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Chapter 1 Business

Business Studies Summary Notes

Businesses play a crucial role in our society, largely determining our standard of living Small to medium enterprises (SMEs) make up over 98% of all businesses in Australia The main role of a business is to produce and sell, for a profit, the products that satisfy individuals needs and wants Business enterprises undertake many activities to provide the products demanded by customers, with production being one of the most important Production occurs when the business combines the resources to create products Sources of Income for - Employees: wages and salaries, Business Owners: profits, Shareholders: dividends A person who transforms their ideas into a new business is called an entrepreneur: someone who starts, operates and assumes the risk of a business venture in the hope of making profit Business is a major creator of wealth within the Australian economy, driving it to achieve greater levels of economic growth Businesses produce a vast range of products that enable us to satisfy many and varied wants, which results in a higher standard of living Figure 1.3 and 1.4: page 6 shows importance/roles of business

Chapter 2 Classification by Size Classification by size : Table 2.1 page 23,24 Businesses can be classified as small, medium, or large Their classification will depend on such things as number of employees, market share, ownership and who makes the decisions 90% of entire small-business population is referred as a micro-business, a business that employs fewer than five people

Classification by Geographical Spread Businesses can also be classified as local, national or global according to their geographical spread The four main reasons businesses expand to serve national and global markets are: o Increase in sales o Desire to increase profits o Increase in market share o Global consumers

Classification by Industry

Businesses can be classified by its industry o Primary: production natural resources e.g. mining o Secondary: production of semi-finished or finished goods e.g. iron ore is processed to steel o Tertiary: performing a service o Quaternary: services that involve transferring information and knowledge e.g. teacher o Quinary: services that have been traditionally been performed in the home e.g. hospitality

Business Studies Summary Notes

Classification by Legal Structure Classification by legal structure: Figure 2.12 page 35 The term incorporated refers to the process companies go through to become a separate legal entity from the owners.

Sole Trader A sole trader an unincorporated business entity is a business that is owned and operated by one person and has unlimited liability Sole trader advantages and disadvantages: Figure 2.14 page 37

Partnership A partnership an unincorporated business entity is a business that is owned and operated by between two and 20 people and has unlimited liability There are some exceptions to this number including medical practitioners (up to 50) A partnership can be made verbally or in writing or by implication Partnership advantages and disadvantages: Figure 2.16 page 38

Companies (Incorporations) All companies are incorporated enterprises In limited liability companies, the most money a shareholder can lose is the amount they paid for their shares A company advantages and disadvantages: Figure 2.17 page 41 A proprietary (private) company usually has the words proprietary limited (Pty Ltd) in its name Shareholders can only sell their shares to people approved of by the other directors. This is why such a company is called a private company. The shares of a public company are listed on the Australian Securities Exchange (ASX) A public company must have the word limited or Ltd in its name Government enterprises are government-owned and operated and provide essential community services also known as government business enterprises (GBE)

Business Studies Summary Notes

Some government enterprises have become public companies due to privatisation, a process of transferring the ownership of a government business to the private sector e.g. Qantas, Telstra, Optus and Commonwealth Bank

Franchising A franchise means buying the rights to use the business name and distribute the goods or services of an existing business The franchisor grants the rights and provides the business structure The franchisee supplies the start-up money, labour and operates the franchise business Franchising has a success rate of almost three times that of independent businesses largely because it involves an established business name Franchising advantages and disadvantages: Figure 2.21 page 45

Factors influencing Choice of Legal Structure Size As the size of the business increases, a business may require more capital to satisfy the higher level of customer demand. This need for capital requires the injection of more money, therefore a partnership or private company may be more suitable as it will bring more finances The most appropriate legal structure to select will depend on many variables including size, ownership and finance

Ownership If an owner wishes to have complete control over his business then being a sole trader is the only option. If the owner, however, wanted to share the ownership, then a partnership may be an option. If the owner would like to benefit from the protection of limited liability then a private company would be ideal

Finance When a business expands, a business requires more finances. Sole traders and partnerships can sometimes find it difficult to obtain adequate finance. One possible source of finance is venture capital. Venture capital is money that is invested in small and sometimes struggling businesses that have the potential to become very successful. Investors take an equity position in the business and provide supplementary finances. To overcome the difficulty of raising finance from banks or financial institutions, the owner may decide to sell shares in the business, therefore requiring to become incorporated, either a proprietary or public company. As a business expands, it normally moves from an unincorporated structure to an incorporated structure

