Unit 1.

Introduction to
Business
Management
 Unit 1.1
 This chapter explains what a business is
and what businesses do.
 It outlines the main business functions (or
departments) and explains the differences
between sectors.
– Primary
– Secondary
– Tertiary
– Quaternary
 The Economic Problem:
Needs & Wants
 A need is something we have to have
to live e.g. food, water, clothing
 A want is something we desire but
don’t necessarily have to have e.g.
jewelry, holidays abroad.
 Activity: Make a list of your personal
needs and wants. Limit your wants to
10 items.
 The Economic Problem
 Wants are unlimited, however,
resources are limited. This creates
scarcity.
 Because of scarcity, we have to make
choices.
 When making a choice, the next best
alternative we had to give up is called
the opportunity cost.
 Opportunity Cost Activity
 What could be the opportunity cost of
using some land to build a restaurant?
 What could be the opportunity cost of
spending $ 200 on a pair of Nike sports
shoes?
What is opportunity cost?
 It is defined as the best alternative that
is foregone when making a decision

 Differs from ACCOUNTING COST – in

that accounting costs do not look at the
cost (or value) of foregone choices

e.g. student education

accounting cost = tuition fees + books
opportunity cost = foregone income if the
person chose to study instead of working
 Businesses exist to satisfy
needs and wants of people,
organization and governments
What is a business?
• Business is a decision-making
organization involved in the
process of using inputs to
produce goods and/or to
provide services.
• Are organizations involved in
the production of goods
and/or the provision of
services.
 Organization
 A social unit of people that is structured and
managed to meet a need or to pursue collective
goals.
 All organizations have a management structure
that determines relationships between the
different activities and the members, and
subdivides and assigns roles, responsibilities,
and authority to carry out different tasks.
 Organizations are open systems--they affect and
are affected by their environment.
http://www.businessdictionary.com
STAGES IN THE PRODUCTION
OF FINISHED GOODS
 INPUTS
Raw materials, components, machinery,
equipment and labor

PROCESSES
Turning inputs into the provision of services
or the manufacturing of goods

OUTPUTS
The output or provision of final goods
and services
 Factors of Production
In the production of any good or service, the
following resources are needed:
 Land = all natural resources provided by
nature e.g. forests, fisheries
 Labor = the efforts and skills of people
 Capital = the finance, machinery and
equipment
 Enterprise = the skill and risk-taking ability
of the person who brings together the
resources to produce a good / service.
 Factors of Production

http://www.investopedia.com/terms/f/fact
ors-production.asp
 Factors of Production
 Land
- natural resources available for production
- renewable resources: those that replenish
- non-renewable resources: cannot be replaced

 Labor
- physical and mental effort of people used in
production

 Capital
- all non-natural (manufactured) resources that are
used in the creation and production of other products

 Enterprise (Entrepreneurship)
- refers to the management, organization and planning
of the other three factors of production
 Entrepreneurship vs.
Intrapreneurship
 Entrepreneurs are owners or operators of an
organization who mange, organize and plan the
other 3 factors of production. They are risk takers
who exploit business opportunities in return for
profits.
 Intrapreneurship is the act of behaving as an
entrepreneur but as an employee within a large
business organization. Intrapreneurs work in an
entrepreneurial capacity, with authority to create
innovative products or new processes for the
organization.
 Examples of Intrapreneur
 https://www.vocoli.com/blog/may-
2014/10-inspiring-examples-of-successful-
intrapreneurship/
 https://www.youtube.com/watch?v=lfmBo
Xp6Mhw
 Entrepreneurs Intrapreneurs

 Owners of organization  Employees of

 Takes substantial risks organization
 Visionary  Takes medium to high
 Rewarded with profit risks
 Responsibility for  Innovative
workforce (labor)  Rewarded with pay and
 Failure incurs personal remuneration
costs  Accountability to the
owner
 Failure is absorbed by the
organization
 Factors of Production

Land Labor Capital Enterprise

Rent Wages Interest Profit

INCOME
1.0 Introduction to Economics Resources

Resource Payments (Incomes for households)

In exchange for their land, labor, capital and entrepreneurship, households receive
payments. The payments for the four productive resources (which are costs for firms).

