Introduction to Business Management

First IB Business Management unit

What are the parts of a system?

Inputs, processes, outputs and feedback

What are the inputs of a business? What categories do they have?

Inputs of a business are resources required to produce a specific product. They belong in these categories:

1. Physical

2. Financial

3. Human

What are physical resources (inputs)?

The raw materials (e.g. wood, timber, crude oil) and semi-finished goods (e.g. steel, iron, electronic components) that a business needs to produce its product as well as capital goods (e.g. equipment and machines that will be used to produce other goods)

What are financial resources (inputs)?

The funds needed to set up and invest in a business and keep it running; can be short-term, medium-term and long-term.

What are human resources (inputs)?

The people needed to run the business.

What are the main 4 types of business functions

1. Human Resource Management

2. Finance and Accounts

3. Marketing

4. Operations

What are the categories of outputs?

1. Goods - tangible, meaning they have physical characteristics and can be measured.

2. Services - intangible, meaning they cannot be touched or described by physical characteristics.

What does the work of an entrepreneur involve?

1. understanding communities and their problems;

2. designing and planning solutions;

3. taking action; and

4. sharing and growing actions and ideas to increase impact.

What are the reasons for starting a new business?

1. New business idea

2. Passion to make change

3. Market need

4. Earning a living

5. Greater financial reward

6. Control

7. Work-life balance

What are the challenges faced by new businesses?

1. Lack of funds

2. Strong competition

3. Market too small / no market

4. Unskilled employees or lack of collaboration

5. Poor management skills

6. Economic, environmental or political shocks

What are the steps to starting a business?

1. Refine the idea

2. Prepare a business plan

3. Decide on a legal structure

4. Register the business

5. Find a location

6. Hire employees

7. Get funding

What are the features of the private sector?

1. Private ownership and control

2. Profits can be earned by owners

3. Little of no government involved

4. Largely privately funded

Role of the private sector

1. creating employment

2. helping the development and growth of the economy

3. providing a wide variety of goods and services

Features of the public sector

1. Owned and controlled by the government

2. Provides essential goods and services to citizens

3. Answerable to the public for any decisions taken

4. Financed by the government through taxed and other funds

Advantages and disadvantages of a sole-trader

Advantages:

1. Easy to set up

2. Keep all the profits

3. Can run the business as they like

4. Fast decision-making

5. Can work alone or choose to employ others

6. Financial records remain private

Disadvantages:

1. The success or failure of the business is the responsibility of the sole trader.

2. Unlimited liability

3. Difficult to finance

4. High risk of failure

5. High workload

6. Lack of distinction between the owner and the business.

7. Businesses cannot be inherited and continued. Lack of continuity.

8. Possible higher taxes from high income tax rates.

Advantages and disadvantages of a partnership

Advantages:

1. Easy to set up

2. Greater access to finance than in a sole proprietorship

3. Greater efficiency and productivity

4. Financial records remain private

Disadvantages:

1. Unlimited liability

2. Lengthier decision-making and potential for disagreement

3. Legal and financial responsibility

4. Lack of continuity

Advantages and disadvantages of privately held companies

Advantages:

1. Control and ownership is shared beween a small group of people, usually family and friends.

2. Greater access to finances. Multiple people can invest in the business. There may be better access to external sources of finance.

3. Limited liability

4. Financial records. These are private and are not made public, anabling the company to take a longer-term view on the development of the company.

