2. © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter One
What is Business?
© The McGraw-Hill Companies, Inc., All Rights Reserved.
McGraw-Hill/Irwin
Introduction to Business

3. Learning Objectives
Differentiate the three meanings of business as commerce, business as occupation and business as organization and identify the four main kinds of productive resources.
Understand how the forces of supply and demand determine fair, or market, prices.
Appreciate how a company’s business model is the source of its competitive advantage and can mean the difference between merely making a profit and profitability

4. Learning Objectives
Recognize the way specialization and the division of labor lead to increasing profit and wealth via the market’s “invisible hand”.
List the reasons why business organizations are created and how they facilitate commerce and lower transaction costs.

5. What is Business? Business
goal-directed behavior aimed at getting and using productive resources to buy, make, trade, and sell goods and services that can be sold at a profit

6. Key Business Terms Productive resources Operating costs
the four crucial ingredients – land, labor, capital, and enterprise – that are needed to profit from business
Operating costs
the cost of acquiring and using the four productive resources to make and sell goods and services

7. Productive Resources and Operating Costs
Figure 1.1

8. Key Business Terms Product Value Price
any kind of good or service that other people value and want to buy
Value
how much utility a product gives customers, how well it satisfies their desires or needs
Price
a way of measuring the value of a product by how much customers are willing to pay for it

9. Products What products are found at thinkgeek.com?
What competitive advantage does ThinkGeek have? ™

10. Key Business Terms Business Model Competitive advantage
a company’s plan of action to use resources to create a product that will give it a competitive advantage
Competitive advantage
a company’s ability to offer customers a product that has more value to them than similar products offered by other companies

11. Question?
What is the amount of money or income that a company generates from the sale of the product?
Net income
Profit
Sales revenue
IBIT
The correct answer is “C” – sales revenue. See next slide.

12. Key Business Terms Sales revenue Profit
the amount of money or income that a company generates from the sale of the product
Profit
the total amount of money left over after operating costs have been deducted from sales revenues

13. Key Business Terms Capital Wealth
profit that is kept in a company and invested in its business
Wealth
the sum total of the resources, assets, riches, and material possessions owned by people and groups in society

14. Key Business Terms Franchising
a business practice whereby investors are allowed to purchase the right to own and operate a business using a company’s name and business model

15. Key Business Terms Nonprofit organization
an organization that is not in business to make profit but to provide value to the people and groups it serves

16. The Three Meanings of Business
Business system
the combination of commerce, occupations, and organizations that result in the production and distribution of goods and services people value

17. The Business System: Commerce, Occupation, Organization
Figure 1.2

18. Business as Commerce Business commerce Trade Barter
the process by which people produce and exchange valuable goods and services that fulfill their wants and needs
Trade
the exchange of products through the use of money
Barter
the exchange of one product for another product

19. Demand, Supply, and the Market Price
Diminishing marginal utility
the principle that the value people receive from an additional unit of a product declines as they obtain more of a product

20. Demand, Supply, and the Market Price
Law of demand
the principle that states as the price of a product rises, consumers will buy less of it, and as the price of it falls, consumers will buy more of it

21. Demand, Supply, and the Market Price
Law of supply
the principle that states that as the price of a product rises, producers will supply more of it, and that as the price of it falls, producers will supply less of it

22. Demand, Supply, and the Market Price
Figure 1.3

23. Determining the Market Price
buyers and sellers for a particular product

24. Question?
What is a group of companies that makes similar products and competes for the same customers?
Industry
Factory set
Trade group
NSCA cluster
The correct answer is “A” – industry. See next slide.

25. The Business Model and Profitability
Industry
a group of companies that makes similar products and competes for the same customers

26. Profit and Profitability
a measurement of how well a company is making use of its resources relative to its competitors

27. Increasing Profitability
Companies are in competition to:
Develop new and improved products to attract customers
Use their resources more productively in order to reduce their operating costs

28. Increasing Profitability
Premium price
the higher price a seller is able to charge versus what its competitors can charge

29. Positive and Negative Effects of Self-Interested Behavior
Figure 1.5

30. Business as an Occupation
Specialization
the process by which people become more skilled and productive when they perform a narrowly defined range of tasks specific to an occupation or job

31. Business as an Occupation
Business occupation
the acquired set of skills that enable a person to create valuable goods and service that can be traded at a profit

