Bm 1.1 What Is A Business

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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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Bm 1.1 What Is A Business

  1. 1. Business and Management-11: 1.1 Nature of Business Activity Lesson 1: What is a business?
  2. 2. 1. Focus Question <ul><li>What is a business? </li></ul>
  3. 3. 2a. So…what is a business? <ul><li>What is the difference between a hobby and a business ? </li></ul><ul><ul><li>A business is an activity performed for profit. </li></ul></ul><ul><ul><ul><li>The difference between carrying on a business and a hobby is that a business has an expectation of profit. </li></ul></ul></ul><ul><ul><li>It is run in a systematic, continuous and regular businesslike manner, and has ordinary commercial principles governing it (such as business and accounting records). </li></ul></ul><ul><ul><ul><li>A person who collects and sells baseball cards on a regular basis from a store is engaged in a business. </li></ul></ul></ul><ul><ul><ul><li>While a casual collector, who will occasionally trade a card or two with friends is probably engaged in a hobby. </li></ul></ul></ul><ul><ul><li>The distinction is important for tax purposes as losses from a business are tax-deductible, while losses generated from a hobby are not . </li></ul></ul>
  4. 4. 2b. So…what is a business? <ul><li>“ The only purpose of a business is to create customers.” </li></ul><ul><li>– Peter Drucker </li></ul><ul><li>A business can be defined as an organization that provides goods and services to others who want or need them. </li></ul><ul><ul><li>Business exist to satisfy the NEEDS and WANTS of people, organizations, and governments. </li></ul></ul><ul><li>What is a need ? </li></ul><ul><ul><li>Basic necessities that a person MUST have in order to survive. </li></ul></ul><ul><li>What is a want ? </li></ul><ul><ul><li>Things that a person would LIKE to have. </li></ul></ul>
  5. 5. 2c. So…what is a business? <ul><li>As a business grows it is important to have clearly defined functions or processes. </li></ul><ul><ul><li>Human resource management </li></ul></ul><ul><ul><li>Production </li></ul></ul><ul><ul><li>Marketing and finance </li></ul></ul><ul><li>External factors; beyond the control of the company… </li></ul><ul><ul><li>Social changes </li></ul></ul><ul><ul><li>Technological developments </li></ul></ul><ul><ul><li>The level of economic activity </li></ul></ul><ul><ul><li>Environmental issues </li></ul></ul><ul><ul><li>Government legislation and policies </li></ul></ul><ul><li>External Shock: </li></ul><ul><ul><li>Oil crisis </li></ul></ul><ul><ul><li>Health care </li></ul></ul><ul><ul><li>Natural disasters </li></ul></ul><ul><ul><li>Outbreak of war </li></ul></ul><ul><li>Remember: </li></ul><ul><ul><li>“ It is easy to open a business, but much more difficult to keep it open.” </li></ul></ul><ul><ul><li>- Chinese proverb </li></ul></ul>
  6. 6. 3. The Marketplace <ul><li>What is the marketplace ? </li></ul><ul><ul><li>Is a place where buyers (customers/consumers) and sellers (businesses) meet to trade. </li></ul></ul><ul><li>Physical Form : such as a shop or restaurant </li></ul><ul><li>Non-physical Form : such as e-commerce </li></ul><ul><li>Who are the customers ? </li></ul><ul><ul><li>The people or organizations that buy a product. </li></ul></ul><ul><li>Who are the consumers ? </li></ul><ul><ul><li>Are the people or organizations that actually use the product. </li></ul></ul><ul><ul><ul><li>Be careful when distinguishing between the two concepts. They are often interchangeable, but have very different meanings. </li></ul></ul></ul>
  7. 7. 4. Types of Products <ul><li>All businesses produce goods and/or services </li></ul><ul><li>What types of products do businesses produce? </li></ul><ul><ul><li>Consumer goods : </li></ul></ul><ul><ul><ul><li>Products sold to the general public </li></ul></ul></ul><ul><ul><ul><li>What are the two types of consumer goods? </li></ul></ul></ul><ul><ul><ul><ul><li>Durable goods </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>They last a long time and can be used again. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Clothes, cars etc. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><li>Non-durable goods </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>They need to be consumed after their purchase. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Fresh food, meal at a restaurant, etc. </li></ul></ul></ul></ul></ul><ul><ul><li>Capital goods / Producer goods : </li></ul></ul><ul><ul><ul><li>Products purchased by other businesses. </li></ul></ul></ul><ul><ul><ul><li>These are used to produce other goods. </li></ul></ul></ul><ul><ul><ul><ul><li>Can you think of any examples? </li></ul></ul></ul></ul>
