BUSINESS BASICSBUSINESS BASICS

WHAT IS A BUSINESS?

• A business is defined as an entity that transform inputs into outputs which increases their value (wealth).

• A business incur cost to acquire inputs, then receive sales revenue or turnover from selling the outputs. Added value is the difference between revenue of outputs and cost of inputs.

• Creating wealth is what business is all about.

A Basic Business Model

Production FunctionProcess

Inputs Outputs

Other FunctionsMarketing LegalTechnical Quality AssuranceFinance Information Services

Personnel Purchasing

Sell Products

Sales Revenue

Added Value

Gross Profit

Operating Profit

Operating Cost

• The model shown is an illustration showing a manufacturing business.

• The production function shows a process of transforming inputs into outputs.

• The production function is supported by other functions (marketing & sales, technical, finance, etc)

• The products (outputs) are sold to generate income called sales revenue.

• The income derived will be used to pay for purchasing inputs, operate production, other supporting functions and costs.

• The surplus is the operating profit. But if it is a deficit, it is a loss!

Fundamental Equations

GROSS PROFIT = SALES REVENUE – COST OF SALES

Cost of sales = Input cost + Process cost

Operating profit = Gross – Operating cost

Added value = Sales revenue – Input cost

Where:

Product Value, Price and Cost

• A seller perceive product value as less than product price because they rather have the money than the product

• A purchaser perceive product value as greater than product price because they rather have the product than the money

Types of Business

• Business can be classified by product or services, size and type of ownership.

Classification by product or services

• Manufacturing business is a business that creates tangible/ physical products for example cars, computers, food, clothes, etc

• Service business is a business that creates non-tangible products that adds value to people. E.g.: Hairdresser, consultancy, education, health, banks, transportation, etc

Classification by Size• Interestingly, most large business

have grown from small business. This is described in four stages:

1. Tiny - A single business managed by one individual, trade limited range of products in restricted local areae.g.: Sundry shop in Kampung Seri, Labis.

2. Small – A single business managed by a team, sell single broad range of products over a wider geographical area.3. Medium – An central organization managing several small businesses as in (2) above.4. Large – A central organization managing several medium businesses as described in (3) above.

Classification by ownership• A business can belong to owner (s)

who are individuals, other business, institutions or governments.1. Sole proprietorship

- owned by one individual- no legal distinction between owner and business. - owner is responsible for all debts- run small retail and service business

2. Partnership- between 2 – 20- Bank : between 2- 10- Professional : 2 – 50- partners are jointly

responsible for any debts and share business profits (or losses)

- run small retail and service business

3. Limited liability companies - Sendirian Berhad which is owned between 2 – 50 shareholders- Berhad (traded in Bursa Malaysia) is a public owned company, therefore, has unlimited no. of shareholders- can enter into contracts, own and sell property, can sue and be sued- it is a legal separate entity and enjoy limited liability

Functions and Organization• Business functions is seen as systems

of transforming information inputs into higher value information outputs.

• Various functions in an organization share a common business purpose (goal), rather than concentrating on particular professional skills.

• E.g: Operation, Production, Accounting & Finance, Marketing & Sales, R & D, etc.

Marketing and sales• The marketing and sales functions

are usually part of an organization because both interact the business to its market-place, concern with products, customers, prices and costs

• Marketing can be defined as the task of capturing and keeping customers by ensuring that the right product is available at the right price with the right promotion in the right place at the right time.

• The sub-tasks of marketing are identified as follows:1. Market research – to locate , define and evaluate customer needs

2. Specify new products and enhance current products3. Define and enhance pricing strategies4. Define and implement adequate and

economic promotional strategies5. Define and implement adequate and

economic product distribution6. Define and implement adequate and

economic arrangements for after-sales customer support (e.g: warranties, maintenance, repair facilities, etc)

• While, Sales functions is primarily to achieve economically the planned orders of products from customers.

• Involves person-to-person selling activities and the people-related skills to ensure success in selling of the products.

Technical• The main role of technical function

is technical innovation. This involves product research & development, design, or product creation process.

