1.1+Introduction+to+Business+Management

1.1 Introduction to Business Management
IB expects students to UNDERSTAND the "role of businesses in combining human, physical and financial resources to create goods and services"



in IGCSE we learnt the definition of a business is "//an organisation that meets the needs &/or wants of society - usually for a profit//" this is not incorrect, just for IB we need to go a little deeper.

- and we start be going back a little, how do they "..meet the needs &/or wants..." ?


 * (*i*) **__**they assemble the inputs/ resources**__ they need, and all these possible resources that might or might not be used by the different businesses fall into 4 categories, which we call Factor Inputs //(you might have heard them called 'the 4 Factors of Production' - either phrase is equally valid)//

they are ...






 * (*ii*) **.. & having got the resources they need they __**process them as efficiently**__ as possible...


 * (*iii*) **...( in such a way that __**add****s**__ **__value__ )** //...//


 * (*iv*) **...to create __**desired outputs**__ that meet the needs &/or wants of customers....


 * (*v*) **....usually for a __**profit!**__



- say it again?

A BUSINESS IS AN ORGANISATION THAT PROCESSES A SET OF INPUTS TO CREATE A DESIRED OUTPUT, IN THE MOST EFFICIENT WAY, NORMALLY FOR THE PURPOSES OF CREATING A PROFIT.
__

Businesses can focus on whatever they do, it doesn't make them more or less of a business. Both are equally meeting the definition of what a business is.
 * one phase of the 'process' (ie just growing tomatoes)
 * or a collection of phases ( ie grow tomatoes __and__ make their own brand of ketchup)

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IB expects students to UNDERSTAND the "four main business functions and their roles"

All business activities - everything that needs to be done to get that //desired output//, to get the //3 factors organised//, all those activities fall into 4 categories - called functions areas. In the case of small, one-person firm all these function areas are controlled by the same one person, while in bigger firms they tend to have a specific manager who will be in charge of each separate function area. But big or small, all businesses will have these functions area, whether they know it or not.. THE 4 FUNCTIONS AREAS ARE :



It should be noted that these areas are NOT independent - for a firm to operate efficiently there must be regular interaction between the function areas eg - //**regarding Price**//: the Marketing Manager will have an input as to what the //customers can afford to pay// while the Operations Manager will have input as to what the //costs are// that the price must cover. eg - //**regarding Location**//: the Finance Manager will have input as to whether the firm can //afford the rent// of that zone, while the Human Resource Manager will have input regarding the //availability of appropriate labour// in the area. .. and a thousand other examples!

- and for you as a student it is worth knowing perhaps that university courses can offer [1] general Business degrees in which you develop your expertise in all functions, [2] specific degrees which focus on a particular function area - commonly Marketing and Finance. + [3] some degrees which begin as a general course and then require you to specialize later on.

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IB expects students to UNDERSTAND the "four different sectors * in which business activity occurs - and the impact on these activities when a firm changes the sector it operates in" * not to be confused with the public & private sector - // the two sectors into which business ownership falls //.

A few points....
 * It doesn't matter which sector a business operates it will still have all 4 functions - however the relative importance of each function might change from sector to sector.
 * A business will always sell its product to __ customers __ (the person who buys it) but may not necessarily sell their product to the __ consumer __ (the person who uses the product in its final intended form.) eg a Miner may dig out the ruby and sell it on to a Jeweler. The final intention is that jewel is to WEAR as a ring. The Jeweler will not wear it, so they are not the consumer. The Jeweler will process the ruby, cut it, shine it, mould it onto the ring etc - and then sell it on to the final consumer. Firms in some sectors seldom get to interact with the 'consumer'.

THE 4 SECTORS ARE...





SPOT THE 'DELIBERATE ERROR' ? the Quaternary Sector should not have an image of grapes being processed!

You might have noticed a connection to what we learnt in IGCSE as the "Production Chain" - this is the different stages a product passes through as it goes from * basic raw material to *final product ready for consumption. So a potato might get harvested by a Farmer, washed, packed, transported, stored, peeled, cut, mashed, fried, advertised, put on a plate & served. Some of those phases are in the Primary Sector, some are in the Secondary Sector and some are in the Tertiary Sector.

