BUSN 100 | Week 1
Business Ecosystem and Entrepreneurship

A business can be defined as “any activity that seeks to provide goods and services to others while operating at a profit… Goods are tangible products such as computers, food, clothing, cars, and appliances… Services are intangible products (i.e., products that can’t be held in your hand) such as education, health care, insurance, recreation, and travel and tourism” (Nickels, McHugh, and McHugh 2013, 4).

Businesses operate in an ecosystem, and to be successful, any business owner must understand the ecosystem and how to navigate it. Many businesses are owned by entrepreneurs. To launch a successful business, an entrepreneur must be knowledgeable about the different forms that businesses can take. Entrepreneurs must set up their businesses in the form most appropriate and likely to provide a successful framework for the goods and/or services that they will sell.

This lesson will introduce the concept of the business ecosystem and discuss the various aspects of the environment that surround most businesses, including branding and ethics. In addition, this lesson will cover entrepreneurship and explain the different forms that a business can take.

Learning Objectives:

  • Describe the environment in which business operates.
  • Summarize the effect of economic conditions on business performance.
  • Identify the main forms of business organizations.
  • Describe the role of ethics in the business environment.

What Is a Business Ecosystem?

The concept of the business ecosystem was first introduced in 1993 by James Moore, a business scholar and researcher associated with Harvard University. Moore argued that every business operates in a network of organizations that both compete and cooperate with each other to provide goods and services in the market. This network of organizations includes businesses, suppliers, and distributors, as well as the customers who purchase the goods and services produced. The network also includes the government agencies at the federal, state, and local levels that regulate and impact business activity. According to Moore, each business operates in the business ecosystem and impacts every other business in operation. Likewise, each business is impacted by all other businesses in the ecosystem. This creates “a constantly evolving relationship in which each business must be flexible and adaptable in order to survive, as in a biological ecosystem” (Investopedia).

Connected dots on a world map

Evolutionary Stages in the Business Ecosystem

According to Moore (1993), a business ecosystem evolves in four stages—birth, expansion, leadership, and self-renewal. He explained each stage as follows:

Birth is the first stage in the business ecosystem. During this phase, entrepreneurs focus on determining:

  • The goods and/or services that they wish to sell.
  • The value of these goods and/or services.
  • The most appropriate means for producing and selling these items.
  • The people who are most likely to be the business’ customers. A customer can be defined as “a party that receives or consumes products (goods or services) and has the ability to choose between different products and suppliers” (BusinessDictionary).
  • The wants and needs of these customers and the best ways for the business to meet them.
  • Other businesses and companies that offer similar goods and/or services and how to compete with them.
  • The particulars and nuances of the market for the goods and/or services.

Relationships in the Business Ecosystem

Collage of business scenes

The business ecosystem includes a variety of actors that interrelate and help determine whether a business will succeed or fail. These include customers, producers, retailers, service businesses, and other stakeholders such as investors.

Customers

A business’ first responsibility is to its customers. This includes offering quality goods and services that meet safety standards and give customers a good value for a reasonable price. As part of this, businesses should conduct their operations in an ethical manner that includes fair business practices. This means a business should take no actions that unfairly disadvantage competitors, limiting competition and reducing the options that customers have in the marketplace (Brown and Clow 2008).

Businesses must be concerned about meeting their customers’ needs. As part of this, they should practice empowerment, giving their frontline employees, such as office clerks and salespeople, “the responsibility, authority, freedom, training, and equipment they need to respond quickly to customer requests. They also must allow workers to make other decisions essential to producing high-quality goods and services” (Nickels, McHugh, and McHugh 2013, 17).

Customers are a critical part of the business ecosystem. If a business does not have a sufficient number of customers purchasing its products and/or services, it will fail. Without customers, there is no business.

Customer making a purchase at a coffee shop

Producers

Man using drilling machine in a factory

Producers gather raw goods and use them to create, expand, manufacture, or improve goods and/or services. Producers provide the finished goods and/or services that will be sold to customers. Producers are critical in the business ecosystem because without them, there would be goods and services to provide to customers.

Intermediaries and Wholesalers

Once producers have done their work, it is necessary to move goods to locations in the marketplace where they are available for customers to buy. This is the work performed by intermediaries and wholesalers.

Intermediaries are businesses that transport goods from one business to another. Intermediaries buy goods, store them, and then resell them to retailers (Brown and Clow, 2008, 101).

