Business Fundamentals: Needs, Wants, Growth and Company Types

Needs, Wants and Factors of Production

Need: a good or service essential for living.

Want: something people would like to have but it is not essential.

Factors of production:

• Land: natural resources
• Labour: workers
• Capital: money and machines
• Enterprise: someone leading the company

Scarcity: the unlimited wants of customers cannot be satisfied because factors of production are limited, so we have to choose.

Opportunity cost: what you don't choose.

Specialization: means more efficiency for companies, more goods produced and lower prices.

Types of Goods and Services

• Consumer goods: goods that are ready to be consumed.
• Consumer services: services that are consumed but they are not physical.
• Capital goods: goods that are used to produce other goods

Added Value, Classification and Business Growth

Added value: branding, customer service, product features, convenience.

Classification: primary and secondary sectors.

Business growth and size: all entrepreneurs need a business plan detailing their idea when creating a start-up. They create jobs, more products available and lower prices. Start-ups receive grants, lower taxation and free training.

Measuring Business Size

There are four ways to measure and compare business size:

• Capital employed: money invested in companies.
• Market share: how many of the sales of the sector are yours.
• Number of employees: workers on your company.
• Value of output: value produced, how much it produces.

How Companies Expand Their Business

• Increase in profit
• Increase in market share
• Economies of scale: when you sell so much that your costs are reduced
• Protection from takeover (adquisición)

Internal and External Growth

Internal growth: growing by yourself. Increasing the number of growth it can produce, buying more or better machines to produce more and reach more customers. Developing new products, increasing the variety of products to reach more customers. Finding new markets, opening a new store in a new place to reach new customers.

External growth: growing by other companies.

• Horizontal integration: when two companies from the same sector merge.
• Forward vertical integration: when you buy a company that is your customer.
• Backward vertical integration: when you buy a company that is your supplier.
• Conglomerate integration: two companies from different sectors merge.

Reasons for Business Failure

• Poor planning: too aggressive plans.
• Liquidity problems: it does not have enough cash.
• Poor management skills: the boss does not make the right decisions.
• Lack of objectives: a company needs a strategy, if not it does not know where to go.

Unincorporated Businesses

Sole Trader

Easy to set up business, makes all the decisions, has complete control, keeps the profit.

Unlimited liability: responsible for business debts, may not be able to raise funds to expand, may have to work long hours, difficult to compete with larger rival firms, may not have business skills to run one.

Partnership

Easy to set up a deed of partnership, partners invest in the business, shared decision making, shared management and workload.

Unlimited liability: responsible for debts, share the profits, business ceases to exist if one partner leaves, decisions are binding on all partners, difficult to raise finance.

Incorporated Limited Companies

Private Limited Company

Small companies (often members of the family), shares can only be sold privately, all members have to agree before shares are sold, difficult to raise additional capital.

Public Limited Company

Large companies, most common form of organization, shares can freely be sold to the general public through the stock exchange, ownership and control are separated, it can raise large sums of money.

Franchise and Joint Venture

Franchise: when you buy the image of a company in exchange for part of the profit.

Joint venture: two companies create a third one.