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The Nature of Business

WHAT IS A BUSINESSBusiness is a way that buyers buy and sellers sell goods and services.
For sellers, business is about how they do their selling and receive
their money and income. For buyers, business is about how they get
what they want. All business offers something to the community. A
business provides goods and services to meet the needs and wants of
the community.
Business is defined as all activities that involve the creation of
goods and services which are then bought and sold.
Normally driven by profit motive
Suppliers and customers are imperative to survival
Inputs are raw materials, outputs are the final product that is
sold to consumers
Function of business is to create/add value or benefits
Prime function is the major/core activity and the reason for
being
Mission statement includes long-term objectives. Used for
planning and evaluation
Social and economic roles are wealth creation, employment,
quality of life and choice
Stakeholders have an interest in a business. Can be internal
(owners, employees, shareholders) or external (customers,
government, competition)
Business goals can be financial, social, environmental and
personal. There may be conflicts.
BUSINESSES CAN BE CLASSIFIED AS Primary producers
Manufacturers
Retailers
Service/tertiary sector
The

importance of businessResponsible for wealth creation


Responsible for most employment
Provider of goods and services
Source of government revenue
Improve our quality of life
Provide greater choice
Innovation

Entrepreneurship
FINANCIAL GOALS Profit
Return on investment
Sales revenue
Market share
Growth
Diversification
SOCIAL GOAL Community services
Environmental protection
Employee satisfaction
Continued employment
PERSONAL GOALS Good reputation
Personal satisfaction
Environmental aware
Stakeholders are all the various individuals and groups with whom a
business interacts. They are all people who have some type of interest
in the business. Internal Stakeholders include owners, shareholders,
managers and employees. External stakeholders include customers,
suppliers, creditors, government, environment, society and
competitors.

The value chain is a set of linked activities that adds value to a


product or service. It helps management manage the separate task
that an organisation performs. By analysing each link in the chain it is
possible for them to not only identify which area of a particular

business can improve but also which areas contain the business
sustainable competitive advantage.

Entrepreneurship - To manage a business, a person must have good


technical
Coordinating the business Coordinating Ensuring that various individual activities are
carried out to fit well together and create a high quality finished
product
Environments that affect business: legal, social and cultural
attitudes, financial, geographic, economic, government, political,
institutional.
ROLE OF MANAGEMENT Management is the process of getting things done through
others activities. In business, management involves creating an
environment that encourages individual to carry out acts
designed to achieve personal as well as corporate goals.
THE BUSINESS LIFE CYCLE Establishment- Is when the business first starts up its
business. Owners must decide the legal structure, how to get
finance, location, government regulations and business plan.
Growth- Once the business has formed and operation has
commenced, it enters into growth stage if there is an increase in
the sales etc.
Maturity- This is when the business plateaus. This could be due
to many factors such as competition, lack of risk-taking,
motivated staff, and innovation.
Post maturity- Is when the business can either have a steady
state, decline, cessation or renewal.

Incorporated is process that business goes through in order to


become separated legal entities. This means they exist separate to the
owner and will continue regardless of what happens to the owner.
Unincorporated is when the business dies with the own

LEGAL STRUCTURE Sole Trader- Someone who conducts a business on his/her own
and is solely responsible for managing and financing of the
business enterprise.
Advantageo Owns the business
o Can easily sell it
o Keeps all the profits
o Inexpensive business structure
o Responsible for all decision
o Not subject to government control
Disadvantageo Limited capital
o Unlimited Liability
o Owner needs to be good in all fields
o Owner bears all the loss
Partnership- Consist of two or more people who join together
to operate a business.
Advantageo Relatively inexpensive to set up
o More capital available
o More specialized people
o Not subject to government control
o Profits are shared between partners
Disadvantageo Unlimited liability
o Possible conflict between partner

o Liable for the other partners action


Companies- When a business is incorporated, a legal entity is
created that is separate from the individual members.
Advantageo Limited liability
o Easier to finance
o Perpetual succession (anything happens to shareholder
business can still operate)
Disadvantageo Expensive establishment cost
o Subject to government control