IT IS PERFECTLY POSSIBLE FOR A BUSINESS TO HAVE ACTIVITIES IN MORE THAN ONE SECTOR! NO PROBLEM!!



GENERALLY SPEAKING THERE IS A TREND REGARDING SKILLS & SALARIES IN THE SECTOR THAT RUNS AS FOLLOWS //PLEASE NOTE IT IS A 'GENERAL TREND' THAT DOES HAVE A SIGNIFICANT NUMBER OF EXCEPTIONS.//
 * __**SECTOR**__ || __**SKILLS**__ || __**VALUE ADDED**__ || __**DOMINATED B**__Y ||
 * Primary || low || low || LEDCs ||
 * Secondary || semi || semi || LEDCs ||
 * Tertiary || high || high || MEDCs ||
 * Quaternary . || very high . || higher . || MEDCs ||

__SO WHAT ELSE__ ? Due to that trend above it is fairly common to find firms trying to change their activities - trying to move from one sector to the other - they might move You can examine the pro's and con's of doing this when we look at the topic of 'expansion'
 * FORWARD i.e. going from mining the raw iron (primary), to producing their own iron rods (secondary)
 * BACKWARDS ie initially they simply design computer software (tertiary), and then start also producing their own laptops (secondary)

There are however certain concerns and issues a firm should be aware of as they start including activities in sectors they are unfamiliar with (known as SECTORAL CHANGE).

As a sector advances 2 main things happen
 * 1) the more complex its operations & the more skilled its operators become. Picking a fruit off a tree is easily done, and limited skills are required. Designing a bridge is more complex and requires higher skills
 * 2) the less they rely on the factor input of Land, and more on Labour

- therefore...
 * any forward movement in the activities of a firm can put considerable strain on their Human Resources. Skills will be required that do not exist. They might need re-training, they might resist this, new skills might need to be recruited, but are they readily available? etc
 * any backward movement puts increased pressure on the environment (on 'Land'). Land that was previously 'wild and/or unused' will now be cleared and cultivated - if this happens on a large scale within an economy the government might well start to intervene with significant legislation, about what can and can't be cut down, put into the soil etc etc



IF IN A GIVEN CASE STUDY YOU READ OF A FIRMS EXPANDING, OR RE-POSITIONING, ANY RECOMMENDATIONS YOU MAKE SHOULD MAKE REFERENCE TO THE CONSEQUENCES OF CHANGING SECTORS - IF THIS IS HAPPENING!

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IB expects students to UNDERSTAND & ANALYSE the "role of entrepreneurship (and the entrepreneur) and intrapreneurship (and the intrapreneur) in overall business activities." * the 3 'other factors are Land, Labour & Capital, because by organising these factors [ie aquiring a loan, puirchasing the right equipment, hiring and motivating staff etc etc] the perosn is showing Enterprise if a person shows enterprise but does not do it for profit, then they could be described as being // entrepreneurial // - but wouldn't be called an entrepreuner.
 * __**ENTREPRENEUR**__ - the person responsible for (i) taking a risk and (ii) organising* the 3 other factors of production, (iii) in order to make a profit
 * __**INTRAPRENEUR**__ - similar as an Entrepreneuer however they do NOT take a risk on behalf of themselves. They are employees who show entreprise for the beneifit of their employee. They may take risks on behalf of the organisation



So whats so great about Entreprenuers?

Essentially they drive the economy forward. In large ways, in small ways - they are the innovators. They are the ones that find new ways to do things, that have the new ideas, form the new products, find the new locations, get things done in a way that wasn't done before - enepreneurship could manifest itself in various ways from opening a Mexican restaurant in a zone that didn't have one before - or bringing the cure to cancer to the market. An economy with many entrepreneuers will be a strong economy.

Whats the difference between an inventor and an entrepreuner, then ?

An inventor will certainly innovate, and create new ideas and products - but the term 'inventor' has no connotations with enterprise, and making a profitable business out of a good idea. This is the role of the entreprenuer. It is certainly possible to be both an inventor and an entrepreneur - however it is quite unusual.

Some qoutes on entreprenuers..






