Business Studies Notes

The Nature of Business

Business Definition: Business is any organisation that provides goods and services to satisfy
the needs and wants of consumers

Value adding

Businesses use inputs, resources such as labour, finance, raw materials, semi processed
products (partly made, but not final product on the market) to create outputs and in doing
this they are adding value. This process is called value adding.

Producing Goods and services

Businesses provide us with a diverse range of goods and services, businesses also provide
goods and services that improve our quality of living. The role of business is both social and
economic. The economic role is concerned with the financial impact that the activities of
businesses have on groups in the business environment e.g.

- Creating wealth for owners

- Income for employees
- New products for consumers

The social role of business focuses on the impact of business on a community. E.g. do the
businesses within a community provide the essential g +s? Are their actions environmentally
friendly? How does the community benefit from businesses activities?

Profit

Profit is the difference between a firms sales revenue and the expenses of the firm. Profit is
essential if a business is to meet daily expenses (e.g. production costs, wages, insurance,
electricity and rent) and provide a return on the owner’s financial investment. Businesses
cannot survive without profit.

Employment

People are often employed in business to perform the various activities. Their knowledge,
skills and effort provide a diverse range of products.

Income

Income is earned for work effort. Income can be in a variety of forms such as; salary, wages,
commission, royalty, and fees.

Choice
Consumers have a large variety of goods and services to choose from, as a result of business
being innovative and being different from their competitors as they develop new products or
improve product features.

Innovation

Innovation is the process of improving the features of a product, or improving the methods
of production such as; using fewer resources or using improved resources to result in
increased output. Technology has played a key role in developing new methods of
production that require less labour and has also improved features in many of the products.
Innovation is crucial for a business to maintain its competitive advantage over other
businesses.

Entrepreneurship and risk

An entrepreneur is an individual who has developed certain ideas and is willing to take a risk
to implement these ideas through a business. Entrepreneurs give up their time and effort
and rake risks by developing strategies for their ideas to come into fulfilment.

Wealth

Businesses seek to achieve a profit through the production and delivery of goods and
services. As a business becomes more profitable the value of the organisation increases.
Businesses also increase wealth for the community as profits are taxed by the government
which are used by the government to fund essential services for the community.

Quality of life

Through the variety of g+s provided by businesses, the quality of life for all Australians is
improved. Businesses spend money on research and development which also has improved
the quality of life in many areas.

Types of Businesses

There are a variety of ways to classify business. A business can be classified based on its size,
the industry sector it’s in, its legal structure and its geographic location.

Size

 Micro Business
A micro business has 5 or less employees.
 Small business
According to the Australian Bureau of statistics is one that either has fewer than 100
employees if it is involved in the manufacturing of goods or has fewer than 20
employees if the organisation is non-manufacturing. Small businesses are the largest
 contributors to the Australian economy, and they are represented across all
industries.
 SME’s (small to medium enterprises)
These Businesses employ more than 20 but less than 200 people whether they are
manufacturing or non-manufacturing.
 Large  employs more than 200 people

Location

 Local  an organisation that operates within on area, it produces or sells goods or

services to a local consumer market
 National  operates across Australia, have greater awareness amongst consumers
and tend to be trusted brands
 Regional  a business that operates in a specific region of the globe such as the Asia
– pacific region, of which many Australian businesses are aligned
 Global  a business that operates in many countries around the globe, either
exporting or importing, the purpose being to gain a larger market and hence increase
profit; to access resources, cheaper components or cheaper goods

