INTRODUCTION TO BUSINESS
: Economic Systems and Business
1.1 The Nature of
Business
How do businesses and not-for-profit organizations help
create our standard of living?
Take a moment to think about the many different types of
businesses you come into contact with on a typical day. As you drive to class,
you may stop at a gas station that is part of a major national oil company and
grab lunch from a fast food chain such as Taco
Bell, McDonald’s, or the neighborhood pizza place. Need more cash?
You can do your banking on a smartphone or another device via mobile apps. You
don’t even have to visit the store anymore: online shopping brings the stores
to you, offering everything from clothes to food, furniture, and concert
tickets.
A business is an organization that strives
for a profit by providing goods and services desired by its customers. Businesses
meet the needs of consumers by providing medical care, automobiles, and
countless other goods and services. Goods are tangible items
manufactured by businesses, such as laptops. Services are
intangible offerings of businesses that can’t be held, touched, or stored.
Physicians, lawyers, hairstylists, car washes, and airlines all provide
services. Businesses also serve other organizations, such as hospitals,
retailers, and governments, by providing machinery, goods for resale,
computers, and thousands of other items.
Revenue is
the money a company receives by providing services or selling goods to
customers. Costs are expenses including rent, salaries,
supplies, transportation, and many other expenses a company incurs from
creating and selling goods and services. For example, some of the costs
Microsoft incurred by developing its software include salaries, facilities, and
advertising. If Microsoft has money left over after it pays all
costs, it has a profit. A company whose costs are greater than
revenues shows a loss. When a company such as Microsoft uses its resources
intelligently, it can often increase sales, hold costs down, and earn a profit.
Not all companies earn profits, but that is the risk of being in
business. Risk is the potential to lose time and money or
otherwise not be able to accomplish an organization’s goals. Without enough
blood donors, for example, the Canadian Red Cross faces the risk of
not meeting the demand for blood by victims of disaster. Businesses such
as Microsoft face the risk of falling short of their revenue and
profit goals. In Canadian business today, there is generally a direct
relationship between risks and profit: the greater the risks, the greater the
potential for profit (or loss).
Thus, businesses create the goods and services that are the
basis of our standard of living. The standard of living of any
country is measured by the output of goods and services people can buy with the
money they have. Canada has one of the highest standards of living in the
world. Although several countries, such as Switzerland and Germany, have higher
average wages than Canada, their standards of living aren’t higher, because
prices are also much higher. As a result, the same amount of money buys less in
those countries. For example, in the United States, we can buy an Extra Value
Meal at McDonald’s for less than $5, while in another country, a
similar meal might cost as much as $10.
Businesses play a key role in determining our quality of
life by providing jobs, goods, and services to society. Quality of
life refers to the general level of human happiness based on factors
including life expectancy, educational standards, health, sanitation, and
leisure time. Building a high quality of life is a combined effort between
businesses, government, and not-for-profit organizations. In 2017, Vienna,
Austria ranked highest in quality of life, followed by Zurich, Switzerland;
Auckland, New Zealand; and Munich, Germany. Seven of the top 10 locations are
in western Europe, two are in Australia/New Zealand, and only one is in Canada,
Vancouver. At the other end of the scale, Baghdad, Iraq is the city scoring the
lowest on the annual survey.1 Creating a quality of life is not without risks,
however.
Not-for-Profit Organizations
Not all organizations strive to make a profit. A not-for-profit
organization is an organization that exists to achieve some goal other
than the usual business goal of profit. Charities such as Habitat for
Humanity, the United Way, the Canadian Cancer Society, and
the World Wildlife Fund are not-for-profit organizations, as are most
hospitals, zoos, arts organizations, civic groups, and religious organizations.
Over the last 20 years, the number of nonprofit organizations—and the employees
and volunteers who work for them—has increased considerably. Government is our
largest and most pervasive not-for-profit group.
Like their for-profit counterparts, these groups set goals
and require resources to meet those goals. However, their goals are not focused
on profits. For example, a not-for-profit organization’s goal might be feeding
the poor, preserving the environment, increasing attendance at the ballet, or
preventing drunk driving. Not-for-profit organizations do not compete directly
with one another in the same manner as, for
example, Ford and Honda, but they do compete for talented
employees, people’s limited volunteer time, and donations.
The boundaries that formerly separated not-for-profit and
for-profit organizations have blurred, leading to a greater exchange of ideas
between the sectors. As discussed in detail in the ethics chapter, for-profit
businesses are now addressing social issues. Successful not-for-profits apply
business principles to operate more effectively. Not-for-profit managers are
concerned with the same concepts as their colleagues in for-profit companies:
developing strategy, budgeting carefully, measuring performance, encouraging
innovation, improving productivity, demonstrating accountability, and fostering
an ethical workplace environment.