Disadvatages:

1. Profits are shared between multiple shareholders

2. Lengthier decison-making

3. Shared cannot be traded publicly to raise finances

4. Privacy. The business may not be examinated by external experts

5. Expensive and time-consuming to set up

Advantages and disadvantages of publicaly held companies

Advantages:

1. Finances. Capital can be raised through selling of shares to the public

2. Risks. The risks are shared among a large number of shareholders.

3. Separate legal identity. If one shareholder dies, the business continue to operate.

4. Limited liability

Disadvantages:

1. Shared profits

2. High costs

3. Loss of control

4. Account are publicly available to be viewed

Types of cooperative by industry

1. Agriculture

2. Wholesale and retail trade

3. Banking

4. Utilities

5. Education

6. Health care

7. Housing

8. Insurance

Benefits and faced challenges of for-profit social enterprises

Benefits:

1. Make a positive impact on the world through their core work

2. Meeting ethical responsibilities to people and the planet

3. More economically sustainable compared to non-profit social enterprises, as they generate revenues and profits

4. Attract and increasing number of customers, investors and talented employees who value sustainable and responsible businesses

Challenges:

1. Funding. Investors may need more time to see returns on their investments or lower returns in general, as more of the value of the business is distributed to all stakeholders.

2. Credibility. May be distrust of the business from a wide range of people.

3. Measuring impact. Measuring social or environmental impact is more difficult.

4. Managing complex supply chains and ensuring that each part of their supply chain is ethical.

5. Remaining true to purpose.

Benefits and faced challenges of non-profit social enterprises

Benefits:

1. Limited liability;

2. They pay no tax on the surplus that is always reinvested back into the company;

3. Some non-profits are able to rely on volunteers for help, which keeps the costs low.

4. May receive grants and donations, increased range of funding available for non-profit organizations.

5. Typically high employee motivation and comitment

Challenges:

1. Funding difficulties, trying to raise funds from donors or applying for grants is time and energy consuming.

2. Intense competition for grants and donations.

3. Limited employee salaries, making it difficult to recruit and retail talent.

4. Significant paper work involved in setting-up a non-profit.

Benefits and limitations of CSR

Benefits:

1. Businesses with long-term objectives or CSR focus earn higher revenue due to alligned values with the consumers

2. Consumers are more likely to stay loyal, promote and pay a price premium for purpose-led products

3. Purpose-led businesses are more likely to recruit, retain and otivate talented employees

4. Reduction of future risks in terms of CSR and their reputation. earlier preparation for anticipated stricter social and environmental regulations from the government

Drabacks:

1. Difficult to change the culture of organisation to focus on CSR. Stakeholders may require educating in the benefits of CSR as well as time to adapt

2. May increase the cost of production i nthe short term as inputs may be more expensive for the business

3. Reputational risk for the business if it doe not follow through on its public CSR commitments.

Examples of internal stakeholders

1. Employees

2. Owners/shareholders

3. Managers

Exmples of external stakeholders

1. Pressure groups/unions

2. Suppliers

3. Government

4. Bank

5. Media

6. Competition

7. Customers

Primary sector

A section of an economy that extracts materials (minerals, oil, etc.) or harvests products from the Earth.

Sustainability

Meeting the needs of the present without compromising the ability of future generations to meet their own needs.

Stakeholders

Any individual or group that affects, or is affected by, an organisation.

Entrepreneur

A person who organises human, physical and financial resources to start a business.

Capital goods

Capital goods are assets used by a business to produce goods and services, such as machinery, buildings, and tools.

Revenue

The income that a business generates.

Medium/long-term financing

Used to finance expensive equipment and facilities that a business needs to operate over a long period.

Short-term financing

Used to pay for inputs that will soon be processed and sold by the business, covering short-term working capital needs.

Outputs

What a business produces, including physical products, services, solutions, or waste.

Feedback

Process by which the output of a system becomes an input to the same system.

Negative feedback

When the output feeds back into the inputs in a way that moves the system in the opposite direction.

Embedded economy model

A model that shows the economy embedded in nature, with inputs of energy from the Sun and outputs of waste; provisioning occurs through markets, households, the state and the commons.

Sectors

An area of the economy.

Secondary sector

The area of economic activity that produces finished goods through manufacturing.

Tertiary sector

The area of economic activity that provides services.

Quaternary sector

The area of economic activity involved with knowledge and the movement of information.

