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1 chapter Business Basics Better Business 3rd EditionSolomon (Contributing Editor) · Poatsy · Martin chapter © 2014 Pearson Education, Inc.
© 2014 Pearson Education, Inc.Why Study Business? Find a successful career (what do you want to be when you grow up?) Be a successful owner Be a better employee Become a smarter consumer and investor © 2014 Pearson Education, Inc.
Business Basics A business is any entity that offers products to their customers to earn a profit. A profit is earned when a company’s revenue (the money a business brings in) is greater than its expenses (the money a business pays out). Nonprofit organizations focus on causes not profit © 2014 Pearson Education, Inc.
© 2014 Pearson Education, Inc.What is a Business? (my definition)…the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs. Important Components of Business Organized Effort of Individuals (Buyers, Sellers, and Resources) Product Elements Profit Motivation Customer Satisfaction Stakeholders Changing Business Environment Learning Objective 1: What is profit, and what is the difference between a good and a service? Businesses are entities that offer goods and services to their customers in order to earn a profit. A profit is earned when a company’s revenue (the money a business brings in) is greater than its expenses (the money a business pays out). More often than not, profit is the driving force behind a business’s growth. © 2014 Pearson Education, Inc.
Organized Effort of IndividualsSellers Manufacturers (businesses that assemble and make products, i.e. Apple, Kodak, Stone Container) Resellers (businesses that resell tangible products to customers or to the other businesses, i.e. Wal-Mart, Target, Lowes, Home Depot) Service Providers (businesses that provide intangible products or perform useful labor on behalf of their customers, i.e. insurance, banking, haircuts, cleaning service) Combination Resources Human (physical labor and knowledge) Natural Materials (raw/natural materials) Entrepreneurship (Willingness to start business) Capital (Financial, Real-physical facilities) Technology (computers, smartphones, software, etc.) Intellectual (patents, copyrights, trademarks) Buyers Consumers (people who buy products for personal consumption) Business (organizations who buy products for to resell to others, use as part of their product, or help in the operation of their business) Government (organizations that purchase products for societal purposes, i.e. military, roads, park maintenance, etc.) Other (non-profit institutions, churches, libraries, etc.) © 2014 Pearson Education, Inc.
What Kinds of Products are Sold by Businesses?Good - refers to a physical product a business sells Service - refers to an intangible product that is bought or sold PRODUCTS CAN CONSIST OF BOTH GOOD AND SERVICE ELEMENTS! A product can be either a good or a service. Goods are physical products offered by a business, such as a new car or a computer. On the other hand, a service refers to an intangible product that is bought or sold, such as a haircut or legal advice. Unlike a polo shirt on the rack at Hollister (a product), services cannot be physically handled. Some companies offer products that are both goods and services. When you order a steak at a restaurant, you’re paying for the good (the steak) as well as the service of preparing, cooking, and serving the steak. © 2014 Pearson Education, Inc.
© 2014 Pearson Education, Inc.Spotlight on Profit Profit is what remains after all business expenses have been deducted from sales revenue. Revenue – Expenses = Profit Sales Revenue = the money a business receive from selling its products (product price * number of products sold) Expenses = the money a business spends trying to sell its products and operate A loss (negative profit) results when a firm’s expenses are greater than its revenues. What do you have when? Revenue > Expenses Expenses > Revenue Sales Revenue - Business Expenses Profit (Loss)* Learning Objective 3: What are the factors of production? To fully understand how a business operates, you have to consider the factors of production, the resources used to produce goods and services. Labor is the human resource that refers to any physical or intellectual work people contribute to a business’s production. Natural resources are the raw materials used to produce goods and services. Soil used in agricultural production, trees used for lumber to build houses, and coal, oil, and natural gas used to create energy are all examples. There are two types of capital – real capital and financial capital. Real capital refers to the physical facilities used to produce goods/services. Financial capital is money from loans, investors, fundraising, and personal savings. Entrepreneurial talent is also essential to the success of a business. Entrepreneurs are people who assume the risk of creating, organizing, and operating a business and direct all the business resources. Entrepreneurs are a human resource, just like labor, but what sets entrepreneurs apart from labor is their willingness to bear risks and their ability to manage an enterprise. Technology refers to items and services such as smartphones and software that make businesses more productive. Finally, intellectual property refers to the ownership of ideas and creative works in the form of patents, copyrights, and trademarks. Intellectual property creates a competitive advantage for drug companies that own patents on a popular and effective drug as well as for technology companies who own patents on hardware and software. *Profit becomes property of its owners © 2014 Pearson Education, Inc.
© 2014 Pearson Education, Inc.Profit Pursuit The purposes of profit To reward business owners for producing goods and services consumers want Profit compensates for RISK Non-Payment Risk Business Failure Risk Entrepreneurs – People who risk their time, effort, and money to start and operate a business Is the pursuit of profit bad? Nick Woodman, Founder/CEO, GoPro © 2014 Pearson Education, Inc.
© 2014 Pearson Education, Inc.Stakeholders “…all the different people or groups of people who are affected by the policies, decisions, and activities made by an organization.” Who are some common business stakeholders? Customers - Government Employees - Lenders Owners - Community © 2014 Pearson Education, Inc.
