Welcome
to
New Generation University College
Business Management
Chapter 2: Introduction to Business
[email protected]
Compiled By: Adise G.
Associate Professor
(BA, MBA, MA)
Definition of Business:
Business is an economic activity and a continuous process
of identifying and satisfying the demand (willing and able
users) need and want of customers by providing goods and
services with the main aim of making profit.
So from the above definition we could take out the following basic points: (ECSPP)
Business is an economic activity
A Continuous process- Business is not a one-time
activity; it should be a continuous process.
Satisfies needs and wants.
Provides goods and services
Its main goal is to make profit - the main motive or
purpose of business is to get profit
Characteristics or Features of Business
Exchange of goods and services
Deals in numerous transactions
Profit is the main Objective…by being ethical and socially responsible
Business skills for economic success
Risks and Uncertainties...Bankrupt (loss), products might get damaged, burned
Buyer and Seller
Connected with production
Marketing and Distribution of goods
Deals in goods and services
To Satisfy human wants
Social obligations --- Donation to poverty-stricken individuals or planting of trees to
keep the environment or creating equal opportunity in the business or affirmative
action for minorities
Advantages of going into Business
Independence
Financial Opportunities
Community Service
Job Security
Family Employment
Learning from Challenges
Introducing Innovation
Business Failure factors
(Why businesses fail)
Poor operations management – The manager lacks the
ability to operate a small business.
Lack of experience – Many owners start businesses in
industries in which they have no experience
Poor financial management – Many owners start with too
little money and with little or no understanding of financial
spreadsheet applications. Illegal loan too!
Cont…nd
Over-investing in fixed assets – Owners who over-
invest in fixed assets may find themselves with no
access to funds for working capital.
Poor credit practices – Owners often sell on credit
to meet (or beat) the competition
and find that they lack the additional working
capital required or the ability to collect receivables.
Failure to plan – The lack of a strategic plan to
guide the business in the long run
Cont…n d
Unplanned and uncontrolled growth – Growth is
natural and healthy, but unplanned growth can be fatal
to a business.
Inappropriate location – Owners who choose a
business location without proper
analysis,
investigation,
and planning often fail.
Too often, owners seek “cheap” sites and locate
themselves straight into failure.
Problems faced by Businesses
Small scale enterprises quite often face distinctive
problems. These are:
Difficult in obtaining credit from commercial banks
because of their general inability to provide
security.
Inability to offer liberal credit terms in the sale of
their products
Absence of management expertise
Difficulty in competing with imported products due
to high production cost
Problems faced by small scale enterprises
(Cont…nd)
Difficulty with competition from other local
entrepreneurs in the same line of business
Difficulties in obtaining industrial land in
towns and cities
Under capitalization
Difficulty in identifying appropriate
technology and technical assistance
Bureaucratic red tape and regulations
Problems in the small businesses
Constraints Facing the business Sectors
The main constraints identified were:-
Lack of working space for production and
marketing.
Shortage of credit and finance
Regulatory problems (licensing, organizing, illegal
Business etc.)
( Cont….nd)
Poor production techniques.
In put access constraints
Lack of Information
Inadequate management and Business skill
Absence of appropriate strategy
Lack of good quality raw materials at reasonable
prices in the field of production.
Cont…nd
Small business owner can avoid some of
the common pitfalls that lead to business
failure by:
Knowing the business in depth
Developing a solid business plan
Managing financial resources
Understanding financial statements
Learning to manage people effectively…
QUALITIES OF A GOOD BUSINESS PERSON
Ability to analyze situations accurately
ability of collecting relevant and accurate information
Initiative and capacity to take quick decisions
Determination courage and perseverance
qualities of will, power and determination to succeed
Intelligence and alertness
Ability to learn, understand & think in a logical way
Quality of leadership and motivation
Business morality and integrity
Training and Education
Sound practical experience
.
Major Categories of Business
Industry Commerce
Concerns with raising, engages in the exchange
producing, & processing and distribution of goods
or fabricating tangible and services.
products. involves the operation of
produces final products many activities that are
directly related to buying
that are ready to be
and selling i.e. exchange
used by ultimate process.
customers (finished
goods) such as shoes,
automobiles etc.
Categories of Industry (GMCE)
1. Genetic Industry Manufacturing Industry
engages in producing and multiplying of 1. Processing industry => Processing
certain animals and plant species for profit of one major raw material
2. Manufacturing Industry Eg. ‘Mojo’ Tannery or Akaki textile
concerns in the conversion or 2. Analytical industry => one input
transformation of raw into many
materials or semi-finished eg. ‘Shola milk pasteurize’
goods into a finished product 3. Synthetic industry => Many into
one eg. “Awash Melkasa’ or ‘Mugger’
3. Construction Industry cement factory.
involves in the construction (building) of 4. Assembling industry => putting of
roads, dams, high ways etc. different inputs in a physical way.
