IB Business & Management

1. IB Business & Management Unit 1 The Nature Of Business Activity

2. Learning Objectives • To understand what business activity involves • Identify inputs, outputs and processes of a business • Identify and explain the main business sectors of industry • HL – Analyse the impact on business activity of changes in economic structure

3. The Nature of Business Activity What is a business? • An organisation meeting the needs/wants of consumers by providing them with goods/services What do businesses do? • Purchase inputs (factors of production or resources) to produce outputs (goods or services)…usually with the aim of making a profit

4. Why? • Needs and wants • Business exist in order to satisfy the needs and wants of people, organizations, and governments • As businesses become larger, it becomes important to have clearly designed functions. i.e. HRM, Production, Marketing, and Finance

5. The Marketplace • Types of Products • Consumer goods • Products sold to the general public. Durable (washing machines) vs. Non-durable (food) • Capital goods / Producer goods • Physical goods that are used by industry to aid in the production of other goods and services • Services • Intangible products provided by businesses

6. INPUTS • 4 Factors of Production • Land • Labor • Capital • Enterprise

7. Factors of Production Factor inputs: to produce any good, there are four vital factors of production that are always required: land, labour, capital, and enterprise • Land – all natural resources on the planet • Labour – physical and mental effort • Capital – non-natural resources (money, buildings, equipment, machinery) • Enterprise – planning of the whole process (must be creative, innovative, and passionate) Different products require different amounts of factor inputs

8. TEACHING VS. CAR MANUFACTURING

9. Adding Value How can we add some value to these products? • Value added is 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. What does this result in? • Suppose production costs for a car are $6000. If customers are willing to pay $18000 for the car, then the value added is what?

10. Feel-good Value for money Quality Brand loyalty Speed and/or quality of service Taste or design Prestige Inability to purchase cheaper Why are consumers willing to pay more? $$$

11. Opportunity Cost • Businesses have to make decisions that affect their daily operations and long term processes • Opportunity cost, the loss of other alternatives when one alternative is chosen • E.G. What losses have you experienced because of your choice of coming to school?

12. PROFIT • Profit is the positive difference between a firms total revenues and its total costs, over time • Revenues are inflows, usually from sales • Costs are outflows, usually from production activities • Profit acts as an incentive • Reward for risk takers • Encourages invention and innovation • Indicator of growth or decline • Source of finance for internal growth

13. Specialization • Specialization is when 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. • 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!

14. Business Functions • A business is normally organized by its functions • E.G Marketing, Operations, HR, Finance • This is because being grouped together allows the functions to benefit from specialisation and division of labour • This leads to lower unit costs and a greater efficiency. However it can mean that there is departmental rivalry. • Larger businesses might have a number of businesses within the whole company. This would be coordinated by a Head Office, where all the major decisions are made.

15. Business Functions Other ways of organising the business could be more appropriate for different types of businesses: • Product – the functions are organised around the product – so at a business like ICI, who are the UK’s leading chemical manufacturer, a product manager would have a team of functions who would answer to them, like accounting, marketing and production • Geographical – a hierarchy might be split according to different places that the product is sold – for instance a business may have a European division of its business, which would take into account the different cultural and supply differences of the region • Market – the organisation is based on market segments – so an airline business like British Airways could concentrate on long haul, short haul, holiday makers, business clients and freight

16. Business Functions • A business whose decision-making comes from one place only is known as a centralised organisation. • Normally Head Office will decide on the major elements of strategy, no matter where the manufacturing plants and sales teams are positioned around the country or globe. • This means that there are good opportunities for economies of scale. • Other businesses, especially multinationals will opt for a more decentralised organisation – where the individual businesses within the whole company group, make decisions for themselves. • This means that there is more opportunity to react to the changing marketplace (one of the advantages of a small firm). • However there is a possibility that these businesses (who may well be in different parts of the world) might be duplicating research or not bargaining in such as strong position as a bigger overall company. • When a business reaches a certain size then it might split into different departments. These departments will specialise, employing people with expertise in these areas.

17. The main functionsin a business are usually: Accounts and Finance Provides a detailed record of the money coming in and going out of the business and prepares accounts as a basis for financial decisions Human Resources Deals with all the recruitment, training, health and safety and pay negotiations with unions/workers Production Makes sure that the production plans are met on time and products of the right quality are produced Operations Buys all the raw materials and goods required for production and makes the product Marketing Deals with all aspects of selling to customers; the marketing function carries out marketing research, organisesadvertising and product promotion

18. Primary, Secondary and Tertiary Sectors Business activity is the process of transforming inputs into outputs by adding value. There are three main sectors of business activity: • Primary sector - Involves the extraction and production of raw materials, such as coal, wood and steel. A coal miner and a fisherman would be workers in the primary sector. • Secondary sector - Involves the transformation of raw materials into goods e.g. manufacturing steel into cars. A builder and a dressmaker would be workers in the secondary sector. • Tertiary sector - Involves the provision of services to consumers and businesses, such as cinema and banking. A shopkeeper and an accountant would be workers in the tertiary sector.

19. Primary, Secondary and Tertiary Sectors Goods move through a “chain of production”. The chain of production follows the construction of a good from its extraction as a raw material through to its final sale to the consumer. So a piece of wood is cut from a tree (primary sector), made into a table by a carpenter (secondary) and finally sold in a shop (tertiary). Some businesses have elements of all sectors in their chain of production. Others businesses choose to specialise.

20. Primary, Secondary and Tertiary Sectors Examples of specialisation: • Baker only baking bread • Machinery that only cuts sheet metal • Lawyer dealing only with criminal law Advantages of specialisation • Producer becomes more efficient because they learn the best way (all the short cuts) to produce at the lowest cost • A producer may be able to charge a higher price from a customer – the customer is prepared to pay more for expert/specialist knowledge (e.g. a cosmetic surgeon)

21. HL Changes in economic structure • Two important features of this classification of business activity • The importance of each sector in a country’s economic structure changes over time • Measured in either levels of employment or output levels as a whole • This will bring about benefits and problems for a country • Consider industrialisation – Africa / Asia • Consider deindustrialisation – UK • The relative importance of each sector varies significantly between economies