Nature & Organization of Business Unit 1: BUSINESS ORGANIZATIONS AND MANAGEMENT 1.1. Nature & Organization of Business Source: Business & Management – Course Companion – Clark, Golden, O’Dea, Weiner, Woolrich, 2009. p7-18.

THE NATURE OF BUSINESS ACTIVITY The nature of business activity inevitably varies from country to country and reflects the needs and resources of the local environment. However, organizations are increasingly being operated in a way that considers the international perspective, cultural diversity and the need for international cooperation.

FOUR FACTORS OF PRODUCTION A business uses a combination of inputs to make the outputs or goods and services that it creates and sells. The inputs or `factors of production` are: Land Labour Capital Enterprise or Entrepreneurship

Includes Money in Business Studies

FACTORS OF PRODUCTION Land Businesses will need space to operate from. Even an internet organization will need some office space. In any additional to `land` referring to physical premises, the word `land can be extended to mean any natural resource in Economics. Eg: Fish in the `sea` can be classified as land.

FACTORS OF PRODUCTION Labour All businesses use varying degrees of labour. A labour intensive business is one that has a high proportion of labour inputs. This category might include potato or pea farms, restaurants and call centres.

FACTORS OF PRODUCTION Capital Capital input covers both money and machinery. A capital intensive business is one that has a high proportion of its inputs as machinery. Examples might be automated car production plants and bulk chemistry processing Economic Students Note: The word capital does not mean money in pure Economic theory.

FACTORS OF PRODUCTION Enterprise or Entrepreneurship This final input is the key factor of production as it is the entrepreneur or business person who harnesses the other inputs effectively to create added value for consumers and profit for the owner.

FACTORS OF PRODUCTION Enterprise or Entrepreneurship If the owner or manager of the business has not got the drive, energy and determination to succeed then it does not matter how good the other inputs are, the business will probably underperform.

BUSINESS OUTPUTS The outputs of a business are dependent on the quantity and quality of the inputs and how they are combined. Outputs can be finished goods ready for movement to the wholesalers and shops or they might be component parts that other manufacturers will need to make a product.

BUSINESS OUTPUTS Examples A ball bearing manufacturer will find its components are included in a diverse range of finished goods. This could include washing machines, conveyor belt systems in coal mines and consoles for aircraft. An output can also be service related, for example – a meal in a restaurant or the dry cleaning of a suit.

BUSINESS FUNCTIONS Finance Marketing (including sales) HR Management Business often have four major functional areas: Finance Marketing (including sales) HR Management Operations Management (production) All four departments are interrelated and a successful business will always try to ensure there is a good team spirit and communication between each function.

BUSINESS FUNCTIONS Finance This is the part of an organization that monitors the movement of funds into and out of the business, produces accounts, prepares forecasts or budgets and ensures that invoicing of customers happens and suppliers are paid. It is a vital function in providing information for other departments and decision makers.

BUSINESS FUNCTIONS Marketing (including Sales) This area covers market research and identifying what customers want though to the designing and packing of the goods and services offered. In addition it looks at deciding the product’s price and the type of promotion used. It would also consider how it is to be distributed and sold, for example, via catalogues, websites, shops or even all three.

BUSINESS FUNCTIONS HR Management This covers the recruitment, rewarding, motivating and training of all staff throughout the organization. It also includes the releasing or redeployment of staff when necessary.

BUSINESS FUNCTIONS Operations Management (production) This represents the engine room of the business – its is the production of goods or the delivery of a service. Those working in this area will be looking at the quality and stock control, methods of production and productive efficiency.

BUSINESS FUNCTIONS To be a good organization you need to have the best, well motivated and effectively managed people in all four areas of the business. To be a successful business, the challenge is making all areas work as one.

ECONOMIC SECTORS Business activity can be classified into three main economic sectors and occasionally a forth classification is used: Primary Sector Secondary Sector Tertiary Sector Quaternary Sector

Source: http://www. regionales-wirtschaften Date Accessed: 12th August 2009

ECONOMIC SECTORS Primary Sector This covers the basic activity that is involved in the extraction of raw materials (eg: coal or gold) and also agriculture and fishing. Often such industries are closely monitored by the government due to: The scarce nature of the materials. The scarce nature of food services The pollution effects of extraction methods.

ECONOMIC SECTORS Secondary Sectors This economic sector includes industries that create a finished or useable product. These industries generally take the output of the primary sector and then manufacture finished goods or components for other industries. In recent decades, the secondary sector has declined in importance for many developed economies because of a loss of international competitiveness.

