The Nature of Business Activity

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

Objectives: 1.Identify inputs, outputs and processes of a business A.Factors of Production B.Products C. Markets, value-added 2.Evaluate the opportunity costs inherent in business decision making 3.Explain the role of different functional departments in a business A.Production/Operations B.Marketing C.Finance D.Human Resources 4.Explain the nature of business activity in each sector A.Primary B.Secondary C.Tertiary

Inputs, Processes, Outputs Insert scanned graphic here

Inputs a.k.a. “Factors of Production” To produce any good or service, 4 vital factors of production are required: 1. Land 2. Labour 3. Capital 4. Enterprise (Entrepreneurship)

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

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

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

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

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

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

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

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

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

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?

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?

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 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

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

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?

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

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.

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

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

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?

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

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”

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

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

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