Changing Business EnvironmentThe business environment is dynamic and constantly changing Business have to stay abreast of its environment in order to capitalize on potential opportunities or minimize potential threats to its business What are some outside factors or influences that impact a business’ activities? Economic Factors Laws Technology Competition Social changes (attitudes, interests, and beliefs) Global influences © 2014 Pearson Education, Inc.
How Does Competition Influence Business?Competition arises when two or more businesses contend with one another to attract customers and gain an advantage. Competition forces companies to - Improve their product offerings - Lower their prices - Aggressively promote their brands - Focus on customer satisfaction Learning Objective 4: How do competition, the social environment, globalization, and technological growth challenge and provide opportunities to business owners? In a market-based economy such as that of the United States, there is an emphasis on individual economic freedom and a limit on governmental intervention. In this type of market, competition is a fundamental force. Competition arises when two or more businesses contend with one another to attract customers and gain an advantage. Competition forces companies to improve their product offerings, lower their prices, aggressively promote their brands, and focus on customer satisfaction. Having to compete for a finite number of consumers usually weeds out less efficient companies and less desirable products from the marketplace. In a competitive environment, companies can create customer satisfaction by offering lower prices, a better product, or superior customer service. For example, small specialty stores often can’t compete on price, but they have highly trained personnel who can assist the customer in the selection of a product. © 2014 Pearson Education, Inc.
How Can Social Media and Employee Empowerment Create Opportunities?Social Media, such as Twitter and LinkedIn, build relationships with customers. Employee Empowerment allows employees to solve customer concerns without management approval. Social media such as Twitter, LinkedIn, Pinterest, and Facebook allow people to connect with others. Many companies have learned to harness the power of social media to raise awareness of their products or build customer loyalty. In a world where customer satisfaction is essential, empowering customer-contact employees to develop solutions to customer concerns creates a competitive advantage. For example, employees at Nordstrom are empowered to accept a customer return of uncomfortable shoes that had already been worn in order to build a long-term relationship with the customer. © 2014 Pearson Education, Inc.
How Does the Social Environment Affect Businesses?Baby Boomers: An aging population - Business opportunities - Providing for retirees Increasing diversity - Workforce development - Consumer demographics The Green Movement - Environmental concerns - New product opportunities A social environment is an interconnected system of different demographic factors such as race, ethnicity, gender, age, income distribution, sexual orientation, and other characteristics. Social, economic, and political movements and trends cause the social environment to change. An aging population presents many opportunities for businesses; it also presents challenges for the U.S. economy as baby boomers reach retirement age and programs such as Social Security and Medicare are stretched. As the United States becomes more diverse, many companies will implement diversity programs that outline their goals and objectives for managing, retaining, and promoting a diverse workforce. Diversity recognizes differences in gender, ethnicity, religion, sexual orientation, or disability. Companies must include these groups in their diversity initiative to ensure that all employees are treated fairly. A green economy is one that factors ecological concerns into its business decisions. The demand for more green products presents new opportunities for entrepreneurs to meet those needs. These “green-collar” jobs may help revitalize U.S. manufacturing. © 2014 Pearson Education, Inc.
© 2014 Pearson Education, Inc.Globalization Globalization - a movement toward a more interconnected and interdependent world economy Multinational enterprises Offshoring Benefits to the U.S. economy Risks to the U.S. A very important trend in business is globalization - a movement toward a more interconnected and interdependent world economy Multinational enterprises, companies that have operations in more than one country, are among the leaders of globalization. Companies such as Nike, McDonalds, and Coca Cola have operations around the globe. A growing number of companies are choosing to relocate their production facilities overseas or subcontracting at least some components of their products to foreign companies around the world at low costs. This is called offshoring. Globalization presents both benefits and risks to the U.S. economy. Companies have the opportunity to sell their products around the globe. Through offshoring, lower production costs allow prices on consumer products to go down. Additionally, businesses can benefit by having higher profits when they make a produce less expensively abroad and lower their expenses. Yet concerns remain about U.S. workers losing their jobs to workers overseas. Increased competition from international companies, fluctuations in the value of the U.S. dollar, security and patent protection concerns, and unstable political climates in foreign countries are additional risks that globalization has created for U.S. companies. The increasingly global nature of business increases the demand for workers who can communicate with international business partners, have up-to-date technological talents, can demonstrate excellent communication and creative problem-solving skills, and possess leadership skills. © 2014 Pearson Education, Inc.