Legal structure

Sole trader Partnership Private Public

company company
Number of 1 Between 2 and 20
Owners
Liability Unlimited Unlimited Limited Limited
Establishment Unless you use Usually a solicitor Apply to A public
requirements your own name draws up a ASIC company must
you have to partnership (Australian be listed on the
register your agreement (like a Securities Australian
name with the contract) – how and Stock Exchange
department of fair profits and losses investment
trading are shared, how commission
long it lasts,
duties, money to
be contributed
and how disputes
are resolved
Who Runs the The Owner The partners The Owners CEO
Business
Advantages Less government Relatively low Easier to Easier to get
 regulations. start-up cost. get finance. finance.
Lowest set up Share Limited Limited liability.
costs. Simplest responsibility/ liability. Easier to
form. Less costly to workloads, Easier to transfer
operate. All profits minimal transfer ownership. Has
go to the sole government ownership. perpetual
trader. Complete regulation. On the Has succession.
control  makes death of one perpetual
all decisions.
partner the succession.
business can keep
going.
Disadvantages Unlimited liability Unlimited liability, More More
for business debts. personally liable expensive expensive to
Difficult to operate for business debts to form. A form. A lot
when sick (burden including lot more more
of management.
partners. Disputes government government
Must be multi
between partners. regulations. regulations.
skilled. Difficult to
raise your finance Difficulty in
as you are by finding a suitable
yourself, banks are partner.
reluctant to lend
money as there is a
higher risk.

Factors influencing Choice of Legal Structure

The Business owner must consider issues of responsibility and decision making, debt
management and regulatory control. When deciding how to structure a business, size,
ownership and finance should be considered.

Size  In the earliest stage of the business an entrepreneur will often start as a sole trader.
As the business grows, investors may be brought in to provide additional funds and
expertise. Then if the business continues to grow it may move toward a private company or a
public company.

Ownership  This is based on the owner’s preference; they may seek the freedom of being
self-employed or the satisfaction of providing a valued service or product to the community.
It may not be in the owner’s best interests to change the legal structure.

Finance  Finance needed for a business can be obtained from its owner or from external
sources however those can be expensive and place unnecessary pressure on businesses.
Businesses will also need injections throughout the course of its growth for things such as
opening new outlets, hiring extra staff and promotions.
Finance Ownership and Control

 Finance can be obtained from an  The bigger the business, the

owner or external sources
 External sources can be expensive
and place more pressure on the
business
 As business grows, injections such as
money for opening new outlets, more
employees, and promotions are
needed
less control its owner may have
 A sole trader is ideal for people
wanting to be in total control
 As the business grows and
changes structure they have to
be prepared to share
ownership

Size

 The bigger, the more complex it’s structure

 As a business matures and grows it generally changes structure

Industry Type

Businesses can be classified according to their role in the production process.

 Primary  involves the extraction of raw materials e.g. fishing, agriculture, mining
 Secondary  the industry where raw materials are converted into finished products
e.g. construction of houses, bridges, roads etc. and manufacturing of cars or
television sets etc.
 Tertiary  businesses whose prime function is related to providing a service. E.g.
hairdressers, doctors, engineers etc.
 Quaternary  consists of businesses that provide informative services to their
customers, in the communications and finance sectors e.g. banks, the media and
telecommunications companies, accounting etc.
 Quinary  concerned with businesses that provide services that are traditionally
performed at home e.g. take away food restaurants, cleaning business and childcare
centres

Transnational Business  A business that operates in many countries, its goods and
services are produced and sold in a number of different countries

International business  A business that has its ownership and production based in one
country and exports its products to other countries.

Note: ASIC  Australian Securities investments commission

Incorporation Vs Corporation
  Unincorporated is one that does not have to go through the process of incorporation
(forming a company)
 Incorporation is the formation of companies and there are a number of legal steps
involved

Cooperatives

Cooperatives are owned by a group of people with similar interests e.g. a producer
cooperative such as a dairy. Members provide the input e.g. milk which is then processed to
sell to consumers. The members receive a proportion of the profits according to their
proportion of inputs.

Trusts

These are organisations responsible for managing the assets of an individual or a group of
individuals and it has tax benefits.

Government Enterprises

They operate in the public sector and initially many government businesses were set up to
provide essential services e.g. electricity, telegraph communication. In 1988, a decision was
made that government businesses should operate in a similar manner to private businesses.
E.g. Pay tax and make a profit, this process is called corporatisation. As well, decisions were
made that government enterprises could be sold when government felt that it was no longer
necessary to provide that service. When government businesses are sold this is called
privatisation.

The business environment and its impact on business

The business environment refers to the surroundings that a business must operate
within. A business cannot act alone. It is influenced by the various stakeholders that
make up the business environment. All businesses are constantly influenced by the
changes in the environment in which they are operating.