Truck container depot

Intermediaries and wholesalers provide a critical service in the business ecosystem as they become the means for moving goods from producers to retailers, thus making them available for customers to buy.

Retailers and Service Businesses

Retailers and service businesses are vital in the business ecosystem because they are the means of delivering goods and services to customers. When customers need a good or service, they do not go to producers, intermediaries, or wholesalers to obtain these items. Instead, they find the retailer or service business that provides what they need and obtain goods and services directly from these businesses.

Investors

Businesses are possible because people are willing to invest in them. Investors are those who use “money to participate in an enterprise that offers the possibility of profit” (Brown and Clow 2008, 547). All businesses require financial resources to operate, and investors ensure that those financial resources are available.

Businesses have a responsibility to ensure that they conduct their operations in a manner that is ethical and maximizes the potential for investors to earn as much profit as possible. This includes safeguarding resources to ensure they are used in a manner that is as efficient and effective as possible to enable the business to achieve its goals and objectives. As with all other actors in the business ecosystem, investors are extremely important as they provide the foundation, including financial support, needed for businesses to function.

Businesswoman presenting plan to an investor

Importance of Marketing in Business Ecosystem

The business ecosystem helps new businesses develop and become well established operations. A key part of this process, and a determinant of whether a business will be successful, is marketing. Marketing can be defined as “the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large” (Nickels, McHugh, and McHugh 2013, 352).

Marketing will be discussed in more detail in Lesson 2. For now, it is helpful to understand that generally, marketing involves four factors, which are known as the four Ps of marketing—product, price, place, and promotion (Nickels, McHugh, and McHugh 2013, 357).

Importance of Finance in Business Ecosystem

Money is needed to support a new business. Financial management will be discussed in more detail in Lesson 6. For now, it is important to recognize that any new business must begin with a business plan that includes a financial plan for how the business will be financially viable. A financial plan can be defined as “a set of documents that outline the essential financial facts about the new venture.” It can be thought of “as a road map that can be used to guide a company into the future” (Brown and Clow 2008, 295).

Businesswoman explaining financial document to investors

According to Brown and Clow (2008), effective financial plans do the following:

  • Identify the assets that a business needs to purchase.
  • Detail the amount of money that a business needs to begin operating.
  • Describe the expenses the business expects to incur and outlines how the business will cover those expenses.
  • Explain the accounting processes the business will use to document and report its financial records.
  • Provide a forecast of the business’ future finances, including anticipated profits.
  • Give details about the methods the business will use to obtain money needed to grow or expand its operations.

As noted previously, investors are a vital part of the business ecosystem as they provide the financial resources required for businesses to survive. When starting a new business, possible investors include banks (in the form of loans) and friends.

Branding Helps Ensure a Business’ Success

One of the most important parts of marketing a good or service is branding. The term “brand” carries over from history in the days of the Old West when farmers and ranchers identified their cattle as belonging to their herd by burning a permanent mark, or brand, into the flanks of each cow. Since cattle were prone to roam over a large area, farmers and ranchers could lose some of their herd if they did not brand each animal with a unique mark (Hiam 2014, 263).

In the marketplace, brands serve a similar purpose by ensuring that manufacturers and retailers cannot substitute their goods and services for those of their competitors (Jones and Slater 2003, 31). Branding can be defined as “the process of identifying and differentiating a product or service, and establishing its uniqueness” (Yadin 1998, 14). In the marketplace, customers use brands to help them make decisions about which goods and services to buy. Brands provide customers with a process for identifying which goods and services have the quality, price, and other features that they need and want (Gorchels 2006, 72).

Branding will be discussed in more detail in Lesson 2 as part of the review of marketing.

Businessman sketching branding ideas in his notebook

Businesses Must Practice Good Ethics

According to President John F. Kennedy, customers have four basic rights: “1) the right to safety, 2) the right to be informed, 3) the right to choose, and 4) the right to be heard” (Nickels, McHugh, and McHugh 2013, 100). To ensure that customers receive these rights, businesses must behave ethically.

For businesses, ethics is concerned with how people behave in the workplace, and “refers to rules (standards, principles) governing the conduct of organization members,” with the rules relating “to what is right or wrong in specific situations” (Ferrell 2005, 4).

Ethics will be discussed in more detail in Lesson 8. At this point, it is useful to understand that for a business to practice good ethics overall and be recognized as an ethical organization, everyone in the organization—leaders, managers, and employees—must behave ethically. To ensure this happens, businesses need to establish compliance rules that specify the behavior expected of those participating in the business. This is accomplished by developing both a code of ethics and a code of conduct. These will be discussed in more detail in Lesson 8, but for now, here’s a quick summary.

