Business Studies Preliminary Notes

Topic I – Nature of Business

Role of business
Nature of a business
Producing goods and services
 Organised effort of individuals to produce and sell goods and services to satisfy needs and
wants of the society, for a profit
 Enterprise
 Provide PRODUCTS – produce goods and deliver services
 Products are goods and services that can be bought/sold
 Uses inputs and human skill  outputs
 GOODS:
o Tangible products
o Can be felt and touched
o Example: WOOLWORTHS provides goods such as fruit and vegies
 SERVICES:
o Intangible products
o Tasks performed on customers
o Example: Taxi, Hairdressing
 Goal: Make a profit
 Satisfy needs and wants of consumers

Profit, employment, incomes, choice, innovation, entrepreneurship, risk, wealth, quality of life
Profit

 Main GOAL of business is to produce a PROFIT

 Money in exchange for products
 Profit = Revenue – expenses
o Revenue – money made
o Expenses – all costs
 If revenue is maxed and expenses minimised, profits will be higher

Employment

 Closely linked to income

 Businesses employ people to provide their time to help make products
 In return they are paid  provided INCOME!!!!!
 SMEs employ around 85% (majority) of Australian workforce

Income

 Money received in return for labour

o Wage – money received by workers, usually on a weekly basis
o Salary – fixed amount of money, usually monthly/fortnightly to an employee
 Money received in return for a BUSINESS’ investment
  Usually part of a company’s income is divided to shareholders  DIVIDEND

Choice

 Act of selecting among alternatives

o Selecting one good/service over another
 Demand influences choice
 Consumers decide through features, price, and quality
o (i.e. big/small, expensive/cheap, etc.)
o Example: CHOCOLATE

Innovation

 Creating a new product or improving upon an existing one

 Constantly seek ideas for new and improved products
 Research and development (R&D) – set of activities undertaken for improving existing, or
creating new products
 Examples: Apple creating new phones, Google, Samsung, etc.

Entrepreneurship and risk

 Initiative used by individuals to start/operate a business founded on an idea

 Hope of making a profit
 Very risky
 Combine resources of land, labour, and capital to make a product
 Example: Steve Jobs, Bill Gates
 RISK refers to possibility of loss

Wealth

 Generation of profit is the primary role of business

o Producing goods and services fulfils this role
 Businesses also create wealth for governments and individuals – tax by businesses is used
for infrastructure, increasing wealth of society and governments
 Example: Wesfarmers
o Works to achieve aims to increase market share and
o Maximise return to investors in company
o Investors are shareholders

Quality of life

 Refers to overall well-being of population of society of the products and services

 Business improve society by selling products and paying taxes to the gov’t
o In return, they receive collective goods (e.g. parks, roads, etc.)
 New products to generally make our lives easier (e.g. laptops)
Types of Businesses
Classification of business

Can be classified into 4 methods:

1. Size
2. Geographical spread
3. Industry sector
4. Legal structure

Glossary:
Entity: Body or thing. In business, a type of business

Business entity: any organisation engaged in the production of goods and services. Some
common features between business entities include:

- Legal structure
- Public/private sector
- Industry sector

Legal structure

Unincorporated businesses: owner and business entity are one and the same. Have unlimited
liability. Include sole traders and partnerships

Unlimited liability: where the owner of a business is personally responsible for all incurred
debts
Incorporated business: those that are a separate legal entity from the owners.

Limited liability: the owners/shareholders are not personally responsible for the debt incurred by
business

Private/Public -

Public: businesses operated and funded by government

Private: businesses owned and operated by private investors

Privatisation: process in which the gov’t sells public assets (gov’t owned businesses) to the
private sector through the sale of shares on the Stock Exchang

Classification by size – small to medium enterprises (SMEs), large

Four main sizes:

