Business

From New World Encyclopedia


Business is the social science of managing people to organize and maintain a collective effort toward accomplishing a particular creative or productive goal, usually to generate revenue. The term refers to general commercial, professional, or industrial activity and has at least three usages, depending on the scope. The general usage can refer to any activities of a particular collective unit. The singular usage refers to a particular company or corporation, wherein individuals organize based on expertise and skills to bring about social or technological advancement. The generalized usage refers to a particular market sector, such as "the record business," "the computer business," or "the business community" and the particular community of suppliers of various goods and services. With some exceptions, such as cooperatives, non-profit organizations and various government institutions, businesses are formed to earn profit and increase the personal wealth of their owners. Owners and operators of a business have as one of their main objectives the receipt or generation of a financial return in exchange for their work and expense of time, energy, and money.

Types of Business Associations

File:View of Wall Street.jpg
Wall Street, Manhattan is the location of the New York Stock Exchange and is often used as a symbol for the world of business.

Businesses are entities formed for the purpose of carrying on commercial enterprise. Such organizations are often established via legal systems that recognize certain contracts, property rights and production mergers.[1] Generally, there are five main types of business units recognized:

Sole Proprietorship: A sole proprietorship, or individual proprietorship, is a business owned by a single person. The owner may operate on their own or may employ others, but retains total and unlimited personal liability of the debts incurred by the business.

Partnership: A partnership is a form of business in which two or more people operate for the common goal of making profit. Each partner has total and unlimited personal liability of the debts incurred by the partnership.

Cooperative Business: A cooperative business, or Co-op business, uses an integrated business structure with members of the co-op sharing decision-making authority. Co-ops normally fall into three types and include consumer co-ops, producer co-ops and worker-owned companies.

Private Limited Company: Private limited companies are small to medium sized businesses that are often run by a family or small group of owners. Owners and managers are only liable for the business up to the amount that they have invested in the company, and are not liable for the debts incurred by the company unless signing a personal guarantee.

Public Limited Company: A public limited company includes any business with limited liability and a wide spread of shareholders. Owners and managers are only liable for the business up to the amount they have invested in the company, and are not liable for the debts incurred by the company unless signing a personal guarantee. In the United States, any limited company can also be known as a corporation or limited liability company.

Businesses can be classified in many ways. One of the most common distinction focuses on the primary profit-generating activities of a business. Such classifications can include manufacturers, which produce products from raw materials or component parts, Service Businesses which offer intangible goods or services and typically generate a profit by charging for labor, business retailers and distributors which act as middle-men in the supply of goods and services, and financial businesses which include banks and other companies that generate profit through investment and management of capital. Other variants can include information businesses which generate profits primarily from the resale of intellectual property, and utility businesses which offer public services such as heat, electricity, or sewage treatment. Many other divisions and subdivisions of businesses exist. The authoritative list of business types for North America is contained within the North American Industry Classification System, or NAICS. The equivalent European Union list is the NACE.

Starting a Business

Commercial Street, Bangalore. India

This whole section on "Starting a Business" was taken directly from this website so it needs reworking or removing.

Doing Business records all procedures that are officially required for an entrepreneur to start up and formally operate an industrial or commercial business. These include obtaining all necessary licenses and permits and completing any required notifications, verifications or inscriptions for the company and employees with relevant authorities.

After a study of laws, regulations and publicly available information on business entry, a detailed list of procedures is developed, along with the time and cost of complying with each procedure under normal circumstances and the paid-in minimum capital requirements. Subsequently, local incorporation lawyers and government officials complete and verify the data. On average 4 law firms participate in each country.

Information is also collected on the sequence in which procedures are to be completed and whether procedures may be carried out simultaneously. It is assumed that any required information is readily available and that all agencies involved in the start-up process function efficiently and without corruption. If answers by local experts differ, inquiries continue until the data are reconciled.

To make the data comparable across countries, several assumptions about the business and the procedures are used. Assumptions about the business

The business:

  • Is a limited liability company. If there is more than one type of limited liability company in the country, the limited liability form most popular among domestic firms is chosen. Information on the most popular form is obtained from incorporation lawyers or the statistical office.
  • Operates in the country’s most populous city.
  • Is 100% domestically owned and has 5 owners, none of whom is a legal entity.
  • Has start-up capital of 10 times income per capita at the end of 2005, paid in cash.
  • Performs general industrial or commercial activities, such as the production or sale of products or services to the public. It does not perform foreign trade activities and does not handle products subject to a special tax regime, for example, liquor or tobacco. The business is not using heavily polluting production processes.
  • Leases the commercial plant and offices and is not a proprietor of real estate.
  • Does not qualify for investment incentives or any special benefits.
  • Has up to 50 employees 1 month after the commencement of operations, all of them nationals.
  • Has a turnover of at least 100 times income per capita.
  • Has a company deed 10 pages long.

