1.3 Getting Down to Business
Learning Objectives
Identify the main participants of business.
Describe the functions that most businesses perform.
Identify the external forces that influence business activities.
A profit-making business Activity that provides goods or services to consumers for the purpose of making a profit. is any activity that provides goods or services to consumers for the purpose of making a profit. When Steve Jobs and Steve Wozniak created Apple in Jobs’s family garage, they started a business. The product was the Apple I, and the company’s founders hoped to sell their computers to customers for more than it cost to make and market them. If they were successful (which they were), they’d make a profitDifference between the revenue that a company brings in from selling goods and services and the costs of generating this revenue..
Before we go on, let’s make an important distinction concerning the terms in our definitions. First, whereas Nike produces and sells goods (Mac, iPhone, iPod, iPad), many businesses provide services. Uber (a ride-sharing company) is a service company, as is Spotify (a music streaming company). Many companies provide both goods and services. For example, AMC theatres provide a service (movies) as well as a good (popcorn and sodas and, at some theatres—cocktails, beer, and wine).
Some organizations are not set up to make profits. These not-for-profit (or nonprofit) organizationsOrganizations established to provide social or educational services. are established to provide social or educational services. They frequently receive funding from private foundations, individuals, and governmental agencies. Such not-for-profit (or nonprofit) organizations include Doctors without Borders, the Sierra Club, Teach for America, and the American Red Cross.
Other organizations, labeled for-profit social enterprises, lie somewhere between a “for-profit business” and a “not-for-profit business.” A for-profit social enterpriseA business that, beyond the profit motive, has a social mission built into its business model. “is a business that, beyond the profit motive, has a social mission built into its business model. Making the world a better place is a significant part of what they do.” For example, after visiting Argentina and discovering first-hand that many children got sick or were injured because they didn’t have any shoes, Blake Mycoskie decided to form a company to help these and other children throughout the world. His company, TOMS, generates a profit by manufacturing and selling shoes. It fulfills its mission to help others by donating a pair of shoes to a needy person for every pair sold. Since 2006, the company has donated more than a million pairs of shoes.
Regardless of whether a company is a for-profit business, a not-for-profit business, or a for-profit social enterprise, these organizations establish goals and work to meet them in an effective, efficient manner.
Business Participants and Activities
Let’s begin our discussion of business by identifying the main participants of business and the functions that most businesses perform. Then we’ll finish this section by discussing the external factors that influence a business’s activities.
Participants
Every business must have one or more owners whose primary role is to invest money in the business. When a business is being started, it’s generally the owners who polish the business idea and bring together the resources (money and people) needed to turn the idea into a business. The owners also hire employees to work for the company and help it reach its goals. Owners and employees depend on a third group of participants—customers. Ultimately, the goal of any business is to satisfy the needs of its customers in order to generate a profit for the owners.
The statement that owners need customers is true for all but one person, Elon Musk. According to a recent article in Fortune magazine “Elon Musk doesn’t have customers. He has followers. ... [who] admire not just his raw ambition but his ideology: He has made it cool to want a carbon-emissions-free world.” After a slow start, the TESLA electric car is catching on. Its Model 3 will not come onto the market until late 2017, but as of the beginning of the year, 373,000 TESLA admirers have already put down $1,000 to reserve one.
Functional Areas of Business
Figure 1.3
It takes people from a number of functional areas to operate a business.
Source: © Shutterstock, Inc.
The activities needed to operate a business can be divided into a number of functional areas: management, operations, marketing, accounting, and finance. Let’s briefly explore each of these areas.
Management
Managers are responsible for the work performance of other people. ManagementProcess of planning for, organizing, directing, and controlling a company’s resources so that it can achieve its goals. involves planning for, organizing, staffing, directing, and controlling a company’s resources so that it can achieve its goals. Managers plan by setting goals and developing strategies for achieving them. They organize activities and resources to ensure that company goals are met. They staff the organization with qualified employees and direct them to accomplish organizational goals. Finally, managers design controls for assessing the success of plans and decisions and take corrective action when needed.
