Commercial Operations - 1 Production and the Factors of Production PDF

# Commercial Operations ## 1 Production and the Factors of Production ### Learning Objectives * Understand the: * nature of production and the manufacture of goods * provision and delivery of services * four factors of production ### General Vocabulary * confectionery: sweets and cho...

# Commercial Operations ## 1 Production and the Factors of Production ### Learning Objectives * Understand the: * nature of production and the manufacture of goods * provision and delivery of services * four factors of production ### General Vocabulary * confectionery: sweets and chocolate ### Subject Vocabulary * mortgage: long-term loan secured with property * insurance: where a company provides a guarantee of compensation for a specified loss suffered by a business or individual in return for the payment of a specified premium ### Getting Started Most businesses exist to make a profit for their owners. They do this by selling products that aim to meet the needs of customers. Some commercial activity involves using a variety of resources such as people, machinery, fuel and natural resources to make physical goods such as computers, furniture, food products and clothes. However, in contrast, others use resources to provide services such as care for the elderly, restaurant services, hotel accommodation and transport. Look at the examples below. ### Case Study: Mars® Mars Incorporated is a large American company with a head office in McClean, Virginia. It is famous for its confectionery products such as Mars® Bars, Milky Ways, Snickers®, Twix®, Bounty® and Wrigley's® chewing gum. It makes these products using ingredients such as milk, cocoa, sugar, dried fruit and nuts; a range of workers and some complex machinery and equipment. In addition to confectionery, Mars makes pet food and other food products in over 400 factories in more than 80 different countries. In 2018, the corporation employed over 100 000 people and generated sales revenue of around US$35 billion. ### Case Study: Banco Santander® Banco Santander is a large banking corporation based in Spain. It offers financial services such as banking, loans, mortgages, insurance, savings products and credit cards. The bank employs over 200 000 people in branches and offices all over the world and has more than 144 million customers. Most of its business is carried out in Spain, Germany, Poland, Portugal, the United Kingdom, Brazil, Mexico, Chile, Argentina and the USA. In 2018 the bank made a profit of EUR7.81 billion (approximately US$8.98 billion). ## Production ### General Vocabulary * satisfy: to provide what is needed or wanted * component: one of the small parts that makes up a particular product ### Subject Vocabulary * production: a process which involves/converting resources into goods or services * services: where tasks are carried out, or facilities provided, for customers. An example of a task might be hairdressing. An example of a facility might be transport. * needs: basic requirements for human survival * wants: people's desire for goods and services * manufacturing: the use of resources such as raw materials, components, fuel, labour and machinery to make physical goods / mass produced goods that are manufactured in very large quantities - perhaps millions of units * consumers: people who buy goods and services for personal use * consumer goods: goods purchased by people to help satisfy their needs and/wants * intermediate goods: goods produced for businesses, such as components / * capital goods: goods used to produce other goods such as tools, equipment and machinery/ ### Production - Converting Resources to Goods or Services Production is a process that involves converting resources into goods or services. These goods and services help to satisfy the needs and wants of people. Needs are the things humans require for their survival such as food, water, shelter and clothing. Wants are the desires people have such as books, confectionery, cars, holidays and restaurants. Firms, such as Mars and Santander, take part in production with the aim of making a profit for their owners. ## Manufacturing - Turning Raw Materials into Physical Goods In some countries, such as China and South Korea, manufacturing is a very important production activity. Manufacturers make goods from raw materials and components. They are likely to use people, tools, equipment and machinery in the process. Some goods, including crisps, cars, electrical goods, breakfast cereals and soft drinks, are manufactured in huge factories that rely heavily on complex machinery for production. These goods are said to be mass produced. In contrast, other goods such as suits, jewellery, some furniture and boats may be handmade by skilled workers and produced on a much smaller scale. Many goods are produced for consumers. These are people like you, your friends and your family, who buy goods to satisfy their needs and wants. These goods may be called consumer goods. However, other manufacturers make intermediate goods. These are components that may be used by other manufacturers. Finally, some manufacturers make capital goods such as tools, machinery and equipment. These are goods that are used in the production of other goods or services. JCB is an example of a manufacturer of capital goods. It is a well-known manufacturer of excavators, forklift trucks, telescopic handlers, site dumpers and backhoe loaders, which are all machines used in the construction industry. ## The Provision and Delivery of Services In many developed countries, such as Germany, France, the USA, Canada, Japan