1.1 - Introduction to business management

Inputs, Processes, and Outputs

Inputs: 

• Physical resources

  • Include the raw materials and semi-finished goods that a business may purchase in order to begin production

• Financial resources

  • Are the funds needed to set up and invest in a business and keep it running on a daily basis

• Human resources

  • Are the people needed to run the business (ex: managers and employees)

Processes, such as:

• Manufacturing

• Food processing

• Construction

Outputs: 

• Goods and services

The role of businesses

• Business: A decision-making organization involved in the process of using inputs to produce goods and/or to provides services

• Inputs: Resources that a business uses in the production process 

  • Labour and raw materials

• Outputs: Known as products

• Product: Refer to both goods and services

  • Goods: Physical products

  • Services: Intangible products 

• Needs: Basic necessities that a person must have to survive

• Wants: People’s desires

The main functions of business

• Human resources: The HR department is responsible for managing the personnel of the organization.

• Finance and accounts: Finance and accounts department is in charge of managing the organization’s money.

• Marketing: The marketing department is responsible for identifying and satisfying the needs and wants of customers. Functions of marketing department can be summed up as the traditional four Ps of marketing:

  • Product

  • Price

  • Promotion

  • Place

• Operations: Known as operations management or production. Responsible for the process of converting raw materials and components into finished goods. 

Business sectors

Primary sector: 

• Involved with the extraction, harvesting and conversion of natural resources

  • Agriculture, fishing, mining, forestry, and oil extraction

• Tend to account for a large percentage of output and employment in less economically developed countries (LEDCs)

  • Businesses in more economically developed countries (MEDCs) use mechanisation and automation

• As economies develop; there is less reliance on the primary sector in terms of employment

  • There is little value added in primary production (the difference between the value of inputs (the costs of production) and the value of inputs (the revenue received for the goods sold)

Secondary sector:

• Involved in the manufacturing or construction of products

  • Clothes manufacturers, publishing firms, construction firms, and energy production companies

• Economically developing countries tend to have a dominant secondary sector that accounts for a relatively large proportion of the country’s national output

Tertiary sector:

• Specialises in providing service to the general population 

  • Retailing, transportation and distribution, banking, finance, health care, entertainment

• Goods can be transformed in the process of providing a service

• The tertiary sector tends to be in most substantial sector in terms of both employment and as a percentage of gross domestic product (the value of the country’s output each year)

Quaternary sector:

• Subcategory of tertiary sector: Businesses in the quaternary sector are involved in intellectual, knowledge-based activities that generate and share information

  • Research and development (R&D), consultancy services, and scientific research

• Exists mainly in MEDCs as it requires a highly educated workforce

Quick Definitions:

• The primary sector involves extracting raw material from the earth. It includes activities such as agriculture, fishing, forestry, and mining for minerals, metals, and oil.

• The secondary sector involves transforming raw materials into finished or semi-finished products. It includes construction, processing and manufacturing.

• The tertiary sector involves the delivery of services such as education, health care, travel and tourism, entertainment and home and car repair services. 

• The quaternary sector includes services related to the development and use of data and information. It is a new term and is usually considered as a subset of the tertiary sector.  

• Four business sectors are linked through the chain of production 

  • Tracks the stages of an item’s production, from the extraction of raw materials used to make the product all the way through to it being delivered to the consumer

  • Four business sectors are interdependent because each sector relies on the others to remain in existence 

  • Businesses are also interdependent as they all need energy, ICT, manufactured producer goods, financial services, etc

• Sectoral change: Refers to a shift in the relative share of national output and employment that is attributed to each business sector over time 

  • Countries develop by the primary sector to manufacturing and then eventually to the tertiary and quaternary sectors

• Primary sector production tends to yield low added value

• Industrialization: A shift in business activity to the manufacturing and service sectors which have higher added value

• More economically developed countries are able to exploit the tertiary and quaternary sectors as the main contributors to national output and employment

• The sectoral change in MEDCs has been due to changes in several factors, including:

  • Higher household incomes

  • More leisure time

  • Greater focus on customer services

  • Increasing reliance on support services

The role of entrepreneurship and intrapreneurship 

• An entrepreneur: An individual who plans, organizes and manages a business, taking on financial risks in doing so.

