Nature of Business Summary

1.1 Role of Business

Syllabus – Students learn about:

•the nature of a business

– producing goods and services

– profit, employment, incomes, choice, innovation, entrepreneurship and risk, wealth and quality of
life

Producing goods and services

- A business is the organised effort of individuals to produce and sell, for a profit, the products
that satisfy individuals needs and wants.
- To satisfy customer’s needs and wants, businesses have to produce products that customers
demand.
- Production is the activities undertaken by business that combine resources to create
products.
- Products include goods which can be seen and touched, and services which are things done
for you by others.

Profit, employment, incomes, choice, innovation, entrepreneurship and risk, wealth and quality of
life.

- Profit: The return, or reward, that business owners receive for producing products, that
consumers need and want.
 Revenue is the money a business receives as payment for its products.
 Operating expenses are the costs of running the business, except the costs of goods
sold.
 Profit is what remains after all business expenses and costs have been deducted
from the business’s sales/revenue.
 A loss is a negative profit when a business’s costs are more than its sales.
- Employment: Businesses provide employment to people in their local community.
- Income: Businesses provide income to business owners/shareholders and employees.
- Choice: Consumers have freedom of choice and the opportunity to purchase products at
competitive prices.
 Consumers benefit from increased choice as more competition means the prices
they pay falls.
- Innovation: Through research and development, existing products are improved, and new
products are created.
 Innovation is the process of creating a new or significantly improved product, service
or process.
 Invention is the development of something totally new
- Entrepreneurship and Risk: Businesses provide individuals with the opportunity to turn their
ideas and passions into a livelihood.
 Entrepreneur is a person who sets up a business, taking on financial risk, in the hope
of profit.
 Risk is a situation involving exposure to danger.
- Wealth: Business activity results in higher levels of economic growth and wealth.
  The wealth created by a business is distributed in many ways including:
 Governments – Taxes
 Business owners/shareholders – profits and/or dividends.
 The business itself – depreciation, retained profits
 Lenders – loan repayments
 Employees – Salaries, wages, and other employee benefits
 Quality of Life: Businesses offer a vast array of products that improve our standard
of living.
- Quality of Life: Businesses offer a vast array of products that improve our standard of living.
 It refers to the overall wellbeing of an individual and is the combination of both
material and non-material benefits.
Nature of Business Summary

1.2 Types of Businesses

Syllabus – Students learn about:

•classification of business – size – small to medium enterprises (SMEs), large

– local, national, global

– industry – primary, secondary, tertiary, quaternary, quinary

– legal structure – sole trader, partnership, private company, public company, government enterprise

•factors influencing choice of legal structure

– size, ownership, finance

Classification of Business

- Size of a business is determined by many things including:

 The number of employees,
 The number of owners
 Market share (the business's share of the total industry sales for a particular
product)
 Legal structure

- Classification by Size
 Microbusiness – a business few than 5 employees
 Small business – a business with 5-19 employees
 Medium business – a business with 20-199 employees
 Large business – a business with 200 or more employees
 Small to Medium enterprises (SME) – firms with fewer than 200 full time employees and/or
less than $10 million turnover.

- Classification by geographical spread

 Local business – serves the surrounding area and is no position to offer products in another
suburb. The majority will be a small to medium business.
 National business – one that operates within one country.
 Global business, also referred to as a multinational corporation – is a large business that has
branches in many different countries.

