Chapter3: What is business

The Big Picture

Business: to view it as a system of integrated actions designed to
ensure that an organization develops and grows a market for its goods
and/or services in a manner that creates organizational value (wealth)
on behalf of its stakeholders.
organizations must succeed in properly identifying solutions to needs
that the marketplace desires, and creating a mechanism for delivering
such solutions to the right customer, at the right place, at the right
time, for the right price. These integrated actions are categorized into
areas such as technology application, product engineering and design,
manufacturing and operations, marketing and sales, distribution, and
service. An efficient and effective operating platform can be assessed
against three fundamental characteristics: its commercial
endeavours, its employee interaction model, and its
organizational efficiency and structure
Commercial endeavours: refers to the markets the organization
serves, the products and services it offers, and the needs it professes
to meet in the marketplace. It reflects the results of understanding the
demand/supply relationships that exist in the marketplace and the
capacity and capability of each competitor within such a market to
deliver products/ services to its buyers. Understanding this
relationship, coupled with an understanding of the price/cost
requirements needed to produce goods and services, is what enables
the creation of a business system that delivers a profitable outcome to
the organization.
Employee interaction: refers to the value-creating skills that an
organizations employees bring to the marketplace. The success of
many businesses lies with the specialized skills that exist within its
labour force. The leveraging of these skills in the production of goods
and/or the delivery of services is what enables a business to create
value and enables transactions to occur that will allow the firm to make
a profit.
Organizational efficiency and structure: is a reflection of the
complexities of the business activities that circulate within an
organization. It is reflective of the development of the infrastructure
and its related culture, which an organization creates, and the
transaction processes that it develops to service the marketplace it
targets. These three characteristics, when assessed jointly, result in an

understanding of a business system whose objective is the design,

production, distribution, and communication of goods and services that
are sought after by the marketplace and valued by the customers
being targeted.

Business: can most easily be thought of as mission-focused activities

aimed at identifying the needs of a particular market, or markets, and
the development of a solution to such needs through the acquisition or
transformation of goods and services that can be delivered to the
marketplace at a profit.
Assets: represent the infrastructure and resource base of the
organization. This includes (but is not limited to) an organizations
land, buildings, process and infrastructure base (bricks and mortar, ecommerce, etc.), equipment and technol- ogy framework, raw
materials, and brand power.
Labour: refers to the human resource requirements of the business
Capital: refers to the money needed by an organization to support
asset-based expenditures, meet operating cash requirements, and
invest in the development of the new products or services that the
organization desires to introduce into the marketplace.
Managerial acumen: refers to the foresight, drive, knowledge, ability,
decision-making competency, and ingenuity of the organizations key
individualsits owners or top-level managers.
Key component- visionary leadership that a senior management team
or business owner provides to the organization. Visionary leadership
refers to the ability of managers to establish a direction for the
organization based on the needs identified in the marketplace and the
mission (reason for being) of the organization.
- Translated into a strategic plan designed to guide the organization to
fulfilling such needs while meeting its mission.
Business Model (System): is the operational platform or structure
that a business uses to generate revenue and profit.
- role of the business owner or management is to sense an
opportunity to create a product, and to deliver a service that is
felt to be unique, important, and of value (meaningful) to a
targeted customer or customers.

- Vision or market opportunity is realized via the efficient and effective

application of the other productive resources the organization
possesses (assets, labour, and capital)
By strategy, we are referring to the specific objectives an organization
hopes to achieve during the planning cycle. A 3C assessment means
analyzing the resources available to the organization and the
capabilities and competencies it possesses. This defines the capacity
of what the organization can and cannot do, which then enables the
management team to define how and to what extent it can capitalize
on its identified strategic opportunities in a manner that is superior to
the competition it competes against on a day-to-day basis.
Understanding its strategic opportunities and its capabilities,
competencies, and overall capacity, the business management team
develops a business plan via a process called the business planning
cycle (see Figure 1.3), which outlines its focus and methodology for
using its resources to create valuable products and services that will
create a unique position in the marketplace.2 In an ideal situation, this
unique position would be built around a competitive advantage. A
company has a competitive advantage when it can offer customers a
product or service that has more value to them than similar products
offered by other companies. If the business plan is competitive and
executed properly, and customers are attracted to the com- panys
product/service offering(s), the company generates money, or revenue,
from the sale of the product. Assuming that the plan is executed in an
efficient and effective manner, this revenue will exceed the expenses
associated with producing or delivering the product/service, thereby
generating a profit for the firm. This then enables the company to grow
through
competitive advantage: when it can offer customers a product or
service that has more value to them than similar products offered by
other companies.

