1.1Nature of business activity

Business and management

Introduction to business(Definitions)

• A business is an activity that generates output in the form of goods or services or a combination of both.

• An organization or enterprising entity engaged in commercial, industrial or professional activities. A business can be a for-profit entity, such as a publicly-traded corporation, or a non-profit organization engaged in business activities, such as an agricultural cooperative.

• Businesses include everything from a small owner-operated company such as a family restaurant, to a multinational conglomerate such as General Electric.

THE NATURE OF BUSINESS ACTIVITY

• The nature of business activity inevitably varies from country to country and reflects the needs and resources of the local environment.

• However, organizations are increasingly being operated in a way that considers the international perspective, cultural diversity and the need for international cooperation.

Opportunity cost

• It is defined as the best alternative that is forgone when making a decision.

• If the workers on a farm can produce either one million pounds of wheat or two million pounds of barley, then the opportunity cost of producing one pound of wheat is the two pounds of barley forgone (assuming the production possibilities frontier is linear). Firms would make rational decisions by weighing the sacrifices involved.

http://www.bized.co.uk/sites/bized/files/audio/opportunity.mp3

Case study: Business opening hoursIn the mid 1990’s supermarkets in the UK went against government advice and began to trade on Sundays. They had realized the opportunity cost of being ‘closed’ on Sundays. They were fined for this, as Sunday trading laws had not been enacted, but the fines were so insignificant compared to the revenues being made that the supermarkets continued opening on Sundays. McDonald’s has followed such practice by opening 24-hour stores around the world. Some banks in Hong Kong are open for business on Sundays.

• 1.Define the term ‘opportunity cost’.[2 marks]

• 2.Examine the reasons why opportunity cost is important in business decision making.[6 marks].

FOUR FACTORS OF PRODUCTION

• A business uses a combination of inputs to make the outputs or goods and services that it creates and sells.

The inputs or `factors of production` are:

• Land• Labour• Capital• Enterprise or Entrepreneurship

Includes Money in Business Studies

FACTORS OF PRODUCTIONLand

• Businesses will need space to operate from.• Even an internet organization will need some

office space. • In any additional to `land` referring to physical

premises, the word `land can be extended to mean any natural resource in Economics.

• Eg: Fish in the `sea` can be classified as land.

FACTORS OF PRODUCTIONLabour

• All businesses use varying degrees of labour.• A labour intensive business is one that has a

high proportion of labour inputs. This category might include potato or pea farms, restaurants and call centres.

FACTORS OF PRODUCTIONCapital

• Capital input covers both money and machinery.

• A capital intensive business is one that has a high proportion of its inputs as machinery.

• Examples might be automated car production plants and bulk chemistry processing

FACTORS OF PRODUCTIONEnterprise or Entrepreneurship

• This final input is the key factor of production as it is the entrepreneur or business person who harnesses the other inputs effectively to create added value for consumers and profit for the owner.

FACTORS OF PRODUCTIONEnterprise or Entrepreneurship

• If the owner or manager of the business has not got the drive, energy and determination to succeed then it does not matter how good the other inputs are, the business will probably underperform.

BUSINESS OUTPUTS

• The outputs of a business are dependent on the quantity and quality of the inputs and how they are combined.

• Outputs can be finished goods ready for movement to the wholesalers and shops or they might be component parts that other manufacturers will need to make a product.

BUSINESS OUTPUTSExamples

Example• A ball bearing manufacturer will find its

components are included in a diverse range of finished goods. This could include washing machines, conveyor belt systems in coal mines and consoles for aircraft.

• An output can also be service related, for example – a meal in a restaurant or the dry cleaning of a suit.

• A method of production where a business focuses on the production of a limited range of products or services for the sole objective of gaining greater degrees of productive efficiency ,quality and cheap products . This specialization is the basis of global trade.

“Specialization”

• Specialization occurs within the United States, as citrus goods naturally occur in the warmer climate of the South America and West America, many grain products come from the farms of the Midwest and maple syrup comes from the maple trees of Vermont and New Hampshire.

Specialization when referred to production, when in a factory an assembly line is organized in a specialized manner rather than producing the entire product at one production station.

Examples of Specialization

1. Workers become specialized in a particular field.2. The production of goods is quicker.3. The cost of production becomes cheaper.4. There is quality and solidarity production.5. Specialization can help in global trade.6. Firms can earn a lot of money through the specialisation in a

specific field as quality can be insured and also supply would never run short in contrast to demand.

ADVANTAGES OF SPECIALIZATION

1. The worker is only specialized in one work or field so he does not develop new knowledge and skills.

2. The training for workers is higher as it has to be specific.3. Workers would be eventually replaced by the machinery.4. Unemployment will be caused if the firm specializes the

workers would lose their jobs very easily.