In addition to pursuing a museum’s artistic goals, for
example, top executives manage the administrative and business side of the
organization: human resources, finance, and legal concerns. Ticket revenues
cover a fraction of the museum’s operating costs, so the director spends a
great deal of time seeking major donations and memberships. Today’s museum
boards of directors include both art patrons and business executives who want
to see sound fiscal decision-making in a not-for-profit setting. Therefore, a
museum director must walk a fine line between the institution’s artistic
mission and financial policies.
Factors of Production: The Building Blocks of
Business
To provide goods and services, regardless of whether they
operate in the for-profit or not-for-profit sector, organizations require
inputs in the form of resources called factors of production. Four
traditional factors of production are common to all productive activity: natural
resources, labor (human resources), capital,
and entrepreneurship. Many experts now include knowledge as
a fifth factor, acknowledging its key role in business success. By using the
factors of production efficiently, a company can produce more goods and
services with the same resources.
Commodities that are useful inputs in their natural state
are known as natural resources. They include farmland, forests, mineral and oil
deposits, and water. Sometimes natural resources are simply called land,
although the term means more than just land. Companies use natural resources in
different ways. International Paper Company uses wood pulp to make
paper, and Pacific Gas & Electric Company may use water, oil, or
coal to produce electricity. Today urban sprawl, pollution, and limited
resources have raised questions about resource use. Conservationists,
environmentalists, and government bodies are proposing laws to require land-use
planning and resource conservation.
KNOWLEDGE IS ALSO A FACTOR OF
PRODUCTION
Labour, or human resources, refers to the economic
contributions of people working with their minds and muscles. This input
includes the talents of everyone—from a restaurant cook to a nuclear
physicist—who performs the many tasks of manufacturing and selling goods and
services.
The tools, machinery, equipment, and buildings used to
produce goods and services and get them to the consumer are known as capital.
Sometimes the term capital is also used to refer to the money
that buys machinery, factories, and other production and distribution
facilities. However, because money itself produces nothing, it is not one of
the basic inputs. Instead, it is a means of acquiring the inputs. Therefore, in
this context, capital does not include money.
Entrepreneurs are
the people who combine the inputs of natural resources, labour, and capital to
produce goods or services with the intention of making a profit or
accomplishing a not-for-profit goal. These people make the decisions that set
the course for their businesses; they create products and production processes
or develop services. Because they are not guaranteed a profit in return for
their time and effort, they must be risk-takers. Of course, if their companies
succeed, the rewards may be great.
Today, many individuals want to start their own businesses.
They are attracted by the opportunity to be their own boss and reap the
financial rewards of a successful firm. Many start their first business from
their dorm rooms, such as Mark Zuckerberg of Facebook, or while
living at home, so their costs remain low. Entrepreneurs include people such
as Microsoft cofounder Bill Gates, who was named the richest
person in the world in 2017, as well as Google founders
Sergey Brin and Larry Page.4 Many thousands of individuals have started companies
that, while remaining small, make a major contribution to the Canadian economy.
Factors of production video: https://youtu.be/2a91BFui5Fc
1.2 Understanding the Business
Environment
What are the sectors of the business environment, and how do
changes in them influence business decisions?
Businesses do not operate in a vacuum but rather in a
dynamic environment that has a direct influence on how they operate and whether
they will achieve their objectives. This external business environment is
composed of numerous outside organizations and forces that we can group into
seven key sub environments, as Exhibit 1.1 illustrates:
economic, political and legal, demographic, social, competitive, global, and
technological. Each of these sectors creates a unique set of challenges and
opportunities for businesses.
Business owners and managers have a great deal of control
over the internal environment of business, which covers day-to-day decisions.
They choose the supplies they purchase, which employees they hire, the products
they sell, and where they sell those products. They use their skills and
resources to create goods and services that will satisfy existing and
prospective customers. However, the external environmental conditions that
affect a business are generally beyond the control of management and change
constantly. To compete successfully, business owners and managers must
continuously study the environment and adapt their businesses accordingly.