4. Extractive Industry Eg. Nazret Tractor Engineering (or
assembly)
discovery and utilization of
natural resources from the earth,
air or water.
Components of Commerce
Trade
Trade is the process of buying and selling, exchanging
or transferring of goods to customers, Wholesalers,
retailers, agents, importers and exporters are examples
of traders and they solve the core problem of
commerce by directly interacting with producers and
customers.
Aids to trade
Solves auxiliary or ancillary problem of commerce such
as making payments, deposits etc. through banks or
protection of assets by insurance companies.
Example: Banks, Transport companies , Insurance
companies, Packaging and Advertisement companies
Forms/Classification of Businesses
Businesses can be classified based on different criteria:
Based on size of the business, Based on the type of goods
and service they provide, based on ownership and based on
domain.
Business classification based on Size: Annual revenue,
market share, No of employees, start-up capital, annual
sales volume and other parameters are used in different
palaces to classify business. Micro, Small, Medium and
large business are the types based on size.
Based on the Type of goods and service they provide:
manufacturing, Merchandising and Service giving.
Based on Ownership: Sole-proprietorship, partnership, and
corporation.
Based on Domain: Domestic, International, Global
Types of Businesses 1. Based on their function:
1. Manufacturing Businesses
Product
General Motors Cars, trucks, vans
Intel Computer chips
Boeing Jet aircraft
Nike Athletic shoes and apparel
Coca-Cola Beverages
Sony Stereos and television
Types of Businesses
2. Merchandising Businesses
Product
Wal-Mart General merchandise
Toys “R” Us Toys
Circuit City Consumer electronics
Lands’ End Apparel
Amazon.com Internet books, music, video
retailer
Types of Businesses
3. Service Providing Businesses
Product
Habesha Band Entertainment
Ethiopian Air Lines Transportation
Marriott Hotels Hospitality and lodging
Merrill Lynch Financial advice
Sprint Telecommunication
Based on their Ownership/Forms
Three basic forms of ownership:
Sole proprietorships
Partnerships
Corporations
…count’
1. Sole-proprietorship: A form of business in which one person
owns all the assets of the business, in contrast to a partnership or a
corporation.
A sole proprietorship is not a separate legal entity, like a
partnership or a corporation.
2. Partnership: A business owned by two or more people who
agree on the method of distribution of profits and/or losses and
on the extent to which each will be liable for the debts of one
another. A partnership permits pass-through of income and losses
directly to the owners.
3. Corporation: An organized body, especially a business, that
has been granted a state charter recognizing it as a separate
legal entity having its own rights, privileges, and liabilities distinct
from those of the individuals within the entity.
1. Sole Proprietorship:
is a business owned and managed by one individual.
is by far the most popular form of business.
is the simplest and cheapest way to start operation and
is frequently the most appropriate form of a new business.
is a form of business organization in which an
individual introduces his/her capital, use of his own
skill and intelligence in the management of its affairs
and is only responsible for the results of its operation.
Examples: Photo studios, bookshops, bakeries, restaurants,
retail stores, radio and watch repair shops etc…
1. Sole Proprietorship:
A separate organization with a single owner
Tend to be small retail establishments and individual
professional or service business - for example, a single
dentist, attorney, or public accountant
The sole proprietorship is an individual entity that is not
separate and distinct from the owner.
Advantages of Sole proprietorships
Ease and low cost of formation and dissolution
Direct motivation and personal care
Total decision-making authority
Business secrecy- Since confidential information is a key to success of a
competitive business, it is unlikely that the owner will leak the information.
Social desirability
It ensures that too much wealth does not concentrate in the hands of few.
It may be one of the ways in which equitable distribution of wealth is ensured.
Single tax - does not pay tax as a business; the profits from the business are the
personal income of the owner. ( No taxation at the entity level - income of sole
proprietorship and partnership is attributed to the owners as individual taxpayers
Disadvantages of Sole proprietorship
Limited resources and size
Limited managerial skill
Uncertain future: Instability or lack of continuity due to
death, insanity, imprisonment or bankruptcy
Unlimited liability- The owner, is personally liable for all
of the business’s debts.
2. Partnership
An organization that joins two or more individuals who
act as co-owners
Dentists, doctors, attorneys, and accountants tend to
conduct their activities as partnerships. Some can be
large international firms.
The partnership is an individual entity that is separate
and distinct from each of the partners.
Advantages of Partnership
Ease of formation
Increased source of capital
Single tax: The owners pay tax from the profit once.