  • Has the skills needed to oversee the whole production process, while having the ability and willingness to take potentially high risks

  • Search for and exploit business opportunities by forecasting and/or responding to changes in the marketplace

• Entrepreneurship: Describes the trait of business leaders who tend to be distinctive in their temperament, attitude, and outlook who drive the business

• Intrapreneurship: The act of being an entrepreneur but as an employee within a large organization

  • An employee who thinks and acts as an entrepreneur within a section of the organization 

  • Skills: Independent, proactive, creative, and generates new ideas and innovations and the organization

  • Takes direct responsibility and risks for turning a project or idea into a profitable finished product for the organization

Reasons for starting up a business

• Several reasons why people decide to set up a business or an enterprise: 

  • Growth

  • Earnings

  • Transference and inheritance

  • Challenge

  • Autonomy

  • Security

  • Hobbies

Steps in the process of starting up a business

1. Write a business plan 

2. Obtain start-up capital

The need to finance working capital is often underestimated by start-ups, and is often a cause of business failures.

3. Obtain business registration

4. Open a business bank account

5. Marketing 

This section describes whom you would like to target in terms of customers. Closely related to the identification of customers is an evaluation of potential competitors. Are there competitors in the market that already offer similar products and services?

• 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 business ideas fail - Mainly due to mismanagement

• The pursuit of profit remains a key incentive for entrepreneurs to take such risks

Problems that a new business may face

• Lack of finance

  • All businesses need finance for the purchase of fixed assets (buildings, equipment, etc)

  • Most owners of small businesses don’t have the credentials to secure external funding without difficulties

    • If accomplished, the funds may be insufficient or the high interest charges might affect the cash flow position

• Cash flow problems

  • A business might have a lot of stock which can’t easily be turned into cash

  • Customers might demand a lengthy credit period (buy now, pay later)

    • Businesses still need to pay their bills

  • A lack of working capital is the largest cause of business failure

• Marketing problems

  • Arises when businesses fail to meet customer needs → Resulting in poor sales

  • The key to small business success is to identify a niche (or gap) in the market, and fill it 

• Unestablished customer base

  • A major problem: Attracting customers

    • Problem is intensified when there are well established rivals

• People management problems

  • New businesses may lack experience in hiring the right staff with all the necessary skills 

    • Can lead to poor levels of customer service

  • New businesses might not know the ideal organizational structure

• Legalities

  • Necessary for businesses to comply with all necessary legislation 

  • Paperwork and legal requirements can be tedious, confusing, time consuming, and expensive 

  • Any oversight in these legalities could lead to penalty fees 

• Production problems

  • Can be difficult for new businesses to accurately forecast levels of demand 

    • More likely to overproduce or underproduce 

      • Overproduction leads to stockpiling, wastage and increased costs

      • Underproduction leads to loss of sales and dissatisfied customers

• High production costs

  • New businesses are likely to experience high production costs due to the large amount of money needed to pay for the cost of equipment, rent, etc

  • Smaller businesses are at a larger disadvantage because they can’t benefit from economies of scale

    • Economies of scale allow larger and more established businesses to benefit from lower average costs of production due to their scale of operations

• Poor location

  • Fixed costs (rent, mortgage, etc) form a large percentage of total costs for many businesses 

• External influences 

  • All businesses are prone to exogenous shocks that create a difficult trading environment

    • More established firms tend to be better resourced to handle these external influences 

The elements of a business plan

• Business plan: A report detailing how a business sets out to achieve its goals and objectives 

  • Helps to reassure financial lenders

• Many business plans have sections devoted to a SWOT analysis and a contingency plan

• A business plan is no longer than 5 or 6 pages 

  • If longer, an executive summary is written 

    • Summarizes the information given in the main report - Highlighting the key points and conclusions 

Introduction to business management and the CUEGIS concepts

• Business activity: The process of turning inputs (land, labour, capital, and enterprise) into outputs (goods and services) in order to meet the wants and needs of different customers

  • The purpose of business activity: Satisfy the needs and desires of customers whilst fulfilling the organization’s own objectives, such as profit maximization