Operations
All companies must convert resources (labor, materials, money, information, and so forth) into goods or services. Some companies, such as Apple, convert resources into tangible products—Macs, iPhones, iPods, iPads, etc. Others, such as hospitals, convert resources into intangible products—health care. The person who designs and oversees the transformation of resources into goods or services is called an operations managerPerson who designs and oversees the process that converts resources into goods or services.. This individual is also responsible for ensuring that products are of high quality.
Marketing
MarketingMarketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large. consists of everything a company does to identify customers’ needs and designs products to meet those needs. Marketers develop the benefits and features of products, including price and quality. They also decide on the best method of delivering products and the best means of promoting them to attract and keep customers. They manage relationships with customers and make them aware of the organization’s desire and ability to satisfy their needs.
Accounting
Managers need accurate, relevant, timely financial information, and accountants provide it. AccountantsFinancial advisor responsible for measuring, summarizing, and communicating financial and managerial information. measure, summarize, and communicate financial and managerial information and advise other managers on financial matters. There are two fields of accounting. Financial accountants prepare financial statements to help users, both inside and outside the organization, assess the financial strength of the company. Managerial accountants prepare information, such as reports on the cost of materials used in the production process, for internal use only.
Finance
FinanceActivities involved in planning for, obtaining, and managing a company’s funds. involves planning for, obtaining, and managing a company’s funds. Finance managers address such questions as the following: How much money does the company need? How and where will it get the necessary money? How and when will it pay the money back? What should it do with its funds? What investments should be made in plant and equipment? How much should be spent on research and development? How should excess funds be invested? Good financial management is particularly important when a company is first formed, because new business owners usually need to borrow money to get started.
Figure 1.4 Business and Its Environment
External Forces that Influence Business Activities
Apple and other businesses don’t operate in a vacuum: they’re influenced by a number of external factors. These include the economy, government, consumer trends, and public pressure to act as good corporate citizens. Figure 1.4 sums up the relationship among the participants in a business, its functional areas, and the external forces that influence its activities. One industry that’s clearly affected by all these factors is the fast-food industry. A strong economy means people have more money to eat out at places where food standards are monitored by a government agency, the Food and Drug Administration. Preferences for certain types of foods are influenced by consumer trends (eating fried foods might be OK one year and out the next). Finally, a number of decisions made by the industry result from its desire to be a good corporate citizen. For example, McDonald’s funds 365 Ronald McDonald Houses in 42 countries. These houses provide a “home-away-from-home” so families can stay close to a hospitalized child at little or no cost. As you move through this text, you’ll learn more about these external influences on business. (Chapter 1, Section 4 “What Is Economics?” will introduce in detail one of these external factors—the economy.)
What Activities Do Managers Perform?
Take a few minutes to complete an online exercise that reinforces what you’ve learned about the activities managers perform. (Flash users click here for the same online exercise.)
Key Takeaways
The main participants in a business are its owners, employees, and customers.
Businesses are influenced by such external factors as the economy, government, consumer trends, and public pressure to act as good corporate citizens.
The activities needed to run a business can be divided into five functional areas:
Management involves planning, organizing, staffing, directing, and controlling resources to achieve organizational goals.
Operations transforms resources (labor, materials, money, and so on) into products.
Marketing works to identify and satisfy customers’ needs.
Finance involves planning for, obtaining, and managing company funds.
Accounting entails measuring, summarizing, and communicating financial and managerial information.
Before going to the next section of this chapter, take a few minutes to take an online quiz in order to test your knowledge of the material covered in this section. Quizzes can be found under the “Quiz” tab at the bottom of the online reader.
Exercises
The Martin family has been making guitars out of its factory in Nazareth, Pennsylvania, for more than 150 years. In 2004, Martin Guitar was proud to produce its millionth instrument. Go to the Martin Guitar website (http://www.martinguitar.com) and read about the company’s long history. You’ll discover that, even though it’s a family-run company with a fairly unique product, it operates like any other company. Identify the main activities or functions of Martin Guitar’s business and explain how each activity benefits the company.
Name four external factors that have an influence on business. Give examples of the ways in which each factor can affect the business performance of two companies: Wal-Mart and Ford Motor Company.