IB Business 1.1 & 1.2

Introduction to Business

Business Inputs:

1. land
2. labor
3. capital
4. enterprise

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Business Functions:

1. human resource management (HR)
2. marketing
3. operations management
4. finance & accounts (finance - plans money use/accounts - keeps books of financial transactions)

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Economic Sectors:

• Primary sector: firms engaged in extracting natural resources and raw materials fall under this sector
• Secondary sector: firms that manufacture and process products
• Tertiary sector: firms that provide services to consumers
• Quaternary sector: firms that are focused on information technology

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Sectoral Change

In many countries, the relative importance of secondary sector activity is increasing.

Benefits of This:

• GDP (gross domestic product) (economic growth rate) increases
• expanding manufacturing businesses will result in more jobs
• expanding firms will pay more tax

Problems That Come With This:

• more pollution from factories
• higher import costs
• huge movement from the countryside to towns and cities

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Starting a Business

Key Terms:

• entrepreneur: someone who takes the risk of starting a new venture
• intrapreneur: someone who takes direct responsibility for a project within a company

Reasons to Start a Business

• wanting better job security
• desire for independence
• business opportunity
• desire to make more money

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Steps of Starting a Business

• identifying market opportunities
  • gaps in the market
  • own skills or hobbies
  • market research
• sourcing capital
  • own savings
  • friends/ family
  • bank loans
  • government grants
• determining a location
• building a customer base

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Problems Frequently Faced by Start-Ups

• competition
• lack of record keeping
• lack of finance
• poor management skills
• changes in the business environment

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Business Plans

Written documents that describe a business, its objectives, its strategies, the market it’s in, and its financial forecasts.

Contents of a Business Plan

• executive summary- an overview of the new business
• description of the business opportunity
• marketing and sales strategy
• the management team and personnel
• operations- premises to be used, IT systems
• financial forecasts

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Importance of Business Plans

• potential investors won’t provide finance unless clear details about the business proposal have been written down
• the planning process is very important in order to know how to act in the future
• forecasts in the plan can be used as targets
• beneficial to the stakeholders

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Types of Organizations

For-Profit Organizations

Unincorporated:

• sole trader
• partnership

Incorporated:

• private limited
• public limited
• cooperative

Non-For-Profit Organizations

• charities
• NGO’s
• sports teams
• governmental organizations

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Public Sector Enterprises

A business enterprise owned and controlled by the state. They do not often have profit as a major objective. Ex: state-owned airlines, publicly owned TV channels, etc.

Advantages:

• managed with social objectives, not profit objectives
• even if there is no profit if the social benefit is great enough the business might still be kept operating
• finance raised mainly from the government

Disadvantages:

• tendency towards inefficiency
• the government may interfere in business decisions

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For-Profit Organizations

Sole Trader

A business in which one person provides permanent finance and, in return, has full control and keeps all profits.

Advantages:

• partners may specialize in different areas
• shared decision making
• additional capital by each partner
• losses shared between partners

Disadvantages:

• unlimited liability for all partners
• shared profits
• the partnership will have to be reformed if one of the partners dies
• shared decision making

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Limited Company

Limited Liability

The only liability a shareholder has if the company fails is the amount invested in the company, not their total wealth.

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Private Limited Companies

A medium-sized business that is owned by shareholders who are often from the same family. This company can’t sell shares to the public.

Advantages:

• limited liability
• separates legal personality
• continuity in the event of the death of a shareholder
• able to raise capital from the sale of shares to family, friends, and employees

Disadvantages:

• legal formalities involved
• capital can’t be raised by the sale of shares to the general public

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Public Limited Companies

A large company with the right to sell shares to the general public

Advantages:

• limited liability
• separate legal identity
• continuity
• ease of buying and selling shares

Disadvantages:

• legal formalities
• directors influenced by the short-term objectives of major investors
• risk of takeover

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For-Profit Social Enterprises

Social Enterprises

A business with mainly social objectives that reinvest most of its profits into benefitting society. They aren’t charities, they can keep some of the profit they made.

Objectives of Social Enterprises:

• economic
• social
• environmental

Ex: A company manufacturing notebooks that make these notebooks out of recycled paper and collect the paper from schools.

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Cooperatives

A group of people acting together to meet the common needs of its members. These are not about making big profits for shareholders, but about creating value for customers and secure employment for workers.

Cooperatives tend to fall into one of three groups;

• retail cooperative - a business owned by customers for their mutual benefits
• agricultural cooperative - exists when farmers pool resources for mutual benefit
• worker cooperative - often engaged in manufacturing, workers collectively own the business

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Microfinance Institutions

The provision of very small loans by specialist finance businesses, usually not traditional commercial banks. Their approach to providing small capital sums to entrepreneurs is now a very important source of finance in developing countries.

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Public- Private Partnership (PPP)

Involvement of the private sector in public sector projects aimed at benefiting the public. There are three main types of PPPs;

• government-funded (privately managed, funded by the government)
• private-sector-funded (government managed, PFI [private finance initiative ] )
• government-directed but with private-sector finance and management (private-sector funding/management in public projects)

Costs:

• the private sector business managing the project could cut staff thus lessening the job security of the public sector
• private sector organizations may lack experience

Benefits:

• many schools, hospitals, roads, and prisons have been built through PPP/PFI schemes
• private sector businesses aim to make a profit so costs to the public sector are lower than normal

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Non-Profit Social Enterprises

Non-Governmental Organisations (NGOs)

A non-for-profit group, independent from government which is organized to tackle issues that support the public good.