ECONOMIC SECTOR Tertiary Sector This area covers the provision of services to businesses and individual consumers. Its includes the transportation and distribution of goods, wholesale and retail services, and advisory and consultancy type-businesses. In the developed world this sector has grown in importance. The Netherlands, for example, is one country where economic output is dominated by services.

ECONOMIC SECTOR Quaternary Sector A fourth sector may be identified which includes organizations providing information services through ICT. Some commentators believe this now applies to all other sectors, particularly the tertiary sector.

ECONOMIC STRUCTURE (Higher Level) Changes in Economic structure in a country can have a significant implications for individual businesses. If there is a move towards a service based-economy, those still manufacturing will no doubt be increasingly reliant on importing component parts. Their customers are also likely to be based abroad and so the business will be vulnerable to fluctuating exchange rates and also the economic cycles in the other countries involved.

ECONOMIC STRUCTURE (Higher Level) A Declining Secondary Sector-Implications The quantity and quality of labour inputs in this sector will be deteriorating. This is because school leavers will be increasingly moving into the service sector as this is a growth area. The remaining workforce will be aging and their productivity may decrease.

ECONOMIC STRUCTURE (Higher Level) A Declining Primary Sector – Implications If there is a move away from primary to secondary sectors in an economy, the impact on individual businesses might include less available labour inputs as the working population is attracted towards higher-growth sectors. It’s possible that businesses will need to become more capital intensive as a result and invest in automation or the latest machinery.

TYPE OF BUSINESS ORGANIZATION Public and Private Sector Organizations Businesses operate in the private or private sector, although recently in some countries the distinction between the two has become less clear.

TYPE OF BUSINESS ORGANIZATION Public Sector The public sector covers activities that are within the control of direction of the government. These organizations do not have outside shareholders and are solely accountable to the government for their performance Often they do not publish financial information, although in many democratic countries there are independent accountants and advisors who monitor their efficiency. In many countries public sector organizations cover activities such as the state health, education, police and prison services.

TYPE OF BUSINESS ORGANIZATION Private Sector Private sector organizations are those owned by individuals and not run by the state. They generally operate with the main objective of making a profit, although charities and independent schools would not.

TYPE OF BUSINESS ORGANIZATION Private Sector: Public & Private Limited companies Public Companies The word `public` means that the shares are traded on the stock market and available to any members of the public to buy and sell. Annual reports and adequate disclosure of financial information must be provided to shareholders and the general public. Private Companies Owned by individuals or organizations. The public cannot buy shares in the company. There is no obligation to produce annual reports that are available to the general public.

STARTING A BUSINESS Reasons for a Starting a Business Talking with friends or relatives you identified a business opportunity or gap in the market. You lost your job and found it easy to start you own businesses to provide the same service you did when employed by others. An inheritance appeared. A windfall of cash encourages you to have a go and run your own business – the dream you always had now feels possible. Your family has always been in business and you are now ready to go your own way and do your own thing. You have learned the skills required to be successful in this or a similar industry.

Identifying a Market Opportunity Market mapping is a method use to access the current goods or services in a market and through this to identify possible gaps and opportunities. The would-be business person should consider two variables: compare existing products, for example products for old and young consumers. Compare products for the affluent market and those at the cheap end of the spectrum.

Market Mapping A Rolls Royce would appeal to the old and rich segment of the market. However, identifying which segment a product fits isn’t so easy.

POSSIBLE PROBLEMS FACED BY START-UPS New companies face a range of problems: Finance Location Developing a customer base, brand loyalty and so repeat business. Poor Cash Flow The Personality of the entrepreneurs. HR management skills

POSSIBLE PROBLEMS FACED BY START UPS Finance New businesses find it hard to raise capital. In the first instance, they may not be able to provide any security for loans such as personal guarantees or property. This is often true for young people who may have little savings. Secondly, a new business obviously has no track record for a bank to assess and therefore the risks are greater for the banks.

POSSIBLE PROBLEMS FACED BY START UPS Location Anyone involved in a new start-up wants to minimize costs and so it may be desirable to work from home to begin with. This is not always ideal from an image viewpoint, but a good location may be very costly and a drain on cashflow at the very time when sales are negligible.

POSSIBLE PROBLEMS FACED BY START UPS Developing a Customer Base, Brand Loyalty It is imperative to build long-term relationships with customers so that they return time and time again. However, this takes time and money. Investing in after sales service or offering bespoke advice can be at odds with the short term need to get money into the business almost without worrying about the quality of goods or services.

