Chapter 1.1- What is a business?

● The nature of business:

○ A business aims to meet the needs and wants of individuals or organisations
through various activities, such as:
■ Creating a good
■ Providing a service
○ Businesses input resources and process them to generate a desired output.
This is how added value is created to their goods/services

■
○ The resource inputs are:
■ Human- the right quality and quantity of people required to make the
product or provide the service. Even highly automated businesses require
at least one human input
■ Physical- the right quality and quantity of materials, machinery and
land space required to make the product or service. Even
internet/e-commerce businesses require some physical space and a
computer
■ Financial- the right quantity of cash and other forms of finance required
to make the product or service
■ Enterprise- enterprise is the ability that an entrepreneur possess in order
to come up with a business idea and make it a reality
○ Production processes that add value:
■ Capital-intensive- use a large proportion of land or machinery relative
to other inputs, especially labour. In some instances, the land or
machinery may have special qualities, such as specialised equipment or
land that is rich with some resource
■ Labour-intensive- use a large proportion of labour relative to other
inputs, especially in comparison to land or machinery. Labour intensive
operations may involve highly skilled employees or fairly low skilled
workers
○ Product outputs are:
■ Goods- these are tangible products that we can physically use. They may
be produced in the primary or secondary sector
 ■ Services- these are intangible and the buyer cannot physically interact
with. They come from the tertiary sector
○ Business functions:
■ Human resources:
● Ensuring that appropriate people are employed to make the
product or service
● HR department must recruit people, train them, dismiss them (if
necessary) and determine appropriate compensation
■ Marketing:
● Ensuring that the business offers a product or service that is
desired by a sufficient number of people or businesses for
profitable operations
● Marketing department must use appropriate strategies to promote,
price, package and distribute the product or service
■ Finance and Accounts:
● Ensures that appropriate funds are made available to make the
product or service
● Finance and accounts department must forecast requirements,
keep accurate records, procure financial resources and ensure
proper payment of goods and services acquired to operate the
business
■ Operations management or production:
● Ensuring that appropriate processes are used in order to make the
product or service and that it is of the desired quality
● Operations management/production department must control the
quantity and flow of stock, determine appropriate methods of
production and look for ways to produce the good/service more
efficiently
● Primary, secondary, tertiary and quaternary sectors:
○ Primary sector- part of the economy that engages in the extraction or production
of raw materials
○ Secondary sector- part of the economy that engages in the production of
finished goods
○ Tertiary sector- the part of the economy engaged in the delivery of services
○ Quaternary sector- the part of the economy engaged in the production,
processing and transmission of information. Quaternary sector activities are
based on advanced knowledge and include IT services, consultancy and R&D
 ■
● Sectoral change:
○ Changing economies are closely linked to complex social contexts
○ Advanced sectors demand complex social contexts for business success
○ Raw material extraction relies on few skilled workers and many low-skilled
workers
○ The quaternary sector needs highly skilled workers and informed consumers
○ As the economy develops, social technologies improve and vice versa
○ Technological developments are not always linear
○ Innovations in one area can render other technologies and jobs obsolete. For
instance, computerised word processors made typewriters and typists obsolete
○ Obsolete jobs are replaced by new ones often considered as high skill
○ Businesses can succeed by anticipating and adapting to changing environments
○ Developed economies typically shift away from the primary sector
○ Shifting from one sector-based economy to another can strain resources
○ Secondary sector businesses may demand specialist skills that are scarce
○ Financial resources are redirected from one sector to another during this shift
○ Economies based on tertiary or quaternary sectors need fewer physical
resources compared to tangible goods production
○ Shifting to the secondary sector can weaken environmental protections
○ Manufacturing firms in developing countries often have a more significant
environmental impact as compared to developed economies
● Challenges and opportunities for starting up a business:
○ Reasons for starting up a business or enterprise:
 ■ Rewards- working for someone else means that you do not get to keep
all the rewards yourself, whereas having your own business would ensure
that you get to keep a higher proportion of rewards as compared to being
an employee or manager within a firm
■ Independence- working for yourself means that you are your own boss
and not following someone else’s rules. Individuals with an
entrepreneurial spirit may feel constrained by bosses, procedures and
policies in large organisations, so starting up a business results in them
setting rules, policies and procedures to their liking
■ Necessity- sometimes businesses are started by individuals whose
positions were made redundant or who could not find work. The necessity
of an income leads them to start up a business
■ Challenge- some people just want to see if they can ‘make it’ themselves.