• It is an important role mainly in technology-based companies.

• It is the intermediary between the marketing and production functions.

Production• Production function include the

product manufacturing operation and the manufacturing support services.

• The manufacturing operation is where inputs are converted into finished products.

• While, manufacturing support services are the principal supporting service activities which includes:

1. Facilities maintenance – aims to sustain the performance of manufacturing machineries. E.G.: inspection, services, preventive maintenance & repair.

2. Industrial engineering – focus on the efficiency of systems including human operators & machines to achieve best output at lowest cost. E.G.: study and specify working methods & procedures, measuring work and determine work standards

3. Production engineering – concern with manufacturing technology in all related areas. Production engineers perform capacity planning, introduce new manufacturing technologies & evaluate new machines. Also involves in developing & design new products, enhance existing products, solve problems relating to established products and concerns on the product cost.

4. Production planning & control – scheduling the individual sub-operations that make up to the manufacturing operation. Mainly to maximize the utilization of available resources at cost efficient level. However, their main challenge is delivery time, cost and quality.

5. Purchasing & Quality assurance – resides within the production function as supporting services to manufacturing, ensure activities are properly fitted into functions and report to the ‘top line management’.

Finance• Finance function relates to every

aspects of a business because all business activities have financial consequences. Its major tasks include:

1. Cash Control – A company’s activity to optimize management of cash. E.g: managing short-term credit, loans & currency exchange transactions

2. Accounting – The most important aspect and finance. It is about financial planning, control & reporting

(i) Bookkeeping – identifying, classifying & recording of

transactions(ii) Mgt Acctg – concerns on

financial planning, analysis & reporting to assist mgrs at all levels to prepare, monitor and control their budgets.

(iii) Financial Acctg – preparation of formal accounts & reports to

meet legal requirement to publish specified financial information (refer Companies Act 1965)

3. Investment Planning & Evaluation –investment activities including purchase of new manuftg machines, development of new product & acquisition of another business.

4. Tax responsibilities – a duty that govt impose on companies. E.g.: , corporate tax, employee income tax, sales tax

5. Payroll – task to calculate the remuneration/ salary of employees & paying it to them accordingly

Personnel (Human Resource)• Responsible for the human resource

within the company• Ensure resource matches required skills,

numbers & location• Ensure employment environment is most

conducive to allow people give their best• Major task of HR are:

1. resource planning

2. increasing ‘headcount’3. decreasing ‘headcount’4. define & implement

remuneration policies5. Provide facilities for training &

career development 6. Monitor operation of grievance & disciplinary procedures at all levels 7. Negotiating with employee

representative (e.g.: trade union)

Purchasing• Handle purchasing of materials from

external suppliers to ensure efficient purchasing in materials management.

• Involves overall planning & control of materials

Quality assurance• Activities aimed at achieving &

maintaining appropriate level of product quality at an economic cost

• This is important to ensure the product quality is maintained at highest level possible.

Information service• An important activity of a company

that always aim to deliver efficient information at all times (info on stocks, suppliers, sales, finance customers, competitors, etc)

• Also named as EDP dept, MIS, IT dept

Legal• Every activities in a company are

influenced by legal requirements/ constraints. The legal function assist the company to ensure the business activities are within proper direction and are accordingly to laws & regulation.

• E.g: Statutory financial reporting under Co Act 1965, tax responsibilities, trade legislations, legality of contracts, etc

Board of Directors (BOD)• A BOD usually comprise a

Chairman, a managing director, few other directors, and non-executive directors.

• The BOD are responsible to shareholders for its performance

• The BOD meets to discuss long-term policies, set & define objectives, assess performances, plan & initiate corrective actions, motivate mgrs & select mgrs

Company Organizations• There are many different ways of

organizing companies.