- Classification by industry
 Primary industry – businesses involved in the collection of natural resources.
 Secondary industry – businesses who take the output of firms in the primary sector and
process it into a finished or semi-finished product.
 Tertiary industry – involves people forming a vast range of services for other people.
 Quaternary industry – includes services that involve the transfer and processing of
information and knowledge.
 Quinary industry – includes all services that have traditionally been performed in the home.
- Classification by legal structure – Sole Trader, Partnership, Private Company, Public
Company, Government Enterprises
 Sole Trader – owned and operated by one person. The sole trader also has unlimited liability
and is unincorporated.
 Partnership – owned and operated by between 2 and 20 people. Has no separate legal
entity, has unlimited liability and is unincorporated.
 Private company (proprietary) – an incorporated business and usually holds between 2 and
50 private shareholders. A private company must have ‘Pty Ltd’ after their name and the
shares can only be sold to approved people by other directors. The shares are also not listed
on the stock exchange
 Public company – has at least one shareholder, no restrictions on the transfer of shares or
raising money from the public by offering shares, to issue a prospectus when selling its
shares for the first time, a minimum requirement of three directors (two must live in
Australia) and, has to publish and annual report each year.
 Government enterprises – are government owned and operated businesses.
 Privatisation – the process of transferring ownership of a government business to
the private sector.
 Incorporation is the process that companies go through to become incorporated.
i.e., to become a registered company and a separate legal entity.
 Limited liability is a form of legal protection for shareholders and owners that
prevents individuals from being held personally responsible for their company's
debts or financial losses.
 Unlimited liability means business owners are legally liable for any debt their
business might accrue.

- Factors influencing choice of legal structure

 Size of the business – As sales increase and the business operations grow to meet this higher
level of customer demand, the business owner may need to select a more appropriate legal
structure.
 Float – the raising of capital in a company through the sale of shares to the public.
 Prospectus – is a document giving the details of a company and inviting the public to
buy shares in it.
 Ownership - If a business owner wishes to have complete control and ownership of a
business, then becoming a sole trader is the only realistic option. On the other hand, if the
owner wishes to share the ownership with other people, then a partnership is the ideal legal
structure. Of course, a private company would also allow the owner to maintain a high
degree of control and it would also offer the protection of limited liability. This is because a
private company structure provides the owner with a large degree of control over who can
become a shareholder of the business. As well, in most cases the maximum number of
shareholders is restricted to 50.
 Finance - A business usually has very limited capital during the establishment phase. This is
especially true for sole traders because only one person can contribute the necessary
capital.
 As growth of the business occurs, more funding is required. This is usually via equity
financing - this means money is invested by individuals who are or become 18 part
owners of the business. (Equity is money invested by owners, whereas debt is
money which is borrowed).
  Equity financing can increase significantly when a business changes from a sole
trader to a partnership i.e. new partners buy part of the business and contribute
new funds as equity.
 If expansion continues, more and more funding may become necessary. This may
mean more partners or expanding the firm to become a private company. Owners
may seek venture capital which is money that is invested in small and sometimes
struggling businesses that have the potential to become very successful. Like the
show Shark Tank.
 A public company offers the greatest access to equity finance because of a lack of a
limit on the maximum number of investors. This means an ‘unlimited’ number of
shares can be sold to the public, and the money received in exchange for these
shares is an equity source of finance.

Nature of Business Summary

1.3 Influences in the Business Environment

Syllabus – Students learn about:

•external influences – economic, financial, geographic, social, legal, political, institutional,
technological, competitive situation, markets

•internal influences – products, location, resources, management and business culture

•stakeholders

External Influences - economic, financial, geographic, social, legal, political, institutional,

technological, competitive situation, markets

 Businesses do not operate in isolation. Changes in the business environment will

impact on business. Successful business managers understand the business
environment and can respond positively to changes in the business environment.
 Business environment – refers to the surrounding conditions in which the business
operates it can be divided into two broad categories – external and internal.
 External environment – includes those factors over which the business has very little
control e.g. government policy, technology, economic conditions and social
attitudes. These factors are outside the business.
 Internal environment –- includes those factors over which the business has some
degree of control e.g. location, products. These factors are inside the business.

