The Role of Business and Business Functions
- Purpose of business activity
- The role of business
- The role of business for society and the economy
- Opportunity cost in business
- Specialization in business
- Key business functions and their roles
Purpose of business activity
Business activity is the main economic activity. It may involve:
- Extracting natural resources and producing raw materials
- Process raw materials into semi-finished goods or finished goods
- Providing services such as transportation, finance, and trade
Businesses aim to make a profit. So, first, they identify our needs and wants. Then, they produce goods or services and sell them at a higher price than it costs to make them.
Businesses have to compete with each other for their activities. So, they don’t just try to give us the highest satisfaction through their products. But they also have to do better than the competition. Thus, consumers continue to buy their products rather than competitors’ products. If successful, the money continues to flow to them.
Some organizations may not operate for non-financial reasons. Instead, they generate revenue but are reinvested into the organization and for social impact.
The role of business
Business plays a role in uniting resources to create goods and services to satisfy needs and wants. They do this by processing inputs into outputs.
- Inputs represent the resources used by the business in processes. Examples are raw materials and labor.
- Process means the way or stages to convert input into output. It may be capital-intensive or labor-intensive.
- Output is the final result, which can be goods or services. Goods can be intermediate goods or final goods.
Other names for these inputs are resources, economic resources, or factors of production. They consist of four, namely:
Land has a broad meaning, not only agricultural land. It also includes natural resources as raw materials for making products such as coal, petroleum, and metallic minerals.
Labor includes the physical and mental effort by workers to be used to produce products or provide services, including their knowledge and skills. Their quality increases through training, education, and experience.
Capital refers to man-made tools for producing products or providing services. Examples are machinery, delivery trucks, and production equipment.
Money and financial capital fall into this category. Financial capital allows businesses to finance operations and investments. For example, a company uses internal and external cash (from issuing stock and debt securities to the public) to purchase production machinery.
But remember: in economics, financial capital is excluded. In other words, capital includes only physical capital. The reasons are clear. We cannot use financial capital directly in the production process. For example, we cannot use the money to process raw materials. Financial capital only helps businesses to buy physical capital.
Entrepreneurship refers to an individual’s efforts to start a business. Entrepreneurs take risks to establish, invest and run businesses. They pool the other three resources and use them to produce goods or provide services. Hopefully, they will make a profit. In addition, they also contribute to innovation by developing new ways of doing things and seeking new opportunities to open and operate businesses.
Creating goods and services
Business creates products. They sell it to consumers to make a profit.
Products are divided into two categories:
Goods represent tangible products. We can see or touch them. They can also be stored for us to use at a later date. Examples are clothing, food, canned drinks, smartphones, and laptops.
Services represent intangible products. They have no physical substance. Thus, we cannot see or touch them. Instead, we can only feel the benefits. What public transport and haircuts provide are examples.
The business produces the service at the same time it provides it to the customer. In other words, services are produced and consumed at the same time.
Satisfying needs and wants
Businesses produce goods and provide services to satisfy needs and wants. Customer satisfaction is vital because it allows customers to continue buying and be reluctant to switch to competitors’ products, enabling them to continue making money.
What are needs and wants?
Needs represent something we fulfill because they are essential to our lives. They are vital for our survival. Clothing and shelter are examples. In fact, without them, we might die. Food and drink are good examples.
Wants are our desire to have something, even though it is not essential for survival. Our wants are limitless because once we fulfill them, we want more. For example, a luxury car may be a desire for a low-income family. However, when they managed to increase their wealth and social status, they could afford it. And it is no longer a wish. And when they have satisfied their desire to own a luxury car, they want something else, such as a private jet or a luxury home.
Businesses add value to products at every production process. The added value makes the output have a higher value than the cost. Thus, customers are willing to pay more once the value is added. For example, bauxite becomes more expensive when processed into aluminum plates, which, in turn, is worth more when used in car or airplane bodies. This is what we know as value creation or value addition.
- Value added is the difference between the selling price of the product and the price of the inputs used to make it.
How do businesses add value to their products and services?
- Adding new features, for example, adding a high-resolution camera on a smartphone
- Providing customized services, for example, engaging customers to design the products they buy
- Offering convenience, for instance, offering a free delivery service
- Creating a brand to influence perception and increase status
- Advertising to build strong brand loyalty
What are the business benefits if they add value?
- Higher selling price and profit
- Differentiating products from competitors
- Creating a perception of high quality
- Encouraging customers to be reluctant to switch to competitors’ products
- Saving on advertising and promotion costs
The role of business for society and the economy
In addition to creating goods and services and satisfying needs and wants, business plays a vital role in society and the economy, including:
- Providing jobs
- Creating income by recruiting workers
- Paying taxes, either by the owner or the business
- Growing the economy through increased output
- Bringing foreign exchange when selling products abroad
- Reducing poverty rates through jobs and income creation
- Improving living standards through innovation and providing more goods and services and cheaper
Opportunity cost in business
Opportunity cost represents the next best alternative businesses give up when choosing something. For example, you are faced with two alternatives for factory locations. You face opportunity costs for locations you don’t choose.
In another example, you have to choose between hiring more workers and adding machines to increase production. If you add machines, you face an opportunity cost, which is the potential output you get if you hire more workers.
Likewise, if one decides to produce good A instead of good B, the potential revenue from selling good B is an opportunity cost.
Specialization in business
Resources are limited. It requires businesses to use them most efficiently. They designed production methods as efficiently as possible. Thus, they can produce cheaper and more output.
Businesses divide their production process into specific and distinct but interrelated tasks. Each task is done by one person or by one machine. This is what we know as the division of labor. We call it specialization when workers or machines concentrate only on specific tasks.
Here are the advantages and disadvantages of specialization
- Proficient in doing the task repeating the same job
- Less time wasted on switching jobs by workers
- Increase efficiency and output
- Allows for higher economies of scale
- Boredom from doing the same task every day
- Moral decline due to boredom
- Interruption in the production process if one worker is absent or the machine is down
- Structural unemployment due to job immobility
Key business functions and their roles
Businesses have several different activities. They usually group these activities into several business functions. Each has a different role in the organization but is interdependent.
The four primary business functions are:
- Human Resources
Marketing deals with generating revenue by selling products. The marketing team identifies and satisfies customer needs and wants. They are responsible for generating as many sales as possible.
The marketing function includes many activities and tasks, including:
- Market research
- Product service management
- Customer relationship management
- Channel management
The operations function deals with the production process. For example, in manufacturing, they are responsible for converting raw materials into finished goods. This function has an interest in producing output at the minimum possible cost.
In general, the operations function plays a role in handling:
- Production processes and techniques
- Procurement and inventory management
- Logistics and shipping inputs
- Research and development
Human resource function
The human resources function deals with people within the organization. It plays a role in recruiting, motivating, developing, and retaining the right employees. The goal is to ensure the company has the best talent to carry out value-creation activities and achieve company goals.
Activities in the human resources function include:
- Training and development
- Dismissal and redundancy
- Industrial relations
The human resources department also develops related strategies, including human resource outsourcing.
The finance function deals with the money circulating in the business. Teams manage money, compile financial records, record financial transactions, and produce financial reports for internal and external consumption. They are also responsible for budgeting and investment evaluation.