UNIT 1 FIRMS

INTRODUCTION TO BUSINESS MANAGEMENT

Sonia Jiménez Soto

1.1 What is a business
Business are everywhere!! Why?

All the definitions tend to have in common the idea that it is someone or a group of
people working in an organized way to achieve a given target.

They are coordinated and they have a purpose in mind. Are hospitals or an school
a business?

A Goal or target
Business as a transformation process
The transformation process involves converting inputs into outputs

Factors of production* are the inputs into the transformation process of a business:
LAND, LABOUR, CAPITAL AND ENTREPRISE.
LAND: Natural resources (all: oil, gold, fish…). In a farm which is the land? The
success of it depends on the quality of land and the weather in this case. What
happened during the war in Ucrania?

LABOUR: The quantity (the number) and the quality (skills) of labour.

CAPITAL: Non-natural resources ( equipment, vehicles…) for example, Amazon

warehouses facilities and computer programmes.

ENTREPRISE: The set os skills that develops new ways of doing things or new
things to do. For example, the hability of being creative and innovative.
ENTREPRISE bring together all the other factors of production to create and make
and idea competitive or to make a product desirable.
Inputs
Depending on them

The costs will vary, and the price it is likely to vary .

The quality of the final product and the sales.

Choosing the right inputs has become especially important in recent years as
customers has become more interested in what resources are used in a production
process and where these resources have come from. Do You agree?
Outputs
The output of a business is a product: good or service or both.

Good is a tangible physical item, such as a car.

A service is intangible. Services cannot be stored. This can create problems,

because if there is a rush of customers, there are no products stockpiled.

In many cases, a business provides a combination of goods and services.

As well as the goods and services are produced , there may also be by-products
from the transformation process as waste asn pollution. Many costumers pay
attention to this.
Adding value
Adding value* occurs in a transformation process when
produced outputs are worth more than the inputs (land,,
labour…)

To increase the value a business might aim to:

Reduce costs of producing the product: mistakes not made, choose suppliers…
all activities that do not create value can be eliminated.

Increase the perceived benefit of the product in the eyes of the customer. This
could be through building the brand or developing a USP.
Activity 1.1.1
Primary, secondary, tertiary and quaternary sectors
Primary: It is the first stage of production. Involves acquiring or extracting raw
materials This can be renewable or non-renewable (sustainable).

Secondary: it refers to the part of the economy that manufactures and

assembles products using raw materials.

Tertiary: they are the business that provide services. These outputs are
intangible. The tertiary sector is often the biggest sector in developed countries.

Quaternary : It is a subset of the terciary sector. They are organizations based on

knowledge and the skills of employees and that provide information: consultancies
and I&D.
Business Economic activity
They are correlated? It is highly likely that they are correlated,

Business make up a vitally important part of an economy. They employ people, pay
employee’s wages and they provide goods and services. Business provide products
and money to buy them. Business innovate to win more customers or to increase
profits, improving the quality of of our lives. Business drive economies
forward. This is why governments are eager to help new firms start up and
compete and help businesses to grow.

At the same time, the economic activity affects the business success. In an
growing economy, demand is high and business will thrive. When the economy is
doing badly and demand is low it is more difficult to survive or grow.
Choice
Market forces: and opportunity
are the forces cost
of supply and demand which
determine the price of a product and the quantitiy sold in a market

Examples:
The opportunity cost
It measure the sacrifice made by choosing one option in therms of the next best alternative

In an economy there is a fixed amount of resources at any moment, therefore

decision have to be made about how this resources are used. If demand of a
product increases (market force) this will encourage business to use all their
resources to produce this instead of something else. What you give up producing
is the opportunity cost.

When we decide to produce something it is always at the expense of not producing

something else.

Opportunity cost measures the sacrifice you make if you choose one course of
action in terms of the best alternative.

When judging the success of a business you should consider the opportunity cost.
Business environment: STEEPLE analysis
Business do not operate in isolation. What ever they do is linked with other factors or variables. Those
external factors are studied in the STEEPLE analysis:
These external factors, known as STEEPLE will
continually be changing therefore, what
business produce and the resources they use,
as well.
Other authors use PESTEL (political,
economic, social, technological,
environmental and legal).
We can apply STEEPLE analysis when :
Starting a new business: the situation of the external environment will help me to make decisions

In groups,
Social change: or demographic situation, if there is an ageing population?Explain

Technological change: if the technology allows producing car batteries?

Economic change: it the economy is thriving?

Environmental change: if there is concern about this issue, what do business have
to produce?

Political change as the agreement between countries to joint a trading union?

Legal change: Fewer regulations in one sector, how affects my business?

Ethical change.The growing interest some values, how affects my business?