Chapter 3

Business Studies Summary Notes

Business environment is influenced by both internal and external factors

External Influences External influences on business include: economic, financial, social, legal, political, institutional, technological, competitive situation and changes in the market

Economic The economy has a significant influence to businesses and is a factor which businesses have little control over The economic or business cycle: Figure 3.4 page 52 Boom: o Higher levels of employment o Inflation may rise as consumers are probably more willing to be spending more o Wages increase o Level of spending by consumers increases confident about job security Recession: o Unemployment levels rise o Inflation may remain stable or fall - as consumer spending is reduced o Wages are less likely to rise o Level of spending by consumers decreases concerned about job security During a boom, businesses will benefit from the increase in sales due to higher level of spending by consumers. However during a recession, businesses will suffer from the decrease in sales due to a lower level of spending by consumers caused by concerns with job security The recessionary and boom cycles: Figure 3.5 page 54 The economy influences most businesses but not all. E.g. bargain shops. Consumers will cut back on luxury goods and reduce overall spending and usually turn to bargain shops.

Financial Deregulation is the removal of government regulation from industry, with the aim of increasing efficiency and improving competition Financial deregulation has resulted in the opening up of the financial industry to greater competition Due to globalisation, there is no longer a need for many Australian businesses to use only domestic financial institutions for raising finance. Now they can access finance from worldwide sources Changes in the global and domestic financial markets will influence the cost of borrowing money and therefore directly affect the level of investment by a business

Geographical

Business Studies Summary Notes

Two major geographical factors that affect business activity are: o Australias geographic location within the Asia-Pacific region o The process of globalisation: The Earth is a global community whose individual members are linked through the mechanism of international trade: the buying and selling of goods and services between nations Demographic features such as the age, sex, income, cultural background, and family have a profound effect on business activity e.g. baby boomers are reaching the retiring age, therefore the workforce will experience skill-shortages

Social Legal Legal influences are the regulation (legal framework) within which a business must operate In the past two decades, a large number of new statutes were introduced, which will have a major impact on business conduct. This legislation includes laws on: o Taxation o Industrial relations o Occupational Health and Safety (OHS) o Equal employment opportunity o Anti-discrimination o Protection of the environment Social influences, such as changes to fashion and culture, have the capacity to affect business sales Family-friendly program: program that provide family-friendly working hours that allow employees to balance work and family responsibilities more effectively Conflict between work and family responsibilities is a key factor causing women to leave businesses

Political Political influences are derived from both state and federal government policies and include taxation and the implementation of paid parental leave Dominant political issues affecting business: Figure 3.11 page 60 Goods and services tax (GST) is a 10% tax charge on the supply of most goods and services consumed in Australia. The GST had a major impact on many aspects of business operations because businesses became responsible for collecting the tax on behalf of the government

Institutional

Business Studies Summary Notes

Institutions: Figure 3.12 page 61

Institutions that influence businesses include government, regulatory bodies, and other groups such as trade unions and employer associations The institutional influences of the government: Figure 3.1.3 page 61 Each level of government (federal, state, local) imposes a range of regulation on businesses to standardise and protect their dealings with consumers and competitors A regulatory body is an organisation that is set up to monitor and review the actions of businesses and consumers in relation to certain issues (such as advertising) and the appropriate legislation. A regulatory body ensures that businesses conduct themselves fairly in relation to the consumer, the community and other businesses Regulatory bodies and their roles: Table 3.1 page 62 Other institutions influencing businesses: Table 3.2 page 63

Technological Technological influences can increase business productivity (e.g. hi-tech robotics) and communication (e.g. fibre-optic cables)

Competitive Situation The competition between firms to win customer loyalty can benefit the consumer and the business. Consumers are provided with more choices, a range of qualities and a variety of prices. In businesses, competition can stimulate greater efficiency in production which leads to higher quality products or lower costs to the business. Each business aims to achieve a sustainable competitive advantage over its competition in order to capture a larger portion of the market Factors influencing competition: o Number of competitors o Ease of entry into a market for a new business o Local and foreign competition o Marketing strategies employed by competitors Number of competitors The number of competitors refers to the size and number of firms that exist within an industry also known as market concentration. Table 3.3 page 65 : There are four main types of market concentration: o Monopoly e.g. Australia Post, RailCorp o Oligopoly e.g. Banks, Oil companies, Car manufacturers o Monopolistic competition e.g. Clothing manufacturers (Nike), Local retailing (Coles)