Types of business entity Unincorporated businesses have unlimited liability


- Sole traders, partnerships
Incorporated businesses have limited liability
- Private and public companies, cooperatives and trusts.
Classification by industry
- Primary: production or extraction of natural resources
- Secondary: manufacturers
- Tertiary: services
- Quaternary: information processing
- Quinary: domestic services

A SMALL BUSINESS

Having less that 20 employee

The importance of small businessSmall-medium sized businesses account for the majority of business
operations in Australia. They contribute to the economy through:
Providing employment
Exporting income
Advancing technology
Large businesses outsource certain jobs to smaller businesses
A MEDIUM BUSINESS

Having between 20-200 employee

A LARGE BUSINESS

Having more than 200 employee

The business environment and its impact on business Economic and social influences
- Economic cycle- economy experiences booms and busts,
growth and recession at different times.
- Consumer tastes- Change as you get older.
- Cultural and product diversity- Different people want
different products.
Competitive situation:
- Number of competitors- Compete for market share.
- Easy of entry- Some industries require larger investments.
- Local and foreign competitors- Affect the business sales.
- Market strategies- The ways businesses promote to the
customers.
- Substitution- Other products can be consumed instead of
theirs.

Government regulation attempts


to ensure the business activity is conducted efficiently,
effectively, equitably and in a socially responsible matter

The government aims to:


Protect consumers
Influence competition
Encourage stability and
growth
Protect employees rights
Enforce zoning, building,
health etc provisions

Provide licensing systems


Disallow dangerous goods

and services

Ethical responsibility refers to doing the right thing by stakeholders.


Social responsibility refers to doing the right thing best for the
whole of society.
INTERNAL ENVIRONMENTSResponsibility to owners - There is a legal obligation to protect
funds and provide a reasonable return on investments.
Responsibilities to other managers- Managers are expected to
supervise and report on the work of their staff. It includes
acknowledging subordinates input and effort, not blocking a
promotional path, not manipulating subordinates and eliminating acts
of discrimination.
Responsibilities to employees- Recognising efforts and involving
them in decision making, correcting ineffective practices, providing
training and career paths and provide a challenging work experience.
EXTERNAL ENVIRONMENTResponsibility to customers- Obligated to provide saleable goods
that perform as specified. Business prohibited engaging in misleading
conduct and ensuring that products are safe to use.
Responsibility to suppliers- A business acting ethically would reveal
to its supplier ahead of time if there were problems in fulfilling a
contract.
Responsibility to governments- To comply with laws and regulation
set up by the government. Governments are generally responsible to
provide roads, water etc. that business need in order to produce and
distribute their goods and services.
Responsibility to the environment- To maintain the quality of
environment that operates without effect or damaging the
environment.
Responsibility to society- Recognise the need to maintain a positive
image as a member of society.

Key Business Functions

The key business functions Operations- involves organising the production of goods and
services in a business
Employment relations- Is responsible for organising the
businesses human resources (the people who work in the
business). Involves hiring and firing of staff and everything in
between
Marketing- is the link between the business and its customers.
Marketing drives the business because it identifies what
customers wasnt and need and then plans the product so it
satisfys the customers demands at and acceptable price. Must
be profitable.
Accounting and finance- is responsible for providing the
financial resources necessary to run the business.
Relationship to value chain Operations- the more skilled and accomplished operations are,
the better the product will be accepted by the market.
Employment relations- This department adds value by
improving work culture and work performance. Creates increased
profits.
Marketing- This department adds value by delivering a product,
pricing, promoting, and distributing it in a way that increases
sales and profitability.
Accounting and finance- This department adds value by
allowing the organisation to use its resources more efficiently,
take advantage of greater liquidity and record higher profit
levels.
Planning is the process of deciding what is to be done, when and how
it will be done and who will do it. Plans provide direction for action.
Controlling is the process of measuring whether the objectives set
out by planning have been achieved. Controlling involves measuring
the actual performance, comparing the performance to targets and
correcting variations from targets.
PLANNINGStrategic planning- is developing a long term general plan of action
that requires the commitment of each business function.
Tactical planning- is focusing on how to achieve the objective
specified in the strategic plan.