Starting a business typically requires one person initially to perform all
functions of the business. Over time, if the business is a success, the
business owner then has to learn new skills, as their role changes to
accommodate a larger and more complex operation
■ Interest- many interesting businesses are set up by people with a
passion for something who want to just keep doing what they enjoy doing
■ Finding a gap- businesses may see or find an untapped opportunity in
order to achieve ‘first-mover advantage’. Sometimes businesses stumble
into opportunities that they were not looking for
■ Sharing an idea- if you are interested in something and want to promote
it, then starting up a business would allow for that
● Process of starting up a business:
○ Features of all successful start-ups:
■ The business idea
■ Planning
○ The business idea refers to the fundamental activity that the business will do.
The business idea can be market-driven or service-driven
○ Having a business plan will reduce the risks associated with starting up a
business

■
○ Steps for starting up the business:
■ Organising the basics- the entrepreneur would have to consider the
location of the business, what to name the business, what legal structure
to implement and operational structure, if there is sufficient business
infrastructure to make the business feasible- suppliers, potential
customers and government services
■ Refining the business idea through market research:
 ● Determine how to distinguish the business in the market
● Identify a specific market segment to target
● Answer key questions- how to conduct market research, target
market, concept testing, USP, communication strategy
■ Planning the business:
● Once the concept has been narrowed, the entrepreneur should
write the business plan; a document that addresses all the issues
that need to be planned before operations begin
● The business plan will be useful to multiple stakeholders,
especially potential owners of shares and financial institutions
● The business plan requires the entrepreneur to think through
most of the specific elements of how the business will operate
● For investors and financiers, the business plan can provide some
confidence, as it indicates that the business has foreseen
potential issues and is trying to address them
■ Establishing legal requirements:
● Laws impact legal organisation, labour practices and
operational practices
● Registration is required for businesses, even sole traders
● Corporations and other entities must comply with host country
laws
● Specific licences and inspections may be necessary
● Investigate tax requirements, including income taxes, payroll
taxes and benefits contributions
■ Raising the finance:
● Money is needed to start and support operations until profitable
● Investor/lender confidence in accounting and auditing procedures
● Attract start up funds from entrepreneur or other investors
● Equity capital means partial ownership
● Capital can be a mix of investment (selling shares) and loans
● Consider lenders and their terms for loans
■ Testing the market:
● Consideration of how the business will be launched, such as a
pilot; a small scale organisation to test consumer reaction
● Define criteria for success of the pilot in order to assess consumer
reactions
● For capital-intensive manufacturing, initial launches can be
expensive and slow to adapt to market feedback
● Some business, like restaurants, can easily respond to feedback
by adjusting menus and other aspects
● The purpose of market testing is to confirm consumer receptivity
and increase the chances of business success
● Challenges that a new business may face:
○ Following the steps above doesn’t guarantee success for start-ups
○ Common reasons for business failure before opening are:
■ Problems with basic organisation
■ Insufficient or poor quality market research for products or services
■ Poor planning
■ Inability to convince investors or lenders
■ Inadequate financial management
■ Unsuccessful launches and low sales
○ Failure can still occur despite a good business idea and strong plan
○ Possible reasons for failure are:
■ Lack of brand recognition in the marketplace
■ Difficulty in recruiting skilled labour
■ Inaccurate anticipation of competitor reactions
■ Limited capital during economic downturns
■ Stress-related problems among managers or executives
○ Many external factors can lead to business failure

○
Chapter 1.2- Types of business entities
● Difference between the public and private sectors:
○ Private sector- is the portion of an economy not controlled or owned by the
government
○ Public sector- those portions of the economy owned or controlled by the
government. For example, government services, public schools and state-owned
corporations
● Main features of the most common types of profit-based (commercial)
organisations:
○ Sole trader- a business owned and operated by one person. No legal
distinction exists between the business and the owner. Thus, the owner has
unlimited liability for the liabilities of the business and the business ceases to
exist when the owner dies
○ Partnership- is a business owned and operated by two or more people. No
legal distinction exists between the business and the partners, each of whom
are responsible for 100% of the liabilities of the partnership
○ Most common profit making businesses:
■ Sole traders
