Chapter 2: What is Business?

The Big Picture

Business is a system of intertwined actions that excels at selling a commodity to create wealth for stakeholders.

  • Organizations must identify solutions to needs that the marketplace desires and create a mechanism for delivering it to the right person, at the right time & price.

Business Foundation

How efficient & effective an operation/business is can be assessed by its commercial endeavours, employee interactions & organizational efficiency & structure

Commercial Endeavours

  • Markets an organization serves, the products & services it offers, & the needs it allegedly meets.

Employee Interaction/Human Resource

  • Refers to the value-creating skills an organization’s employees bring to the market. The success of businesses lies on using the specialized skills within its human capital.

Organizational Efficiency & Structure

  • A reflection of the complexities of the business activities that circulate within an organization, as well as the infrastructure, culture and transaction processes that an organization develops.
  • Refers to, for example, technical infrastructure, managerial hierarchy, operating processes & decision-making/communication processes.

What Is Business?

Business is a mission-focused activity aimed at:

  1. Identifying the needs of a market.
  2. Providing a solution while making a profit.

Business managers must recognize an opportunity to create value for its targeted customers!

4 Core Fundamental Resource Areas (& Business Model System)

Managers will build business models around 4 core fundamental resource areas:

  • Assets: Infrastructure & resource base of an organization (land, buildings, bricks & mortar stores/e-commerce, equipment, technology framework, raw materials, brand powers, etc.).
  • Labour: Human resources.
  • Capital: Money for asset-based expenditures and investments.
  • Managerial Acumen: Foresight, drive, knowledge, ability, competency, & ingenuity.

Combination of all 4 resources areas for the purpose of creating value determines a company’s cost base & overall operating platform (also known as its business model system).

Business Planning Cycle

Businesses must begin their planning cycle by conducting a “strategy & 3C assessment”. Strategies are objectives an organization hopes to achieve during the planning cycle. The 3Cs are capabilities, competencies & capacity. A company must also develop competitive advantage (an advantage an organization has over its competitors that enables to achieve greater margins, reduce costs, attract customers).

What are the Planning Cycles Designed to Do?

  • Identify & set objectives that will allow a firm to achieve a unique position within the market.
  • Objectives should be specific, measurable, actionable & controllable (SMAC).
  • Should be achievable within given the time frame of the planning cycle.
  • Allocate resources to achieve objectives.
  • Assess performance of the organization in achieving objectives & determine any adjustments.
  • A flattening or declining of revenue is a key identifier as to whether a plan is working or not.
  • Failure to meet objectives can be due to poor positioning, poor operational execution or both.
  • Direct the positioning of the company within the marketplace.
  • Orchestrate the creation of a business plan that will achieve the objectives formulated.
  • Ensure linkage between vision & mission of organization.
  • Develop the required operational tactics that will ensure smooth execution of plan.

Not-for-Profit Organizations

Not-For-Profit Organizations are those that are not in the business to make a profit or create wealth, but rather seek to deliver services to the people, groups & communities they serve (for collective and social interests). They still need to operate much like a business would (creating planning cycles & goals, etc).

  • They need to create operational surplus. (be able to cover costs)
  • Acquire external capital funding commitments.
  • They need to constantly be assessing the needs of their stakeholders to ensure they’re relevant.
  • Expand services to where demand exists. (by developing new programs, etc)
  • Held to a high level of social responsibility.
  • They must do all of the above while staying true to their charitable mission.

3 Fundamental Objectives of Business

  • Short-Term Profit: Make a profit to cover the expenditures and costs of living.
  • Long-Term Growth & Profitability: Have constant stream of profit (by innovating or entering markets, etc).
  • Social & Environmental Responsibility

Too much emphasis on one can cause detrimental harm to an organization!

Business Model & Profitability

What's the Difference Between Profit & Profitability?

Profit is simply Total Revenue subtract Total Expenses.

Profitability measures how well a company is using its resources over a period of time to generate earnings relative to its competitors. Takes factors into account such as capital invested, return on equity, the financial leverage the organization undertook to finance its operations, level of pre-tax income earned, etc.

What are the 3 Ways to Improve Profitability?

  • Develop new product opportunities.
  • Meet evolving needs in emerging markets.
  • Streamline operations.

Creating a Value Proposition

Value Proposition is a statement that summarizes whom a product/service is geared toward & the benefits the consumer will realize as a result of consuming the product. It also communicates how the product/service differ from competing products/services.

Value Proposition = Service Benefits + Product Benefits + Brand Benefits + Cost Benefits + Emotional Benefits

Managers must constantly ask what benefits (out of the 5) their product provides.

Understanding Your Cost Base

Asset-based expenditures are expenditures on assets (like equipment or tech).

Operating expenditures are expenses incurred due to performing normal business operations (wage, shipping, marketing, etc).

Managers must understand their expenses when setting the price of a product/service.

The Business Decision-Making Landscape

Developing & Managing a Business Requires Its Owners/Managers To...

  • Create a vision of the opportunity in the marketplace.
  • Confirm that there is enough demand for your product/service.
  • Confirm that a position within the market will allow you to apply your competitive advantage.
  • Confirm the market situation will stay constant long enough for plans to be developed & executed.
  • Confirm that the organization has the resource base & capability to execute the strategy.
  • Execute the strategy.

Strategy is a plan that guides the direction of the firm & determine its long-term performance.

Tactics are immediate actions that meet short-term objectives set forth in the planning cycle.

Businesses must have a good mix of tactics and strategy. Too much of one is a bad thing!

Chapter Summary

In this chapter, we have discussed...

  • Businesses create profit by creating value for their targeted customers
  • Interactions of business like commercial endeavors, employee interaction & org efficiency
  • Business model
  • Resource areas: assets, labour, capital, managerial acumen
  • Objectives of Business: short term profit, long-term profitability & social responsibility
  • Value Proposition
  • Interrelationship with strategies & tactics

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