....................................................... IB expects students to UNDERSTAND the "reasons for starting up a buisness"

If Businesses do indeed create DESIRED outputs EFFICIENTLY then it makes sense a strong economy and developed society will want many businesses to exist. One way of encouraging businesses to exist, is to find out what motivates people to set them up, and then try to do what you can, as a government, to ensure those motivators are satisfied

Here are the typical reasons why people start a business


 * __**REWARDS**__ : Entrepreneuers will often risk their own money (time, capital, reputation even relationships and health sometimes) when setting their business up. if as a society we want them to set their businesses up (because they produce a // desired // output) we have got to provide reward for that risk. That reward must be greater than simply working for someone else - which requires no risk. So entrepreneurs set businesses up because they hope for a large reward.
 * __**INDEPENDENCE**__ : Quite simply you are your own boss, and don't take orders from any third party. Don't mistake this for a lazy, indisciplined life. Entreprenuers are usually very ready to work hard, and follow a very disciplined schedule, they just to it on their own terms.
 * __**NECESSITY**__ : // 'necessity is the mother of invention // ' says the old proverb - and it is not uncommon for people to become their own employer because they could not find appropriate employment anywhere else. Sometimes - usually in the case of charities - it is the desperate needs of the 'customer', that inspires philanthropists to set up a venture. Remember these guys from Shark Tank : http://luminaid.com/
 * __**CHALLENGE**__ : some people are simply driven, they find the limitations of a Job Description boring - they want to be busy, do new things, set them selves challenges, they like the 'stress' of multi tasking. For the same reason businesses expand, business owners feel they are too comfortable where they are, there is an energy in them that is unspent - so they look for ways to expand their business and create new challenges.
 * __**INTEREST**__ : the business is linked to a passion. Its what they know, its what they love, and what they want to spend their time involved in. Its what they want to share with the world.

....................................................... IB expects students to UNDERSTAND the "Common steps in the process of starting up a business"

So a strong economy will have lots of entreprenuers and encourage businesses to set up.

SAN DIEGO - ranked by Forbes as the "best city in the USA to start a Business" http://www.forbes.com/pictures/mgj45ekkj/1-san-diego-ca/

WHAT THEN ARE __THE KEY STAGES TO SETTING UP A BUSINESS__?



It is certainly possible that some entreprenuers have skipped a step or two, or done them in a different order, or placed different emphasis on different stages - this diagram above only indicates the usual steps, in the most common order. Its NOT a hard and fast rule followed by all.

Lets look a little bit more at each step

These involves resolving issues such as what exactly is my product? where will i be located? what will be the business name? who will be involved? etc you don't yet need to have made firm decisions, but it is useful to have a general answer to these questions.
 * [1] ORGANISING THE BASICS

This is required to refine the idea, getting information in order to //put meat on the bones// you might say. Step 1 is about the entrepreneur thinking their thoughts, about their own plans, and their ideas. Step 2 is confirming what potential customers will think of it. This could lead to abandoning the idea, or more likely refining the idea. This is a good time to determine what exactly is the firms __U__nique __S__elling __P__oint ie what will make it that little bit different from its rivals - what will make customers chose //them//.
 * [2] RESEARCH THE MARKET

This is formally doing what we started in Step 1. Is is outlining a Business Plan. Remember the proverb "a failure to plan, is a plan to fail." More on what goes in a Business Plan later on.
 * [3] PLANNING THE BUSINESS

All businesses must be registered with the government, small for-profit businesses like Sole Traders are often granted legal permission to trade quite quickly (depending on the country could take 30 minutes to 4 weeks) while larger companies, or not-for-profit organisations can take significantly longer. To set up a 'Fundacion' in El Salvador could easily take up to one year. //They dont pay tax so the government wants to run lots of checks to ensure they are legit.// Apart from registering there are a multitude of other possible legal requirements to resolve - eg facilities for staff, health & safety, licences and permits etc etc
 * [4] RESOLVING LEGAL REQUIREMENTS

http://www.doingbusiness.org/ : rates SINGAPORE as the country that makes it easiest to set up and run a business, while ERITREA as the worst, in the world

Hopefully they will have their own personal/ internal finance - if not they may have to borrow external finance(Unit 3.1 looks at all the different possible Sources of Finance). It is a delicate balance. Some entreprenuers - in an attempt to avoid borrowing, or minimise risk - try keep the cost of launching to a minimum. The result can be that no-one ever really knows about your product - or your location isn't as good as it needs to be etc etc and failure is the result.
 * [5] RAISE THE FINANCE

a $50 000 business could fail because of costs that were cut, whereas if they had spent that little bit more on advertising, decorations, hiring better staff etc - and spend $60 00 it might have succeeded.