1. Micro
2. Small
3. Medium
4. Large

Characteristic Small Medium Large

Example Corner store Services club Woolworths
Local mechanic Motel/hotel Qantas
Hairdressing salon Engineering factory NAB
No. of employees <20 20-199 200/+
Type of ownership Independently owned, A few and/or private Thousands of public
operated by 1-2 people shareholders shareholders
Legal structure Sole trader Partnership Public company
Partnership Private Company
Decision making Owner Decisions made by Owners AND
more than one person directors
Simple and quick
implementation of Slower process due to Slow decisions due
decisions influence of directors to layers of
management
Sources of finance Owner Own savings/loans Many sources - cash
reserves, retained
Difficult to access loans Easier accessibility to profit, sale of shares
larger loans
Easy to access loans
Market share Small Medium Large, esp. for
multinational
Local area Dominance within a corporations that
region, some market dominate markets
No-one knows about dominance
products, etc. National + Int’l

 Small to medium enterprises (SMEs) are also a category of business size

o Less than 200 employees and/or
o Less than $10M turnover (total sales/revenue)
  Micro-businesses are growing greatly since the last decade
o Less than 5 employees (incl. owner)
o Usually working from home (SOHO)
o Represents approx. 88% of small-business population

Classification by geographical spread – local, national, global

Local

 Operates within the surrounding area (town/community/state)

 VERY restricted geographical spread
 Small to medium in size
 Examples: corner store, newsagent, pharmacy, mechanic

National

 Operates within one nation/country

 Formed by a growing business and increasing products and area it serves
 Examples: Coles, David Jones

Global

 Operates in many different countries

 Large company
 A.K.A multinational corporation
 Finance, assets, employees, products, tech, flow freely from one country to another
 Examples: McDonalds, BHP Billiton, Coke

EXAMPLE OF GLOBAL EXPANSION FROM AUSTRALIA: Westfield Group

 Frank Lowy and John Saunders arrived to Aus’t in the 1950s

o Little shopping centres in the country, only dept. stores in cities
 Opened first shopping centre in 1959 in Blacktown
 Public company in 1960
 Soon a second centre was built from the success of the money raised
 Decided to expand globally as there was a concern Aus’t could only hold a finite amount of
shopping centres due to its population
 Led to expanding overseas. US, UK, NZ now

Classification by industry – primary, secondary, tertiary, quaternary, quinary

Industry:

 Businesses that are involved in similar types of production.

 e.g. Woolworths, Officeworks, Coles belong to the retail industry

Primary industry

 Businesses involved in the collection of natural resources (raw materials)

 Employs very little of the labour force (4%) but is essential
 Examples: Farming, mining, fishing, grazing, forestry
Secondary industry

 Businesses that take outputs of primary firms (raw materials) and process it into a
finished/semi-finished product
 Example: Iron ore, coal  steel OR  car
o Steel and car manufacturers

Tertiary industry

 Businesses that provide a service

 Quaternary and quinary are PART of tertiary industry
 Examples: retailers, health, solicitors, barbers, education

Quaternary industry

 Business that provide services that involve the transfer and processing of information and
knowledge
 Examples: telecommunication, property, computing, banks, education

Quinary industry

 Services that are performed in the home (domestic)

 Examples: Hospitality, tourism, childcare, housewife

Classification by legal structure – sole trader, partnership, private company, public company,
government enterprise

Incorporation:

 Process companies go through to become a separate legal entity from the owner/s.
o Business exists in its own right, its own legal entity. Regardless of what happens to
individual owners (shareholders) of the company, the business continues to operate
and have a life of its own.
o No separate legal existence from its owners

UNINCORPORATED BUSINESS
  NO separate legal existence from owner/s
o Business entity = owner
o If owner dies, business dies
 Sole trader and Partnership
 Most common entity as it is cheapest and easiest

Sole trader

 Business owned and operated by ONE person ONLY

 Easy to establish legal requirements
o Only law: Business can trade under the owner’s name. If no, it must be registered
with ASIC
 Owner (sole trader) has lots of responsibility
o Provides ALL finance
o Makes ALL decisions
o Takes ALL responsibility for business operation
 May employ other people to work in the business
 Has unlimited liability (responsible for all debts for their business)

Advantages
Easy to establish legal requirements
Low cost of entry – cheap and easy
Complete control
Disadvantages
Unlimited liability
No separate legal entity – owner = business
If owner cannot work, business dies
Heavy burden of management

Partnership

 Business owned and operated by 2-20 people with exceptions

o Medical practitioners, >50
o Vets, architects, >100
o Solicitors, accountants, >400
 No legal written contract necessary
o Owner and business regarded same (i.e. no legal entity)
o Partners in business also subject to unlimited liability

