Topic 1

Foundations of Business
Definition and why study business
Types of Competition
What is a business?
 A business can be defined as an economic activity involving the purchase, production and sale of goods
and services with a motive of earning profits by satisfying human needs in society.
 Business elements in a wide range of fields including accounting, finance, marketing, human resources
management, e- business, international business, taxation, laws, operation management and so on.
 Business of whatever size or nature exist to make a profit. The production and distribution of goods and
services to satisfy the needs and wants of the customers at a profit.
 Profit can be defined as the amount of money a business earns above and beyond what it spends
for salaries and other expenses. Revenue is the total amount of money a business takes in during a given
period by selling goods and services.
 For a business to be organized, it must combine four kinds of resources: material, human, financial and
informational.

Human resources BUSINESS Informational resources

Financial resources
Material resources

 Material resources include the raw materials used in manufacturing processes as well as buildings and
machinery. For example: Famous Amos needs flour, sugar, butter, eggs and other raw materials to pro-
duce the food products it sells worldwide.
 Human resources are the people who furnish their labor to the business in return for wages.
 Financial resources is the money required to pay employees, purchase materials and generally keep the
business operating.
 Information is the resource that tells the managers of the business how effectively the other three re-
sources are being combined and used.

What do businesses do?

 Businesses identify the needs of consumers or other firms. They then purchase resources, which are the
inputs of the business, or factors of production, in order to produce output.
 The ‘outputs’ of business are the goods and services that satisfy consumers’ needs, usually with the aim
of making a profit.
 Business activity exists to produce goods or services, which can be classified in several ways: consumer
goods, consumer services and capital goods.
  Consumer Goods the physical and tangible
goods sold to the general public. They include cars
and washing machines, which are referred to as dura-
ble consumer goods.
 Non-durable consumer goods include food, drinks and
sweets that can only be used once.

 Consumer Services non-tangible products

that are sold to the general public and include hotel
accommodation, insurance services and train jour-
neys

 Capital goods physical goods that are used by

industry to aid in the production of other goods and
services, such as machines and commercial vehicles.

What are business ‘inputs’?

FACTORS OF PRODUCTION
These are the resources needed by business to produce goods or services. Firms will use different combina-
tions of inputs, depending on the product being produced and the size of the business. There are four main
inputs:
(a) Land- this general term not only includes land itself but all of the renewable and non -renewable
resources of nature, such as coal, crude oil and timber.
(b) Labour- manual and skilled labour make up the workforce of the business. Some firms are labour
intensive, that is they have a high proportion of labour inputs to other factors of production, e.g. house
cleaning services.
(c) Capital – this consists of the finance needed to set up a business and pay for its continuing operations as
well as all of the man-made resources used in production. These include capital goods such as comput-
ers, machines, factories, offices and vehicles. Some firms are capital intensive, that is they have a high
proportion of capital to other factors of production, e.g. power stations.
(d) Enterprise – this is the driving force of business, provided by risk-taking individuals, which combines the
other factors of production into a unit that is capable of producing goods and services, It provides a man-
aging, decision-making and coordinating role. Without this essential input, even very high quality land,
labour and capital inputs will fail to provide the goods and services that customers need.
 Functional Areas of Business
Most business can be divided into a number of functional areas: management, operations, marketing, ac-
counting and finance. These will be staffed by people with specific qualifications and experience in the work
of the functional areas.

Management

 Management involves planning, organizing, staffing, directing, and controlling a company’s resources so
that it can achieve its goals.
 Managers plan by setting goals and developing strategies for achieving them. They organize activities
and resources to ensure that company goals are met. They staff the organization with qualified employ-
ees and direct them to accomplish organizational goals.
 The managers design controls for assessing the success of plans and decisions and take corrective ac-
tion when needed.

Operations

 Operation management has responsibility for ensuring adequate resources are available for production,
maintaining production and quality levels and achieving high levels of productive efficiency.
 For example, some companies such as Apple, convert resources into tangible products- Macs, iPhones,
iPod, iPads. Others, such as hospital, convert resources into intangible products-health care.
 The person who designs and oversees that transformation of resources into goods or services is called an
operations manager. This individual is also responsible for ensuring that products are of high quality.