and Sweden, most production involves the provision or delivery of services. The range of services provided is enormous and they are often divided into two categories. ### Direct Services/Personal Services Direct services are those that providers aim directly at consumers. They may also be called personal services. Direct services include: * financial services, such as banking, insurance, investment management and loans * telecommunications and IT services * personal services, such as hairdressing, dry cleaning, mobile pet grooming, personal trainers and wedding organisers * care services, such as day centres and accommodation for the elderly or people with special needs * education, such as schools and universities * public transport, such as rail, bus, taxi and air. ### Commercial services Commercial services are provided to support businesses with the distribution of products. This includes the distribution of raw materials, intermediate goods, finished goods and also services. Commercial services are often divided into two categories. These are trade and aids to trade. Trade involves the exchange of goods and services between different owners for money. Trade can take place in the domestic economy or overseas between businesses in different countries. Some examples of services provided in this branch of commerce include: * export agencies that provide services to businesses that want to sell their goods in other countries * import agencies that provide services to businesses that want to buy goods from overseas * retailing that may include the provision of shops and other outlets, such as the Internet, which allows people to buy a wide variety of products. **Aids to trade** are services provided by commercial enterprises to support businesses in the trading process. They are indirect services and some examples include: * communications systems, such as telephone lines and systems to support Internet use * transport, such as shipping to aid (help) the exporting and importing of goods * advertising to provide information about the nature and availability of goods and services. For example, advertisers might create and place adverts for businesses using appropriate advertising media, such as television, newspapers, magazines or online. Note that some businesses might be involved in the provision of both commercial services and direct services. For example, banks provide financial services for consumers and businesses. The role played by these different commercial services is also discussed in Chapters 2 and 3. ## The Factors of Production Production involves converting resources into goods or services. The resources used by companies such as Mars and Santander in the case studies on page 4 are often called the four factors of production. They are summarised in Figure 1.1. | | |---|---| | Land | | Labour | | Four factors of production | | Capital | | Enterprise | ### General Vocabulary * summarised: to provide a summary * premises: buildings used by a business * developer: somebody who buys land or property to improve it and sell it in order to make a profit ### Key Point Some land resources are non-renewable. This means that once they have been used they cannot be replaced. Examples include coal, oil, limestone and iron ore. Renewable land resources are those like fish, forests and water which are replaced by nature. These resources should not run out. However, there is a risk that if some of them are not protected they could disappear. ### Subject Vocabulary * workforce: all the employed people; all the people that work for a company * economy: the system that attempts to solve the basic economic problem, i.e. divide scarce resources among competing needs and wants * labour: the people used in production * working capital or circulating capital: resources used up in production such as raw materials and components * fixed capital: the stock of man-made resources, such as machines and tools, used to help make goods and services * entrepreneur: an individual who organises the other factors of production and risks their own money in a business venture ### Land Businesses will need a piece of land to locate their premises. For example, the developers of a large shopping mall may look for land near a town to locate the stores and other facilities However, land also includes natural resources such as coal, oil, iron ore, rainwater, forests, rivers and fertile soil. In the case study on page 4, the raw materials used in the manufacturing of chocolate, such as milk, sugar and cocoa beans, are examples of resources associated with this factor of production. ### Labour The workforce in the economy is the labour. Manual workers, skilled workers and managers are all part of a nation's workforce. The quality of individual workers will vary considerably. Each worker is unique and has a different set of abilities, characteristics, skills and knowledge. The workers mentioned in the case study on page 4 in Mars factories and the people employed by Banco Santander, such as bank tellers, are examples of labour. ### Capital - Not the Money Put into a Business Capital is often said to be an artificial resource because it is made by labour. There are two types of capital. * Working capital or circulating capital refers to stocks of raw materials and components that will be used up in production. It also includes stocks of finished goods that are waiting to be sold. * Fixed capital refers to the factories, offices, shops, machines, tools, equipment and furniture used in production. Fixed capital is used in production to convert working capital into goods and services. In the case study