■ Partnerships
■ Privately held companies or corporations
■ Publicly held companies or corporations
○ Sole traders:
■ Features of a sole trader:
● The sole trader owns and runs the business- sole traders may
employ other people, including those empowered to make some of
the decisions. But, the sole traders make management decisions
and have ultimate responsibility for the business
● No legal distinction exists between the business and the sole
trader- the sole trader is the business and is liable for all debts of
the business and any other claims (unlimited liability)
● Finance is usually limited- sole traders typically have limited
finance, either because their personal savings are limited or any
external sources may be reluctant to lend finance due to the high
failure rate of start-ups
● The business is often geographically close to the customer- a
sole trader is typically a small business. This allows for the sole
trader to interact with customers on a more personal level and get
to know their customers on an individual basis, thus providing a
more personalised service
● The sole trader has privacy and limited accountability- most of
the time, sole traders do not have to declare their finances to
anyone except tax authorities or potential lenders of finance
● Registering the business is easy, inexpensive and quick- sole
traders have less legal paperwork to fill out and file. Also, sole
traders make all decisions themselves and do not have to spend
 time in the decision making process to when setting up the
business
■ Advantages of sole traders:
● Complete control over all important decisions
● Flexibility in terms of working hours, products and services, and
changes to operations
● Privacy, as sole traders generally do not need to divulge
information
● Minimal legal formalities
● Close ties to customers, which give a competitive advantage
■ Disadvantages of sole traders:
● Competing against established businesses all by yourself can be a
daunting challenge
● There may be stress and potential ineffectiveness because the
sole trader makes all the decisions, with limited time to make
them and limited opportunity to seek advice from others
● Lack of continuity
● Limited scope for expansion
● Limited capital- focus of the business will be on having sufficient
working capital
● Unlimited liability
○ Partnerships:
■ Features of partnerships:
● Decisions are made jointly by the partners- partners may
employ other people, however they still make all management
decisions. Partners also own the business, each partner having a
percentage ownership
● The business is owned and managed by more than one
person- number of partners is technically unlimited, however the
typical number is 2-20
● No legal distinction exists between the business and the
partners- partners have unlimited liability, even if they only own a
small percentage of the business
● Finance is usually more available than for sole traders-
finance can come from the partners savings or from financial
institutions, as they are usually more willing to provide finance to a
partnership than to a sole trader, as partnerships are considered
more stable
● Some partners may be ‘sleeping partners’- meaning that they
provide some finance as an investment into the partnership and
expect a share of the profit. A sleeping partner provides no other
role in the business
● The partnership can offer a more varied service than a sole
trader- different partners may bring different expertise and the
 product or service offerings of the business can vary. For example,
a law firm run as a partnership would have lawyers specialising in
all fields, criminal law, commercial law, etc
● Partners typically have a greater degree of accountability
than a sole trader- it may not be a legal requirement in most
countries, however having a deed of partnership can be very
useful. A deed of partnership is a legally binding document that
sets out the rights and duties of the partners. A deed of
partnership includes:
○ Responsibilities
○ Financing
○ Division of profits
○ Liabilities
○ Procedures for changing circumstances
● Partnerships are more stable than sole traders and have a
higher likelihood of continuity- drawing up a DOP will slow
down the registering of the business, but it will help the
organisation in the long term
● Partners do not necessarily share all of the profits equally-
profits in partnerships are typically distributed based on each
partner's ownership percentage. A partner who contributes more
financing may receive a larger share of profits. In partnerships with
active and sleeping partners, active partners may receive
agreed-upon salaries or drawings as expenses before profit
allocation, which is then done based on ownership percentages
■ Advantages of partnerships:
● Partners often bring different skills and qualities, partnerships
may have more efficient production as a result of the
specialisation and division of labour
● Partners bring more expertise than one person can
● As partnerships are perceived as having greater stability and
lower risk, they generally have access to more finance
● Partners can help in emergencies or when others are ill or on
holiday
● Partners have a higher chance of continuity
■ Disadvantages of partnerships:
● Each partner has unlimited liability. However there is one
exception to this liability, which is when in the DOP, a partner/s are
