“Business shapes the world. It is capable of changing society in almost any way you can imagine.”
- Dame Anita Roddick (1942 – 2007), Founder of The Body Shop

The first section of the IB Business Management syllabus looks at the nature of businesses in terms of why they exist, what they do, and how they do this. Businesses exist to satisfy the needs and wants of their customers by selling goods and services, usually in return for profit. They do this by combining human, physical, and financial resources to create goods and services to meet the needs and wants of individuals and societies.

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.

As management guru Peter Drucker (1909 - 2005) 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:

“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

Therefore, 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. Hence, these are sometimes referred to as physical resources.
• Labour – This refers to human effort used to produce goods and services. Hence, this is often referred to as human resources.
• Capital – This refers to non-natural (or manufactured) resources used in the production process. Examples include tools, machinery, motor vehicles, physical premises, and infrastructure. As these are all funded by money, capital resources are sometimes referred to as financial resources.
• 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

In order to provide goods and services, businesses carry out a number of functions. In large organizations, there is scope for these functions to be split into departments (or functional areas):

However, entrepreneurs of smaller businesses such as sole traders are likely to have to carry out these functions by themselves.

Human resources

Human resources (HR) is the function that handles all aspects relate to the workforce. It involves all aspects of business operations related to staff (personnel) within an organization. Examples include the: recruitment, induction, training, development, appraisal, promotion, remunerating (rewarding) and dismissal of staff.

The HR Department must also comply with legal aspects of the external business environment business environment. In particular, it must observe different labour laws in all the countries it operates in. Examples include laws about: minimum wages, working hours, gender equality, equal opportunities, and anti-discrimination.

Finance and accounts

The finance and accounts function of an organization refers to the responsibility for ensuring that the business has sufficient funds in order to conduct its daily operations. Essentially, the finance and accounts department is responsible for managing the organization’s money and maintaining accurate accounts (financial records) of the firm’s funds.

Marketing

Marketing is about identifying the needs and wants of customers so that the business can provide goods and services to meet these requirements and desires, usually in a profitable way.

Marketing activities include:

• Market research to discover the products that customers want, in an ever-changing and dynamic business environment

• Determining appropriate pricing methods to sell the products

• Promotion to inform and persuade customers about buying the products

• Distributing the products to customers efficiently.

Operations management (production)

Operations (also known as operations management or production) is the process of making goods and providing services from the available resources of a business to meet the needs and wants of its customers. It involves ensuring that goods and services meet production targets, deadlines and certain quality standards.

All four of these functions of a business are interdependent, i.e. depend and are reliant upon one another. For example, the marketing department cannot determine an appropriate marketing campaign without necessary discussions and approval from the finance and accounts department. Production of a certain good may need to change if recent market research shows changes in consumer habits, fashions and tastes. All business decisions have implications on the human resources department as people are needed to carry out the other three functions.

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.