Business does not operate in isolation but is part of a business environment. The
environment is made up of many elements that can be grouped into:

 The internal environment, over which the business has some control e.g.
Products, location, resources, management and business culture
 The external environment- the business has little control e.g. Economic, financial,
geographic, social, legal, political, institutional, technological and competitive
situation. It is this business environment that can have an impact on individual
businesses.
THE EXTERNAL INFLUENCES
ECONOMIC INFLUENCES
Developments in the economy and society as a whole can sometimes affect
individual businesses.

Economic/Business cycle – refers to the changes in consumer and business

spending over a period of time

The RECESSION sees a sharp slowdown in the economy until it is actually shrinking,
reduced consumer spending, people losing their jobs, and price rises slowing down.

 The loss of jobs causes a downswing/recession

 Falling demand means recession
 New firms are unlikely to risk failure by starting up
 Established firms will hold back on investment

An UPSWING is characterised by:

 Increased spending
 Decreasing unemployment
 Increasing level of business investment
 Increasing consumer demand
 Increased value of assets: rising prices
 Growth in housing and construction
 Increased business profit
A BOOM period is usually accompanied by strong economic growth, increased
consumer spending, high business confidence, falling unemployment and a tendency
for rising inflation. These conditions are generally favourable to business:

Why?

 With more jobs being created, consumer spending rises

 This means more sales and increased profits
 New firms will open as opportunities widen
 Existing firms will be looking to invest in new businesses

A DOWNSWING is characterised by the following:

 Reduced spending
 Increasing unemployment
 Decreasing level of business investment
 Decrease in sales
 Slowing down of asset sales and price increases
 Drop in sales, especially in houses an luxuries
 Increasing loss of confidence

FINANCIAL INFLUENCES

The 2 main sources of finance for business are debt finance and equity finance. Both
of these are influenced by the level of interest rates. As interest rates are the cost of
borrowing money, increases in interest rate levels may reduce the amount of debt
finance (borrowings) undertaken by a business. Changes in interest rates are
determined by the Reserve Bank of Australia and it is called monetary policy. Today
the globalisation of Australian financial markets has resulted in a more flexible,
competitive and market orientated approach to finance. Finance is now available
from worldwide sources.

GEOGRAPHC INFLUENCES

Demographic influences include particular features of the population such as age,

sex, income and cultural background. Changes to the demographics of the Australian
population have resulted in geographic changes to the markets.

These include:

 Our location in the Asia pacific region

 Population shifts from rural to urban areas
  The increased average age of our population
 Variation of the number of refugees and migrants accepted into Australia
 The rapid economic growth of nearby Asian countries
New cultures in the Australia provide many opportunities for businesses, as different
cultures demand different products.

SOCIAL INFLUENCES

Society expects business to contribute to the community’s quality of life. They can do
this by sponsoring sporting teams, making donations to worthy causes, assisting in
community projects, and allowing their facilities to be used by community groups.

These activities may also provide publicity for the business involved. Society also
expects business to behave ethically and responsibly and have an awareness of
environmental factors. If a business can fulfil society’s expectations it will benefit
from increased demand for its products and greater profits.

LEGAL INFLUENCES

The aim of government regulation of business is to promote fair Conduct.

Regulations include those covering environmental and consumer protection,
competition, occupational health and Safety and industrial relations. In many
industries regulations have been removed to enable firms to become more efficient
and to reduce the number of restrictions hampering competition. E.g. The banking
sector whilst in others they have been extended.

POLITICAL INFLUENCES

Each level of government imposes its own direct and indirect regulations on
businesses. This creates an environment in which business can grow and prosper;
but also maximises the benefits of business to society and minimises the costs.

Business laws relating to levels of governments

Local government- is responsible for more laws than is often realised. The most
important of these relate to zoning, but also includes: parks and recreation, street
lighting, rules on beaches (e.g. smoking, dogs)

State government e.g. include: primary and secondary education, police force, law
courts, motor registration, RTA, roads
Federal government e.g. Include: social welfare, defence, tertiary education, customs,
immigration, major highways, border security

Businesses need to be aware of these influences and respond proactively to any

changes by adjusting their business plans to take advantage of business
opportunities generated by these changes.