Marketing

 Marketing consists of everything that a company does to identify customers’ needs and designs products
to meet those needs.
 Marketers develop the benefits and features of products, including price and quality. They also decide on
the best method of delivering products and the best means of promoting them to attract and keep custom-
ers. They manage relationships with customers and make them aware of the organization’s desire and
ability to satisfy their needs.

Accounting

 Managers need accurate, relevant, timely financial information, which provided by accountants. Account-
ants measure, summarize, and communicate financial and managerial information and advise other man-
agers on financial matters.
 These are two fields of accounting: i) financial accountants-prepare financial statements to help users,
both inside and outside the organization, assess the financial strength of the company, ii) managerial ac-
countants prepare information, such as reports on the cost of materials used in the production process,
for internal use only.
 Human Resources Management

 Human Resources Management (HR) are responsible for ensuring that the organization has all of the
skills and capabilities necessary to run the business. HR department develop staffing plans, recruit and
select new employees, monitor the performance management process, and develop succession plans for
advancement and replacement. They develop standards for compensation and benefits and assists man-
ager with staff issues.

Importance of Business
Business is an integral part of modern society. It is an organized and systematic activity for earning profit. It is
concerned with activities of people working towards a common economic goal. Modern society cannot exist
without business. The importance of business can be described as follows:

a) Business improves standard of living of people by providing better quality and large variety of goods and
services at the right time and at the right place.

b) It provides opportunities to work and earn a livelihood. Thus, it generates employment in the country,
which in turn reduces poverty.

c) It utilises the scarce resources of the nation and facilities mass production of goods and services.

d) It improves national image by producing and exporting quality goods and services to foreign countries. By
participating in international trade fairs and exhibitions it also demonstrates the progress and achieve-
ments of its own country to the outside world.
e) It enables the people of a country to use quality goods of international standards. This possible by way of
importing goods from foreign countries or by producing quality goods in the country by applying modern
methods of production.
f) It gives better return to the investors on their capital investment and also provides opportunities to grow
and expand the business.
g) It promotes social interest by providing tourist services, sponsoring cultural programmes, trade shows etc.
in the country, which enable people of different parts of country to exchange their culture, traditions and
practices. Thus, it promotes national integration.
h) It also facilities exchange of culture among the people of different nations and thus, maintains internation-
al harmony and peace.
i) It helps in the development of science and technology. It spends large amount of money on research and
development in search of new products and services. Hence a number of innovative products and ser-
vices are developed through industrial research.
 Objectives of Business
Business objectives are something, which a business organization wants to achieve or accomplish over a
specified period of time. It is generally believed that a business has a single objective, that is to make profit
and safeguards the interests of its owners. However. no business can ignore the interest of its employees,
customers as well as the interest of society as whole. Business objectives also need to be aimed at contrib-
uting to national goals and aspirations as well as towards international well-being. Thus, the objectives of
business may be classified as:-

(a) Economic objectives- of a business refer to the objective of earning profit and those which have a
direct impact on the profit earning objective of business. Some of the main economic objectives of busi-
ness are:
 Growth and expansions of business operation. A business can grow in size with the passage of time. It is
desirable to get the benefit of large scale business. A successful working can motivate the owners for
growth of business.
 Making innovation and improvements in goods and services.
 Exploring new markets and creation of more customers.
 Making use of available resources in the best possible manner
 Earning of adequate profits

(b) Social objectives of business are those, which are desired to be achieved for the benefit of the society.
Some of the major social objectives are:
 production and supply of quality goods and services to the society
 making goods available at reasonable prices
 avoidance of unfair practices like hoarding, black-marketing, over-charging, etc
 contributing towards the general welfare and upliftment of the society
 ensuring fair return to the investors
 taking steps in the direction of consumer education
 conserving natural resources and wild life and protecting the environment