Technological ChangesChallenges of technological changes: Demands on time and capital Changes to business operations Benefits of technological changes: Lower costs and improved productivity, security, and communications. Telecommuting, teleconferencing and other Although expensive and time-consuming, technology can help streamline businesses, cut costs, and increase productivity, security, and transparency, as well as communications with customers. Technology is making it possible for employees to telecommute, or work from a location away from the office. Teleconferencing is keeping CEOs and other corporate representatives from having to travel for meetings. It is also allowing companies to communicate easily. If IT is the tool that is changing the function of business, the Internet is the tool that is changing the scope. Although IT by itself would be extremely influential for the business world, the Internet makes it truly revolutionary. © 2014 Pearson Education, Inc. Publishing as Prentice Hall 1-16 16
© 2014 Pearson Education, Inc.E-Commerce E-commerce takes several forms: B2C business to consumer B2B business to business C2C consumer to consumer Online security and privacy E-commerce has been growing rapidly since the new millennium, forcing many businesses to either adapt or be left in the dust. E-commerce primarily consists of several different kinds of business: business-to-consumer (B2C), business-to-business (B2B), and consumer-to-consumer (C2C). Most students are familiar with B2C sites such as Amazon.com and Target.com, where they can buy a wide range of products. Businesses also use online C2C marketplaces to sell their products to other businesses. The newest form of e-commerce is consumer-to-consumer sites, such as Etsy and CraigsList, where consumers may sell items to others with a third party to mediate the transaction. With the growth in e-commerce, businesses have the responsibility to take measures to protect consumers’ online security and privacy. © 2014 Pearson Education, Inc.
Types of Businesses: Local and RegionalA local business - usually one of a kind, serves a limited surrounding area Regional businesses - serve a wider area although they do not serve a national or international market Challenges Managing money Undercapitalization Controlling costs Objective 5: What are the four types of businesses? A company is a local business if there is only one outlet that serves a limited surrounding area. Local companies generally have a small number of employees and are associated with the town or city in which they are located. Regional businesses serve a wider area although, like local companies, they do not serve a national or international market. The most common challenge for local and regional businesses is managing money. Poor financial planning, as well as unfavorable economic conditions, can lead to bankruptcy. Undercapitalization occurs when a business owner cannot gain access to adequate funding. Many small businesses fail when the economy slows down because consumers are less likely to spend extra money. Business owners also have to take taxes and insurance costs into consideration, such as health insurance and liability insurance. © 2014 Pearson Education, Inc.
Types of Businesses: NationalA national business has several outlets throughout the country and provides goods or services to virtually all U.S. residents, no matter where in the country they live Special challenges: Budget and finances Must be aware of all state laws in every state in which they do business Manage longer, more complex supply chain A national business has several outlets throughout the country, but it does not serve an international market. It provides goods or services to virtually all U.S. residents, no matter where in the country they live. Like local and regional companies, national companies also have to worry about their budget and managing their finances. Since laws vary from state to state, national companies have to be aware of state laws in every state where they do business. Another challenge that national companies face is a longer, more complex supply chain. The supply chain is the process by which products, information, and money move between supplier and consumer. The product flows from supplier to manufacturer to wholesaler to retailer to consumer. The bigger a business is, the longer and more complicated the supply chain becomes. © 2014 Pearson Education, Inc.
Types of Businesses: MultinationalMultinational businesses - provide goods or services to international consumers or have suppliers or production facilities in other countries. Special challenges: Differences in international laws Cultural differences Economic differences Multinational businesses are businesses that provide goods or services to international consumers or have suppliers or production facilities in other countries. Multinational companies must be familiar with the laws of the countries in which they operate. Import and export laws, safety regulations, quality control, copyrights, and patent rights are just some of the laws that multinational corporations have to keep in mind. Cultural differences which multinational companies must consider include different business hours, workweek schedules, values and customs, wage expectations, and language barriers. We’ll discuss these further in Chapter 4. Multinational companies also have to contend with many important economic differences among countries, such as the different levels of economic development, interest rates, and inflation rates that make international business more complicated than purely domestic business. © 2014 Pearson Education, Inc.
Taking Business PersonallyHow do you receive funding? What are your expenses? How does the social environment affect your life? How does globalization affect your life? How do you keep up with new technology? What sort of e-commerce do you use? How do you keep your “business” secure What types of financial goals do you have? Learning Objective 6: How do life skills translate to the business environment? How do you receive funding? Regardless of whether or not you have a job, you’re receiving money from somewhere. It could be from a line of work, a family member, a student loan, or your own savings. Similarly, businesses need funds to operate. What are your expenses? Rent, clothing, food, tuition—these are considered expenses. Ultimately, you will want to generate enough income to cover your expenses and have some left to save. How does the social environment affect your life? The social environment presents similar opportunities and challenges to you as it does to businesses. Do you embrace diversity? How do you relate to people from an older generation? Are you finding ways to make your lifestyle more eco-friendly? It is important to address these issues in order to live a more harmonious life. How does globalization affect your life? Do you speak a foreign language or keep up with world news? Perhaps you have friends or relatives in another county. The world is getting smaller for businesses and for you. How do you keep up with new technology? Chances are you use some sort of technology to run your life. What sort of e-commerce do you use? What sort of things do you buy or even sell online? How do you keep your “business” secure? Keeping your personal information secure while you’re online can help you avoid identity theft or other potentially dangerous blows to your financial health. What types of financial goals do you have? The goals of a business typically revolve around reaching some level of financial success. You too might have certain financial goals you’d like to achieve in your life. To reach these goals, you’ll need to make informed decisions about how you spend and save your money. © 2014 Pearson Education, Inc.
© 2014 Pearson Education, Inc.
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