POSSIBLE PROBLEMS FACED BY START UPS Poor Cash Flow Many new starts ups fail, not because their product is poor or that their can’t make a profit, but because they don’t manage their cash flow in the early years. It is imperative that entrepreneurs and small business owners manage cash as their first priority when establishing their business. This might mean chasing new customers for payment and slowing down payment to suppliers

POSSIBLE PROBLEMS FACED BY START UPS The Personality of the Entrepreneurs Key Question Do entrepreneurs have the desire and industry to make the business work, at all costs to them, and possibly their families?

http://estores. merchantpartners http://estores.merchantpartners.com/wpb5w/images/Entrepreneurs-Dream-sign-600.jpg Accessed: 12th May 2009

http://www.1000ventures.com/design_elements/selfmade/entrepreneurs-hitech_motivators.png Date Accessed: 14th Aug 2009

http://www. hanungbayu http://www.hanungbayu.com/wp-content/uploads/2008/04/entrepreneurs_ttt-synergy1.gif Accessed: 14th May 2009

POSSIBLE PROBLEMS FACED BY START UPS HR Management Skills Are the entrepreneurs able to manage and motivate a workforce?

TYPES OF BUSINESSES: PROFIT BASED ORGANIZATIONS There are three main types of businesses: Sole Traders or Sole Proprietors Partnerships Companies or Corporations

Sole Traders or Sole Proprietors This is when the business is set up by an individual and where that persons is the owner, the sold trader (known as a sole proprietor in some countries). It is not a company and in a legal sense has not shareholders. In fact the “person is the business” and the two are the same. For example: Mr Vincent Vasquez trading as “Blinko”.

Sole Traders or Sole Proprietors The Problem of Unlimited Liability There is no legal distinction between the business and person: the assets and liabilities of the two are not separated. This leads to a very important weakness of being a sole trader – “unlimited liability”. If the individual is sued, for example for giving bad advice or supplying a faulty product, there is no limit on his or her liability. This means that if the business cannot pay the debt or court fine, the person’s private assets can be seized to pay it off. The person’s private wealth is not protected from shareholders

Sole Traders or Sole Proprietors Advantages of being a Sole Trader Ownership and control of the business is with the sole trader, as the firms doesn’t have to directors and separate shareholders. Sole traders do not have to file financial accounts with public registrars and competitors, customers and suppliers cannot easily discover the sales and profits they make. Sole traders only need to submit accounts to the tax authorities. Sole traders pay different tax rates to companies and have more opportunities to reduce their taxable profits through the large number of extra allowances.

Sole Traders or Sole Proprietors Who are sole traders? Sole traders can include trades people, such as plumbers and carpenters, some shopkeepers, individual accountants and lawyers, and many consultants in IT and other fields.

Partnerships These are organizations where two or more individuals choose to work together as co-owners These organizations are not companies. As with sole traders, there are no shareholders and the owners all have unlimited liability. There private wealth is at risk if the business fails.

Partnerships The problem of liability for each other’s debts There is one further disadvantage from unlimited liability – the partners are liable for each other’s debts.

Partnerships The problem of liability for each other’s debts Case Study A two person law firms owes a customer $5 million for giving bad advice. When the business is closed down, it cash reserves show that it can only pay $2 million. Partner A has private wealth of $1 million and Partner B has wealth of $20 million.

Partnerships The problem of liability for each other’s debts Case Study (continued) As the partners jointly owe another $3 million to clear their debt to client you might think that it should be divided equally and that they now owe $1.5 million each, but you would be wrong. The partners are liable for each other’s debts, and as the customer knows that partner B has more wealth the customer will chase partner B for the remaining $3 million and will probably ignore parter A>

Partnerships The problem of liability for each other’s debts The need for INSURANCE If you go into partnership with other people get a very good insurance policy to cover giving bad advice or else you could end up paying for more than you bargaining for. Most partnerships will take out extensive insurance policies to cover bad advice and faulty goods affecting customers and the public more generally.

Partnerships Advantages of Partnerships The advantages of a partnership is that you can share the risks a little more than when a sole trader. You can also specialize in certain tasks. Many accountants and law practices are partnerships. Accountants PwC have thousands of partners around the world as does Freshfields, a large international law firm.

Partnerships Tax Issues & Financial Disclosure As with sole traders, partnerships do not need to file financial accounts with public registrars, but they do file accounts for the tax authorities. Another advantages is that they pay different tax rates from companies and have more opportunities to reduce their taxable profits through a large number of extra allowances or deductions. Partnerships also make no distinction between the owners and managers of the business – they are usually the sample people.

Partnerships A Rule Book or Partnership Agreement Partnerships usually establish a rule book to avoid arguments or confusion arising later on. However, in some countries, if not partnership agreement exists, it will be assumed that profits and losses are shared equally. Arguments over strategic development for the business often a serious issue, something a sole trader would never face.

