Chapter 1: Foundations of Business

The Concepts of Business

A business is any organization that provides goods or services to satisfy customers’ needs and wants for a profit. A business must be organized to provide products by combining resources such as materials, human, financial and information resources. A business can also produce services which are intangible products such as dental services and financial advice. Some businesses like restaurants offer both products and services. Not-for-profit organizations often service local communities through educational and social means such as public schools, charity groups, and government agencies. Profits are earned when a firm gets larger revenues than expenses. If the expenses exceed revenues, then the firm experiences a loss. An entrepreneur is an individual who starts a business and risks losses for profits. Therefore, profits are the rewards entrepreneurs receive for producing goods and services that consumers want. Keep in mind that profits generated by businesses also benefit various stakeholders. Stakeholders are the groups of people that have a stake in or are affected by the that have a stake in or are affected by the decisions, activities and policies made by an organization. Major organizational stakeholders are owners, customers, employees, investors, suppliers and communities. Suppliers are businesses that supply material resources or services to other businesses. Businesses must create value-added products in order to attract and satisfy customers. Keep in mind that other firms are also trying to sell their products and services, often to the same groups of customers. The result is competition among those firms. Competition is the rivalry among businesses for the same resources, customers or markets. A successful business not only generates income from its sales for the owner(s), it also employs working people with wages and salaries and other potential benefits such as health care, training and retirement. Businesses produce most of the goods and services that we consume, generate income and spending in an economy. Therefore, businesses are one of the critical elements that contribute to our standard of living. Standard of living is the degree of wealth and material aspects available to a person, a family or groups of people in an economic system. Businesses support governments at the local and national levels by paying taxes. A government then spends money on building a country’s infrastructure such as transportation and communication systems, water and electric; improving public safety and national defense etc.

There are four types of business. Local business as the ones that serve a limited geographical area and rely on local consumers. Regional businesses would serve a larger geographical area like Southern Turkey or the Black Sea region. However, they do not extend their businesses to the whole country. National businesses serve the whole country and provide products or services to the majority of its people. Many successful regional firms expand their businesses nationally by having locations in most parts of a country with each store having a similar format, offering similar goods or services. International or multinational businesses operate, make, and/or sell goods or services in more than one country. These firms lead the movement toward more interaction, integration, and interdependent world economies through a process called globalization. The concept of globalization means the tendency of businesses and investment funds to move to other markets around the world, increasing international trade and the culture exchange.

Major functional areas in a business are human resources or HR, marketing and sales, production, manufacturing, or research and development and Finance and Accounting. The human resources function deals with HR planning, staffing, training, and developing employees for the whole company. The marketing function involves activities to create, communicate, deliver and exchange offerings that have value for customers. To provide goods and services that satisfy customers, marketing activities also include market research, product development and pricing. Production or manufacturing function for both goods and services involves making products or creating services for customers which include activities such as purchasing and logistics. Finance and accounting functions are there to ensure that a company has necessary funds to operate sufficiently and to collect and report financial information to various stakeholders. Lastly, the research and development function is necessary for firms to develop new and innovative products to meet customers’ needs or to exceed their expectations.

The External Environments of Business

Every business has limited resources; therefore, managers/owners must take into consideration economic conditions when making business decisions. Companies should be concerned with economic forces that impact the cost and the availability of products, services and labor which shape the actions of both the firms and their customers.

Technological forces from the practical applications of information and communication technologies and other by products of scientific research have led to innovations in goods and services. The term technology does not only mean physical equipment, machines and computers but also includes work methods, techniques and knowledge used in a business. Therefore, technology would also lead to the improvements of business processes or business practices. E-commerce is the use of networks to conduct trade between business-to-consumer (B2C), business-to-business (B2B), and consumer-to- consumer (C2C). The applications of tools and technology in business have resulted in increasing productivity which is a major factor in economic growth globally. Productivity is a measure of the amount of output generated given the amount of input.

The social environment refers to the trends and forces in a society under which all businesses operate. Its elements include demographic factors, customs and values, and social and economic movements of the society. Demographic characteristics such as age, gender, lifestyles and income distributions, along with the values and norms acceptable to a society, impact organizations from what kinds of products to offer consumer to the ways in which they conduct their businesses.

The legal environment affects businesses through all the laws and regulations imposed on them. This also includes political forces such as their policies, transparency and stability, and the relationship between government and business. Every firm operates within a particular market environment in which revenues are obtained. Important groups here include customers, employees, suppliers and competitors. Employees are very important in helping firms to become more effective. Empowerment in the context of business refers to giving an employee or a team the power, information, responsibility and accountability to do the job well.

The global environment has seen larger influences on companies around the world, even those that operate only domestically. Factors such as global economic and political conditions, international competition, a country’s exchange rate, and international trade alliances and agreements affect firms in various ways.