(c) Human objectives refer to the objectives aimed at the well-being as well as fulfillment of expectations of
employees as also of people who are disabled, handicapped and deprived of proper education and train-
ing. The human objectives of business may thus include economic well-being of the employees, social
and psychological satisfaction of employees and development of human resources.
 arrangement of better working conditions and proper work environment for the employees
 providing job satisfaction by making the jobs interesting and challenging putting the right persons in right
job
 providing the employees with more and more promotional opportunities
 organizing training and development programmes for the growth of the employees
 providing employment to the backward classes of the society and people who are physically and mentally
challenged
d) National objectives - being important part of the country, every business must have the objective
of fulfilling national goals and aspirations. The goal of country may be to provide employment opportunity
to its citizen, earn revenue for its exchequer, become self-sufficient in production of goods and services,
promote social justice, etc. Business activities should be conducted keeping these goals of the country in
mind, which may be called national objectives of business.
 creation of employment opportunities
 promotion of social justice
 produce and supply goods in accordance with national interest and priorities
 payment of taxes and other dues honestly and regularly
 helping the state in maintaining law and order by promoting good industrial relations
 implementing government's economic and financial policies framed from time to time

e) Global objectives- of business are the objectives of facing the challenges of global market. Today
because of globalization the entire world has become a big market. Goods produced in one country are
readily available in other countries.
 making available globally competitive goods and services
 reducing disparities among rich and poor nations by expanding its operations
Business Development and its Contribution to Society
You may wonder why a nation should focus on business development . Therefore, we need to examine its
impact and contribution to society at large. An economy will grow faster with the expansion of business activi-
ties. When organization increase their investment, additional job opportunities are created, reducing rate of
unemployment. This also increases aggregate income and aggregate demand of the nation.

A nation’s businesses are part of an economic system that contributes to the standard of living and quality of
life for everyone in the country.

Standard of Living
 Standard of living refers to the amount of goods and services people can buy with the money they have.
Business create and produce innovative products that consumers want and need.

 Consumers, with their purchasing power, are able to choose from a wide range of goods and services
provided by businesses.

 The ability to buy a greater amount of goods and services will lead to higher standard of living.

 Businesses have also contributed to society's quality of life.

Quality of Life
 Quality of life refers to the general well-being of society in terms of political freedom, a clean natural envi-
ronment, education, health care, safety, free time and everything else that leads to one’s happiness and
satisfaction.

 Just look around us! New forms of technology, service businesses and international opportunities promise
to keep production, consumption and employment growing.

 Business profits enhance the personal incomes of owners as well as the shareholders. They also gener-
ate the nation’s revenue to support the government’s activities through the business taxes paid.

 Many businesses have also supported charities and other corporate social responsibility initiatives to en-
hance society’s quality of life. The more money businesses create, the higher the potential to society to
improve its quality of life.

 Shareholders- individuals or parties that invest their funds in a business.

Balancing the Interests of Stakeholders
We noted earlier that profits are the rewards for owners who risk their money and time to be in business. In
pursuing profits, businesses must take into account what consumers want and need. While today’s society
has high respect for entrepreneurs and their contributions, businesses nowadays have also realized the criti-
cal need to balance the interests of all stakeholders to be successful. In the past, the emphasis had been to
fulfil the interests of shareholders or stockholders since they are have invested in the business.

Who Are Stakeholders?

 A stakeholder is any person, organization, social group, or society at large

that has interest or concern in the business.
 Businesses have many stakeholders. They include shareholders, custom-
ers, suppliers, bankers, employees, government agencies, non-
governmental organizations (NGOs) as well as competitors.

