What is business? It is an activity that combines inputs of raw materials, labor, machinery and enterprise through a productive process to create a useful output.
Management guru Peter Drucker said that the only purpose of a business is to satisfy the needs and wants of people, organizations and governments.
Needs: Basic necessities that a person must have in order to survive, e.g. food, water, warmth, shelter and clothing. Wants: desires; e.g. a new mobile phone or a vacation. Wants are said to be infinite since people always want more than they need.
Market: a place or process where customers and businesses meet to trade. Such as a shop, restaurant or cinema.
A market can exist as a non-physical form such as e-commerce or using telephones to sell shares or motor insurance.
Customers: people or organizations that buy a product
Consumers: The ones who use the product
Types of products
All businesses produce goods and/or services
•Consumer goods: products that are sold to the general public rather than to other businesses. •Capital goods (producer goods): products purchased by other businesses to produce goods and services. •Services: intangible products provided by businesses.
•Businesses must add value in the production process.
•Added value is different between the value of inputs (the costs of production) and the value of outputs (the goods and services that are sold to customers). Added value allows a business to sell products for more that its production cost and so make a profit •Added value is also applied in the service sector. Customers are paying for the skills, expertise and experience
Added value can come in from:
•Speed and/or quality of service
•Quality of finished product
•Prestige associated with the purchase
•Brand image and/or brand loyalty
•Taste or design
•Perceived value for money
•Inability to obtain such products cheaper elsewhere
Opportunity cost and business activity
•Businesses need to make decisions that affect their long-term prospects. •Opportunity cost is defined as the best alternative that is forgone when making a decision. •Due to limited resources, such as time and money, businesses are confronted with choices •Opportunity costs consider foregone income
The role of profit in business activity
•Profit refers to the positive difference between a firm’s total revenue and its total costs per period of time. •Revenues are the inflows of money usually from the sales of product. •Costs are the outflows of money, to finance production activities •If costs are greater than revenues the organization makes a loss The functions of profit include:
➢It acts as an incentive to produce. It is a motivator and key driving force for most business transactions engaged in business activity ➢Encourages invention & innovation. New technological ideas & processes that cut costs of production resulting in higher profits to the business owner ➢Acts as an indicator of growth (or decline). Hence, it signals to the owners and investors of a business to switch from low-profitability to high-profitability business activities. ➢It is a source of finance and used to fund the internal growth of a business.
•Businesses must make profit in order to survive in the long run. •Non-profit organizations must make a surplus (extra money exceeding their costs going back into the business)
Factors of production
•Factors of production: are the resources used to produce a good or a service. LandLabor
Refers to all natural resources found on the planet that are available for production. E.g. wood, water, fish, and the physical land itself. They can be categorized as: Renewable resources: those that replenish themselves such as fish, trees and water. Non-renewable resources: those that cannot be replaced once consumed such as minerals and fossil fuels.Physical mental effort of people in the production of a good and service. For example, workers are needed to operate machines and to sell products to customers. Capital Enterprise (or entrepreneurship)
Refers to all non-natrural resources that are used in the production of other products. E.g. money, buildings, equipment, tools, machinery and vehicles. When firms increase their spendi g on capital it is called investment. Investment increases the productive capacity of the economy and is crucial for its growth.Refers to the management, organization and planning of the other three factors of production. Entrepreneurs have the skills needed to oversee the ehole production process, while potentially taking high risks. The success or failure of a business rests on the talents of the entrepreneur.
•Different products will require varying amounts of factor inputs. •Nevertheless all products need a combination all four factor inputs.
•Means that a business concentrates on the production of a particular good or service or a small range of similar products. •Specialization tends to increase the level of employee efficiency because they become more skilled in their specialized operation.
Specialization occurs at different levels:
•Individual: people specialize in profession such as lawyers, teachers, farmers and doctors. Division of labor is the term used to refer to the specialization of people, rather than organizations. It involves breaking down different people to each particular part of the work. Instead of a single person doing all the tasks, through the division of labor, output should be higher. •Departmental: departments within an organization specialize in different functions. They are typically the marketing, personnel, and finance and production activities of a business. •Corporate: most firms specialize in the provision of a limited range of products. •Regional: certain regions within a country can also specialize. •National: Countries also specialize; some more than others.
Increased productivity- output increases as the business uses specialized machinery and/or the staff is more proficient at what they do.Boredom- people are likely to become fed up with doing the same repetitive tasks, thereby negatively affecting staff motivation and productivity. Increased efficiency- there is better use of scarce resources because employees are more competent. As a result, average costs of production are likely to fall.Inflexibility- employees who specialize will be less flexible as they lack the skills to adapt to different roles and responsibilities. Workers who over specialize may find it difficult to switch to alternative occupations if there is a drop in demand for their services. Standardization- specialization results in product specifications being consistently met. Specialized machinery will mean that outputs are of the exact same standard and quality.Lack of autonomy- specialization results in interdependence in the production process. A breakdown or delay in one part of the process will cause problems for the entire business. Higher profit margins- customers may be prepared to pay a higher price for specialist goods and services. Highly specialized professionals are therefore able to earn relatively higher incomes.Capital costs- the purchase and maintenance of specialist machinery and equipment can be extremely expensive, possibly exhausting much of a firms finance.
Production (operations): the actual process of producing the output Marketing: Where the business has any dealings with the consumer. Ensuring that the products sell. This is done through market research, test marketing, packaging and advertisement. Functions of the marketing department are the 4ps: Product: ensuring that goods and services meet the customer’s requirements such as a products various sizes, colors packaging and core functions invading market research, branding and product development. Price: using various pricing methods to sell the products of a business. Numerous pricing strategies can be used depending on factors such as level of demand, the number of substrate products and the costs of producing goods and services. Promotion: making sure that customers know about the firms products. This is often done through the mass media. Place: ensuring that goods and services are available in convenient places for consumers to buy. Marketing managers must ensure that they select appropriate ways to distribute products to the marketplace. Finance: Where the business manages the flow of cash and profit Human resources: where the business has any dealings with the employees
Primary: Businesses operating in the primary sector are involved with the extraction, harvesting and conversion of natural resources. E.g. agriculture, fishing, mining, forestry and oil extraction. Secondary: the processing of material inputs into a physical output e.g. construction, manufacturing Tertiary: the processing of inputs into a non-physical output, i.e. a service eg banking, leisure, retailing, tourism, transport.
The chain of production
The chain of production links the three sectors of production. All three-production sectors are said to be independent because each sector relies on the other two to remain in existence. Businesses are also interdependent as they all need energy, manufactured producer goods and financial services.
•Structural change: a shift in the relative share of national output and employment that us attributed to each business sector over time. •Countries develop by shifting the majority of national output being contributed by the primary sector to manufacturing and then eventually to the tertiary sector. •When a country moves away from primary production towards manufacturing as its principle sector then it is said to have experienced industrialization. •Countries that are able to exploit tertiary sector as the key contributor to national output and employment are said to be developed countries.
The structural change in developed countries has been due to changes in several factors, including: •Higher household incomes: as a country develops, consumers demand more services such as eating out at restaurants, visits to the hairdresser or financial planning. The demand for services is positively correlated to changes in income level. •More leisure time: one feature of higher standards of living is the increase in leisure time. As nations develop, people tend to have more time for recreation, thereby creating huge opportunities for the service sector. •Greater focus on customer service: Firms have realised that good customer service before, during and after a sale can be an important source of competitive advantage. •Increased reliance on support services: businesses need more sophisticated support services. Firms are increasingly relying on the services of other businesses.