LESSON 1

BUSINESS IN A CHANGING WORLD

TOPICS
1. The Nature of Business
2. Options for Organizing Business
3. The Nature of Management

LEARNING OUTCOMES
At the end of the lesson, you should be able to:
1. Explain basic concepts such as business, product, and profit.
2. Identify the main participants and activities of business and explain why
studying business is important.
3. Define and examine the advantages and disadvantages of different
business organizations.
4. Describe the major functions of management.

TOPIC 1: THE NATURE OF BUSINESS

A business tries to earn a profit by providing products that satisfy people’s needs.
The outcome of its efforts are products that have both tangible and intangible
characteristics that provide satisfaction and benefits. When you purchase a product, what
you are buying is the benefits and satisfaction you think the product will provide.
Most people associate the word product with tangible goods –an automobile,
computer, coat, or some other tangible item. However, a product can also be a service,
which results when people or machines provide or process something of value to
customers. Dry cleaning, photo processing, a checkup by a doctor, and a performance by
a movie star or basketball player – these are examples of services. A product can also be
an idea. Consultants and attorneys, for example, generate ideas for solving problems.
 The Goal of Business
The primary goal of all businesses is to earn
a profit, the difference between what it
costs to make and sell a product and what a
customer pays for it. If a company spends
P100.00 to manufacture, finance, promote,
and distribute a product that it sells for
P150.00, the business earns a profit of
P50.00 on each product sold. Businesses have the right to keep the use their profits as
they choose – within legal limits – because profit is the reward for the risks, they take in
providing products. Not all organizations are businesses. Nonprofit organizations, such
as Greenpeace, Special Olympics, and other charities and social causes, do not have the
fundamental purpose of earning profits, although they may provide goods or services.

To earn a profit, a person or organization needs management skills to plan,

organize, and control the activities of the business and to find and develop employees so
that it can make products consumers will buy. All business also needs marketing expertise
to learn what products consumers need and want and to develop, manufacture, price,
promote, and distribute those products. Additionally, a business needs financial
resources and skills to fund, maintain, and expand its operations. Other challenges for
business people include abiding by laws and government regulations; acting in an ethical
and socially responsible manner; and adapting to economic, technological, and social
changes. Even nonprofit organizations engage in management, marketing, and finance
activities to help reach their goals.

To achieve and maintain profitability, businesses have found that they must
produce quality products, operate efficiently, and be socially responsible and ethical in
dealing with customers, employees, investors, government regulators, the community,
and society. Because these groups have a stake in the success and outcomes of a business,
they are sometimes called stakeholders.

The People and Activities of Business

Figure 1.1 shows the people and
activities involved in business. At the center
of the figure are owners, employees, and
customers; the outer circle includes the
primary business activities – management,
marketing, and finance. Owners have to put
up resources – money or credit – to start a
business. Employees are responsible for the
work that goes on within a business. Owners
can manage the business themselves or hire
employees to accomplish this task. The Figure 1.1
president of General Motors, for example, does not own GM but is an employee who is
responsible for managing all the other employees in a way that earns a profit for
investors, who are the real owners. Finally, and most importantly, a business’s major role
is to satisfy the customers who buy its goods and services. Note also that people and
forces beyond an organization’s control – such as legal and regulatory forces, the
economy, competition, technology, and ethical and social concerns – all have an impact
on the daily operations of businesses.

Management Marketing Finance

Management involves Marketing includes all Finance refers to all

coordinating employees’
actions to achieve the
firm’s goals, organizing
people to work efficiently,
and motivating them to
achieve the business’s
goals.
Management is also
concerned with acquiring,
developing, and using
resources (including
people) effectively and
efficiently.
the activities designed to activities concerned with
provide goods and obtaining money and
services that satisfy using it effectively.
consumers’ needs and People who work as
accountants,
wants.
stockbrokers, investment
advisors, or bankers are
all part of the financial
world

TOPIC 2: OPTIONS FOR ORGANIZING BUSINESS

The legal form of ownership taken by a business is seldom of great concern to you
as a customer. Nonetheless, a business’s legal form of ownership- sole proprietorship,
partnership, and corporation – and weighs the advantage and disadvantages of each.
These forms are the most often used whether the business is a traditional “bricks and
mortar” company, an online-only one, or a combination of both.
Types of Business Ownership

