Lecture 1: What Is Business? PDF

LECTURE 1 WHAT IS BUSINESS? Niza Talukder LESSON PLAN A broad understanding of what constitutes a business. An outline of the key elements of a business model and how their effective development and implementation impact business performance. Discussion on the crucial r...

LECTURE 1 WHAT IS BUSINESS? Niza Talukder LESSON PLAN A broad understanding of what constitutes a business. An outline of the key elements of a business model and how their effective development and implementation impact business performance. Discussion on the crucial role played by the business owner or the "C-suite" management team. Insight into how businesses engage in planning. Introduction to the idea of visionary leadership. An overview of the connection between business strategy and business model development, emphasizing the significance of executing both successfully to meet a business's goals. Class activity on the key areas of a business model using example of Amazon. Class activity on understanding the difference between profit and profitability. WHAT IS BUSINESS? ‘Business’ is a broad term that is difficult to define and understand. There is no one-size-fits-all definition. Here is a broad-based explanation of what business is all about. A set of integrated actions aimed at  identifying the needs of a particular market,  and developing a solution to meet such needs  through the production of goods and services  that can be delivered to the marketplace at a profit. To run a business using an efficient and effective profit maximization approach, managers need to initiate and control the above actions by building a business model. Before diving into business models, we shall first talk about the underlying characteristics crucial in comprehending a business entity. Assessing these three characteristics jointly will lead to a macro-level understanding of a business entity. THE BIG PICTURE There are three fundamental characteristics that create the Big Picture, shaping how a business operates. The efficiency and effectiveness of a business entity can be assessed against these features: the commercial endeavours it undertakes, its human resource (employee) interaction model, and its organizational efficiency and structure. THE BIG PICTURE Commercial Endeavors refers to the core activities through which a business generates revenue and creates value for its customers. It encompasses the products or services offered, pricing strategies, marketing efforts, and sales channels. Whether it's entering new markets, launching innovative products, or refining existing offerings, commercial endeavors are central to a company's strategic direction and operational success.  For instance, let's consider a technology company like Apple.  Apple's commercial endeavors include designing and manufacturing innovative hardware products such as iPhones, iPads, and MacBooks, as well as developing software services like iCloud and the App Store.  Their commercial success relies on continuous innovation, brand loyalty, and effective marketing campaigns that emphasize product features and user experience. THE BIG PICTURE Employee Interaction refers to the value-creating skills that employees bring to the market place.  In other words, it is the dynamic exchange of knowledge, expertise, and capabilities among employees that directly contribute to the creation of value for customers and stakeholders.  It involves leveraging individual and collective skills to deliver products or services that meet or exceed customer expectations.  For example, in a software development company, employee interaction might involve software engineers collaborating with user experience designers, product managers, and quality assurance testers to develop user-friendly and functional software solutions.  Each employee contributes their unique expertise and insights, resulting in a product that addresses customer needs and adds value in the market place.  Ultimately, employee interaction serves as a catalyst for creativity, learning, and continuous improvement within the organization, driving innovation and competitive advantage in the marketplace. THE BIG PICTURE 3) Organization culture and decision-making strategy is a reflection of the framework of the business activities and decision-making ecosystem that exists within an organization.  Encompasses the values, beliefs, norms, and behaviors shared among employees, which shape the overall work environment and guide how work is performed and decisions are made.  Example: Netflix is renowned for its unique organizational culture, which emphasizes on freedom and responsibility.  The company's culture is reflected in its famous "Culture Deck," a document that outlines its core values and principles.  At Netflix, employees are empowered to make decisions autonomously and take ownership of their work. This culture of freedom encourages innovation and risk-taking, as employees are encouraged to experiment and learn from both successes and failures.  This approach has led to the development of groundbreaking content, technological advancements, and a highly successful streaming platform. BUSINESS MODELS Commercial endeavors Employee interaction Business system Business model Organizational efficiency and structure  This is a framework that a business uses to deliver valuable products or services to customers in a manner that will generate revenue sufficient to cover costs and also yield profit  Another way to think of a business model is to visualize an “ecosystem” comprising integrated elements, which interact and are codependent on each other.  