IB Business Management

By the end of this chapter, you should be able to:

 Explain the role of business in combining human, physical
and financial resources to create goods and services.
 Explain the main business functions and their roles (human
resources, finance and accounts, marketing and operations).
 Explain primary, secondary, tertiary and quaternary sectors.

 Outline the nature of business activity in each sector and the

impact of sectoral change on business activity.
 Explain the role of entrepreneurship (and entrepreneur) and
intrapreneurship (and intrapreneur) in overall business
activity.
 Identify reasons for starting up a business.
 Outline common steps in the process of starting up a
business.
 Identify problems that a new business may face.
 Outline the elements of a business plan.
 A business is an organization that makes decisions involved in
the process of using resources to meet the needs and wants of
consumers, with goods and services, which are demanded, in
order to generate a benefit.

 Demand is the amount of

goods and services that
buyers want to purchase in
the market.
 Some businesses focus on
one activity. Other
businesses engage in
multiple activities.
Satisfaction = Result - Expectation
 People’s basic needs are what they must have for survival – food
and drink, shelter (housing) and warmth (clothing).
 Wants are those things one would like to have or experience
and are not necessarily basic. Wants cover a wide range of
goods and services. The opportunities for business are endless
– from fashion to entertainment and from relaxation to travel.
 An organization satisfies the needs and wants of consumers
through goods and/or services.
 Goods are tangible, can be standardised and can separate the
purchase from the consumption; even when there are products
with a short life, there is a time interval between the purchase
and the consumption.
 Services on the other hand are
intangible, cannot be stored and
are heterogeneous. The provision
and the consumption happen
simultaneously.
 Consumer goods are the physical and tangible goods sold to
the general public.
 They include cars and washing machines, which are referred to
as durable consumer goods.
 Non-durable consumer goods include food, drinks and sweets
that can only be used once.
 Consumer services are the non-tangible products that are sold
to the general public and include hotel accommodation,
insurance services and train journeys.
 Capital goods are the physical goods that are used by industry
to aid in the production of other goods and services such as
machines and commercial vehicles.
 Consumers are the people who use a good or service.
 Customers are the buyers of a good or service.
 Buyers and users are not necessarily the same.
 A business identifies needs and wants of the consumers and
other businesses.
 Then purchases resources, that are inputs or factors of
production to make products (output).
 The business adds value (added value) to the inputs and is
rewarded for doing so either by gaining revenue (sales) for
satisfying what is wanted or by gaining recognition for
satisfying what is needed.
 Many activities or organizations that most people would not
consider a business, operate under many business principles.
 All organizations must have human, physical, and financial
resources.
 Many religious organizations, charities, and other types of
organizations such as clubs are in a certain sense a business.
 human
goods
physical
production
financial
services
enterprise

Resource inputs Processes to add value Product outputs

 The stocks of primary factors and/or commodities
used as inputs for the production of goods and
services.
 Human: the right quality and quantity of people.
 Physical: the right quality and quantity of materials,
machinery and land space.
 Financial: the right quantity of cash and other forms
of money.
 Enterprise: the skills required to combine the first
three factors of production through innovation and
management.
 Financial: Money from
Human: Cultivators savings or loans
and pickers

Physical: Citrus grove, sorter, Enterprise

warehouse, and trucks
 Human Physical Financial Enterprise

sellers flowers money from knowledge

Flower shop manager stand loan initiative
water organization

coffee maker shop money from vision

Coffee shop waiter coffee beans mortgage innovation
coffee grinder

baker establishment money from knowledge

Bakery cashier oven loan passion
bowl determination
 Capital intensive: uses a large proportion of land or
machinery relative to other inputs, especially labor.
 Labor-intensive: uses a large proportion of labor
relative to other inputs, especially in relation to
land or machinery.
 Finished goods
 Component parts
 Services
 Most businesses have four functional departments.
 These will be staffed by people with specific
qualifications, skills and experience in the work of
the functional areas.
 A small business entrepreneur may have to cover
all of these functions by themselves or outsource
these functions to specialised firms.
 Finance and accounts
 Marketing
 Human resource (HR) management
 Operations management or production
 Monitors the movement (flow) of funds into and
out of the business.
 Keeps and analyses accounts.
 Prepares forecasts or budgets.
 Ensures that invoicing of customers happens and
suppliers are paid.
 Provides financial information for other
departments and decision makers.
 Includes sales.
 Covers market research.
 Identifies what customers want.
 Looks at deciding the product’s price and the
type of promotion used.
 Consider how it is to be distributed and sold.
 Covers the recruitment, rewarding and
motivating, and training of staff throughout
the organization.
 Covers the releasing or redeployment of staff
when necessary.
 Represents the engines room of the business.
 It is the production of goods or the delivery of service.
 Ensures adequate resources are available.
 It looks at quality and stock control, methods of
production, and productive efficiency.
 In service industries,
ensures that the processes
for the delivery of the
service are well tested,
consistent and understood
by all employees.
 It should not be assumed that all business decisions
taken within these departments are separate and
unconnected to the other parts of the business.
 Effective strategic decision-making develops from the
functions working closely together.
 Good communication, cooperation and close
interrelationship between functions are essential before
major decisions are made.
For example, the decision of BMW to develop and launch its first
electric-powered sports car, the i8, required interaction between:
 Marketing - will consumers be prepared to buy this car and at what
price?
 Finance – do we have the capital needed to develop and produce it?

