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
 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.
• Organizations are 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
 INPUTS
Raw materials, components, machinery,
equipment and labor

PROCESSES
Turning inputs into the provision of services or
the manufacturing of goods, in this phase the
goods or services are called work in process

OUTPUTS
The output or provision of final goods
and services
STAGES IN THE PRODUCTION
OF FINISHED GOODS
 Factors of Production
 Land
- natural resources available for production forests,
fisheries
- 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 (the finance, machinery and equipment)

 Enterprise (Entrepreneurship)
- refers to the management, organization and
planning of the other three factors of production
TEACHING VS. CAR MANUFACTURING
 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.
 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
HOMEWORK
➤ Pick a famous/successful
entrepreneur
➤ How did they become famous?
➤ What steps did they take?
➤ In their own words, or from inferences, what
characteristics of an
entrepreneur do they most exhibit?
➤ You must have at least 3
sources.

Search for inspiring successful intrapreneurs, at

least 3 examples
 4 factors of financial return

 Rent ------- reward for land

 Interest ------ reward for capital (bank loans)

 Wages and Salaries -------- reward for labor

 Profit ------- reward for responsibilities

4 Returns are generally known as INCOME!

 Factors of Production

Land Labor Capital Enterprise

Rent Wages Interest Profit

INCOME
What businesses need
 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.
 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
 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
For Land: their own use or to rent it to firms for their use. If the landowner uses his land for
Rent his own use, the opportunity cost of doing so is the rent she could have earned by
providing it to a firm.

For Labor: Firms pay households WAGES. To employ workers, firms must pay workers
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 pay
Interest 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.

Entrepreneurs Households earn PROFIT for their entrepreneurial skills. An entrepreneur who
takes a risk by putting his creative skills to the test in the market expects to earn a
hip: Profits normal profit for his efforts.
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?
 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 has 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.
 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.
 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.
 Adding Value

Value added is also the difference between the value of the inputs (i.e. the costs of production) and the value
of the outputs (i.e. the goods and services sold to customers.

Value added allows a business to sell its products for more than its production costs…which results in what?

Suppose production costs for a car are $6000. If customers are willing to pay $18000 for the car, then the
value added is what?
 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
 Inflows of money,
usually from the sale
of products

Outflows of
If business costs are greater money, to finance
than revenue? production
activities
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.
 Specialization
Advantages Disadvantages
 Increased  Boredom
productivity  Inflexibility
 Increased  Lack of autonomy
efficiency  Capital costs –
 Standardization extremely expensive
 Higher profit
margin
 Specialization
 Specialization means that a business
concentrates on the production of a
particular good or service or a small range
of similar products. Can also be
specialization in making one product,
with different specialists.

 Italian Restaurants are specialized in

Pasta and Pizza, the specialists are chefs,
cleaners, drivers.

– i.e. Coca Cola, Samsung, Toyota

 Specialization will tend to increase

employee efficiency because the become
better and better in their jobs. A chef does
not deliver, but a driver does!
 Business Sectors

 Primary sector
 Secondary sector
 Tertiary sector
 Quaternary sector
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.
• Includes retail sales, transportation,
entertainment, restaurants, media, healthcare,
banking, etc
• Relies on the primary and secondary sector for
inputs
Tertiary sector – the breathtaking Burj Al Arab
hotel in Dubai
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.
 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.
 Chain of Production
 All four business sectors are interdependent
because each sector relies on the others to remain
in existence.
 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
 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’)
 Impact of sectoral change
 Change in economic structure (primary to secondary, secondary to
tertiary, etc.)
 Industrialization
 When a country moves towards the manufacturing sector as its
principal output and employment (primary to secondary)
 Products become more refined and have more export potential
 Raises the standard of education
 Opens better job opportunities

 Deindustrialization
The growing importance of the tertiary sector service industries in
developed countries
• Exploits the tertiary sector as the national output of employment
 Further raises the standard of education
 Examples of effects of shifting to the tertiary sector

 For a labor-intensive manufacturer of aluminum cans

 Quality of products improve
 More distributors
 Less employees and higher wages for employees
 Can consider turning to robots and machines, as well as outsourcing
 For the owner of a small seaside bed and breakfast
 Easier to find competent employees
 More income due to higher demand
 More competition
 People would rather work for bigger companies
 Can consider expanding
 For a family-owned vegetable farm
 More demand due to more stores
 Less laborers
 Can consider opening a small business or outsource
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.
STEPS IN • Write a business plan
THE • Obtain start-up capital
PROCESS • Obtain business registration
OF • Open a business bank account
STARTIN • Marketing
GA
BUSINES
S
 • Money that is needed to start a
business.
• Small business owners will use
their own savings and/or obtain
START-UP loans to finance their start-up.
CAPITAL • The loan process can take several
months to complete, with the lender
usually requesting a completed
business plan before any funds are
approved.
 • Before a business can trade or hire
workers, it must satisfy registration
and licensing requirements.
BUSINESS • The owner(s) must also register the
REGISTRATION legal status of the business (ie.
partnership or limited liability –
Unit 1.2)
 • Setting up business bank account
BUSINESS
allows the business to pay for its
BANK costs of operation and to receive
ACCOUNT payments from customers.
 • Potential customers need to know
about the business and its products.
MARKETING
• Marketing includes advertising and
other promotional materials.
 • Starting a new business is highly
risky because the owners and
investors are taking a step into the
unknown, even if risks are
calculated.
NOTE: • 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 • Business idea
A • Finance
BUSINESS
FACTORS • Human resource
TO • Entrepreneurial skills
CONSIDER: • Fixed assets
• Suppliers
• Customers
• Marketing
• Legalities
 • Business idea
• This might be done by setting up a
business that does not currently exist, by
STARTING A identifying and filling the niche (unfilled

BUSINESS gap) in a market or by providing products

that have a unique selling point.
FACTORS TO • Examples of successful business based on

CONSIDER: innovative ideas:

• Amazon.com (online book retailing)
• Dell (custom-made computers)
• Dyson (bag-less vacuum cleaners)
STARTING A • Finance
• Needed to fund business activities
BUSINESS • Is usually the key barrier to setting up
FACTORS TO a new business as most entrepreneurs
CONSIDER: need to borrow some money
• Need record keeping of financial
accounts – need to hire accountants
 • Human resource
STARTING A • Needed at all stages of business
activity, from the design and
BUSINESS development of a product to delivering
FACTORS TO it to the consumer

CONSIDER: • Entrepreneurs will have to consider the

need for hiring, training, retaining and
motivating their staff
 • Entrepreneurial skills
• Industrial and interpersonal skills

STARTING A http://www.skillsyouneed.com/interper
sonal-skills.html
BUSINESS • Effective leadership and negotiation
FACTORS TO skills are required to deal with different
stakeholder groups such as employees,
CONSIDER: suppliers and the government
• Must have self confidence and a
passion for what they do
 • Fixed assets
• Such as premises and capital

STARTING A equipment
• Location decision is crucial but
BUSINESS problematic
FACTORS TO • Popular location improves the

CONSIDER: chances of attracting customers,

but the cost of land and property
is much greater
 • Suppliers
STARTING A • Needed to provide the business with its
BUSINESS raw materials, finished stock of
products and support services
FACTORS TO • Negotiations over issues such as price
CONSIDER: 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