THE CHALLENGES OF STARTING UP A BUSINESS
Internal problems

A lack of experience of all the different aspects of business: the entrepreneur

needs to manage finances, people, marketing… and the production process…Few
people have all these skills.

Difficulties raising money to set up and expand: at the beginning they are high risk
so they can find it difficult to to raise finance. Entrepreneurs may have to use their
own funds which can be limited. This can limit the development and launching of a
product.

The difficulties building brand awareness: may be the product is new and there are
well established brands…

A lack of market power as the business is small : that makes clients pay you later
and suppliers require advance payment.
1.2 TYPES OF BUSINESS ENTITIES
Previous knowledge : distinction between private and public sectors

Private sector: business owned by private individuals. They have profit objectives.

Public sector: business owned by the government. They may air to generate surplus to improve their
provision, also they have social objectives, not just Profit objectives such as transport to remote
areas. Is a private sector business interested in transport to remote areas?

If a government takes control of a private sector : nationalization

If a government sells one of its business or organizations to the private sector, it is called
privatization.

Typically a government is likely to run organizations that have a strategic importance to the country,
that provide essential services, such as energy or health services.

Merit goods such as education and health are those that generate positive externalities and if
government do not help, may be under-consumed. So they tend to be subsidised or provided free
ath the point of use. The state and the private sector provide them..
Reasons for the changing the %
of private and public sectors
The extent or % to which a government intervenes in an economy will vary from
country to country and depends on political views about the role of the state.

Also it can vary as times goes by.

Find information about Cuba.

Sole traders

Those are people working for themselves, although sometimes sole traders hire
other people to help them out, but they are the owners and remain responsible for
the overall business. Sole traders are actively involved in the running of it on a
daily basis.

Sole traders need a wide range of skills and an enormous degree of flexibility. They
have to make their own decisions, therefore self-confidence.

Sole traders have to be used to working hard as running your own businesses is no
easy task. You must be good at managing stress. If your decisions are wrong, the
responsibility is yours. Also the profits!

It requires a high level of self-discipline, you are your own boss.

Advantages of being a sole trader

It is easy to start up in business.

You do not receive orders from other people

You make your own decisions (when and where to work)

It can be incredibly motivating

You keep all the rewards of the business, you do not share profits.
Challenges of being a sole trader
You carry all the responsibility if anything goes wrong

It is quite lonely

The work time is demanding

You may not be able to take much time off for hollidays as you must close

It is difficult to raise finance to set up and expand the business

It is risky as if anything goes wrong : sole traders have unlimited liability: they
are responsible for any loses and they respond with their personal
possessions .

They cannot share ideas with other people

They do not receive regular income

Partnerships
If you join with other people(sole traders) and set up a business to work together . Benefits:

You have other people to share ideas with

There are more people to invest in the business and help finance it

You Can benefit from the other’s skills

You can cover for each other if someone is ill or on holiday

Challenges of partnership
There may be disagreements between the partners over the polices and direction
of the business.

You are dependent on the actions of others. If someone makes a mistake or brings
the partnership into disrepute, it will have impact on all the partners. Each
partner is liable for the actions of the other partners,which can be risky.

In most partnership, partners have unlimited liability: there is not restrictions in

law between individuals and the business. If the partnership is sued the individuals
can lose their personal possessions.
Members can write a a deed of partnership to set the rules of the business: how the partnership
would be dissolved if someone wants to leave and what the person will receive, how to resolve
disputes if the votes against and for are equal and how profits will be distributed It not profits will be
divided up equally.
Private sector companies

To avoid some of the problems of being a sole trader or a partnership you may
decide to establish a company instead.

To set up a company the owners have to complete a number of documents which

set out details such as what the business is going to do, the rights of the owners
and where the head of the office is located (address). These documents are the
Articles of Association and Cerficate of Incorporation in the UK. The
certificate of Incorporation must be registered in the Companies House.In Spain :
La escritura de constitución de una empresa( incorpora nombre, domicilio social,
estatutos…), que se deposita en el Registro Mercantil. Se le da un CIF. Se paga el
impuesto de actividades económicas….and you can produce or sell products
legally. Now you are controlled by the Government and the tax authorities.
The company is owned by shareholders. Each share represents a part of the
company. The more shares you own the more the company belongs to you. If you
have More than the 50% of the company, you will rule the company or those who
you decide.

The company has its own identity, separate

from its owners.
The company will own its assets and its
liabilities and not the shareholders.
Shareholders own share, that is, they invest.
The company is the productive one.
If the company fails, the shareholders can lose the money they invested in the shares but
they will not lose more than this, even it they own the 100% of the shares: this is LIMITED
LIABILITY.
MOST companies are in the private sector, but they can operate in the public sector.
They must be profitable to mantain shareholders, that’s why managers of companies are responsible
to investors for whom financial gain is a dominant objective.
Limited Liability means that investors can lose the money they have invested into
the business but their personal possessions are safe. There is a limit to their risk.