Firms pay households RENT. Landowners have the option to use their land for
their own use or to rent it to firms for their use. If the landowner uses his land
For Land: Rent for his own use, the opportunity cost of doing so is the rent she could have
earned by providing it to a firm.
Firms pay households WAGES. To employ workers, firms must pay workers
For Labor:
money wages. If a worker is self employed, the opportunity cost of self-
Wages employment is the wages he could have earned working for another firm.
Firms pay households INTEREST. Most firms will take out loans to acquire capital
equipment. The money they borrow comes mostly from households' savings.
For Capital: Households put their money in banks because they earn interest on it. Banks
Interest pay interest on loans, which becomes the payment to households. If a
household chooses to spend its extra income rather than save it, the
opportunity cost of doing so is the interest it could earn in a bank.
Households earn PROFIT for their entrepreneurial skills. An entrepreneur who
Entrepreneurs
takes a risk by putting his creative skills to the test in the market expects to earn
hip: Profits a normal profit for his efforts.
What businesses need
The Marketplace
What’s a MARKET?
A place or process whereby buyers
(customers) and sellers (businesses) meet
to trade.

Important to NOTE:
CUSTOMERS are the people or organizations
that buy a product
CONSUMERS are the ones that actually use
the product
e.g. Student’s education
Common Mistake
The terms customer and consumer are
often used interchangeably by
candidates, although they have different
meanings. Make sure you can
distinguish between the two concepts
and use them in the right context –
customers are the people or
organizations that buy a product
whereas consumers are the ones who
actually use the product. These may be
the same entity (e.g. someone who
buys and eats a meal), but not
necessarily such as parents
(customers) paying for their children’s
(consumer) birthday presents.
 The Circular Flow
1.0 Introduction to Economics of Resources

The Circular Flow

Market economies are
characterized by a circular flow
of money, resources, and
products between households
and firms in resource and
product markets. Notice:
• Money earned by
households in the resource
market is spent on goods
and services in the product
market
• Money earned by firms in
the product market is spent
on resources from
households in the resource
market.

The incentives of Households: Maximize Utility

The incentive of Firms: Maximize Profits!
 Types of Products
 Consumer goods – products sold to
general public
- consumer durable goods:
products that last a long time and
can be used repeatedly
- non-durable goods:
products that need to be
consumed very shortly after
purchase
 Capital goods or Producer goods –
products purchased by other
businesses to produce other
goods and services
e.g. computers, machinery, tools

 Services – intangible products

provided by businesses
e.g. teachers (education),
doctors (health care)
 Why is business activity
needed?
 The aim of all business is to combine the
factors of production to make products
(goods or services) which will satisfy
people’s wants.
 Businesses add value to the factors of
production.
 Businesses employ workers and pay them
wages, this allows them to consume
products made by other people.
 Value Added
 The enhancement a company gives its
product or service before offering the
product to customers. Value added is used
to describe instances where a firm takes a
product that may be considered a
homogeneous product, with few
differences (if any) from that of a
competitor, and provides potential
customers with a feature or add-on that
gives it a greater sense of value.
(Investopedia)
 Value Added
 Note that added value is NOT the same
as profit.
 A value add can either increase the product's
price or value. For example, offering one year
of free support on a new computer would be a
value-added feature. Additionally, individuals
can bring value add to services that they
perform, such as bringing advanced financial
modeling skills to a position in which the
hiring manager may not have foreseen the
need for such skills. (Investopedia)
 Value added can come in the
form of:
 Speed and /or quality of service
 Prestige associated with the purchase
 Feel-good factor
 Perceived value for money
 Quality of the finished product
 Brand image and/or brand loyalty
 Taste or design
 Inability to obtain such products cheaper
elsewhere
 Value Added
 http://www.investopedia.com/terms/v/valu
eadded.asp
Profit = Total Revenue - Total Costs

Inflows of money,
usually from the sale
of products

Outflows of
If business costs are money, to finance
greater than revenue? production
activities