Operational planning- implements strategic plans and is used by


managers to carry out task and responsibilities.
Functional structures- operations organized according to key
functions and geographic factors. They are either specialized into
divisions according key functions to meet the needs of a market

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Market structures- types of organization based around


markets/consumers
DIVISION OF LABOURDivision of labour- separation of power that occurs within an
organization on the basis of responsibility and expertise
Labour- a businesses workforce
Managers- people who have greater responsibility; makes decision
affecting resource use, use of funds and charges to behave ethically
SPAN OF CONTROL/CHAIN OF COMMANDSpan of control- no. of people for whom a manager is directly
responsible as well as the ratio of managers to subordinates across
successive layers
Downsizing- reducing labour and encourage more flexible skills
Chain of command- flow of authority from snr management to
supervisors then workers
Operations Operations deals with the production of goods and services and
the day-to-day running of a business.
The organizing process of operations consists of consideration of
plans, determining work activities, classifying and grouping
activities, assigning work and delegating authority and
establishing a chain of command
The operations function creates value by transforming inputs to
outputs
PURCHASING/SUPPLY CHAIN MANAGEMENT
Purchasing and supply chain management involves determining the
input needs, selecting your suppliers, negotiating prices and follow-up
Supply chain- range of suppliers from which a business purchases
from.
Lead time- length of time taken to meet needs of customers thru
provision of good/service
Computer Integrated Manufacture (CIM) - manufacturing process
characterized by linking key bus functions
Materials Requirements Planning (MRP) - anticipate levels of
demand for a product and order supplies of required inputs accordingly

ROSTERING/SCHEDULING
Rostering- process of organizing workers in the businesses so that
work can be completed; forming a timetable showing availability of
employees are main tools used to schedule:
Program Evaluation Review Technique (PERT)
Critical Path Analysis (CPA)
PERT and CPA show what needs to be done and how long it takes and
order.

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TASK DESIGN
Task design- classifying job activities in ways that make it easy for an
employee to perform and complete the task successfully
Process:
Define what needs to be done in a general statement
Analyze job into duties
Allocate difficulty and time
Match tasks to awards
Articulate task via job descriptors and pay a scale to allow a
range of experience in a range of work settings

TECHNOLOGY
Technology is the development of methods of production or products
that help us do things faster.
Robotics- highly specialized form of technology capable of complex
tasks
CAD/CAM
CAD- computer aided design; computerized design tool that allows bus
to create product possibilities from a series of input parameters; a
computerized graphical design that generates 3D diagrams from a set
of input data. CAD designs a sequence of steps needed to be taken to
create desired products in shortest lead time possible
CAM- computer aided manufacture; software that controls
manufacturing processes; can be linked to CAM to allow instantaneous
manufacture of designs that are accepted by clients
INVENTORY CONTROL
Stocktake- the physical counting of goods to determine how much of
each stock item the bus has at a certain point

JIT- just in time; ordering stock when needed saves businesses on


storage costs, handling costs, stocktaking, security and problems
associated with slow turnover

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PRODUCT LAYOUT/OFFICE LAYOUT/PROCESS LAYOUT


Mass production- characterized by manufacture of high volume of
constant quality goods
Work stations- desk areas required by office workers
Process layout- characterized by grouping together machinery with
similar function
QUALITY MANAGEMENT
Quality assurance- is a pre-control process; series of steps
taken prior to processing to ensure quality goals are met
Quality control- a series of controls designed to bring attention
to areas where quality parameters are not met. Quality control is
important as consumers will buy the product they think is best
quality. Quality control involves checking the product after it has
been produced and discarding it if it does not meet standards.
WAREHOUSING
Warehousing- storage of raw materials and inventories
Warehouse should be located in an area accessible to transport b/c
helps distribute product to markets, helps employees access site, it
depends on cost however.
RECORDS MANAGEMENT
Records management is focused on the efficient collection, storage and
retrieval of information.
Records management- an administrative task involving collection of
data
Employment relations Employment relations are the business function that deals with
the relationship between employer and employees of a business.
The role of ER is to manage people within an organisation so
they can be the most productive resource that they can possibly
be. Employment relations involve the recruitment, selection,
placement, training, appraisal and effective utilization of staff.
The human resource cycle isAcquisition Development Maintenance Separation
Acquisition- This is to make sure the business has enough employees
with the right skills and experience.

