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Chapter 3

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University of Toronto Mississauga
Gill Parveen

Ch.3 What Is Business? The Big Picture • An efficient and effective operating platform can be assessed against three fundamental characteristics: its commercial endeavours, its emoloyee interaction model, and its organizational efficiency and structure • Commercial endeavors 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 • Employee Interaction refers to the value-creating skills an organization’s employees bring to the marketplace. The success of many businesses lies with the specialized skills that exist within its labor force. • 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. What is Business? • Business refers to the 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 and transformation of resources into goods and services that can be delivered to the marketplace at a profit. • In order to have results in the most efficient and effective way to the marketplace, an organization will build its business model or system around four core fundamental resources areas –assets labor, capital and managerial acumen • Assets: Refers to the infrastructure and resources base of the organization. –Includes, an organization’s land buildings, process and infrastructure base (bricks and morater, e-commerce etc.) • Labour: Refers to the human resource requirements of the business, while capital: refers to the money needed by an organization to support assert-based expenditures, meet operating cash requirements, and invest in the development of new products to and/or services which the organization desires to introduce into the marketplace. • Managerial Acumen: Refers to the foresight, drive, knowledability, decision-making competency, and ingenuity of the organization’s key individuals –its owners or top-level managers. • 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 • Business Model System: Is the operational platform or structure that a business uses to generate revenue and profit • The role of the business owner or management team is to anticipate, recognize, or 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. • 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 what organizations can and cannot do which then enables the management team to define how and to what extent it can capitalize on its identified strategic oportunities in a manner that is superior to the competition it competes against • 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, which outlines its focus on methodology for using its resources to create valuable products and services that will create a unique position in the marketplace • A company has a competitive advantage when it can offer customers a product or servce that has more value to them than similar products offered by other companies. • Competitive Advantage: is an advantage an organization has over its competitors that enables it to generate more sales, achieve greater margins, achieve a lower cost base, or attract and retain more customers. • Businesses need to identify and set objectives that will enable them to achieve a defined position in the marketplace, and detail an implementation strategy that wil enable them to achieve this desired position. • For-profit companies need competitive business models, so do not- for-profit organizations, such as hospitals, school boards, YMCA’s, social service agencies, educational institutions and registered charities. • For-profit companies are organizations whose overarching objective is profitability and wealth creation on behalf of their shareholders and stakeholders. • 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. • Not for profit 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 The Fundamental Objectives of Business • Profit is necessary in the immediate term for the business to pay its bills and reinvest in the future • Set in motion the ability of the organization to achieve long-term grown and profitability • Business recognize the demand for the products and services they currently offer will change, and could, in fact, disappear over time. • Decision making process is really important because the social and environmental responsibility • On a global basis –consumers are encouraging –and, in some industries, demanding –that businesses operate and act in a manner that demonstrates social responsibility with respect to product development, resource consumption and operating processes. • Managers are expected to place society the organization and the organization’s stakeholders ahead of personal gain when making decisions and when interacting with the marketplace. • Stakeholders: refers to individuals, groups or organizations that have a direct or indirect relationship with an organization and that can be impacted by its policies, actions, and decision. Stakeholders could include customers, suppliers, government, employees and so on. • Fundamental Objectives of Business Managers o Short Term Profit o Long Term Growth and Profitability o Social and Environmental Responsibility The Business Model and Profitability • A 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 • Model could bebuilt around cost advantages, service advantages, sales and marketing advantages, technological advantages or human resource ompetency advantages The Difference between Profit and Profitability • Profit: is the “bottom line” result an organization has realized for an identified immediate period of time. In simple terms, Total Revenue – Total Expenses = Profit • Profitability: measures how well a company is using its resources over a specific period fo time to generate earnings relative to tis competitors. • Profitability analysis takes into consideration such factors as return on the capital invested, return on equity, the financial leverage the organization undertook to finance its assets and operations, the level of pre-tax income it earned, and so on. • Stockholders refers to any person, company, or organization that owns at least one share of stock in a specific company. Creating a Value Proposition • Business organizations need to design, produce, distribute, and communicate to the marketplace to products and services they offer. • The management team accomplishes this through the development of 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. • It also communicates to the purchaser how the product or service differs from competing products or services offered in the marketplace. • Companies develop value propositions for the purpose of communicating to customers how their products/services are different and the important benefits which they offer • Value Proposition = service benefits+product benefits+brand benefits+ cost benefits+emotional benefits • In general the more unique, important, and value-driven your product is, the greater the opportunity to communicate to the potential purchase: a value proposition which has a positive price/quality relationship, and which can be considered to be superior to those of your competitors • Value proposition is important because it’s not always about the lowest price, but about understanding the needs and desires of the marketplace and offering a product/service that responds to those needs. • In developing your value proposition, 5 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: o What is my cost base for producing and/or delivering this product/service to the marketplace, and how does this compare to that of my main competitors o 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 o 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? o Are there unique service benefits I can incorporate into this value proposition that will assist me in supporting potential and existing customers • 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 Understanding Your Cost Base • Expenses can take the form of either asset-based expenditures (capital asset expenditures) or operating expenses • Asset-based expenditures are those expenditures incurred in commencing a business operation or expanding its capacity. • Operating expenditures are expenses incurred as a result of the normal business operations. • Managers and business owners need to understand the costs they will incur in setting up, expanding and operating their businesses. These 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. • A key component of managing any business is in understanding the expenses that must be considered when setting the price of a product/service offering. The Business Decision Making Landscape • Being in business is about being able to understand the macro environment around you; the resources, capability and capacity that you possess; and the ability to communicate to the marketplace the uniqueness and importance of the products/services you offer. • Developing and managing business requires its owners/managers to: o Create a vision of the opportunity in the marketplace o 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 o 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 o Confirm that the market situation will stay constant long enough for the business plan to be developed and executed o Confirm that the business has the resource base and the capability to execute the strategy o 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 • Strategy focuses on the vision of the firm and the opportunity it believes exists in the marketplace, it also checks that the life expectancy of the product or service is long enough to ensure that the initial investment can be recovered and that the firm can make a profit • Strategy development assesses whether the firm has the competencies and resources to compete in this targeted market. • 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. • Tactics can be thought of as the actions items a firm undertakes to ensure
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