Procedures

A procedure is defined as any interaction of the company founder with external parties (government agencies, lawyers, auditors, notaries). Interactions between company founders or company officers and employees are not counted as procedures. Procedures that must be completed in the same building but in different offices are counted as separate procedures. The founders are assumed to complete all procedures themselves, without middlemen, facilitators, accountants or lawyers, unless the use of such a third party is mandated by law.

Both pre- and post-incorporation procedures that are officially required for an entrepreneur to formally operate a business are recorded. Procedures that are not required to start and formally operate a business are ignored. For example, obtaining exclusive rights over the company name is not counted in a country where businesses may use a number as identification.

Procedures required for official correspondence or transactions with public agencies are included. For example, if a company seal or stamp is required on official documents, such as tax declarations, obtaining it is counted. Similarly, if a company must open a bank account before registering for sales tax or value added tax, this transaction is included as a procedure. Shortcuts are counted only if they fulfill 3 criteria: they are legal, they are available to the general public, and avoiding them causes substantial delays.

Only procedures required of all businesses are covered. Industry-specific procedures are excluded. For example, procedures to comply with environmental regulations are included only when they apply to all businesses conducting general commercial or industrial activities. Procedures that the company undergoes to connect to electricity, water, gas and waste disposal services are not included.

Time

Time is recorded in calendar days. The measure captures the median duration that incorporation lawyers indicate is necessary to complete a procedure. It is assumed that the minimum time required for each procedure is 1 day. Although procedures may take place simultaneously, they cannot start on the same day. A procedure is considered completed once the company has received the final document, such as the company registration certificate or tax number. If a procedure can be accelerated for an additional cost, the fastest procedure is chosen. It is assumed that the entrepreneur does not waste time and commits to completing each remaining procedure without delay. The time that the entrepreneur spends on gathering information is ignored. It is assumed that the entrepreneur is aware of all entry regulations and their sequence from the beginning but has had no prior contact with any of the officials.

Cost

Cost is recorded as a percentage of the country’s income per capita. Only official costs are recorded. The company law, the commercial code and specific regulations and fee schedules are used as sources for calculating costs. In the absence of fee schedules, a government officer’s estimate is taken as an official source. In the absence of a government officer’s estimate, estimates of incorporation lawyers are used. If several incorporation lawyers provide different estimates, the median reported value is applied. In all cases the cost excludes bribes.

The paid-in minimum capital requirement reflects the amount that the entrepreneur needs to deposit in a bank before registration starts and is recorded as a percentage of the country’s income per capita. The amount is typically specified in the commercial code or the company law. Many countries have a minimum capital requirement but allow businesses to pay only a part of it before registration, with the rest to be paid after the first year of operation. In Mozambique in March 2006, for example, the minimum capital requirement for limited liability companies was 1,500,000 meticais, of which half was payable before registration. The paid-in minimum capital recorded for Mozambique is therefore 750,000 meticais, or 10% of income per capita. In the Philippines the minimum capital requirement was 5,000 pesos, but only a quarter needed to be paid before registration. The paid-in minimum capital recorded for the Philippines is therefore 1,250 pesos, or 2% of income per capita.

This methodology was developed in Djankov and others (2002) and is adopted here with minor changes.

Business departments

Most businesses must accomplish similar functions regardless of size, legal structure or industry. These functions are often organized into departments. Common departments include (but are not limited to):

Finance and control
typically responsible for bookkeeping, financial reporting, financial controls and the raising of the capital necessary to run the business. See also Accounting
Human Resources
typically responsible for hiring, firing, payroll, benefits, etc.
Marketing and sales
responsible for selling the business' goods or services to the customer and for managing the relationships with the customer
Marketing
typically responsible for promoting interest in, and generating demand for, the business' products or services, and positioning them within the market
Sales
finding likely purchasers and obtaining their agreement (known as a contract) to buy the business' products or services
Production/service
makes the product or delivers the service
Production
produces the raw materials into the delivered goods, if they require processing
Customer service
supports customers who need help with the goods or services
Procurement
responsible for acquiring the goods and services necessary for the business. Sometimes organized as:
Strategic sourcing
determines the business' needs and plans for acquiring the necessary raw materials and services for the business
Purchasing
processes the purchase orders and related transactions
Research and Development
tests to create new products and to determine their viability (e.g. pilot plants)
Information Technology
manages the business' computer and data assets
Communications/Public Relations
responsible for communicating to the outside world
Administration
provides administrative support to the other departments (such as typing, filing, etc)
Internal Audit
an independent control function typically accountable to the Board of Directors for reporting on the proper functioning of the other departments


Management is sometimes listed as a "department" but typically refers to the top level of leadership within the business regardless of their functional role.