Development- A business needs to develop its human


resources by improving the skills and qualifications of all
employees.
Maintenance- This is keeping valued employees. This can
increase productivity and can reduce absenteeism, turnover and
disputes.
Separation- This is the ending of the employment relation.
When employee leaves the job voluntary or involuntary

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AcquisitionThe labour requirements of the organisation need to be constantly


evaluated. Acquisition involves three key stages Identifying staffing needs (by analysing tasks involved in jobs
and creating a job description)
Recruiting (making contact with suitably qualified people)
Selection (identifying the best possible candidate for the job)
Recruitment and SelectionAfter a need for a job within the business is identified, a job
description and person specifications are drawn up. Recruitment is
the process of attracting people to apply for vacancies. Selection is
the process that follows on from recruiting, where certain candidates
are selected from those who have applied for the job.
TrainingTraining is a process that aims to improve specific skills and
knowledge. Through training and development, employees existing
skills can be enhanced and new skills acquired. Increased performance
should result from training which will benefit the whole business.
Development of human resourcesDevelopment can be defined as the process of preparing employees
for advancement to jobs where their capacity can be used to the
greatest extent.
Maintenance of human resourcesEmployers try to maintain staff loyalty and commitment by striving to
create a sense of belonging among their employees and by showing a
caring nature within their whole organisation. This can be done
through monetary benefits (pay rise, etc) or non-monetary (company
cars, discounts, etc)

Separation of human resourcesEmployees leave an organisation for many reasons. Separation can be
voluntary (retirement, resignation, etc) or involuntary (redundancy,
retrenchment, dismissal etc)

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Labour contract a contract between employer and employee


regarding duty of care, payment of income, duty to obey lawful orders,
etc
Equal opportunity and Anti-discrimination States that race,
gender, marital status, religious beliefs, age or sexual preference must
not influence employment, training or promotion
Affirmative action requires employees to develop programs that
promote equal opportunity for women.
Occupational health and safety states that employees are to
ensure the health and safety of employees, employees have the
responsibility for their own safety and safety of other workers and
customers

Marketing Marketing maximizes profitable sales. It is the total system of


business activities designed to plan, price, promote and
distribute want-satisfying products and services to markets in
order to achieve the objectives of the business
The target market can be either:
- market aggregation (seeing the target market as one
single unit)
- market segmentation (breaking the market into smaller
sections)

Furthermore, market segmentation can be divided


into:
concentrated marketing (focusing on one single
segment)
differentiated marketing (targeting a number
of different segments)

A market can be separated by consumer


characteristics:

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Geographic where consumers live

(city/town, urban/rural)

Demographic (age, gender,

income, religion etc)

Psychographic (social class, life

style, personality)

The marketing mix is made


of product, price, promotion and placement

Product is a set of tangible


and intangible features.