• Organization by Function, Organization by Product, Organization by Geography, A Large Company Organization

• Refer Figure 1-4

Board of Directors

Managing Director

Production/OperationDirector

IT/ MIS Director

Marketing Director

Finance Director

Human ResourceDirector

Figure 1: Organization by Function

Board of DirectorsManaging Director

Finance & Product Directors

Fire Security

IntruderAlarms

PhysicalSecurity

ComputerSecurity

Finance Function

SecuritySystems

Figure 2: Organization by Product

SecurityGuards

Board of DirectorsManaging Director

Finance & Regional Directors

GermanyFranceBritain

Other Countries

Finance Function

Other Europe

Figure 3: Organization by Geography

Asia

Global Power PLC

ProductionTechnicalMarketing

& Sales

QualityAssurance

Purchasing

Finance

Figure 4: A Large Company Organization

Personnel/HR

Information Services

British Power Ltd

Physical Power Division

Business Objectives

• The mgrs of a business aim to determine its future by:

1. setting business objectives2. directing its resources towards

achieving the objectives

• Drucker (1989) identified 8 critical performance areas where objectives should be set.1. market standing2. Innovation3. Productivity4. physical & finance resources5. profitability6. worker performance & attitudes7. manager performance & development8. public responsibility

Market Standing• Is an index of importance in

marketing product• Percentage of market share is the

normal measure & can only be measured if the total market size in a period is known

• Threats to maintaining good market standing include price war, legal constraint, complacency of products

Innovation• Is one path of a better market

standing & its objectives must align with the marketing objectives

• Innovation is aimed to enhance profit and also to improve efficiency of the whole business process

• The ultimate choice for all business operating in competitive market is to ‘innovate or die’

Productivity• Measures management

competency how efficient does a business use its resources (people, total assets & capital employed)

• Productivity is the only way to compare different businesses that operates in the same market/ industry

Physical & financial resources• Obtaining adequate financial

resources is the most critical objective to achieve other objectives

• There are 3 ways to obtain financial resources for investment:

1. retained profit2. borrowing3. issue/ sell more shares

Profitability• There are 2 productivity measures:

1. Return on asset (ROA)2. Return on equity (ROE)

• Profitability measure is mainly to describe business & management performance

• Profit is needed for the business to survive & generate more wealth

Worker performance & attitudes• The performance & attitudes of workers

must coincides/ commonly aims to achieve same goals/ objectives

• Employees at all level should contribute to the business & maintain performance quality

• The management should motivate & encourage lower–level employees to participate in the business. This will enhance employee job satisfaction, improve performance & increase sense of belonging in the company

Manager performance & development

• Managers are among the top management people. Management quality is a factor that distinguish one competitor from another

• Measuring mgr performance in a defined mgt job is not difficult but developing mgt talent & skill is not easy.

Public responsibility• A business is should not focus solely

on gaining profits but also has social & economic responsibility.

• E.g: Products that benefit the customer most, promote safe environment & no pollution, recycling, safe & healthy work–place, etc

• However, not all business voluntarily accept this responsibility that laws need to be enforced

About Management• Management competency is a

critical factor for determining the health of a business

• This section explains briefly the nature of management & identifies some personal traits/ qualities that managers require

Management TasksThere are four management tasks:

1. Planning – setting objectives & define and economic way to achieve those objectives

2. Organizing – mobilizing resources & people to implement the plans

3. Leading – motivating people to deliver their best performance & work toward achieving the set goals

4. Controlling – assessing deviations from plan & taking necessary corrective actions

• Personal qualities• This is not a technical skill but is

an inborn skill that is further developed over time within a person . Personal qualities include:

1. Creativity & analytic skills2. Selling & political abilities3. Communication skills4. Good judgement

4. Courage5. Mental & physical endurance6. Confidence, optimism, zest, competence & trust in people

A good manager is a manager who has both skills in ‘management technology’ & the right ‘personality’

The Management Hierarchy

TopManagers

MiddleManagers

First-LineManagers

President, CEO, VPMake long-term plans Establish policies Represent the company

Financial ControllerMarketing Mgr Production Mgr

Implement goalsMake decisionDirect First-line mgrs

Office mgrSupervisorForeman

Implement plansOversee workersAssist middle mgr