Supply chain

The steps involved in creating finished goods.

Outsourcing

When a business takes an internal function and has it performed externally by another person or business.

Integrated business

A business whose activities span two or more sectors.

Economy

A system for producing, provisioning, and distributing goods and services among a group of people.

Product-orientation

Market-orientation

Recession

When the GDP declines for a period of time, usually six months or more.

Circular business models

A business model that aims to work more like nature, by designing systems that feed back outputs as inputs, and by designing out waste from the start.

Private sector

The portion of an economy not owned or directed by the government.

Multinational companies

A company that operates in at least two countries, one of which is not the company's home country.

Profit

Total revenue minus total costs.

Public sector

The portion of the economy controlled or owned by the government such as government services, schools and state-owned businesses.

Tax

A payment by individuals or businesses to the government.

For-profit commercial enterprise

A type of business that earns profits, which are distributed to owners or shareholders; profits may have prioritity over other objectives.

Sole trader

A business owned and run by one person; there is no legal separation between the owner and the business.

Unlimited liability

A situation where the owners of a business are personally responsible for all the debts of the business if it fails; the owners and the business are not legally separated.

Partnership

A business owned and run by two or more people who share the responsibility for the business and the profits; there is no legal separation between the business and the owners.

Company

A business owned by multiple shareholders who have limited liability; can be privately held or publicly held.

Dividends

A portion of a business’s profits distributed to the owners/shareholders.

Limited liabiity

A situation where the owners of a business are not personally responsible for the debts of the business if it fails; the owners and the business are legally separated.

Privately held company

A company that is privately owned and often has family or friends as the shareholders; the shares are not sold to the wider public and are not traded on a stock exchange.

Initial public offering (IPO)

A situation where a company sells all or part of the business to external shareholders for the first time.

Publicly held company

A company that is publicly owned and and has many shareholders who can buy and sell their shares through a stock exchange.

For-profit social enterprise

A type of social enterprise that earns revenue and profits, but integrates social and/or environmental impact directly into its business model.

Private sector for-profit social enterprise

A type of social enterprise that produces goods and services that are typically sold in markets for a price by for-profit businesses.

Public sector for-profit social enterprise

A type of social enterprise that produces goods and services that are typically provided by the public sector.

Cooperative

A business owned and operated by its members, who share the profits.

Non-profit social enterprises

A type of social enterprise that produces goods and services to meet human needs, but where any surpluses earned must, by law, be reinvested back into the business.

Surplus

A situation where a non-profit social enterprise has greater revenue than costs; non-profits must reinvest the money into the enterprise.

Non-governmental organisations (NGOs)

An independent, typically nonprofit organization that operates outside government control. NGOs often focus on humanitarian or social issues but can also include clubs and associations offering services to members.

Social enterprise

Any organisation that has a social and/or environmental purpose at its core; it describes the primary purpose of a business, not its legal form.

Vision statement

A long term goal, a dream or understanding of what the future should look like. It is typically used to inspire and motivate people involved with the company.

Mission statement

A short statement that defines what the organisation does, right now, in order to achieve its vision.

Objectives

A stated outcome that a business aims to achieve; can be broadly stated in vision and mission statements, or more narrowly stated with measurable outcomes.

Value extraction

The capturing of value from other stakeholders, either outside or inside the business.

Corporate social responsibility (CSR)

Businesses actively seeking ways to improve society and the environment through core business activities and business designs.

Product portfolio

All of the goods and services that a business offers.

Strategy

A plan that an organisation creates in order to reach a specific goal. They can help the business respond to the changes in the external environment, making the business more resilient.

Tactic

 A small action that a business takes to reach its goals. Tactical decision for one organization may represent a strategic decision for another, depending on the size of the organizations.

Linear production

Taking resources from the Earth, making products with them and then disposing of the products.

