Key Terms

• Goods are tangible products such as computers, food, clothing, cars, and appliances.
• Services are intangible products (i.e., products that can’t be held in your hand) such as
education, health care, insurance, recreation, and travel and tourism.
• An entrepreneur is a person who risks time and money to start and manage a business.
• Revenue is the total amount of money a business takes in during a given period by selling
goods and services.
• Profit is the amount of money a business earns above and beyond what it spends for salaries
and other expenses needed to run the operation.
• A loss occurs when a business’s expenses are more than its revenues.
• Risk is the chance an entrepreneur takes of losing time and money on a business that may
not prove profitable.
SYSTEM OF 4M’S
Nonprofit Businesses
A nonprofit or not-for-profit business is one that provides goods and
services to consumers, but its primary goal is no to return profit to the
owners of the business (as is the case with a for-profit business).
Instead, it uses those profits to provide a public service, advance a
cause, or assist others.
Examples
• Red Cross
• American Cancer Society
For-profit vs. Non-profit Businesses
For-Profit Business Non-Profit Business
• Provides goods or services to • Provides goods or services in
consumers for the purpose of order to generate income that
making a profit furthers its mission
Comparing For-Profits and Nonprofits
For-Profit Not-for-Profit/Nonprofit
Incurs expenses for operations Incurs expenses for operations
Provides goods and services for Provides goods and services for
customers customers
Generates revenues from sales Generates revenues from sales
and/or contributions
Owned by individuals, partners, or Operated by board of directors,
shareholders trustees, or managers
Profit is used to pay owners, Profit is used to further the mission
partners, and shareholders of the organization
Pays salaries to employees and Pays salaries to to employees and
managers managers
Profits are subject to taxation by Profits are NOT subject to taxation
local, state, and federal authorities by local, state, and federal
authorities
 The Five Factors of Production
• Land (or natural resources): Land and other natural resources are used to make homes,
cars, and other products.
• Labor (workers): People have always been an important resource in producing goods and
services, but many people are now being replaced by technology.
• Capital: This includes machines, tools, buildings, or whatever else is used in the production
of goods. It might not include money; money is used to buy factors of production but is not
always considered a factor by itself.
• Entrepreneurship: All the resources in the world have little value unless entrepreneurs are
willing to take the risk of starting businesses to use those resources.
• Knowledge: Information technology has revolutionized business, making it possible to
quickly determine wants and needs and to respond with desired goods and services. The late
management expert and business consultant Peter Drucker said the most important factor of
production in our economy is and always will be knowledge
Understanding Functional Areas
Functional Area Functions

Management Plans, organizes, controls, leads

Operations Transforms resources into products

Works to identify and satisfy customer

Marketing/Sales needs

Plans, obtains, and manages

Finance company funds

Provides knowledge and ideas that

Research and
help a company keep up and ahead
Development of the competition
 Management
The primary role of managers in business is to supervise other people’s
performance. Most management activities fall into the following categories:
• Planning: Setting long-term and short-term goals for the business, as well as
short term strategies needed to execute against those goals.
• Organizing: Organizing the operations of a business in the most efficient
way, enabling the business to us its resources effectively.
• Controlling: When people or processes stray from the path, managers are
often the first ones to notice and take corrective action.
• Leading: The manager may lead work teams or groups through a new
process of the development of a new product. The manager may also be seen
as a leader of the organization when it interacts with the community,
customers, and suppliers.
Operations
Operations are where inputs (factors of production) are converted to
outputs (goods and services).

Operations is the heart of a business, pumping out goods and services

in a quantity and of a quality that meets the needs of customers.

The operations manager is responsible for overseeing the day-to-day

business operations, which can include ordering raw materials or
scheduling workers to produce tangible goods.
Marketing
Marketing identifies customers’ needs and designs products and
services that meet those needs.

The marketing function includes:

• Promoting goods and services
• Determining how the goods and services will be delivered
• Developing a pricing strategy to capture market share while
remaining competitive
• Building and overseeing businesses’ Internet presence
 Finance
Finance involves planning for, obtaining, and managing a company’s funds.

Finance managers plan for both short- and long-term financial capital needs
and analyze the impact that borrowing will have on the financial well-being of a
business.

The finance department answer questions about how funds should be raised,
the long-term cost of borrowing funds, and the implications of financing
decisions for the long-term health of the business.

Accounting is a crucial part of the Finance functional area. Accountants provide

managers with information needed to make decisions about the allocation of
company resources.
Research and Development (R&D)
Research and Development is the lifeblood of manufacturing
businesses. R&D is staffed with scientists, thought-leaders, subject-
matter experts, and industry analysts striving to provide the
organization with knowledge and ideas to keep up and ahead of the
competition.

