UNDERSTANDING BUSINESS
BUSINESS
An organization or economic system where goods and services are exchanged for one another or for
money. Every business requires some form of investment and enough customers to whom its output
can be sold on a consistent basis in order to make a profit. In easier words, a business is an exchange of
anything with a motive to gain profit.
CIRCULATION OF MONEY
Currency in circulation is the total value of currency (coins and paper currency) that has ever been
issued minus the amount that has been removed from the economy by the central bank. More broadly,
money in circulation is the total money supply of a country, which can be defined in various ways
always including currency and also including some types of bank deposits.
ECONOMIC ENVIRONMENT
The economic environment consists of external factors in a business market and the broader economy
that can influence a business. You can divide the economic environment into the microeconomic
environment, which affects business decision making - such as individual actions of firms and
consumers - and the macroeconomic environment, which affects an entire economy and all of its
participants. Many economic factors act as external constraints on your business, which means that you
have little, if any, control over them.
Macroeconomic influences are broad economic factors that either directly or indirectly affect the entire
economy and all of its participants, including your business. These factors include such things as:
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Interest rates
Taxes
Inflation
Currency exchange rates
Consumer discretionary income
Savings rates
Consumer confidence levels
Unemployment rate
Recession
Depression
Microeconomic factors influence how your business will make decisions. Unlike macroeconomic
factors, these factors are far less broad in scope and do not necessarily affect the entire economy as a
whole.
Microeconomic factors influencing a business include:
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Market size
Demand
Supply
Competitors
Suppliers
Distribution chain, such as retail stores
POLITICAL ENVIRONMENT
Political environment is the government actions which affects the operations of a company or business.
These actions may be on local, regional, national or international level. Business owners and managers
pay close attention to the political environment to gauge how government actions will affect their
company.
The political environment in a country affects business organizations and could introduce a risk factor
that could cause them to suffer a loss. The political environment could change as a result of the actions
and policies of governments at all levels, from the local level to the federal level. Businesses need to be
prepared to deal with the fallouts of government politics.
TECHNOLOGICAL ENVIRONMENT
Changes in technology affect how a company will do business. A business may have to dramatically
change their operating strategy as a result of changes in the technological environment. It can come as
an important tool within the company, improving the operations and functions or it can be the very
reason why a company exists. Such is the scale of impact of technology on business. Heads of
companies are on constant lookout for updates and developments in the technological environment.
This helps them not just to improve the efficiency of the way the organization works but to be aware of
the transformational phase and come up with groundbreaking strategies to drive growth.
SOCIO-CULTURAL ENVIRONMENT
The social environment or sociocultural context refers to the immediate physical and social setting in
which people live or in which something happens or develops. It includes the culture that the
individual was educated or lives in, and the people and institutions with whom they interact.
It is a set of beliefs, customs, practices and behavior that exists within a population. International
companies often include an examination of the socio-cultural environment prior to entering their target
markets.
BUSINESS ENVIRONMENT
Business environment is the sum total of all external and internal factors that influence a business. You
should keep in mind that external factors and internal factors can influence each other and work
together to affect a business. For example, a health and safety regulation is an external factor that
influences the internal environment of business operations. Additionally, some external factors are
beyond your control. These factors are often called external constraints.
TYPES OF BUSINESS
PRIMARY INDUSTRY
An industry involved in the extraction and collection of natural resources, such as copper and timber,
as well as by activities such as farming and fishing. A company in a primary industry can also be
involved in turning natural resources into products.
Primary industry tends to make up a larger portion of the economy of developing countries than they
do for developed countries.
SECONDARY INDUSTRY
The industrial sector of an economy that is dominated by the manufacture of finished products.
Unlike a primary industry, which collects and produces raw materials for manufacture, a secondary
industry makes products that are more likely to be consumed by individuals. Examples of secondary
industry divisions include automobile manufacturing, steel production and telecommunications. It is
also called the secondary sector of industry.
TERTIARY INDUSTRY
An industry made up of companies that primarily earn revenue through providing intangible products
and services.
Tertiary industry companies are involved in retail, transport, distribution, food services, as well as
other service-dominated businesses. It is also called service sector, tertiary sector of industry.
MANUFACTURING BUSINESS
A manufacturing business is any business that uses components, parts or raw materials to make a
finished good. These finished goods can be sold directly to consumers or to other manufacturing
businesses that use them for making a different product. Manufacturing businesses in today's world are
normally comprised of machines, robots, computers and humans that all work in a specific manner to
create a product.
Manufacturing plants often use an assembly line, which is a process where a product is put together in
sequence from one work station to the next. By moving the product down an assembly line, the
finished good can be put together quicker with less manual labor. It's important to note that some
industries refer to the manufacturing process as fabrication.
