Business and Management-11: 1.1 Nature of Business Activity Lesson 1: What is a business?

1. Focus Question What is a business?

What is a business?

2a. So…what is a business? What is the difference between a hobby and a business ? A business is an activity performed for profit. The difference between carrying on a business and a hobby is that a business has an expectation of profit. It is run in a systematic, continuous and regular businesslike manner, and has ordinary commercial principles governing it (such as business and accounting records). A person who collects and sells baseball cards on a regular basis from a store is engaged in a business. While a casual collector, who will occasionally trade a card or two with friends is probably engaged in a hobby. The distinction is important for tax purposes as losses from a business are tax-deductible, while losses generated from a hobby are not .

What is the difference between a hobby and a business ?

A business is an activity performed for profit.

The difference between carrying on a business and a hobby is that a business has an expectation of profit.

It is run in a systematic, continuous and regular businesslike manner, and has ordinary commercial principles governing it (such as business and accounting records).

A person who collects and sells baseball cards on a regular basis from a store is engaged in a business.

While a casual collector, who will occasionally trade a card or two with friends is probably engaged in a hobby.

The distinction is important for tax purposes as losses from a business are tax-deductible, while losses generated from a hobby are not .

2b. So…what is a business? “ The only purpose of a business is to create customers.” – Peter Drucker A business can be defined as an organization that provides goods and services to others who want or need them. Business exist to satisfy the NEEDS and WANTS of people, organizations, and governments. What is a need ? Basic necessities that a person MUST have in order to survive. What is a want ? Things that a person would LIKE to have.

“ The only purpose of a business is to create customers.”

– Peter Drucker

A business can be defined as an organization that provides goods and services to others who want or need them.

Business exist to satisfy the NEEDS and WANTS of people, organizations, and governments.

What is a need ?

Basic necessities that a person MUST have in order to survive.

What is a want ?

Things that a person would LIKE to have.

2c. So…what is a business? As a business grows it is important to have clearly defined functions or processes. Human resource management Production Marketing and finance External factors; beyond the control of the company… Social changes Technological developments The level of economic activity Environmental issues Government legislation and policies External Shock: Oil crisis Health care Natural disasters Outbreak of war Remember: “ It is easy to open a business, but much more difficult to keep it open.” - Chinese proverb

As a business grows it is important to have clearly defined functions or processes.

Human resource management

Production

Marketing and finance

External factors; beyond the control of the company…

Social changes

Technological developments

The level of economic activity

Environmental issues

Government legislation and policies

External Shock:

Oil crisis

Health care

Natural disasters

Outbreak of war

Remember:

“ It is easy to open a business, but much more difficult to keep it open.”

- Chinese proverb

3. The Marketplace What is the marketplace ? Is a place where buyers (customers/consumers) and sellers (businesses) meet to trade. Physical Form : such as a shop or restaurant Non-physical Form : such as e-commerce Who are the customers ? The people or organizations that buy a product. Who are the consumers ? Are the people or organizations that actually use the product. Be careful when distinguishing between the two concepts. They are often interchangeable, but have very different meanings.

What is the marketplace ?

Is a place where buyers (customers/consumers) and sellers (businesses) meet to trade.

Physical Form : such as a shop or restaurant

Non-physical Form : such as e-commerce

Who are the customers ?

The people or organizations that buy a product.

Who are the consumers ?

Are the people or organizations that actually use the product.

Be careful when distinguishing between the two concepts. They are often interchangeable, but have very different meanings.

4. Types of Products All businesses produce goods and/or services What types of products do businesses produce? Consumer goods : Products sold to the general public What are the two types of consumer goods? Durable goods They last a long time and can be used again. Clothes, cars etc. Non-durable goods They need to be consumed after their purchase. Fresh food, meal at a restaurant, etc. Capital goods / Producer goods : Products purchased by other businesses. These are used to produce other goods. Can you think of any examples?

All businesses produce goods and/or services

What types of products do businesses produce?

Consumer goods :

Products sold to the general public

What are the two types of consumer goods?

Durable goods

They last a long time and can be used again.

Clothes, cars etc.

Non-durable goods

They need to be consumed after their purchase.

Fresh food, meal at a restaurant, etc.

Capital goods / Producer goods :

Products purchased by other businesses.

These are used to produce other goods.

Can you think of any examples?