declared as “limited partners”, thus having limited liability but
also limited control
● Partnerships typically have less access to loans from banks and
other financial institutions, as compared to corporations. Limited
finance can often prevent the business from funding its
expansion or maximising opportunities for making profit
 ●An individual partner does not have complete control over the
business and has to rely on the goodwill and work of others
● Profits must be shared among the partners
● Partners may disagree, which in the worst case could lead to the
break-up of the partnership
○ Companies or corporations:
■ Advantages of being a shareholder:
● Price of the shares may increase in value if the company is
performing well- this may be in theory and not in practice,
however the value of a company is based on its profits. As profits
increase, so should the total value of its shares. Therefore,
individual shares of stock in the company should increase in
value at the same rate
● The company issues a portion of the company profits as
dividends- the amount of money each shareholder receives
depends on the number of shares they own. With small or new
companies, dividends are often not paid or are relatively small.
With large, established companies, dividends are often paid
regularly- on a quarterly basis. Shareholders invest in the
company partly because they want regular dividend income that
comes with share ownership in that company
● Shareholder has limited liability
■ Disadvantages of being a shareholder:
● The price of the shares may decrease in value if the company
is not performing well- if profit declines, then so will the value of
individual shares
● The company may choose not to issue dividends if it does
not have to- companies that are doing poorly may not have
sufficient cash on hand to be able to pay dividends. Businesses
that are growing rapidly would also need money to support the
growth. As a result, many companies rarely or never pay
dividends
● As “owners” often own only a fraction of the shares of the
company, owning shares in a firm may not mean that an individual
shareholder has any meaningful say in decisions about the
business
■ Reasons for becoming a company:
● Enhanced status of being a company is generally recognition that
the business has become successful
● Selling shares is a good source of finance, especially one with
growing working capital requirements
● Becoming a company increases the stability of the business, as
a company has legal existence separate from its owners
 ● Companies typically have improved chances of gaining further
finance, especially loans from financial institutions and
governments
○ Privately held companies and publicly held companies:
■ Privately held company- an incorporated business offering limited
liability to the owners. In most countries, shareholders of privately held
companies cannot sell their shares unless they have first been offered
to existing shareholders; the shares cannot be traded on a stock
exchange and there are limits on the numbers of shareholders
■ Publicly held company- an incorporated business offering limited
liability to the owners. The shares of the company are traded on some
public exchanges. Most publicly held companies must disclose
considerable information about the company, including financial
information
■ Main features of a company:
● The shareholders own but do not run the business- their
purchase of shares provides finance, but otherwise the
shareholders have little input in the day-to-day running of the
business. Instead professional managers are normally employed
to make all management decisions
● The business and the owners are legally separate entities- the
shareholders are not liable for any debts of the business (limited
liability). A person owning shares in the company can decide to
sell the shares for any reason whatsoever
● The details of the company formation are legally recorded
and are matters of public record- to form a company, owners of
the business must have two documents drawn up and registered
with the appropriate government agency; the documents are:
○ Memorandum of association- this document records the
key characteristics and the external activities of the
company being created. For example, the memorandum
will provide basic information on the objectives of the
business and record the share capital initially required
○ Articles of association- this document specifies how the
company will be regulated internally. For example, it will
explain the initial organisation of the executives of the
company, with their titles and areas of responsibilities
(CEO, CFO, etc) and the rights/responsibilities of each
shareholders
● Greater finance is generally available- the initial offering of
shares represents a one-time injection of capital to the
business. Once the business sells its shares, it receives the price
paid at the IPO (initial public offering). Thereafter, the initial shares
and future gains/losses in price are to benefit/cost of the
 shareholder only, unless the company issues and sells additional
shares to raise more capital
● A company is held to a high degree of accountability- the
owners and the company are separate entities, so from time to
time the company must provide information to the shareholders so
that they can understand the condition of their investment.