Understanding The Basics of Economics

Economics can be broadly defined as the study of how people use resources or the study of decision-making. Resources are required to produce goods and services that consumers need or want. Factors of production describes various resources used to produce goods and services. Businesses focus on five essential elements of the factors of production: labor, natural and physical resources, financial capital, entrepreneurship, and information resources. Businesses use natural resources such as land, oil, minerals, water, and trees. Physical resources include raw materials used by businesses such as equipment, machines, offices, factories, and computers. Labor is the human resource which contributes time and effort to produce goods and services. Financial capital refers to money or funds used to create and operate a business. Crowdfunding is to raise capital for a new business venture from a large number of individuals who often contribute small amounts of capital. Entrepreneurship is the process of starting one’s own business. An entrepreneur is a person who creates and operates a new business. Information resources play a major role in enabling a business to use knowledge and information effectively; to help make better decisions, to manage more efficiently, to gain specialized knowledge, and to understand the external environments.

Private enterprise under the free-market system requires the existence of four conditions:

• Private property - individuals have the right to own private property and resources that are used to create wealth.

• Freedom of choice – employees can work where they choose, consumers can buy what they want, and firms can hire people and produce what they choose.

• Profits – owners can keep the profits for themselves as rewards for taking risks.

• Fair competition – free and fair competition is the basis for a free-market system to operate efficiently.

Most countries rely on the mixed market system that combines characteristics of both planned and free-market economies. Allocation of resources and production decisions are made by both the market and some by the government in the mixed market system. One of the tools for economic reform to bring a country closer to free-market economy is privatization which is a process that is thought to bring more efficiency to a government-owned enterprise. Privatization is the transfer of ownership of government enterprises to the private sector.

In a market economy, consumers have choices about what to buy, from whom, and at what price. These decisions are determined primarily by two fundamental concepts of economics: supply and demand. The supply of a particular product refers to the quantity of the product available for purchase at various prices at any given time. Substitute products are those that customers perceive as alternative, similar or comparable such as tea and coffee or butter and margarine. The law of supply - the amount of a product supplied will increase as the price rises; and if the price drops then less of the product will be supplied. The demand for a particular product refers to the amount of the product customers will buy at various prices at a given time. The law of demand states that customers will demand more of a product as the price drops; and if the price increases then less will be demanded. The market price (equilibrium price) at which the quantity supplied is equal to the quantity demanded. A surplus is when quantity supplied is larger than quantity demanded. A shortage is when quantity demanded is larger than quantity supplied. The market price reflects the profit-maximizing price where there is no shortage or surplus. Determinants of the supply and demand are shown on Table 1.7 at page 17.

Free-market systems with the existence of private enterprises must rely on various types of competition which are also essential to the understanding of the behavior of the overall market economy. Pure competition exists when no single supplier is large enough to influence prices. Therefore, prices are largely determined by supply and demand conditions. Most of the competitions that exist today in free-market economies fall in this category where firms have unrestricted freedom of entry. Monopolistic competition exists when there are many buyers and suppliers and the products are similar although buyers perceive them as different. An industry where only a few suppliers exist, each with a large share of the market, is called an oligopoly market. Typically, these firms are fairly large, and often require a high investment of financial capital to enter the market. A monopoly exists when a supplier of goods or services has control of all (or nearly all) of its market.

We can use various statistical economic indicators to measure and monitor economic activity and performance. Decision makers wants to know if economy expanding or contracting. The business cycle refers to short term fluctuations in the general economic activities. Gross Domestic Product or GDP refers to the total value of a country’s overall economic output it produces during a given time period through its use of domestic factors of production. GDP per capita is GDP divided by total population. Standard of living is the value of all goods and services produced in an economic system that people can purchase, reflecting the level of material wealth and comfort of its citizens. Nominal GDP - GDP is stated in today’s currency value and at current prices. Real GDP - GDP adjusted for price changes. Real economic growth rate is expressed as a percentage showing the rate of change for a country’s real GDP from one year to the next. Recession is a significant period of weakening in economic activity that spreads across the economy in which real GDP declines. Inflation occurs when there is a widespread price increases throughout an economy. The consumer price index or CPI is used to measure the weighted average of prices of a basket of typical consumer Consumer Price Index (CPI) is used to measure the weighted average of prices of a basket of typical consumer goods and services purchased by households. Unemployment occurs when a person seeking employment is unable to find work in an economic system. There are various categories of unemployment:

• Frictional unemployment results when a person is in-between jobs, careers and locations.

• Cyclical unemployment occurs due to the business cycle.

• Structural unemployment occurs when people lose their jobs when an industry experiences structural changes such that employees’ skills are outdated.

• Seasonal unemployment occurs when workers get laid off during the off or low- season.

In every type of economic system, governments have various roles in managing the economies. A government manages its collection and spending of its revenues using fiscal policies. Major sources of revenues come from taxation including income taxes earned by businesses and individuals, property taxes and sales taxes. Governments policies such as spending on the goods and services, tax cuts or tax increases, and distributions of various payments are examples of fiscal policies. Monetary policies involve a government’s control of the nation’s money supply. By monetary policies government tries to stabilize the economy.