- businesss grow by executing a series of planning cycles over time

- failure to meet the objectives of a planning cycle can be the result of
poor positioning, poor operational execution, or a combination of the
two.
-they direct the positioning of the company within the marketplace,
- orchestrate the creation of a business plan that will achieve the
objectives formulated for the planning period,
- ensure linkage with the vision and mission of the organization,
and develop the required operational tactics that will ensure the plan is
executed in a fashion that leads to growth and profitability.
Businesses need set objectives that will enable them to achieve a
defined position in the marketplace, and detail an implementation
strategy that will enable them to achieve this desired position.
objectives should be specific, measurable, actionable, and controllable
(SMAC) by the firms management team.
-

achievable within the given time frame that defines the planning
cycle. The manage- ment team must then allocate the resources
and leverage the companys capabilities in a man- ner that
ensures the tactics designed to achieve the objective actually
work and produce the desired results. Finally, the management
team needs to assess the success of the company in achieving
the desired objectives, and determine adjustments required in
order to further grow the company within upcoming planning
cycles. If an organization does not achieve its objectives as a
result of either poor positioning or poor execution of the
strategies initiated, then the company will most likely not
achieve the results anticipated and will need to redirect the
current organizational effort in order to get back on track and
achieve its revenue and profitability targets. A flattening, or
declining, of revenue or a reduction in overall profitability are key
identifiers as to whether a given plan is working. Figure 1.6
illustrates a failure to grow the company to the desired position
and meet its objectives during a planning cycle.

For-Profit Companies: are organizations whose overarching objective

is profitability and wealth creation on behalf of their shareholders and
not-for-profit organizations are those that are not in business to
make a profit, but rather seek to deliver services to the people, groups,
and communities they serve. Nevertheless, not- for-profits still need a
business plan, operating model, and business system that will enable
them to cover their operating costs and to employ strategies to fund
the ongoing delivery of meaningful services. Small businesses, as well,
need to recognize the need for a well-thought- out business plan in
order to determine just how, where, and when to compete.

The Fundamental Objectives of Business

First objective: businesses utilize resources with the idea of
transforming them into products and services.
-These products/services are then sold to other businesses or to
consumers to achieve a profit for the firm. Profit is necessary in the
immediate term for the business to pay its bills and reinvest in the
future.
-Making a profit on a monthly, quarterly, and annual basis is
fundamental to ensuring the immediate survival of the firm.
2nd Objective: As managers consider current and future business
direction, an equally important objective to short-term profit must be
considered
-

to achieve long-term growth and profitability.

demand for the products and services they currently offer will
change/disappear

businesses are constantly searching for new markets and new

opportunities to further grow the scope and focus of their
organizations.

immediate-term operating performance : based on the

products and services a business offers today

However new products and services will need to be developed to

ensure the organization remains healthy and continues to grow.
Ex apple ( growth via innovation)

Third objective: social and environmental responsibility.

-

consumers are encouraging and demanding that businesses

operate and act in a manner that demonstrates social
responsibility with respect to product development, resource
consumption, and operating processes.

- Green initiatives, truth in advertising, environmentally sustainable

resource practices, and other environmental and social codes of
conduct are challenging businesses to position themselves as good
corporate citizens in order to acquire and retain customers.
-

make decisions that conform o highest ethical standards

Put society, stakeholder , org, ethics and environmentally
sustainable business concepts and practices before personal gain
when making decisions and when interacting with the
marketplace.
Stakeholders :to individuals, groups, or organizations that have
a direct or indirect relation- ship with an organization, and that
can be impacted by its policies, actions, and decisions.
Stakeholders could include customers, suppliers, government,
employees, and so on.

