Download Unit 1_1 Business

Unit 1.1 Nature of Business
Activity
“Business, that’s easily defined; it’s other people’s money” –
Alexandre Dumas (1802-1870), French author
What is a Business???
• A business is a decision-making organization
involved in the process of using inputs to
produce goods and/or to provide services.
– Inputs are the resources of which a business uses in
the production process.
• Ex. Labour and raw materials
– This process produces outputs, which are known also
as the products.
– Product = the goods and services of a business
– Goods = physical products: cars, computers, books,
etc.
– Services = intangible products: a haircut, bus ride,
visit to the cinema.
• Business are also affected by external factors,
which are beyond their control.
Inputs, Processes and Outputs
Inputs:
Processes:
Outputs:
Examples: Raw materials,
components, machinery,
equipment and labour
Turning the inputs
into the provision of
services or the
manufacturing of
goods.
The output or
provision of final
goods and services.
Needs and Wants
• Businesses exist to satisfy the needs and
wants of people, organizations and
governments.
– Needs = the basic necessities that person
must have in order to survive.
• Ex. Food, water, warmth, shelter and clothing.
– Wants = the desires people have or things
they would like to have.
• Ex. Larger home, new phone, or foreign holiday.
The Marketplace
• Market = a place or
process whereby buyers
(customers) and sellers
(businesses) meet to
trade.
– Ex. A shop, restaurant, or
cinema.
• A market can also exist in
a non-physical form.
– Ex. Internet
• Customers = the people
or organizations that buy
a product.
• Consumers = one that
actually use the product.
Types of Products
• Consumer goods = products that are sold to the general
public, rather than to other businesses.
– Consumer durable goods= products that last a long time and can
be used repeatedly
• Ex. clothes, electronics, furniture.
– Non-durable goods = those that need to be consumed very
shortly after first used.
• Ex. Food and newspapers
• Capital Goods = are the products purchased by other
businesses and are used to produce other goods as
well.
– Ex. Computers, machinery, tools, specialist equipment, etc.
• Services = intangible products provided by businesses.
Ex. Health care, transportation, food, recreation,
legal advice and education.
Adding Value
ALL BUSINESS MUST ADD VALUE IN THE
PRODUCTION PROCESS.
Value of outputs – value of inputs = Value
Added
Value added allows a business to sell its products
for more than production costs, thus earning a
profit.
Customers are willing to pay prices in excess of
the costs of producing goods and services due
to several reasons.
Adding Value Pt. 2
•
•
•
•
•
•
•
•
Speed and/or quality of service
Prestige associated with the purchase
Feel-good factor
Perceived value for money
Quality of finished product
Brand Image and/or loyalty
Taste or design
Inability to attain products cheaper
elsewhere.
Opportunity Cost and Business
Activity
• Businesses have to make decisions that affect
their daily operations and their long-term
prospects.
– Opportunity costs = the best alternative that is
forgone when making a decision.
– Opportunity costs differs from accounting costs in
they way that accounting doesn’t look at the cost of
foregone choices
• Ex. If a student decided to go into higher education, the
accounting cost would include the tuition fees and other costs
associated with studying at the university. By studying for a
degree the student hopes to attain a higher salary to offset
the cost of studying.
• Rational decision makers = they choose the
option that gives them the most benefit.
Role of Profit in Business
Activity
Profit = total revenue – total cost
Profit loss = total cost > total revenue
Functions of profit:
• Incentive to produce
• Reward for risk takers
• Encourages invention and innovation
• Indicator of growth
• Source of finance
Surplus (revenues exceeding costs, A.K.A extra money)
The difference between profit and surplus is that any
surplus generated is all ploughed back into the business,
rather than having some of it being distributed to its
owners.
Factor of Production
To produce a good or to produce a service, RESOURCES
must be used (factors of production). There are four
vital factors of production:
1. Land = All natural resources found on the planet
available for production.
1.
2.
2.
3.
4.
Renewable resources = those that replenish themselves; fish
stocks, trees and water
Non-renewable resources = those that cannot be replaced once
consumed; minerals and fossil fuels.
Labour = The physical and mental effort of people
used in the production of a good or service.
Capital = All non-natural (manufactured) resources that
are used in the creation and production of other
products.