- External influences – Economic

Economies around the world e.g. the Australian economy experience economic
cycles of booms and bust.
 Economic cycles (or business cycles) - are the periods of growth (boom) and
recession (bust) that occur as a result of fluctuations in the general level of economic
activity.
 Economic forces have an enormous impact on both business and customers. They
influence a business’ capacity to compete and a customer’s ability to spend. E.g. the
recession caused by Covid-19.
 The recessionary cycle – when economic problems start to appear, consumers
become more cautious about the way we spend our money and overall confidence
begins to fall. This reduced spending has an impact on business owners – they find
profits falling and cost cutting must occur if they are to survive. Unfortunately, this
cost cutting can be in the form of retrenching workers, therefore, the economy falls
further into recession.
 Inflation is a measure of the increase in the cost of goods and services.
 Boom cycle - When there is evidence of a growing economy, consumer confidence
returns. The consumer is more willing to purchase consumer or luxury goods, which
in turn sees spending levels rise and business profits improve. One important factor
to consider in terms of economic cycles is that not all businesses experience a
downturn in revenue or sales during a recession; nor do they necessarily experience
an upswing in trade during a ‘boom’ period. The business most susceptible to the
‘swings’ are those selling consumer or luxury goods as consumers will cut back on
those when they reduce overall spending. E.g. the sale of cars dropped in Australia
during the Covid-19 recession. Some businesses fare very well during a recession, for
example ‘bargain shops’ or other clearance outlets. E.g. the Reject Shops sales
increased in Australia during the Covid-19 recession.
- External Influences – Financial
 Financial influences on business refer to sources of finance i.e. where businesses get
their money from e.g., debt (borrowing money) or equity (people investing in the
business, who then become owners e.g. buying shares in a company).
 Financial influences are affected by:
 Fluctuations in the economy i.e. it is easier to obtain debt finance or to
attract equity finance when the economy is good e.g. in a boom. It is difficult
to obtain finance when the economy is in a downturn or trough e.g.
recession.
 Globalisation – Globalisation is the breaking down of barriers between
countries, so money, people, information and goods move more easily. In
the past Australian businesses had to borrow from Australian financial
institutions e.g. banks. Globalisation has meant it is easier for large
Australian businesses to access finance from around the world. This has
meant they can borrow from overseas and take advantage of the lower
interest rates overseas. Australian companies can also more easily sell
shares to people overseas.
 Advances in communications technology – have meant it is easier for
businesses to raise finance globally.

- External Influences – Geographical

 Major geographical factors impacting on business activity in Australia are:
 Australia is located in the Asia-Pacific region. This means we are close to
Asia meaning it is less costly to trade (buy and sell) due to the lower freight
costs compared to trading with Europe or North America.
 The economic growth in a number of Asian nations, especially China. The
growing ‘middle class’ in China means more demand for our products E.g.
vitamins from Blackmores and baby formula. (Except when China puts a ban
on importing our goods, which has been occurring with goods such as wine
and rock lobster).
 Globalisation - the process that sees people, goods, money and ideas
moving around the world faster and more cheaply than before.
Globalisation has meant:
 Increased competition from overseas
 Expanded markets – Australian businesses can more easily sell to
markets (countries) overseas
 Cheaper materials – businesses may be able to buy supplies more
cheaply from overseas

- External Influences – Social

 Social influences refer to the impact of people or groups on business.
 Some examples of social influences include:
 Australia is a multicultural nation. This means businesses have to adapt to
new cultural influences. E.g. McDonalds sells some Halal menu items in
some parts of Sydney.
  Growing awareness of the environment e.g. Australians have become
more aware of practices which harm the environment e.g. clearing
rainforests for cheap palm oil. In response, some businesses only use palm
oil from reputable sources or no longer use it e.g. KFC.
 The expectation that businesses provide more family-friendly workplaces
e.g. more flexible hours and sometimes subsidised childcare. This helps
businesses keep experienced workers and helps employees care for others.
 The expectation that businesses cater for workplace diversity e.g. different
age, gender, cultural background etc.
 Australia’s demographics (the make-up of the population e.g. age) is also
changing. Australia has an ageing population this means there will be an
increase in the demand for age-related services e.g. health and aged care as
the median (middle) age of the population increases. Provide two other
examples of services that may increase in demand due to Australia’s ageing
population.