- same fundamentals imply for the not for profit org event ho they
dont strive for profits, they do need to create operational surpluses
and/or acquire external capital funding commitments that enable
reinvestment in the organization to ensure it remains vibrant and
responsive to community needs
- need to assess services to remain meaningful to the customers
and expand services where there is demand and capability to do
so
- add new programs and services that meet the current
community need
- high social responsibility- meet societal needs that are not met
by the fro profit org

- delivery of socially required programs and services that for-profit

entities would
choose not to deliver due to an absence of a
profit opportunity.
- make decisions that enable all three of these responsibilities to be
considered equally
- balance both short and longterm profability to obtain market position
and sustainable operating performance.
- liquidity issues if focus too much on long term prof

successful business model (system): is one that enables a

company to meet the needs of the marketplace in a manner which is
superior to that of its competitors. Such a model could be built around
cost advantages, service advantages, sales and marketing advantages,
technological advantages, or human resource competency advantages
- most common way of comparing how well a specific company is
performing is by measuring its profitability over a period of time, and in
direct comparison with its industry competitors.
Profit: is the bottom line result an organization has realized for an
identified, immediate period of time, Total Revenue 2 Total Expenses 5
Profit.
Profitability: measures how well a company is using its resources
over a specific period of time to generate earnings relative to its
competitors
Probability analysis
- factors like as return on the capital invested, return on equity, the
financial leverage the orga- nization undertook to finance its assets
and operations, the level of pre-tax income it earned, and so on.
- assessed over a period of time so that efficiency and effectiveness
results
- compared on a period-over-period basis.

- enables a management team to determine whether the operation has

improved in its ef- fective utilization of its assets and capital
-focuses on comparisons among competitors within an industry to
determine which organizations are the most effective in their utilization
of resources
-Competitors who are the most profitable over a period of time are
generally the most attractive to investors for investment purposes. The
benefit of profitability analysis is that it levels the playing field between
competitors, recognizing that some may be significantly larger than
others.

Improving probability
-

companies in the marketplace are continually being challenged

to develop new product opportunities, meet evolving needs in
emerging markets, and stream- line operations, all in an effort to
improve immediate and longer-term profitability.

- challenge to improve profitability faces companies large and small

- Broaden its offerings and expand product line
Stockholders refers to any person, company, or organization that
owns at least one share of stock in a specific company.
Creating a Value proposition
Value proposition is a statement that summarizes whom a product or
service is geared toward and the benefits the purchaser will realize as
a result of using the product or service
- companies develop VP to communicate to customers on
how their product different from the competing products in the
market m the benefits they offer
- not driven by tangible or functional product benefits
- many of the reasons why products or services are purchased have
little to do with the actual product itself, but more with the perceived
benefits the product or service offers.
Value Proposition =Service Benefits + Product Benefits + Brand
Benefits + Cost Benefits + Emotional Benefits
Apple ipod>mp3

Product benefits,tangible product features (touch screen and other

interfaces, video capabilities) along with the Brand benefits (Apples
brand strength), the support services (such as iTunes), the overall ease
of use, and the peer affiliation of owning an iPod make it the preferred
choice.

The Impact of Price

-

price is also a key component in a potential purchasers

assessment of an organizations value proposition

Purchasers will assess the price/quality relationship of one

businesss value proposition and measure it against those of its
competitors.

important to offer the most attractive price/quality re-lationship

for the target market segment.

The price/quality relationship is the relationship between what

consumers are being asked to pay for a product and what they
expect to receive (benefits).

benefits may be both tangible (product features) and intangible

(emotional benefits, status, image).
- More unique, important, and value-driven your product is, the
greater the opportunity to communicate to the potential purchaser a
value proposition that has a positive price/quality relationship and that
is considered superior to those of your competitors.
- not always abt the lowest price but to understanding the desires of
the market and offering a product that responds to those needs.
-It is also about recognizing that segments within the market will have
different feelings as to how these needs can be met.

