A business is any profit-seeking organization that provides goods and services designed to satisfy the customers’ needs.
A good way to understand what any business does is to view it as a system for satisfying customers by transforming lower-value inputs into higher-value outputs (see Exhibit 1.1).
Each company in the value chain makes certain choices about what it will do to generate revenue – money the company brings in through the sale of goods and services. The result of these decisions is a company’s business model – a clearly stated outline of how the business intends to generate revenue.
Generating revenue isn’t enough; the business model must also indicate how the company is going to realize profit, which is the amount of money left over after expenses—all the costs involved in conducting the business—have been deducted from the revenue.
One of the beauties of a free-market economy is that companies usually have a lot of flexibility in deciding which customers they want to focus on and how they want to compete.
Each company seeks a competitive advantage that makes its products more appealing to its chosen customers. Consumers benefit from better products and more choices, and companies get to focus on what they do best.
The driving forces behind most businesses are the prospects of earning profit and building assets. Assets can be defined as anything owned by the company that can be of meaningful value, from patents and brand names to real estate and company stock. In contrast, not-for-profit organizations (also known as nonprofit organizations) such as museums, most universities, and charities do not have a profit motive. However, they must operate efficiently and effectively to achieve their goals, and successful nonprofits apply many of the business-management principles you’ll learn in this course.
Goods-producing businesses create value by making “things,” from Pop-Tarts to school furniture to spacecraft. Most goods are tangible, meaning they have a physical presence; other goods, such as software, music downloads, and similar digital products, are intangible.
Service businesses create value by performing activities that deliver some benefit to the customer, such as finance, insurance, transportation, construction, utilities, wholesale and retail trade, banking, entertainment, healthcare, maintenance and repair, and information. Twitter, Jiffy Lube, HBO, and Verizon Wireless are examples of service businesses. Many companies are both goods-producing and service businesses.
The relationship between risk and reward is fundamental to every modern economy. A company needs to see some promise of reward before it will decide to accept the risks involved in creating and selling products. However, to ensure responsible behavior, these risks need to stay attached to those decisions, meaning if a decision turns out to be bad, that company would suffer the consequences.
Because they require large amounts of money, equipment, land, and other resources to get started and to operate, goods-producing businesses are often capital-intensive businesses. The capital needed to compete in these industries is a barrier to entry – a resource or capability a company must have before it can start competing in a given market.
As you progress through this course, you’ll start to develop a business mindset as you gain an appreciation for the many decisions that must be made and the many challenges that must be overcome before companies can deliver products that satisfy customer needs (see Exhibit 1.3).
Your experiences as a consumer have taught you a great deal about business already. Now the challenge is to turn those experiences around and view the world from a manager’s perspective. Examples of how a business professional approaches some of the questions you’ve asked as a consumer are illustrated in Exhibit 1.3.
The relationship between business and society is complex and far reaching. Individuals, communities, and entire nations benefit in multiple ways from the efforts of businesses, but even responsibly-managed companies can at times have negative impacts on society in return.
Every business operates in an overlapping mix of dynamic environments that continuously create both opportunities and constraints.
Every business operates within the broad social environment – the trends and forces in society at large. For instance, all companies are affected by population trends that change the composition of consumer markets and the workforce.
Various segments of society also have expectations about the appropriate relationship of business and society. The responsibility of a company to its stakeholders—all those groups affected by its activities, from employees to local communities to advocacy groups—is a subject of ongoing controversy.
The technological environment stems from the practical application of science to innovations, products, and processes. Technological changes have the potential to change every facet of business, from altering internal processes to creating or destroying market opportunities.
Disruptive technologies, those that fundamentally change the nature of an industry, can be powerful enough to create or destroy entire companies. For example, the fact that music can be recorded and played back in a different time and place is a profound advance made possible by technology. In the 130 years or so that recorded music has been around, it has been available on numerous technological platforms, from wax cylinders and wire recorders to vinyl discs, a variety of tape formats, compact discs, and finally digital formats such as MP3. The addition of each new technology has created opportunities for some businesses and destroyed opportunities for others.
