Topic 1: Organization And Environment
1.1 Nature Of Business Activity external image one_1.gif

Identify inputs, outputs and processes of a business.

What is a business?




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Describe how business activity combines human, physical and financial resources to create goods and services.

Explain the role of the different business departments in overall business activity.


A business is an activity that generates output in the form of goods or services or a combination of both. We are all familiar with the business concept, but what is not immediately recognizable is the fact that all businesses share certain similarities. We begin our understanding of the business with Factor Inputs or Factors of Production. The Factor Inputs for the production process are similar for both a corner hotdog stand and a multi-national corporation (MNC).

All Businesses have what are known as factor inputs that are put into the production process in order to generate output.


These are the:


Enterprise: Comprised of the Entrepreneur, who is an individual capable of harnessing the other factors of production



Land: Anything that is provided by nature. Land is unprocessed and natural and does not only mean the earth that we stand on. In economics Oranges are classified as the factor of production called Land, as is the sand on beachfront, the ocean, crude oil, trees or even flowers in a field. So long as it is not processed and is provided by nature it is classified as Land.


Capital: That which has been created by humans and helps in the production process. Therefore, machines, robots, buildings, cars, trucks, pizza ovens, oil refineries, orange juice machines and other human-made machines are all considered Capital.

Labor: This is only human and can either physical or mental.


A large MNC corporation has factor inputs as does a small hot-dog stand. Therefore, factor inputs serve to describe the process that takes place in the creation of outputs. So where do these outputs go?

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Outputs meet the needs and wants of members and institutions in society. Needs are basic human requirements for survival, and wants are desires created by society. For example, food, clothing and shelter are basic needs we absolutely must have in order to survive. We also have other needs such as psychological needs e.g. love and recognition. On the other hand, wants are the needs that are not necessary, but shaped by societies influence on us all. For example caviar, a silk scarf and a mansion on a hill are all forms of food, clothing and shelter, but we can very well do without them. Right? It is important to note that wants are unlimited whereas needs are limited.


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Serving up our unlimited wants.
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Businesses, therefore, are organization that provide us with our needs and wants. However, before these outputs are generated to fulfill us, the coordination of the production process is vital.

Business functions


In order for the production process to work effectively, various units coordinate in what are separate business functions. Consequently, business organizations can be divided into various divisions with allocated functions in the production process. In the human body, the brain, kidneys and liver all play very specific roles that enable the whole organism to function in unison. Similarly, the business organization, although not as complex, has functional units that perform discernable functions. Let briefly take a look at these units.

Production/Operations


This division involves converting raw material into finished products. Relative of course to the type of business, this is where for example the automobile factory creates the cars or the oranges are converted to orange juice.Click the link and find out how jellybeans are made!
Marketing


In marketing the needs and wants of the consumers are identified profitably. With the ever growing nature of local and global competition, this division has played an increasingly central role in the business organization. It begins with among others marketing research, promotion, pricing and distribution to consumers. As an example, the business organization determines the need for fuel efficient cars by conducting market research, promotion through automobile shows and advertising campaigns, and pricing them to be affordable while ensuring that the dealerships have them available in their show rooms for potential clients to test drive.

Finance

This unit ensures that all the inflows and outflows of money are recorded and issued in a controlled manner. The finance department is a vital part of the functionality of the organization and seeks to provide information that is vital to decision-making.


Human Resources/Personnel


Not only does the human resources or personnel department manage labor but it also looks out for the well-being of employees. It is responsible for recruitment, training, appraisal and among others ensuring that all laws governing worker rights are met.

The entrepreneur takes the risks necessary to generate output by coordinating the factors of production and creatively integrating business ideas. Once the business has started to achieve a certain level of output capacity, it becomes necessary for the entrepreneur to ensure that the different business functions mentioned above are capable of effectively supporting the entire production process. This coordination of human, physical and financial resources to create goods and services is what the study of Business and Management is all about.

HL Only Analyse the impact on business activity of changes in economic structure.


Internal and external factors will determine the ability of the business organization to reach its goals and strategic objectives. We have focused on the internal factors that are within the control of the business. However, external economic factors will also have a significant impact on business activity.

These external economic forces go through periods of ups and downs known as the business cycle. When the economy is doing well and consumers are willing to purchase goods and services, producers are also willing to provide more goods and services. Consumers are generally employed and the prices of the goods are acceptable. However, because of the high demand for goods, Producers will increase their inventory and subsequently raise prices in order to meet the demands of a booming economy. Invariably the increased prices will curtail the desire of consumers to continue with their consumption habits and in time prices will fall in response to the decreasing demand. Business organizations are greatly affected by the changing demand for their products and by consequence have to closely monitor the trends in the economy.