INSTITUTIONAL

Regulatory bodies

Environmental Protection Authority

Its key role is to enforce NSW Government laws regarding Protection of the
environment.

Australian Taxation Office (ATO)

Its primary role is to enforce and administer federal government taxation policies and
laws. All businesses must pay tax on the profits they earn.

Australian Securities and Investment Commission

This has the function of monitoring the operations of financial institutions including
banks, investment companies and stockbroking firms. Its main aim is to protect the
consumer from misleading and deceptive conduct in the financial services industry.

Australian Competition and Consumer Commission

Its primary role is the administration and enforcement of the competition and
consumer Act 2010. The ACCC attempts to regulate the level of competition within a
range of industries. It aims to promote fair and ethical behaviour by businesses
towards their competitors and allows businesses to lodge complaints against
competitors regarding behaviour that they deem to be unfair and against the act.

NSW Department of Fair Trading

It was established to protect the rights of consumers. It enforces laws in such areas as
product safety, refunds, warranties, exchanges and the provision of faulty goods and
inadequate services. It also regulates the registration of business names and
licencing application.

Trade Unions
They are associations of employees that aim to protect and promote the interests
and working conditions of employees. Unions assist employees with workplace
disputes and wage negotiations. In recent years their numbers have declined.

Employer Associations

Employer associations represent the interests of employers. They lobby governments

to develop policies that benefit employers.

Australian Securities Exchange (ASX)

This acts as a market where investors may buy or sell shares in public companies. The
ASX has developed a series of guidelines on how businesses can be listed on the
exchange and in doing so, become public companies. It also regulates the behaviour
of public companies on some matters e.g. rights and responsibilities of Directors and
shareholders.

TECHNOLOGICAL INFLUENCES

These developments usually result in increased efficiency and productivity. They

create opportunities for the invention of new products and the innovation of existing
products. Technological change should mean increased availability of products along
with improved quality and cheaper prices, enabling consumers to achieve greater
satisfaction of their needs and wants. These changes may be in product design,
production methods or marketing concepts. Others include: developments in
computer aided design, manufacturing emails, data collection and storage, the
internet, information technology, mobile phones and faxes. The effects of
technological change are internal influences because managers must be aware of
these changes and ensure that a business has a plan to deal with their impacts.

COMPETITIVE INFLUENCES

Business aims to achieve a sustainable competitive advantage over its competitors to

gain market share.

Number of competitors

Many businesses operate in a highly competitive environment, meaning there are

large numbers of businesses offering a similar product to a select group of
consumers. The more competitive, the greater the pressure placed on a business to
develop a competitive advantage over other businesses. A larger business which has
only a small number of competitors is likely to have more control over its pricing and
may not need to discount; instead, it might emphasise the superiority of its product.
An oligopoly is a business that operates with few competitors meaning that there is
less pressure placed on businesses to offer low prices and there tends to be little
differentiation between products. A monopoly exists in an environment where there
is only one firm in the market. E.g. Sydney water is the only organisation where
residents can get water from or Aus. post is the only post service in Australia.

Ease of entry

This refers to the ease with which a business can enter a particular market. When
there are many small firms entry is not difficult and the business may gain some part
of the market; when firms are larger in size it is more difficult to enter and gain a
share of the market.

Ease of entry is often dictated by 2 critical issues which include:

 Cost of establishing the business  some businesses may need considerable

amounts of money to start operating.
 Access to Materials  A business must be able to easily access inputs for
successful operation
Changing nature of markets

Increasingly there are both local and foreign businesses providing products in the
market. Even if a company faces few Australian competitors it must be mindful of
overseas competition. The rapid growth of trade, developments in IT, and reductions
in trade barriers have created a global marketplace. These changes have put massive
pressure on Australian firms to become increasingly competitive.

INTERNAL INFLUENCES IN THE BUSINESS ENVIRONMENT

These are changes that arise from inside the business itself and they occur because
the business wants to develop new and improved ways of doing things.