 HR management – do we need to recruit additional engineers before

this project can be turned into a market-ready car?
 Operations management – can we produce this product at a cost
which allows the marketing department to set a profitable price
level? Will quality of the vehicle be up to normal BMW standards?
To be a good organization you need to have
the best, well-motivated and effectively
managed people in all four areas of the
business.
To be a successful business the challenge is
making the four areas work as one.
Identify which business function is most likely to
undertake the following roles:
 Setting prices of new products.

 Recruiting a new production manager.

 Allocating resources to purchase capital equipment.

 Deciding on the appropriate levels of stocks for raw

materials.
 Finding out if consumers prefer one product design to
another.
 Determining the level and number of employees the
business needs for future operations.
 Primary sector
Goods
 Secondary sector
 Tertiary sector
Services
 Quaternary sector
 Covers business activity that is involved in the
extraction of raw materials, agriculture and fishing.
 Are closely monitored by governments due to the
scarce nature of the materials and food sources
and also the pollution effects of extraction
methods.
 For example, forestry
provides timber.
 Includes industries that create a finished or useable
product.
 These industries generally take the output of the
primary sector to manufacture finished goods or
components for other industries.
 Car production, for example,
involves the production of
parts that are needed for
final assembly.
 Covers the provision of services to businesses and
individual consumers.
 It includes the transportation and distribution of
goods, wholesale and retail services, and adviser
and consultancy-type of business.
 Includes organizations providing information
services through ICT (information and
communication technologies).
Primary production – Dairy Secondary production –
cattle in France Clothing factory in India

Tertiary production – The Quaternary production –

breathtaking Burj Al Arab The online shopping offered
hotel in Dubai by Amazon
 During your IB Business Management course it is a good idea
to read the business section of newspapers regularly.
 This will help you to apply the work you have done in class to
the world outside.
 What, for example, was the major business story in your
country this week?
 Sectors are typically linked in what is referred to as
the production chain or chain of production.
 A chain of production is the steps through the
different sectors that must be made to turn raw
materials into a consumer good that is marketed.
 As businesses grow, they often acquire other
businesses. Sometimes this is “horizontal” growth
or “vertical” growth.
 “Horizontal” integration refers to a business
acquiring or merging with another business
engaged in the same activity.
 “Vertical” integration refers to a business acquiring
other businesses involved in earlier or later stages
in the chain of production.
 If the activity of the business acquired is earlier in
the chain, this process is called backwards vertical
integration.
 When a business purchases another business or
enters another business, the process is called
forward vertical integration.
 backwards
vertical

horizontal integration horizontal

forwards
vertical
 Horizontal integration is usually intended to increase
market share and market power and to take advantage
of economies of scale.
 Vertical integration occurs to lower transaction costs,
ensure reliable supply, increase market power, and
eliminate or weaken the market power of other
businesses.
 Not always does vertical or horizontal integration lead
to greater profits, as it can introduce proportionally
greater complexity (costs) than savings.
Identify which sector the following businesses are in:
 An insurance company

 Shell (multinational energy provider)

 An auto electrician

 Eidos (computer games publisher)

 Nike (sportswear)
Be a thinker
Think of the following products and imagine their
production chain. What primary, secondary, tertiary,
and quaternary business are involved in the
production, distribution and marketing of these
products?
 An apple pie

 A cellphone

 A pizza
 The size of each sector of the economy may change
according to the growth and development of
individuals, businesses and countries.
 Economists usually measure the
size of each sector in terms of
the number of people employed
by the industries in that sector.
 The more advanced a sector is,
the more complex are the
needed social contexts for
businesses to thrive.
 Developments are not, however, linear.
 Technological innovation in one area and its related
workers can make other technologies and
occupations obsolete, such as typewriters and typists.
 Businesses that can anticipate or adapt to the changing
environment can do well, even in industries that are perceived
as “in decline”.
 Developed economies have moved away from the primary
sector.
 The process of shifting from one sector in an economy to a
different can produce strains on resources, such as human
resources.
 As an economy shifts to the secondary sector, legislation and
other protections against environmental damage are often
weak.
 Manufacturing firms in developing countries often do more
damage to the environment than manufacturing in developed
economies.
ENTREPRENEURSHIP
 Defined as the “action of
undertaking innovation, finance
and business skills in an effort to
transform innovation into
economic goods”.
ENTREPRENEUR
 Owner or manager of a business
enterprise who makes money
through risk and initiative.
 A person who is willing to help
launch a new venture or
enterprise and accept full
responsibility for the outcome.
Entrepreneurs have:
 had an idea for a new business

 invested some of their own savings and capital

 accepted the responsibility of managing the
business
 accepted the possible risks of failure
 A strong desire to succeed
 Hard-working and energetic
 Innovative
 Organization and leadership skills
 Ability to get on with and
motivate others
 Believe oneself
 Risk taker
“Inside each one of us there is an
entrepreneur. Sometimes it just takes a little
piece of opportunity to bring him or her to
the surface.”
Robert Kiyosaki
What do you need to become
a successful businessperson?