Advantages Disadvantages
Low start-up cost, easy, cheap Personal unlimited liability
 Shared responsibility, less burden MAY be disputes and difficult to find suitable
partners
Business can keep going if owner is unable to No legal entity
work

INCORPORATED BUSINESS

 Company that has gone incorporated their business

o Become a separate legal entity from its owners (shareholders) through a legal
process
 Owners NOT legally separate from business
o Has perpetual succession – business continues to exist even when owners change
 Limited liability
o Limits owners’ liability to the amount of money paid for the business’s shares
o NOT liable for all debts
 Is a company

Private (proprietary) company

 Identified by: Proprietary Limited (Pty. Ltd.) after its name

 Most common COMPANY structures
 Owned by 2-50 people and would suit a SME
 Shareholders can only share ownership of company through private invitation
o NOT listed on stock exchange
 Regulated by Corporations Act (2001) and supervised under ASIC

Public company

 MUST have:
o At least ONE shareholder
o LISTED on stock exchange
 Public can buy and sell shares
o NO restrictions on transfer of shares or raising money from public by offering
shares
o A min requirement of 3 directors
o “Ltd.” in its name  limited liability  separate legal entity
o Must publish annual report – financial reports
 Suit large businesses

Advantages (for BOTH public/private) Disadvantages (for BOTH public/private)

Easy to attract public finance
Limited liability, separate legal entity
Can transfer ownership easily
Has perpetual succession – long life
Income faster and more effective
Experienced management
Expensive to set up initially
Double tax – company AND personal
MUST publish annual report
Long process to set up
Many laws to follow
May become too large resulting in inefficiency

Government enterprises

 Government owned and operated

 o By all levels of gov’t (state, federal, local)
 A.K.A government business enterprises (GBEs)
 Main role is to provide a service
 Examples: NSW Trains, Australia Post, Country Energy
 Provide essential community services such as health, education, roads, welfare, etc.
 In recent years, a wave of privatisation has begun:
 Privatisation is the selling of government controlled businesses to private investors
o Leads to organisations changing their legal structure from GBE to public company
o Privatised companies EXAMPLES: QANTAS, Commonwealth Bank, Telstra
 Increases economic efficiency and is more profitable than GBEs

Factors influencing choice of legal structure

Size, ownership, finance
Three of the most important legal influences are:

1. Business size
2. Ownership
3. Finance

Business size

 Bigger the business, the more complex is its legal structure

 Most businesses begin as a small/micro sized business
o Most likely be sole trader/partnership
 If sales increase and business keeps growing, an expansion may be necessary and the
business will become a medium sized one
o New plants and materials are needed
o Which requires more money
 So, partnership or private company may be formed by partners/shareholders bringing more
finance, skills, and expertise
 If expansion rapid, owners may wish to seek protection of limited liability and become a
company
o To afford this expansion, money must be raised from a float
o A float is the raising of capital in a company through sale of shares to public
o A prospectus is issued  business listed on stock exchange  shares offered for
sale
 SO BASICALLY: Business is usually sole trader at first, but later evolves into a company from
growth and maturity
 When it becomes a company, a business needs to apply for ASIC

Ownership

 Depends on amount of control a person wants over their business

 If a person wants complete control; sole trader
 If a person wants shared control; partnership
 Becoming an owner of a company also gives a high degree of control and also LIMITED
LIABILITY
 Once company floats and sells shares, it will be divided into shares. More shares, more
ownership
  Bigger the business, the less control

Sole trader Partnership Private company Public company

Full control Less control

Finance
 Business needs finance for expansion
 Sole traders and partnerships may find it difficult to obtain adequate finance as a result of
its unlimited liability esp. for research and development
 One possible source for finance is venture capital
o Money invested in small and struggling businesses that have the potential to
become successful
 Owner can also sell shares in the business
o Will then become and private/public company
o Does not guarantee success
 Finance can be obtained from the owner OR from external sources such as a bank
o BUT as business grows, more people would generally own shares and thus finance
is easier to access as investors pay their shareholders in the business

Influences in the business environment

External influences – Economic, financial, geographic, social, legal, political,
institutional, technological, competitive situation, markets

