The Nature of Business Activity

1. The Nature of Business Activity

2. The BIG questions: • What is a “business”? • What are the purposes of business activity?

3. Objectives: • Identify inputs, outputs and processes of a business • Factors of Production • Products • Markets, value-added • Evaluate the opportunity costs inherent in business decision making • Explain the role of different functional departments in a business • Production/Operations • Marketing • Finance • Human Resources • Explain the nature of business activity in each sector • Primary • Secondary • Tertiary

4. Inputs, Processes, Outputs • Insert scanned graphic here

5. Inputs a.k.a. “Factors of Production” • To produce any good or service, 4 vital factors of production are required: • Land • Labour • Capital • Enterprise (Entrepreneurship)

6. LAND • All natural resources found on the planet • FISH, WATER, WOOD, OIL, MINERALS, METAL ORES

7. LABOUR • Physical and mental effort of people used in production of good or service

8. CAPITAL • Non-natural resources used in the creation and production of OTHER PRODUCTS Money, buildings, equipment, tools machinery, vehicles These are MANUFACTURED, not NATURAL

9. Capital investment • Spending on capital items (stocks) • It is called investment because… • It increases the productive capacity of an economy • It is crucial for growth

10. ENTERPRISE (Entrepreneurship) • Manages the other 3 factors • Assumes all risk • Responsible for the success of the organization This is why the entrepreneur IS NOT included in Labour

11. Financial Returns • Land • Labour • Capital • Entrepreneur Rent Wages/Salaries Interest Profits

12. Specialization • Increases productivity • Increases efficiency • What’s the difference between PRODUCTIVITY & EFFICIENCY? • Productivity= overall output • Efficiency = “waste” (time/materials)

13. Division of Labour • Specialization of people, rather than the organization • Problems: • Boredom • Inflexibility • Lack of autonomy • Capital costs

14. Outputs: Products • Products can be Goods or Services Goods Tangible Have physical substance and monetary value Can be touched Services Intangible Only their results can be seen

15. Products can be consumer goods or capital goods • Consumer goods: • Gum, clothing, food, education, cell phone • Capital goods: • Tool and die machine, jet airplane, lathe,computer,mixing vat • How would you define consumer and capital good?

16. Definitions • Consumer goods • Products sold to general public, for individual consumption • Capital goods • Purchased by businesses and are used to produce other products • Think critically – Is a refrigerator a consumer or capital good?

17. What are an Organisation’s Functions? • As we have seen, businesses exist to provide products or services that people want to consume • They do this by organising the firm’s resources to meet customers’ needs (PROCESS) • Many organisations arrange these resources into different business functions

18. What are an Organisation’s Functions? Many businesses will also have the following activities that need managing: • Sales • Purchasing or buying • Research and development • Information technologies Whether they do or not depends on their industry or sector

19. What are an Organisation’s Functions? Many businesses will also have the following activities that need managing: • Sales • Purchasing or buying • Research and development • Information technologies Whether they do or not depends on their industry or sector

20. What is a Market? • ShopRite is a market • Cluck U is a market • E-Bay is a market • Challenge- If we open MHS every Friday evening to come together to trade our unwanted music CD’s, is it a market?

21. “Market” Defined • A place or process that brings buyers and sellers together to trade “value”. • Money does not have to trade hands

22. Is there a difference between a “Customer” and a “Consumer”? • A customer BUYS a product • A consumer USES a product • Why is this an important distinction for a business? • It determines who the business should be marketing to (the target market). IOW, who the business will communicate, advertise or promote to.

23. Challenge • Who is Gerber Baby Food’s target market ? • Who is Disney’s Hanna Montanna target market?

24. Value Added • The difference between the value of all inputs (materials, labor, capital) to produce a product and the price a consumer is willing to spend to purchase the product. • The value of all inputs to produce a car = $6,000, The price paid for the car = $18,000. Difference = $12,000 • Value added= profit=$12,000

25. Challenge • The inputs to produce a pair of Nike sneakers = $6.80. Consumers pay $120 for the sneakers. What accounts for the value added (profit) of $113.20? • Wal-Mart sneakers cost the same $6.80 to produce yet, consumers will pay only $9.97 for the sneakers. What accounts for this comparatively reduced value added (profit) of $3.17?

26. Farming Accounting Autos Mining Restaurants Shoes Oil drilling sales Primary Tertiary Secondary Primary Tertiary Secondary Primary tertiary Business Sectors

27. Primary Sector • Extraction and harvesting of natural resources • Less Economically Developed Countries • LEDC’s • Why? • Little value added – low prices • “Tea leaves and coffee beans”

28. Secondary Sector • Developing Countries • Called the “Wealth Creating sector” WHY? • Value is added in the manufacturing process • Goods can be exported to earn income

29. Tertiary Sector • Service sector • Highest value added What is the most important input factor in this business sector? LABOUR

30. Chain of Production • All three sectors are interrelated • As one moves up the chain, more value is added