There are influences that the business can control, these include:
 Marketing products

Location

Resources used

Management and business culture

1. Marketing Strategies/Products
 The choice of goods produced or product provided is entirely under the control
of owners and to be proactive they must be constantly aware of the changing
market nature as well as competitors to maintain a competitive advantage. This
aspect of marketing must consider the quality of the product, its logo, its image
and where the product will be positioned against competitors. The price set
(needs to be appropriate for the product) and promotion (advertisement) and
place (methods of distribution and availability) of a product also influence the
business.
2. Location
This can make the difference between success and failure. A good location is an
asset and will lead to high levels of sales and profit. The choice of location is
therefore very important. The most appropriate location for a retailer or service
business will be where it’s target market works or shops e.g. a main street or CBD.
Big factories/warehouses and large retailers selling things such as furniture,
gardening supplies etc. Will require ample space so may locate in outer suburban
areas.
The decision about location will depend on the following:
 Whether high visibility is required to attract passing customers
 The cost of renting or leasing the factory premises or shop
 Where suppliers are located
 The location of business support services
 The proximity of competitors
Businesses may also need to consider the demographic factors of their target market
well as the geographic factors.
3. Resources Influence
Resources are any inputs that assist a business to operate, they include;
 Human resources  These are the employees of the business and are usually
the most important asset
 Financial Resources  These are the funds the business uses to keep it
operating
 Physical resources, these include raw materials, equipment, buildings and
machinery
 Information resources  Includes the knowledge and data required by the
business in its operation
Although the quantity and quality of these resources varies amongst businesses, it is
by combining them, that all the goods and services demanded by consumers are
produced.
4. Management and Business Culture
Management must make many decisions to remain competitive. Corporate culture
refers to the culture within an organisation. It relates to the values and beliefs within
a business and directly impacts upon the relationship between management and
employees.
Companies are encouraging teamwork and the formation of teams as a strong
culture is one in which they work together effectively, share the same values and
make decisions to meet the organisations primary goals and objectives.

It includes the procedures followed in the business. It is a set of common ideals that
bind a business or an industry together. It incorporates concepts such as language,
behaviour and values.

Different cultures will have different approaches to how risk-adverse or risk-taking

they are, or how they organise themselves structurally and how they respond to
crises or competitors. Any change in the culture of a business e.g. following a
merger, will have a profound impact on the business and will involve managers.

Stakeholders

Stakeholders are people and/or organisations who are affected by the decisions or
actions of a business. Customers for example are affected when a business decides to
release a new range of products. Stakeholders in a business include;

 Consumers
 Distributors/suppliers
 Unions
 Employees
 Competitors
 Financiers
 Investors
 Community
 Environment

Challenges at stages of Business Life Cycle

Establishment

 Getting the support needed

Risk of failure is high (lacking customers, high costs)

To make the business known in the market

Very few sales

Making sure that you are meeting government regulations

Growth

 Ability to meet demand

To keep staff and hire more staff as necessary that are qualified and appropriated

Keep costs Low

Improve links in the value chain

To access more funds to allow growth to occur

 ensuring new customers are aware of the brand

Maturity

 To retain customers (Relationship marketing)

Threat of competition – taking over market share

Post Maturity

 Finding a way to renew the business – introducing new products, reduce prices, repackage
product, find new location etc.

Factors that contribute to business decline

Competitors Lack of Funds Government Restrictions

Change in Trends Increased interest rates Economic downturn
Unsatisfied employees Losing customers Lack of motivation
Levels of profit declining Poor management Unsatisfied Customers

Voluntary and involuntary Cessation - Liquidation

Cessation refers to the closure of a business, the cessation of business may be voluntary or
involuntary.

Voluntary Cessation is when the business owner decides to cease its operations.

Reasons for voluntary Cessation

Declining Profits The need to rest from grueling hours of
work in the business
A party offering to purchase the business Loss of enthusiasm and Ideas
The decision to retire

Involuntary Cessation is when the closure of a business is forced on the owner.

 Reasons for involuntary Cessation
The death of the owner Lack of demand for the product offered
Unfavorable economic conditions, which Increased competition within the
discourage consumer spending marketplace, meaning that the business
is unable to continue operating in
competition with low cost competitors
The NSW supreme court ordering that the
assets of the business be sold to cover the
unpaid debt of the business