Loss!
Functions of profit:
 Acts as an incentive to produce
 Acts as a reward for risk takers
 It encourages invention and
innovation
 Acts as an indicator of growth (or
decline)
 A source of finance
 Making the best use of limited
resources: specialization
 It is important to use the resources we have
in the most efficient ways.
 Specialization is when each worker
specializes in some part of the production
process.
 This dividing up of the production process
into different tasks is called division of
labor.
 Specialization and the division of labor
increase efficiency and output.
TASK: List advantages and Disadvantages of
Specialization
 Specialization
Advantages Disadvantages
 Increased  Boredom
productivity  Inflexibility
 Increased  Lack of
efficiency autonomy
 Standardization  Capital costs –
 Higher profit extremely
margin expensive
 Four functional areas of a
business organization

Production
Marketing
Finance
Human Resources (Personnel)
 Business Functions
1. Production (operations) – responsible
for converting raw materials into
finished goods.
Tasks include:
 Deciding how the good will be
manufactured
 Stock control
 Quality control
 Research and development
 Business Functions
2. Marketing – responsible for identifying
and satisfying consumer wants and
needs.
Responsible for:
 Product
 Price
 Place
 Promotion
 Business Functions
3. Finance – in charge of managing the
money of the organization.

Responsible for:
 Recording financial transactions
 Cash flow
 Budgeting
 Business Functions
4. Human Resources – manager, the
personnel of the organization.

Responsible for:
 Recruitment
 Training
 Pay and benefits
 Health and safety
 Decision by Peugeot Citroen in 2010 to
launch the world’s first hybrid diesel car
required interaction between:
 Marketing – will consumers be prepared to buy
this car and at what price?
 Finance – do we have the capital needed to
develop and produce it?
 HR Management – do we need to recruit
additional engineers before this project can be
turned into a market-ready car?
 Operations Management – can we produce this
product at a cost which allows the marketing
department to set a profitable price level?
 Question 1.1.1
The Business of Education
Page 3
 Business Sectors
1. PRIMARY Sector
- business involved with the extraction,
harvesting and conversion of land (i.e. natural
resources) as a factor of production
- ex. agriculture, fishing, mining, forestry
 Business Sectors
1. PRIMARY Sector
- business involved with the extraction,
harvesting and conversion of land (i.e. natural
resources) as a factor of production
- ex. agriculture, fishing, mining, forestry
2. SECONDARY Sector
- business involved in using raw materials and
other resources for the manufacturing or
construction of finished and useable products
- ex. aircraft manufacturer uses steel, rubber
 Business Sectors
1. PRIMARY Sector
- business involved with the extraction,
harvesting and conversion of land (i.e. natural
resources) as a factor of production
- ex. agriculture, fishing, mining, forestry
2. SECONDARY Sector
- business involved in using raw materials and
other resources for the manufacturing or
construction of finished and useable products
- ex. aircraft manufacturer uses steel, rubber
3. TERTIARY Sector
- business involved in providing services
Tertiary sector – the breathtaking Burj Al Arab
hotel in Dubai
 Business Sectors

4. Quaternary Sector – services involving

complex processing and handling of
information: education & research,
engineering, IT specialist, R&D etc.
- Subcategory of the tertiary sector where
businesses are involved in intellectual,
knowledge-based activities that generate and
share information.
 Business Sectors
 All four business sectors are
interdependent because each sector relies
on the others to remain in existence.
 Primary sector production tends to yield
low added value. In order to develop
economically, there must be a shift in
business activity to manufacturing and
service sectors which have higher added
value. (This shift is referred to as ‘sectoral
change’ and the process is known as
‘industrialization’)
Sector vs. Industry
This difference pertains to their scope;
a sector refers to a large segment of
the economy, while the
term industry describes a much
more specific group of companies or
businesses. A sector is one of a few
general segments in the economy
within which a large group of
companies can be categorized.