4b. Types of Products Services : Are intangible products provided by businesses. Sometimes the results of the service are tangible . Doctors (health care) Bus and rail companies (transportation) Restaurants (food) Gyms and sports centers (recreation) Lawyers (legal advice) Teachers (education)

Services :

Are intangible products provided by businesses.

Sometimes the results of the service are tangible .

Doctors (health care)

Bus and rail companies (transportation)

Restaurants (food)

Gyms and sports centers (recreation)

Lawyers (legal advice)

Teachers (education)

5. Adding Value All businesses must add value in the production process. What does value added mean? Value of outputs - Value of inputs = Value added (goods & services sold to customers)- (costs of production) Value added allows a business to sell its products for more than its production costs, thus earning a profit . For example : Suppose that the input costs (labor and components) for producing a Plasma TV are 500 dollars. If customers are willing to pay 2000 dollars for the TV, what is the value added? $1500 , this surplus will contribute to the firms profit. This concept also applies to the service sector. Example, services of an electrician, teacher, accountant, customers are paying for the skills, expertise, and experience that they do not personally have.

All businesses must add value in the production process.

What does value added mean?

Value of outputs - Value of inputs = Value added

(goods & services sold to customers)- (costs of production)

Value added allows a business to sell its products for more than its production costs, thus earning a profit .

For example :

Suppose that the input costs (labor and components) for producing a Plasma TV are 500 dollars.

If customers are willing to pay 2000 dollars for the TV, what is the value added?

$1500 , this surplus will contribute to the firms profit.

This concept also applies to the service sector.

Example, services of an electrician, teacher, accountant, customers are paying for the skills, expertise, and experience that they do not personally have.

5b. Adding Value What are some reasons for customers willing to pay in excess of the cost of producing goods and services? Speed or quality of service Prestige connected with the acquisition Feel-good factor Perceived value for money Quality of the finished good Brand image / brand loyalty Taste or design Inability to obtain the product cheaper elsewhere Explain how the following products have value added. A 100-page fashion magazine A photo of a famous celebrity with a signed autograph. A state-of-the-art laptop computer.

What are some reasons for customers willing to pay in excess of the cost of producing goods and services?

Speed or quality of service

Prestige connected with the acquisition

Feel-good factor

Perceived value for money

Quality of the finished good

Brand image / brand loyalty

Taste or design

Inability to obtain the product cheaper elsewhere

Explain how the following products have value added.

A 100-page fashion magazine

A photo of a famous celebrity with a signed autograph.

A state-of-the-art laptop computer.

6. Opportunity Cost and Business Activity Businesses make decisions that affect their daily operations. What is opportunity cost? is the value of a product forgone to produce or obtain another product. What is accounting cost? Do not look at the cost or value of forgone choices. They look at the actual cost of operations. If you go to university the accounting cost would be the tuition fees and other costs related to studying at university. The opportunity cost would be the forgone income that could have been earned had the person chosen to work instead of studying. Likewise, a student would hope that by studying for a degree that he would earn a higher salary to offset the accounting and opportunity costs of obtaining that degree.

Businesses make decisions that affect their daily operations.

What is opportunity cost?

is the value of a product forgone to produce or obtain another product.

What is accounting cost?

Do not look at the cost or value of forgone choices. They look at the actual cost of operations.

If you go to university the accounting cost would be the tuition fees and other costs related to studying at university.

The opportunity cost would be the forgone income that could have been earned had the person chosen to work instead of studying.

Likewise, a student would hope that by studying for a degree that he would earn a higher salary to offset the accounting and opportunity costs of obtaining that degree.

7. The Role of Profit in Business Activity How would you calculate profit? A firms total revenue – its total costs = profit What is revenue? The inflows of money, sale of products. What are costs? The outflows of money, to finance production. How would you calculate a loss? Business costs > than revenues = a loss The majority of businesses will aim to provide goods and services at a profit. This will ensure they earn a return on their investment (ROI)

How would you calculate profit?

A firms total revenue – its total costs = profit

What is revenue?

The inflows of money, sale of products.

What are costs?

The outflows of money, to finance production.

How would you calculate a loss?

Business costs > than revenues = a loss

The majority of businesses will aim to provide goods and services at a profit.