There are two components: the company-centric side and the market-centric side BUSINESS MODELS The company-centric side, “the business system” which reflects the underlying mechanics as to how the business is structured.  Consist of five key areas. 1) Activities 2) Resources 3) Partners 4) Cost Structure 5) Portfolio of Products and Services The market-centric side exhibits how the business is connected to the market place (external factors)  Includes four key areas 1) Available Customer Segment 2) Positioning 3) Value Proposition Segment 4) Revenue Model Development BUSINESS MODELS  A business model allows you to capture the present picture of an organization, or it helps you design how you want a company to look like in the future. You can imagine a business model as a picture or a painting.  To develop a business model a company has to come up with a business strategy which is a way to get to a business model.  A business strategy is a complete plan of action that a business uses to achieve its goals in the market. It lists out the various possible situations a business is likely to find itself in and specifies the set of actions that it should take in each of the situations in order to achieve its goals in the market.  Thus, where a business model is the painting, a business strategy is the hand that draws that painting. CLASS DISCUSSION ON AMAZON Amazon, founded in 1994 by Jeff Bezos in his garage, has grown from an online bookstore into a global e-commerce and technology giant. The company offers a vast selection of products and services, including its popular Amazon Prime membership, which provides benefits like free shipping and streaming content. Amazon Web Services (AWS) has become a leader in cloud computing, providing scalable and reliable IT infrastructure to businesses worldwide. Through continuous innovation and customer-centric strategies, Amazon maintains its position as a dominant force in the digital marketplace. Class Activity Refer to the overview of Amazon’s business framework displayed in class. Create a table with two columns labelled "Company-Centric" and "Market-Centric." Identify the key areas from the information given and place them in the appropriate column.  DIFFERENTIATE BETWEEN THE CONCEPTS OF PROFIT AND PROFITABILITY  Profit is strictly the “bottom line” results that an organization has realized for a given period of time.  In simple terms: Profit = Total Revenue – Total Costs  Profitability, on the other hand, corresponds to the efficiency and effectiveness of an organization to use its assets and its capital to generate profits over a period of time.  It is expressed as a ratio or a percentage.  Profitability analysis is assessed over a period of time so that efficiency and effectiveness results can be compared on a period-over-period basis.  Profitability analysis focuses on comparisons among competitors within an industry to determine which organizations are the most effective in their utilization of resources. Competitors who are the most profitable over a period of time are generally the most attractive to investors for investment purposes. DIFFERENTIATE BETWEEN THE CONCEPTS OF PROFIT AND PROFITABILITY Profitability analysis takes into consideration such factors as:  return on sales (profit/sales),  return on assets (profit/assets),  return on the capital invested (profit/capital invested),  return on equity, and so on. You can check the formulas on the document Profitability and Other Ratios posted under Class 1 folder on Blackboard DIFFERENTIATE BETWEEN THE CONCEPTS OF PROFIT AND PROFITABILITY  Which company has the highest profitability? Company A Company B Company C Profit $70 million $25 million $7.5 million Sales $650 million $150 million $250 million Assets (total) $240 million $35 million $200 million Equity (total) $150 million $15 million $140 million DIFFERENTIATE BETWEEN THE CONCEPTS OF PROFIT AND PROFITABILITY Company A Company B Company C Profit $70 million $25 million $7.5 million Sales $650 million $150 million $250 million Assets (total) $240 million $35 million $200 million Equity (total) $150 million $15 million $140 million Return on sales 11% 17% 3% (profit/sales) Return on assets 29% 71% 4% (profit/assets) Return on equity 47% 167% 5.3% (profit/equity) EFFECTIVE VERSUS EFFICIENT  The words effective and efficient both mean "capable of producing a result," but there is an important difference.  Effective means "producing a result that is wanted".  Efficient means "capable of producing desired results without wasting materials, time, or energy (cheaper or faster)".  Imagine a company producing and selling handmade furniture  The company decides to launch a new line of eco-friendly furniture to tap into the growing market demand for sustainable products. Despite higher production costs, the product line becomes highly popular and significantly boosts the company's market share and revenue. This decision is effective because it successfully meets the company’s strategic goal of increasing market share and revenue.  How can the company improve efficiency? THE ROLE OF THE BUSINESS OWNER OR “C-SUITE” MANAGER The role of the business owner or top-level management team is to  Efficiently and effectively execute the business model the management team creates, and deploy the productive resources the organization possesses.  C-suite is a collective term for top executives.  3 C’s - Capability, Competency, Capacity  Managers must develop a strategy geared towards taking advantage of market opportunities and recognizing the required capabilities, competencies, and capacity the company must possess in order to successfully execute such a strategy.  