Personal supervision
Reduced risk
Motivation of important employees
Combined managerial skill
Disadvantages of Partnership
Unlimited liability-If the assets of the partnership are not sufficient to meet the
obligation, creditors may choose to sue any or all partners to satisfy the debts.
Risk of implied authority-A dishonest or incompetent partner, by his/her
acts, misjudgment or fault, may put the firm in difficulties
Investment withdrawals difficulty- A person who invests money in a
partnership may have a hard time withdrawing the investment.
Lack of continuity-Due to death, retirement, or withdrawal of a partner for any
reasons like dissatisfaction, bankruptcy, or any serious disagreement among partners or
by court order.
Lack of harmony - Disagreement among partners
Characteristics of a partnership
Limited life – Dissolution of a partnership occurs whenever
there is a change in member of a partner
Co-ownership of partnership property – the property
invested in a partnership by a partner becomes the property of
all the partners jointly.
Mutual Agency –each partner is an agent of the partnership,
with the authority to enter into contract for the partnership.
Participation in income of the partnership – NI/NL is
distributed among the partners according to their agreement.
Unlimited liability –each partner is individually liable to
creditors for debts incurred by the partnership.
Non-taxable entity – partnership is a non-taxable entity and
is therefore not required to pay federal taxes.
Other Classifications of Business
Businesses can be classified based on different
criteria: Based on size of the businesses:
Business classification based on size: Annual
revenue, market share, No of employees, start-up
capital, annual sales volume and other parameters
are used in different palaces to classify business.
Micro, Small, Medium and large business are the
types based on size.
Based on domain: Domestic, International, Global
Business objectives: It is generally believed that a business has a
single objective, that is, to make profit. But it cannot be the only
objective of business. Any business unit cannot ignore the interests of its
employees, customers, the community, as well as the interests of society
as a whole. Thus, the objectives of business may be classified as -
Economic Objectives: Profit earning; Creation of customers; Regular
innovations; Best possible use of resources
Social Objectives: Production and supply of quality goods and services;
Adoption of fair trade Practices ; Contribution to the general welfare of
society
Human Objectives: Economic well being of the employees; Social and
psychological satisfaction of employees ; Development of human
resources ; Well being of socially and economically backward people
Profit = Revenue – Cost
…Count’
National Objectives: Creation of employment;
Promotion of social justice; Production
according to national priority; Contribution to
the revenue of the country; Self-sufficiency and
export promotion.
Global Objectives: Raise general standard of
living; Reduce disparities among nations; Make
available globally competitive goods and
services
Objectives of Business
Survival
Profit Social
Growth Responsibility
Business Environment
It is important to Business people to understand their
environment because Environment is of crucial importance to
the success and failures of any organization.
The general reasons for this importance relates to the
consideration of organizations as open systems.
The Internal Environment – an operation system of the
organization is shaped by internal forces that are said to be
controllable by managers.
Its major components include the management, employees,
policy, finance, purchasing, R&D, organizational culture,
organizational politics, integration of working system, size of
the organization…etc.
….Count’
The External Environment – is every thing outside an organization
that might affect it. The external environment of an organization
is composed of two layers: the general environment and the task
environment.
A) The General Environment – consists of the non specific
dimension and forces in its surroundings that might affect the
organization’s activities. The general environment of an
organization consists of five dimensions: economic, technological,
sociological, political, legal and international.
B) The Task Environment – consists of specific organizations or
groups that are likely to influence the organization. The task
environment may include competitors, customers, suppliers,
regulators, labor, owners, and partners.
Business Environment
Business Ethics
Ethics: is a set of moral principles and values
governing the behavior of an individual, a group,
and a profession; is the study of the moral quality of
behavior, conduct, an act of people; is the study of
morality’s effect on conduct: the study of moral
standards and how they affect conduct.
Ethics is a branch of Philosophy which deals with the
question of “What is right? Or what is wrong?” It
raises question on something about right and wrong
…Cont’d
A business commits itself to the ethical requirements in
relation to the 3 areas of corporate responsibilities. These
corporate responsibilities are:
Consumer Care: Satisfying demands for ease of use and
product safety
Environmental Care: Environmental safety and protection
Care for Minimum working Conditions: Employee right and
duties
In general businesses have moral foundations for their
establishment. Businesses cannot be independent of moral
concerns to build their reputation and trust in front of their
stakeholders
International Business
Definition:
Business transactions that take place across national
borders. This broad definition includes the very small firm
that exports (or imports) a small quantity to only one
country, as well as the very large global firm with
integrated operations and strategic alliances around the
world.
International business consists of transactions that are
devised and carried out across national borders to satisfy
the objectives of individuals, companies, and organizations
List successful businesses in ETHIOPIA?
If you had to work for a company in
Ethiopia, your choice will be…
What do you think is their secret
for success?
