Introduction to

Business
Management
 Unit 1.1
 This chapter explains what a business is
and what businesses do.
 It outlines the main business functions (or
departments) and explains the differences
between sectors.
– Primary
– Secondary
– Tertiary
– Quaternary
 The Economic Problem:
Needs & Wants
 A need is something we have to have
to live e.g. food, water, clothing
 A want is something we desire but
don’t necessarily have to have e.g.
jewelry, holidays abroad.
 Activity: Make a list of your personal
needs and wants. Limit your wants to
10 items.
 The Economic Problem
 Wants are unlimited, however,
resources are limited. This creates
scarcity.
 Because of scarcity, we have to make
choices.
 When making a choice, the next best
alternative we had to give up is called
the opportunity cost.
 Opportunity Cost Activity
 What could be the opportunity cost of
using some land to build a restaurant?
 What could be the opportunity cost of
spending $ 200 on a pair of Nike sports
shoes?
What is opportunity cost?
 It is defined as the best alternative that
is foregone when making a decision

 Differs from ACCOUNTING COST – in

that accounting costs do not look at the
cost (or value) of foregone choices

e.g. student education

accounting cost = tuition fees + books
opportunity cost = foregone income if the
person chose to study instead of working
 Businesses exist to satisfy
needs and wants of people,
organization and governments
What is a business?
• Business is a decision-making
organization involved in the
process of using inputs to
produce goods and/or to
provide services.
• Are organizations involved in
the production of goods
and/or the provision of
services.
 Organization
 A social unit of people that is structured and
managed to meet a need or to pursue collective
goals.
 All organizations have a management structure
that determines relationships between the
different activities and the members, and
subdivides and assigns roles, responsibilities,
and authority to carry out different tasks.
 Organizations are open systems--they affect and
are affected by their environment.
http://www.businessdictionary.com
STAGES IN THE PRODUCTION
OF FINISHED GOODS
 INPUTS
Raw materials, components, machinery,
equipment and labor

PROCESSES
Turning inputs into the provision of services
or the manufacturing of goods

OUTPUTS
The output or provision of final goods
and services
 Factors of Production
In the production of any good or service, the
following resources are needed:
 Land = all natural resources provided by
nature e.g. forests, fisheries
 Labor = the efforts and skills of people
 Capital = the finance, machinery and
equipment
 Enterprise = the skill and risk-taking ability
of the person who brings together the
resources to produce a good / service.
 Factors of Production

http://www.investopedia.com/terms/f/facto
rs-production.asp
 Factors of Production
 Land
- natural resources available for production
- renewable resources: those that replenish
- non-renewable resources: cannot be replaced

 Labor
- physical and mental effort of people used in
production

 Capital
- all non-natural (manufactured) resources that are
used in the creation and production of other products

 Enterprise (Entrepreneurship)
- refers to the management, organization and planning
of the other three factors of production
 Entrepreneurship vs.
Intrapreneurship
 Entrepreneurs are owners or operators of an
organization who mange, organize and plan the
other 3 factors of production. They are risk takers
who exploit business opportunities in return for
profits.
 Intrapreneurship is the act of behaving as an
entrepreneur but as an employee within a large
business organization. Intrapreneurs work in an
entrepreneurial capacity, with authority to create
innovative products or new processes for the
organization.
 Examples of Intrapreneur
 https://www.vocoli.com/blog/may-2014/10
-inspiring-examples-of-successful-intrapre
neurship
/
 https://www.youtube.com/watch?v=
lfmBoXp6Mhw
 Entrepreneurs Intrapreneurs

 Owners of organization  Employees of

 Takes substantial risks organization
 Visionary  Takes medium to high
 Rewarded with profit risks
 Responsibility for  Innovative
workforce (labor)  Rewarded with pay and
 Failure incurs personal remuneration
costs  Accountability to the
owner
 Failure is absorbed by the
organization
 Factors of Production

Land Labor Capital Enterprise

Rent Wages Interest Profit

INCOME
1.0 Introduction to Economics Resources

Resource Payments (Incomes for households)

In exchange for their land, labor, capital and entrepreneurship, households receive
payments. The payments for the four productive resources (which are costs for firms).

Firms pay households RENT. Landowners have the option to use their land for
their own use or to rent it to firms for their use. If the landowner uses his land
For Land: Rent for his own use, the opportunity cost of doing so is the rent she could have
earned by providing it to a firm.

For Labor: Firms pay households WAGES. To employ workers, firms must pay workers
money wages. If a worker is self employed, the opportunity cost of self-
Wages employment is the wages he could have earned working for another firm.

Firms pay households INTEREST. Most firms will take out loans to acquire
capital equipment. The money they borrow comes mostly from households'
For Capital: savings. Households put their money in banks because they earn interest on it.
Interest Banks pay interest on loans, which becomes the payment to households. If a
household chooses to spend its extra income rather than save it, the
opportunity cost of doing so is the interest it could earn in a bank.

