󾠮
Topic 1 - The Nature of Business
The Role of Business
The Economy
Sectors
Households
Business
Government
Overseas
Key Business Functions (KBFs)
Finance
Marketing/Sales
Operations
Human Resources
Roles of Business
Essentially:
Entrepreneurship and risk creates a business
Which employs workers (creating income & wealth)
And the products & services provide choice, innovation, and quality of life for consumers.
If profitable, the business creates income & wealth for business owners.
1. Producing Goods & Services
Business: the organized effort of invidiuals to combine resources in order to produce and sell,
for a profit, the products (goods & services) that satisfy the needs & wants of our society.
Business adds value by transforming inputs into outputs.
Business adds value along the production process of a good (value chain).
3 types of goods/products along the production process :
1. Finished Goods
2. Semi-Finished Goods
3. Capital / Intermediate Goods
Topic 1 - The Nature of Business
1
2. Profit
What remains after all business expenses have been dedcuted from sales revenue.
Subject to taxation - pays for Government services.
Provides return on the owner's financial investment.
Allows businesses to meet day-to-day expenses (e.g. wages, rent, etc.)
Can be reinvested into the business in order to expand.
3. Employment
An agreement between an employer & and employee that the employee will provide his/her
time & skills to facilitate the accomplishment of the business goals in return for compensation
(income).
Can be full-time, part-time or casual.
Private sector accounts for 75-80% of all jobs.
Critical for Government: provides tax revenue and ensure that they are not dependent on
welfare.
4. Income
Money (in the form of salary & wages) received by an employee in return for providing labour.
Businesses also provide incomes (in the form of dividends) to shareholders as a return on
their investments.
Businesses provide revenue to the Government - pay company tax.
5. Choice
Funtion of business is to produce goods & services for consumers to satisy their needs &
wants.
Competition between businesses means that same, similar or improved producs are
produced.
Consumers therefore have alternatives & freedom of choice.
Competition drives lower prices & better products.
6. Innovation
Development of new products, or improvements to existing products.
Competition & the profit motie encourage businesses to innovate & invest.
New ideas / products can improve quality of life & provide opportunities for businesses to
grow & thus provide greater employment opportunities.
Topic 1 - The Nature of Business
2
7. Entrepreneurship & Risk
Someone who has an idea & combines other inputs to start, operate & assume the risk of a
business venture in the hope of making a profit.
Success of businesses and individuals in accumulating wealth provides an incentive for
others.
8. Wealth
The more that is produced, the more wealth is generated within the Australian economy.
Business helps to drive the economy forward and achieve greater levels of economic growth
& wealth.
Income earned by individuals can be saved, invested & help accumulate wealth.
9. Quality of Life
Refers to the overall wellbeing of an individual, and is a combination of both material & nonmaterial benefits.
Business reasearch & development has also contributed to a significant improvement in our
quality of life (e.g. more comfortable, live longer).
Types of Businesses
1. Size of Business
Small: 0 - 20 employees
Medium: 20-199 employees
Large: 200+ employees
2. Location of Business
Local: usually one location
National: across Australia
Global: physical locations overseas
3. Industry
Primary: Exploit natural resources and raw materials. Examples include mining and
agriculture. 4.5% of employees.
Secondary: Use the materials provided by Primary industry to transform & value add to
produce a finished or semi-finished product. 7% of employees.
Tertiary: Sevices - all non-primary and secondary. Includes retail, Goverment, Transport, etc.
88% of employees and thus can be broken down:
Topic 1 - The Nature of Business
3
Quarternary: Applies human knowledge & information processing - e.g. Teaching, IT &
banking.
Quinary: Domestic services - e.g. household cleaning, dog washing, child care.
4. Legal Structures
Public Sector:
3 levels of Government
Federal, 6 states, ~700 councils
Public Trading Enterprises
Approx. 20% of employees
Private Sector
All non-Government businesses
Approx. 80% of employees
99% of businesses (of which sole trader is approx. 80%)
Unincorporated Business: The business entity & owner are one and the same.
Incorporated Business: The legal process companies go through to become a separate legal
entity from the owners.
Sole Trader:
A business owned & operated by 1 person.
Owner & the business are the same for all matters (inc. legal + financial).
Unlimited liability: personal property may be vulnerable for debts - i.e. you are personally
liable for all losses.
Partnership:
Topic 1 - The Nature of Business
4
A business owned & operated by between 2 & 20 people with the aim of making a profit.
Can have as many as 400 partners.
Does not rely entirely on the skills of one person.
Unlimited liability: personal property may be vulnerable for debts - i.e. you can be liable
for other partner's unpaid debts.
Companies:
Companies are 'limited', meaning it is a separate legal entity from the owners.
A company can enter a contract, be sued, own porepty and has perpetual succession.