Enterprise (entrepreneurship) = management,
organization and planning of the other 3 factors of
production.
Factors of Production
• The four factors of production have a
financial return for their part in the
production process:
– Reward for use of land = Rent
– Return for the use of capital = Interest
– Remuneration for labour = Salaries
– Entrepreneurs receive profit for their
responsibilities and risk-taking in the
production process.
Income Chart
Rent, Wages, Interest and Profit all connect to Income. The
more factors inputs a person or business has, the higher their
incomes tends to be.
Factorsof
production
Land
Labor
Capital
Enterprise
Rent
Wages
Interest
Profit
Specialization
• Specialization = means that a business
concentrates on the production of a particular
good or service or a small range of similar
products.
• Specialization occurs at different levels:
– Individual – Specialize in a profession
– Departmental – Specialize in various functions.
– Corporate – Specialize in the provision of a limited
range of products.
– Regional – Certain regions within in a country also
specialize. Ex. New York and Wall Street
– National – Countries also specialize. Ex. German Cars
Advantages of Specialization
• Increased productivity – Output increases
• Increased efficiency – Better use of scarce resources with
specialization.
• Standardization – Specialization results in product
specifications being consistently met.
• Higher profit margins – Customers may prepared to pay a
higher price for specialist goods.
Disadvantages of Specialization
• Boredom – People are likely to become fed up
with doing the same repetitive tasks.
• Inflexibility – Employees will be less flexible as
they lack skills and opportunities.
• A lack of autonomy – Specialization results in
interdependence in the production process.
• Capital costs – Purchase and maintenance of
specialist machinery and equipment may be
expensive.
Production (Operations)
• Functions of the production department will be
coordinated and monitored by the production
manager. Tasks include:
– Determining how the good will be manufactured or
how the service will be delivered.
– Deciding on the resources needed for production.
– Planning on a timescale of production.
– Stock management and control
– Performing quality control and inspections
– Arranging for delivery of finished stocks to customers
– Meeting production targets and deadlines
– Carrying out research and development into new
products and work process.
Marketing
The marketing department is responsible for
identifying and satisfying consumer wants and
needs. Functions of the marketing department
can be summed up as the four P’s.
• Product – ensuring that goods or services meet
the customer’s requirements. Such as, product's
sizes, colors, and functions.
• Price – using various pricing methods to sell the
products of a business.
• Promotion – making sure that customers know
about the firm’s products.
• Place – ensuring that goods and services are
available in convenient places for consumers to
buy.
Finance and Human Resources
(Personnel)
• The finance department is in charge of managing the
organization’s money. The finance manager must ensure
that accurate recording and reporting of financial
documentation takes place.
• The human resources department is responsible for
managing the personnel of the organization. The HR
department is likely to deal with the following issues:
– Workforce, planning, recruitment, training, appraisal, pay and
benefits, equal opportunities, health and safety mattes, and
fostering working relations.
Business Sectors
Business can be classified according to the stage of production that they are
engaged in. There are three main sectors:
•
•
•
Primary – involved with the extraction, harvesting and conversion of land as
a factor of production.
• Ex. Agriculture, fishing, mining, foresting and oil extraction.
Secondary – involved in using raw materials and other resources for the
manufacturing or construction of finished and usable products.
• Ex. Aircraft manufacturing: using steel, rubber and plastics to produce
aeroplanes.
Tertiary – provide services to their private and corporate customers. In
more developed countries (Canada, Italy) this sector tends to be the most
substantial sector in terms of both employment and the % of Gross
Domestic Product (GDP), the value of a country's’ output each year.
• Ex. Retailing, education, travel and tourism, entertainment, insurance,
transport, banking, finance, healthcare and catering.
Chain of production
• This tracks the stages of an item’s production,
from the extraction of raw materials used to
produce the product all the way through to it
being delivered to the consumer.
Primary Production
Consumers
Manufacturing
Tertiary Production
Changes in Economic Structure
•
•
•
•
Structural change- a shift in the relative share of national output and employment that
is attributed in each business sector, i.e. primary, secondary and tertiary sectors. It is
observed in an economy over time.
When a country moves away from primary production towards manufacturing as its
principal sector for national output and employment, then it is said to have
experienced industrialization.