  8. 8. 4b. Types of Products <ul><ul><li>Services : </li></ul></ul><ul><ul><ul><li>Are intangible products provided by businesses. </li></ul></ul></ul><ul><ul><ul><li>Sometimes the results of the service are tangible . </li></ul></ul></ul><ul><ul><ul><ul><li>Doctors (health care) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Bus and rail companies (transportation) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Restaurants (food) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Gyms and sports centers (recreation) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Lawyers (legal advice) </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Teachers (education) </li></ul></ul></ul></ul>
  9. 9. 5. Adding Value <ul><li>All businesses must add value in the production process. </li></ul><ul><ul><li>What does value added mean? </li></ul></ul><ul><ul><ul><li>Value of outputs - Value of inputs = Value added </li></ul></ul></ul><ul><li>(goods & services sold to customers)- (costs of production) </li></ul><ul><ul><li>Value added allows a business to sell its products for more than its production costs, thus earning a profit . </li></ul></ul><ul><ul><li>For example : </li></ul></ul><ul><ul><ul><li>Suppose that the input costs (labor and components) for producing a Plasma TV are 500 dollars. </li></ul></ul></ul><ul><ul><ul><li>If customers are willing to pay 2000 dollars for the TV, what is the value added? </li></ul></ul></ul><ul><ul><ul><ul><li>$1500 , this surplus will contribute to the firms profit. </li></ul></ul></ul></ul><ul><li>This concept also applies to the service sector. </li></ul><ul><ul><li>Example, services of an electrician, teacher, accountant, customers are paying for the skills, expertise, and experience that they do not personally have. </li></ul></ul>
  10. 10. 5b. Adding Value <ul><li>What are some reasons for customers willing to pay in excess of the cost of producing goods and services? </li></ul><ul><ul><li>Speed or quality of service </li></ul></ul><ul><ul><li>Prestige connected with the acquisition </li></ul></ul><ul><ul><li>Feel-good factor </li></ul></ul><ul><ul><li>Perceived value for money </li></ul></ul><ul><ul><li>Quality of the finished good </li></ul></ul><ul><ul><li>Brand image / brand loyalty </li></ul></ul><ul><ul><li>Taste or design </li></ul></ul><ul><ul><li>Inability to obtain the product cheaper elsewhere </li></ul></ul><ul><li>Explain how the following products have value added. </li></ul><ul><ul><li>A 100-page fashion magazine </li></ul></ul><ul><ul><li>A photo of a famous celebrity with a signed autograph. </li></ul></ul><ul><ul><li>A state-of-the-art laptop computer. </li></ul></ul>
  11. 11. 6. Opportunity Cost and Business Activity <ul><li>Businesses make decisions that affect their daily operations. </li></ul><ul><ul><li>What is opportunity cost? </li></ul></ul><ul><ul><ul><li>is the value of a product forgone to produce or obtain another product. </li></ul></ul></ul><ul><ul><li>What is accounting cost? </li></ul></ul><ul><ul><ul><li>Do not look at the cost or value of forgone choices. They look at the actual cost of operations. </li></ul></ul></ul><ul><ul><ul><ul><li>If you go to university the accounting cost would be the tuition fees and other costs related to studying at university. </li></ul></ul></ul></ul><ul><ul><ul><li>The opportunity cost would be the forgone income that could have been earned had the person chosen to work instead of studying. </li></ul></ul></ul><ul><ul><ul><li>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. </li></ul></ul></ul>
  12. 12. 7. The Role of Profit in Business Activity <ul><li>How would you calculate profit? </li></ul><ul><ul><li>A firms total revenue – its total costs = profit </li></ul></ul><ul><li>What is revenue? </li></ul><ul><ul><li>The inflows of money, sale of products. </li></ul></ul><ul><li>What are costs? </li></ul><ul><ul><li>The outflows of money, to finance production. </li></ul></ul><ul><li>How would you calculate a loss? </li></ul><ul><ul><li>Business costs > than revenues = a loss </li></ul></ul><ul><li>The majority of businesses will aim to provide goods and services at a profit. </li></ul><ul><ul><li>This will ensure they earn a return on their investment (ROI) </li></ul></ul>