This will ensure they earn a return on their investment (ROI)

7b. The Functions of Profit What are the functions of profit? Provides an incentive to produce. Acts as a reward for risk takers. It encourages invention and innovation. Acts as an indicator of growth or decline. It is a source of finance. In the end, all businesses MUST make profits to survive in the long run. Even for Non-profit Organizations it is important to make a SURPLUS (revenues exceeding costs). Confused? What is the difference between profits and surplus ? Any surplus is put back into the business. Profits are usually divided up among its owners.

What are the functions of profit?

Provides an incentive to produce.

Acts as a reward for risk takers.

It encourages invention and innovation.

Acts as an indicator of growth or decline.

It is a source of finance.

In the end, all businesses MUST make profits to survive in the long run.

Even for Non-profit Organizations it is important to make a SURPLUS (revenues exceeding costs).

Confused? What is the difference between profits and surplus ?

Any surplus is put back into the business.

Profits are usually divided up among its owners.

8. Factors of Production In order to produce a good or provide a service you need what? Resources or factors of production or factor inputs. What are the factors of production of a book? Paper, ink, equipment for printing and binding, editor etc. What are the four vital factors of production to produce any good or service? Land – natural resources found on the planet Renewable resources – fish, trees, water Non-renewable resources – minerals, fossil fuels Labor – physical and mental effort of people Capital – all non-natural resources used in production Enterprise ( entrepreneurship ) –the management, organization, and planning of the other three factors of production.

In order to produce a good or provide a service you need what?

Resources or factors of production or factor inputs.

What are the factors of production of a book?

Paper, ink, equipment for printing and binding, editor etc.

What are the four vital factors of production to produce any good or service?

Land – natural resources found on the planet

Renewable resources – fish, trees, water

Non-renewable resources – minerals, fossil fuels

Labor – physical and mental effort of people

Capital – all non-natural resources used in production

Enterprise ( entrepreneurship ) –the management, organization, and planning of the other three factors of production.

8b. Factors of Production The four factors of production have a financial return for their part in the production process: Factors of Production Land Rent Income Wages Interest Profit Enterprise Labor Capital

The four factors of production have a financial return for their part in the production process:

9. Specialization What does specialization mean? A business which concentrates on the production of a particular good or service or a small range of products. Can you list some examples of specialization ? Pizza Hut Dominos Chow Family Burger King KFC At what levels does specialization occur? Individual – in a job, doctor, teacher, lawyer Departmental – marketing, finance, personnel Corporate – Dell (computers), Hilton (hotels) Regional – Wall Street, New York (financial services) National – Japan (electronics), Germany (cars), France (wines)

What does specialization mean?

A business which concentrates on the production of a particular good or service or a small range of products.

Can you list some examples of specialization ?

Pizza Hut

Dominos

Chow Family

Burger King

KFC

At what levels does specialization occur?

Individual – in a job, doctor, teacher, lawyer

Departmental – marketing, finance, personnel

Corporate – Dell (computers), Hilton (hotels)

Regional – Wall Street, New York (financial services)

National – Japan (electronics), Germany (cars), France (wines)

9b. Specialization What does division of labor mean? Refers to the specialization of people. Defines different aspects of a job or task assigning different people to each part of the work. Are there advantages to specialization? Increased productivity – staff are more skilled at what they do. Increased efficiency – better use of resources, less time wasted. Standardization – same quality being produced. High profit margins – customers may be prepared to pay a higher price for specialist goods.

What does division of labor mean?

Refers to the specialization of people.

Defines different aspects of a job or task assigning different people to each part of the work.

Are there advantages to specialization?

Increased productivity – staff are more skilled at what they do.

Increased efficiency – better use of resources, less time wasted.

Standardization – same quality being produced.

High profit margins – customers may be prepared to pay a higher price for specialist goods.

9c. Specialization What are the disadvantages to specialization? Boredom – doing the same repetitive task. Inflexibility – less flexible to adapt to different roles and responsibilities. A lack of autonomy – a breakdown or delay in the process will cause problems for the entire business. Capital cost – the purchase and maintenance of specialist machinery and equipment may be extremely expensive.

What are the disadvantages to specialization?

Boredom – doing the same repetitive task.

Inflexibility – less flexible to adapt to different roles and responsibilities.

A lack of autonomy – a breakdown or delay in the process will cause problems for the entire business.

Capital cost – the purchase and maintenance of specialist machinery and equipment may be extremely expensive.