32. How Specialization and the Division of Labor Increase Capital and Wealth
Figure 1.6

33. The Invisible Hand of the Market
the principle that the pursuit of self-interest in the marketplace naturally leads to the improved well-being of society in general

34. The Invisible Hand of the Market
Monopoly
a situation in which one company controls the supply of a product and can charge an artificially high price for it
Human capital
a person’s stock of knowledge, skills, experience, judgment, personality, and abilities

35. Transaction Costs Related to Business
the costs of bargaining, negotiating, monitoring, and regulating exchanges between people in business
Teamwork
a phenomenon that occurs when people pool their skills to create more valuable products than they could create alone

36. How Business Organizations Lower Transaction Costs
a tool that empowers people to shape and control the behavior of other people to produce goods and services
Organizational structure
the framework of task and authority relationships that coordinates people so they work towards a common goal

37. How Business Creates Value for People
Functional activities
the task-specific operations needed to convert resources into finished goods and services sold to customers
Value chain
the coordinated series or sequence of functional activities necessary to transform resources into the products customers want to buy

38. How Business Creates Value for People
Primary functions
functions directly responsible for utilizing scarce resources most efficiently and effectively to create goods and services
Secondary functions
functions not directly responsible for getting products to customers but whose activities contribute to the efficiency and effectiveness of other functions

39. Primary and Secondary Value-Chain Functions
Figure 1.9

40. Video - Todd McFarlane
This video features a discussion with Todd McFarlane, CEO of McFarlane Companies in Tempe Arizona.
From Todd McFarlane’s perspective, what is the key element of his business model?
What are the four main productive factors in business organizations?
What influences people to buy or not buy a product such as the comic book Spawn created by McFarlane?
Title: Todd McFarlane
Summary: The video features a discussion with Todd McFarlane, CEO of McFarlane Companies in Tempe Arizona. This global company spans comics, sports, monsters, and toys. In fact, it is the world’s largest and most successful toy company. McFarlane is a very successful entrepreneur who started as a college baseball player looking to break into the major leagues. Unfortunately, this venture was not successful. Instead, he fell back on his self-taught ability to draw comics. After 300 rejections from various companies, Marvel Comics hired him. In 1990, Todd was the highest paid comic cartoonist in the industry.
He still wasn’t satisfied, however. He left the company at the peak of his career and took 6 of the leading artists with him and formed his own company. Success came fairly quickly with the publication of the comic book Spawn which sold 1.7 million copies. This success was despite the predictions by industry insiders that Todd McFarlane wouldn’t last a year on his own.
McFarlane knows that the two most important elements to successfully generate wealth are entrepreneurship and knowledge. Both of which he possesses in large measure. In a dynamic business environment, there are several areas that need to be addressed in order to be successful. (1) Economic environment—in McFarlane’s case it is focused in the area of intellectual property laws; (2) technological environment—McFarlane sees technology as a tool to push the creative environment; (3) competitive environment—he sees the opportunity to earn less per unit profit by taking advantage of the opportunities to produce a higher quality product; (4) social environment—he keys in on his target demographic; (5) global environment—which effects all the other areas.
Discussion Questions:
1. From Todd McFarlane’s perspective, what is the key element of his business model?
Answer: The McFarlane Companies are highly successful due to the emphasis on quality and competitive advantage. Todd McFarlane sees opportunities left by other companies in the “small” areas such as the example of painting seams on a toy basketball. In short, paying close attention to the details, to make it right, to design and manufacture quality into the product is the key success factor.
2. What are the four main productive factors in business organizations?
Answer The four main productive factors are land, labor, capital and enterprise. The McFarlane Companies utilizes these resources to produce the various products across their businesses including comic books, toys, and sports memorabilia. In McFarlane’s case, the CEO uses labor, capital and enterprise in creative ways to generate wealth.
3. What influences people to buy or not buy a product such as the comic book Spawn created by McFarlane?
Answer: The forces of supply and demand determine a product’s market price (and subsequently profitability for the firm). In turn, supply and demand are the result of peoples’ subjective judgment of the value of utility they will receive from consuming a particular product. In McFarlane’s case, it is clear that the demand for the comic book, Spawn, was significant (1.7 million copies sold), thus clearly communicating the “value” that was perceived by those who bought the product.