Directly or indirectly, virtually every decision a company makes is influenced by the economic environment, the conditions and forces that (1) affect the cost and availability of goods, services, and labor and (2) thereby shape the behavior of buyers and sellers.
Every business is affected by the legal and regulatory environment – the sum of laws and regulations at local, state, national, and even international levels. Some businesses, such as electricity and other basic utilities, are heavily regulated, even to the point of government agencies determining how much such companies can charge for their services. The degree to which various industries should be regulated remains a point of contention, year in and year out.
Within the various other environments just discussed, every company operates within a specific market environment composed of three important groups: (1) its target customers, (2) the buying influences that shape the behavior of those customers, and (3) competitors—other companies that market similar products to those customers. The nature and behavior of these groups and their effect on business strategy vary widely from industry to industry.
Products are conceived and designed through research and development (R&D), sometimes known as product design or engineering. Of course, not all companies have an R&D function; many companies simply resell products that other firms make. However, for companies that do develop products, R&D is essential for survival because it provides the ideas and designs that allow these firms to meet customer needs in competitive markets.
Companies can also engage in process R&D to design new and better ways to run their operations. Much of this effort goes into information technology (IT) systems that promote communication and information usage through the company, or allow companies to offer new services to their customers.
Variously called manufacturing, production, or operations, this function concerns whatever the company makes (for goods-producing businesses) or whatever it does (for service businesses). In addition to supervising the actual production activity, operations managers are responsible for a wide range of other strategies and decisions, including purchasing (arranging to buy the necessary materials for manufacturing), logistics (coordinating the incoming flow of materials and the outgoing flow of finished products), and facilities management (everything from planning new buildings to maintaining them).
Your experience as a consumer probably gives you more insight into marketing, sales, distribution, and customer support than any other functional area in business. Although the lines separating these three activities are often blurry, generally speaking, marketing is charged with identifying opportunities in the marketplace, working with R&D to develop the products to address those opportunities, creating branding and advertising strategies to communicate with potential customers, and setting prices.
The sales function develops relationships with potential customers and persuades customers, transaction by transaction, to buy the company’s goods and services. Depending on the type of product, a distribution function can be involved both before the sale (helping to promote products to retailers, for example) and after the sale (to physically deliver products). After products are in buyers’ hands, customer support goes to work, making sure customers have the support and information they need.
The finance and accounting functions ensure that the company has the funds it needs to operate, monitor, and control how those funds are spent and draft reports for company management and outside audiences such as investors and government regulators. Roughly speaking, financial managers are responsible for planning, while accounting managers are responsible for monitoring and reporting.
The human resources (HR) function is responsible for recruiting, hiring, developing, and supporting employees. Like finance and accounting, HR supports all the other functional areas in the enterprise. Although managers in other functional areas are usually closely involved with hiring and training the employees in their respective departments, HR usually oversees these processes and supports the other departments as needed. The HR department is also charged with making sure the company is in compliance with the many laws concerning employee rights and workplace safety.
A wide variety of business services exist to help companies with specific needs in law, banking, real estate, and other areas. These services can be performed by in-house staff, external firms, or a combination of the two.
Professionalism is the quality of performing at a high level and conducting oneself with purpose and pride. True professionals exhibit seven distinct traits: striving to excel, being dependable and accountable, being a team player, communicating effectively, demonstrating a sense of etiquette, making ethical decisions, and maintaining a positive outlook (see Exhibit 1.7).
The functional areas in a business coordinate their efforts to understand and satisfy customer needs. Note that this is a vastly simplified model, and various companies organize their activities in different ways.
A vital element of professionalism is etiquette, the expected norms of behavior in any particular situation. The way you conduct yourself, interact with others, and handle conflict can have a profound influence on your company’s success and on your career. Etiquette blunders can have serious financial costs through lower productivity and lost business opportunities.