A company is either a private or proprietary company - 'Pty Limited' - or is a public
company - 'Limited'.
Private Comapny (Pty Ltd)
Usually between 1 & 5 private shareholders.
Tend to be small to medium sized and family owned.
Not listed on the stock exchange & trading in shares is restricted.
Less reporting / compliance than a public company - e.g. no requirement to publish
annual audited reports.
Public Company (Ltd)
Shares are freely traded on the stock exchange.
No maximum number of shareholdesr / owners.
Minimum # of shareholders is 1.
Greater reporting and public disclosure - annual audited reports, prospectus required for
IPO/new share issues.
Main Ads & Disads
Of being incorporated : separate legal entity
Ads:
Limited liability: personal assets not at risk - losses limited to initial investment
amount.
Easier to attract finance.
Better able to manage large number of owners/shareholders.
Disads:
Greater complaince & reporting - annual accounts, taxation, etc.
Stringent director duties.
Topic 1 - The Nature of Business
5
Of being public (rather than private)
Ads:
Better able to manage even larger number of owners/shareholders.
Easier to attract finance - IPO
Disads:
Even greater compliance & reporting - audited annual accounts, must produce
prospectus when issuing shares.
Influences in the Business Environment
a) External Influences
1. Economic
During a Peak or Boom:
Increased demand for G & S
More production (output /\)
More employment
Higher wages, inflation
Opposite applies during a contraction or trough.
2. Financial
Movement in Interest Rates
When rates are low, businesses have an incentive to borrow in order to expand.
Interest ryes may go up, and high debt levels can cause financial failure.
Movement in Exchange Rates
Topic 1 - The Nature of Business
6
Movements in the value of the AUD relative to other currencies can dramatically impact
profitability of doing business overseas.
Exchange rate fluctuations mean you can't be certain what will be the actual cost in AUD.
E.g. if AUD value increases, imports become cheaper and exports are therefore more
expensive.
E.g. if AUD value decreases, exports become cheaper and imports are therefore more
expensive.
3. Geography
'Asian Century' - Australia is close to the fastest growing economic region - we have very little
manufacturing but this is very good for exporters.
Globalisation - tendency for less trade barriers due to Free Trade Agreements & technology but has led to the decline of manufacturing (e.g. Holden) and other industries expanding (e.g.
education and mining).
4. Social - CSR
Refers to changing tastes & expectations, including:
Increased environmental awareness.
Increased demand for flexible work practices.
Increasingly diverse workforces.
5. Legal
Significant amount of laws & reguatlions impacting businesses, including:
Consumer Laws (Consumer and Competition Act 2010) - 'deceptive & misleading'
Labour Laws (Fair Work Act 2009)
Taxation Laws
WHS Act (2010)
6. Political
Refers to policy positions of the Government which could determine laws - does not refer to
laws that have already been passed - for example:
Policies to encourage use of renewable energy.
Policies to reduce the rate of company tax.
Policies to encourage Free Trade Agreements.
Policies to deal with COVID-19.
Topic 1 - The Nature of Business
7
7. Institutional
Inclues all 3 levels of Government & Regulatory bodies.
Fair Work Act (2009)
Fair Work Commission (sets award, NWM - national minimum wage)
Fair Work Ombudsman (investigates alleged breaches of FWA)
Work Health & Safety Act (2010)
SafeWork Australia
Competition and Consumer Act (2010)
ACCC (enforces the CCA + other consumer-related legislation)
Income Tax Assessment Act (1936)
ATO (enforces the ITAA, collects tax on behalf of the Government)
Corporations Act (2001)
ASIC (enforces the Corporations Act, requires lodgement of prospectus, etc.)
8. Technological
a. Personal Technology
Mobile devices (e.g. iPhones, laptops, etc.)
Helps individuals improve productivity.
b. Enterprise-Wide Technology
Robotics, computers - CAD (Computer Aided Design) & CAM (Computer Aided
Manufacturing), 3D printing, etc.
Helps the business improve productivity.
9. Competitive Situation
4 considerations when determining the competitive situation:
Number of competitors
Topic 1 - The Nature of Business
8
Marketing strategies employed by competitors.
Local & Foreign competition
Easy of entry into a market for a new business.
Types of Market Concentration
Monopoly: complete concentration by one firm in the industry (e.g. AusPost)
Oligopoly: a small number of larger firms that dominate the market (e.g. banks,
supermarkets)
Monopolistic Competition: large number of buys and sellers - G & S sold are differentiated
from competitors using methods such as packaging, advertising, brand names and
quantity.
Perfect Competition: large numbers of small businesses that sell products that are the
same/similar - only way to achieve market share is through price competition.
10. Markets
a. Labour Market
Easier to access overseas labour.
More outsourcing of non-core activities.
More part-time/casual labour + increase in 'gig' economy.
b. Financial Market
Has been deregulated over the years, including foreign banks entering Australia therefore increased availability of funds that can be borrowed in order to invest/expand.