- hand bag example diff brands, some ppl go for higher level of quality
ex coach or Gucci allowing the influence of emotional and brand
benefit to make decision
- key is to recognize the qualitieand to match them against the
segment of the market that will best respond, and then deliver the
value proposition in a manner superior to the competition that is
seeking the same market position and set of customers as you are.

Five fundamental questions need to be assessed and will ultimately

assist the management team of a business in determining how and
where to compete in the marketplace. These questions are as follows:

What is my cost base for producing and/or delivering this

product/service to the market- place, and how does this compare to
that of my main competitor(s)?

Do I have a strong brand profile in the marketplace that I can

leverage as part of the benefit to the customer when purchasing this
product?

Are there emotional benefits that the customer will attach to this
product/service offering? If so, how can I use this to assist me in
strengthening my value proposition?

Are there unique service benefits I can incorporate into this value
proposition that will assist me in supporting potential and existing
customers?
Can I create a strong market segmentation to compete? Market
Segment is a portion of the market that is deemed to possess unique
characteristics businesses can target in order to generate a preference
for their products and/or services.
Ex Tim hortons: strives to provide excellent service, has achieved
sufficient size and scope to keep its costs of doing business in line with
the competition. A key to its value proposition has been its ability to
tap into the emotional affiliation of Canadians with what the company

stands for. It presents itself in its communications as being uniquely

Canadian, and has been successful in reinforcing Canadian values and
our way of life within its positioning message.
Not successful in US: to improve its success in the United States, it will
need to adjust its value proposition and communication emphasis until
its brand profile and emo- tional benefit messaging can be redirected
in a way that is attractive to the U.S. population. This may include
having to lower pricesand accept lower profits in

Understanding Your Cost Base

- key for managing a business is understanding the expenses that must
be considered when setting the price of a product or service offering
Asset-based expenditures are those expenditures incurred in
commencing a business operation or expanding its capacity. Ex,
purchase of equipment or building(s). Operating expenditures are
expenses incurred as a result of the normal business operations. ex,
salaries/wages of employees, the purchase of raw materials.
-costs must be recognized within their business plans and pricing
strategies to ensure the costs of the operation and other related
financial obligations are fully offset by the revenue generated by the
business and that acceptable levels of profit are realized.
Business Decision making landscape
- developing and managing a business requires its owners/managers
to:
create a vision of the opportunity in the marketplace

confirm that the market size of customers is large enough that, once
commercialized, the opportunity can enable the organization to make a
profit and sustain this profitability for the anticipated planning cycle
and beyond
confirm that a position within the market is feasible, which will enable
the company to compete in a manner that is superior to its direct
competition
confirm that the market situation will stay constant long enough for
the business plan to be developed and executed
confirm that the business has the resource base and the capability to
execute the strategy execute the strategy in an efficient and effective
manner, achieving the objectives set forth within the business plan
created

Strategy refers to the development of plans and decisions that will

guide the direction of the firm and determine its long-term
performance.
- vision of the company,opportunity in the marketplace, life expectancy
of product
Tactics refers to the immediate- term actions which a firm executes in
order to meet the short-term objectives set forth in the current
planning cycle.
-the expenditure of money for new equipment, the hiring of new staff
with specialized skills, or the manufacturing processes in developing a
product or service.
-ensure that the right product reaches the right customer at the right
time, and at the right place for the right price
Business is not about producing and distributing goods and services. It
is about delivering value to customers in a manner that meets their
wants and desires. The key is to ensure that the value you deliver to
the customers you target via the products and services you offer
exceeds that of your competitors. As managers, in conducting business

we need to avoid the temptation to become pre- dominantly focused

on short-term results. Managers need to make decisions in recognition
of both immediate needs and longer-term requirements in order to
protect and grow the general health of the organization.