Defination of Business
Business includes the activities of all commercial producers of goods and services. These producers range from small shops owned by one person to huge organizations owned by thousands of stockholders who have shares in the companies. The word business may refer to producers of the same product or service, such as the clothing business or the insurance business. An individual enterprise may also be called a business.
Business affects nearly every part of our lives and provides almost all the goods and services that we use daily. It also supplies most of the jobs and salaries that enable us to buy those goods and services.
The world of business includes a tremendous variety of products and services, some of which we may never see. For example, many people think of an automobile as the product of an assembly line in a plant. But the assembly line is only the final stage of a long process involving many companies. These companies include producers of batteries, glass, steel, tires, and upholstery. Manufacturing a car also requires the services of people in such professions as drafting, engineering, and tool-and-die making. Business also includes advertising, selling, and other marketing activities.
Business plays a dominant role in the United States, Canada, and other nations that have an economy based on free enterprise. In a free enterprise system, the managers of businesses decide what goods and services should be produced and what their prices should be.
Business in a free enterprise system
Business in a free enterprise system depends on factors both in the economy and within individual companies. The most important of these factors include (1) productive resources, (2) profits, and (3) competition.
Productive resources enable business firms to produce goods and provide services. They include natural resources—land and raw materials, such as minerals, water, and sunlight; capital—a company’s factories, supplies, and equipment, and its money to buy these things; labor—the work of a company’s employees; and technology—a firm’s scientific and business research and inventions.
The productive resources of a business are also known as inputs. The kind and quantity of inputs depend on the goods and services, called outputs, that are produced. For example, such service businesses as hotels and telephone companies need the work of many employees. Many farms require large areas of land. Many manufacturing companies must have large amounts of capital for the purchase of machinery and raw materials.
Profits are the earnings of a firm after all expenses have been paid. These expenses include the costs of productive resources in the form of wages, rent, and interest.
The goal of nearly all business firms is to earn a maximum profit. Most business policies are based on this profit motive. Sales provide the income for most firms, and executives try to increase their company’s profit by boosting the sale of outputs to consumers. Executives also try to run their companies efficiently. Efficient employees and equipment help to lower production costs—and thus increase profits—by getting the job done with as little waste of both energy and time as possible.
Competition among business firms affects the price and quality of goods and services. Firms must maintain reasonable prices and standards to attract and keep customers. People are not likely to buy from a company if they are dissatisfied with its product, or if they can purchase the product for less money elsewhere. Firms compete for sales by using such techniques as advertising and by offering special discounts or bonuses.
Certain types of businesses have few or no competitors. Most of these businesses provide essential services to the public. For example, many public utility companies have a legal monopoly in their fields. In providing such services as electric power and water, one company may be able to operate more efficiently than several competing firms. Other enterprises, such as airports and railroads, are too expensive for several companies to operate in the same area. In these types of businesses, government regulation replaces competition in setting prices and establishing standards of quality.
Types of business ownership
There are three main types of business ownership in the United States: (1) single proprietorships, (2) partnerships, and (3) corporations. The nation has about 23 million nonfarm single proprietorships, 3 million partnerships, and 6 million corporations.
Single proprietorships are businesses owned and operated by one person. The owner makes all decisions and receives all profits. He or she is legally responsible for any business debts. Proprietors can start a business with a small amount of capital and few legal formalities. Many single proprietorships are small stores or such service enterprises as beauty parlors and repair shops. Single proprietorships are the most common form of business ownership in farming, construction, and many other industries. Most of these businesses close down if the owner dies or runs out of capital.
Partnerships consist of two or more owners who share the responsibilities and profits of a business. In most cases, each partner is liable for all business debts.
Partners may sign a legal agreement that specifies the amount of work and capital each person contributes and the percentage of profits each receives. Most partners together can raise more capital and handle more business than a single proprietor. However, nearly all partnerships are small businesses. They are most common in law, medicine, real estate, and retailing. A partnership can be dissolved by mutual agreement or by the withdrawal of any of the partners.
