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The role of businesses in combining resources to create goods & services

  • /
  • Old course (N23)/
  • Unit 1/
  • 1.1 Introduction to business management/
  • The role of businesses in combining resources to create goods & services
The role of businesses (AO2)

“There is only one valid definition of business purpose: to create a customer. It is the customer who determines what a business is. For it is the customer, and he alone, who through being willing to pay for a good or for a service, converts economic resources into wealth, things into goods. What the business thinks it produces is not of first importance - especially not to the future of the business and to its success. What the customer thinks he is buying, what he considers ‘value’, is decisive - it determines what a business is, what it produces and whether it will prosper.”
- Peter Drucker, The Practice of Management (1954), HarperCollins

The first section of the IB Business Management syllabus looks at the role of businesses in combining human, physical and financial resources to create goods and services (AO2). As Peter Drucker said, the purpose or nature of a business is to create a customer, i.e. to provide goods and/or services that meet the needs or desires of customers.

A business can be defined as a decision-making organization established to produce goods and/or provide services. Goods are physical products, e.g. food, clothes, furniture, cars and smartphones. Services are intangible products, e.g. haircuts, tourism, public transport, banking, insurance education, and healthcare.

Businesses exist to produce goods and services to satisfy the needs and wants of their customers (individuals, other businesses and/or governments), usually in return for a profit. There may be additional or alternative objectives, such as survival, increasing their market share, being the market leader, or being a socially responsible business.

To produce goods and services, businesses need to combine human, physical and financial resources in an effective way. Economists call these resources factors of production, which are comprised of:

  • Land – These are natural resources needed to produce goods and services. Examples include water, timber, sand, minerals, metal ores, plants and animals.
  • Labour – This refers to human effort used to produce goods and services.
  • Capital – This refers to non-natural (or man-made) resources used in the production process. Examples include tools, machinery, motor vehicles, physical premises, and infrastructure.
  • Entrepreneurship – This refers to the knowledge, skills and experiences of individuals who have the capability to manage the overall production process. Entrepreneurs have the ability and willingness to take risks in order to produce goods and provide services to customers, profitably.

Factors of production are needed to generate output

Businesses produce new goods and services for numerous reasons including new tastes and preferences of customers, changes in technology, and some goods and services becoming obsolete. To stay competitive businesses may also introduce new goods or services or adapt existing products to fill gaps in the market.

Customers are the people or other businesses that purchase goods and services. They are willing to pay to buy certain goods and services because the production process adds value to the final products. Adding value is the process of producing a particular good or service that is worth more than the cost of the resources used to produce it. For example, a good textbook is worth far more to customers (such as IB Diploma students) than the paper and ink used to publish it.

Businesses aim to combine the various human, physical and financial resources to create goods and services that add value to a good or service. This will help the organization to be competitive and, ultimately, to earn profit.

ATL Activity - Famous entrepreneurs posters

Students are to investigate an entrepreneur of their choice, and report back on the main achievements / accomplishments of the person.

This will help them to be more engaged in learning about the role of entrepreneurship in IB Business Management. It can also be useful as preparation for their CUEGIS essays. Students can present their findings in the form of an A3 poster to form part of your classroom display.

Some examples are shared here.

Exam Practice Question

(a)  Define the term adding value.    [2 marks]

(b)  Explain how businesses combine factors of production to create goods and services.    [4 marks]

Answers

(a)  Define the term adding value.    [2 marks]

Adding value (in the production process) is about creating value for customers. It can be measured by the difference between a product’s selling price and the material or direct costs of production.

Award 1 mark for a limited response.

Award 2 marks for a good response that shows a clear understanding of adding value, similar to the example above.

(b)  Explain how businesses combine factors of production to create goods and services.    [4 marks]

The four factors of production are:

  1. Land - natural resources
  2. Labour - human resources in the production process
  3. Capital - non-natural resources / manufactured resources
  4. Entrepreneurship - the business owner(s) who take financial risks in return (usually) for profit.

These resources are needed to create (or to produce) goods and services. They are collectively needed to produce any given good or service. For example, to produce a car, businesses will need:

  1. Land - such as the raw materials needed to make the steel, rubber and glass to create a car
  2. Labour - the employees who work at the car manufacturing plant
  3. Capital - such as mass production lines and robots used to make the cars
  4. Enterprise - such as the CEO and/or production director who oversees the whole operations of te cars being manufactured and delivered to customers.

Award 1 - 2 marks for an answer that shows some understanding of the demands of the question. There is some understanding of how businesses combine factors of production to generate production but the answer lacks sufficient depth.

Award 3 - 4 marks for an answer that shows a good understanding of the demands of the question. There is a detailed explanation of how businesses combine factors of production to generate production. The answer makes effective use of business management terminology.

Key terms

Adding value is the process of producing a particular good or service that is worth more than the cost of the resources used to produce it.

A business can be defined as a decision-making organization established to produce goods and/or provide services.

Consumers are the people who use goods and services. They are not necessarily the customers though.

Customers are the people or other businesses that purchase goods and services.

Factors of production is the collective term for the resources needed to produce goods and services. Businesses combine human, physical and financial resources in an effective way to create goods and services to meet the needs and wants of consumers.

Goods are physical products, e.g. food, clothes, furniture, cars and smartphones.

Services are intangible products, e.g. haircuts, tourism, public transport, banking, insurance education, and healthcare.

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