Guns, Germs and Steel

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

1. Focus Question

What is a business?

2a. Sowhat 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.

2b. Sowhat is a business?The only purpose of a business is to create customers. Peter DruckerA 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. Sowhat is a business?As a business grows it is important to have clearly defined functions or processes.Human resource managementProductionMarketing and financeExternal factors; beyond the control of the companySocial changesTechnological developmentsThe level of economic activityEnvironmental issuesGovernment legislation and policiesExternal Shock:Oil crisisHealth careNatural disastersOutbreak of warRemember:It is easy to open a business, but much more difficult to keep it open. - Chinese proverb

3. The MarketplaceWhat is the marketplace?Is a place where buyers (customers/consumers) and sellers (businesses) meet to trade.Physical Form: such as a shop or restaurantNon-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 ProductsAll businesses produce goods and/or servicesWhat types of products do businesses produce?Consumer goods:Products sold to the general publicWhat are the two types of consumer goods?Durable goods They last a long time and can be used again.Clothes, cars etc.Non-durable goodsThey 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 ProductsServices: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 ValueAll 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 ValueWhat are some reasons for customers willing to pay in excess of the cost of producing goods and services?Speed or quality of servicePrestige connected with the acquisitionFeel-good factorPerceived value for moneyQuality of the finished goodBrand image / brand loyaltyTaste or designInability to obtain the product cheaper elsewhereExplain how the following products have value added.A 100-page fashion magazineA photo of a famous celebrity with a signed autograph.A state-of-the-art laptop computer.

6. Opportunity Cost andBusiness ActivityBusinesses 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 inBusiness ActivityHow would you calculate profit?A firms total revenue its total costs = profitWhat 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 lossThe 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 ProfitWhat 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 ProductionIn 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 planetRenewable resources fish, trees, waterNon-renewable resources minerals, fossil fuelsLabor physical and mental effort of people Capital all non-natural resources used in productionEnterprise (entrepreneurship) the management, organization, and planning of the other three factors of production.

8b. Factors of ProductionThe four factors of production have a financial return for their part in the production process:

Factors of ProductionLandRentIncomeWagesInterestProfitEnterpriseLaborCapital

9. SpecializationWhat 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 HutDominosChow FamilyBurger KingKFCAt what levels does specialization occur?Individual in a job, doctor, teacher, lawyerDepartmental marketing, finance, personnelCorporate Dell (computers), Hilton (hotels)Regional Wall Street, New York (financial services)National Japan (electronics), Germany (cars), France (wines)

9b. SpecializationWhat 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. SpecializationWhat 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.