Goods | Business functions | Sectors | Starting a business | Challenges | Business plans| Key terms

According to Peter Drucker, the sole purpose of a business is to create customers by satisfying their needs and wants. Needs are basic necessities like food and shelter, while wants are desires such as a new smartphone or a vacation.

The main business functions are human resources, finance, marketing, and operations. These areas must collaborate to achieve organizational goals.

A rough overview

Goods—consumer and capital

Consumer goods are products sold to the general public, split into durable (lasting) goods like electronics and non-durable goods like fresh food. Capital goods are bought by businesses to produce other goods and/or services, like machinery. Services are intangible products like healthcare or legal advice.

Business Functions

Human resources manage personnel, dealing with recruitment and training while finance and accounts oversee money management and financial reporting. Marketing identifies and satisfies customer needs through activities like market research and advertising. The department functions through the traditional 4Ps (product, pricing strategies, promotion (social media) and place). Operations convert raw materials into finished goods or provide services to customers.

Business Sectors—primary, secondary, tertiary, quaternary

Businesses can be classified into different sectors based on their involvement in the production process:

• Primary sector: extraction, harvesting of natural resources ie. agriculture and mining
• Secondary sector: manufacturing or construction of products ie. clothes and electronics
• Tertiary sector: providing services to the general population, ie. retailing, healthcare
• Quaternary sector: intellectual, knowledge-based activities ie. ICT, R&D

These sectors are linked through the chain of production, from raw materials to the final product delivered to consumers.

All sectors are interdependent, relying on each other for existence. For instance, without retail (clothing) shoppers, there wouldn’t be need for primary industries such as cotton-making.

Can you think of other ways tertiary/ quaternary sectors are linked to primary industries?

Sectoral Change

Sectoral change refers to the shift in the share of national output attributed to each sector over time. This shift typically progresses from primary to manufacturing, and eventually to tertiary and quaternary sectors.

Industrialization is crucial for economic development, moving from low-value primary production to higher-value manufacturing and services. Despite this, some countries still benefit from specializing in primary products, like France with its agricultural exports. More than 600,000 French are employed in the industry.

Modernization has led to a decline in secondary sector employment due to automation. Developed countries rely more on tertiary and quaternary sectors for output and employment, as seen with companies like Apple and Samsung focusing on services rather than manufacturing.

Driving Sectoral Change

Several factors drive sectoral change in more developed economies:

• Higher household incomes lead to increased demand for services
• More leisure time encourages spending on recreational activities
• Better customer service becomes a competitive advantage
• Growing businesses rely on support services like subcontractors and consultants

Entrepreneurship and Intrapreneurship:

• Entrepreneur: Organizes and manages a business, taking financial risks
• Intrapreneur: Acts as an entrepreneur within a larger organization, driving innovation and taking risks

Examples like Post-it notes and Gmail showcase successful intrapreneurship. Companies like 3M and Google encourage employees to innovate.

(INSERT CASE STUDY)

Reasons for Starting a Business:

• Growth: Business ownership can lead to asset appreciation
• Earnings: Entrepreneurs can earn more than traditional employment
• Transference and Inheritance: Businesses can be passed down through generations
• Challenge: Business ownership provides personal satisfaction and self-esteem
• Autonomy: Being self-employed offers independence and flexibility
• Security: Business owners have more control over their job security and financial future
• Hobbies: Passionate entrepreneurs turn hobbies into successful businesses

Steps in Starting a Business:

1. Write a business plan: Outline goals and objectives
2. Obtain start-up capital: Use savings or obtain loans
3. Obtain business registration: Fulfill legal requirements
4. Open a business bank account: Facilitate financial operations
5. Marketing: Promote the business and its products to potential customers

Starting a business is risky, but careful planning can mitigate challenges. Examples of start-up costs include premises, equipment, legal fees, marketing, and human resources.

Business Idea	A unique and feasible business concept targeting a specific market niche or offering a distinct product. Examples include Amazon.com (online book retailing), Dell (custom-made computers), and Dyson (bag-less vacuum cleaners)
Finance	Capital required for business activities, including manufacturing and marketing, often a key barrier
Human Resources	Staffing needs, including hiring, training, and motivating employees throughout various business stages
Enterprise	Entrepreneurial skills in planning, organizing, and managing the business, with effective leadership
Fixed Assets	Premises and equipment needed, location decision crucial for attracting customers despite cost concerns
Suppliers	Sourcing raw materials, products, and support services, negotiating prices and delivery times
Customers	Attracting and retaining customers through market research, offering desirable products at fair prices.
Marketing Essential	Essential for promoting the business idea to lenders and buyers, convincing them of its potential success. Examples include Anita Roddick’s The Body Shop and J.K. Rowling’s Harry Potter books.
Legal Issues	Consideration of consumer protection laws, copyright/patent legislation, and employment rights compliance.

Challenges Faced by New Businesses

Around a fifth of new businesses fail within their first year due to various challenges. Key problems include:

• Lack of Finance: Securing external funding is challenging for new or small businesses, leading owners to often remortgage their homes for collateral
• Cash Flow Problems: Difficulty in financing daily operations due to slow stock turnover and delayed customer payments
• Marketing Issues: Inability to meet customer needs or identify market niches, leading to poor sales. Examples include Amazon.com and budget airlines like easyJet
• Building Customer Base: Attracting customers, especially in the presence of established competitors, requires substantial marketing efforts
• People Management: Difficulty in hiring skilled staff and establishing an optimal organizational structure
• Legal Compliance: Navigating complex legal requirements for business registration, insurance, and consumer protection
• Production Challenges: Forecasting demand accurately to avoid overproduction or underproduction
• High Production Costs: New businesses face high costs due to equipment, stock, rent, and advertising expenses, without the benefits of economies of scale
• Poor Location: Balancing premises costs with customer traffic, with some entrepreneurs opting for home-based businesses initially
• External Influences: Vulnerability to external shocks like economic recessions or crises, impacting business survival

In summary, new businesses often struggle due to cash flow issues, poor cost control, and management incompetence.

CUEGIS

Concept-based learning in IB Business Management involves understanding CUEGIS concepts— change, culture, ethics, globalization, innovation, and strategy. Business activity transforms inputs into outputs to meet customer needs, essentially the goal is to satisfy customer needs while achieving organizational objectives, typically profit maximization.

Key Terms

Key Terms	Definition
Business plans	Document addressing all the issues that need to be planned before operations begin
Businesses	Aims to meet the needs and wants of individuals or through providing goods/ services/ extracting raw materials
Consumers	Individuals or organizations that purchase or consume goods or services to satisfy their needs and wants
Customers	Individuals or organizations who buy products or services from a business. They may or may not consume the product themselves
Entrepreneurs	An individual who identifies business opportunities and takes the initiative to start a new venture, often assuming financial risks in the pursuit of profit
Intrapreneurship	The practice of applying entrepreneurial skills and mindset within an established organization to innovate, develop new products, or improve existing processes
Needs	The basic necessities required for survival and well-being, such as food, clothing, and shelter
Products	Goods or services that are offered for sale to satisfy the needs or wants of consumers They can be tangible items (such as smartphones or cars) or intangible services (such as insurance or education)
Wants	The basic necessities required for survival and well-being, such as food, clothing, and shelter

Read here for more on Business Plans

Source
Hoang, Paul. Business Management for the IB Diploma Study and Revision Guide. Hachette UK, 2016.