Information Attitude
 Vital to business activity as they provide the
impetus for innovative products and new business
opportunities.
 Entrepreneurs are typically self-employed.
 Intrapreneurs are employed by large organizations
and develop new products or services for the
benefit of their employers.
 Both must balance the risk of failure against the
likelihood of success for new business ventures.
 They both want to create a start-up, either for a
new product or for a whole new business.
 Market reading: observing customers and
competitors and then making small changes to
existing products.
 Need seeking: communicating with current and
potential customers to determine their needs.
 Technology driving: investing in research and
development and following opportunities offered by
technological capabilities.
Risk-takers
 According to Bloomberg, eight out of ten entrepreneurs who start
businesses fail within the first 18 months.
 Predicting the success of a business is an incredibly difficult thing to
do.
 People who start businesses and then see
them fail can lose large sums of money
and suffer what can be the significant
emotional pain associated with business
failure.

 To what extent do new entrepreneurs

have to be risk-takers?
Tomorrow’s big business is
today’s small business
The origins of Richard Branson’s Virgin empire
began when he was still at school with the launch
of a student magazine.
The magazine didn’t
make his fortune, but
out of this came his idea
to sell cheap records by
mail order through the
magazine. Virgin
Records was born and
the rest is history.
 Rewards
 Independence
 Necessity
 Challenge
 Interest
 Finding a gap
 Sharing an idea
 To what extent do intuition, imagination and reason
factor into the decision to set up a new business?
Business idea Product-driven

Market-driven
Anon
1 Organizing
the basics

2 Market
research

3 Business
plan

4 Legal
requirements

5 Raising the
finance

6 Testing the
market
 Sets out how the organization will meet its
business objectives.
 Involves stepping back from day-to-day operations
and asking where the business is heading and what
its priorities should be.
 Applies to a specific period, potentially over several
years, and is a detailed statement of the short-
term and long-term objectives of the business with
an analysis of the resources needed to achieve
these objectives.
 Should be regularly reviewed and, if necessary,
updated.
 Responsibility for delivering all the elements of the
business plan will be allocated to key individuals in
the organization, such as department heads.
 Success will be measured against clearly stated
performance targets set out in the plan.
 Is usually combined with details budgets to finance
the required activities.
 Support the launch of a new organization or
business idea
 Attract new funds from banks, grant providers, or
venture capitalists
 Support strategic planning
 Identify resource needs
 Provide a focus for development
 Work as a measure of business success
 A good business plan may be of significant use to
stakeholders.
 For potential investors, it will provide a basis for
assessment of risk by detailing how the business
will use a bank loan or investment.
 For employees, it will identify specific objectives
and goals and provide a focus for action and a
source of motivation.
 For suppliers, analysis of the business plan may
identify whether there are likely to be long-term
advantages from a commercial relationship with
the business.
 For the local community and pressure groups,
access to the business plan will provide the basis
for assessing the organization’s role in the
community.
 Businesses that have become successful will have
usually started off with a clear plan.
 This is often in the style of a document called the
“Business plan” which can be presented to potential
investors or other interested groups such as the
government or the bank manager.
 The business idea, aims and objectives
 Business organization
 HR
 Finance
 Marketing
 Operations
 Organization
 Market research
 Business plan
 Legal requirements
 Finance
 The market
 The location of the business is
inappropriate.
 The name does not register.
 The structure does not work.
 Suppliers are unreliable.
 The research was poor.
 The target market wasn’t appropriate.
 The test was too optimistic.
 Channels of communication were weak.
 The business plan did not convince.
 Goals were too vague or contradictory.
 Labor laws were not addressed.
 Registration was too difficult.
 Tax obligations were not addressed.
 The accounts were not kept properly – cash
flow, in particular, was a problem.
 Raising start-up capital was too difficult.
 Raising medium-term to long-term finance
was difficult.
 The launch failed.
 The pilot was inconclusive.
 Success was limited – the product failed to
inspire.
 New enterprises need to differentiate themselves from rivals,
many of whom will be well established.
 One way of achieving this is by innovating – providing either a
different type of product or service which is different from
those of competitors or which is delivered in a distinct way.
 Stimpson, P., Smith, A. (2015) Business Management for the
IB Diploma. Cambridge
 Lominé, L., Muchena, M., and Pierce, R. (2014) Business
Management. Oxford
 Clark, P. and Golden, P. (2009) Business and management
Course Companion
 Gutteridge, L. (2009) Business and management for the IB
Diploma
 Thompson, R. and Machin, D. (2003) AS Business Studies