Bm 1.1 What Is A Business

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IB Business and Management (Standard Level) …

IB Business and Management (Standard Level)
All material taken from the IB Business and Management Textbook:
"Business and Management", Paul Hoang, IBID Press, Victoria, 2007

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  • 1. Business and Management-11: 1.1 Nature of Business Activity Lesson 1: What is a business?
  • 2. 1. Focus Question
    • What is a business?
  • 3. 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 .
  • 4. 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.
  • 5. 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
  • 6. 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.
  • 7. 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?
  • 8. 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)
  • 9. 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.
  • 10. 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.
  • 11. 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.
  • 12. 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)
  • 13. 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.
  • 14. 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.
  • 15. 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
  • 16. 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)
  • 17. 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.
  • 18. 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.