Countries that are able to exploit the tertiary sector as the key contributor to national
output and employment. Are said to be developed countries.
The shifts toward the tertiary sector being the predominant sector in developed
countries has occurred due to changes in factors such as:
– Higher household incomes- as nation develops, consumers demand more
services simply because they can afford to. Demand for services is positively
correlated to changes in income levels
• Eating out at restaurants, visits to the hairdresser or financial planning
– More leisure time- as nations develop, people tend to have more time for
recreational purposes. Trend has provided many opportunities for the service
sector.
– Larger focus on customer relations management- Businesses have realized
that good customer service before, during and after the sale of an item can be an
important source of competitive advantage.
– Increasing reliance on support services- Businesses need even more
sophisticated support services. Firms are increasingly relying on the services of
other businesses. As businesses grow internationally, they will also rely more
heavily on the services of financial lenders, accountants and lawyers.
• Ex: subcontractors, advertising agencies, market research analysts and
management consultants.
Nature of Business Activity and
Business Strategy
• Business activity is the process of turning factor inputs
into outputs of goods and services in order to meet the
needs and wants of different customers.
• Ex: the functional areas of a business are all instrumental in
determining the nature of business activity
• The purpose of the business is to satisfy the needs and
desires of customers whilst also fulfilling the
organization’s own objectives. All businesses must
generate a profit or surplus in order to survive. (Chances
of a new business succeeding are often very low.)
• Opportunity cost is at the heart of business decisionmaking, whether conscious or unconscious concepts.
• External forces will also affect the nature of the business
activity.
Review Questions
• 1) What is a ‘business’?
• 2) What are the purposes of business activity?
• 3) Distinguish between ‘consumers’ and ‘consumers’
of a business.
• 4) What are the four factors of production and their
production and their respective for being used in the
production process.
• 5) Outline three advantages and three
disadvantages of specialization.
• 6) What are the four functional areas of a business
• 7) Describe the three business sectors of the
economy
• 8) What is meant by the ‘chain of production’
Higher Level Extension
• 9) How was the
structure of business
sectors changed
over time?
• 10) Outline the
implications of such
changes on business
activity.
Vocabulary
•
•
•
•
•
•
•
•
•
Business – are organizations that are involved in the production of goods
and/or the provision of services.
Capital – refers to all non-natural resources used in the production process.
Probably the best example of capital is money, but the term also includes
resources such as machinery, tools, equipment and factories.
Division of labour- refers to the specialization of workers in the provision of
goods and/or services by breaking a job down into particular roles or
components that are repeated by the same workers.
Entrepreneurs- people who manage, organize and plan the other three
factors of production. They are risk takers who exploit business
opportunities in return for profits.
Factors of Production- are the inputs necessary for the production process:
land, labour, capital and enterprise entrepreneurship))
Functional areas- term used to refer to the different sections of a business.
Usually named as the marketing, production , finance, and human
resources departments.
Industrialization- process experienced by a country that moves away from
primary production towards manufacturing as its principal sector for national
output and employment.
Labour- physical and mental human effort used in the production process.
Land- natural resources found on the planet. Includes renewable and
nonrenewable sources such as water, fish, wood and physical land itself.
Vocabulary con’t
•
•
•
•
•
•
•
•
Opportunity cost- cost measured in terms of the next best alternative that is
foregone when a choice is being made, e.g. money spent for immediate
benefit or saved for the future.
Primary Sector- business involved in the cultivation or extraction of natural
resources, such as farming, mining, quarrying, fishing, oil exploration and
forestry.
Private sector- part of the economy under the control of private individuals
and business, rather than the government.
– Ex: sole traders, partnerships and companies.
Public Sector- part of the economy under the control of the government.
– Ex: state health and education services, emergency services (police,
fire service and ambulance)
Secondary Sector- section of the economy where the business activity is
concerned with the construction and manufacturing of physical products.
Structural Change- a shift in the relative share of national output and
employment that is attributed in each business sector, i.e. primary,
secondary and tertiary sectors.
Tertiary Sector- section of the economy where business activity is
concerned with the provision of services to customers. Largest sector of
employment and output in today’s economy.
Value added- difference between a product’s price and the total cost of the
inputs that went into making it. It is the extra worth created in the production
process.