Small Business, Entrepreneurship, And Business Ownership

Generally, a small business is independently owned and operated and not dominant in its field of operation. We can measure the size according to the number of employees or the monetary value of a business such as its balance sheet total. Business size standard varies widely according to the industry and geography. The importance of small businesses can be summarized below. Job market; Small businesses are the major source of new jobs. Innovation; Small business flexibility also tends to favor innovations in terms of new products or introducing new business processes or methods. Contributions to other businesses; Small businesses provide goods and services to other small and large companies. People who start, organize, and operate a business and assume risks are called entrepreneurs. Most successful entrepreneurs share certain personal characteristics such as being innovative and creative. Entrepreneurs are very important to the market economies. They start new businesses, accept the risks, create jobs, and contribute to innovation. Dynamic economies are seen as those with many successful entrepreneurs, working in a supporting business environment that encourages and motivates entrepreneurs’ activities. To increase the chance for success, entrepreneurs should come up with a comprehensive business plan which defines the vision, the strategy and the implementation for the new business.

Entrepreneurs must decide on which forms of ownership is best for their companies and their goals. There are several factors to consider including:

Partnerships

• A partnership is a non-corporate business that is owned by two or more people.

• A general partnership (a collective company) means that the partners can invest equal or unequal sums of money but are equally liable for the debts and obligations incurred by the firm’s operations.

• A sole proprietorship or sole trader is a business owned by one person, therefore is suitable for a small business.

• A commandite company is equivalent to the limited partnership in which the partners can be active (called general partner) or dormant (called silent partner).

• Active partners manage the firm and have unlimited liability.

• Silent partners have no role in the management of the firm but have limited liability

The Turkish Commercial Code (TCC) states that corporate forms may be established under Joint Stock Company (JSC), Limited Liability Company (LLC) and Cooperative Company.

• A joint stock company (JSC) in Turkey (referred to as A.Ş.) is equivalent to a public limited liability company.

• A corporation that is privately held and whose shares or stocks are not available for sale to the public, is called a closed or private corporation.

• A public corporation is a corporation whose ownership (shares or stocks) is dispersed and available for sale to the public.

• A limited liability company (LLC) in Turkey (referred to as LTD) is a company formed by two or more real persons or legal entities

Alternatives in Business Ownership

• A cooperative form of business allows individuals, companies, municipalities and other associations to operate commercial activities as a legal entity.

• A strategic alliance is an agreement between two or more companies to pursue common goals such as project development of new products, while still remaining independent organizations.

• A joint venture is a form of strategic alliance where the ownership of a new venture is shared among the partner firms.

• A merger means a combination of two corporations to form a new company.

• An acquisition occurs when one firm completely buys another outright.

Business Ethics and Corporate Social Responsibility

Business or corporate ethics examines moral or ethical issues in a business environment such as ethical or unethical behaviors by managers and employees in the workplace. Ethics is a system of moral principles (what is right and wrong) that governs a person’s behavior. Business or corporate ethics involve ethical or unethical behaviors by employees in a business environment. Managerial ethics involve managers’ principles or standards of behavior in an organization. A situation where an employee’s personal interest is at the cost of others in the company would result in a conflict of interest. A code of ethics is a formal document that companies use to guide employees to conduct business fairly, honestly and with integrity.

Corporate Social Responsibility

Corporate social responsibility (CSR) is the concerns and obligations businesses have for the welfare of their stakeholders and the larger society. A movement by individuals, groups, and governments to put pressure on businesses to help protect consumer rights and interests is called consumerism. An important issue for consumers concerns unfair pricing of goods or services such as price fixing. Price fixing or collusion is an agreement among competitors in the same industry to increase or decrease prices to interfere with competition. The basis for CSR toward employees concerns human resources activities such as recruiting, hiring, training, promoting and compensating. A company has obligations to fairly reward employees for their hard work, to have a chance for promotion while being treated with respect. Governments should take an active role in preventing unjust business practices and in supporting employees. The environment and environmental protection have become major issues not only for governments but also for businesses around the world as well. Pollution is the process of injecting harmful substances into the environment. Recycling is the process of converting waste materials into new and useful materials and objects. Whistleblower refers to an employee who reports information or activity that is illegal or unethical within the company. Business managers are responsible to investors and stockholders by providing them fair return on their investments. Insider trading involves the use of private or special company information for financial gains.

Traditionally, companies often view social responsibility as philanthropic activities involve giving money (to causes like education, charitable, and humanitarian), time (such as employee community service projects), and goods and services donations by businesses. Although businesses may not receive direct benefits for philanthropy, many see it as a good thing to do as all firms are part of the community/society.

Many businesses large and small, should consider socially responsible actions and behavior not only because they are the right things to do. Potential advantages to firms can be seen in several areas:

• Create new business or market opportunities

• Increase a company’s social standing, social capital, brand reputation and brand awareness

• Improve a company’s environmental impact and operational efficiency

• Increase employees’ motivation

• Reduce operating costs

• Protect important resources that a company depends on