Business and government

The Bank of England in Threadneedle Street, London, England.

Most legal jurisdictions specify the forms that a business can take, and a body of commercial law has developed for each type. Some common types include partnerships, corporations (also called limited liability companies), and sole proprietorships.

Structuring a Business

The major factors affecting how a business is organized are usually:

  • The size and scope of the business, and its anticipated management and ownership : A smaller business is more flexible, larger businesses or those with wider ownership or more formal structures, will usually tend to be organized as partnerships or (more commonly) corporations. In addition a business which wishes to raise money on a stock market or to be owned by a wide range of people will often be required to adopt a specific legal form to do so.
  • The sector and country : private profit making businesses are different from government owned bodies. In some countries, certain businesses are legally obliged to be organized certain ways.
  • Limited liability : corporations, and limited liability partnerships, protect their owners from business failure, and are treated as separate entities, whereas an unincorporated business or person working on their own is usually not so protected.
  • Tax advantages : Different structures are treated differently in tax law, and may have advantages for this reason.
  • Disclosure and compliance requirements : different business structures may be required to make more or less information public (or reported to relevant authorities), and may be bound to comply with different rules and regulations.

Many businesses are operated through a separate entity such as a corporation, limited partnership or limited liability company. Most legal jurisdictions allow people to organize such an entity by filing certain charter documents with the relevant Secretary of State or equivalent and complying with certain other ongoing obligations. The relationships and legal rights of shareholders, limited partners, or members, as the case may be, are governed partly by the charter documents and partly by the law of the jurisdiction where the entity is organized. Generally speaking, shareholders in a corporation, limited partners in a limited partnership, and members in a limited liability company are shielded from personal liability for the debts and obligations of the entity, which is legally treated as a separate "person." This means that unless there is misconduct, the owner's own possessions are strongly protected in law, if the business does not succeed.

Where two or more individuals own a business together but have failed to organize a more specialized form of vehicle, they will be treated as a simple (USA: general) partnership. The terms of a partnership will be partly governed by a partnership agreement if one is created, and partly by the law of the jurisdiction where the partnership is located. No paperwork or filing is necessary to create a partnership, and without an agreement, the relationships and legal rights of the partners will be entirely governed by the law of the jurisdiction where the partnership is located.

A single person who owns and runs a business is commonly known as a sole proprietor, whether he or she owns it directly or through a formally organized entity.

A few relevant factors to consider in deciding how to operate a business include:

  1. General partners in a partnership (other than a limited liability partnership), plus anyone who personally owns and operates a business without creating a separate legal entity, are personally liable for the debts and obligations of the business.
  2. Generally, corporations are required to pay tax just like "real" people. In some tax systems, this can give rise to so-called double-taxation, because first the corporation pays tax on the profit, and then when the corporation distributes its profits to its owners, individuals have to include dividends in their income when they complete their personal tax returns, at which point a second layer of income tax is imposed.
  3. In most countries, there are laws which treat small corporations differently than large ones. They may be exempt from certain legal filing requirements or labor laws, have simplified procedures in specialized areas, and have simplified, advantageous, or slightly different tax treatment.
  4. In order to "go public" (sometimes called Initial public offering|IPO) — which basically means to allow a part of the business to be owned by a wider range of investors or the public in general — you must organize a separate entity, which is usually required to comply with a tighter set of laws and procedures. Most public entities are corporations that have sold shares, but increasingly there are also public LLCs that sell units (sometimes also called shares), and other more exotic entities as well (for example, REITs in the USA, Unit Trusts in the UK). However, you cannot take a general partnership "public."

Commercial Law and Other Regulation

Most commercial transactions are governed by a very detailed and well-established body of rules that have evolved over a very long period of time, with that being the case governing trade and commerce was a strong driving force in the creation of law and courts in Western civilization.

As for other laws that regulate or impact businesses, in many countries it is all but impossible to chronicle them all in a single reference source. There are laws governing treatment of labor and generally relations with employees, safety and protection issues (OSHA or Health and Safety), anti-discrimination laws (age, gender, disabilities, race, and in some jurisdictions, sexual orientation), minimum wage laws, union laws, workers compensation laws, and annual vacation or working hours time.

