A business is an organisation engaged in commercial, industrial or professional activities that can be a for-profit or a non-profit. Profit-making organisations persuade customers through effective marketing to purchase their products or services at a higher price than it costs to produce them. A business seeks to meet the needs and wants of consumers – whether private individuals or other businesses – by combining human, physical and financial resources to create goods and services.
Businesses can be classified by:
- Sector – e.g. whether privately or publicly (state) owned
- Level of activity – how close the business is to the customer in the distribution chain, e.g. businesses extracting raw materials, such as oil, are early in the distribution chain, whereas retail outlets are closer to the final customer
- Size – businesses are small, medium or large, measured by capital employed, market share, sales turnover, profit and the number of employees
- Legal structure – the way that a business is set up
- Physical presence – whether the business operates from physical premises, is purely online, or a mixture of both.
There are many different types of business, including service businesses, manufacturing businesses and retail businesses. The legal structure of a business varies from country to country.
Features of a business:
- a decision-making organisation;
- made up of groups of workers (employees), managers, directors and shareholders;
- exists in association with customers, suppliers, competitors, the environment, local, national and other governments;
- uses factors of production;
- produces and sells goods and/or services;
- normally profit-making.
A business is a type of system with inputs, processes and outputs.
- When producing an output the business uses resources, often known as inputs. Inputs are land, labour, capital and enterprise (or entrepreneurship). Collectively these are called the four factors of production.
- An output of either a good or service is produced.
- Business functions (processes) include administration, production, marketing and finance. In larger organisations, these functions are carried out by specialist departments.
- Businesses are affected by external activity, such as social changes, government policies and external shocks (e.g. sudden oil price change).
The aim of an organisation is to generate outputs and add value, by selling at the outputs for more than the costs of the inputs.
Inputs: Factors of production
- Land (physical resources) – any natural resource, e.g. raw materials.
- Labour –services given by employees. A labour-intensive business has a high proportion of labour compared to other inputs, because labour is cheap.
- Capital –money, or assets used for production, e.g. buildings, plant and equipment. A capital-intensive business depends more on capital than other factors of production; because labour is relatively expensive.
- Enterprise –that ‘spark’ or idea provided by the entrepreneur, and the planning that combines the other three factors of production.
Each factor receives a reward, such as wages for labour and rent for land.
Outputs: Goods and Services
Key terms 🗝
Goods (visible or tangible items) are items that can be seen and touched, e.g. shoes.Services (invisible or intangible items) are items that cannot be seen or touched but have visible results, e.g. hairdressers’ services. Customers pay for the skill and experience shown by the person delivering the service.
Consumer goodsProducer goodsFMCG’s(Fast Moving Consumer Goods)Items bought regularly, e.g. food.ConsumablesItems with a short life and little value, e.g. raw materials and paper.Consumer durablesGoods which last through many uses, e.g. furniture, cars and clothing.Capital goodsPlant and equipment used to produce consumer goods. Not for sale as they are the ‘life blood’ of the business.Purchasers of products are customers, but those who enjoy the product are consumers. These may be the same, e.g. a customer buys and consumes an ice-cream. If a parent buys their child an ice-cream, the parent is the customer and the child the consumer. When marketing a product, a firm must decide whether the customer or consumer is most influential in the purchasing decision.
Services can be:
- commercial (business)
There are often overlaps between the two, e.g. banks offer financial services to both individual and business customers.