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3 Focus on different types of businesses

[17]Private households come in many different forms – large families, singles, couples, with or without children – and so do businesses. The large variety of businesses is due to the fact that they differ in the factors of production that they combine, in the sector(s) they operate in and in size. But they all need to consider their stakeholders around them and the environment.

3.1 Businesses combine different factors of production

As mentioned earlier in the introduction, a business is an entity that offers goods and/or services to customers. In order to do so, it combines different factors of production, the resources used to create goods and services. The most important factors are

■ labour (all human resources),

■ land (all natural resources),

■ capital (resources like machinery, plant, vehicles, financial resources), and

■ entrepreneurship (which brings land, labour and capital together) as well as

■ knowledge and technology.

Depending on the factors that are dominant for the production process, a wide range of businesses can be found. Tina and Steve are mainly combining their own knowledge and skills, labour, technology and some capital as well as entrepreneurship. AT&S combines all factors of production. A winemaker with large vineyards combines land, labour, capital and entrepreneurship, but his business might also be dependent on his knowledge, experience and some technology.

3.2 Businesses operate in the primary, secondary and/or tertiary sector

Depending on what a business does, it contributes to one (or more) of three sectors of the economy. The three-sector model differentiates between three sectors of activity:

The primary sector refers to the extraction of raw materials from the earth. It mainly comprises farming, fishing, mining and forestry. Emerging countries (which are economically less developed) usually depend largely on the primary sector.

Businesses of the secondary sector transform raw materials into goods (manufacturing). Such businesses produce cars, ships, machinery, printed circuit boards and IC substrates (like AT&S), computers, clothes etc.

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The tertiary sector comprises the service industry, like distribution, banking, insurance, coaching etc. Tina and Steve offer services: they trade goods, develop software and provide technical support.

The more the economic development of a country advances, the more important the third sector becomes. In economically highly developed countries, like EU countries with a high gross domestic product (GDP) per capita (indicating a high standard of living), the tertiary sector usually accounts for more than 70% of the output of the economy, while the primary sector – as important as it may be for providing food – only accounts for a small percentage of the output of the economy.

Please note that GDP is the total monetary value of final goods and services that are produced within a country's borders in a certain time period (usually a year). Therefore, it is considered to measure the overall economic activity of a country. GDP is also used as an indicator for economic growth: if GDP (adjusted for inflation) increases over time, the economy is growing. However, the use of GDP is not undisputed. Critics say that not all sources of income are taken into account. What is more, GDP does not tell anything about the quality and/or sustainability of growth, nor is it a perfect indicator of economic wellbeing in a country. For example, GDP would also increase after ecological disasters that require action to rebuild infrastructure and to mitigate the damage. However, GDP is usually correlated to some indicators of well-being like health status and happiness.

3.3 Businesses can be profit-oriented or not-for-profit

Most businesses aim to operate for a longer time period. In order to do so and to thrive over time, most businesses aim to make a profit, i.e. they intend to have higher revenues than costs and expenses. Profits are important to the business itself because they can be reinvested in the business, which enhances the durability and sustainability of the business. Of course, profits are also important to the owners and investors because the profits are their reward for the risk they have taken.

However, there are also businesses (or organisations) that are not-for-profit and mainly aim to cover their costs. Nevertheless, they also need to achieve a certain level of revenues (or in many cases: donations) in order to be able to offer their goods and services. Any profit they make is also beneficial to the organisation, because it can be reinvested and used to enhance the services for customers or to engage in more projects. The Red Cross, the World Wildlife Fund or Greenpeace are examples of such non-profit organisations (NPOs).

3.4 Businesses come “in all sizes”, large and small

[19]There is an enormous variety of businesses: micro, small and medium enterprises (MSME or just SME) as well as large businesses. About 99% of all businesses in the EU are SMEs. The European Commission differentiates between these types of businesses (see http://ec.europa.eu) as presented in table 1.

Company category	Staff headcount	Turnover	OR	Balance sheet total
Micro	‹ 10	≤ €2 m		≤ €2 m
Small	‹ 50	≤ €10 m		≤ €10 m
Medium-sized	‹ 250	≤ €50 m		≤ €43 m

Table 1. Size categories of businesses

The definition of an SME is important for access to finance and EU support programmes targeted specifically at these enterprises. Tina and Steve have a micro company; even if they hire two assistants, they are still a micro company. AT&S on the other hand, with about 10,000 employees, is a large company.