  13. 13. 7b. The Functions of Profit <ul><li>What are the functions of profit? </li></ul><ul><ul><li>Provides an incentive to produce. </li></ul></ul><ul><ul><li>Acts as a reward for risk takers. </li></ul></ul><ul><ul><li>It encourages invention and innovation. </li></ul></ul><ul><ul><li>Acts as an indicator of growth or decline. </li></ul></ul><ul><ul><li>It is a source of finance. </li></ul></ul><ul><li>In the end, all businesses MUST make profits to survive in the long run. </li></ul><ul><ul><li>Even for Non-profit Organizations it is important to make a SURPLUS (revenues exceeding costs). </li></ul></ul><ul><li>Confused? What is the difference between profits and surplus ? </li></ul><ul><ul><li>Any surplus is put back into the business. </li></ul></ul><ul><ul><li>Profits are usually divided up among its owners. </li></ul></ul>
  14. 14. 8. Factors of Production <ul><li>In order to produce a good or provide a service you need what? </li></ul><ul><ul><li>Resources or factors of production or factor inputs. </li></ul></ul><ul><li>What are the factors of production of a book? </li></ul><ul><ul><li>Paper, ink, equipment for printing and binding, editor etc. </li></ul></ul><ul><li>What are the four vital factors of production to produce any good or service? </li></ul><ul><ul><li>Land – natural resources found on the planet </li></ul></ul><ul><ul><ul><li>Renewable resources – fish, trees, water </li></ul></ul></ul><ul><ul><ul><li>Non-renewable resources – minerals, fossil fuels </li></ul></ul></ul><ul><ul><li>Labor – physical and mental effort of people </li></ul></ul><ul><ul><li>Capital – all non-natural resources used in production </li></ul></ul><ul><ul><li>Enterprise ( entrepreneurship ) –the management, organization, and planning of the other three factors of production. </li></ul></ul>
  15. 15. 8b. Factors of Production <ul><li>The four factors of production have a financial return for their part in the production process: </li></ul>Factors of Production Land Rent Income Wages Interest Profit Enterprise Labor Capital
  16. 16. 9. Specialization <ul><li>What does specialization mean? </li></ul><ul><ul><li>A business which concentrates on the production of a particular good or service or a small range of products. </li></ul></ul><ul><ul><ul><li>Can you list some examples of specialization ? </li></ul></ul></ul><ul><ul><ul><ul><li>Pizza Hut </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Dominos </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Chow Family </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Burger King </li></ul></ul></ul></ul><ul><ul><ul><ul><li>KFC </li></ul></ul></ul></ul><ul><li>At what levels does specialization occur? </li></ul><ul><ul><li>Individual – in a job, doctor, teacher, lawyer </li></ul></ul><ul><ul><li>Departmental – marketing, finance, personnel </li></ul></ul><ul><ul><li>Corporate – Dell (computers), Hilton (hotels) </li></ul></ul><ul><ul><li>Regional – Wall Street, New York (financial services) </li></ul></ul><ul><ul><li>National – Japan (electronics), Germany (cars), France (wines) </li></ul></ul>
  17. 17. 9b. Specialization <ul><li>What does division of labor mean? </li></ul><ul><ul><li>Refers to the specialization of people. </li></ul></ul><ul><ul><li>Defines different aspects of a job or task assigning different people to each part of the work. </li></ul></ul><ul><li>Are there advantages to specialization? </li></ul><ul><ul><li>Increased productivity – staff are more skilled at what they do. </li></ul></ul><ul><ul><li>Increased efficiency – better use of resources, less time wasted. </li></ul></ul><ul><ul><li>Standardization – same quality being produced. </li></ul></ul><ul><ul><li>High profit margins – customers may be prepared to pay a higher price for specialist goods. </li></ul></ul>
  18. 18. 9c. Specialization <ul><li>What are the disadvantages to specialization? </li></ul><ul><ul><li>Boredom – doing the same repetitive task. </li></ul></ul><ul><ul><li>Inflexibility – less flexible to adapt to different roles and responsibilities. </li></ul></ul><ul><ul><li>A lack of autonomy – a breakdown or delay in the process will cause problems for the entire business. </li></ul></ul><ul><ul><li>Capital cost – the purchase and maintenance of specialist machinery and equipment may be extremely expensive. </li></ul></ul>

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