WHAT IS BUSINESS?

What do you think about when you hear the term ‘business’? You may think of the company you work for, others will think of the merchants they patronize (such as shops and restaurants) or you may think of the famous companies that advertise on TV. Whatever you think of, they are all examples of businesses.

Business includes small entities such as a grocery shop, and large businesses like Boeing or Unilever. Business consists of all profit-seeking activities and enterprises that provide goods and services necessary to an economic system. In capitalist countries, this system is the private enterprise system.

At the core of every business endeavour is an exchange between a buyer and a seller. A buyer recognizes a need for a good or service and trades money with a seller to obtain that product. The seller participates in the process in hope of gaining profits. Profits represent rewards for businesspeople that take the risks involved in blending people, technology and information to create and market crucial goods and services.

1.1 Not-for-profit organizations:

Although the majority of businesses seek to maximize profits to survive, there are many not-for-profit organizations whose primary objectives are not to return profits to the owners. Not-for-profit organizations operate in both the private and the public sectors. These organizations play important roles in society by placing public service above profits. Examples of not-for-profit organizations are the U.S. postal service and the American Heart Association.

In the public sector most government agencies, political parties, labor unions are classified as not-for-profit organizations. However, managers in not-for-profit organizations face many similar challenges as are faced by managers in profit-seeking organizations. These include generating funds to cover operating costs, human resource management and marketing.

1.2 Factors of Production:

Capitalism, like other economic systems, requires certain inputs for effective operation. In economics, the common term is factors of production to refer to the four basic inputs:

·   Natural resources

·   Capital

·   Human resources

·   Entrepreneurship

Natural resources include all productive inputs that are useful in their natural states, including agricultural land. Natural resources are the basic inputs required in any economic system.

Capital, another key resource, includes technology, tools, information and physical facilities. Technology is a broad term that refers to machinery and equipment such as production lines or basic inventions. Technology plays an important role in the success of many businesses. Sometimes technology results in a new product, such as the device introduced by OmniSonics that uses sound waves rather than drugs or tools to clear blocked arteries. Information, frequently improved by technological innovations, is another critical success factor because both managers and employees require accurate, timely information for effective performance of their assigned tasks. Two key technologies today, the Internet and GPS (Global positioning system) have their origins in the US Army (or Department of Defense).

Human resources represent another critical input in every economic system. Human resources include anyone who works, from the Chairman to the self-employed. With the widespread use of computer technology, most companies now rely on their employees as a source of ideas and knowledge as well as physical effort. 

Entrepreneurship is another basic input and is the willingness to create a new enterprise by taking risks. An entrepreneur is someone who sees a potentially profitable opportunity and then devices a plan to achieve success in the marketplace and earn these profits.

2. THE PRIVATE ENTERPRISE SYSTEM

No business operates in a vacuum. All operate within a larger economic system that determines how goods and services are produced, distributed and consumed in a society. In America and other capitalist countries, the economic system is called the private enterprise system, an economic system that rewards businesses for their ability to perceive and serve the needs and demands of consumers. Another name for this system is capitalism. The father of capitalism is Adam Smith, who in his 1776 book, ‘the wealth of nations’, says that the best regulator in an economy is the invisible hand of competition. This refers to the battle among businesses for consumer acceptance.

The invisible hand concept is a basic premise of the private enterprise system. In the US, competition regulates much of economic life. To compete successfully, each firm must find a basis for competitive differentiation, the unique combination of organizational abilities and approaches that sets a company apart from competitors in the minds of consumers. Businesses operating in a private enterprise system face a critical task of keeping up with changing marketplace conditions. Firms that fail to adjust to shifts in consumer preferences or ignore the actions of competitors leave themselves open to failure.

2.1 Basic Rights in the Private Enterprise System:

Certain rights critical to the operation of capitalism are available to citizens living in a private enterprise economy. These include:

·   rights to private property  

·   rights to profits

·   freedom of choice,

·   competition.

