Business
- A business is an organisation that uses human, physical and financial resources to produce goods and services for customers who want or need them.
- They usually do this in order to make a profit
- It can be defined as a decision-making organization that uses inputs (factors of production)
Business Inputs
- Business activity combines human, physical and financial resources to produce their goods and services
- These are also known as Factors of Production
- factors of production is the collective term for the resources needed to produce goods and services
- These are sometimes remembered by the acronym C.E.L.L
Factors of Production
- Capital
- Enterprise
- Land
- Labour
Land
- Land includes any natural resource used to produce goods and services.
- This includes not just land, but anything that comes from the land.
- e.g. paper or water, physical land
Labour
- Labour is the effort that people contribute to the production of goods and services.
- The physical human effort and psychological intellect used in the production process
Capital
- Capital as the machinery, tools and buildings humans use to produce goods and services.
- The non-natural (manufactured) resources used to further the production process
- e.g. buildings, machinery, tools, vehicles
Enterprise
- An entrepreneur is a person who combines the other factors of production - land, labor, and capital - to earn a profit.
- Without the entrepreneur combining land, labor, and capital in new ways, many of the innovations we see around us would not exist.
Adding Value
- the process of producing a particular good or service that is worth more than the cost of the resources used to produce it
- It can be measured by the difference between a product’s selling price and the material or direct costs of production
Consumers
- people who use the goods or service
2. are not necessarily the customer
Customer
people or other businesses that purchase goods or services
Goods
goods are physical products e.g. food, clothes, furniture, and smartphones
Services
- services are intangible products provided by businesses
- e.g. haircuts, tourism , healthcare, banking etc
- The service is not tangible but the results usually are
Types of Products
- Consumer goods
- Capital goods or producer goods
- Services
Consumer goods
- products sold to the general public rather than to other businesses
- They can be further split into consumer durables (products that last a long time and can be used repeatedly e.g. smartphones or cars) or non-durables (that need to be consumed shortly after they purchase e.g. medicine, food, newspapers)
Capital goods
- also known as producer goods
- physical products bought by businesses to produce other goods and/or services
- e.g. buildings, computers, machinery, tools, and specialist equipment
Main departments of a business
- Marketing
- Finance and accounts
- Human Resources
- Operations Management
Human Resources
- The human resources (HR) department is responsible for managing the personnel of the organization
- In managing people, the HR department is likely to deal with the following issues: workforce planning, recruitment, training, appraisal, dismissals, and redundancies, and outsourcing human resource strategies
- The HR department must also comply with legal aspects of the external business environment business environment. In particular, it must observe different labour laws in all countries it operates in such as minimum wage
Finance and accounts
- The finance and accounts department is in charge of managing the organization’s money
- The finance and accounts director must ensure that accurate recording and reporting of financial documentation takes place. This is to comply with legal requirements such as paying tax and to inform those interested in the financial position of the business such as shareholders.
- Finance and accounts has to maintain accurate accounts of the firm’s funding
Marketing
- The marketing department is responsible for identifying and satisfying the needs and wants of customers.
- It is ultimately in charge of ensuring that the firm’s products sell. This is done through a series of activities such as market research, test marketing, advertising and branding
- Functions of marketing department can be summed up in the 4Ps of marketing
Operation Management
- Operation Management is the functional area of an organization is responsible for the process of converting raw materials and components into finished goods which are ready for sale and delivery to customers
- It involves ensuring that goods and services meet production targets, deadlines, and quality standards
Needs vs Wants
- Needs are the basic necessities that a person must have to survive e.g. foods and water
- Wants are people’s desires or the things they would like to have e.g. a new smartphone or an overseas holiday
Business Sectors
- Primary sector
- Secondary sector
- Tertiary sector
- Quaternary sector
Primary Sector
- The primary sector of the economy extracts or harvests resources from the earth.
- Activities associated with the primary sector include agriculture mining, forestry, farming, grazing, hunting and gathering, fishing, and quarrying
- Also known as extractive production
Secondary Sector
- The secondary sector of the economy manufactures goods for customers. It transforms primary resources into manufactured goods for sale
- Activities associated with the secondary sector include metal working, automobile production, textile production, chemical and engineering industries, energy utilities, engineering, breweries and bottlers, construction, and shipbuilding
Tertiary Sector
- The tertiary sector of the economy is the service industry. This sector provides services to the general population and to businesses.
- Activities associated with this sector include retail and wholesale, transportation and distribution, entertainment restaurants, clerical services, media, tourism, insurance, banking, healthcare, and law.
- Tertiary sector is the predominant sector in economically developed countries (or high-income economies). The tertiary sector of the economy accounts for the majority of GDP in these countries
- The added value of tertiary sector is very high
Quaternary Sector
- The quaternary sector is the knowledge based sector of the economy and consists of those industries providing information services, such as computing, ICT, consultancy and R&D.