In some specialized businesses, there may also be licenses required, either due to special laws that govern entry into certain trades, occupations or professions, which may require special education, or by local governments who just want your money. Professions that require special licenses run the gamut from law and medicine to flying airplanes to selling liquor to radio broadcasting to selling investment securities to selling used cars to roofing. Local jurisdictions may also require special licenses and taxes just to operate a business without regard to the type of business involved.

Some businesses are subject to ongoing special regulation. These industries include, for example, public utilities, investment securities, banking, insurance, broadcasting, aviation, and health care providers. Environmental regulations are also very complex and can impact many kinds of businesses in unexpected ways.

Capital

When business need to raise money (called 'capital'), more laws come into play. A highly complex set of laws and regulations govern the offer and sale of investment securities (the means of raising money) in most Western countries. These regulations can require disclosure of a lot of specific financial and other information about the business and give buyers certain remedies. Because "securities" is a very broad term, most investment transactions will be potentially subject to these laws, unless a special exemption is available.

Capital may be raised through private means, by public offer (IPO) on a stock exchange, or in many other ways. Major stock exchanges include the New York Stock Exchange and Nasdaq (USA), the London Stock Exchange (UK), the Tokyo Stock Exchange (Japan), and so on. Most countries with capital markets have at least one.

Business that have gone "public" are subject to extremely detailed and complicated regulation about their internal governance (such as how executive officers' compensation is determined) and when and how information is disclosed to the public and their shareholders. In the United States, these regulations are primarily implemented and enforced by the United States Securities and Exchange Commission (SEC). Other Western nations have comparable regulatory bodies.

As noted at the beginning, it is impossible to enumerate all of the types of laws and regulations that impact on business today. In fact, these laws have become so numerous and complex, that no business lawyer can learn them all, forcing increasing specialization among corporate attorneys. It is not unheard of for teams of 5 to 10 attorneys to be required to handle certain kinds of corporate transactions, due to the sprawling nature of modern regulation. Commercial law spans general corporate law, employment and labor law, healthcare law, securities law, M&A law (who specialize in acquisitions), tax law, ERISA law (ERISA in the United States governs employee benefit plans), food and drug regulatory law, intellectual property law (specializing in copyrights, patents, trademarks and such), telecommunications law, and more.

Intellectual property

Businesses often have important "intellectual property" that needs protection from competitors in order to stay profitable. This could require patents or copyrights or preservation of trade secrets. Most business have names, logos and similar branding techniques that could benefit from trademarking. Patents and copyrights in the United States are largely governed by federal law, while trade secrets and trademarking are mostly a matter of state law. Because of the nature of intellectual property, a business needs protection in every jurisdiction in which they are concerned about competitors. Many countries are signatories to international treaty|treaties concerning intellectual property.

Business and management

The study of the efficient and effective operation of a business is called management. The main branches of management are financial management, marketing management, human resource management, strategic management, production management, customer service management, information technology management, and business intelligence.

Exit plans

Businesses can be bought and sold. Business owners often refer to their plan of disposing of the business as an "exit plan." Common exit plans include IPOs, MBOs and mergers with other businesses.

Business models

The term business model describes a broad range of informal and formal models that are used by enterprises to represent various aspects of business, such as operational processes, organizational structures, and financial forecasts. Although the term can be traced to the 1950s, it achieved mainstream usage only in the 1990s. Many informal definitions of the term can be found in popular business literature, such as the following:

A business model is a conceptual tool that contains a big set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.
 

More recently, researchers build definitions based on economic and organizational theories and show that the definitions are econometrically sound. For example, Malone, et al. (2006)at MIT propose an operational definition of business model, based on theories such as those from transaction cost economics. Zott and Amit (2002) from INSEAD and Wharton based their definition on boundary-spanning transactions.

Components of a Business Model

No different conceptualizations of business models exist (Chesbrough and Rosenbloom 2000; Hamel 2000; Linder and Cantrell 2000; Petrovic, Kittl et al.; Weill and Vitale 2001; Gordijn 2002; Afuah and Tucci 2003; Osterwalder 2004; Fetscherin & Knolmayer 2005). They all have various degrees of resemblance or difference. The model proposed by Osterwalder (2004) synthesises the different conceptualizations into a single reference model based on the similarities of a large range of models. The author's conceptualization describes a business model as consisting of nine related business model building blocks. Thus, a business model describes a company's business:

Infrastructure

  • core capabilities: The capabilities and competencies necessary to execute a company's business model.
  • partner network: The business alliances which compliment other aspects of the business model.
  • value configuration: The rationale which makes a business mutually beneficial for a business and its customers.