 A poor relationship with a major supplier may disrupt production of the final goods. Similarly, by fulfilling
customers’ needs, they will maintain their loyalty to the products and sales will be stable.
 Businesses also have to consider employees’ needs. Employees have to be fairly rewarded to commen-
surate with the expected output from them. A highly motivated workforce will certainly improve work
productivity and generate higher profits for the organization.
 While providing customers’ needs, businesses must try to cause minimal damage to the natural environ-
ment , such actions will comply with the government's policy to conserve the environment for better quali-
ty of life.
 Businesses are part and parcel for the community. Therefore, while addressing the stakeholders’ inter-
ests, they are also fulfilling their social responsibility. While businesses nowadays maintain their main
objectives of making profits and maximizing shareholders’ value, they must also cater, as much as possi-
ble, for the needs of all stakeholders.
Shareholders (owners)

Government Agencies Competitors

Bankers
ORGANIZATION Suppliers

Employees

Customers
Non-governmental organizations
Business Environment
Business environment consists of the surrounding factors that either promote or restrict the development of
today’s businesses. They are economic conditions, legislation, technological process, the socio-cultural envi-
ronment, competition and globalization.

1. Economic condition
 Economic conditions directly affect businesses. For example, if the economy is in recession, business ac-
tivities will be slow due to low demand from consumers. Unemployment will rise and household consump-
tion will drop or people will increase their savings as a precautionary measure to face the uncertainty of
the future.
 In response to the declining demand from consumers, businesses need to take remedial actions to reposi-
tion themselves for business survival. For example, some organizations may diversify their markets over-
seas to reach more customers, whereas some may embark on cost-cutting measures such as reducing
shift work from round-the-clock to 8-hours-oer-day operations.
 During the recession, if the government reduces the amount of profit taxes, businesses will improve the
business climate as a whole, hence the economic situation ultimately.
 Economic conditions, therefore, do have an influence on the business environment.
2. Legislation
 Businesses have to comply with the rules and regulations enforced by the government or local authority.
 For example, those who want to start a small business must apply for a license with the city municipality
such as Sibu Municipal Council or register with the registrar of Companies.
 They also have to comply with environmental rules and regulations to preserve the environment while
they produce their goods and services for society.
 Organization interested to do business overseas need to be aware of the rules and regulations of other
countries to avoid complications while implementing business decision.

3. Technological progress
 Technological deals with industrial arts, applied science, engineering process-
es, inventions or methods. It is a body of knowledge applied to produce goods.
 Technological change takes two forms – pure invention or creation and innova-
tion.
 Business today are influenced by the technological development such as infor-
mation and communication (ICT).
 The ways businesses are conducted have shifted somewhat from the days
when ICT was non-existent.
 Although customers are able to enjoy a wider range of goods and services in
the market, businesses today are left with no choice but to manage technologi-
cal change.
 For example, many businesses are now using social media to provide customers with information about
products and services. If you ask different people, you will often find different definitions for social media,
but for our purposes social media is defined as online interaction that allows people and businesses to
communicate and share ideas, personal information, and information about products or services.
 Another example, businesses today can secure orders from customers immediately through e-commerce.
Similarly, they can also search for suppliers etc. and this has sped up decision making.

4. Socio-cultural environment
 The socio-cultural environment consist of highly related aspects, such as demographics, religion and cul-
tural trends.
 There are business opportunities that exist in a society’s popular culture; business opportunities for con-
sumer and durable goods, retailing and services, leisure and entertainment, and housing and construc-
tion, to name a few.
 For example, the Chinese New Year celebration provides opportunities for retailers to sell mandarin or-
anges and wax duck.
 Likewise the high composition of ‘Muslim’ population in a society calls for the production and supply of
halal food to retail outlet.

5. Competition
 Competition in business is inevitable. Entrepreneurs in new business ventures have to analyze their com-
petitors in the industry.
 These competitors are the businesses that fulfill the same customer needs or
have the potential to serve those customers.
 In the retail petroleum business, PETRONAS and SHELL are competitors,
and each will try to maintain its market share by implementing non-price com-
petition initiatives. These include advertising and promotion on the services
provided at their stations as well as improving the quality of services to their
customers.
 The more number of competitors, the smaller the profit margin for a business,
unless the market is huge.