SOLE PROPRIETORSHIP PARTNERSHIP

- A business owned and operated by one - A business owned and operated by two
person. or more people. Each person contributes
money, property, labor or skill, and
Advantages expects to share in the profits and losses
• Ease of formation and dissolution of the business.
• Simplicity of operation and flexible
management
• Sole beneficiary of profits General Partnership – partners have
• Benefits of small-scale operations unlimited liability for the debts and
• Prompt decisions obligation of the partnership
• Retaining secrecy
• Social desirability Limited Partnership – liability only up to
• Tax advantage the amount of their capital contribution.
• Full control
Advantages
• Minimum government control
• Easy formation
Disadvantages • Large resources
• Limitation of management skills • Combined skills and balance judgement
• Limitation of capital • Sharing of risk
• Unlimited liability • The personal element
• Lack of continuity • Prompt decisions
• Weak bargaining position • Relationship between reward and work
• Limited scope for expansion • Wholesome effect of unlimited liability
• Risk of wrong decisions • Protection of minority interests
• No large-scale economies • Easy dissolution
• Limited scope for employees
Disadvantages
• No check and control
• Lack of harmony
• Limited resources
• Instability
• Lack of public faith
• Restricted enterprise
• Restriction on transfer of interest
• Loss to the society
• Burden of implied authority
• Liability after retirement

CORPORATION COOPERATIVE
- A business owned by a number of - Owned and operated democratically
people and operated under written among all members and the laws vary
permission from the state in which it is between states
located.
Stock Corporation – This is a Advantages
• Easy to form
corporation with capital stock divided into
• Open membership
shares and authorized to distribute to the
holders of such shares dividends or • Democratic management
• Limited liability
allotments of the surplus profits on the
basis of the shares held. • Stability
• Economical operations
Non-stock Corporation – This is a
• Government patronage
corporation organized principally for
• Low management cost
public purposes such as foundations, • Mutual co-operation
charitable, educational, cultural, or similar • No speculation
purposes and does not issue shares of • Economic advantage
stock to its members. • Other benefits

Advantages Disadvantages
• Limited liability • Limited capital
• Easy availability of capital • Inefficient management
• Perpetual existence • Absence of motivation
• Ownership transfer • Differences and factionalism among
• Build credibility members
• Rigid rules and regulations
Disadvantages • Lack of competition
• Complex process • Cash trading
• Double taxation • Lack of secrecy
• Conflict of interest • Weightage to personal gains
• Lacks business confidentiality • Lack of incentive and initiative
• Extensive rules to follow • Corruption

OTHER TYPES OF BUSINESSES

LCC (Limited Liability Corporation)
• Hybrid of corporation and partnership
• Owners are referred to as members
• Can decide if they wish to be tax as partnership or corporation
• Provides degree of liability protection

Franchise
• Individual business people buy and operate a business that already exists. A certain
percentage of sales or profits go back to the original franchise corporation

Non-Profit Organization
• An institution that tries to its operating costs. This type of business usually offers a
service that is considered beneficial to society.

TOPIC 3: THE NATURE OF MANAGEMENT

For any organization – small or large, for profit or nonprofit – to achieve its
objectives, it must have equipment and raw materials to turn into products to market,
employees to make and sell the products, and financial resources to purchase additional
goods and services, pay employees, and generally operate the business. To accomplish
this, it must also have one or more manages to plan, organize, staff, direct, and control
the work that goes on.
The Importance of Management

Management is a process designed to achieve an organization’s objectives by

using its resources effectively and efficiently in a changing environment. Effectively
means having the intended result; efficiently means accomplishing the objectives with a
minimum of resources. Managers make decisions about the use of the organization’s
resources and are concerned with planning, organizing, staffing, directing, and controlling
the organization’s activities so as to reach its objectives.

Every organizations, in the pursuit of its objectives, must acquire resources

(people, raw materials, equipment, money, and information) and coordinate their use to
turn out a final good or service. The manager of a local movie theater, for example, must
make decisions about seating, projectors, sound equipment, screens, concession stands,
and ticket booths. All this equipment must be in proper working condition. The manager
must also make decisions about materials. There must be films to show, popcorn and
candy to sell, and so on. To transform the physical resources into final products, the
manager must also have human resources – employees to sell the tickets, run the
concession stand, run the projector, and maintain the facilities. Finally, the manager
needs adequate financial resources to pay for the essential activities; the primary source
of funding in the money generated from sales of tickets and snacks. All these resources
and activities must be coordinated and controlled if the theater is to earn a profit.
Organizations must have adequate resources of all types, and managers must carefully
coordinate the use of these resources if they are to achieve the organization’s objectives.

Management Functions

To coordinate the use of resources so that the business can develop, make, and
sell products, managers engage in a series of activities: planning, organizing, staffing,
directing, and controlling. Although we describe each separately, these five functions are
interrelated, and managers may perform two or more of them at the same time.