- External Influences – Legal

 There are many legal influences which affect businesses regardless of their size. It is
costly and time consuming to comply (follow) laws and regulations. Laws and
regulations can also be confusing.
 Legislation affecting business includes:
 Taxation (e.g. companies will have to pay more tax if the government
increases the company tax rate)
 Industrial relations (how employers treat employees)
 Workplace health and safety – employers must provide a safe workplace
and provide PPE personal protective equipment e.g. steel capped boots
 Equal employment opportunity e.g. helping women to be promoted as
there is a shortage of women in upper management
 Anti-discrimination – ensuring people are not discriminated against due to
age, race, gender
 Protection of the environment e.g. businesses who pollute the air or water
can be fined
 Fair competition and consumer protection – The Australian Competition
and Consumer Commission (ACCC) administers the Competition and
Consumer Act. This act ensures there is fair competition between businesses
and that consumers are protected e.g. no misleading and deceptive
advertising

- External Influences – Political

 Political influences refer to the influence of government on business. These political
influences will depend on which political party is in power e.g. Labour or the
Coalition (Liberal and National Party).
 These policies will affect businesses as governments make laws that businesses must
follow.
  Dominant political issues affecting business include:
 Taxation e.g. the government can introduce new taxes such as the Good and
Services Tax (GST). Businesses had to pay for the cost of complying with the
GST e.g. ensuring receipts used the correct format and for collecting GST
and paying it to the government.
 Labour market reforms – e.g. there are more ways of determining wages
than in the past. Businesses can now have enterprise agreements (which
outline hours of work, pay etc) rather than following an award that applies
to all fast-food businesses. For instance, KFC has its own enterprise
agreements. This means businesses can adapt their enterprise agreements
to their business.
 Social reforms – E.g. paid parental leave was introduced in 2011 and is an
added cost for business. Before 2011 there was not paid leave for fathers.
 Environmental management – the Gillard government introduced the
carbon tax to try and reduce carbon output to try and reduce climate
change. However, the Abbott government repealed or removed the law
when they got into power. Businesses who were affected by this law had to
put in place measures to comply with the law and then remove these
measures. This is an added cost to business.

- External Influences – Institutional/Technological

 Institutional - Institutional influences are the result of the activities of government,
regulatory bodies and other groups e.g. trade unions. They can have a significant
influence on business e.g. affect sales, costs and profits of business
 Government - Federal, state and local governments impose a range of regulations
(rules, laws or orders) that businesses must follow.
Federal (All of Australia)
 Payment of taxes on behalf of employees and GST and company tax.
If businesses do not pay tax then the ATO can enforce penalties such
as fines.
 Paying employees’ superannuation
State e.g. NSW
Imposes:
 Workplace health and safety
 Payment of payroll taxes. A tax business with more employees will
pay.
 Environmental protection laws e.g. air pollution
Local e.g. Lake Macquarie City Council
 Approves new development and alteration applications e.g. if a
business wants to build a new building
 Fire regulations
 Parking regulations
 Approves the size, location and shape of business signs
 Regulatory Bodies - Regulatory bodies are set up by the government to monitor and
review the actions of businesses and consumers in relation to certain issues e.g.
advertising. This is to ensure that businesses conduct themselves fairly in relation to
the consumer, the community and other businesses.
  NSW Environmental Protection Agency - Primary environmental regulator
for NSW
 NSW Fair Trading - The NSW consumer protection agency
It looks after:
 Business licence registration e.g. car dealers
 Product safety standards
 Scales and scanners used to weigh and measure products.
 Australian Securities and Investment Commission (ASIC)
 ASIC Is responsible for implementing and enforcing regulations
derived from the Corporations Act 2001 (Cwlth), especially in regard
to the financial conduct of business.
 It monitors and investigates financial institutions and their clients;
mainly banks, superannuation funds, and investment companies.
 ASIC can prosecute businesses and their directors for illegal
activities e.g. deliberately not providing accurate or truthful
information in financial reports and press releases.
 ASIC is responsible for business name registration.
 Australian Competition and Consumer Commission (ACCC)
ACC administers the Competition and Consumer Act 2010 (Cwlth).
The ACCC monitors:
 Anti-competitive and unfair market practices e.g. misuse of market
power. It ensures there is enough competition.
 Mergers and acquisitions that could decrease the level of
competition.
 Misleading and deceptive advertising (making sure businesses don’t
lie)
The ACCC enforces and administers competition and consumer
protection laws.
 Other Institutional Influences
 Employer associations- Represent the interest of employers. Employer
associations are actively involved in political lobbying with the aim of
achieving better outcomes for businesses e.g. the Australian Retailers
Association. This means they try to persuade the government to get what
they want. An example of how they assist employers is acting on behalf of
employers in negotiating enterprise agreements (a type of agreement
covering wages and working conditions)
 Trade and industry associations - Trade and industry associations represent
larger groups of employers e.g. lobbying the government on issues e.g.
National Farmers Federation.
 Trade Unions - Trade unions are focused on advancing the interests,
working conditions and pay rates of employees in the workplace. They
represent employees. Unions often negotiate with employers on behalf of
workers e.g. enterprise agreements. Examples are the SDA (retail union) and
the Australian Worker’s Union (AWU). The influence of the union movement
has decreased over the last 40 years.
 Australian Securities Exchange (ASX) - Operates a share market where
public companies can raise funds i.e. equity by issuing shares in the
company
  Technological Influences
 Appropriate technology means businesses can:
 Increase efficiency and productivity
 Create new products
 Improve the quality and range of products and services
 The use of high-tech robotics in manufacturing:
 Improving productivity
 Reducing operating costs
 Eliminating many boring and repetitious tasks
 Robotics is used in manufacturing cars
 Rapid advances in technology (IT) has:
 Reduced communications delays
 Allowed suppliers and customers to interact over great distances.
 A business that wants to be locally, nationally and/or globally competitive
must adopt the appropriate technology.
 If slow to use and exploit technology, a business is likely to fail i.e. the
competition will strive to capture greater market share and develop a
sustainable competitive advantage.