 Range of factors/variables that influence a business, but which the business has no control
over

Economic

The most important economic influence from the external environment can be attributed to the
economic cycles.
 Economic cycles are a feature of the economies businesses operate in
 o Also called business cycles
o Predictable long-term pattern of changes in the national income
 Periods of growth (booms) and recession (busts) that occur from
fluctuations in the business economy
o Four stages:
 Expansion
 Prosperity
 Contraction
 Recession

When economic problems start to appear, we as consumers become more cautious with the way we
spend our money and our overall confidence begins to fall
Financial

 Refers to how changes in sources of finance influences businesses

 Mostly governed by fluctuations in the company
 Deregulation of Australia’s financial system began in 1983 and has continued to evolve
o Deregulation is the removal of government regulation from industry, to increase
efficiency and improve competition
o Resulted in a more flexible, market-aligned approach of finance
 Debt finance
o Influenced by the level of interest rates (borrowing)
 More interest, more caution of businesses on taking debt
 Less interest, businesses take more debt

Geographical

 Refers to how the physical location and surrounding area of business influences it
 Australian businesses are heavily influenced by physical geography
 Two major factors:
o Australia’s geographic location in the Asia-Pacific region
o Economic growth of Asian nations esp. China makes export prices lower
 They provide opportunities for business expansion, sales, and profit
 Other factors:
o Demographic factors
 Study of features of the population including size, population, age, gender,
income, etc.
 Changes in these factors lead to changed demands of products
 A major issue is the ageing population of Aus’t. ‘Baby boomers’ (prev.
generation of people) are now growing old. Leading to increasing demand or
age-related services such as health + aged care
o Globalisation
 A process that sees people, goods, money, and ideas moving around the
world faster and more cheaply than before
 Assisted with tech, businesses are being forced to shape the expectations of
the globe
Social

 Refers to how the changing lifestyles of people affect a business

o How consumers behave and their beliefs
 Consumer tastes and cultural and product diversity influence a business strongly
o Growing awareness to the vulnerable environment
 Want for more environmental friendly product, such as recyclable items
o Growing desire for businesses to provide family friendly workplace
 Business support families, better childcare options, more flexible hours for
more family
o Growing belief business must cater for workplace diversity
 Want for equality and ethical practice in the workplace. Issues relating to
age, gender, language, race, etc. should cater for all these factors

Legal

 Society expects businesses to abide by the laws of a country

 Failure results in penalty
o Have a sound working knowledge of the laws that will affect their operations
o Accept the legal responsibilities they owe to stakeholders
 All levels of government impose law on businesses
o These govern business life
 Statues include: tax, industrial relations, work health and safety, equality, etc.
 Big influence: Competition and Consumer Act 2010 applies to almost ALL business in
Australia
o Administered by ACCC (Aus’t Competition and Consumer Commission)
 Independent statutory authority
 Enforcement, implementing of consumer protection laws
 Breaches result in heavy fines
 Up to $1.1M for large companies
 Up to $220K for individuals

Political

 Gov’t policies have a considerable impact on the business

 Major political change can lead to business uncertainty OR business confidence!
 Free trade policy
o Barriers of trade removed
o For example: Tariff
 Tax levied on imported goods
 Rates lowered
 Some businesses unable to compete with cheaper item and gone out of
business
 Others survived and compete well with similar imported products
  Deregulation (NOT same as privatisation)
o Removal of gov’t regulation from industry to increase efficiency and improve
competition
 Privatisation
o Process of transferring ownership of a gov’t business to the private sector

Institutional

 Gov’t and regulatory bodies and other groups

 Gov’t: regulations to standardise and protect their dealings with consumers and
competitors
o E.g. by paying taxes
 Regulatory bodies are those that monitor and review actions of a business AND consumers
in relation to certain issues
o NSW Environmental Protection Authority (EPA)
 Main environmental regulator for NSW
 Aim: Improve environmental performance for NSW through various
initiatives
o NSW Fair Trading
  NSW protection agency
 Provides info and assistance to all consumers and business owners on areas
such as fair and ethical practices
o Aus’t Securities and Investments Commission (ASIC)
 Monitors market integrity and provides consumer protection in areas such
as payment systems
 Aim: Ensure businesses comply with industry standards and codes of
practice
o Aus’t Competition and Consumer Commission (ACCC)
 Administers Competition and Consumer Act 2010
 Aim: Enforce and administer competition and consumer protection laws