http://www.investopedia.com/ask/answers
/05/industrysector.asp
Question 1.1.2
Production Sectors
Page 6
 Chain of Production
 Primary – timber workers and miners
extract materials such as wood, sand and
metal ores
 Secondary – Engineers and builders use
machinery and equipment to transform raw
materials into usable items, such as doors,
bricks, windows and paint
 Tertiary – sales agents, financiers and
solicitors are needed to sell the finished
house
Exam Tip!
◼ During your IB Business and
Management course it is a good idea
to read the business section of
newspapers regularly. This will help
you to apply the work you have done
in class to the world outside.
◼ What, for example, was the major
business story in your country this
week?
 Reasons
for
setting up
a business
 Reasons for setting up a business
(GET CASH)
Growth
Earnings
Transference and inheritance
Challenge
Autonomy
Security
Hobbies
 Reasons for setting up a business
(GET CASH)
Growth
Assets such as property and land
tend to increase in value over time.
This is called capital growth
It is quite common for the capital
growth of a business to be worth
more than the value of the owner’s
salaries
 Reasons for setting up a business
(GET CASH)
Earnings
Chinese saying “You can never
get rich earning money from
working for someone else”
Potential returns from setting up
your own business can easily
outweigh the costs, even though
the risks are high
 Reasons for setting up a business
(GET CASH)
Transference and inheritance
Many self-employed people view
their business as something that
they can pass on (transference) to
their children (inheritance). This
helps to give them a sense of
security that might not be possible
if they chose to work for someone
else.
 Reasons for setting up a business
(GET CASH)
Challenge
Some people might view setting up
and running a business as a
challenge. It is this challenge that
drives them to perform and gives
them personal satisfaction.
Being successful in business
boosts self-esteem.
 Reasons for setting up a business
(GET CASH)
Autonomy
Being self-employed means that
there is autonomy (independence,
freedom of choice and flexibility)
in how things are done within the
organization.
 Reasons for setting up a business
(GET CASH)
Security
There is usually more job security
for someone who is their own boss
Although the risks are great,
being self-employed makes it
potentially easier to accumulate
personal wealth (financial
security) to provide higher funds
for (early) retirement
 Reasons for setting up a business
(GET CASH)
Hobbies
Successful entrepreneurs have a
passion for what they do and this
is made easier if the nature of the
work is directly related to their
interests
Steps in the process of starting a business
 Write a business plan
 Obtain start-up capital
 Obtain business registration
 Open a business bank account
 Marketing
 Business Plan
 This document include the goals and
objectives for the new business with an
outline plan of how these targets are to be
accomplished.
 Start-up capital
 Money that is needed to start a business.
 Small business owners will use their own
savings and/or obtain loans to finance their
start-up.
 The loan process can take several months
to complete, with the lender usually
requesting a completed business plan
before any funds are approved.
 Business Registration
 Before a business can trade or hire
workers, it must satisfy registration and
licensing requirements.
 The owner(s) must also register the legal
status of the business (ie. partnership or
limited liability – Unit 1.2)
 Business Bank Account
 Setting up business bank account allows
the business to pay for its costs of
operation and to receive payments from
customers.
 Marketing
 Potential customers need to know about the
business and its products.
 Marketing includes advertising and other
promotional materials.
NOTE:

Starting a new business is highly risky

because the owners and investors are
taking a step into the unknown, even if
risks are calculated.
Most new business ideas fail, mainly
due to mismanagement.
Careful consideration in the business
plan can reduce the risks of setting up a
new business.
Starting a Business
Factors to consider:
Business idea
Finance
Human resource
Entrepreneurial skills
Fixed assets
Suppliers
Customers
Marketing
Legalities
Starting a Business
Factors to consider:
Business idea
This might be done by setting up a
business that does not currently exist, by
identifying and filling the niche (unfilled
gap) in a market or by providing products
that have a unique selling point.
Examples of successful business based on
innovative ideas:
Amazon.com (online book retailing)
Dell (custom-made computers)
Dyson (bag-less vacuum cleaners)
Starting a Business
Factors to consider:

Finance
Needed to fund business activities
Is usually the key barrier to setting up a
new business as most entrepreneurs need
to borrow some money
Need record keeping of financial accounts
– need to hire accountants
Starting a Business
Factors to consider:
Human resource
Needed at all stages of business activity,
from the design and development of a
product to delivering it to the consumer
Entrepreneurs will have to consider the
need for hiring, training, retaining and
motivating their staff
Starting a Business
Factors to consider:
Entrepreneurial skills
Industrial and interpersonal skills
http://www.skillsyouneed.com/interpersonal-skills.html
Effective leadership and negotiation skills
are required to deal with different
stakeholder groups such as employees,
suppliers and the government
Must have self confidence and a passion
for what they do
Starting a Business
Factors to consider:
Fixed assets
Such as premises and capital equipment
Location decision is crucial but problematic
Popular location improves the chances of
attracting customers, but the cost of land and
property is much greater
Starting a Business
Factors to consider:
Suppliers
Needed to provide the business with its
raw materials, finished stock of products
and support services
Negotiations over issues such as price and
delivery times also need to be undertaken
Starting a Business
Factors to consider:
Customers
Business will fail without them
Need market research to produce products
that are desirable, available at the right
prices and sold in the right places
The size of the market also determines the
amount of sales
Example: Publishers are generally not
interested in authors whose work only
caters for a very small number of
customers
Starting a Business
Factors to consider:
Marketing
Is ESSENTIAL, irrespective of how good a
business idea might be
It is needed to convince lenders and
buyers that the product is a WINNER
Starting a Business
Factors to consider:
Legalities
Legal issues must be considered
Example: consumer protection rights,
copyright and patent legislation,
employment laws
Infringement of legal issues can present
huge problems for a business
Example if a restaurant breaks food hygiene
laws, it might be required to cease all
operations
 Possible problems faced by
start-ups
• Lack of finance capital
• Cash flow problems
• Marketing problems
• Unestablished customer base
• People management problems
• Legalities
• Production problems
• High costs of production
• Poor location
• External influences
 Possible problems faced by
start-ups
• Lack of finance capital
 Possible problems faced by
start-ups
• Lack of finance capital
▪ Owners of new or small businesses might not
have the credentials or experience to secure
funding
▪ Funds borrowed might require high interest
repayments which could affect the cash flow
position of the firm
▪ Some business owners might have to
remortgage their own homes to raise the funds
needed
 Possible problems faced by
start-ups
• Cash flow problems
 Possible problems faced by
start-ups
• Cash flow problems
▪ Problem with working capital (money available for
the daily running of a business)
• Lot of stock that cannot be easily turned into cash
• Customers might demand a lengthy credit period (buy
now pay later schemes ranging from 30-60 days)
• Ongoing costs – wages, rent, utility bills, taxes and
interest payments on bank loans
▪ Businesses produce cash flow forecast in their
business plan to identify likely periods of poor cash
flow so that provisions can be taken to cover any
shortfalls.
 Possible problems faced by
start-ups
• Marketing problems
 Possible problems faced by
start-ups
• Marketing problems

▪ Arise when businesses fail to meet customer

needs which results in poor sales

▪ Key to success is to identify a niche (gap) in the

market and then fill it
 Possible problems faced by
start-ups
• Unestablished customer base
 Possible problems faced by
start-ups
• Unestablished customer base

▪ Major problem facing new businesses is

attracting customers

▪ Customer loyalty is built over a long period of

time and may require marketing know-how and
large amounts of money
 Possible problems faced by
start-ups
• People management problems
 Possible problems faced by
start-ups
• People management problems

▪ New businesses lack experience in hiring

appropriate staff with all the necessary skills

▪ Lead to poor levels of customer service and the

need to retrain staff or to rehire people
 Possible problems faced by
start-ups
• Legalities
 Possible problems faced by
start-ups
• Legalities

▪ The paperwork and legal requirements of

setting up a new business can be tedius,
confusing, time consuming and expensive.