- External Influences – Competitive Situation/Markets

 Competitive Situation – Competition between businesses is good for the business
and the consumer. For the business, competition can result in greater efficiency and
quality, and lower costs, and for the consumer there is more variety in products and
prices. Each business aims to achieve a competitive advantage and try to gain as
many customers as possible.
 Competitive advantage will be affected by:
(i) The number and size of competitors in the industry – (called competitive
situation). Where there is one or a few large dominant businesses
(monopoly or oligopoly), it is difficult for a new, smaller business (e.g. soft
drinks). In an industry where there are a large number of smaller businesses
(monopolistic competition or perfect competition) – e.g. convenience stores
or nail salons, it is easier to compete.
(ii) Ease of entry into an industry for a new business – whether the new
business has enough resources to gain part of the market and compete with
other businesses – this will be affected by market concentration.
(iii) Local and foreign competition – Australian businesses face competition
from competitors located in local markets and businesses located overseas.
(iv) Deregulation in a number of industries by the Australian government has
increased competition for Australian businesses.
(v) Differentiation strategies used by competitors – large businesses many
use TV advertising to reach consumers, small businesses rely on simpler,
cheaper methods (e.g. junk mail or social media)
(vi) Marketing – for a business to compete in a market where there are lots
of the same or similar products, promotion of the business’ products is
important.
 Market concentration – the number and size of firms in the industry. The fewer the
number of firms the higher the market concentration.
  Price Maker – Dominant firm in the industry
 Price Taker – Smaller firms. Price takers can achieve an increase in market share by
improving their quality and service to give them a competitive advantage.
 Ease of Entry – Markets that are difficult to enter usually have high capital
equipment costs.
 Foreign Competition – Can occur from the importation of overseas goods and
overseas ownership of businesses competing in Australia. Foreign competition
encourages local business to compete in terms of both quality and price and
therefore creates a better situation for customers.
 Marketing Strategies and Substitutes – Businesses use many different marketing
strategies to encourage consumers to purchase their products not their competitors.
Also, by using expansion strategies (e.g. horizontal and vertical integration)
businesses can achieve greater market share and profits. Many products in the
market are very similar and can substitute for another product quite easily (e.g. Coke
and Pepsi). Close substitutes mainly compete on price but recently businesses have
introduced consumer loyalty programs to encourage people to always use their
products.
 Markets
There are three different types of markets affecting business:
1. Financial/Capital Markets: refers to the market share (buying and selling
of shares).
 There has been a big increase in financial flows between countries
since the 1970s due to governments reducing restrictions on buying
and selling of foreign currencies.
 This means it is now easier for individuals and businesses to buy
shares in companies overseas share markets. This may make it
easier for companies to raise finance.
2. Labour Markets – labour refers to workers
 There has generally been less flow of labour globally than 60 years
ago.
 However, highly skilled employees are able to move from country to
country to work, e.g. doctors. Australia relies on temporary skilled
migrants.
3. Consumer Markets – refers to people purchasing products
 New consumer markets are emerging and growing in countries like
China and India meaning more demand for goods.
 The growth of e-commerce (buying and selling online) has meant consumers can
buy from all over the world.