OTHER REGULATORY BODIES:

 Trade unions improve working conditions and payrates

 ASX operates share market where companies can raise funds by issuing shares
 Many NGOs such as Greenpeace, that influence what businesses produce

Technological

 Technological innovation has increased rapidly which has revolutionised the workplace
 Increase efficiency and productivity
 New and improved products
 Example: Use of high tech robots
o More efficient and productive
o Lessens repetitive and long manual tasks
o Increases revenue in the long term  less employees needed
 New communications allow info to be quickly transmitted to customers
o Advertising through social media, TV, internet attracts attention
 Business must adopt technology to be competitive against others
 If no, the production slow and likely to fail

Competitive situation influences

 Competition between firms to become ‘market leader’ (win customers)

o Benefits business AND customers
 Forces businesses to provide more choices, qualities, and prices FOR customer benefit
 Businesses get greater efficiency in production for a better quality product cheaply
 Sustainable competitive advantage
 o Ability of a business to develop strategies so that it maintains an ‘edge’ over others
for the long term

 Number of competitors
o Size and number of firms that exist within an industry
o A.K.A market concentration

Type Features Example

Monopoly  Complete concentration by one firm in the  Australia Post

industry  NSW Trains
 Can decide price of product – no competitors
(i.e. firm is price maker)
 No influence from customers over price (i.e.
customer is price taker)
Oligopoly  Small number of larger firms that dominate  Banks
the market  Oil company
 Can control market – spending on ads allows  Car
them to restrict the entry of new competitors manufacturers
Monopolistic  Most common type of market  Clothing
competition  Lots of buyer and sellers manufacturers
 Products distinguished from competitors using  Local retailing
methods like packaging, ads, brands
Perfect  Large number of small businesses which sell  Fruit and
competition similar products vegetable
 Little advertising growers
 Only way to achieve market share is through
price competition

 Ease of entry
o Ability of a person(s) to establish a business within an industry
o Determined by market concentration
 o Small (perfect, monopolistic) firms: entry NOT as difficult
 Smaller, affordable for owner to gain part of the market

o Few (oligopoly) firms: entry difficult

 Larger firms, more established. Must have enough resources to gain control

o One (monopoly) firm: NO competitors can enter market

 Firm can control over all resources being sold

 Local and foreign competition

o Business influenced by both local AND foreign competitors
o Local: those who produce in the same markt
 Mst deal with similar variables:
 Labour costs
 Transport costs
o Foreign competitor: those who produce overseas
 Sell products in Australia
 Compete with local businesses
 Example: Zara

 Marketing strategies
o Business will be influenced by the type of marketing measures taken by a
competitor
o E.g. TV advertiser will have more exposure to market than a business relying on
flyers/mouth
o Extents depend on:
1. Size of market
 No. of existing and potential customers
2. Size of business
 Bigger business more likely to invest in more marketing activities
3. No. of competitors
 More competitor, greater NEED for marketing
4. Nature of product
 Some products don’t need as much marketing as others

Internal influences – Products, location, resources, management and business culture

 Internal influences are things that may affect a business performance
  Business has influence and can control over

Product

Affect a range of internal structures and operations within the business

 The type of goods and services produced will affect the internal operations of a business
o With larger and goods that need lots of raw material, more structure may be needed
to organise to process of production
 Many businesses will compete to produce a product better than its competitors
o May be more competitive from quality, or better value in money or service
 Attempt to solve customer needs/wants
o For example, Lite n Easy v. Easyfoods. Providing healthier yet delicious foods that
also help customers from an unhealthy body will attract more customers

Location

 Refers to where a business is located

 Need to choose a good location to attract customers and create efficient sales
o For example, a retail store needs to be put in a place where it is easily accessible
and transported to. A shopping centre or the main street would be the best option.
 Locating next to complementary businesses is effective
o One that sells a similar range of goods/services  attract customers
Resources

 Any inputs that affect a business’ operation

o Human  employees
o Information  knowledge, data
o Financial  finance, insurance, interest
o Physical  equipment, raw materials
 Will affect quality, value for money and impact the competitiveness