Information on a company is generally provided by:
○ Published, audited annual company reports
○ AGM (annual general meeting) open to all shareholders
○ EGM (extraordinary general meeting) if called by the
shareholders
● Companies have greater stability and a higher chance of
continuity- when a shareholder dies or sells shares, the company
continues to operate. The death of a shareholder or the sale of
shares has no direct impact on the company
■ Advantages of companies:
● Finance is more readily available than for sole traders or
partnerships- companies are perceived as having greater stability
and lower risk than sole traders and partnerships. Individuals and
institutions are more likely to invest and banks and financial
institutions are more likely to make loans to companies
● The investor has limited liability- investors can only lose the
value of their shares and nothing else. Each investment is limited
and thus their risks are spread out many companies
● There is continuity
● There are possibilities for expansion- companies have more
opportunity to expand because generally they last longer and have
more access to finance
● Established organisation structure- managers and workers do
not have to change every time a shareholder sells shares. This
stability can help the business develop long term relationships
with customers and suppliers alike. It can also allow the business
to hire individuals with expertise for individual positions who will
enhance the performance of the business
■ Disadvantages of companies:
● Setting up a company can take time and cost a great deal of
money to fulfil the necessary legal requirements- whether
reorganising into a company or starting a business as a company,
the owners must retain lawyers, have legally required paperwork
filled out, and file papers with the appropriate government
agencies
● Selling shares does not guarantee that the desired or
intended amount of finance will be raised- sometimes IPO’s
are unsuccessful and a business has sold itself for relatively little
 cash. Thus reorganising a business as a company or starting up a
company involves risk
● Owners risk partial or entire loss of control of the business-
owners of a company, especially for a publicly held company the
owners must give up some control of their business. Former
owners still retain 51% of the shares, they must still answer to the
new owners. In the case of public companies, loss of control can
be significant. Original owners can have a very small percentage
of the shares after the firm has gone public
● There is a loss of privacy- a publicly held company is required to
fulfil a number of legal obligations, including publishing its
accounts publicly. So in instances when the companies
performance has been weak-sales are down or profits are -ve- the
future performance can be further jeopardised, some customers
may not want to purchase from or do business with a weak
company
● A company has no control over the stock market- share prices
may fall, which can damage the image of the company. The share
price may fall due to no reason of the business, but some external
factors, such as elections, natural disasters, etc
● A company has limited control over who buys its shares- in
the scenario when a competitor may want to take over the
business. If the shareholders are willing to sell their shares, the
company cannot prevent a takeover. Companies are especially
vulnerable to being taken over if their share price falls
○ For profit social enterprises:
■ Private sector companies:
● Social enterprise- is a business that advances a social purpose
in a financially sustainable way. While aiming to do social good,
social enterprises rely on business models, have sales revenue
and reinvest what profits they make in the business. Social
enterprises do not depend on philanthropy
● Social enterprises vary in their legal organisation. Some take the
form of sole trader, partnership or company
■ Public sector companies:
● Some social enterprises, typically organised as companies,
operate in the public sector
● For profit social enterprise- an organisation with many
similarities to a normal social enterprise, except it often earns a
profit, some of which may be distributed to owners. The primary
aim is to provide a social service
■ Cooperatives:
● Cooperative- is a business organisation owned and operated by
its members, who share any profits
 ●Types of cooperatives:
○ Financial- is a financial institution with ethical and social
aims that are of higher importance than profits
○ Housing- is run to provide housing for its members. A
common trait of housing cooperatives is owning an
apartment in which each member is entitled to one
housing unit in the building. The members own the
building and surpluses are reinvested in the building and
its operation, so costs to individual members are lower.