Or as Sharktank man Mark Cuban said... "it is easier to get a 100% return on a $100,000 business than from a $10,000 business"

it just might be true that "to make money you have to have money"?

This is easier done for some firms that others, but basically this step involves seeing what customers initial reaction is. Creating a small quantity of the product, selling them and checking customers feedback. if you are a restaurant this may be easier, as you can quite easily change the recipe, or menu, but if you plan to batch produce military helicopters this might be more difficult.
 * [6] TEST THE MARKET

To some extent you have already launched in Step 6, but now we are talking about the full launch of what you consider to be your final product.
 * [7] LAUNCH

....................................................... IB expects students to UNDERSTAND the "elements of a business plan"

SO WHATS THAT ABOUT A __**BUSINESS PLAN**__

http://www.business-in-a-box.com One of many websites that will help you create your Business Plan

http://mishkaalarcon.com/ recommended this one because it fits onto one page and is very visual



The truth is there are many versions out there -most are equally valid, just going about telling you different ways to do the same thing : Plan thoroughly!

Here's one the IB recommends because it kind of follows the IB syllabus structure - and links to some previous points :-)

Part 1 : __**The Idea**__ : Give the plan some context, such as (i) what is the core product (ii) what is the business trying to do - what is its vision, mission and objectives (iii) what is its USP etc Part 2 : __**The Organizing**__ : The key practical details such as (i) where will it be located (ii) what business form will it be (iii) who are the key owners, and what will they be in charge of (iv) what are the key legal requirement to be met etc [ - and then a section each for the 4 function areas] Part 3 : __**Human Resources**__ : The staff details ie how many staff, with what basic responsibilities, how will they be paid, what type of contract etc Part 4 : __**Finance**__ : How much money do you need? What for? Where will you get it from? Part 5 : __**Marketing**__ : Customers need to //know// about your product - and they need to be //persuaded// to buy it. How will you do that? Part 6 : __**Operations**__ : How will the product actually get made? where? who are your suppliers? transport & storage? and all other members of the supply chain.

His point being, be prepared with the right tools The Business Plan helps you get prepared.
 * "Give me 6 hours to cut a tree, and i will spend the first 3 hours sharpening the axe" **- Abraham Lincoln

............................................................................................................................................... IB expects students to UNDERSTAND the "problems a new business may face"

Different sources cite different rates of how many business start-ups have failed and closed within the first few year - rates vary from 92% to 35%. You just need to know that LOTS fail - and the key reason - w//hich can be avoided by taking the steps above// - is POOR PLANNING

Other reasons- harder to avoid are ....
 * Lack of brand recognition - while in some industries being new is cool, in most industries its risky : and in times of doubt customers usually revert back to brand they know and trust. New businesses struggle.
 * Human Resources, of all the function areas new businesses find recruiting the appropriate staff the most difficult task
 * Competitors reaction. Impossible to plan for, but when the established brands see a new competitor enter the market they react to protect their market share, perhaps via special promotions. Customers who might have been thinking about trying something new are tempted to stick with the existing product because of the offer, consequently the new business never gets enough customers to survive
 * Inexperience. "no strategy ever survives contact with the enemy " said General Helmut van Moltke. This means despite the best planning there will be unexpected events that you need to react to. Events that you couldn't see when you were planning, but now have to face once you are up-and-running. New businesses have less experience and less resources to react appropriately and so are more likely to fail.

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NOW GO BACK AND RE-READ THE PARTS IN BLUE THAT SAY "IB EXPECTS STUDENTS TO..." ARE YOU SATISFIED YOUR KNOWLEDGE OF UNIT 1.1 IS COMPLETE? BRING QUESTIONS / DOUBTS TO THE LESSON!

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