on page 4, the machinery used in the Mars factories and the furniture, fixtures and fittings and equipment that are used by Banco Santander are examples of this factor of production. ### Enterprise Entrepreneurs are responsible for setting up and running businesses. Without them, production would not take place. What is the role of entrepreneurs? * They come up with a business idea. This might involve the production of a completely new product. However, this is unusual. Most new businesses supply goods or services that are currently produced by others. * They are business owners. They usually provide some money to help set up a business and are responsible for its direction. They own all the resources bought by the business, but are also responsible for any debts that are accrued as a result of trading. * Entrepreneurs are risk-takers. For example, they risk their own money in the venture. If the business fails they may lose some or all of the money. However, if the business is successful they may make a lot of profit. When they start up they do not know what will happen - they are therefore taking a risk. * Entrepreneurs are responsible for organising resources. They have to buy and hire resources such as raw materials, tools, equipment and labour. Entrepreneurs need to use skills such as decision making, people management, time management and financial judgement to organise resources effectively. ## Activity 2: Celia Sanchez Celia Sanchez runs a small bakery in a suburb of Monterrey, Mexico. She learnt her baking skills working as a patisserie chef in a large hotel in Mexico City making high quality cakes and desserts. However, she did not like working split-shifts so she purchased some property and built a bakery in an old outhouse. She invested MXN700 000 of her own money and started by supplying cafés, hotels and small shops with a range of homemade cakes. After setting up a website, she started to get orders for customised birthday and wedding cakes. After three years, Celia's business was well-known in the area. Celia recruited three staff to help in the bakery. In the future, she hopes to open her own retail outlet - perhaps even a chain. 1. Suggest two examples of capital that Celia will use. 2. Celia Sanchez is an entrepreneur. What evidence is there in this case study to support this view? ## Activity 1: Jindal Steel and Power India-based Jindal Steel and Power is part of the giant US corporation, US$22 billion OP Jindal Group. The steel manufacturer has production facilities in the states of Chhattisgarh, Odisha and Jharkhand in India. Many of its factories rely heavily on the use of machinery and equipment to manufacture steel products. These include steel plate, steel rolls, coils, wire rods and railway lines. The steel railway lines are made in highly automated factories where liquid steel is poured into machinery that carries out three important processes - rolling, cooling and straightening. During the manufacturing process, the rails go through a thorough automated inspection process to maintain quality. Special equipment (such as ultrasound technology and lasers) helps to inspect the steel's inner quality, the rail surface quality and the track dimensions. The main advantage of this approach is that efficiency is improved in production. Consistency and quality are also guaranteed. 1. What is meant by the term manufacturing? 2. Jindal Steel makes a large quantity of intermediate goods. What does this mean? 3. What might be one advantage of using a greater quantity of machinery in production than labour? ## Activity 1: TravelLibro® In India the contribution made by the sale of services to the economy is growing. In 2016/17 the amount generated by services was INR7.37 trillion. This was 53.66 per cent of the total income for the country in that year. One service provider in the growing travel industry is TraveLibro. It is an online information service for travellers, designed to connect users with fellow travellers, bloggers, travel agents and other industry partners. Based in Mumbai, TraveLibro provides a research, planning and booking service for travellers. It supplies an app which is able to provide: * customised holiday plans for a wide range of different holiday experiences, such as family vacations and backpacking with friends * simple and efficient planning tools linked to the information sources and an option to make bookings * a social networking portal that enables users to capture, save, share and relive their travel experiences * an opportunity for advertisers to aim their products at very specific audiences * travel agents with a global marketplace to sell their products. Monish Shah began working the venture in 2013. He was joined by Malhar Gala in 2014, who contributed a substantial amount of money and became a co-founder of TraveLibro. This helped to match the huge amount that Monish had already invested. In 2014, the two entrepreneurs rented their first office and hired some talented people from the technology, travel, research and digital industries. In the first two years, the pair worked very hard to develop the business. TraveLibro launched its website in August 2015. By 2017 the website was receiving over 25 000 unique visitors per month and the app had signed up about 30 000 users since its launch in 2017. 1. What is meant by the term production? 2. Calculate the total income for India (in INR) from all types of production in 2016/17. 3. Describe what is meant by delivering a service. 4. Describe one factor of production used by TraveLibro. 5. Discuss the roles played by entrepreneurs such as Monish Shah and Malhar Gala.