OPERATIONS MANAGEMENT

Lecture 6

The Three Meanings of Business

The Business System: Is the combination of commerce, occupations, and organizations that result in the production and distribution of goods and services people value. Three different but related meanings of the word business can be identified: I. Business as Commerce II. Business as an Occupation III. Business as an Organization

Business as Commerce
Business commerce is the process through which people produce and then trade, barter, or exchange valuable goods and services to better fulfill their wants and needs. The goal of business commerce and the trading or bartering of goods and services is to allow people to increase their utility or satisfaction--- to make themselves better off by fulfilling their needs for security, food and clothing, entertainment and so on. This occurs through exchange whereby people obtain products that are more valuable than money. People profit from trade or barter when the exchange increases their utility.

Business as Commerce
Utility by obtaining a product is dependant on: Personal judgment: A product that one person perceives as satisfying may be perceived by another as being unsatisfying. Price as a measure of profit from exchange: The price of different products is a measure of their relative value to different people. In general, the more than a particular product is valued, or demanded, by people, or the harder it is to find, the higher will be its price.

Business as Commerce
The difference between Profit and Profitability: The two concepts are different. Profit: It is simply the total or absolute monetary difference between sales revenues and operating costs. Profitability: It measures how well a company is making use of its capital by investing in resources that create goods and services that generate profits.

Business as Commerce
The important difference is that the size of the profit that a company makes in one year says little about how well its managers are making use of resources and its ability to generate future profits. Profitability by contrast, gives managers and investors much more information to assess how well a company is performing against the others in its industry. That is, past, present and future. Profitability is an indicator of its ability to generate future profit and capital. It depends on the future prospects of the industry.

Business as Commerce
Increasing Profitability: In any industry, companies are in competition: 1. To develop new and improved products to attract customers, and 2. To use their resources more productively in order to reduce operating costs. Those companies that succeed in attracting many customers (especially customers willing to pay a higher, or premium, price) and lowering their costs will have the highest profitability. A premium price is the higher price a company is able to charge versus what its competitors can charge.

Business as an Occupation
Business Occupation: The acquired set of specialized skills that enable a person to create valuable goods and service that can be traded at profit. People have learned that specializing can make them more prosperous. Specialization is the process by which people become expert in a narrowly defined range of tasks, such as those involved in an occupation, or job. This helps them to become more skilled and productive at what they do, which increases productivity and more products to exchange.

Business as an Occupation
In essence to do well in business and improve your standard of living, you need to have an occupation you are good at. To succeed in business is to try to excel in occupation and perform at a high level to profit from exchange and increase one s personal capital and wealth. There is a market for occupations and jobs just as there is a market for wheat and potatoes. Increasing specialization and division of labor lead to greater productivity and rising profitability across occupations and business commerce in general.

How specialization and the Division of Labor Increase Capital and Wealth
Greater quantities of products being produced and more income generated Increasing division of labor which also results in more products being created and more income generated

Increasing Specialization

Increased demand for better quality goods and services

The Invisible Hand of the Market

People choose an occupation to pursue a self-interested way based on their desire to profit personally from their improved skills. All these decisions about what kind of skill to develop are being made independently by self-interested people seeking personal gain. In the process however, the decision made by each person indirectly helps everybody else because, collectively it furthers the gains that can be derived from specialization.

The Invisible Hand of the Market

Adam Smith believed that the self-interested economic behavior of individual people ultimately makes society better off. The invisible hand of the market only works to create a public good and higher utility for most people if a system of rules and laws exist to allow free and fair competition for resources and products. In summary, through the invisible hand of the market, the interaction of business commerce and occupation determines the standard of living, wealth, and prosperity of people, groups, and society.

Business as an Organization
Business Organization: A tool that empowers people to shape and control the behavior of other people to produce goods and services. The business s organizational structure is the framework of task and authority relationships that coordinates people so they work towards a common goal. The terms business enterprise or venture suggest, by combining the talents and resources of many different people, a business organization can pursue new opportunities and take more risks to create profitable goods and services.

Objectives of Business
I. Profit and Profit Only: Maximize profit through any means.

Limitations: i. New business in the market. ii. Decrease in volume of sales of monopoly business.

Objectives of Business
Limitations of Profit and profit only: iii. Substitute products iv. Illegal and immoral practice v. Decrease in goodwill II. Service and Service only: Limitations: i. Shortage of funds to start ii. Lack of funds if working below breakeven.

Objectives of Business
Limitations of Service and Service Objective: iii. No profit no business iv. Disinterest in the project by new generation v. Lack of funds for expansion vi. Lack of monetary incentives to workers resulting in lower quality

Objectives of Business
III. Profit through Service: Reasonable profit through better service, reasonable price and good quality. Advantages: i. Increase in goodwill ii. Less danger of negative competition iii. Proper monetary incentive for workers iv. Sufficient working capital v. Moral satisfaction vi. Easy expansion.