Corporations are owned by stockholders, who have shares of stock in these companies. The approval of a majority of the stockholders may be required for certain major decisions that affect business operations. However, professional managers actually run the everyday activities of a corporation. Profits may be distributed among the stockholders as dividends or reinvested in the corporation. Most corporations are larger than businesses owned by individuals or partners. Corporations account for about 80 percent of all business receipts in the United States.
A corporation is more difficult to establish and operate than a single proprietorship or a partnership. For example, people who want to establish a corporation must meet many legal requirements of the federal, state, and local governments. The decisions of a corporation are also subject to the approval of both the stockholders and the managers. However, corporations have three chief advantages over other types of business ownership. First, large amounts of capital can be raised through the sale of stock. Second, the owners—that is, the stockholders—have limited liability. If the corporation goes into debt, they can lose no more than their investment. And third, business operations are not affected by an owner’s death or withdrawal from the company.
Corporations vary tremendously in size and in the extent of their business activities. The firms range from small companies whose products or services reach only a few consumers to huge organizations that produce most of the goods and services in a particular field. Corporations at the two extremes of size differ so greatly that they may be considered as separate types of corporations. A third type is a conglomerate—that is, a giant corporation that controls many smaller companies producing different and usually unrelated goods and services.
Small corporations are generally defined as those with assets of less than $500,000. Approximately 5 million corporations, or more than 80 percent of all U.S. corporations, are in this group. However, small corporations control only about one-half of 1 percent of the total corporate assets in the United States.
Giant corporations have assets greater than $500 million. They represent less than two-tenths of 1 percent of the corporations in the United States. But these corporations control about 90 percent of the country’s corporate assets. They dominate such industries as banking, insurance, petroleum, public utilities, and transportation. Some of their operations extend around the world. A corporation of this size controls more productive resources than many countries do.
Conglomerates own a number of companies and mostly operate in unrelated industries. Many conglomerates are formed to protect total sales from changes in the economy or in consumer demand. For example, if the member companies differ sufficiently in their activities, the conglomerate can usually offset losses in some of its operations with profits in others.
An example of a conglomerate is the General Electric Company. It makes such products as electric appliances, locomotives, jet engines, power generation equipment, automation systems, and medical equipment. The corporation has hundreds of factories, which are in the United States and dozens of other countries. It also operates a large financial services and leasing company and is a part-owner of NBC Universal, Inc., a major media and entertainment company.
How a corporation operates
The way a corporation is run reflects the nature of its business and the attitudes of its management. No two business firms operate in exactly the same manner. However, nearly all corporations have a similar organization that includes (1) stockholders, (2) top management, and (3) specialized departments.
Stockholders, the owners of a corporation, vote on certain major questions of company policy and elect a board of directors to head the firm. In most cases, stockholders have one vote for each share of company stock that they own. If they cannot attend the corporation’s annual meeting of stockholders, they may assign their votes to other shareholders by means of a document called a proxy.
Top management of a corporation consists of the board of directors and the executive officers. The board of directors determines basic company policies and appoints the executive officers. These officers include a chairman of the board or chief executive officer, a president, and a number of vice presidents. They are responsible for carrying out the decisions of the board of directors and the stockholders. The executive officers also select the managers of the various departments of the corporation.
Specialized departments. The number of departments in a corporation depends on the size of the company and on the nature of the goods and services that it provides. For example, a corporation with many employees may need a personnel department. A manufacturing firm may need a research department to study ways of developing new products or improving existing ones.
Most corporations have departments that handle three basic business activities—production, finance, and marketing.
The production department has the responsibility for every activity that helps produce a firm’s goods and services. In a manufacturing company, the production department may employ industrial engineers, machine operators, and a plant maintenance crew. The department may be headed by a production manager who reports to the vice president in charge of production.
The finance department handles all aspects of raising capital, making and receiving payments, and keeping financial records. It may include accountants, bookkeepers, and experts in statistics on its staff. Most finance departments are supervised by a controller.
The marketing department deals with selling goods and services to consumers. It evaluates prices, consumer demand, promotional activities, and other factors that affect sales. The department’s staff may include specialists in advertising, market research, and public relations. In most corporations, the department manager reports to the vice president in charge of marketing.