Disadvantages of Specialization

Case study: The business of education Education is a big business. Schools can earn

revenue from numerous sources, such as tuition fees(for fee paying schools),grants from the government and fund-raising events. They might also lease their facilities during weekends and school holidays. Schools use the revenues to finance their expenditure, such as staff salaries for teacher and non-teaching staff. Parents might also have to pay for items such as uniforms,books,sports equipment and food.

Questions: 1.Define the term ‘specialization’ and give an

example of how this is fond in schools.[3marks]2.Examine how business functions operate in

organizations such as schools.[6marks]

BUSINESS FUNCTIONS

Business often have four major functional areas:

• Finance • Marketing (including sales)• HR Management• Operations Management (production)

All four departments are interrelated and a successful business will always try to ensure there is a good team spirit and communication between each function.

BUSINESS FUNCTIONSFinance

• This is the part of an organization that monitors the movement of funds into and out of the business, produces accounts, prepares forecasts or budgets and ensures that invoicing of customers happens and suppliers are paid.

• It is a vital function in providing information for other departments and decision makers.

BUSINESS FUNCTIONSMarketing (including Sales)

• This area covers market research and identifying what customers want though to the designing and packing of the goods and services offered.

• In addition it looks at deciding the product’s price and the type of promotion used.

• It would also consider how it is to be distributed and sold, for example, via catalogues, websites, shops or even all three.

BUSINESS FUNCTIONSHR Management

• This covers the recruitment, rewarding, motivating and training of all staff throughout the organization.

• It also includes the releasing or redeployment of staff when necessary.

BUSINESS FUNCTIONSOperations Management (production)

• This represents the engine room of the business – its is the production of goods or the delivery of a service.

• Those working in this area will be looking at the quality and stock control, methods of production and productive efficiency.

BUSINESS FUNCTIONS

• To be a good organization you need to have the best, well motivated and effectively managed people in all four areas of the business.

• To be a successful business, the challenge is making all areas work as one.

Business Sectors• Business can be classified according to the stage of

production that they are engaged in. The three main business sectors and occasionally a forth classification is used:

• Primary Sector• Secondary Sector• Tertiary Sector• Quaternary Sector• Video link:http://www.youtube.com/watch?v=s24tfWgNUP0

Source: http://www.regionales-wirtschaften.de/bilder/sectors_of_economy.jpgDate Accessed: 12th August 2009

BUSINESS SECTORSPrimary Sector

• The sector of the economy that produces unrefined raw materials (e.g. through mining)

• This covers the basic activity that is involved in the extraction of raw materials (eg: coal or gold) and also agriculture and fishing.

• Often such industries are closely monitored by the government due to:

The scarce nature of the materials. The scarce nature of food services The pollution effects of extraction methods.

BUSINESS SECTORSSecondary Sectors

• The sector of the economy that takes raw materials and turns them into finished or part-finished goods (e.g. through manufacturing).

• This economic sector includes industries that create a finished or useable product.

• These industries generally take the output of the primary sector and then manufacture finished goods or components for other industries.

• In recent decades, the secondary sector has declined in importance for many developed economies because of a loss of international competitiveness.

BUSINESS SECTORTertiary Sector

• The sector of the economy where businesses provide services, either to individuals, households or other businesses.

• This area covers the provision of services to businesses and individual consumers.

• Its includes the transportation and distribution of goods, wholesale and retail services, and advisory and consultancy type-businesses.

• In the developed world this sector has grown in importance. • The Netherlands, for example, is one country where

economic output is dominated by services.

BUSINESS SECTORQuaternary Sector

• A fourth sector may be identified which includes organizations providing information services through ICT.

• Some commentators believe this now applies to all other sectors, particularly the tertiary sector.

Chain of production • The process that raw materials or other

primary inputs go through from the start of production to the completion or delivery of a final product or service.

• The three sectors are linked through the chain of production.

ECONOMIC STRUCTURE (Higher Level)

• Changes in Economic structure in a country can have a significant implications for individual businesses.

• If there is a move towards a service based-economy, those still manufacturing will no doubt be increasingly reliant on importing component parts.

• Their customers are also likely to be based abroad and so the business will be vulnerable to fluctuating exchange rates and also the economic cycles in the other countries involved.

ECONOMIC STRUCTURE (Higher Level)

A Declining Secondary Sector-Implications• The quantity and quality of labour inputs in

this sector will be deteriorating. • This is because school leavers will be

increasingly moving into the service sector as this is a growth area.

• The remaining workforce will be aging and their productivity may decrease.

ECONOMIC STRUCTURE (Higher Level)

A Declining Primary Sector – Implications• If there is a move away from primary to secondary

sectors in an economy, the impact on individual businesses might include less available labour inputs as the working population is attracted towards higher-growth sectors.

• It’s possible that businesses will need to become more capital intensive as a result and invest in automation or the latest machinery.

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