A private enterprise economy maximizes individual human welfare and happiness by providing alternatives. The US government has passed laws to prohibit ‘cut-throat’ competition – excessively aggressive competitive practices designed to eliminate competition. It has also established rules that outlaw price discrimination, fraud in financial markets, and deceptive advertising and packaging.

2.2 The Entrepreneurship Alternative:

An exciting career option offered by capitalism is entrepreneurship. In fact, the entrepreneurial spirit beats at the heart of private enterprise. An entrepreneur is a risk taker in the private enterprise system. Individuals who recognize marketplace opportunities are free to use their capital, time, and talents to pursue those opportunities for profit.

The willingness of individuals to start new ventures drives economic growth and keeps pressure on existing companies to continue to satisfy customers. You can see the prevalence of entrepreneurship in the private enterprise system by considering that 75% of all businesses in operation in the US are self-employed people without any employees, out of 20 million businesses, 15 million are self-employed people.

Entrepreneurs often find novel ways to use natural resources, technology, and other factors of production. Nathaniel Weiss found a creative application for technology: a package of hardware and software that translates music played on a guitar into sheet music. His product, called G-vox, became popular among musicians because it made writing tunes much simpler.

Entrepreneurship is also important to existing companies in the private enterprise system. Large firms often encourage entrepreneurial thinking, hoping to benefit from enhanced flexibility, improved innovation, and new market opportunities.

3. SIX ERAS IN THE HISTORY OF BUSINESS:

1.      The colonial period (pre 1776):

Before USA gained independence from Britain, the economy was mainly rural and agricultural.

2.      The Industrial Revolution (1750-1850):

This revolution began in Britain around 1750 moving operations from independent skilled situations to mass production by semi-skilled workers aided by machines.

3.      The age of the industrial entrepreneur (Late 1800s):

Advances in technology and increased demand for manufactured goods, leading to enormous entrepreneurial opportunities.

4.      The production era (Pre 1920s):

Emphasis on producing more goods faster, leading to production innovations like assembly lines. During this era, business focused attention on internal processes rather than external influences. Little attention was paid to consumer wants or needs.

5.      The marketing era (1950s – 1990s):

The great depression of the 1930s changed the face of US business.  Managers began to pay more attention to the markets for their goods and services, and sales and advertising took on new importance. During this era, selling was synonymous with marketing.

After 1945 businesses began to think of marketing as more than just selling. Firms began to analyze consumer desires before beginning actual production and consumer choice shot up. Businesses also discovered the need to distinguish their goods and services from those of competitors.

Branding, the process of creating an identity in consumers’ minds for a good, service or company, is an important tool used by marketing-oriented companies. A brand can be a name, term, sign, symbol, design, or some combination that identifies the products of one firm and differentiates them from the competition.  One of the best known brands even today is McDonalds, another is Coca Cola. The marketing era has had a big influence on the way business is conducted today.

6.      The relationship era:

Contemporary business has entered a new age, the information age, driven by advances in information technology. These new technologies are helping businesses form deep, direct links with their customers, employees and suppliers. Businesses gain several advantages by developing ongoing connections with customers.

Since it is much less expensive to serve existing customers than to find new customers, businesses that develop long-term customer relationships can reduce their overall costs.

For example, relationships have helped Dell to maintain a competitive edge, as personal computers become less of an innovation and more of a commodity. Dell is one of many firms to realize that the relationship era is an age of connections.

The world economy is increasingly interconnected, as businesses expand beyond their national boundaries. In this new global economy, techniques for managing networks of people, businesses, information, and technology are of paramount importance to business success.

4. MANAGING THE TECHNOLOGY REVOLUTION

The relationship era is driven by new technologies that are changing nearly every aspect of people’s lives. Technological innovation has played a part throughout business history.  Technological breakthroughs such as supercomputers and electrical cars result in new goods and services for consumers, improved customer service and reduced prices. Technology can make products obsolete such as color TVs replacing ‘black and white’ TVs.