Once strategic direction is determined, it is the role of the management team to develop and execute the business model to achieve the desired objectives. THE ROLE OF THE BUSINESS OWNER OR “C-SUITE” MANAGER The figure shows that the effectiveness of strategic development and tactical execution results in business growth and profitability. THE ROLE OF THE BUSINESS OWNER OR “C-SUITE” MANAGER The three fundamental objectives managers need to consider as they manage the ongoing evolution of a business entity are  Short-term Profit Necessary to pay bills and reinvest in the future.  Long-term Growth & Profitability New products and services need to be developed to ensure the organization remains healthy and continues to grow.  Social & Environmental Responsibility Customers want businesses to operate and act in a socially responsible manner. THINKING ACROSS MULTIPLE HORIZONS  Stakeholders - direct or indirect relationship with an organization  Managers are expected to place society, the organization, and its stakeholders ahead of personal gain when making decisions and interacting with the marketplace.  Overemphasis on short-term profits may result in decisions that are detrimental to long-term market opportunities and fall short of social responsibility expectations. BUSINESS PLANNING CYCLE The business planning cycle outlines the focus and methodology for setting the business model in motion. Ideally, the plan revolves around leveraging the competitive advantage which is a key component of the cycle. COMPETITIVE ADVANTAGE  Capabilities that enables a company to outperform its competitors.  Establishing a competitive advantage is essential to attracting customers and generating revenue/profit, which is then reinvested back into the company to grow.  This process of strategizing, executing on a competitive advantage, and reinvesting profits is the essence of the business cycle.  iPhone is a prime example of Apple’s competitive advantage in action.  What is Google’s competitive advantage?  What sets Lululemon apart from its competitors?  Class Activity THE CONCEPT OF VISIONARY LEADERSHIP  CEO of Hudson’s Bay: Helena Foulkes led efforts to revitalize the company’s retail operations and improve its digital and in-store customer experiences. Her strategic vision and leadership aimed at modernizing the brand and adapting to the evolving retail landscape. Foulkes is recognized for her ability to drive change and innovation within established companies, making her a respected figure in the business world.  CEO of the Royal Bank of Canada (RBC): Under David McKay’s leadership, RBC has focused on innovation, digital transformation, and sustainability, positioning itself as a leader in the financial sector. He played a significant role in RBC's acquisition of HSBC Canada. In November 2022, RBC announced that it would acquire HSBC Canada for CAD $13.5 billion, marking one of the largest deals in Canadian banking history. THE CONCEPT OF VISIONARY LEADERSHIP  Visionary leadership is the ability to inspire your workforce (talent) to pursue a shared goal beyond ordinary expectations.  It involves creating a concise vision for the organization's future trajectory, then crafting a workplace culture that motivates and empowers employees to align with this vision. This entails making the vision personally meaningful to employees and instilling a belief in the company's competency, capability and capacity to achieve it.  Visionary leaders understand that vision enables strategy, which provides the guidelines for the tactics and activities to be implemented within the business model.  Furthermore, they are able to communicate the key metrics to be used to measure the success of the organization as it pursues the identified vision. KEY ABILITIES OF VISIONARY LEADERS MANAGEMENT REFLECTION BUSINESS DECISION-MAKING LANDSCAPE  What is required to develop and manage a business? – Create a vision – Confirm the market size of customers – Confirm that market position is feasible – Confirm that the market position will stay stable – Confirm the availability of resources – Execute the strategy BUSINESS DECISION MAKING MODEL STRATEGY AND TACTICS  STRATEGY - The development of plans and decisions that will guide the direction of the firm and determine its long-term performance.  Strategically, managers need to understand where the market is headed and how their products and services will fit into the market and meet the customer needs.  TACTICS - The immediate term actions that a firm executes to meet its short-term objectives as set forth in the current planning cycle.  Tactically, they need to ensure that the right product reaches the right customer at the right place for the right price. SUMMARY  Businesses create profits while they meet the needs, wants, and desires of targeted customers.  Business is a commercial endeavour, guided by employee interaction and supported by organizational efficiency and structure.  A business model is designed to deliver desired goods and services to the marketplace.  Businesses seek profit using productive resources from the sale of goods and services and ensure long-term profitability and growth. SUMMARY  The new requirement of social and environmental responsibility is resulting in a significant emphasis on resource sustainability and environmental initiatives.  Visionary leaders create a shared vision and culture which inspires employees to embrace the vision.  The interrelationship between strategy and tactics is important, businesses not only have to properly develop a plan for attacking the marketplace, but also must be effective in the implementation of this plan. HOME WORK Go through Lecture 1 slides and Chapter 1 from the book. Practice ‘Question for Discussion’ on slide 12, page 32. Attempt ‘Question for Individual Action’ on slide 12, page 32.