It is essential for companies to be able to find investors (those who buys their
shares and finance companies). Without it investoss would be far less likely to buy
shares because the risk to their personal possessions.

Being a company means that the business have to pay corporate taxes on profits,
must have its accounts checked annually by independent accountants or auditors
and the company accounts must be made public, so that outsiders can see the
revenue and profits of the business as well as the balance sheet (what they own
and what they owe). Less privacy than sole traders.
Why become a shareholder in a company?
By investing in a company, shareholders became the owners of the business, and it means that:

If the business is successful, the value of their shares should increase if they are
listed in the stock exchange.

Shareholders also receive some of the profits that the company makes each year:
dividends. Each year shareholders decide on the amount of dividends to be paid
per share. This and other decisions are made in the Annual General Meeting.
Shareholders are invited and receive a copy of the company’s annual report.

Shareholders can gain financially in these two ways

They have voting rights, so they can influence the policy of the business.Each
share is worth 1 vote.
 At the AGM the directors and
managers give an overview of
the company’s position and
respond to any questions
that shareholders might have.
If there is a need for an
emergency meeting a
company may call an
Extraordinary General
Meeting (EGM).
PUBLIC SECTOR COMPANIES
When the owner or the main owner is the government.

That means that the company may be more likely to have social objectives as well
as financial ones. In Spain Adif, AENA, Agencia EFE are still public companies.

Some companies may be jointly owned between the private and public sector.
Thes private and public companies have been used in many countries to develop
projects such as schools, hospitals and transportation systems. Private companies
and government are rewarded with these collaborations.
 Privately held companies.SL———Publicly held companies SA

They are owned by shareholders and the They are also owned by shareholders but,
owners can place restrictions on who the restrictions cannot be placed on the sale
shares are sold in the future, this makes that of these shares in the stock market. This
outsiders do not become involved. Shares are can cause problems if another firm starts
sold privately. They are not listed in the stock to buy up shares in the business in an
market . If the owners of a privately held attempt to gain control of it. Some times
company do not need to raise large sums of some shareholders sell their shares to this
money via sale of shares and want to mantain firm and the rest of share holders that
the control of the company they would not want to resist cannot do anything about
want to make it a public company. it. They are listed in the stock market.
Case Study
Why entrepreneurs change the legal structure?

It is common at the If sole traders need When the formers If you have an LTD but
beginning. No so much more people to broaden decide to have you need more investors
paperwork to set up a their business they get limited liability to finance projects. Here
business. BUT there is not together. There is not and when they you make more
limited liability. You keep limited liability either. want to raise information available to
your earnings private. finance from the public and there is
someone that they greater regulation, bigger
agree to enter the legal and accountancy
company. They bills. Shares are sold in
publish their the stock market.
accounts. Deed.
For-profit social enterprises
Social entreprises
The objective is just to make a profit for their owners.

They are the opposite of social entreprises, that aims to improve the world around
them. They are set out to create jobs to provide opportunities for people and
improve society and environment. They may aim to make a profit but a significant
proportion is reinvested to promote social aims.
Cooperatives
They are business that are owned and run by and for its members, who
have one vote each. The aim is to improve the members situation.

Examples of the members can be, farmers or a region, people who want to build a house, taxi
drivers, customers…

The members of a cooperative have one vote each and so, it is a democracy.

The members act as a group to reach benefits for their business or personal situation.

Profit are shared among their members.one member one share one vote.

Examples: Employee cooperatives, here employees are more motivated, they are equally
owners. But, decision-making sometimes is complicated and you cannot sell shares to those
outside your company or not workers in this case. Aslo there are Community cooperatives ,
whose members are people among the your community or neighborhood. They can call for a
post office or transport in their area. Retail cooperatives also are extended, here, independent
retailers join together and operate under one brand name. They can buy in bulk and share
marketing costs.
Non-profit social entreprises
Non-governmental organizations (NGO) and charities

They will aim to make a surplus but it is all used to

reinvest to support society rather than being paid to
owners. The most common: NGO and charities

NGOs focus on social and political issues but operates

independently of any government. NGOs may be
funded in various ways, including government funding
or funds from commercial organizations or private
individuals. They aim to raise awareness of their
cause and put pressure on governments to bring
about change.

Charities promote a particular cause such as child

welfare or mental health. Charities generally operates
in the private sector and raise money through
donations and events.
Case study: Wikipedia