Circular production

A production model that reduces waste by ensuring outputs of the production system feed back into the system as inputs

Circular supply models

A business model that enables businesses to reduce new material inputs, replacing them with recovered or bio-based materials. Otherwise known as cradle-to-cradle.

Resource recovery models

Business models that are focused on collecting, sorting and processing waste materials to be used as inputs in the production process.

Product like extension models

Business models that focus on extending the time that a consumer uses products, in ways such as:

1. Designing for durability;

2. Reuse and repair

3. Remanufacturing

Premium pricing

A pricing strategy where a business sets the price of its products higher to create the impression that the products are higher quality or value than their lower-cost equivalents.

Sharings models

A business model that allows consumers to share the use of products with strangers, reducing the new inputs needed for products that might be underutilised by the consumer. 

Product service system models

Business models that involve selling the service for using a product rather than selling the product itself.

Types of models:

1. Product-oriented service models focus on selling products and associated after-sale services, such as maintaining or repairing the product through a contract of take-back agreement

2. User-oriented product service system models involve consumers paying for temporary access to products, usually through a leasing agreement.

Patient capital

Offshore

When a business moves some of its business operations to another country.

(Re)generative business

A business that aims to strengthen its social and environmental ecosystems by creating opportunities for other businesses and communities to develop, and by restoring the natural environment. The business enjoys a network of mutual benefits and increased resiliency

Market capitalisation

The total value of a company's shares; the number of shares multiplied by the price of a share.

Growth

The expansion of a business in terms of revenue, profit, number of employees, locations or another important metric.

Types of business growth

• Growth in sales revenue - increasing the money earned from selling the products;

• Growth in profit - increasing the amount of money left over after costs of production have been subtracted from the revenues.

• Growth in market share - increasing the percentage of a fiven market represented by a business’s sales

• Growing impact - increasing the positive social and environmental consequences of the actions of the business

• Growing a resilient business ecosystem - generating opportunities for other businesses to grow and to strengthen their relationships with a wide range of stakeholders, distributing more of the value of the business to them.

Advantages of business growth

• Accuired economies of scale

• New customers and markets, increasing market share, sales revenue and profit

• Being a large business allows the company to influence the prices of products and services

• Business that are able to grow are in a better position to face competitors and external changes in the business environment.

• Businesses that are growing often attract new employees for better salaries, diverse experiences and opprtunities for carreer growth

Disadvatanges of growth

• Cash flow problems. Might need to take out a loan.

• Problems with quality.

• Loss of control of the business

• May face higher labour turnover if the Human resources aren’t properly managed.

Economies of scale

The reduction in per-unit production cost as a business grows.

What are internal economies of scale and what are their types?

Cost reductions experienced by a business when it expands its output.

Types:

• Purchasing economies of scale - when a business buys inputs at a lower cost by purchasing larger amounts (bulk buying)

• Marketing economies of scale - when the cost of a marketing campaign is spread over a larger quantity of output, thus lowering the average cost of the campaign.

• Managerial economies of scale - when the cost of hiring a manager is spread over a larger output.

• Technical economies of sale - when a large company is able to invst in equipment that make the business more efficient and results in a lower average cost of production.

• Financial economies of scale - when a large business takes out a larger loan for investment. Larger loans often have a lower interest rate, which means they cost less to repay, especially when the costs are spread over largers output.

What are external economies of scale and what can they be due to?

Cost-saving benefits of large businesses in their region or industry that are not under the control of the business.

Due to:

1. Innovation - when an industry becomes significant to society, which allows businesses to collaborate with universities or other research institutions in order to improve or create new products, thus reducing their own research costs.

2. Infrastructure - a good transportation network supports quick delivery of products and helps workers arrive at work on time, increasing productivity

3. Specialisation - when companies, suppliers, and workers start to focus on a particular industry due to its size. The number of companies in an industry increases, it becomes more profitable for suppliers to focus on supplying customers within that industry. It becomes easier for specialised workers to find a job in that industry, making it easier for companies to recruit workers.