Intro to Business Management 1.1-1.4

1. Introduction to Business Management

The Role of Businesses in Combining Resources to Create Goods and Services

Business - an organization engaged in commercial, industrial, or professional activities that can be a for-profit or a non-profit. Profit-making organizations persuade customers through effective marketing to purchase their products or services at a higher price than it costs to produce them.

Goal: To meet the needs and wants of consumers by combining human, physical, and financial resources to create goods and services.

Features of a business

  • A decision-making organization.

  • Made up of groups of workers, managers, directors, and stakeholders.

  • Exists in association with customers, suppliers, competitors, the environment, local, national, and other governments.

  • Uses factors of production.

  • Produces and sells goods/services.

  • Normally profit-making.

Business Activity

Aim: To generate outputs and add value, by selling the outputs for more than the costs of the inputs.

  • When producing an output, the business uses resources, often known as inputs. Inputs are land, labor, capital, and enterprise (or entrepreneurship). Collectively these are called the four factors of production.

  • An output of either a good or service is produced.

  • Business functions (processes) include administration, production, marketing, and finance. In larger organizations, these functions are carried out by specialist departments.

  • Businesses are affected by external activity, such as social changes, government policies, and external shocks (e.g. sudden oil price change).

Inputs: Factors of production

  • Land (physical resources) – any natural resource, e.g., raw materials.

  • Labor – services given by employees. A labor-intensive business has a high proportion of labor compared to other inputs because labor is cheap.

  • Capital – money, or assets used for production, e.g., buildings, plants, and equipment. A capital-intensive business depends more on capital than other factors of production; because labor is relatively expensive.

  • Enterprise – that ‘spark’ or idea provided by the entrepreneur, and the planning that combines the other three factors of production.

Production

  • Capital intensive - processes use a large proportion of land or machinery relative to other inputs, especially labor.

  • Labor-intensive - processes use a large proportion of labor relative to other inputs, especially in relation to land or machinery

Outputs: Goods and Services

  • Goods (visible or tangible items) - are items that can be seen and touched, e.g., shoes.

  • Services (invisible or intangible items) - are items that cannot be seen or touched but have visible results, e.g., hairdressers’ services. Customers pay for the skill and experience shown by the person delivering the service.

Goods

Consumer goods

Producer goods

FMCG’s (Fast Moving Consumer Goods)

Items bought regularly, e.g., food.

Consumables

Items with a short life and little value, e.g., raw materials and paper.

Consumer durables

Goods that last through many uses, e.g., furniture, cars, and clothing.

Capital goods

Plant and equipment used to produce consumer goods. Not for sale as they are the ‘lifeblood’ of the business.

Purchasers vs. Consumers

  • Purchasers of products = customers

  • Enjoyers of products = consumers.

When marketing a product, a firm must decide whether the customer or consumer is most influential in the purchasing decision.

Services

Services can be:

  • Personal

  • Commercial (business)

There are often overlaps between the two, e.g., banks offer financial services to both individual and business customers.

Business Functions and Their Roles

Function (department)

Role

Human resources (HR)

Managing people in an organization, including recruitment and training.

Finance and Accounting

Finance is managing the financial operations of an organization. Accounting is recording, summarizing, and reporting transactions to provide an accurate picture of a firm’s financial position and performance.

Marketing

Anticipating, identifying, and satisfying the needs and wants of consumers, e.g. promoting and selling products or services. The marketing department coordinates the marketing ‘mix’.

Operations management/ production

Management of resources used for the production of goods and services at the required quality and as efficiently as possible.

Sectors of business activity

Chain of production - the stages in the production of a particular product.

  • Value is added at every stage, so they can be sold for more than the cost of the raw materials.

Business organizations operate in one or more of the following sectors:

Output

Sector

Activity

Goods

Primary

Extractive industries that acquire raw materials for production, e.g., farming, mining, forestry, and fishing.

Goods

Secondary

Manufacturing and construction. Raw materials are processed and turned into consumer and/or capital goods.

Services

Tertiary

Personal and commercial services, e.g. shops and banks.

Services

Quaternary

Specialist technology businesses and/or knowledge industries, e.g., e-commerce.

  • Primary-sector activities tend to dominate in less economically developed countries (LEDCs).

  • Tertiary and quaternary-sector activities tend to dominate in more economically developed countries (MEDCs).

  • Secondary-sector activities tend to dominate in newly industrializing or emerging economies (NICs).

The Nature of Business Activity in Each Sector and Sectoral Change

Sectoral change - is the trend for the percentage of a workforce in agriculture to decline over time, and for the secondary and then tertiary sectors to become increasingly important as economies develop. Developing countries are characterized by subsistence primary production and low levels of income. As they develop, they industrialize, with manufacturing becoming dominant. This has the following effects:

  • urbanization

  • capital-intensive industries

  • increases in GDP/living standards

  • increasing employment

As development continues, there is a move towards tertiary-sector activity, with the following effects:

  • higher incomes and increasing consumption of luxury goods

  • increasing specialization

  • increasing demand for personal services

  • growth of technology and communication

Types of business growth

Horizontal growth refers to a business acquiring or merging with another business engaged in more or less the same activity.

Vertical growth refers to acquiring other businesses involved in earlier or later stages of the chain of production or by beginning operations in an earlier stage through internal growth.

  • Backwards vertical integration - the activity of the business acquired is earlier in the chain.

  • Forward vertical integration - the activity of the business acquired is later in the chain.