1 What is a business?

Higher-level Chapter 1 What is a business? LEARNING OBJECTIVES On completing this chapter you should be able to: Know and understand: • The nature of business (AO1) SAMPLE

Apply and analyse: • Primary, secondary, tertiary and quaternary sectors (AO2) • Entrepreneurship – challenges and opportunities for starting a business (AO2)

Select and apply the business management tool: • The business plan (AO4)

BUSINESS IN CONTEXT

Enterprise in Chile Chile is a good place for entrepreneurs. It was classed as the most innovative country in South America in the 2020 Global Innovation Index. According to the Global Entrepreneur Monitor (GEM), Chile is the most entrepreneurial country in the world, ahead of the US and India. Many factors explain this, such as a stable economy, several sources of start-up funding, a skilled workforce, government initiatives to support entrepreneurs and a good education system. It is possible to set up a new company in just one day. This is one reason why Chile is number one in Latin America on the 2020 World Bank’s Ease of Doing Business Index. Wheel the World is a travel company that was set up in Chile in 2017 for people with disabilities. It creates tailored travel experiences at tourist destinations around the world. The entrepreneurs who created this start-up, Alvaro Silberstein and Camilo Navarro Bustos, identified a gap in the global tourism market. The start-up raised a total of $2 million from Booking Booster, Google Launchpad Accelerator, Facebook, and Startup Chile. The company attracts disabled tourists and their families from many countries. It provides employment for an increasing number of employees who agree with Wheel the World’s mission of: • encouraging tourism for people with disabilities • raising awareness of people with disabilities as active people who strive to live their life fully • inspiring others with stories of overcoming, fellowship and love. Discuss in pairs or in a group: • What benefits does the economy of Chile obtain from new business start-ups such as

Wheel the World? • Why is it important for entrepreneurs to identify a ‘gap in the market’? • What challenges must an entrepreneur overcome to make their business succeed?

KEY TERM entrepreneur: someone who takes the financial risk of starting and managing a new venture KEY CONCEPT LINK Creativity New enterprises need to differentiate themselves from rivals, many of whom will be well established. One way of achieving this is by innovation – providing either a different type of product or a service that is different from those of competitors, or which is delivered in a distinct way. Encouraging employees to be creative could mean they

become a very useful source of ideas for new goods and services, which could help the business add value for consumers. Creativity is the ability of the mind to think freely and to generate new There are very few global travel companies that specialise in holidays for those with disabilities SAMPLE and original ideas. Some of the ideas of creative employees are eventually implemented on innovative products.

A business is any organisation that uses resources to meet the needs of customers by providing a product or service that they demand. There are several stages in the production of finished goods. Business activity at all stages involves adding value to resources such as raw materials and semi-finished goods and making them more desirable to – and thus valued by – the customer. Without business activity we would still be entirely dependent on the goods that we could make or grow ourselves; in fact, people in some communities still are. Business activity uses the scarce resources of our planet to produce goods and services that allow us to enjoy a much higher standard of living than would be possible if we remained entirely self-sufficient. 1.2 The nature of business Businesses identify the needs of consumers or other firms. Then they purchase resources, which are the ‘inputs’ of the business, or factors of production, in order to produce output. The ‘outputs’ of a business are the goods and services that satisfy consumers’ needs, usually with the aim of making a profit. Business activity exists to produce goods or services, which can be classified in several ways: consumer goods, consumer services and capital goods. Consumer goods include cars and washing machines. These two examples are referred to as durable consumer goods. Food, drink and soap are examples of non-durable consumer goods as they can only be consumed once. 1.3 What are business ‘inputs’? These are the human, physical and financial resources needed by businesses to produce goods or services. They are also known as factors of production. Businesses use different combinations of inputs,

depending on the product being produced and the size of the business. There are four main inputs: • Land – this general term includes not only land itself but all of the renewable and non-renewable KEY TERMS consumer goods: the physical and tangible goods sold to final users; these include cars, food and clothing consumer services: non-tangible products that are sold to final users; these include hotel accommodation, insurance services and train journeys capital goods: physical goods that are used resources of nature such as coal, crude oil and timber. • Labour – manual and skilled labour make up the workforce of the business. Some businesses are labour intensive, that is they have a high proportion of labour input compared to other factors of production. An example is house-cleaning services. • Capital – this consists of the finance needed to set up a business and pay for its continuing operations. The term also includes the human-made resources used in production. These resources include capital goods such as computers, machines, factories, offices and vehicles. Some businesses are capital intensive, that is they have a high proportion of capital compared to other factors of production. An example is power stations. • Enterprise – this is the driving force of business, provided by risk-taking individuals, who combine the other factors of production into a unit that is capable of producing goods and services. Enterprise provides a managing, decision-making and coordinating role. Without this essential input, even very high-quality land, labour and capital inputs will fail to provide the goods and services that customers need. There are many other things that businesses need before they can successfully produce the goods and services demanded by customers. Figure 1.1 shows the wide range of these needs. SAMPLE by industry to aid in the production of other goods and services such as machines and commercial vehicles