The size of a business is also relevant in terms of legal requirements for their accounting (see chapter 6, Accounting). In many countries, small businesses are allowed to use simpler accounting methods in order to calculate their profits or losses.

3.5 Businesses may be local, national or international

A local (or regional) business operates in a small, limited area. Most customers live very close to the business. They do not serve a national or international market. Tina’s and Steve’s business would be such a local business, at least at the beginning. The most important challenge of (small) local businesses is to have sufficient financial funds and to acquire a substantial number of customers. Many business owners face the difficulties of undercapitalisation: their own funds are limited and it is very hard for them to access additional funding.

A national business serves the home market (the market within a country), but not the international market. An insurance company or a bakery that operates all over Austria, but not abroad, is a national business. Like a local business, it has to choose a suitable location. Additionally, it has to decide how to deliver its goods and services to other places within the country. The supply chain is much longer.

International (or multinational) businesses make and/or sell their goods and services in more than one country. As the home market might be limited and too small for some companies, they strive to serve a larger market. A larger, international market brings along a number of challenges: an even longer supply chain, different legal and economic systems, different cultures and languages, maybe also different currencies. As the number of multinational businesses has increased over time, the world has become globalised and we have experienced globalisation. AT&S is an international business that has production plants in Asian countries as well as in Austria and that sells its goods to other businesses all over the world.

3.6 Businesses operate in an environment – stakeholders are important

[20]There is one thing that all businesses have in common: they are always integrated into an environment in which they operate. Therefore, they deal with many other people and/or businesses and need to consider their interests as well. Everyone that is (potentially) affected by the activities of a business and/or has an interest in what a business does is a stakeholder. Due to globalisation, the world has become a smaller place and the number of stakeholders has grown considerably. Furthermore, people are more environmentally conscious and expect businesses to preserve and protect the environment. The most important stakeholders of a business are shown in figure 5.

Figure 5. Stakeholders of a business

The owners of a business are stakeholders because they have invested their money in the business and want their investment to pay off. They want to make a profit in order to get something in return for the risk they have taken. They also profit from the increase in value of a business if the business operates successfully on the market. This increase is usually reflected in the price of shares of this business. It can be earned by selling the shares or the whole business (for example, the company Runtastic GmbH was bought by Adidas for 220 million euros). Making a profit may be one, but does not have to be the only goal of the owner(s) of a business. Solving a problem, contributing to a solution to a problem that customers have (such as computer problems), and making a contribution to the welfare of society may also be important. Tina and Steve create value for their customers and they also help preserve the environment by repairing and setting up used computers and – consequently – reducing waste.

[21]Managers (who can, but do not necessarily have to be owners) as well as employees are stakeholders because they depend on the business. Working for the business is their source of income, so job security is important. What is more, many managers and employees identify themselves with their tasks and their contribution to the business. And just as they depend on the business, the business depends on them as well. Only if owners, managers and employees share the values and objectives can a business succeed not only in the short run, but also in the long run. Figure 6 illustrates the interdependencies of employees, managers and the business in the case of AT&S.

Figure 6. Interdependencies of people, values, objectives and vision (source: AT&S annual report 2017/18)

Suppliers are important to a business and its production. Timely deliveries of good quality and the correct quantity of supplies needed for production are crucial. If a supplier fails, a business cannot produce its goods or services. In return, suppliers expect to get paid and hope for more orders in the future. If a business fails, suppliers may also get into trouble.

A similar mutual dependency exists between a business and its customers.

Local, national and international communities as well as the government also depend on a business and are affected by its activities.

[22]Finally – and most importantly – businesses also need to act responsibly with the environment and the natural resources that they use. It is not sufficient only to claim to be environmentally friendly and to care about the environment (to “green wash” the business activities), but it takes concrete activities and proven results. More and more businesses report their activities on their websites and in their annual reports, as the example of AT&S in figure 7 shows.

Figure 7. The impact of AT&S activities on the environment (source: annual report 2017/18)

There are many factors that influence the success of a business. Considering the stakeholders and their (conflicting) interests is one of these factors. Other important factors include a suitable legal structure and a solid financial structure of the business, awareness of the market and changes in the market, awareness of costs and profitability. The following chapters deal with these topics.