Government regulation of business
In a free enterprise economy, business executives decide what products or services to offer consumers. They can adjust operating procedures and prices in an attempt to increase the profits of their firms. But in such countries as the United States and Canada, the government establishes certain controls over various business practices. These controls include (1) health and safety regulations, (2) moral regulations, and (3) antitrust laws.
Health and safety regulations are designed to ensure the welfare of a company’s employees, the consumers, and the community. Some of these controls deal with working conditions within a business. Such laws include limits on the number of hours that people work and safety standards for the maintenance of machinery.
Some health and safety regulations protect consumers. These laws range from building codes to labeling requirements for cosmetics. Other health and safety regulations involve the effects of business operations on the environment. For example, the U.S. government sets emission standards to restrict the amount of air pollution produced by automobiles. It also prohibits paper manufacturers from dumping poisonous chemical wastes into lakes and streams.
Moral regulations. Certain business practices or products may conflict with the moral standards of a society. Its citizens may decide that these areas of business should be strictly controlled or even prohibited. Most Western nations, for example, have laws against prostitution and the sale of certain drugs. Nearly all the state governments in the United States regulate the sale of guns and alcoholic beverages.
Antitrust laws are intended to maintain competition among business firms. A trust consists of two or more companies that combine in order to control the supply and price of a product or service. Such an arrangement eliminates competition among the companies and generally results in higher prices for consumers. Other companies in the same field as a trust may find themselves forced out of business.
The first antitrust legislation in the United States was the Sherman Antitrust Act of 1890. This law forbids any business combination or practice that interferes with free competition or promotes monopoly. The Federal Trade Commission (FTC), established in 1914, and the Antitrust Division of the Department of Justice have the authority to break up price-fixing agreements among companies. These agencies also can prevent any merger (joining of two or more companies) that would reduce competition. Most states have additional laws that prevent the creation of trusts.
Other regulations affect such industries as banking, air and rail transportation, and radio and television broadcasting. The government assumes additional powers over business in a national emergency or when severe economic problems occur. During World War II (1939-1945), U.S. government agencies controlled prices and rationed certain products in order to meet the nation’s military needs. In the late 1970’s, the shortage of petroleum products led to some government regulation of the distribution and sale of gasoline.
Since the 1980’s, many conglomerates and giant corporations have been formed through mergers. Mergers may be divided into two types—hostile take-overs and friendly take-overs. In a hostile take-over, an individual, group, or firm known as a raider acquires a sufficiently large portion of a company’s stock to gain control or ownership of the company. Most firms targeted for hostile take-over try to fend off raiders. In a friendly take-over, the shareholders and directors of two or more independent firms agree to combine their firms. Many companies have discovered that they can compete better by merging with a firm that complements their strengths.
Also in the 1990’s, many businesses began downsizing by reducing their labor force and by spreading the former employees’ work among the remaining workers. In many cases, this strategy produced short-term cost savings. However, it did not solve many efficiency problems. By the mid-1990’s, numerous business leaders had concluded that their firms had to pay more attention to reducing error rates and improving quality.
In the late 1990’s, many businesses recognized the importance of the Internet as a business tool. The Internet allows their workers to correspond effectively with clients and other businesses. It also provides them with opportunities to advertise and sell their merchandise online. Companies are also able to gather information using Internet resources to help operate their businesses more efficiently. They can also purchase many of their supplies online. Such online transactions are known as e-commerce or electronic commerce.
The early 2000’s were marked by a series of corporate failures related to faulty or dishonest accounting practices. In November 2001, Enron Corporation, one of the world’s largest energy companies, revealed that it had overstated its earnings by several hundred million dollars since 1997. In June 2002, WorldCom Inc., a global communications company, announced that it had improperly concealed billions of dollars of expenses. Both Enron and WorldCom were based in the United States, and both filed for bankruptcy soon after their announcements. The failures led to a series of criminal investigations and charges of fraudulent accounting practices. These scandals and others involving U.S. companies severely damaged investors’ confidence in U.S. stocks. In July 2002, the Sarbanes-Oxley Act went into effect. This act established a new oversight board to monitor the accounting industry. The act also increased punishments for corporate fraud.
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