Entrepreneurs Households earn PROFIT for their entrepreneurial skills. An entrepreneur who
takes a risk by putting his creative skills to the test in the market expects to earn
hip: Profits a normal profit for his efforts.
What businesses need
The Marketplace
What’s a MARKET?
A place or process whereby buyers
(customers) and sellers (businesses) meet
to trade.

Important to NOTE:
CUSTOMERS are the people or organizations
that buy a product
CONSUMERS are the ones that actually use
the product
e.g. Student’s education
Common Mistake
The terms customer and consumer are
often used interchangeably by
candidates, although they have different
meanings. Make sure you can
distinguish between the two concepts
and use them in the right context –
customers are the people or
organizations that buy a product
whereas consumers are the ones who
actually use the product. These may be
the same entity (e.g. someone who
buys and eats a meal), but not
necessarily such as parents
(customers) paying for their children’s
(consumer) birthday presents.
 The Circular Flow
1.0 Introduction to Economics of Resources

The Circular Flow

Market economies are
characterized by a circular flow
of money, resources, and
products between households
and firms in resource and
product markets. Notice:
• Money earned by
households in the resource
market is spent on goods
and services in the product
market
• Money earned by firms in
the product market is spent
on resources from
households in the resource
market.

The incentives of Households: Maximize Utility

The incentive of Firms: Maximize Profits!
 Types of Products
 Consumer goods – products sold to
general public
- consumer durable goods:
products that last a long time and
can be used repeatedly
- non-durable goods:
products that need to be
consumed very shortly after
purchase
 Capital goods or Producer goods –
products purchased by other
businesses to produce other goods
and services
e.g. computers, machinery, tools

 Services – intangible products

provided by businesses
e.g. teachers (education),
doctors (health care)
 Why is business activity
needed?
 The aim of all business is to combine the
factors of production to make products
(goods or services) which will satisfy
people’s wants.
 Businesses add value to the factors of
production.
 Businesses employ workers and pay them
wages, this allows them to consume
products made by other people.
 Value Added
 The enhancement a company gives its
product or service before offering the
product to customers. Value added is used
to describe instances where a firm takes a
product that may be considered a
homogeneous product, with few
differences (if any) from that of a
competitor, and provides potential
customers with a feature or add-on that
gives it a greater sense of value.
(Investopedia)
 Value Added
 Note that added value is NOT the same
as profit.
 A value add can either increase the product's
price or value. For example, offering one year
of free support on a new computer would be a
value-added feature. Additionally, individuals
can bring value add to services that they
perform, such as bringing advanced financial
modeling skills to a position in which the
hiring manager may not have foreseen the
need for such skills. (Investopedia)
 Value added can come in the
form of:
 Speed and /or quality of service
 Prestige associated with the purchase
 Feel-good factor
 Perceived value for money
 Quality of the finished product
 Brand image and/or brand loyalty
 Taste or design
 Inability to obtain such products cheaper
elsewhere
 Value Added
 http://www.investopedia.com/terms/v/
valueadded.asp
 Inflows of money,
usually from the sale
of products

Outflows of
If business costs are greater money, to finance
than revenue? production
activities
Functions of profit:
 Acts as an incentive to produce
 Acts as a reward for risk takers
 It encourages invention and
innovation
 Acts as an indicator of growth (or
decline)
 A source of finance
 Making the best use of limited
resources: specialization
 It is important to use the resources we have
in the most efficient ways.
 Specialization is when each worker
specializes in some part of the production
process.
 This dividing up of the production process
into different tasks is called division of
labor.
 Specialization and the division of labor
increase efficiency and output.
TASK: List advantages and Disadvantages of
Specialization
 Specialization
Advantages Disadvantages
 Boredom
Increased
 productivity
Inflexibility
 Increased
 Lack of autonomy
 efficiency
Capital costs – extremely expensive
 Standardization
 Higher profit
margin
 Four functional areas of a
business organization

 Production
 Marketing
 Finance
 Human Resources (Personnel)
 Business Functions
1. Production (operations) – responsible
for converting raw materials into
finished goods.
Tasks include:
 Deciding how the good will be
manufactured
 Stock control
 Quality control
 Research and development
 Business Functions
2. Marketing – responsible for identifying
and satisfying consumer wants and
needs.
Responsible for:
 Product
 Price
 Place
 Promotion
 Business Functions
3. Finance – in charge of managing the
money of the organization.

Responsible for:
 Recording financial transactions
 Cash flow
 Budgeting
 Business Functions
4. Human Resources – manager, the
personnel of the organization.

