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A business is an organization or entity involved in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to provide service to customers for profit.
Business administration is also a social science that studies business operations. A business is legally recognized as a separate entity from its owners.
What is a Business?
Businesses are organizations or enterprising entities engaged in commercial, industrial, or professional activities.
Businesses is an organization that provides value to its customers through services or products they produce and or distribute.
The Case for a Business
The Economic Problem
The economic problem is that there are a finite amount of resources that cannot satisfy all needs and unlimited wants in a given country. Simply put, there is a scarcity of factors of production.
The Factors of Business Production
Land
Land includes all-natural resources such as fields, gas, oil, trees, metals, and other minerals.
Capital
Capital comes in different forms, but it is the resources needed to manufacture or deliver goods and services. These include finances, equipment, machines, vehicles, and other types of assets.
Labor
Labor is represented by people who deliver the efforts needed to make products or provide services.
Enterprise
This is the skill of bringing all the other factors of production together to produce goods and services. This involves risk-taking ability and is usually associated with entrepreneurs.
Business Objectives
Business objectives depend on the type of business. Businesses are founded by people and others by the government, the motivations and purposes usually differ.
Individuals are usually profit-focused and governments are usually motivated to deliver community service. Businesses are usually started around these objectives:
- To increase market share
- To make a profit
- To increase add value
- For Business growth (expansion)
- For business survival
- To provide a public service (community service)
Profit
A privately-owned business exists to deliver a profit for its shareholders. At the end of the accounting year, shareholders are entitled to their percentage share in the amount of the profits (after tax and interest).
A profit-motivated business always tries to optimize its return on investment. This is also regulated by the market forces of supply and demand which prevent any type of negative behavior such as overpricing.
Value Added
Value add is adding value by bringing materials together to make a final product. If you are assembling a car with material that costs $2500 and selling it for $5500, the Added Value is $3000.
Business Growth
Company directors may seek to invest profits in a new business venture to keep the main business growing. Expansion my take please for other reasons such as:
- To increase market share
- To gain a cost advantage by adding a business in their value chain
- To open up new opportunities
- To reduce business risk depending on a limited income stream
Survival
A scenario when sales are declining and the businesses are under pressure to uphold income above costs is a race to survival. A business may be kicked into survival mode because of:
- Economy is experiencing a recession
- Raw material costs have gone up or are volatile
- New competitors threaten the business
- Loss of market share
- Sales are declining
Provide a Public Service
Some services are essential and are provided by the government in to keep the prices low and affordable for the general public. These public goods are not delivered with a financial profit motivation, they include:
- Electricity
- Water
- Street lighting
- Roads
- Public hospital
- bridges
Business Stakeholders
Business activities involve and impact different groups of people. These people are defined as stakeholders. A stakeholder is anybody who is interested in the performance and activities of a business. Stakeholders of a business mainly fall into these categories:
- Business owners
- Directors
- Employees
- Customers
- Government
- The Local Community
Business Owners
A business owner is the capital investor in a business. They bear the risk of the performance of the business, however, if the risk pays of they get rewards with profits distributed to shareholders.
Directors
A director is part of a board of directors. The board of directors is made up of people nominated by the business owners whose main interest is to grow the business.
Employees
They are employed by the business and are generally led by their superiors to attain business goals and objectives.
Customers
A customer is the main reason the business exists in the first place. They buy the goods and services produced by the business.
Government
The government is the custodian of the economy in which the business operates. The government regulates and licenses businesses according to its laws and statutes.
The Local Community
The community is made up of people who live in the location in which the business operated. They benefit in the form of jobs and are impacted in some cases by pollution as a result of the business operating their community.
Business Sectors
Every industry has a value chain. A value chain is the process a good or service follows from production to ready for final purchase by the consumer. There are three categories that classify this process and they are primary, secondary, and tertiary sectors.
Primary Sector
The primary sector is involved in the production of raw materials. This includes activities like farming, natural mineral mining, fishing, and forestry.
Secondary Sector
In the secondary sector, raw materials from the primary sector are processed into finished goods.
This sector comprises activities like car manufacturing, construction, mobile phone assembling, and bakery.
Tertiary Sector
The tertiary sector provides services for businesses and individuals. Services in the tertiary sector include tourism, banking, insurance, lodges, and transport.
The Public and Private sectors
Most economies in the world are mixed economies that is they have both the private and public sectors working hand in hand.
The Private Sector
The private sector is a sector made up of businesses that are privately owned and run. Each business has the freedom to decide what to produce and at what price. They also have the freedom of who to hire and promote.
The aim of a privately owned business is to be financially profitable and serve shareholder interests. Notably, private businesses operate within the law of a country, and in certain industries such as petrol, the prices are regulated.
Types of Private Sector Businesses
Your business structure determines how the organization performs its functions and how it will be run on a day-to-day basis. Determining the right business structure is important because it has legal and taxes ramifications.