Product strategies includes


extension adding new products, contraction when a
business stops making a product and rejuvenation
redesigning/repackaging a product

Pricing is how much a


product will be sold for

Pricing strategies are:


Penetration pricing
setting the price below the competitors
Market skimming
pricing for products with no competition
Meet-thecompetition pricing setting prices at same level as
competitors
Psychological pricing
pricing products at odd prices ($49.95 instead of $50)
Promotion is the approaches used to get a good or service
noticed by potential customers
Marketing strategies include personal selling, advertising,
sales promotion and publicity
Place is where the exchange between buyer and seller occurs.
Placing strategies include intensive (where product is available
at every possible outlet i.e. coke), selective (wide distribution of
products without intensive i.e. shampoo at hairdresser) and
exclusive (limited supply, implies elitism)
Accounting and finance Accounting and finance is the process of identifying, measuring,
recording and communicating financial information.
Funds can come from debt (money borrowed from institutions
i.e. bank loans, trade credit etc) and equity (money obtained
from the owners or retained profits)
Short term finance is money which is used for periods of up to
one year (overdrafts, trade credit), medium term finance is for

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over one year (loans, leasing) and long term finance is for much
longer (long-term loans)
The key financial statements are a balance sheet which shows
the financial position at the time, revenue statement which
measures financial performance over a period of time and a
cash flow statement which shows the sources and uses of cash
over a period of time.
A balance sheet is comprised of two columns; the left is assets
and the right liabilities and owners equity.
A = L + OE
Current assets will be turned into cash within 12 months, noncurrent assets will not. Current liabilities are to be paid off in
the next 12 months, non-current liabilities will not be.
Important equations for a revenue statement:
COGS = Opening Stock + Purchases Closing Stock
Gross Profit = Sales Revenue Cost of Goods Sold
Net Profit = Gross Profit General Expenses
A revenue statement is in the form
Sales revenue
Less COGS
Gross Profit
Less Expenses
Net Profit
A cash flow statement simply shows where money is coming
into the business, and where it is being spent.
Financial statements are used to forecast, and for interested
stakeholders.
Budgets can be used as a planning tool

Establishing a Business
Entrepreneurship being a visionary, having high motivation and
financial sense. An entrepreneur identifies a need, develops the idea,
takes risks and is passionate
Personal features-

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Personal qualities: These are the attributes or characteristics that a


person would generally display if they are to be successful business
people.
- Motivation is the interest or desire for doing something. Some
common factors that encourage people to take on risk of starting
a business are:
o Independence
o Status
o Wealth
o Personal qualities
o Power and influence.
-

Experience Prior knowledge of an industry and business due to


previous work. This is essential because it take time and
education to establish a competitive business without any prior
knowledge or experience.

Expectations refers to the outcomes the business person


anticipates to achieve. Expectations often shape performance.

Cultural background an awareness of the diversity of


Australias cultural background is an important consideration
when establishing a business. Advantages to business from
cultural diversity:
o Language skills other than English
o Knowledge and experience to deal with culturally diverse
customers or businesses
o Migrants bring knowledge of business networks from
overseas.

Gender Business need more and more of soft skills and cultural
flexibility (the skills they say are associated with women)

Identifying business opportunities Opportunities originate from the changing needs of customers
and changes in the business environment
Sources of information help determine whether an opportunity is
viable or not
Considerations-

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Skill requirements- The necessary skills needed to develop. What


does a person need to know about marketing, office
administration, selling, finance, recruiting and managing people?

Finance- Involves thorough costing, including the cost of all the


research as well as setting up the business.

Competition- A business needs to asses how much competition


they might present and how you will win against your
competition.

The business ideaThe business idea involves a well thought-out plan with strategies for
marketing, organizing and finance. A successful business opportunity
will involve a number of important factors Must be an opportunity that is doable and will be profitable
and competitive.
Will involve a well-thought-out plan with strategies for
marketing, organising and finance
Identifying the target marketPotential customers and their needsPotential customers are those who in the future may purchase a
product or service for a particular business. Research must be done to
find out the geographical, demographical and psychographic
information of a potential market. Market research is comprised of
market surveys (provides info about how many customers, whether
market is growing, details about suppliers, etc) and customer surveys
(info about where customers live, age, earnings etc)

Identifying immediate and/or customer marketsMass market Targeting Everyone


Niche market Targeting people by a characteristic

Potential markets possible customers in the future


Determining competitive advantageCompetitive advantage- refers to those things a business does that
distinguishes it from its competitors. E.g. good quality products, high
level customer service etc.
-

Value the perception in the mind of customers that a product


is worth it. If an item is expensive they expect it to be higher in
quality etc.