A code of ethics is a written document that outlines an organization’s mission and values, such as the expectation that employees will give the organization’s customers the utmost respect. It explains the ethical principles that the organization promotes based on its mission and values. It also details the standards of professional behavior that employees are expected to maintain, including how they should approach problems. Codes of ethics are broader and more general than codes of conduct. Typically, codes of ethics can be found in an organization’s published materials, such as its written policies and procedures.

Knowledge Check

Which of the following “actors” in the business ecosystem is responsible for creating the products that will be sold to customers?


Which of the four Ps of marketing deals with ensuring that customers have access to something so that they can buy it?


What is branding?

Business Types

An entrepreneur is anyone “who recognizes a business opportunity and organizes, manages, and assumes the risks of starting and operating a business. Entrepreneurship is the process of recognizing an opportunity, testing it in the market, and gathering the resources necessary to go into business” (Brown and Clow 2008, 77).

Business owner standing in her shop

When an entrepreneur sets up a new business, he or she has several options for how that business can be formed and organized. To ensure a business’ success, entrepreneurs must ensure that they select the business type most appropriate to handle the goods and/or services they intend to provide. The types of businesses that entrepreneurs can select from to form their business include sole proprietorship, partnership, corporation, and limited liability companies (LLC).

Sole Proprietorship

Sole proprietorships are businesses that are owned, as well as usually managed, by one individual. Sole proprietorships are the easiest form of business to create because the law does not require major documentation be filed to establish one. Any individual who wants to establish a sole proprietorship can do so provided he or she has the necessary resources such as office space and equipment. Local governments may require licenses and/or permits for sole proprietorships to operate, but it is usually a simple process to obtain these.

Sole proprietorships have the advantages of allowing business owners to be their own bosses and retain all profits that they can generate from the business. Sole proprietorships also are not subjected to any special taxes. Instead, profits from the business are taxed as personal income for the business owner, and he or she simply pays typical income taxes on those profits (Nickels, McHugh, and McHugh 2013, 87).

Partnerships

A partnership is a business that has two or more owners. According to Nickels, McHugh, and McHugh (2013), partnerships come in several forms including the general partnership, limited partnership, and master limited partnership.

Partnerships have the advantage of having more financial resources since more owners are involved in the business. They also avoid special taxes, such as corporate income taxes, and since at least two people are involved in the business, they usually have a larger knowledge base for operating the business.

Partnerships also have disadvantages such as unlimited liability of partners, and the necessity to divide profits among the partners. In addition, whereas sole proprietorships can easily be dissolved, partnerships are more difficult to end. The partners must agree about who will retain any assets from the business as well as who will be responsible for liabilities.

Two businessmen shaking hands

Corporations

Corporations are legal entities owned by shareholders, but corporations have the authority to act independently of their shareholders. This includes having liability that is not connected to the shareholders. This is one of the advantages of a corporation. The shareholders have limited liability, which means they are only responsible for any losses up to the amount that they invest in the business. They have no liability beyond the amount that they invested.

Let’s look at some additional advantages, as well as some disadvantages of corporations.

Corporations offer several advantages. For example, since stockholders have limited liability in the business, it is easier to convince them to invest in it, making it easier to raise money to start a corporation. It is easy to change the ownership of a corporation because the only requirement is to sell the stock to someone else. Also, stockholders generally do not manage the corporations they own so there is no need for the owners of a corporation to have business knowledge. Corporations can hire individuals with business expertise to manage their operations.

Limited Liability Companies (LLC)

Business owners meeting with each other

A limited liability company (LLC) is similar to a corporation, but the liability of the owners is limited, and LLCs are not as formal as corporations. They are recognized as partnerships by the Internal Revenue Service (IRS) and as such, do not have to pay corporate income taxes. LLCs also do not have the extensive paperwork requirements that are imposed on corporations.

LLCs do have disadvantages. For example, individuals with ownership in an LLC cannot sell or transfer their ownership in the company without the approval of all other owners in the company.

Knowledge Check

Which type of business is the easiest to create?

Lesson Overview

Whether a business is new or already established, it is important for business owners to understand the basic concepts of business, such as the business ecosystem and types of business formations. Business owners also need to know about other aspects of business, such as marketing and financial management. These will be covered in later lessons provided in this course.

Collage of images from the lesson

Definitions

Bibliography