Internal influences – products, location, resources, management and business culture

- Internal influences - Products – Product influences affects a range of internal structures

 Main product influences on a business:
1. Types of goods and services will affect the internal operations of a business. If the
goods being produced are large or require the input of many raw materials then
there will need to be structures in place to organise and monitor the process
involved in production. The larger the number of types of goods that are being
produced (the range) the more expansion of operations and internal structures will
be required.
 2. Type of business (service, manufacturer, or retailer) e.g. some goods or services
require extensive preparation while others are merely deliverers. E.g. a
manufacturer will be making the product where as a retailer will be selling it.
3. Size of the business – this will then affect the internal structures and operations of
the business. E.g., a café is a smaller scale compared to a club bistro.
- Internal influences - Location – The choice of location is very important especially for retail
and service-oriented businesses because they require the constant flow of people walking
past the store – passing trade. Locating next to complementary businesses may be
beneficial, because customers may be attracted to a single site.
 Complementary Business – A business that sells a similar range of goods and
services e.g. a health food shop near to a shop selling sporting goods.
 Factors to consider when choosing location:
1. Visibility – If businesses want high visibility, they will locate in a prime shopping
area e.g. shopping centres or main street. If the business is a manufacturing
business, they would not consider visibility as being crucial and may choose a low
visibility location out of town.
2. Cost – It is more expensive to be in a busy shopping centre compared to a location
with lower levels of passing trade. However, this cost is unavoidable for retail shops
and fast-food outlets who are relying on passing trade. If a business is not relying on
passing trade and location is not crucial then the business may search for low-cost
sites especially if they are and require large premises, also mechanics, car yards,
equipment hire, solicitors and doctors. Businesses who sell primarily through the
internet or telemarketers do not consider their locations as being important.
3. Proximity to suppliers – A business that relies on bulky raw materials or finished
goods e.g., logging manufacturer, has significant transport costs. They will attempt
to locate closer to their supplier in an attempt to reduce costs. Businesses who do
not transport bulky goods will not view proximity to suppliers as a major
consideration e.g. florists, bakeries.
4. Proximity to customers – A retail business must be convenient and locate close to
their customer base. However, a manufacturer may believe it is better to be closer
to their supplier and transport products to their customer.
5. Proximity to support services
Support services – are the activities needed to assist the core operations or prime
function of a business. Examples include accountants, solicitors and government
agencies. Due to advancements in technology, proximity to support services is not
the most important factor. This is because all businesses can access support services
through the internet, email, mobile phones, phone and video conferences.

- Internal influences – Resources

 Managers need to gather, select and coordinate resources (or inputs) for use in their
business. Managers need to be knowledgeable and efficient to be able to use
resources to achieve the objectives of the business.
 Human resources – these are the employees of a business and are generally
its most important asset.
 Information resources – these resources include knowledge and data
required by the business such as market research, sales reports, economic
forecasts, technical material and legal advice.
  Physical resources – include equipment, machinery, buildings and raw
materials.
 Financial resources – are the funds the business uses to meet its obligations
to various creditors (the business owes money to its creditors).
- Internal influences – Management
 Management is an important internal influence.
 High level management will influence the production process (how products are
made), decisions on expansion or contraction, the direction of change e.g. entering
new markets, and business culture.
 Middle management is important in determining business location, distribution
methods (how goods are delivered to customers), production methods and
advertising.
 In recent times businesses have flattened their structures – this means there are
fewer levels of management. Businesses with fewer level of management are able to
adapt quickly to changing consumer needs and market conditions because there are
fewer managers needed to approve decisions.
 Management includes decisions being made by those in a position of leadership and
can affect the business culture, day-to-day operations, and overall efficiency of a
firm. All of these small decisions ultimately contribute to the foremost goal of a
business – to make a profit.
 Management is intertwined with all operating sectors of a business: finance,
operations, marketing, and human resources, as well as being responsible for
determining the goals of a firm. Poor management is likely to cause a business to
not turn as much profit as a similar business with efficient and successful
management practices.
- Internal Influences – Business Culture
 Business culture – refers to the values, ideas, expectations and beliefs shared by
members of the organisation.
 Business culture can determine the values of a business and the way employees
interact with each other can determine the nature of the business, leading it to
success.
 Values – the things that matter most to a business.
 Ideas – the main concepts of a business and their approach
 Expectations – what a business/employees should be doing or where they
should reach
 Beliefs – what a person believes/inclines about something e.g. believe their
product is better.