Benefits product benefits can give a business competitive


advantage by
Giving a greater variety of choice
The creation of products that give more benefits to
consumers. E.g. products with warranties.

Price business can seek a competitive advantage for using


particular pricing strategies. E.g. market skimming, penetration
pricing, meet the competition etc.

Key considerations in setting up a businessEstablishing optionsThere are 3 main ways of setting up a business
Setting up a new business:
- Considerations
Business must be planned and organized
Research must be done (capital availability)
Target markets must be considered
- Advantages
Opportunity and freedom
You choose the direction of business
Select own employees and training methods
Dont pay for goodwill develop own reputation
- Disadvantages
Higher risk of failure (uncertainty)
No established customers/reputation
Costly (staff)
Have to develop relations (suppliers/distributors)
Long start up time (run at a loss)
Difficult to establish financial relationships

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Purchasing an existing business


Advantages
Immediate income
Easier finance due to past financial records
Customers are aware of business
Established channels of distribution
Disadvantages
Inherit mistakes made previous owner
Employees may be unhappy with new owner
Financial problems (unable to determine good will)
Outstanding debts
Contractual obligations
Buying a franchise
Advantages
Good expectations for growth
Name and product/service is recognized
Bulk buying is available
Pre-planned marketing strategy and financial system
On-going market research and management
assistance
Disadvantages

Must follow operating standards

Restricted range of products/services

% of profits goes to franchisor

May not get financial returns you hoped for

Conditions apply for leaving business

LocationThe place where you set up your business in relation to a businesss


customers and suppliers A good location is vital for success. Visibility, cost and proximity
to suppliers/customers/support services must all be taken into
account
Visibility is particularly important if you are in the retail industry
and people passing by need to see your business easily
If raw materials are expensive to transport, location close to
suppliers is appropriate
Sources of capital, cost of capital and gearing are also
considerations
CapitalThe funds needed to finance the purchase and/or running of the
business.

Capital can be equity (from owners


pocket, profits etc) or debt (money borrowed, investments etc)
The cost of capital is the interest that
must be paid back on debts

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Legal regulations Zoning is an area with a distinctive feature or quality.


Health practices Government health regulations apply to
particular businesses.
Trade practices the way businesses go about dealing with
each other and with consumers.
Patents a patent is the right to use and sell an invention
for a certain period of time
Outsourcing
Outsourcing occurs when a business purchases a particular service,
such as accounting or marketing, from another business specialising in
that function.

Operations Some business outsource their production or


operations. E.g. Clothing companies. Business making products
containing many components also outsource some of their
production.

Staffing The function of recruiting is often outsourced.


Business contract labour in order for a more flexible workforce.
People can be hired in times of need and let go when sales are
down with ease.

Accounting This function if often outsourced in small


businesses. People feel that they do not have to time or the skills
to properly perform this takes, so hire others to do this.

Marketing Marketing specialists are able to advise on the


most appropriate forms of promotion and assist with marketing
strategies.

Critical issues in business success and failure-

The importance of the business plan:


- A business plan is a document setting out a description of the
business, its market, its competitive advantage etc. Assist in the
path which the business will take
Identifying and sustaining competitive advantage:
- A competitive advantage refers to the things a business does
that distinguishes it from the competition.
Managing cash flow:
Cash flow is the money coming into the business in the form of cash
receipts, and the money leaving the business as cash receipts. The
management of cash involves payment of bills and loan instalments,
making sure there is a balance between cash flowing in and cash
flowing out, and investing any surplus cash.

Developing a Business Plan


Purpose of a business planThe business plan essential in outlining:
Where the business is now
Where it is going in the future
How it is going to get there
If the goals are being achieved
Why have a business plan?
A business plan focuses efforts on the main business goals and
aims
It clearly outline what has to be done and why
It forewarns of any future potential problems such as reduced
cash flow and outlines possible solutions
A plan develops strategies for marketing and for the further
growth of the business

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