Site for buildings Raw materials Finance Factories/Offices

Land Capital Machines

1.4 Business functions Most businesses have four main functional departments. In all but very small businesses they will be staffed by people who have specific qualifications and experience in the work of the functional area. Human resource management Human resource (HR) management identifies the workforce needs of the business. Then it recruits, selects and trains appropriate individuals and provides motivational systems to help retain workers and encourage them to work productively. It also draws up contracts of employment and deals with the redundancy or redeployment of employees if this becomes necessary. The aim of this business function is to manage human resources to help the business achieve its overall objectives. Finance and accounts This function is responsible for monitoring the flow of finance into and out of the business, keeping and analysing accounts and providing financial information to both senior management and other departments. Without adequate finance, no effective decisions can be

Customers Resources needed by business Government

Suppliers

Labour Skilled Permanent

Unskilled Temporary made within the other functional areas, so finance is a key division of any business. Marketing This function is responsible for market research and for analysing the results of such research so that consumer wants can be correctly identified. This information will then be discussed with other departments of the business so that the right product decisions are made. Once a product is available for sale, the marketing function will have to make important decisions concerning its pricing, how and where to promote it, how to sell it and how to distribute it for sale. Operations management Operations management is responsible for ensuring adequate resources are available for production, maintaining production and quality levels, and achieving high levels of production as efficiently as possible. This function is important in service industries as well as in traditional manufacturing. In service industries, operations management will aim to ensure that the processes for the delivery of the service are well tested, consistent and understood by all employees.

Roads/Rail/Airports Schools/Colleges Risk-takers Coordinators Decision-makers

Law and order Enterprise Figure 1.1: What businesses need SAMPLE 5

ACTIVITY 1.1 KEY TERMS

1 Identify which business function is most likely to undertake the following roles.

Role Function

Setting prices of new products

Recruiting a new operations manager

Allocating resources to purchase capital equipment

Deciding on the appropriate inventory levels of raw materials

Finding out if consumers prefer one product design to another

Determining the level and number of employees that the business needs for future operations 2 The function responsible for the first role (setting prices of new products) must collaborate closely with another function before the decision is taken. Which function do you think that is? 3 How did you decide on your answer to Question 2? Did you consider the roles of all four basic business functions first to narrow your choices and to justify your answer? 1.5 Economic sectors All production can be classified into four broad types of business activity, or economic sectors. These categories relate to the three stages involved in turning natural resources, such as oil and timber, into the finished goods and services demanded by consumers, plus the ‘knowledge-based’ support services that businesses require. The four sectors are primary, secondary, tertiary and quaternary. National economic data often makes no distinction between tertiary and quaternary sectors. The balance of the primary, secondary and tertiary sectors in the economy varies substantially from country to country as it depends on the level of industrialisation in each country. The balance between the sectors is often referred to as a country’s ‘economic structure’. Table 1.1 shows the different economic structures of two countries.

primary sector business activity: businesses engaged in farming, fishing, oil extraction and all other industries that extract natural resources to be used and processed by other firms secondary sector business activity: businesses that manufacture and process products from natural resources, including furniture, brewing, baking, clothing and construction tertiary sector business activity: businesses that provide services to consumers and other businesses, such as retailing, transport, insurance, banking, hotels, tourism and telecommunications quaternary sector business activity: this focuses on information technology (IT) businesses and information service providers such as research and development, business consulting and information gathering Country Primary Secondary Tertiary United Kingdom 1.2 18.1 80.7 Ghana 33.8 18.6 47.6 Table 1.1: Employment data 2020 – as a percentage of total employment CASE STUDY 1.1 Huan and Bonnie want to become entrepreneurs Huan and Bonnie have recently graduated from university. Huan holds a degree in chemical engineering and Bonnie has graduated from a business school. They both want to become entrepreneurs, so they decided to create a start-up business producing and selling fresh ice cream. Huan will undertake the management of operations, while Bonnie will specialise in marketing. They are worried about the management of the human resource and finance functions. They SAMPLE need to recruit four employees for their small production unit and two employees for the retail shop. All employees will need to be trained on the business’s processes.