- Internal Influences – Stakeholders

 People who have an interest in what the business does are called stakeholders.
A stakeholder is any group or individual who has an interest in or is affected by the
activities of a business.
 Shareholders – have a direct influence on a business because they have
voting rights on major business decisions. Shareholders can also ask
questions at the annual general meeting. Companies need to maximise the
return to shareholders in a sustainable way e.g. high dividends.
Shareholders also want share prices to increase.
  Managers – Management has the responsibility of running a profitable or
successful business. Managers need to be socially and ethically responsible
and understand legal issues. A managers leadership approach is a major
influence on business culture, employee productivity and morale.
 Employees – Employees influence business because the quality of the
product they produce depends on their skills and commitment to the
business. If employees are valued, trained properly, treated ethically they
will become more motivated and valuable to the business.
 Customers – Customers are increasingly likely to seek compensated if they
have been treated unfairly or purchased a product that did not perform as
promised. Customers are increasingly putting pressure on businesses
(through their spending decisions) to be environmentally aware, demanding
products that are clean, green and safe. E.g. environmentally friendly
packaging. Businesses need to constantly reassess consumers’ needs and
wants if they want to remain viable and profitable
 Society – Members of the community i.e. society expect organisations to
show concern for the environment e.g. waste disposal, pollution. Socially
responsible businesses will participate in a range of community projects and
activities e.g. McDonalds and Ronald McDonald House.
 Environment - There is growing pressure for business to adopt ecologically
sustainable operating practices. This is in response to concerns about
climate change and the destruction of the natural environment. Ecological
sustainability occurs when economic growth meets the needs of the present
generation without endangering the ability of future generations to meet
their needs.

Nature of Business Summary

1.4 Business Growth and Decline

Syllabus – Students learn about:

•stages of the business life cycle – establishment – growth – maturity – post-maturity

•responding to challenges at each stage of the business life cycle

•factors that can contribute to business decline

•voluntary and involuntary cessation – liquidation

Stages of the business life cycle – establishment, growth, maturity, post-maturity

 Once businesses are established, they often go through different phases over the course of
their existence. The stages include establishment, growth, maturity, and post-maturity –
These stages are apart of a cycle known as the business life cycle. Although this life cycle is
common, it is not inevitable that businesses experience all of these stages. If a business
adapts successfully to the different challenges at each stage of the cycle in can avoid the
final stages of decline in the cycle.

- Business life cycle - Establishment Stage

 High costs associated with setup
 Difficulties obtaining the necessary funds
 Slow growth in sales
 Difficulties attracting staff

Business life cycle – Establishment stage challenges

 Choosing an appropriate product with a distinctive advantage over the product.

 Finding the right legal structure
 Choosing the right size and location of premises
 Working out the best marketing strategies
 Anticipating the business’s entire financing requirements throughout its
establishment phase.

- Business life cycle – Growth stage

 Increased customer awareness
 Range of products become more diverse, in response to customer demand
 Benefit from better management
 Cost saving advantages
 Improve distribution channels and marketing
 Easier to obtain finance
 Employee numbers expand

Business life cycle – growth stage challenges

 Ensuring quality of service or production is maintained as output grows.

