1.1 What is business?

Full video class on YouTube, summary and notes on Instagram, class extracts on TikTok, text below. Have fun!

This class might not be the most fun one, but it has a lot of essential information. Everything that you learn further is based on knowledge from this class.

Business is an organisation that provides goods and services and satisfies needs and wants in a profitable or non-profitable way. This definition already includes some extra business terms that we’ll talk about in a moment. I believe the easiest way to understand what business is and how it functions is input-output model, that I outlined for you below.

As you can see from the figure above, businesses take inputs (or resources, or factors of production — all of these refer to the same thing in our context), do certain processes with them and add value to them, and transform them into outputs. As simple as that. Now let’s talk about each of the three steps in the input-output model in more detail.

Inputs are the resources that businesses use in order to transform them into outputs by adding value. In traditional economic theory these resources/inputs are called factors of production:

1. Land (physical resources) — land, real estate or raw materials, for example, fish, gold, wood.
2. Labour (human resources) — people in business: employees and managers.
3. Capital (financial resources) — cash and other forms of financial resources as well as capital goods, i.e. things/equipment used in production: office chairs, desks, laptops or assembly line robots.
4. Entrepreneurship — skillset that combines all the factors of production in order to transform them into products (goods and services).

The second stage in input-output model is adding value. Added value is extra perks/features that are added to inputs in order to sell them to customers. If there’s no added value, there’s no business. Why would someone pay extra for something that did not undergo any transformations? The two major ways in which businesses add value are production (manufacturing) of goods and provision of services. Speaking of production, it can be either capital-intensive or labour-intensive. Capital-intensive refers to high reliance on machinery in production process. For example, car manufacturing is usually highly automated and is manly performed by robots. Labour-intensive refers to high reliance on human labour. For example, textile industry (manufacturing of clothes) is usually highly labour-intensive and depends on the manual work of people.

And finally, the last stage of the input-output model is outputs. Output is a product, that can either be tangible (good) or intangible (service). Once again, product is either a good or a service. Very often students say “product” but mean “good”. Goods are products, but not all products are goods, because services are also products. Products can also be categorised based on who they are sold to. If a product is sold by one business to another, this is a producer good or service. This relationship of one business to another is called B2B (business-to-business). For example, if a school buys desks and chairs from a furniture manufacturer, that would be a producer good. If a product is sold by business to the general public, this is a consumer good or service. This relationship is called B2C (business-to-consumer). For example, if your parents go to a shop and buy a desk and a chair for your bedroom, that would be a consumer good. As you can see, one and the same thing can be either producer or consumer good or service, depending on who it is sold to.

Once we are clear about what business is and how input-output model works, we’re ready to explore business further and talk about business functions. All businesses, regardless of their size, location and other characteristics have the same 4 business functions:

1. Human resource management (HRM) — making sure that the right people are employed and paid by the business, regularly trained, appraised and treated in accordance with Health & Safety regulations.
2. Finance and accounts — planning for the future costs, revenues and cash flow and keeping records of the costs, revenues and cash flow in the past, as well as financial analysis and budgeting.
3. Marketing — making sure the right product is sold at the right price in the right place using appropriate promotion methods.
4. Operations management — making sure that goods are produced using relevant methods of production and/or making sure that the most efficient processes are used to provide services.

It’s okay if you feel like you don’t fully understand what’s included in these business functions. Usually, Business Management is taught in 5 modules: introduction to BM plus 4 business functions. So, it will take about two years to figure out what these functions actually are, so take your time, and this overall understanding of the functions we have so far is enough, for starters.

Once again, all businesses, regardless of their size, have the same 4 business functions. The only difference is that, for example, a sole trader will perform all four functions on their own while in larger companies these functions will be allocated to departments. So, all businesses have 4 functions, but not all businesses have departments.

Which business function is the most important? Well, this is a tricky question. On the one hand, it is believed that HR is the one because it has to do with professional relationships. On the other hand, none of the functions should be the most important one or the least important one. Also, if an organisation is broken down into several departments, they should not be too independent from each other. It is extremely important to coordinate the actions of all functional departments and make sure all of them have a shared goal. Otherwise, the organisation will fall apart and will be in a constant state of conflict. This idea of organisation where all functions are united by common goal and rely on each other is called interdependence.

Economic sector (or sector of industry) refers to all the businesses within an economy that are involved in a similar activity. So, if you want to divide all businesses in a country into economic sectors, you have to see what they do. Overall, there are four economic sectors:

1. Primary sector refers to all the businesses that extract raw materials: mining, fishing, forestry, agriculture, oil extraction, etc.
2. Secondary sector businesses transform raw materials, extracted by primary sector businesses, into goods, i.e. secondary sector refers to manufacturing.
3. Tertiary sector refers to provision of services: banking, education, retail stores, cinemas, transportation, etc.
4. Quaternary sector is quite similar to tertiary, because it also includes services, but exclusively those services that relate to data, knowledge and IT. For example, app and video game development would be an example of quaternary sector activity. However, selling these apps and video games in retail stores would be an example of tertiary sector activity.

All the consumer goods go through economic sectors. For example, bread that you buy in a local supermarket once was crops that were harvested by farmers in the primary sector, then processed into flour by the bakery in the secondary sector, and then delivered into supermarkets (tertiary sector businesses) all over town that sell this bread to you. This route, or path, or process that raw materials go through on their way of becoming a finished consumer good is called chain of production. For some products, like bread, it is relatively short and doesn’t take much time. But for more complex goods, like airplanes, production chains are more complicated as well.