Other forces, such as natural disasters, can also have a
major impact on businesses. While still in the rebuilding stage
after Hurricane Katrina hit in 2005, the U.S. Gulf Coast suffered
another disaster in April 2010 as a result of an explosion on
the Deepwater Horizon oil-rig, which killed 11 workers and sent more
than 3 million barrels of oil into the Gulf of Mexico. This event, which played
out for more than 87 days, severely affected the environment, businesses,
tourism, and people’s livelihoods. Global oil conglomerate BP, which was
responsible for the oil spill, has spent more than $60 billion in response to
the disaster and cleanup. Seven years after the explosion, tourism and other
businesses are slowly recovering, although scientists are not certain about the
long-term environmental consequences of the oil spill.6
No one business is large or powerful enough to create major
changes in the external environment. Thus, managers are primarily adapters to,
rather than agents of change. In some situations, however, a firm can
influence external events through its strategies. For example, major U.S.
pharmaceutical companies have been successful in getting the Food and Drug
Administration (FDA) to speed up the approval process for new drugs.7 In recent years, the five largest companies in the
S&P Index—Google, Facebook, Amazon, Microsoft,
and Apple—have spent close to $50 million on lobbying activities in the
nation’s capital in an effort to help policy makers understand the tech
industry and the importance of innovation and an “open” internet.9 Let’s now take a brief look at these varied
environmental influences.
Economic Influences
This category is one of the most important external
influences on businesses. Fluctuations in the level of economic activity create
business cycles that affect businesses and individuals in many ways. For
example, when the economy is growing, unemployment rates are low which lead to
overall increase in consumer incomes. Inflation and interest rates are other
areas that change according to economic activity. The government may attempt to
stimulate or curtail the level of economic activity through policies that
affect taxes and interest rate levels. In addition, the forces of supply and
demand determine how prices and quantities of goods and services behave in a
free market.
Political and Legal Influences
The political climate of a country is another critical
factor for managers to consider in day-to-day business operations. The amount
of government activity, the types of laws it passes, and the general political
stability of a government are three components of political climate. For
example, a multinational company such as General Electric will
evaluate the political climate of a country before deciding to locate a plant
there. Is the government stable, or might a coup disrupt the country? How
restrictive are the regulations for foreign businesses, including foreign
ownership of business property and taxation? Import tariffs, quotas, and export
restrictions also must be taken into account.
Demographic Factors
Demographic factors are an uncontrollable factor in the
business environment and extremely important to managers. Demography is
the study of a population’s statistics, such as their age, gender, race,
ethnicity, and location. Demographics help companies define the markets for
their products and also determine the size and composition of the workforce.
Demographics are at the heart of many business decisions.
Businesses today must deal with the unique shopping preferences of different
generations, which each require targeted marketing approaches, goods, and
services. For example, more than 75 million members of the millennial
generation were born between 1981 and 1997. In 2017 they surpassed baby boomers
as America’s largest generation.9 The marketing impact of millennials continues to be
immense. These are technologically savvy and prosperous young people, with
hundreds of billions of dollars to spend. And spend they do—freely, even though
they haven’t yet reached their peak income and spending years.10 Other age groups such as Generation X—people born
between 1965 and 1980—and the baby boomers—born between 1946 and 1964—have
their own spending patterns. Many boomers nearing retirement have money and are
willing to spend it on their health, comforts, leisure pursuits, and cars. As
the population ages, businesses are offering more products that appeal to
middle-aged and senior markets.
Social Factors
Social factors—our attitudes, values, ethics, and
lifestyles—influence what, how, where, and when people purchase products or
services. They are difficult to predict, define, and measure because they can
be very subjective. They also change as people move through different life
stages. People of all ages have a broader range of interests, defying
traditional consumer profiles. People are also experiencing a “poverty of time”
and seek ways to gain more control over their time. Changing roles have brought
more women into the workforce. This development is increasing family incomes,
heightening demand for time-saving goods and services, changing family shopping
patterns, and impacting individuals’ ability to achieve a work-life balance. In
addition, a renewed emphasis on ethical behavior within organizations at all
levels has managers and employees alike searching for the right approach when
addressing gender inequality, sexual harassment, and other social behaviors
that impact the potential for a business’s continued success.
Global Factors
Global competition is basically an uncontrollable element in
the external environment. Changes in leadership or changes in policy of other
countries can have a big impact on a business especially if it is one of your
biggest trading partners. Free trade agreements can be altered or the tariffs
that are charged by a certain country can be raised thus having a detrimental
effect on a business.
Competitive Factors
Competition is something every firm has to deal with. Even
when you are an innovator and are first to market with a product or service
competitors will be soon to follow trying to take away market share. A company
cannot control competitors actions but they can control how they react by
raising or lowering prices, altering or expanding product offerings, changing
market strategies or expanding to new markets.
Technology
The application of technology can stimulate growth under
capitalism or any other economic system. Technology is the
application of science, engineering, and knowledge to solve production and
organizational problems. New equipment and software that improve productivity
and reduce costs can be among a company’s most valuable assets. Productivity is
the amount of goods and services one worker can produce. Our ability as a
nation to maintain and build wealth depends in large part on the speed and
effectiveness with which we use technology to improve manufacturing
productivity, develop new products, and process information and make it
instantly available across the organization, suppliers, and customers.
Gd work
ReplyDelete