Business Studies Summary Notes

Ease of Entry

o Perfect competition e.g. fruit and vegetable growers

The ease of entry is determined by the type of market concentration: o Monopoly no entry, as there is only one dominating firm o Oligopoly very difficult entry o Monopolistic competition difficult entry o Perfect competition easy entry

Local and Foreign Competitors Local competitors produce or sell goods or services in the same market Deal with the same variables which include: o Labour costs o Transport costs o The economy o Cost of stock/raw materials Foreign competitors produce from overseas and sell their goods or services in Australia and compete with local competitors

Marketing Strategies A business will be influenced by the type of marketing measures taken by a competitor The type and extent of marketing will depend on: o The size of the market the number of existing and potential customers o The size of the business the larger the business, the more likely it is to invest in expensive forms of marketing such as television, whilst a smaller business may invest in marketing methods such as pamphlets or local paper advertisements o Number of competitors usually the more competitors in a market, the greater need for marketing. This is necessary to maintain or increase market share o The nature of the product this refers to the type of product and whether it requires marketing. Some products such as postage stamps, do not require advertising to make sales

Changes in markets Financial/capital market Labour markets Consumer markets

Internal Influences on business

Business Studies Summary Notes

The internal influences on a business include product, location, resources, management and business culture

Product Product influences affect a range of internal structures and operations within the business 1. Type of goods and services: o If the goods produced are physically large or require raw material inputs, there will need to be structures in place to organise and monitor the processes involved in production o In contrast, a service may be delivered by a home-based business or franchise business such as Jims Mowing and will influence the internal structure o The range has an internal impact as a company with a large range of products such as Coca Cola will require to make internal changes to operations and management to allow expansion in product range to occur 2. Type of business: o A service, manufacturer and retail business will, internally, be differently structured. E.g. difference in clothing manufacturer and clothing retailer 3. Size of business: o The larger the business, the more goods and services being produced, which will in turn influence the internal structures and operations of the business. o The sizes of businesses will vary the: Range of products Level of technology utilised Volume of goods and services o E.g. caf will operate at a different scale to a bistro Location Location will have a direct impact on the sales of profits of some businesses as it can make the difference between success and failure Prime location = Customer convenience + Visibility Retailers location must be convenient for customers Manufacturers location must be convenient for e.g. transport and shipping of supplies Factors to consider when choosing a location are: o Visibility o Cost retailers need a high level of customer traffic. Central location has high level of customer traffic but can be expensive. Manufacturers dont require a high level of customer traffic, therefore, they can search for low-cost sites o Proximity (nearness) to suppliers cheaper transport costs

Business Studies Summary Notes

o Proximity to customers o Proximity to support services: support services are the activities needed to assist the core operations or prime function of a business e.g. accountants

Resource The four main resources of a business are: o Human e.g. employees o Information e.g. legal advice, market research o Physical e.g. machinery, equipment o Financial e.g. funds Example of resources required to produce a school musical: Figure 3.23 page 76

Management A flatter organisational structure reduces the number of levels of management, giving greater responsibility to individuals in the business. A flatter management structure encourages a sense of ownership and innovation by managers, emphasising teamwork and responsibility Different organisational structures: Figure 3.24 page 76

Business Culture Business culture refers to the values, ideas, expectations and beliefs shared by members of the organisation. Business culture can be revealed from policies, goals or slogans. It may also be revealed from other things such as , the way staff dress, the language used and how staff treat each other and customers Having a business culture is a powerful tool for achieving goals as the workplace is more positive and personalised Four essential elements of a business: o Values: e.g. hard work, teamwork, honesty, quality customer service o Symbols: e.g. use of language, slang, dress codes, ways in addressing (hey or whats up) o Rituals: e.g. regular social gatherings to develop a sense of belonging o Heroes: a businesss successful employee who reflect its values who acts as an example for others Formal businesses: hierarchical management structures, tend to conform to a culture of loyalty and respect for superiors Less formal businesses: flatter management structure, more positive and personalised Management must ensure that staff members are given sufficient training to reflect the values of the business. Management may reward employees who display appropriate value

