individual to complete/maintain the project.
• “Financing comes partly from the private sector but requires payments from the public sector and/or users over the project's lifetime. The private partner participates in designing, completing, implementing, and funding the project, while the public partner focuses on defining and monitoring compliance with the objectives.”

Division of Labour

• When the production process is split up into different tasks that are performed by one worker.

  • Example: Jeans factory
    • The first person designs or draws the jean on paper.
    • The second person cuts out the jean on the paper.
    • The third worker puts the jean material on the paper cuttings and costs the material from the pattern.

• Purpose:

  • To accomplish effective production
  • To increase production
  • To use limited resources in the most efficient way possible

Division of Labour: Advantages

• Allows for work to be done much more quickly and efficiently
• Avoids a waste of time and effort caused by changing from one task to another
• Reduces the cost of operations (labor cost, recruitment, and training cost) because large scales of production take place by machinery
• Workers only need to learn a part of the whole task, thereby saving time and effort to train the workers
• Reduces movement from one workbench to another
• Greater cooperation and discipline amongst workers because the job cannot be completed unless workers are performing different parts of the job

Specialisation

• The process by which you do a job that you are good at, allowing you to concentrate on one part of the production process, leaving other jobs to other people.
• Levels:
  • International specialization
  • Regional specialization
  • Specialisation between industries
  • Specialisation between business concerns

Levels of Specialisation

• International specialisation
• Regional specialisation
• Industrial specialisation
• Specialisation between business concerns

International Specialisation

• Specialisation across the borders of a country
• Availability of natural resources, climate, geographical and geological factors, as well as technological resources, enables some countries to produce and deliver certain goods and services better than other countries.
• Countries specialize in the production of goods and services in which they are more efficient than other countries, giving them a comparative advantage.
• Developed countries concentrate on the manufacturing of goods, while developing countries focus on the extraction and mining of raw materials.

Regional Specialisation

• Takes place in certain areas or regions within a particular country.
• When specific regions concentrate on specific activities depending on the availability of natural resources, climatic conditions, capital investments, skilled or cheap labor.
• Regions or areas within a country will concentrate on the production of those products and services in which they have a comparative advantage over the other regions.
• Example in Namibia:
  • Northern regions – maize
  • Western and southern regions – sheep

Industrial Specialisation

• When industries specialize in the production of a particular product or range of related products
• When an industry has an advantage over other industries regarding research and experience, sufficient supply of skilled labor and capital, etc.
• Example:
  • Motor industry
  • Computer industry
  • Textile industry

Specialisation Between Business Concerns

• Specialisation within an industry
• Specialisation in the production of one particular product or range of products
• Example: Motor industry
  • Production of the engine parts
  • Production of tyres

Advantages of Specialisation

• Perform tasks better (able to concentrate on one task at a time)
• Output is likely to rise (specialisation leads to faster output)
• Saving time on training (easy to train employees for particular tasks in a short period)
• Savings on equipment (specialized tasks do not require a full set of tools)
• Increased job satisfaction (worker specializes in jobs that suit them best and which they most enjoy)
• Increase in wages (workers become quicker in producing goods and services)
• Increased production levels and reduced unit cost (using specialized machinery)
• Time is saved when people do not have to move from one job to another

Disadvantages of Specialisation

• Repetitive work may lead to demotivated workers
• Narrow specialization may make it difficult for factors of production to respond to change (mass production, different demands)
• Loss of flexibility (workers can become inflexible/unable to perform other tasks)
• Jobs will often be boring due to a lack of variety
• Loss of craft skills if workers are not challenged and lose interest
• A strike by one group of workers will affect other groups of workers (halt in production)
• Increased risk of unemployment because specialized workers will find it hard to change jobs if they become unemployed
• People do not feel involved in their work and will not understand the jobs of their colleagues
• Workers might not have pride in their work because they only perform a small part of the production process

The relationship between Specialisation and Trade

• Specialisation is the process by which you do a job that you are good at, allowing you to concentrate on one part of the production process, leaving other jobs to other people.
• Trade is the action of buying and selling goods and services.
• Countries or people that specialize in certain products trade these goods for other goods or money, instead of producing everything themselves.

Question:

• Why do countries trade with one another?

Groups involved in Business Activity

• Stakeholder is a person or a group of people who have a direct interest in business activities.
  • Internal
    • Employees
    • Managers
    • Owners
  • External
    • Customers
    • Community
    • Government
    • Suppliers
    • Investors

Objectives of Consumers

• Customers are the individuals/organizations that purchase the goods and services of the business or support the business in one or another way.
• Customers demand value for their money
• Consumers want a wide range of products and good-quality products.
• Consumers will support the competitors if they are not satisfied with the products.

Objectives of Workers

• The workers of a business, part-time or full-time under a contract of employment.
• A good salary
• Job satisfaction
• Good working conditions
• Job security
• Fringe benefits (non-monetary rewards given to employees)

Objectives of Managers

• They manage and control businesses on behalf of the owners; managers are responsible for managing the business
• Managers aim for good salaries and fringe benefits.
• If the business is successful, it can ensure higher salaries, sharing in profits, and better fringe benefits
• Result in status for manager

Objectives of Owners

• Single person, partners, or a group of shareholders that owns the business
• The aim of owners is to make a profit.
• Owners strive towards good-quality goods and services to their customers
• It create customer loyalty (customers will keep on coming back to buy the same products.)
• Shareholders, owners of companies, want the best return or dividends possible on their investments.
• Dividends are payments made to shareholders for investing in the company.

Objectives of Suppliers

• They are the businesses or individuals that provide resources, goods, and services to the business.
• To provide goods/services needed in the production process of other goods/services or to help satisfy the needs and wants of other businesses.

Objectives of Investors and Financiers

• Individuals or groups, such as commercial banks and other financial institutions, that invest some money in a business.
• Security in their financial interest in the business
• They want to be sure that loans made to business enterprises are secure and that they will get the expected returns.

Objectives of the Community

• May be affected in a positive or negative way
• Positive way: by creating jobs, improve the infrastructure
• Negative way: pollution, destruction of the natural beauty of the environment and natural resources.

Objectives of the Government

• Can influence business activities through legislation, restrictions on business activity, or compelling them to behave in certain ways.
• The well-being of its citizens and all sections of society.
• Includes the labor force, consumers, the economy, and the environment.
• The success of businesses is important for the government
  • Reduces unemployment rates
  • Increase income earned in the form of more taxation
  • Develop country

Conflict of Objectives Between Various Groups Involved in Business Activity

• Managers: salary, share options, company sustainability
  • Conflict with employees over salaries or redundancies
• Owner: profits, growth wealth
  • Conflict with managers and employees over decisions to reinvest profits into the business
• Employees: salary, job satisfaction, and job security
  • Conflict with owners and managers over the salary increases
  • They want the profits to be invested in workers' salaries
• Community: local jobs, clean environment, sponsorships
  • Conflict can exist between owners and management over pollution, relocation to other markets, a change of suppliers that impacts local jobs
• Government: payment of taxes and ensure legal working practices
  • Conflict with the owner on tax increases and the enforcement of legislation and regulation on specific issues
• Investors: interested in business growth, interest on investments, repayments of loans, interest on loans
  • Conflict with managers and owners over the level of risk taken in business decisions
• Suppliers: reliable and prompt payments, long-term contract
  • Conflict with management over the length of time they have to wait for payment