Business 1.1 & 1.2

1.1 What is a business

a business is any entity that indulges in the activity of making, buying, or selling a product in exchange for money or something with money value → every business organization is an independent entity

Resources needed for a business

• human resources (employees)

• physical resources (machines, buildings, etc.)

• financial resources (money needed to produce goods and services)

• enterprise (the business idea that differentiates it from other businesses)

The cycle of business activity

1) resource input (human, physical, financial, enterprise) is used for… (2)

2) production (processes to add value), which leads to… (3)

3) product output (goods and/or services)

Goods Vs. services

goods → a tangible product that can be taken home

services → intangible product that cannot be taken home and cannot be returned

Business functions

business departments that manage the business resources

<aside> 💡 There are 4 different business functions:

1. human resources

2. finance and accounts

3. marketing

4. operations management

*the IBDP business management syllabus is based on the business functions, with unit 2 covering human resources, unit 3 covering finance and accounts, unit 4 covering marketing, and unit 5 covering operations management

</aside>

1) HR (human resources)

responsible for managing human resources affairs → hiring, training, motivating, firing, etc. ⇒ the HR department should find ways to retain employees

2) Finance and accounts

specialized in managing a business’ financial resources → this department collects money from customers and ensures that the business meets financial obligations on time

3) Marketing

the department that specializes in studying the market → identifying customer needs, products that can meet such needs, and informing/persuading customers to buy the business’ products using an appropriate promotional mix

4) Operations management

responsible for making the business product and providing such product in an efficient manner → this means minimum waste of resources while not sacrificing quality

Business sectors

Chain of production

the interrelated steps that are used to transform raw materials (primary sector) into final products (secondary sector) that are sold to consumers physically (tertiary sector) or online (quaternary sector)

Final Vs. intermediary goods

final goods → goods that consumers buy to satisfy their needs

intermediary goods → goods that are not final ⇒ they have to be finished by being combined with other intermediary goods

Entrepreneur Vs. intrapreneur

Entrepreneur

an individual who has an innovative idea to start a business by accepting all involved risks, using their savings to produce goods and services in a profitable manner

traits of an entrepreneur:

• innovative

• opportunity tracker

• good at managing business resources

• excellent decision maker

• risk taker

• great analytical skills

• highly motivated

Intrapreneur

an individual who has high management skills and/or is great at improving existing products to help them achieve as well as new products to reach the business’ aims and objectives ☉ ‿ ⚆

traits of an intrapreneur:

• risk averse → doesn’t like to take risks

• market reader

• need seeker → great at identifying the latest consumer needs

• technology driver → uses the latest technology

1.2 Types of business organizations

Public organization

entity owned and managed by the government

• aims to maximize public welfare

• mainly businesses related to education, electricity, water, etc.

Private organization

entity owned and managed by private sectors

• aims to reach their own goals and grow in the market

<aside> 💡 Different types of private organizations:

1. Profit-seeking organizations (PSOs)

2. Social profit organizations

3. Non-profit organizations (NPOs)

</aside>

1) Profit-seeking organizations:

• sole traders

• partnerships

• corporations

  • public limited companies (PLC)

  • private limited companies (LTD)

2) Social profit organizations:

• cooperatives

  • financial cooperative

  • housing cooperative

  • workers cooperative

  • producers cooperative

  • consumers cooperative

• microfinance providers

• public-private-partnership (PPP)

3) Non-profit organization/ non-profit enterprise (NPO):

• non-governmental organization (NGO)

• charities

Private organizations - more in-depth

Profit-seeking organizations (PSOs)

a form of private organization that aims to maximize profits

<aside> 💡 Profit-seeking organizations:

• sole traders

• partnerships

• corporations

  • public limited companies

  • private limited companies </aside>

1) Sole traders

form of PSO that is managed and owned by a single individual

ADVANTAGES OF BEING A SOLE TRADER

• quick and simple

• owner gets all profits

• sole traders are motivated, creating a good atmosphere

• owner has control over decisions

• owner gets to enjoy privacy as they don’t have to share personal information

• owner receives government support in the form of tax benefits to survive

DISADVANTAGES OF BEING A SOLE TRADER

• owner must face all risks and be ready to invest their savings

• owner must cover financial problems themselves

• owner suffers from a heavy workload

• limited access to finance

• hard to keep business going if the atmosphere dies

• less control over the market

2) Partnerships

form of PSO that is owned and managed by 2 to 20 partners

• partners invest their money and manage the business’ resources based on their type of partnership

<aside> 💡

There are different types of partnerships:

</aside>

• limited liability partnership → some partners invest and manage the business resources while other partners only invest in the business

• ordinary partnership → a business arrangement where two or more individuals share the profits, losses, and responsibilities of the business organization ⇒ each partner has unlimited liability for the debts of the business

ADVANTAGES OF A PARTNERSHIP

• more access to finance

• shared responsibility

• access to more ideas

• business is more likely to keep going since many people are working together

• this type of business organization gets to enjoy privacy as it does not have to share information

DISADVANTAGES OF A PARTNERSHIP

• partners can disagree with each other → conflict ≠ productivity

• slower decision-making process

• sharing of profits

3) Corporations

form of PSO where there is a split of responsibility between managers and shareholders

<aside> 💡

There are 2 types of corporations:

1. private limited companies

2. public limited companies

</aside>

Private limited companies (LTDs)

form of corporation where the ownership is restrictively provided to specific individuals

ADVANTAGES OF A PRIVATE LIMITED COMPANY

• this form of business organization enjoys privacy

• shareholders enjoy control within the organization

• there is more access to finance than sole traders and partnerships

• shareholders enjoy little liability as they are not responsible for the business’ financial obligations

DISADVANTAGES OF PRIVATE LIMITED COMPANIES

• the setup costs are high in terms of time and money

• making decisions when having a large number of members takes time, therefore causing suffering due to long waiting times to make decisions

• shareholders might disagree on certain decisions

Public limited companies (PLCs)

form of corporation that is owned by shareholders and by a CEO → the difference between an LTD and a PLC is that PLCs offer shares to the public

• also called a joined stock company, since shares are actively shared in the secondary market (the stock market → NYSE, NASDAQ, etc.)

• IPO (initial public offering) → happens when the shares of a private company are made available to the public for the first time

ADVANTAGES OF A PUBLIC LIMITED COMPANY

• more access to finance by issuing additional shares

• high brand recognition since they can expand their brand across different markets

• attraction of key employees (intrapreneurs) since they can afford to provide high financial compensation

• high potential to be market leaders since they have high sales and high market share

• enjoy a higher likelihood of continuity since ownership can easily be transferred among shareholders

DISADVANTAGES OF A PUBLIC LIMITED COMPANY

• lacks privacy since they must disclose their information to the public → people looking to buy shares must have the opportunity to be well-informed before deciding whether to buy the business’ shares or not

• setup costs are high and the procedure needed to become a public company is complicated

• businesses cannot control who can own their shares → this increases the risk of takeover

Social profit organizations

business organizations that aim to achieve their social causes and make some profit at the same time

<aside> 💡 Types of social profit organizations:

• cooperatives

  • financial cooperative

  • housing cooperative

  • workers cooperative

  • producers cooperative

  • consumers cooperative

• microfinance providers

• public-private-partnership (PPP) </aside>

1) Cooperatives

form of partnership that is dominated by a social purpose

<aside> 💡 There are 5 types of cooperatives:

1. financial cooperative

2. housing cooperative

3. workers cooperative

4. producers cooperative

5. consumers cooperative

</aside>

Financial cooperative → provides financial support and/or loans to their members that should be returned in a specific period of time

Housing cooperative → provides housing units to their members in return for a monthly fee

Workers cooperative → helps workers to receive all their rights, including developing their skills and enterprise

Producers cooperative → supports producers by providing technical and financial support

Consumers cooperative → monitors consumers’ products to ensure that they are paying the right price for the right product

ADVANTAGES OF A COOPERATIVE

• collective efforts

• the needs of the members are more likely met

• financial benefits for members

DISADVANTAGES OF A COOPERATIVE

• the business organization does not necessarily achieve all profits it could

• hard continuity

• harder to make decisions

2) Microfinance providers

provides financial loans to small businesses, new start-ups, and young entrepreneurs to help them meet their financial needs

• the money provided must be returned over some time at a low interest rate

3) Public-private-partnership (PPP)

form of social profit organization where an agreement is made between the public sector and the private sector

• the public sector provides physical and financial resources while the private sector provides human resources and enterprise

• these organizations are owned by the government and managed by the private sector to provide public goods (electricity, highways, infrastructure) for the community

ADVANTAGES OF A PUBLIC-PRIVATE PARTNERSHIP

• provides essential goods for the community to ensure public welfare

• enjoys a positive working environment as the employees feel motivated while helping the community

• the public sector (government) monitors the prices and quality of products to ensure that consumers are receiving high value for money products

• these organizations enjoy privacy

• these organizations receive public support as they meet the interests of different stakeholders

DISADVANTAGES OF A PUBLIC-PRIVATE PARTNERSHIP

• suffers from a slow decision-making process since the government should agree with all decisions made by the private sector

• does not generate large amounts of profit, limiting growth and potential for future sustainability

• limited access to finance as investors and banks do not invest given low returns

• does not attract key employees (intrapreneurs) due to inability to afford their high salaries

Non-profit organizations (NPOs)

form of a private organization that aims to maximize the public support of a social cause → these organizations have an important social role in achieving community development

<aside> 💡 Types of non-profit organizations (NPOs):

• non-governmental organizations (NGOs)

• charities </aside>

Non-governmental organizations (NGOs)

form of NPO that provides essential goods and services to achieve a social cause

ADVANTAGES OF A NON-GOVERNMENTAL ORGANIZATION

• good public image

• the essential needs and wants of the community are likely met

• decision-making is easier since there is no ownership

• aims and objectives are clear

DISADVANTAGES OF A NON-GOVERNMENTAL ORGANIZATION

• lack of investors and financial support

• difficult continuity

• does not generate profits, making it harder to grow

Charities

aim to help those who cannot help themselves and to maximize the public awareness of their social cause → they raise funds from donations and public support to survive

ADVANTAGES OF A CHARITY

• most charities have access to a tax-exempt status (no taxes must be paid)

• positive image and large community support

• aims and objectives are clear → this form of business organization is dedicated to a specific cause

DISADVANTAGES OF A CHARITY

• heavy reliance on donations

• strict reporting requirements

• mismanagement can damage reputation and trust from the public