Types of Management

All managers – whether the sole proprietor of a small video store or the hundreds
of managers of a large company such as Paramount Pictures – perform the five functions
just discussed. In the case of the video store, the owner handles all the functions, but in
a large company with more than one manager, responsibilities must be divided and
delegated. This division of responsibility is generally achieved by establishing levels of
management and areas of specialization – finance, marketing, and so on.
 Figure 1.2

Levels of Management

Many organizations have multiple levels of management – top management,

middle management, and first line, or supervisory management. These levels form a
pyramid, as shown in Figure. As the pyramid shape implies, there are generally more
middle managers than top managers, and still more first-line managers. Very small
organizations may have only one manager (typically, the owner), who assumes the
responsibilities of all three levels. Large businesses have many managers at each level to
coordinate the use of the organizations’ resources. Managers’ at all three levels perform
all five management functions, but the amount of time they spend on each function
varies.

Figure 1.3
Top Management
In businesses, top managers include the president and other top executives, such
as the chief executive officer (CEO), chief financial officer (CFO), and chief operations
officer (COO), who have overall responsibility for the organization. Oprah Winfrey, for
example, is the chief executive office of Harpo Inc., which owns O magazine as well as the
Oprah Winfrey Show. Circulation of O magazine fell just under 10 percent; however,
advertising sales remain strong for the TV show, and a deal has been signed with XM
satellite radio for three year for $55 million. In public corporations, even chief executive
officers have a boss – the firm’s board of directors. With technological advances
continuing and privacy concerns increasing, some companies are adding a new top
management position – chief privacy officer (CPO).

Top managers spend most of their time planning. They make the organization’s
strategic decisions that focus on an overall scheme or key idea for using resources to take
advantage of opportunities. They decide whether to add products, acquire companies,
sell unprofitable business segments, and move into foreign markets. Top managers also
represent their company to the public and to government regulators.

Middle Management
Rather than making strategic decisions about the whole organization, middle
managers are responsible for tactical planning that will implement the general guidelines
established by top management. Thus, their responsibility is more narrowly focused than
that of top managers. Middle managers involved in the specific operations of the
organization and spend more time organizing than other managers. In business, plant
managers, division managers, and department managers make up middle management.
The product manager for laundry detergent at a consumer product manufacturer, the
department chairperson in a university, and the head of a state public health department
are all middle managers. The ranks of middle managers have been shrinking as more and
more companies downsize to be more productive.

First-Line Management
Most people get their first managerial experience as first-line managers, those
who supervise workers and the daily operations of the organization. They are responsible
for implementing the plans established by middle management and directing worker’
daily performance on the job. They spend most of their time directing and controlling.
Common titles for first-line managers are foreman, supervisor, and office manager.

Areas of Management
At each level, there are managers who specialize in the basic functional areas of
business: finance, production and operations, human resources (personnel), marketing,
and administration.
 Focus on obtaining the money needed for
the successful operation of the
organization and using that money in
Financial Management
accordance with organizational goals.

Administrative Production and

Management Operations
Management
Manage an entire business or a
Developing and administering the
major segment of a business,
activities involved in transforming
coordinate the activities of
Areas of resources into goods, services, and
specialized managers, and often Management
ideas ready for the marketplace.
called general managers.

Information Technology Human Resources

(IT) Management Management

Responsible for implementing, Human resources managers handle

maintaining, and controlling the staffing function and deal with
technology applications in business, Marketing Management employees in a formalized manner.
such as computer networks.

Responsible for planning, pricing,

and promoting products and making
them available to customers
through distribution.

Skills Needed by Managers

Leadership Technical Conceptual Skills Analytical Skills Human

•Leadership is the Expertise •Conceptual skills, •Analytical skills Relations Skills
ability to influence •Managers need the ability to think refer to the ability •People skills, or
employees to technical in abstract terms, to identify human relations
work toward expertise, the and to see how relevant issues skills, are the
organizational specialized parts fit together and reorganize ability to deal with
goals. Strong knowledge and to form the whole, their importance, people, both
leaders manage training needed to are needed by all understand the inside and outside
and pay attention perform jobs that managers, but relationships the organization.
to the culture of are related to their particularly top- between them, •People skills are
their organizations area of level managers. and perceive the especially
and the needs of management. •Conceptual skills underlying causes important in
their customers. •Technical skills are also involve the of a situation. hospitals, airline
•Types of most needed by ability to think •All managers need companies, banks,
leadership are first-line managers creatively. to think logically, and other
authoritarian, and least critical to but this skill is organizations that
paterrnalistic, top-level probably most provide services.
democratic, managers. important to the
laissez-faire, and success of top-
transactional. level managers.
 Managers are typically evaluated as to how effective and efficient they are.
Managing effectively and efficiently requires certain skills – leadership, technical
expertise, conceptual skills, analytical skills, and human relations skills.
Table 1: Mintzberg’s 10 Managerial Roles

Decision Making
Managers make many different kinds of decisions, such as hours of work, which
employees to hire, what products to introduce, and what price to charge for a product.
Decision making is important in all management functions and levels, whether the
decisions are on a strategic, tactical, or operational level. A systematic approach using
these sic steps usually leads to more effective decision making:

Figure 1.4