Manufacturing businesses can be very simple, with only a few parts required for assembly, or they can
be very complicated, with hundreds of parts needed to create a finished product. Compared to other
businesses, manufacturing businesses usually have more legal regulations and environmental laws to
deal with. These things can range from scrutinized labor laws to environmental and pollution issues.
MERCHANDIZING BUSINESS
A commercial enterprise dedicated to the purchase of finished goods and their resale for a profit. A
merchandising business will generally buy their products from a wide range of distributors
domestically and internationally and market their products in huge consumer shopping facilities.
It is a business that purchases finished products and resells them to consumers. Companies who
provide services are not considered merchandising businesses, unless they offer merchandise as part of
their service. For instance, if you go to a tanning salon, the tanning session is considered a service.
However, if the salon offers tanning lotions, creams, and tanning enhancers, it could be considered a
merchandising business because it has products available for you to purchase.
SERVICE BUSINESS
A commercial enterprise that provides work performed in an expert manner by an individual or team
for the benefit of its customers. The typical service business provides intangible products, such as
accounting, banking, consulting, cleaning, landscaping, education, insurance, medication, treatment,
and transportation services.
HYBRID BUSINESS
Hybrid business a commercial enterprise which is using a combination of previous types of business,
either it is manufacturing with merchandizing, manufacturing with servicing, merchandizing with
servicing, or all three altogether.
SOLE PROPRIETORSHIP
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of enterprise
that is owned and run by one natural person and in which there is no legal distinction between the
owner and the business entity. The owner is in direct control of all elements and is legally accountable
for the finances of such business and this may include debts, loans, loss, etc.
The sole trader receives all profits (subject to taxation specific to the business) and has unlimited
responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all
debts of the business are the proprietor's.
Advantages
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Full control of management
No conflicts in decision making
Legalization process is simple (sometimes registration is not even required)
Profit is fully owned
Disadvantage
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Unlimited liability
Full responsibility of risk
Less capital (compared to other types)
Slower growth
Lack of ideas
PARTNERSHIP
A partnership is an arrangement in which two or more individuals share the profits and liabilities of a
business venture. Various arrangements are possible: all partners might share liabilities and profits
equally, or some partners may have limited liability. Not every partner is necessarily involved in the
management and day-to-day operations of the venture. In some jurisdictions, partnerships enjoy
favorable tax treatment relative to corporations.
Forming a partnership is backed by the Partnership Act of 1932, and it is practiced till date with little
amendments. All the terms and conditions of the partnership (for example type of liability, percentage
share of investment, percentage share of profit, role in the business, etc.) are enlisted in the agreement
of partnership, which may change in future with the mutual consensus of partners. According to the
law, a partnership can start with minimum two partners and go up to a maximum of 20 partners.
General Partnership
A general partnership involves two or more owners carrying out a business purpose. General partners
share equal rights and responsibilities in connection with management of the business, and any
individual partner can bind the entire group to a legal obligation. Each individual partner assumes full
responsibility for all of the business's debts and obligations.
Limited Partnerships
A limited partnership allows each partner to restrict his or her personal liability to the amount of his or
her business investment. Not every partner can benefit from this limitation -- at least one participant
must accept general partnership status, exposing himself or herself to full personal liability for the
business's debts and obligations. The general partner retains the right to control the business, while the
limited partner(s) do(es) not participate in management decisions. Both general and limited partners
benefit from business profits.
Limited Liability Partnerships (LLP)
Limited liability partnerships (LLP) retain the tax advantages of the general partnership form, but offer
some personal liability protection to the participants. Individual partners in a limited liability
partnership are not personally responsible for the wrongful acts of other partners, or for the debts or
obligations of the business.
Since no partner is liable to clear the debts from personal assets, this type of partnership is backed by
some insurance company or financial institution. Usually, LLPs are not appreciated to be formed and
the state restricts such formations.
Advantages of Partnership
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More capital sole proprietorship
Shared liability in case of closure
Easier registration and legislations in comparison to companies
More ideas and better growth chances
More helping hands in management
Disadvantages of Partnership
 Chances of conflict in ideas
 Uneven distribution of profit and liability may lead to end of partnership
 Business operations and closure is in hand of multiple people
COMPANY OR CORPORATION
A corporation/company is a more complex business structure. A corporation has certain rights,
privileges, and liabilities beyond those of an individual. Doing business as a corporation may yield tax
or financial benefits, but these can be offset by other considerations, such as increased licensing fees or
decreased personal control.
Usually companies are limited and working or share capital, being registered on some stock exchange,
in terms of gather capital from the market. Two major types of limited companies are public limited
company and private limited company.
Private Limited Company
A type of company that offers limited liability or legal protection for its shareholders but that places
certain restrictions on its ownership. These restrictions are defined in the company's bylaws or
regulations and are meant to prevent any hostile takeover attempt.