R&D is led by the Chief Technology Officer (CTO) who manages a

Development VP or similar title depending on what technology
products are being produced.
Practice Question 4
Which functional area of a business is responsible for converting the
factors of production into goods and services?
A. Management
B. Operations
C. Marketing / Sales
D. Finance
Practice Question 5
Sea-Worthy is an ocean shipping company. The company decided to
develop their own internal ERP (Enterprise Resource Management) system
since none of the existing commercial packages met the specific needs of
their unique business segment. Halfway into development by their IT
department, the company came to the realization that this system could
be licensed to their competitors to offset their development cost and fund
future enhancements. Which functional area of the company would be
responsible for creating revenue from this internal system?
A. Marketing
B. Operations
C. Finance
D. R&D
Business Stakeholders
A stakeholder is an individual or a group that has a legitimate interest in
a company, organization, or business.
Internal Stakeholders

Internal stakeholders are groups or people who work directly within

the business, such as managers, employees, and owners.

Managers and employees want to earn high wages and keep their jobs,
so they have a vested interest in the financial health and success of the
business.

Owners want to maximize the profit the business makes as

compensation for the risks they take in owning or running a business.
External Stakeholders
External stakeholders are groups outside the business or people who
do not work inside the business but are affected in some way by the
decisions of the business. External stakeholders can include:
• Customers
• Shareholders
• Creditors
• Federal, state, and local governments
• The local community
• Society
• Suppliers
Understanding External Forces
…influence business activities
 TODAY’S
DYNAMIC
BUSINESS
ENVIRONMENT
 Economic Environment
After decades of growth and dominance, the US economy is now challenged by
the developing economies of other nations.

Since the financial crisis of 2008, the US economy and businesses have
struggled to recover from the greatest economic crisis since the Great
Depression of the 1930s.

Thus far, the US economy has proven resilient, and since the Great Recession in
2008, progress has been made to stabilize the housing industry, maintain low
and affordable interest rates, and provide additional incentives for businesses to
open and/or expand.
 Legal Environment
There is a minefield of regulations, laws, and liabilities that companies must
cope with in order to stay in business.

Legal developments in our culture at large – for instance, the legalization of

marijuana and same-sex marriage or the strengthening of privacy laws – can
have an enormous impact on the ways companies do business. These legal
developments can affect:
• What companies sell
• How their products are manufactured
• How their products are labeled
• How their products are marketed.
 Competitive Environment

The competitive environment has intensified with the development of new

technologies, the opening up of foreign markets, and the rise of consumer
expectations.

Example: The local hardware store now finds itself competing with big box stores
like Lowe’s and Home Depot. Larger stores can often sell a product at a lower price
and offer an online shopping option or same day delivery. It can be difficult for
independent stores to compete with these features.

Staying competitive is a challenge for every business, and business owners are
finding that benefits such as customer service, employee knowledge, and high
quality can help them survive.
 Competitive Environment

Competing by Exceeding Customer Expectations

Competing by Restructuring and Empowerment
 Technological Environment

Businesses are often driven to rethink the business technology (digital tools such as
computers, telecommunications, and the internet) they use to reach customers, produce their
products, and provide their services.

The expansion of internet access all over the world has forced many traditional brick-and-
mortar businesses into e-commerce or online sales.

The advantage to businesses is that customers no longer have to live in proximity to their
stores to purchase goods and services. The disadvantage to businesses is that consumers are
also able to compare competitors’ prices, benefits, features, and services.
 Technological Environment

How Technology Benefits Workers and You?

The Growth of E-Commerce
Using Technology to Be Responsive to Customers
 Social Environment

The social environment of business encompasses the values, attitudes, beliefs,

wants, and desires of the consuming public.

The demographics that describe the American population are changing: by 2050 the
Hispanic and Asian populations in America are expected to double. At the same
time, America is aging, and with the current median age at 36, it won’t be long until
the majority of America is ready to retire.

Corporate Social Responsibility (CSR) also compels businesses to be “good

corporate citizens” by supporting charities, contributing to local communities,
adhering to ethical standards, and adopting environmentally responsible practices.
 Social Environment

Managing Diversity
The Increase in the Number of Older Citizens
The Increase in the Number of Single-Parent Families
 Global Environment

Free trade among nations has allowed goods and services to flow across
international borders more efficiently and cheaply.

Formal trade agreements among nations has forged unprecedented links and
interdependence among economies.

It’s not just the local economy or even the national economy that business must
track – they must also keep an eye on the world economy in order to anticipate and
adapt to changes that will impact their products and services.
 Global Environment

War and Terrorism

How Global Changes Affect You
The Ecological Environment
 Quick Review
• What is the relationship of businesses’ profit to risk assumption?
• Who are stakeholders, and which stakeholders are most important to a business?
• What are the five factors of production?
• What can governments in developing countries do to reduce the risk of starting
businesses and thus help entrepreneurs?
• How has technology benefited workers, businesses, and consumers?
• How have social changes affected businesses?
• What will be the impacts of future wars and terrorism?
 CRITICAL
THINKING
• Imagine you are thinking of starting a restaurant in your community. Answer
the following questions:
1. Who will be the various stakeholders of your business?
2. What are some of the things you can do to benefit your community other
than providing jobs and tax revenue?
3. How will you establish good relationships with your suppliers? With your
employees?
4. Do you see any conflict between your desire to be as profitable as possible
and your desire to pay employees a living wage?
5. Which of the environmental factors outlined in this chapter might have the
biggest impact on your business? How?