Individuals and households have also taken advantage of cheap loans & have borrowed
to buy property.
High levels of household debt, combined with very slow wage growth, has decreased our
ability to consume.
c. Consumer Markets
Consumers are increasingly using the internet to both compare prices & then buy online.
Impact on traditional retailers is significant - they must have a considered 'multidistribution' strategy.
Rapidly expanding middle classes in Asia are looking to consume more - huge
significance for Australian exporters.
b) Internal Influences
1. Product
The choice of good or service that a business will sell will impact every aspect of a business.
Topic 1 - The Nature of Business
9
E.g. a service based company (e.g. accounting) is fundamentally different from a mining
company.
The choice of product or service will impact the size of a business, how it is structured &
managed, the people it employs, how it markets/advertises and its location.
Management must carefully consider the introduction of new products. Does it complement?
2. Location
Choice of location can be the difference between success & failure.
Choice will depend on type of business:
e.g. sandwich store - shopfront, factory - near suppliers.
One business can have multiple locations:
e.g. both manufacturing and retail.
3 factors when choosing location:
1. Visibility
2. Cost
3. Proximity to employees, customers, suppliers, etc.
3. Resources (Inputs)
Every business has 4 broad types of resources/inputs:
1. Labour
2. Physical (materials, facilities/equipment)
3. Financial
4. Information
Management must weigh up what combinations to use.
e.g. choice between labour or machinery/automation.
4. Management
Spectrum of management aproaches/styles.
e.g. traditional/classical vs. behavioural
3 features of management:
1. Organizational Structure (hierachical vs. flat)
2. Leadership Style (planning & controlling vs. leading & communicating)
3. Employee Involvement (level in decision making)
Type of Workplace (unsafe vs. more creative)
Topic 1 - The Nature of Business
10
5. Culture
Refers to the values, attitudes, expectations and beliefs which are shared by staff and
managers.
Managers must understand, promote and use the corporate culture.
Elements of a culture:
1. Values
2. Symbols
3. Rituals, Rites & Celebrations
4. Heroes
Impact of culture on business can be significant:
e.g. help attract and retain the best staff (reduce turnover)
e.g. produce quality products and services
Both of which can lead to increased positive brand awareness, sales & profit maximization.
c) Stakeholders
Someone who interacts in some way with a business & has a vested interest in its activities.
Busienss is expected to do the 'right thing' by its stakeholders.
This includes being:
Compliant with laws
Socially just & ethical
Ecologically sustainable
Profitable (for shareholders)
The interests of stakeholders are often conflicting - must keep a balance of competing interests.
There are many types of stakeholders:
1. Shareholders
2. Employees
3. Consumers
4. Community
5. Environment
6. Suppliers
7. Government
Business Growth and Decline
a) Stages of the Business Life Cycle
Topic 1 - The Nature of Business
11
Whilst businesses expand (or decline) at different rates and therefore have different life cycles,
we are able to apply a model of what is a 'typical' business life cycle.
1. Establishment (Introduction) Stage
Customers & Sales: small customer based, little brand awareness.
Sales: can be slow.
Costs: very high setup costs.
Profit: can make a loss (low revenue, high costs).
Cashflow: can be a very significant problem - especially if under-capitalised.
Funding: can be difficult to attract funds.
Marketing: more intensive and wide ranging.
Employees: can be difficult to attract.
Management: informal systems & proceedures.
2. Growth Stage
Customers & Sales: increased brand awareness, word of mouth - sales rapidly increase,
repeat sales occur.
Costs: starts to achieve economies of scale.
Profit: starts to increase.
Topic 1 - The Nature of Business
12
Cashflow: can be a problem if not collecting cash & high costs.
Funding: can be easier to obtain because you have actual results.
Marketing: start to consider 'what works' & what doesn't - more efficient.
Employees: may need to hire more - can start to specialize.
Management: starts to delegate, still difficult to manage - begin to formalize systems &
proceedures.
Growth is usually 'organic' - i.e. the business grows gradually by doing things better, incluidng
new goods & services.
However, growth can sometimes be achieved immediately either by a merger or acquisiton.
Merger: where the owners of separate businesses agree to combine resources and form a
new organization.
Acquisition: where one business takes control of another business by purchasing a controlling
interest - friendly or hostile.
Vertical integration: where a business expands at a different but related level of production
and/or marketing of a product.
E.g. a butcher acquires an abbatoir.
'Forward' vertical integration means acquiring a butcher.
'Backward' vertical integration means acquiring a cattle farm.
Horizonatal Intergration: where a business acquires or merges with a firm that makes or sells
similar products.
e.g. one butcher merges with another.