Why do we need this knowledge about economic sectors? Because you, as a Business Management student and potential entrepreneur, might make a lot of conclusions that your potential business might benefit from in the future, if you know what economic sectors are. One thing you can do is predict the future. History tells us that all economies go through the same stages of development over time. Have a look at a graph below first.

As you can see, as time goes by, the importance of primary sector declines, because there is not much added value there, that sector is simply about extraction of raw materials… Secondary sector increases first (this increase is called industrialisation) as manufacturing is growing, and then after a certain point, usually when it becomes cheaper to manufacture goods in a different country, secondary sector decreases (the decrease of the secondary sector is called deindustrialisation). Tertiary sector is gradually increasing over time, because the more economy develops, the wealthier people usually become, and the more money they prefer to spend on tertiary sector activities, i.e. services: better education, travel, opening a bank account — all of these are services. Also, as time goes by, quaternary activities are increasing because they are proportional to technological progress and development of IT.

Another conclusion that you can make based on the knowledge about relative importance of economic sectors is the type of economy. Economies where primary sector dominates are called less developed economies. This usually means that workforce is not very well educated and that quality of life and income levels are not very high. Economies where secondary sector dominates are called developing economies. An example could be BRICS: Brazil, Russia, India, China, South Africa. Labour costs in these countries are relatively low and these countries are a good destination to outsource manufacturing of goods. Countries where tertiary and quaternary sector dominate are referred to as developed economies. Income levels there are relatively high and people spend money on services. At the same time, labour costs in these countries are also pretty high and it might be very expensive to manufacture goods in these economies.

One last thing about economic sectors is how to measure their importance. There are two ways:

1. Count the number of people who work in this or that sector. For example, let’s say in a tiny country X there are only 100 people and 75 of them work in tertiary sector businesses: banks, schools, cinemas, barbershops. It means that the relative importance of this sector is 75%.
2. Count the proportion or total value of GDP in a given sector. If half of the overall GDP comes from manufacturing, then the relative importance of secondary sector is 50% and it is an indicator of a developing economy. Or, if GDP is 1 billion dollars and 600 million is generated by secondary sector, then its importance is 60%.

Keep in kind that if the sector is more important in terms of GDP, it is not necessarily the most important in terms of workforce. Very often tertiary sector generates most value, while primary sector is the most labour-intensive.

You might be interested in relative importance of economic sectors in different countries. Follow this link and learn more about it.

First of all, if we’re gonna talk about startups (new businesses), we’ve gotta talk about entrepreneurship. As you remember, it is one of the four factors of production and an essential part of any business, that refers to a skillset (or knowledge/wisdom) that allows to combine all factors of production and start an enterprise. People who have this skillset are called entrepreneurs. One of the most important characteristics of entrepreneurs is risk-taking. In addition entrepreneurs, there are also intrapreneurs — people who are similar to entrepreneurs but who work for a company. They are usually provided with a lot of freedom, they hire people for their team themselves, they manage their time own their own and share pretty much the same opportunities and threats as entrepreneurs, but all of this is happening within a company context. Intrapreneurship is very common in Google, for example. Gmail is the product of intrapreneurship.

Having said that, we are going to talk about challenges and opportunities of startups now. The three main topics that relate to that are reasons, process (including business plan) and problems.

Reasons to start up a business. There is no one right answer to what these reasons are but some of them are really common. When I ask my students what they think the main reasons are, they usually give me very good answers! Here’s a top chart of what they usually say and a fancy BM-terminology version (in brackets) of what my students say:

1. “Getting rich!” (financial rewards)
2. “Doing something new” (innovation)
3. “Manage time on your own” (life-work balance)
4. “Find something others don’t do” (filling in the market niche/gap)
5. “No boss” (independence)
6. “I’m the boss!” (responsibility)
7. “Hobby” (commercialising personal interest)

Process of starting up a business. Again, there is no one right answer, however all startups go through pretty much the same experience and follow these steps (not necessarily in this order and not necessarily these steps only):

1. Refine business idea (thinking about what the business is about in general)
2. Outline business plan (more details further)
3. Choose the type of business entity (more details in 1.2)
4. Seeking finance (more details in 3.2)
5. Start trading!

With regards to business plan, it is a document that outlines business idea and explains how business is operated functionally (in terms of 4 business functions). Nowadays, BP often includes sustainability and CSR (more about it in 1.3) — ethical standards that a business is committed to comply with. There is no one standardised format for all BPs, but a good one usually includes the elements mentioned previously in this or that way. You can play with BP and try to create your own here, for example. BP samples are pretty easy to find online.

Problems/challenges that startups face. With regards to this topic, my students were of great help again. See below their ranking with a BM-termed explanation in brackets:

1. “No money!” (limited finance)
2. “Don’t know how to run a business” (lack of organisation skills)
3. “Nobody wants to work for me” (recruitment issues)
4. “People don’t work well” (limited expertise)
5. “A lot of other similar businesses” (competition)

Make sure you can define all of these:

1. Business
2. Input-output model
3. Inputs
4. Outputs
5. Added value
6. Factors pf production
7. Land (physical resources)
8. Labour (human resources)
9. Capital (financial resources)
10. Entrepreneurship
11. Capital-intensive
12. Labour-intensive
13. Product
14. Good
15. Service
16. B2B
17. B2C
18. Consumer goods and services
19. Producer goods and services
20. Business functions
21. HRM (human resource management)
22. Finance & accounts
23. Marketing
24. Operations management
25. Interdependence
26. Economic sector
27. Primary sector
28. Secondary sector
29. Tertiary sector
30. Quaternary sector
31. Chain of production
32. Industrialisation
33. Deindustrialisation
34. Less developed economies
35. Developing economies
36. Developed economies
37. Startup
38. Entrepreneur
39. Intrapreneur
40. Business plan (BP)