6. Globalization
 Today’s businesses are greatly affected by globalization, which influences all the other business environ-
ments discussed, be it economic conditions, legislations, technological progress, socio-cultural or compe-
tition.
 Globalization calls for loosening of trade barriers amongst nations of the world bilateral and multilateral
relationships. With the openness of the global economy, there will be able to serve a bigger market than
before.
 Munchy’s Malaysian biscuit brand with its manufacturing base in Johor Darul Tak’zim, is among the suc-
cessful ventures that have been able to export quality products to the global market. Apart from serving
the local community, Munchy’s exports its biscuits to Healin’s product, Gamogen, which has successfully
penetrated the European market. The ever open global opportunities have certainly enhance the gross
MARKET COMPETITION
In market economies, there are a variety of different market systems that exist, depending on the industry and
the companies within that industry. It is important for small business owners to understand what type of mar-
ket system they are operating in when making pricing and production decisions, or when determining whether
to enter or leave a particular industry.

a) Perfect Competition

 Perfect (or pure) competition is the market situation in which there are many buyers and sellers of a prod-
uct, and no single buyer or seller is powerful enough to effect the price of that product. For perfect compe-
tition to exist, there are five very important concepts:

i) The market condition where there is a large number of suppliers offering very similar product or
service.
ii) There are no restrictions on firms entering the industry.
iii) All buyers and sellers know everything there is to know about the market.
iv) Each seller’s market share is so small that it cannot dictate the price of the product.
v) The products sold by one producer are easily replaced by a similar product from another pro-
ducer.
 Examples of products competing under this type of market structure are agricultural products, such as oil
palm, rubber, rice, etc.

b) Monopolistic Competition

 The market in which there are many firms competing with products that are somewhat different.
 This market structure exists when a large numbers of sellers produce goods that are very much similar
but are perceived to be different by buyers.
 Each seller attempts to make its product different from the others by providing unique product features, an
attention-getting brand name, unique packaging, or services such as free delivery or a lifetime warranty.
 Product differentiation is the process of developing and promoting differences between one’s products
and all competitive products.
 Examples of products sold under this market structure are the varieties of food at restaurants, soap deter-
gents and cosmetics.

c) Oligopoly
 A market structure in which a small number of dominant businesses are providing very similar products or
services with some barriers to entry.
 Oligopoly is a market structure whereby two or more sellers or firms dominate a market, and the prices of
their products are most similar.
 Generally, these sellers are quite large, and sizable investments are required to enter into their market.
 Examples of oligopolies are the automobiles, airline, car rental, cereal and farm implement industries.
 Because there are few sellers in an oligopoly, the market actions of each seller can have a strong effect
on competitors’ sales and prices.
 For example: If Mazda reduces its automobile prices, Ford, Honda, Toyota, and Nissan usually do the
same to retain their market shares.
 In the absence of much price competition, product differentiation becomes the major competitive weapon;
this is very evident in the advertising of the major automobile manufacturers.

d) Monopoly
 The market condition in which one supplier offers the unique product or service. There is no direct compe-
tition, and there are barriers to entry (regulated by the government).
 Monopoly is where the market features a single seller with many buyers.
 The firm produces a unique product and the entry of competitors into the market is impossible due to legal
consideration, patents, copyrights; or the seller is the owner of a vital resource.
 For example: a copyright exits for a specific period of time and can be used to protect the owners of writ-
ten materials from unauthorized use by competitors that have not shared in the time, effort, and expense
required for their development.
 Because Microsoft owns the copyright on its popular Windows software, it enjoys a legal-monopoly posi-
tion.

Market Struc- Number of Type of product Entry into and exit Example
ture seller from market

Perfect Compe- Many Identical/ homoge- Very easy Agriculture product, e.g. rice
tition nous and rubber

Monopoly One Unique Impossible Public utilities, e.g. TNB and

PETRONAS

Monopolistic Many Homogenous or Easy Restaurants and local cos-

competition differentiated metics industry, e.g.
Sendayu Tinggi, Sari Ayu,
Mustika Ratu and Simplicity
cosmetics products.

Oligopoly Few Homogenous or Difficult Automobile and pharmaceu-

differentiated ticals, e.g. Nazaria and KIA
Motors