 Developing accounting and financial information systems that provide detailed
information to management about the performance of the different aspects of the
business.
 Managing cash flow and taking into account financial requirements
 Improve economies of scale
 Sustaining growth
 Recruiting new employees and delegating responsibility
 Redefining the role of management so that the managers workload is not
overwhelming.
 Mergers and acquisitions – to expand its range of products, eliminating competition
 Merger – When the owners of two separate businesses agree to combine their resources
and form a new organisation.
  Acquisition (takeover) – When one business takes control of another business by purchasing
a controlling interest in it.
 Types of mergers and acquisitions
 Vertical Integration – when a business expands at different but related
levels in the production and marketing of a product
 Horizontal Integration – when a business acquires or merges with another
firm that makes and sells similar products.

- Business life cycle – Maturity Stage

 Unlikely to achieve any further growth
 Product of decisions
 Maximum achievable size -be content with the current size
 Once the business has reached a certain level of success, the owner may not want to
work so hard, missing out on growth opportunities
All of these factors will hold the business back from further growth.
 Reduce production costs – changes to management, reducing staffing levels, using
different equipment, scaling back on expenses such as marketing.

Business life cycle – Maturity stage challenges

 Staying responsive to changes in consumer demands

 Identifying opportunities for innovation in products and services
 Sustaining the motivation of management and staff
 Rationalising business operations and minimising costs

- Business life cycle – Post-Maturity Stage

 Can continue on a steady state – sale levels are maintained, and business remains
profitable
 Can go through renewal – business takes off and expands again which is fuelled by
the introduction of new products, a takeover or a merger, or expansion into new
markets
 Can go into decline or final closure – lose its competitive advantage, product may
become obsolete, profits may decline steadily to a point where the business is no
longer viable, loss of market share.

Business life cycle - Post-maturity stage challenges

 Understanding the changing tastes and needs of the customer base.

 Shifting into new or related markets where there are greater growth opportunities.
 Orientating the management and staff towards change.

Factors that can contribute to business decline

 Failure to meet customers needs

 Lack of demand for the product
 Failure to plan
 Increased competition
  Lack of adequate cash flow
 Poor location
 Lack of management skills
 Uncontrolled growth
 Failure to adapt to changes in external environment
 Failure to price product correctly
 Unfavourable economic conditions
 Ignorance of existing competition
 Ill-conceived business idea

Voluntary and involuntary cessation – liquidation

- Cessation of the business means that it ceases to operate. Cessation of a business can be
voluntary (of the business’s own choice) or involuntary (forced by others).
- Voluntary cessation – any assets owned by the business are sold.
Reasons for voluntary cessation include:
 The owner wants to retire
 If it is a sole trader, they have died
 Business failure
- Involuntary cessation – when the owner is forced to cease trading by the creditors of the
business.
- Creditors – are those people or businesses who are owed money.
- Involuntary cessation for sole traders or partnerships
 Bankruptcy – is a declaration that a business or person is unable to pay his or her
debts.
 Bankruptcy can be voluntary or involuntary. Either the business owner or a
creditor goes to court for a bankruptcy order to be made. The court
appoints a representative to collect any money owed to the business. The
assets of the business are sold, including the owners personal assets. This
money is then divided between creditors.
- Involuntary cessation for private companies or public companies
When a company is experiencing financial difficulties, it cant be place in voluntary
administration.
 Voluntary administration – when an independent administrator is
appointed to operate the business in the hope of trading out the present
financial problems. If voluntary administration is successful, the business
may resume normal trading. If it is unsuccessful, then the business goes into
liquidation.
If a country is in financial difficulty, its shareholders, creditors or the court can put
the company into liquidation.
 Liquidation – when an independent and suitability qualified person – the
liquidator – is company’s assets in an orderly way to pay the creditors. A
company in liquidation can also be in receivership.
- Receivership is where a business has a receiver take charge of the affairs of the business.
Unlike liquidation, the business may not necessarily be wound up. The main features of
liquidation are that it normally results in the life of a company coming to an end, it occurs
because the business is insolvent (when a business cannot pay its debts as when they fall
due). When a company is being liquidated because it is insolvent, the liquidators prime
responsibility is to the company’s creditors. This includes liquidating the company’s assets
and repaying the creditors as much money as possible.