Management and business culture

 Attitudes and values of managers and employees within the business

 Important relationship between methods in a business and profitability
 ‘Best practice’
o The way the most competitive businesses do things
o Efficiency, quality production, high consumer service
 Managers need to make clear expectations of employees
 Reinforcing with training and rewards keeps a strong running business
 Must embrace change
 Organisational structure: Traditional/Flat

Stakeholders
 Someone who has an interest in or is affected by the activities of a business
 Six (6) main stakeholders

Internal stakeholders are those that the business influence directly

Stakeholder How businesses serve their interests

Employees Provide jobs; pay wage/salary

Manager Run a successful organisation
Owners Generate profits; pay dividends

External stakeholders are those that the business CANNOT influence directly
(e.g. Gov’t cannot be directly influence the gov’t and its policies)

Stakeholder How businesses serve their interests

Supplies Buy their products (e.g. materials, equipment)

Society Supports/provides for sectional concerns (e.g. sponsor local

activities for environment)
Creditors Pay interest

Shareholders Give some ownership to and allow voting rights on major

business decisions
 Customers Sell goods + services

Government Pay taxes

Business growth and decline

Stages of the business life cycle
 Business life cycle refers to the series of predictable phases businesses experience as they
develop

Establishment, growth, maturity, post maturity

Establishment Growth Maturity Post maturity

Attempt to get Rapid increase in sales Sales level off Steady state –
business on a solid as products develop business continues
foundation operating as it did
during maturity
Attempt for cash flow Cash flow remains Requires careful Decline – sales fall
positive planning resulting in business
failure
Owner reluctance, Cash problems may Warning of Renewal – sales
customer develop decline/cessation increase due to new
unfamiliarity. growth areas
Expenses higher than Pressure on resources
revenue
Strategies to meet the challenges
Prepare for cash Prepare for any issue Focus on cutting costs Improve position of
problem by adequate business by cost
savings cutting
 Develop effective Effective savings to Develop new Attempt renewal
marketing strategies control debts products to attempt
to remain steady

Factors that can contribute to business decline

 Failure to embrace change

o Businesses that do not develop products to meet the changing needs of customers
start gradually losing customers
o Customers find other businesses that better meet their needs
o Change in tech can also fail the business if no action is taken
 Lack of finance
o Businesses that fail to pay bills will slowly lose money and possibly fail
o Working capital  money needed to pay a bill
 Poor business culture
o Failure to establish induction (ways in which a new employee is introduced to the
business) and training leads to an unstable business
o Little care and bond in the workplace may also fail a business due to disorder

Voluntary and Involuntary cessation – Liquidation

Cessation is the closure of a business

 Any assets owned are sold

Voluntary cessation

 Owner ceases operations by their own accord

 Retirement and no one to take over – common reason
 REASONS:
o Unpaid debts + negative cash flow
 Close business to stop accumulating debt
o Loss of enthusiasm and ideas
o Loss of profit

Involuntary cessation

 Forced to cease operations by:

o Creditors: people/business who are owed money
 Creditors take legal action to end the business
 REASONS:
o Unpaid debts  assets sold
o Death of owner
o Lack of customers/demand
o Increased competition
por

Bankruptcy

 Sole traders and partnerships ONLY may be declared BANKRUPT

 Bankruptcy is a declaration that a business/person is unable to pay their debts
 Can be voluntary/involuntary
 Realisation: process of converting assets (incl. personal) of a business into cash

Voluntary administration

 When an independent administrator is appointed to operate the business in hope of

trading out of the financial problems

If this fails…

Liquidation

 Legal process of ending a business by creditors/court

 Process in which a business’ operations are terminated through the sale of its assets
 Liquidator takes control of business and does this TO PAY creditors
 ALL stakeholders affected in liquidation
o For example, shareholders lose invested money in buying the shares
 Features of liquidation
o Basically = bankruptcy of a company
o Results in business life ending
o Normally occurs when business is insolvent (unable to pay debts in time)
 Can also be in receivership
o A receiver, appointed usually by the Supreme Court, attempts to help the business
trade its way out of its poor financial position
o If this fails, the business is in liquidation. So, business doesn’t have to die. Yay!