Diversification: where a business acquires or merges with a business in a completely
unrelated industry.
e.g. Channel 7 bought Westrac
3. Maturity Stage
Customers & Sales: sales start to plateau - customer base steadies as there is market
satuation/more competitors.
Costs: overhead costs continue.
Profit: can be squeezed as costs continue & revenue slows.
Cashflow: decreased revenue & profit - less reinvestment.
Marketing: may decrease, may need to reduce price.
Employees: can become complacent - must stay responsive as poor performing staff may
have been employed.
Management: can become complacent - must stay responsive and; motivate staff, identify
cost savings & seek new opportunities.
Topic 1 - The Nature of Business
13
4. Post Maturity Stage
3 directions the company can now take:
1. Steady State - sales levels are maintained & business remains profitable without major
changes to products.
2. Renewal - business takes off again & expands, may be fuelled by new products, new
markets, etc.
3. Decline and Closure - profits decline and the business loses competitive advantage or
products are obselete.
Challenges in this stage:
1. Understanding the changing tastes & needs of the customer.
2. Shifting into new geographic markets with greater opportunities.
3. Developing new product or service offerings.
4. Orienting the staff & management towards change.
b) Factors that Contribute to Business Decline
Many factors can cause a business to decline or fail. Usually a combination of factors including:
Poor Planning
Not meeting customer needs
Insufficient demand for product/service
Ignorance of the market (e.g. competition)
Excessive borrowing (over-capitalised)
Failure to get professional advice.
However, there are two factors that inevitably cause issues:
1. Lack of Management Expertise
Lack of a detailed business plan (or failure to modify & adapt as circumstances change)
Often lacking in crucial skills e.g. financial management
2. Lack of Sufficient Cashflow
Can be an issue at commencement when a business is 'under-capitalised' and has
insufficient money to purchase stock, pay wages, etc.
Can cause business failure even if fundementals are good.
Can be na issue in maturity if you 'over-capitalise' in the establishment phase and cannot
repay your debts.
Topic 1 - The Nature of Business
14
c) Cessation
Voluntary & Involuntary Cessatation
Whether a business suceeds or fails depends largely on the owners abilities, resources,
enthusiasm and mangement expertise/skills.
Many businesses ceases to operate, which can occur in one of two ways:
Voluntary Cessatation
Occurs when the owner ceases to operate the business of their own accord.
Could be because the owner wishes to retire or have a change in lifestyle (or if a sole trader
dies).
Most voluntary cessetations are because the owner sees the 'writing on the wall' - i.e. they
realise the business is underperforming and they stop trading to prevent further losses or
debts.
Involuntary Cessataion
Occurs when the owner is forced to cease trading by the creditors of the business.
The owners did not see the 'writing on the wall' and kept trading in the hope that 'things would
get better'.
Process of Cessatation
Bankruptcy
A declaration that an individual or business (being either a sole trader or partnership) is
unable to pay his or her debts.
Topic 1 - The Nature of Business
15
An application is made to a court by the owner (voluntary) or a creditor (involuntary).
The court appoints a representative to collect all monies owed to the business and to sell all
business assets and, if required, personal assets (due to unlimited liability).
This process of converting assets to cash is called realisation.
Voluntary/Involuntary Administration
When a company is experiencing financial difficulties it is placed into 'Voluntary/Involuntary
Administration'.
This is where an independent administrator is appointed to operate the business in the hope
of trading out of the difficulties.
Three things might happen once a company enters voluntary administration:
1. If successful, the business resumes normal trading.
2. If unsuccessful, the business may be sold to another party.
3. If unsuccessful and no buyer is found, the company goes into liquidation because it can
no longer pay its debts (i.e. the company is insolvent).
Liquidation
Is the equivalent of bankruptcy for a company.
Occurs when a liquidator is appointed to take control of the business and to sell assets in an
orderly way in oder to repay creditors.
Any surplus cash is returned to the shareholders.
Note: limited liability means that personal assets cannot be sold.
Liquidation is either:
Voluntary - the most common. Occurs either when the shareholders vote to appoint a
liquidator, or the creditors vote for liquidation following voluntary administration.
Involuntary - court appoints a liquidator following an application by a creditor, shareholder,
director or ASIC.
Liquidation of a company creates problems for stakeholders. There is usually not enough
money to pay all stakeholders once all assets have been realised into cash.
Accordingly, there is an order or ranking of how money is paid out or distributed:
1. Liquidators Fees
2. Employee Wages & Super
3. Employee Leave Entitlements
4. Employee Retrenchment
5. Secured Creditors
6. Unsecured Creditors
7. Shareholders
Topic 1 - The Nature of Business
16
If there is not enough money to pay one category, then money can be prorated. For example,
all unsecured creditors receive 10c on the dollar.
Directors may be personally liable if they have acted inappropriately or illegaly (for example, if
they knowingly traded while the company was insolvent).
Topic 1 - The Nature of Business
17