The 8 types of business structures in the private sector:
- Sole proprietor
- Partnerships
- Private Limited Company
- Public Limited Company
- Cooperatives
- Close Corporation
- Joint Venture
- Franchises
Sole Proprietor
A Sole Proprietor is a business owned and operated by one person. This type of business can only be owned by one person. It is a common form of business and very easy to set up. It also has few legal requirements.
Advantages of a Sole Proprietor
- They are easy to set up with few requirements.
- Decisions are taken quickly as there is one owner.
- The owner has flexible working hours.
- With one owner, the incentive to work harder and smarter is clear.
- The sole proprietor has close contact with customers.
Disadvantages of a Sole Proprietor
- A sole proprietor does not have limited liability.
- There are no other people to brainstorm ideas.
- It’s difficult to attract financing from banks with this business structure.
Partnerships
A partnership business is made up of a group of individuals between 2 and 20. All owners contribute capital to the business and have an equal say and profits in the business. Partnerships can be set up with a verbal or written partnership agreement.
Advantages of a Partnership
- There are a good number of sources for raising capital.
- The responsibilities of running the business are shared.
- Business risk is shared among partners.
Disadvantages of a Partnership
- Partners do not have limited liability (only offered in select countries).
- The business is not a separate legal entity.
- Making decisions takes longer compared to being a sole proprietor.
- The number of partners is limited.
Private Limited Company
A Private Limited Company is a separate legal entity from its shareholders. The company accounts and contracts are separate from those of the owners. Shares of a private company can be traded and do not affect the existence of the business.
Advantages of a Private Limited Company
- There is no limit on the number of shareholders.
- All shareholders have limited liability.
- The ownership structure depends on the value of capital contributed by each shareholder.
Disadvantages of a Private Limited Company
- Setting up a private limited company has more legal requirements compared to sole proprietors and partnerships.
- Shares can only be traded with the consent of the other shareholders.
- Annual returns have to be filed with the Registrar of Company every year.
- The company cannot offer its share to the general public on a company exchange.
Public Limited Company
Public Limited Companies are usually large-scale businesses such as chain stores. A public limited company is similar to a private limited company.
The main difference is that public company shares are offered to the general public on a stock market. Also and the financial statements are public.
Shareholders elect a board of directors to make important decisions about the business and control it for a period of 12 months. The board appoints day-to-day managers of the business such as the Chief Executive Officer.
Shareholders are paid dividends periodically from profits after the company has paid tax.
Advantages of a Public Limited Company
- Shareholders have limited liability.
- The company is a separate legal entity.
- Public limited companies are an opportunity to raise large amounts of capital.
- There is no need for shareholder consent to trade shares.
- Public limited companies usually have a strong brand utility and can get favorable price financing with banks and good prices from suppliers.
Disadvantages of a Public Limited Company
- Publically listing a lengthy and complicated process.
- There are many rules and regulations set in place to protect shareholders.
- Public Limited Company can grow to the extent of being difficult to manage and control.
- Selling shares to the public is a costly exercise that needs a merchant bank, which will charge a commission.
- Previous owners can lose control of the business once it goes public.
Cooperative
Cooperatives are formed by a group of people pooling their resources together. All members of a cooperative have one vote and help in running the business. The profits of a cooperative are shared equally among members.
Cooperative can take the form of the producer or retail cooperatives. Some cooperatives exist to take advantage of buying in bulk from suppliers and enjoying the economies of scale.
Close Corporation
A Close Corporation is similar to a Private Limited Company but quicker to startup. It has fewer rules and regulations to form and manage. How a Close Corporation is founded:
- Close corporations can only have up to 10 members.
- The only requirement with the Registrar of companies is a founding statement.
- Members are also managers.
- The Close Corporation is a separate legal entity.
Disadvantages of a Close Corporation
- Close corporations are limited to 10 members.
- Making a decision can take longer because there are many owners.
- The business structure is not suitable for scaling (large business).
Joint Venture
When two or more businesses start a project together (not businesses) with a shared capital input, risk and profits it is a joint venture.
Advantages of a Joint Venture
- Companies share project costs.
- Both companies have a human capital advantage and share knowledge and ideas.
- The companies share the risk or downside of the project.
Disadvantages of a Joint Venture
- Each company only gains a fraction of the profits in the event that the project is successful.
- If there is a disagreement on important decisions.
- Business culture on project approach and implementation could stall the project.
Franchises
A franchise is a business that is licensed to use another to use the company’s logo, brand, and trading methods to sell to customers. For example, MacDonald’s and Kentucky Fried Chicken. The company licensing their business is called the franchisor. The company obtaining the license is called the franchisee.
Advantages of a Franchisor
- The business has a chance to expand quicker compared to if the franchisor self-financed the project.