The internet is a worldwide network of interconnected computers that, within limits, lets anyone with access to a computer or other computing device send and receive images and data anywhere. In 1993, Internet usage began to spread to individual users with the development of the World Wide Web, an interlinked collection of graphically rich information sources within the larger Internet. The web has made it possible for organizations and individuals to communicate their information to the world via web sites. E-mail is in fact the most widely used Internet application. In order to search for information on the Internet, you need to use a search engine. The most popular search engine is google, others  include yahoo and alta vista.

For businesses, the Internet represents a huge community of prospective customers. Hundreds of millions of people use the Internet. Essentially, the Internet facilitates direct, interactive relationships between businesses and their customers. The Internet is also a major source of jobs and recent estimates put the figure as 2.5 million employed in internet-related work.

5. FROM TRANSACTION MANAGEMENT TO RELATIONSHIP MANAGEMENT:

Since the industrial revolution, most businesses have concentrated on developing products and then hoping that enough customers would buy them to cover costs and earn reasonable profits, an approach called transaction management. Firms now seek ways to actively nurture customer loyalty by carefully managing every interaction with customers. Relationship management refers to the activities involved in building and maintaining ongoing, mutually beneficial ties between a business and its customers.

5.1 Strategic alliances and partnerships:

Businesses are also finding that they must form partnerships with other organizations to take advantage of available opportunities. A partnership is an affiliation of two or more companies with the shared goal of assisting each other in the achievement of common goals.

One such form of a partnership is a strategic alliance, a partnership formed to create a competitive advantage for the businesses involved. These can include joint production, joint R&D (Research & Development), minority investments and joint-ventures. The extreme case is a merger between firms or acquisitions.

Sometimes Internet companies make alliances with each other. AOL recently asked Google to become AOL’s exclusive search engine, in return for which AOL would distribute Google’s ads to its 35 million subscribers.

6. CREATING VALUE THROUGH QUALITY AND CUSTOMER SATISFACTION

Nowadays, consumers are looking for more than just low prices, they are looking for value. Value is the customer’s perception of the balance between the positive traits of a good or service and its price. Customers who think that they have received value – that is, positive benefits for a fair price – are likely to remain satisfied and continue their relationships with a firm. But when customers perceive an inequitable balance between benefits and price, they become dissatisfied and look elsewhere.

Value is also an important way to differentiate (persuade consumers the different distinct quality) goods and services from competing offerings. Peter Drucker, the American business guru, said “ Quality in a product .. is not what the supplier puts in. It is what the customer gets out and is willing to pay for.. Customers pay only for what is of use to them and what gives them value.”

Customers’ value perceptions are often tied to quality, the degree of excellence or superiority of a firm’s goods and services. Technically, quality refers to physical product traits, such as durability and performance reliability.  Quality also includes customer satisfaction, the ability of a good or service to meet or exceed buyer needs and expectations. With technological advances, customers now insist on products that can perform expanded functions with improved reliability.

7. COMPETING IN A GLOBAL MARKET

International trade is expanding at an annual rate of more than 3%. The US accounts for a lion’s share of this trade. US exports of merchandise account for 12% of the world total while the US share of exports of commercial services is 18% of the world total.

As far as private business brands are concerned, the US accounted for 8 of the 10 most valuable brands, as of 2002. The most valuable brands include well known names like Microsoft, Nokia and IBM. (see fig. 1.6) The most valuable brand is coca-cola with a value of $70 billion, followed by Microsoft at $64 billion.

Productivity is a key facet of global competitiveness. As discussed earlier, firms need a number of inputs, or factors of production, to produce goods and services. Productivity is the ratio of output to input.

Total productivity =

When a constant amount of inputs generates increased outputs, an increase in productivity occurs. Productivity is a widely recognized measure of a company’s efficiency. During the last ten years, USA has experienced a growth in productivity and much of the credit goes to investment in information technology.

