Understanding Business

Seventh Edition
McGraw Hill Education
Nickels, McHugh, & McHugh

Chapter One

Meeting
Challenges of
Todays Dynamic
Business
Environment

What is Business?

Business is any activity that seeks to

profit by providing goods and services to
others.
Profit: the amount a business earns above
and beyond what it spends for salaries and
other expenses (or what it costs to provide
goods and services to others).
Economic profit: business profits minus
opportunity costs.

Opportunity costs: cost of choosing

to use resources for one purpose
while sacrificing the next best
alternative use for those resources.
Goods: tangible products such as
computers, food, clothing, cars, and
appliances.
Services: intangible products such as
education, health care, and insurance.

Business provides us with:

- The necessities such as food, clothing,

housing, medical care, and transportation
- Wealth (Increased Standard of Living)
- Higher Quality of Life
Standard of Living: the amount of
goods and services people can buy with
the money they have.
Quality of Life: the general well-being
of a society.

What is an Entrepreneur?

Entrepreneur: a person who

risks time and money to start and
manage a business.
Entrepreneurs create wealth:
for themselves through profits,
and for others by providing
employment.

Employees and businesses pay taxes

to the government (Federal, State, and
Local), who in turn provide hospitals,
schools, playgrounds, parks, etc.

Businesses as part of the nations

economic system provide wealth which
leads to an increased standard of living
and a better of quality of life.

Succeeding In Business

Two ways to
succeed in
business:
Entrepreneurship
Working for others

Successful entrepreneurs
usually:
start with getting a
good education
work for (a) firm(s) to
learn all they can about
a certain business
start their own
business.

Succeeding Business
Successful entrepreneurs usually:
start with getting a good education
work for (a) firm(s) to learn all they can
about a certain business
start their own business.

What is Risk?
For a business to be successful in the
long term it must generate profits.
If profits are equal to revenues less
expenses, to be profitable the businesss
revenues must be greater than its
expenses.
If the businesss revenues are less than
its expenses, the business will suffer a
loss.

What is Risk?
As a business can experience either profits
or losses, we can conclude that starting a
business involves some risk.
Risk: the chance an entrepreneur takes of
losing time and money on a business that
may not prove to be profitable.
Some types of businesses involve more risk
than others.

 Therefore as an individual you must decide

on the type and how much risk you are willing
to take.

You can choose to:

Put your money in the bank,
Invest in the stock market,
Purchase real estate, or
Take part in some other type of investment
(start a business).

Factors That Create Wealth

Factors of Production: the resources
used to create wealth: land, labour,
capital, entrepreneurship, and
knowledge.
Land: land and other natural resources
used to make homes, cars, and other
products.
Labour: (workers) people employed in
the production of goods and services.

Factors That Create Wealth

Capital: machines, tools, buildings and other
means of production.
Entrepreneurship: people willing to take the
risk of starting businesses to use those
resources
Knowledge: information that makes it
possible to quickly determine wants and
needs, and to respond with desired goods
and services.

The Business Environment

Business environment that encourages

entrepreneurship is important to the
development of wealth

Five elements are key to business

growth and job creation.

The Business Environment

These together make up the business
environment.
The economic environment
The technical environment
The competitive environment
The social environment
The global business environment

The Economic Environment

People are willing to start new businesses
if they feel that the risk of losing their
money is not too great.
Part of that risk involves the economic
system and how the government works
with or against businesses.

The Economic Environment

Freedom of ownership: allowing

ownership leads to a greater incentive to
work hard and create wealth.
Contract laws: rule of law creates laws
that make contract enforceable in court
which lowers the risks of starting a
business.
Elimination of corruption: decreases
the difficulty in getting permission to start
up in a country as well as taking away the
power of local officials to threaten
competitors and minimize competition.

Tradable currency: allows businesses

to enter the world market as other
countries recognize your currency and
have faith in your economy.
Minimum taxes and regulations:
Increased taxes or more regulations
lead to an increase in the cost of doing
business which lowers profits and the
return on investment (ROI).
Return on Investment: a return a
businessperson gets on the money
he/she invests in a firm.

Capitalism is founded on four

basic rights

1. The right to private property

2. The right to own a business and to

keep all of that businesss profits

3. The right to freedom of competition

4. The right to freedom of choice

The Technical Environment

Various tools and machines developed

throughout history have changed the
business environment tremendously.
Information technology: information and
how to manage has become an important
factor in becoming a world class competitor.
Databases: with the development of faster
and smaller computers that store more data
in a form easily accessed and managed by
the user, the information to make decisions is
readily available in real time.

Bar codes: these are the lines on products

that contain information regarding the
product. All this information is recorded at
the point of sale which allows businesses to
obtain the real time data regarding
customers, inventory movements, and sales.
The Internet: a powerful communications
medium that allows its user instant access
and allows businesses to operate without
borders from anywhere at anytime day or
night.

What is E-Commerce?

E-commerce: the buying and

selling of products and services over
the Internet.

Two types of e-commerce:

B2C: Business to customers
B2B: Business to business

Businesses like e-commerce

because of:

Low transaction costs

Large purchases/transactions
Integration of business processes
Flexibility
Large catalogs
Improved customer interactions

The Competitive Environment

Businesses must offer both high quality

goods and outstanding service at
competitive prices.
Customer service: customers are very
demanding, therefore to be successful
businesses must listen more closely to
customers to determine their wants and
needs; then adjust products, policies,
and practices to meets those demands.

Stakeholder recognition: businesses must

meet the needs of all stakeholders (those
people who stand to gain or lose by the
policies and activities of an organization).

Employee service: front line employees

have responsibility, freedom, training, and
equipment to respond quickly to customers
requests, needs, and complaints.

Concern for the natural environment:

businesses must cause minimal damage to
the environment.

. The Social Environment

Businesses must understand
demographics and the changes in this
area and how that affects their business
and profits.
Demography: statistical study of human
population to learn its size, density, and
other characteristics

 Diversity: changes in the make up of the

population.
Demographic changes:
increases/decreases in population or an
increase in the age of the population (baby
boomers) can provide many changes in
the market for goods and services.
Family changes: this involves the
increase in the number of 2 income
families as well as the increase in single
parent families.

The Global Environment

The global environment of business is so
important that it surrounds all business
environmental influences
International competition: today
manufacturers in countries such as China,
India, South Korea, and Mexico can produce
high-quality goods at low prices because their
workers are paid less money than US
workers and because theyve learned quality
concepts from Japanese, German, and US
producers.

 This competition has hurt many US industries

and they have had to increase their
productivity to remain competitive.
Productivity is the total output of goods and
services in a given period of time divided by
work hours (output per work hour). Better
technology, machinery, tools, education, and
training enable each worker to be more
productive and the US companies to remain
competitive.

 Free trade: these agreements between

nations have created new markets for
businesses to sell their goods and
services
High quality imperative: because of the
easy movement of goods and services
around the world, to maintain a businesss
competitiveness they must provide high
quality goods to consumers everywhere in
the global market.

Importance of Global Environment

As businesses expand to serve global
markets, they create new jobs in both the
manufacturing and service industries.
Global trade means global competition.
Businesses must be prepared to compete in
a rapidly changing environment.
Rapid changes create a need for continuous
learning: courses in computer technology,
telecommunications, language skills, and
other subjects to remain competitive.