The major ownership restrictions are:
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Shareholders cannot sell or transfer their shares without offering them first to other
shareholders for purchase,
Shareholders cannot offer their shares to the general public over a stock exchange, and
The number of shareholders cannot exceed a fixed figure (commonly 50).
Public Limited Company
A company whose securities are traded on a stock exchange and can be bought and sold by anyone.
Public companies are strictly regulated, and are required by law to publish their complete and true
financial position so that investors can determine the true worth of its stock (shares). Also called
publicly held company.
Advantages of a Company
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Limited liability
Continued existence – even if the original owner dies
Better access to capital (even improved in public limited company compared to private limited)
Legalized and registered with government
More prestigious profile compared to other types of business
Disadvantages of a Company
 Complex structure due to huge size
 Management is difficult compared to other types (even more difficult for public limited than
private limited)
 Registration process is difficult and lengthy
 Decisions are taken after much consultancy with the heads (CEO, board of directors, etc.)
PRODUCTS
CONVENIENCE PRODUCTS
A convenience product is a consumer product or service that customers normally buy frequently,
immediately and without great comparison or buying effort. Examples include articles such as laundry
detergents, fast food, sugar and magazines. As you can see, convenience products are those types of
consumer products that are usually low-priced and placed in many locations to make them readily
available when consumers need or want them.
SHOPPING PRODUCTS
Shopping products are a consumer product that the customer usually compares on attributes such as
quality, price and style in the process of selecting and purchasing. Thus, a difference between the two
types of consumer products presented so far is that the shopping product is usually less frequently
purchased and more carefully compared. Therefore, consumers spend much more time and effort in
gathering information and comparing alternatives. Types of consumer products that fall within the
category of shopping products are: furniture, clothing, used cars, airline services etc. As a matter of
fact marketers usually distribute these types of consumer products through fewer outlets, but provide
deeper sales support in order to help customers in the comparison effort.
SPECIALTY PRODUCTS
Specialty products are consumer products and services with unique characteristics or brand
identification for which a significant group of consumers is willing to make a special purchase effort.
As you can see, the types of consumer products involve different levels of effort in the purchasing
process: the specialty product requires a special purchase effort, but applies only to certain consumers.
Specialty products are usually less compared against each other. Rather, the effort must be understood
in terms of other factors: Buyers invest for example the time needed to reach dealers that carry the
wanted products.
UNSOUGHT PRODUCTS
Unsought products are those consumer products that a consumer either does not know about or knows
about but does not consider buying under normal conditions; or can be said to be bought in case of
emergency. Thus, these types of consumer products consumers do not think about normally, at least
not until they need them.
MATERIAL AND PARTS
It includes raw materials and manufactured materials and parts. Raw materials consist of farm products
(wheat, cotton, livestock, fruits, vegetables) and natural products (fish, lumber, crude petroleum, iron
ore). Manufactured materials are parts consist of component materials (iron, yarn, cement, wires) and
component parts (small motors, tires).
CAPITAL ITEMS
They aid in the buyer’s production or operations, including installations and accessory equipment.
Installations consist of major purchases such as buildings (factories, offices) and fixed equipment
(generators, drill presses, large computer systems, and heavy machinery). Accessory equipment
includes portable factory equipment and tools (hand tools, lift trucks) and office equipment
(computers, fax machines, desks).
SUPPLIES AND SERVICES
It includes operating supplies (lubricants, coal, and stationery) and repair and maintenance items
(paint, nails, brooms). Business services include maintenance and repair services (window cleaning,
computer repair) and business advisory services (legal, management consultancy, and advertising).
PERFECT COMPETITION
Perfect competition is a market system characterized by many different buyers and sellers. In the
classic theoretical definition of perfect competition, there are an infinite number of buyers and sellers.
With so many market players, it is impossible for any one participant to alter the prevailing price in the
market. If they attempt to do so, buyers and sellers have infinite alternatives to pursue. In a perfect
competition, it is believed that all products supplied to the market are similar.
MONOPOLY
A monopoly is the exact opposite form of market system as perfect competition. In a pure monopoly,
there is only one producer of a particular good or service, and generally no reasonable substitute. In
such a market system, the monopolist is able to charge whatever price they wish due to the absence of
competition, but their overall revenue will be limited by the ability or willingness of customers to pay
their price.
OLIGOPOLY
An oligopoly is similar in many ways to a monopoly. The primary difference is that rather than having
only one producer of a good or service, there are a handful of producers, or at least a handful of
producers that make up a dominant majority of the production in the market system. While oligopolists
do not have the same pricing power as monopolists, it is possible, without diligent government
regulation that oligopolists will collude with one another to set prices in the same way a monopolist
would.
MONOPOLISTIC COMPETITION
Monopolistic competition is a type of market system combining elements of a monopoly and perfect
competition. Like a perfectly competitive market system, there are numerous competitors in the
market. The difference is that each competitor is sufficiently differentiated from the others that some
can charge greater prices than a perfectly competitive firm.