Offering

  • value proposition: The products and services a business offers.

Customers

  • target customer: The target audience for a business' products and services.
  • distribution channel: The means by which a company delivers products and services to customers. This includes the company's marketing and distribution strategy.
  • customer relationship: The links a company establishes between itself and its different customer segments. The process of managing customer relationships is referred to as customer relationship management.

Finances

  • cost structure: The monetary consequences of the means employed in the business model. A company's overhead.
  • revenue: The way a company makes money through a variety of revenue flows. A company's income.

These 9 business model building blocks constitute a business model design template which allows companies to describe their business model.

Evolution

A brief history of the development of business models might run as follows. The oldest and most basic business model is the shop keeper model. This involves setting up a store in a location where potential customers are likely to be and displaying a product or service.

Over the years, business models have become much more sophisticated. The bait and hook business model (also referred to as the "razor and blades business model" or the "tied products business model") was introduced in the early 20th century. This involves offering a basic product at a very low cost, often at a loss (the "bait"), then charging compensatory recurring amounts for refills or associated products or services (the "hook"). Examples include: razor (bait) and blades (hook); cell phones (bait) and air time (hook); computer printers (bait) and ink cartridge refills (hook); and cameras (bait) and prints (hook). An interesting variant of this model is a software developer that gives away its word processor reader for free but charges several hundred dollars for its word processor writer.

In the 1950s new business models came from McDonald's Restaurants and Toyota. In the 1960s the innovators were Wal-Mart and Hypermarkets. The 1970s saw new business models from FedEx and Toys R Us; the 1980s from Blockbuster, Home Depot, Intel, and Dell Computer; the 1990s from Southwest Airlines, Netflix, eBay, Amazon.com, and Starbucks. Poorly thought out business models were a problem with many dot-coms.

Today, the type of business models might depend on how technology is used. For example, entrepreneurs on the internet have also created entirely new models that depend entirely on existing or emergent technology. Using technology, businesses can reach a large number of customers with minimal costs.

Example business models over the years

  • The subscription business model
  • The razor and blades business model (bait and hook)
  • The pyramid scheme business model
  • The multi-level marketing business model
  • The network effects business model
  • The monopolistic business model
  • The auction business model
  • The online auction business model
  • The bricks and clicks business model
  • The loyalty business models
  • The Collective business models
  • The industrialization of services business model
  • The servitization of products business model
  • The low-cost carrier business model
  • The online content business model
  • The freemium business model
  • The premium business model

Do Business Models Matter?

Malone et al. (2006), at MIT find that some business models, as defined by them, indeed performed better than others in a dataset consisting of the largest U.S. firms, in the period 1998 through 2002.

Zott and Amit (2002) also link business models to performance, in the context of 190 young, growth-oriented firms in the US and Europe that had gone public between 1996 and 2000. See also their additional research on value drivers.

Related Concepts

The process of business model design is part of business strategy. The implementation of a company's business model into organizational structures (e.g. organigrams, workflows, human resources) and systems (e.g. information technology architecture, production lines) is part of a company's business operations. It is important to understand that business modeling commonly refers to business process design at the operational level, whereas business models and business model design refer to defining the business logic of a company at the strategic level.

Global Marketplace

As time progresses more and more businesses need to adapt to the demands of the global marketplace. Some countries have put an emphasis on innovation (i.e. America), while others may focus more on production and manufacturing (i.e Japan). Some points to consider when adapting a business to the worldwide market:

Removing trade obstacles and economic distortions (getting prices right) to enable countries to benefit from their comparative advantage is a prerequisite for competing in international markets on the basis of competitive primary production factors. At this stage, the role of Government and TSIs is primarily to eliminate biases against outward-looking development.

Specialization matters: countries need to focus on sectors with high value-added growth potential. Hence, creating competitive advantage in growth sectors should be one of the overriding concerns not only of companies, but also of governments. It requires a strong public-private partnership.

There are three major transitions: (i) from a traditional specialization to factor-driven competitive advantage, (ii) from factor-driven competitive advantage to investment-related competitive advantage, and (iii) from investment-related competitive advantage to innovation-driven competitive advantage.

Each of these transitions requires a different set of policies and strategies from the public and the private sector. What may have been a strength at one stage may turn into a liability at the next. Winner takes it all: in the new international division of labour, the only sustainable competitive position is leadership. The challenge is to segment markets accordingly.

Also with the advancement of technology and the World Wide Web more companies are preparing to become more globalized.

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  1. Britannica