▪ Any oversight could result in the business

having to pay out large sums of money for
compensation or penalty fees.
 Possible problems faced by
start-ups
• Production problems
 Possible problems faced by
start-ups
• Production problems

▪ Difficulty to forecast levels of demand,

therefore more likely to either over produce or
under produce
▪ Overproduction leads to stockpiling, wastage
and increased costs
▪ Underproduction leads to dissatisfied customers
and a loss of potential sales
 Possible problems faced by
start-ups
• High costs of production
 Possible problems faced by
start-ups
• High costs of production

▪ Huge amount of money needed for purchasing

assets required for production
▪ Need to pay start-up costs such as rent,
advertising and insurance
▪ Cannot benefit from economies of scale
 Possible problems faced by
start-ups
• Poor location
 Possible problems faced by
start-ups
• Poor location

▪ Busy areas will offer the highest potential

number of customers, but the premises will also
cost the most
▪ Fixed costs, such as rent or mortgage
repayments, form a large percentage of total
costs
• Aim for any new firm is to break-even by keeping
down the fixed costs
 Possible problems faced by
start-ups
• External influences
 Possible problems faced by
start-ups
• External influences

▪ All businesses, irrespective of size are prone to

exogenous shocks that create a difficult trading
environment
• ie. oil crisis, economic recession
▪ More established firms tend to be better
resourced to handle external influences; new
businesses are more vulnerable so potentail for
business failure is greater
Common Mistake
◼ Candidates often claim that businesses
should not pursue a particular project
because of the risks involved. However,
all business decisions carry an element
of risk.

◼ Mark Zuckerber, co-founder of

Facebook, said that the biggest risk for
entrepreneurs is not taking any risks,
especially in a rapidly changing
business world.
 Elements of a business plan
 The business
 The product
 The market
 The finance
 The personnel
 The marketing

See Table 1.1.b (page 12)

 CUEGIS
Change, Culture, Ethics, Globalization, Innovation,
Strategy
Key TERMS
Review
 LABOR
Refers to physical and mental human effort
used in the production process.
 CAPITAL
Refers to all non-natural resources used in
the production process. An example is
money, but the term also includes resources
such as machinery, tools, equipment and
factories.
 ENTREPRENEURS
Are people who manage, organize and plan
the other 3 factors of production. They are
risk takers who exploit business
opportunities in return for profits.
 DIVISION OF LABOR
Refers to the specialization of workers in the
provision of goods and/or services by
breaking a job down into particular roles or
tasks that are repeated by the same workers.
 FUNCTIONAL AREAS
Is the term used to refer to the different
sections of a business. These are usually
named as the marketing, production, finance
and human resources departments.
 PRIMARY SECTOR
Refers to businesses involved in the
cultivation or extraction of natural resources,
such as farming, mining, quarrying, fishing,
oil exploration and forestry.
 OPPORTUNITY COST
Refers to cost measured in terms of the best
alternative that is foregone when a choice is
made.
 SECONDARY SECTOR
Is the section of the economy where business
activity is concerned with the construction
and manufacturing of products.
 LAND
Means natural resources that can be found on
the planet. This includes renewable and non-
renewable natural resources such as water,
fish, wood and physical land itself.
 TERTIARY SECTOR
Refers to the section of the economy where
business activity is concerned with the
provision of services to customers.
 Business Sectors
 Primary Sector – extracts and uses
the natural resource.
 Secondary Sector – manufactures
goods using the raw materials from
primary sector.
 Tertiary Sector – provides services to
consumers and other sectors of
industry.
 Quaternary Sector – services
involving complex processing and
handling of information: education &
research, engineering, IT specialist,
etc.
 Specialization
Means that a business concentrates
on the production of a particular good
or service or a small range of similar
products

Division of Labor
Is the term used to refer to the
specialization of people, rather than
organizations
 Business must add VALUE in
the production process
 VALUE ADDED is the difference
between the value of inputs (costs of
production) and the value of outputs
(goods/services sold to customers)

 Profit is earned – business selling its

products for more than its production
costs

PROFIT = REVENUE – COSTS

 ADDED VALUE

Is the difference between a product’s price

and the total cost of the inputs that went into
making it. It is the extra worth created in the
production process.
The End of
Unit 1.1