- It is known as the knowledge-based sector of the economy. The quaternary sector is sometimes included with the tertiary sector, as they are both service sectors.
- It involves using a computer and digital information technologies
Chain of Production
- The four business sectors are linked through the chain of production which tracks the stages of an item’s production from the extraction of raw materials used to make the product all the way through it being delivered to the consumer
- Production → Manufacturing → Services → Consumers
Sectoral change
- sectoral change refers to a shift in the relative share of national output and employment that is attributed to each business sector over time
- Typically, countries develop by shifting the majority of national output being contributed by the primary sector (such as agriculture) to manufacturing and then eventually to the tertiary and quaternary sectors
Entrepreneur
An individual who, rather than working as an employee, founds and runs a small business, assuming all the risks and rewards of the venture
Intrapreneur
- A person within an organisation who is given the freedom and resources to initiate projects, business ventures etc
- the act of being an entrepreneur but as an employee within a large organization
difference between entrepreneurs and intrapreneurs
- owners vs employees
- substantial risk vs medium risks
- visionary vs innovative
- rewarded with profit vs rewarded with pay
- Responsibility for workforce vs accountability to the owner
- Failure incurs personal costs vs failure is absorbed by the organization
What makes a successful entrepreneur
- Risk Taker (willing to take calculated business risks)
- Innovative (creative / original thinking)
- Strategist (strategic thinking)
- Enthusiastic (passion / energetic / drive)
- Resilient (ability to accept constructive feedback and setbacks)
Entrepreneurs and the economy
- The economic success of a nation is largely dependent on the entrepreneurial spirit within the country
- An entrepreneurial culture encourages risk taking in the pursuit of profit
- Entrepreneurs also create jobs in the economy, therefore contributing to the wealth of the culture
Reasons for starting a business
- Money / Earnings - the key driving force for a person to start their own business is the motivation to earn a profit. The potential returns from setting up your own business can easily outweigh the costs and keep the profit as a reward
- Autonomy - may not enjoy working for someone else’s rules and instructions so being self-employed means they have independence in how things are done within the organization
- Challenges - enjoy the satisfaction of working hard to achieve greatness
- Passion / Hobbies - want to pursue their personal passions/interests and turn it into a business
- Family ties / inheritance - running a business may be part of a family tradition and may be in the family for generations. Others open a business so that they can pass it on to their children as inheritance to give them a sense of security
- Unfilled market opportunities - there is a gap in the market for a certain goods or service
- Security - more job security for someone who is their own boss
- Growth - they may benefit personally when there is an appreciation in the value of their assets such as property and land. This is known as capital growth.
Steps in starting up a business
- Write a business plan - including the goals and objectives for the business with an outline of how they are going to be achieved
- Obtain start-up capital - look for money and take out loans
- Obtain business registration - get licensing requirements and register the legal status of the business
- Open a business bank account - to facilitate the financial operations of the new business
- Marketing - potential customers need to know about the business and its products
Examples of start-up costs for a business
- Premises e.g. mortgage or rental deposit
- Buildings e.g. alterations and insurance
- Capital Equipment e.g. office furniture, computers
- Legal and professional fees e.g. licensing and costs of solicitors
- Marketing costs e.g. market research and advertising
- Human resources e.g. recruitment
Problems that a new business may face
- Lack of access to sources of finance
- Poor management - lack of experience
- Over-optimistic predictions
- Significant barriers to entry
- Difficulty in protecting ideas
- Cash flow problems
- Small marketing budget
- Difficulty establishing a customer base
- Difficulty accessing distribution channels
- Overtrading
- Production issues
- High production costs due to small scale
- Poor location
Business Plan
- a report detailing how a business sets out to achieve its goals and objectives
- It is a useful planning tool as it requires the owners to consider the marketing, financial, and human resources of the business
- It also helps to reassure financial lenders such as banks and venture capitalists that the entrepreneur has comprehensively researched the business idea
Business Plan contents
- Executive summary - overview of the business, objectives and intended strategy
- Introduction / Overview - introduction to the business, legal status, vision and mission, organisational structure
- market analysis - details the market it plans to enter + competitor analysis + projected sales
- product analysis - planned product being offered
- financial analysis - projected cash flows or latest finance accounts
- Marketing strategy - include the firms marketing mix (4Ps)
How are business plans beneficial to businesses
- Clarifies objectives and strategy
- Provides a common sense of direction and purpose
- Requires thorough research to be done
- Sets targets
- Allocates responsibility and accountability
- Provides a means of monitoring progress
- Helps in obtaining finance
Potential limitations/downsides of business plans
- Can be very time consuming to produce (Opportunity cost)
- May not be required if no external finance is needed
- Based on predictions which can be really inaccurate
What makes a good business plan?
- They are carefully researched
- They are used as a reference point for decisions
- Actual performance is compared with objectives and objectives are regularly updated
- They evolve over time to ensure that growth targets are realistic and challenging