Responsible for:
 Recruitment
 Training
 Pay and benefits
 Health and safety
 Decision by Peugeot Citroen in 2010 to
launch the world’s first hybrid diesel car
required interaction between:
 Marketing – will consumers be prepared to buy
this car and at what price?
 Finance – do we have the capital needed to
develop and produce it?
 HR Management – do we need to recruit
additional engineers before this project can be
turned into a market-ready car?
 Operations Management – can we produce this
product at a cost which allows the marketing
department to set a profitable price level?
 Question 1.1.1
The Business of Education
Page 3
1. PRIMARY Sector
- business involved with the extraction,
harvesting and conversion of land (i.e. natural
resources) as a factor of production
- ex. agriculture, fishing, mining, forestry
1. PRIMARY Sector
- business involved with the extraction,
harvesting and conversion of land (i.e. natural
resources) as a factor of production
- ex. agriculture, fishing, mining, forestry
2. SECONDARY Sector
- business involved in using raw materials and
other resources for the manufacturing or
construction of finished and useable products
- ex. aircraft manufacturer uses steel, rubber
1. PRIMARY Sector
- business involved with the extraction,
harvesting and conversion of land (i.e. natural
resources) as a factor of production
- ex. agriculture, fishing, mining, forestry
2. SECONDARY Sector
- business involved in using raw materials and
other resources for the manufacturing or
construction of finished and useable products
- ex. aircraft manufacturer uses steel, rubber
3. TERTIARY Sector
- business involved in providing services
Tertiary sector – the breathtaking Burj Al Arab
hotel in Dubai
4. Quaternary Sector – services involving
complex processing and handling of
information: education & research,
engineering, IT specialist, R&D etc.
- Subcategory of the tertiary sector where
businesses are involved in intellectual,
knowledge-based activities that generate and
share information.
 All four business sectors are
interdependent because each sector relies
on the others to remain in existence.
 Primary sector production tends to yield
low added value. In order to develop
economically, there must be a shift in
business activity to manufacturing and
service sectors which have higher added
value. (This shift is referred to as ‘sectoral
change’ and the process is known as
‘industrialization’)
Sector vs. Industry
This difference pertains to their scope;
a sector refers to a large segment of
the economy, while the
term industry describes a much
more specific group of companies or
businesses. A sector is one of a few
general segments in the economy
within which a large group of
companies can be categorized.

http://www.investopedia.com/ask/answers
/05/
industrysector.asp
Question 1.1.2
Production Sectors
Page 6
 Chain of Production
 Primary – timber workers and miners
extract materials such as wood, sand and
metal ores
 Secondary – Engineers and builders use
machinery and equipment to transform raw
materials into usable items, such as doors,
bricks, windows and paint
 Tertiary – sales agents, financiers and
solicitors are needed to sell the finished
house
Exam Tip!
 During your IB Business and
Management course it is a good idea
to read the business section of
newspapers regularly. This will help
you to apply the work you have done
in class to the world outside.
 What, for example, was the major
business story in your country this
week?
 Reasons
for
setting up
a
business
 Reasons for setting up a business
(GET CASH)
Growth
Earnings
Transference and inheritance
Challenge
Autonomy
Security
Hobbies
 Reasons for setting up a business
(GET CASH)
Growth
Assets such as property and land
tend to increase in value over time.
This is called capital growth
It is quite common for the capital
growth of a business to be worth
more than the value of the owner’s
salaries
 Reasons for setting up a business
(GET CASH)
Earnings
Chinese saying “You can never
get rich earning money from
working for someone else”
Potential returns from setting up
your own business can easily
outweigh the costs, even though
the risks are high
 Reasons for setting up a business
(GET CASH)
Transference and inheritance
Many self-employed people view
their business as something that
they can pass on (transference) to
their children (inheritance). This
helps to give them a sense of
security that might not be possible
if they chose to work for someone
else.
 Reasons for setting up a business
(GET CASH)
Challenge
Some people might view setting up
and running a business as a
challenge. It is this challenge that
drives them to perform and gives
them personal satisfaction.
Being successful in business
boosts self-esteem.
 Reasons for setting up a business
(GET CASH)
Autonomy
Being self-employed means that
there is autonomy (independence,
freedom of choice and flexibility)
in how things are done within the
organization.
 Reasons for setting up a business
(GET CASH)
Security
There is usually more job security
for someone who is their own boss
Although the risks are great, being
self-employed makes it potentially
easier to accumulate personal
wealth (financial security) to
provide higher funds for (early)
retirement
 Reasons for setting up a business
(GET CASH)
Hobbies
Successful entrepreneurs have a
passion for what they do and this
is made easier if the nature of the
work is directly related to their
interests
Steps in the process of starting a business
 Write a business plan
 Obtain start-up capital
 Obtain business registration
 Open a business bank account
 Marketing
 Business Plan
 This document include the goals and
objectives for the new business with an
outline plan of how these targets are to be
accomplished.
 Start-up capital
 Money that is needed to start a business.
 Small business owners will use their own
savings and/or obtain loans to finance their
start-up.
 The loan process can take several months
to complete, with the lender usually
requesting a completed business plan
before any funds are approved.
 Business Registration
 Before a business can trade or hire
workers, it must satisfy registration and
licensing requirements.
 The owner(s) must also register the legal
status of the business (ie. partnership or
limited liability – Unit 1.2)
 Business Bank Account
 Setting up business bank account allows
the business to pay for its costs of
operation and to receive payments from
customers.
 Marketing
 Potential customers need to know about
the business and its products.
 Marketing includes advertising and other
promotional materials.