Partnerships Customer Impressions of Partnerships Partnerships look more substantial to potential customers than sole traders, as their letterhead will list all the partners’ names, or for very large organizations it may indicate that the names can be viewed at one of the organizations offices.

Companies or Corporations A company has shareholders and directors and they often not the same people. This means there is separation in ownership and control (management of the business).

Companies or Corporations Limited Liability The shareholders are limited in their ability to the amount of their investment. If they have invested $100,000, then that is the limit to the amount the can lose. Their private wealth is untouchable and equally they cannot be held liable for other shareholder debts.

Companies or Corporations Legal Structure & Obligations To establish a limited company the owners must complete registration documents and pay a small fee. Companies also have to file annual financial information to public registrars. This means various external stakeholders can analyse how well the business is performing and that may impact on whether a supplier will continue giving credit, whether a customer will place an order, or whether a bank will lend more money.

Companies or Corporations Public Perceptions It is often considered that a company presents a more solid and trusting image than a sole trader. The company’s letter head will have a registration number and most large businesses are companies.

Companies or Corporations LIMITED LIABILITY COMPANIES Privately Owned Could be controlled by family, a group of individuals or be a subsidiary of a larger company. Public Corporations Shares can be purchased and a traded on the stock exchange.

OWNERSHIP STRUCTURES CHANGE OVER TIME As businesses develop and become more established the changes are that the organizational type will change – often from being unlimited liability to limited liability companies. The need for future finance to support expansion may encourage the owners to change the status of the business, such as changing from a private to a public limited company. How much control they want will also dictate the type of organizational structure.

OWNERSHIP STRUCTURES CHANGE OVER TIME Example A number of well known entrepreneurs have taken their companies off the stock market and have become privately listed companies. In this way they are free from the media spotlight and do not need to meet short term profit objectives, which may hinder long term development plans. Company specific examples include Richard Branson with his Virgin Empire.

NON PROFIT ORGANIZATIONS Some organizations are not run for profit, for example charities and pressure groups. Charities include well-known international organizations like the Red Crescent, Medicins san Frontieres, and Oxfam. Charities also include local fundraising groups, religious groups and private schools.

NON PROFIT ORGANIZATIONS Pressure Groups Pressure groups include political parties, trade unionists, commercial lobby groups (such as the hand gun association in the UK) and local protest action groups, perhaps trying to stop new airport or motorway from being built in a rural area.

NON PROFIT ORGANIZATIONS Legal Issues All non profit organizations need to be established carefully and comply with legal requirements for charities and the like. If they don’t they may loose their charitable status and this may mean their funding or tax benefits are lost.

Group Discussion Partners are “jointly and severally liable” for each others debts; but shareholders in companies have limited liability to the amount they invested. Discuss whether you think this is fair for all stakeholders.

NON PROFIT ORGANIZATIONS Operational Issues Charities tend to run along business lines, they aim to minimize costs in order to maximize net revenue and therefore charitable donations. They also seek to educate and inform the public about their area of expertise or concern. Charities focus their objectives on money raising, education and lobbying.

NON GOVERNMENT ORGANIZATONS (NGOs) This covers a diverse range of organizations, but they all tend to be involved economic development and humanitarian issues. Many charities can also be considered to be NGOs, or not for profit organizations. NGOs plan and implement specific projects in developing countries such as earthquake relief in Pakistan in 2007.

NON GOVERNMENT ORGANIZATONS (NGOs) NGOs also try to influence government policies on areas such as poverty and human rights. They work in the field where a disaster happens and often in places that official government aid does not reach.

The Business Impact of non-profit organizations & NGOs Non profits organizations and NGOs have both a direct and indirect impact on business. Pressure groups trying to stop low wages or child factory in Africa may have an impact by persuading European or US consumers to stop buying cheap clothes from shops that sell these products. Charities with retail outlets (eg: Amnesty International) may have an impact on the sales of other shops in the high street. Equally, there is an opportunity for manufacturers to devise life-saving products or vaccines.

The Business Impact of non-profit organizations & NGOs Example A UK company recently invented a special bottle that can clean the worst river or pond water and make it drinkable for humans. The likely sales of this device will no doubt make the inventors very rich indeed. Organizations can also offer sponsorship to NGOs and thereby improve their corporate image.

PUBLIC & PRIVATE SECTOR PARTNERSHIPS Organizations in the public and private sector are not mutually exclusive; they do the work together at times. Sometimes they work together on one-off projects like building a new road and renting it out to motorists to use (by paying a toll). In the UK & Australia there has been two specific initiatives between the two sectors. public private partnerships (PPPs) private finance initiative. (PFI)

EXAMINATION QUESTION Evaluate what the costs and benefits of cooperation between the public and private sector might be in some of the examples above or in any that you are aware of in your country.