The total productivity of a nation’s businesses has become a measure of its economic strength and standard of living. In economics, they call this figure the Gross Domestic Product (GDP) or GDP/capita. The GDP is the sum of all goods and services produced within the boundaries of a nation. The GDP per capita is the GDP divided by the population of a country. According to the Internet, Luxembourg, an European country, has the highest GDP/capita. Burundi, an African country has the lowest GDP per capita of around USD 680 (according to members of IMF).

8. DEVELOPING AND SUSTAINING A WORLD-CLASS WORKFORCE:

The key properties of the current US and worldwide workforce are the following:

Ageing of the population; by 2030 the number of Americans who are age 65 or older will reach 71 million, nearly double what it is today. The worldwide population of seniors will also double from 420 million to 973 million by 2030. The number of people working to support the older people will fall, requiring higher pension contributions etc.

Shrinking Labor Pool; the challenge of a shrinking labor pool is especially great in developed nations, where the birthrate has shrunk to less than the death rate. Particularly in Europe, where the population of some countries is expected to decline in the future.  In the US, the pool of college educated workers has doubled in the last 20 years, from 20 million to 40 million, but the demand still exceeds the supply.

Increasingly diverse workforce; because of large number of immigration taking place in America, the workforce is becoming very diverse.

Changing nature of work; move from manufacturing to service businesses. Manufacturing no longer accounts for most of US annual output. Services such as banking and communication make up 60% of US GDP. A new part of international  business is outsourcing. Outsourcing is defined as the contracting with another business to perform tasks or functions previously handled by internal staff members.  The main factor behind outsourcing is lower costs and focusing on competencies.

New employer – employee partnership; employers are sharing financial data and rewarding employees with company stock to share in the firm’s success

Benefits of Diversity; several studies have shown more diverse teams perform better. Also, since the customers are diverse in the US, having a diverse workforce helps understand customers better.

9. THE NEW TYPE OF MANAGER AND REQUIRED QUALITIES

One: importance of vision

An important required managerial quality is vision, the ability to perceive market-place needs and what an organization must do to satisfy them.

An example of an entrepreneur with vision is Norm Brodsky, who started a new business of secure document shredding. He realized that despite this being the information economy, with cell phones and laptop computers, people still liked to have paper copies. These copies later needed shredding. However, the need for vision is not limited to entrepreneurs.

Two: Importance of critical thinking and creativity:

·   critical thinking is the ability to analyze and assess information to pinpoint problems or opportunities. The critical-thinking process includes activities like determining the authenticity, accuracy and worth of information, knowledge and arguments. It involves looking deeper than the surface and identifying critical issues and solutions.

·   Creativity is the capacity to develop novel solutions to perceived organizational problems. This involves the ability to see better and different ways of doing business. Companies must constantly find innovative ways to communicate with and attract new customers, while keeping the interest of established customers. An example of creative thinking is the ability to make familiar concepts unfamiliar, such as 3M’s post-it notes, which shows the new concept of a glue that doesn’t stick very well.

Three: Ability to steer change

The final quality is the ability to steer their companies through the changing conditions such as technology, marketplace demands and global competition.

10. MANAGING ETHICS AND SOCIAL RESPONSIBILITY:

Many instances of low ethical standards and mismanagement have taken place in recent years such as the scandals at Enron, WorldCom and Tyco in the USA. Many thousands of jobs were lost as well as life savings of workers. Investors became distrustful of top executives and the American public in general lost confidence in top executives.

·   Business ethics refers to the standards of conduct and moral values involving right and wrong actions arising in the work environment. Poor ethical standards can lead to public image problems, costly lawsuits, high levels of employee theft, and a host of other expensive problems. It is especially important for top executives to demonstrate ethical behavior, since employees often follow their example.

Working hand-in-hand with business ethics is social responsibility, a management philosophy that highlights the social and economic effects of managerial decisions. Businesses demonstrate their social responsibility in a variety of ways including supporting environmental groups.