Economic Sciences Basics: Introduction to Business

Economic Sciences Basics (ECSB) - WS 24/25 - Course Unit 1: Introduction to Business and Economy - PT 1

• Learning Objectives:
  • Comprehend the concept of business
  • Understand the classification of products and markets
  • Explore the characteristics and various forms of businesses
  • Acquire a fundamental understanding of basic economic principles

Definition of Business

• Definition: A business is any activity that seeks to provide goods and services to others while operating at a profit or sometimes for purposes other than profits.
• Core Activity: Primarily involves the activity of buying and selling goods and services.
• Purpose: To deliver goods and services that meet needs and wants, and to earn money. Can be for profit or not-for-profit

Goods

• Definition: Tangible items or products manufactured, produced, or acquired to meet consumer needs and wants.
• Examples: Doughnuts, flashlights, toothpaste, vehicles, shoes, dolls

Services

• Definition: Intangible activities or tasks provided by individuals or businesses in exchange for compensation.
• Examples: Healthcare, education, media and entertainment, information technology

Types of Businesses - Classification Criteria

• Size: Small and Medium-sized Enterprises (SMEs) and Large Enterprises
• Function: Manufacturing companies, service companies, marketing and retail (merchandising) companies, hybrid companies
• Legal Form: Sole Proprietorship, Partnerships, Corporations

Small and Medium-Sized Businesses (SMEs)

• Characteristics: Independently owned and operated, not dominant in their field, meet specific size criteria (sales or employees).
• Percentage: A high percentage, comprising 19 out of 20 businesses in the USA.
• Key factors determining SME status: Staff headcount and either turnover or balance sheet total.
• Factors determining SME status (Example):
  • Medium-sized: <250 staff headcount, €50m turnover
  • Small: <50 staff headcount, €10m turnover
  • Micro: <10 staff headcount, €2m turnover
• Advantages: Easy to form, low costs, effective owner-worker relations
• Disadvantages: Weaknesses in competing with large companies, limited growth and "inadequate" management

Large Enterprises

• Characteristics: Massive scale, wide geographic reach, offering diverse products and services, complex organizational structures with multiple departments.
• Advantages: Professional management, financial strength, diversification of products and services
• Disadvantages: High levels of bureaucracy, higher operational costs, complex decision-making

Types of Businesses - Function

• Manufacturing Companies: Concentrate on producing goods, transforming raw materials to finished products.
• Service Companies: Provide intangible products or services instead of physical goods.
• Marketing and Retail (Merchandising) Companies: act as intermediaries between manufacturers and customers, purchasing in bulk and distributing at retail.

Types of Businesses - Legal Form

• Sole Proprietorship: One-man owned firm, company owned by a single person, simplicity in procedures, minimal administrative complexity; potential for unlimited liability. Profit Retention and Tax Benefits. Leaving Legacy.
• Partnerships: Company operated by 2+ people, co-owners by legal agreement; General Partnership and Limited Partnership. Unlimited Liability (GP) vs Limited Liability (LP).
• Corporations: Separate legal entity, with its own assets and liabilities, ownership represented by shares of stock, shareholders have limited liability. Perpetual Existence, complex structure, Formal governance with a Board of Directors and Officers.

Liability Concept

• Liability: Legal responsibility for actions or inactions.
• Types of Liability: Unlimited and Limited
• Unlimited Liability: Owner is personally responsible for all business debts; creditors can seize personal assets.
• Limited Liability: Individual's liability is limited to the invested amount in the company; personal assets are protected.

Ownership Considerations for Businesses

• Sole Proprietorship: One person owns and operates.
• Partnerships: Two or more people co-own through legal agreement (General vs. Limited).
• Corporations: Separate legal entity from owners, with shareholders owning shares.

Management of Corporations

• Shareholders: Elect the Board of Directors.
• Board of Directors (BOD): Represents shareholder interests, selects top management
• Top Management (e.g. CEO): Oversee company activities, managed by the BOD.
• Middle Management: Oversee various departments, managed by the top management
• First-line Management: Oversees employees directly.