Housing cooperatives typically have control over who can
become a member which increases the likelihood of
social harmony in the building
○ Workers- is a business that is owned and operated by the
workers themselves and the wages of the managers and
workers are similar. Providing employment to workers is a
priority. Workers cooperative emerges when a business
is about to fail. Workers, fearful of losing their jobs,
take over the business, sack the managers (or reduce
their pay drastically), and reinvest all of the profits in the
business (rather than paying them out as dividends)
○ Producer cooperative- is when groups of producers
collaborate in certain stages of production. Producer
cooperatives are typically common in agriculture. The
aim is to maximise the utilisation of an expensive piece
of equipment that individual members by themselves
cannot afford. Also, cost efficiencies can only be achieved
when a stage of the production process is carried out
on a large scale, so many producers pool in their
resources to obtain cost efficiencies
○ Consumer- provides a service to its consumers who are
also part owners of the business
■ Common features of for profit social enterprises:
● Profit is important, but not the priority, social aims take
precedence- the main aim is to earn profits sufficient to sustain
the business
● High degree of collaboration between the business and local
community- for-profit social enterprises usually signify a desire
for cooperation between the business community and the
government because both recognize a need being met by
ordinary business activity or by government
● Cooperatives are more democratic than other for profit
organisations- in for profit social enterprises, decision-making
tends to be more consultative and transparent
● Operates with the same functions as any business
 ■ Advantages of for profit social enterprises:
● Favourable legal status is achieved- the legal structure of a for
profit social enterprise allows individuals to engage in activities
that are good for humans, society and the environment, without
being liable or accountable to shareholders
● Strong communal identity- for profit social enterprises often
have highly motivated employees and other stakeholders working
together with a common sense of purpose. Employees often
report a high degree of satisfaction, knowing that they have a
positive impact on society
● Stakeholder community benefits- for profit social enterprises
help many stakeholders and the government, because for profit
social enterprises tackle human, social or environmental problems
that the government does not address
■ Disadvantages of for profit social enterprises:
● Decision-making is complex and time-consuming- for profit
social enterprises take a long time to make decisions, as they
need to be consultative and transparent. So, if many parties are
involved with the decision, the extended decision making time can
limit the effectiveness of the business
● Capital may be insufficient for growth- the business model of a
for profit social enterprise may not be sufficient in the long term.
As, without large profits, for profit social enterprises would struggle
to survive and expand
● Capital may be insufficient for financial strength- for profit
social enterprises tend to have lower profit margins and profits
than traditional for profit businesses because they try to make their
products and services as inexpensive as possible, which results in
them not having sufficient financial strength to survive during times
of economic recessions
○ Non-profit social enterprises:
■ Non profit social enterprise- is an organisation with many similarities to
a normal social enterprise, except that it is less willing to earn a profit
or surplus. The primary aim of a non-profit social enterprise is to
provide a social service
■ Features of NPO’s:
● Some businesses operating in the private sector do not aim to
make profits at all. These businesses are also social enterprises
(their main aim is for a social purpose), but they are different from
for profit social enterprises in that they do not aim to make any
profits whatsoever
● Though these social enterprises are run as businesses, they
generate surplus rather than profit. A surplus is similar to profit,
however rather than being distributed to owners like profit, it is