- The franchisee handles managing the outlets.
- The franchisor is the only supplier of inputs.
- The franchisor gains income from licensing the franchisee.
Disadvantages of a Franchisor
- Poor performance of the franchisee impacts the franchisor's brand utility.
- Franchisee keeps most of the profits attributed to the licensed outlet.
Advantages of a Franchisee
- The business is a proven business model.
- The brand strength is already positive and established.
- Suppliers are established and there is a stable supply process.
- There are fewer moving parts compared to starting from scratch, for example, pricing is set.
- The franchisor trains the staff and helps with recruitment.
- Financial institutions are more likely to finance a proven business model, thus making it easier.
Disadvantages of a Franchisee
- There are operational restrictions, decisions need to be approved by the franchisor.
- The franchisor is restricted when it comes to making suitable local decisions or products which could be profitable.
- The license fee could be high and some agreements include a percentage of the profits are being shared with the franchisor.
Public Sector
The public sector wholly belongs to the government. The government determines what good will be produced in this sector and also determines the pricing.
Some public goods can be offered for free such as education, defense, fire departments, public clinics, roads, electricity, and water. The public sector is funded with taxpayer money and from government bonds.
There are two types of Public Sector organizations:
- Public Corporations or Parastatals
- Municipal enterprises
Public Corporations (Parastatals)
Public corporations are owned by the government but not run or operated by the government. A government minister appoints a board of directors and gives them the responsibility of running the business on a day-to-day basis. The board is given objectives for the organization.
Objectives of Public Corporations
Public corporations have social objectives to ensure the population’s basic needs are met. The Public Corporation objectives may include:
- Make services affordable by keeping prices low.
- To create jobs and reduce unemployment.
- To provide services nationwide.
It is clear that the motivations are not profit-related, hence the majority of Public Corporations are not profitable. Public corporations are funded with taxes.
Objectives of late have been revised and the approach is to make them sustainable. This means to be sustainable, parastatals have the following objectives:
- To reduce operation costs, even if it means reducing the workforce.
- To aim for efficiency like a private company.
- To offer services sustainably, even if some of the population may only access some services at the provisional level.
Advantage of a Public Corporation
- Some services, like electricity, are essential, and not having them in your country will affect foreign investment.
- It allows natural monopolies like railway companies to be owned by the government.
- If a big employer is failing and has a lot of jobs at stake, the government can nationalize it until it is profitable again, then sell it back to the private sector.
- Some services need to base on the private sector before the economy is ready for the private sector competitors. For example state Television and radio.
Disadvantages of a Public Corporation
- There are not enough incentives like profit-driven investors for Public Corporations to be efficient.
- Subsidies can incentivize management not to be motivated to deliver great products and services.
- Public sectors do not have competitors in some cases which can affect customer service.
- Public Corporations can be used for political power, especially prior to elections.
Business Size
Measuring the size of a business varies. The most common way
to measure a business is by profit, however there are other measure that meandifferent things in the market. Ways of measuring a business:
- By profit for year
- Value of sales ( revenue)
- Value of production or Output
- Capital employed
- Number of employees
Business Growth
Directors are focused on growing a business’s profit and market share. There are two main ways a business grows, internally and externally.
Internal Growth
This happens when a business expands its current business operations. This could be by opening another branch in another location. This type of growth is usually financed with retained profits.
External Growth (Mergers and Acquisitions)
This type of growth takes place when a business acquires another business or merges with it. There are three ways firms merge:
- Horizontal merger
- Vertical merger
- Conglomerate merger
Horizontal merger
A horizontal merger happens when a business acquires or mergers with another business in the same industry and in the same sector of the value chain.
For example, Bakery A sees an opportunity for growth by merging with Bakery B, in the secondary sector, and purchases or merges with them.
Benefits of Horizontal mergers
- The merger increases market share
- There is an opportunity to reduce cost through economies of scale or operational advantages
- There are fewer competitors to focus on.
Vertical merger
A vertical merger is when a company merges or purchases another in the same industry but at a different stage in the value chain or sector. For example, if clothing Shop A buys or merges with clothing Supplier A in the same industry.
Benefits of Vertical mergers
- The merger gives an assured distribution into the next sector.
- Costs for retail are lowered and increase profit.
- The supplier has competitive advantages compared to its counterparts.
- The information shared between companies strengthens their insights and gives them an edge in the marketplace.
Conglomerate Merger
When a company purchases or merges with another company in a completely different industry. For example, if a shoe company buys or merges with a car company with aims to diversify their income.
Benefits of Conglomerate Mergers
- The merger reduces industry risk for both companies.
- There can be cost-saving if company B offers services Company A already uses. If company B is a clothing business it can supply company A with clothing at cost.
- ross-industry ideas could help bring new ideas from a fresh perspective.