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Stakeholders

Business Studies Summary Notes

Businesses have many stakeholders with varying, and sometimes conflicting interests Responsibilities of a firm to its stakeholders: Figure 3.27 page 82 Responsibilities to Shareholders o Shareholders putting their money at risk; therefore they expect a reasonable rate of return Responsibilities to Managers o Managers expect the confidence and support of senior executives Responsibilities to Employees o Employees expect a safe and psychologically rewarding work environment. Their legal rights must always be honoured and respected Responsibilities to Customers o Businesses that respect and satisfy their customers have a much greater chance of success o Legislations provide customers with certain rights o The Commonwealths Trade Practices Act 1974 and the New South Wales Fair Trading Act 1996 protect customers from misleading and deceptive business behaviour Responsibilities to Society o Society expects businesses to be good corporate citizens, and give back something to the community e.g. McDonalds Ronald McDonald charity Responsibilities to the Environment o Society expects businesses to adopt ecologically sustainable operating practises e.g. McDonalds rainforest alliance certified: a non-government organisation working to conserve biodiversity

Chapter 4 The business life cycle refers to the stages of growth and development a business can experience Four stages of the business life cycle (establishment, growth, maturity, post-maturity): Figure 4.1 page 88 In each stage of the cycle, a business is confronted with new challenges and presented with different opportunities

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Establishment

Business Studies Summary Notes

The main challenge at the establishment stage is to get the business on a solid foundation by generating enough sales to create a positive cash flow Detailed planning can help greatly reduce the risk of failing

Growth During the growth stage the business has increased sales, a regular customer base, develops new products and improves its cash flow With growth comes complexity and responsibility, which creates the need for longterm planning Growth and expansion can occur either through a merger or acquisition (takeover) A merger occurs when the owners of two separate businesses agree to combine their resources and form a new organisation An acquisition (takeover) occurs when one business takes control of another business by purchasing a controlling interest in it Merger and acquisitions: Figure 4.4 Vertical integration occurs when a business expands at different but related levels in the production and marketing of a product Horizontal integration occurs when a business acquires or merges with another firm that makes and sells similar products Diversification (or conglomerate integration) occurs when a business acquires or merges with a business in a completely unrelated industry Types of integration: Figure 4.5 page 97

Maturity The maturity stage requires a more professional approach to planning The business introduces a more formal organisational structure Sales increase at the maturity stage, but at a slower rate; an early warning sign of possible decline The stage where a sense of complacency (sense of self-satisfaction) often envelops the business, affecting both management and staff

Post-Maturity There are three possible outcomes at the post-maturity stage: o Steady state: the business is neither declining or expanding, very unstable and eventually may lead to decline o Decline: fall in sales, cash flow and eventual business failure o Renewal: new products are developed an new markets are created, leading to increased sales and positive cash flow

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Factors to Business Decline

Business Studies Summary Notes

The two main causes of business decline are: o Lack of management expertise o Undercapitalisation (lack of sufficient money): lack of sufficient funds to operate a business normally e.g. not able to purchase stock and materials, therefore leading to a lost in sales and falling profits The businesss cash flow position should be carefully monitored in order to have enough cash to keep operating

Cessation

A business may cease operating, either:

Voluntarily o Voluntary cessation occurs when the owner ceases to operate the business of their own accord Involuntary o Involuntary cessation occurs when the owner is forced to cease trading by the creditors of the business o Creditors: are those people or businesses who are owed money Different methods for ceasing operations: Figure 4.9 page 108

Methods of ceasing operations Sole traders and partnerships may voluntarily or involuntarily go into bankruptcy: a declaration that a business, or person, is unable to pay his or her debts A company has two options when facing financial difficulties: o Voluntary administration: occurs when an independent administrator is appointed to operate the business in the hope of trading out of the present financial problems o Voluntary or Involuntary liquidation: is the process of an appointed liquidator converting the businesss assets into cash to pay the creditors o A company in liquidation can also be in receivership. Receivership is where a business has a receiver appointed by creditors or the Courts to take charge of the affairs of the business. Unlike liquidation, though, the business may not necessarily be wound up o Liquidation normally occurs because the company is insolvent o Being insolvent occurs when a company is not able to pay its debts when due o It is estimated that an average of 30 to 40 people are personally affected by one companys insolvency: Table 4.5 page 110

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Terms 1. 2. 3. 4. Notes

Business Studies Summary Notes

Liquidation: the process in turning securities and commodities into cash Float: raising of capital in a company through the sale of shares to the public Prospectus: a document giving details of a company and inviting the public to buy shares in it Small and Medium Enterprises (SME)

1. Dont forget business report 2. Business environment encompasses all those factors that affect a companys operations e.g. external (MEG SPLIT Four Cakes) and internal (product, location, resource, management, business culture) 3. Look at these question in the textbook (2b, 7c, 12, 14)