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MANAGEMENT TOOLS & PRINCIPLES,
,PART 1: SETTING THE STAGE - The Business of Business
Chapter 1: Developing a Business Mindset
Understanding what Businesses do
Business - is any profit-seeking organization that provides goods and services designed to
satisfy customers’ needs.
Adding value: The Business of Business
Businesses are a system for satisfying customers by transforming lower-value inputs into
higher-value outputs
At every stage, a company adds value to create the
product in a way that makes it appealing to the next
customer in the chain.
Each company in this chain has made certain choices
about what it will do to generate revenue. The result
of these decisions is a company’s business model,
which also indicates how the company is going to
realize profit.
Revenue - Money a company brings in through the
sale of goods and services.
Business model - A concise description of how a
business intends to generate revenue.
Profit - Money left over after all the costs involved in
doing business have been deducted from revenue.
Businesses add value by transforming lower-value inputs to higher-value outputs. In other
words, they make goods and services more attractive from the buyer’s perspective, whether it’s
creating products that are more useful or simply making them more convenient to purchase.
Competing to attract and Satisfy customers
Competition gives customers a wider range of options, and it tends to increase quality, improve
customer service, and lower prices.
In a free market economy companies usually have a lot of flexibility in deciding which customers
they want to focus on and how they want to compete. They may decide to compete on price,
quality, uniqueness, specifically targeted audience, etc, which all require different cost,
marketing and managerial priorities.
Each company seeks a competitive advantage - some aspect of a product or company that
makes it more appealing to target customers.
Accepting Risks in the Pursuit of Rewards
Every producer along the supply chain must accept some level of risk in order to conduct its
business and in order to receive the future rewards. Businesses take risks in anticipation of
future rewards. This linking of risk and reward is critical for two reasons
1. Without the promise of rewards, businesses would have no incentive to take on the risk
, = little would be done in the economy
2. Risk associated with business decisions needs to “stay attached to those decisions o
encourage smart and responsible decision making
If individuals and companies believe they can pursue rewards without facing the risks that
should be attached to those pursuits, they are more likely to engage in irresponsible and even
unethical behavior = moral hazard
Moral hazard occurs when the company thinks they will not face the consequences. Moral
Hazard is not when someone takes a risk and then an external thing changes causing them to
lose. If a government bails a company out they create moral hazard
Identifying Major Types of businesses
The driving forces behind most businesses are the prospects of earning profits and building
assets: anything of meaningful value (patents, brand names, real estate, stocks, etc).
In contrast, not-for-profit organizations → prgs that provide g/s without a profit motive
(nonprofit organizations). However, they must operate efficiently and effectively to achieve their
goals and successful nonprofits apply many of the business-management principles.
Business can be classified into two broad categories
1. Goods-producing businesses: Companies that create value by making “things,” most
of which are tangible (digital products such as software are a notable exception).
2. Service businesses: Companies that create value by performing activities that deliver
some benefit to customers.
Goods-producing businesses require large amounts of money, equipment, land, and other
resources to get started and to operate, goods-producing hence are also called
capital-intensive businesses and such industries also have high barriers to entry - Any
resource or capability a company must have before it can start competing in a given market.
Service businesses tend to be labor intensive → they rely more on human resources than on
buildings, machinery and equipment to prosper.
Making the Leap from Buyer to Seller
Seeing Business from the Inside out
It is important for business people to assume a business professional perspective on the market
and business instead of the default consumer perspective. As a consumer you learn a lot about
the market already that leads you to ask daily questions but as a business person you have to
look from the other side and ask the other questions
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