In trying to determine how the business is affected by these fluctuations consider that during the economic boom more raw materials (inputs) would be purchased to meet the increased demand for output. However, in the downturn, the business would have to sharply reduce the costs associated with operations and be more prudent in terms of efficiency decisions.

The ability of the business to meet its input costs will be measured by the accounting conducted in the Finance section of the business. If all the inflows and outflows of money are recorded accurately, decisions can to made to plan ahead for the rainy days.

This is clearly an oversimplification of a highly complex set of economic events that begin with a boom and end with a recession. However, the nature of the economy will be examined in much closer detail in the latter portion of this Module.

Primary, secondary and tertiary sectors

Explain the nature of business activity in each sector.


These three distinctions as developed by Colin Clark and Jean Fourastié which serve to classify where production takes place. If production takes place within the sector that involves products that are directly provided by nature and if these product are not altered then this is the Primary sector. Most developing countries are said to be in the primary sector because of the high level of production in the agricultural sector or primary sector.




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Therefore a wheat farmer who harvests his or her crop and provides it to the market is indeed performing primary sector activity. Crude Oil is drilled from the earth and shipped into a tanker is also primary sector activity. Collecting and processing raw materials is also within this sector.

When products from the primary sector are processed, mostly with the use of capital, the end result is a change in the raw form of the product. The activity is classified as having taken place in the Primary sector. If we go back to our example of the orange farmer who plucks oranges and provides them to the market, when these are then processed to make orange juices, this is indeed the Secondary Sector. The wood that is used (from the primary sector) is refined into pulp (secondary sector) and the juice that is poured into the processed paper carton is an example of Primary sector activity taking place for both products. The other example we used of Crude Oil being drawn from the ground and sent to processing and chemical plants, where the crude oil is processed and refined into products, such as fuel, and other oil based products is an example of the Primary sector. Oil is used mostly as a fuel although approximately 5% of this as non-fuel. Did you know that bubble gum, ammonia, ink, and , and heart valves are part of that 5%? How many products on your desk can you identify as directly oil based and indirectly linked to oil? With this begins an understanding of how pervasive this product is in our economy and the need to shift our dependency.

Secondary sector activity involves the use of that factor of production we called Capital. If you recall, Capital is human made and helps in the production process. Therefore when raw materials from the primary sector are manufactured and created into finished usable products, mostly with the use of capital, the end result is a change in the raw form of the product. The activity is classified as having taken place in the Secondary sector. The distinction is usually made between light industry and heavy industry.

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Manufacturing is a historical part of the industrial revolution, where through the use of the steam engine, Thomas Newcomen created the atmospheric steam engine, an improvement over Thomas Slavery's previous design in the early 1600’s. The use of steam served to multiply human effort and with this the modern industrial (secondary sector) era began.

In the Tertiary (or third) sector, this activity involves human beings providing a service in the production process that is non-tangible (can not be touched). The end result is consumer utility or satisfaction gained from the service. In this sector an example is the transportation and distribution of the orange juice and Crude oil mentioned earlier. Other examples of the tertiary sector include banking, entertainment, consultancy, travel and tourism, insurance, healthcare, legal and all means of provided a service by human beings. As economies develop, the move from the primary (agricultural) secondary (manufacturing) and then Tertiary sector is evident. In the U.S., approximately 80% of the labor force is involved in the tertiary sector.

As the economy evolves activities related to the production process inevitably also change. The growth in the Tertiary sector has prompted the creation of the Quaternary Sector (involved with intellectual services and information and communication technology and some forms of scientific research) and the Quinary Sector (involving the highest levels of decision-making in areas such universities, science, healthcare, culture and government.

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What is Business?


In this first section we looked at the fundamental element of what comprises a business unit. These fundamental are shared by all business' from Airbus to your local Kiosk.
1) Complete the assignment outlined below, answer and submit the questions in class (not online).
Introduction to Business Activity - What do Businesses do?



2) Complete the above to the Discussions tab and post at least one response to the question below.

Read the article on "The Biggest Accounting Scandals of All Time". Now consider the following statement, "Business is primarily set up with the object of maximizing profits. Without government regulation, Business organizations would inflict more harm than good on society". Post your response in the Discussion tab to this statement.

3) For further discussion on topics of interest go to Netvibes.com and comment on news article posts.


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What is the ‘tertiary sector’?


Explain public limited company.