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The world of business today can be summed up in a single word:…
The world of business today can be summed up in a single word: change. And not just change, but rapid change. In order to remain profitable and competitive, businesses are finding that they need to be more responsive than ever to customers’ needs. This is not only true of big companies like Apple, Nike, and Whole Foods, but of smaller businesses, toolike your local hardware or grocery store. The rapidly changing business environment affects them all.
What is the business environment? In some ways, it resembles the natural environment in which we live: it’s all around us, but not always noticeable. It includes things like technology, competitors (other businesses), advertising, regulations, consumer demands, and money. When these elements of the business environment changein the same way that seasons and weather changecompanies need to be able to predict, react, and adapt accordingly. Those who fail to do so may find themselves out in the rain or cold and struggling to survive.
Although the environment in which businesses operate is always changing, the accelerated pace of change presents special challenges and opportunities for businesses today. Think about this: in the 1950s, the average lifespan of a Fortune 500 corporation (the largest businesses we know) was over 60 years. Today, the life expectancy of a Fortune 500 corporation is fewer than 20 years.
To get a sense of this rapid and dramatic change, consider something that’s fairly routine for Americans: getting a prescription filled. A couple of decades ago, you would have taken a written prescription from your doctor to your local drugstore and presented it to the pharmacist. Then, while waiting for it to be filled, you might have leafed through magazines or browsed the store for extra itemsperhaps shampoo or a greeting card. When your name was called, you probably paid in cash or wrote a check. All such transactions took place during normal business hoursMonday through Friday, 9:00 a.m.-5:00 p.m.; larger pharmacies may have been open for a few hours on Saturday.
What about now? Think about the last time you had a prescription filled. Did you ever even see it? Chances are you went to the doctor, and at the end of your visit, she faxed or emailed the prescription straight to the pharmacy (perhaps a Rite-Aid, Walgreen’s, or Duane Reed). A little while later, you may have received a text message notifying you that your prescription was ready. Since it wasn’t convenient for you to pick it up during the workday, and because it’s a 24-hour pharmacy, you went at night. You pulled up to the drive-through window and paid using Apple Pay or Google Wallet. Afterward, you verified that you received points on your customer loyalty card, which means savings or cash that can be applied to future purchases. You never set foot inside the store.
Alternatively, you may have gotten your prescription filled online and mailed right to your home by a national discount supplier, or maybe you chose to pick it up at Walmart or Target when you stopped in to shop for a new garden hose.
You can see from this example that the way companies “do business” is very different today. Some of these changes are the result of developments in technology, while others are the result of shifting consumer demands and trends. Regardless of the particular cause, though, all businesses have to cope with the changing nature and pressures of the business environment. A large part of this course will focus on the ways in which they do just that.
Defining Business
So, what is this thing we call “business”? A business is any activity that provides goods or services to consumers for the purpose of making a profit. Examples of goods provided by a business are tangible items, such as cars, televisions, or soda. A service is an action or work performed for monetary compensation. Services include things such as haircuts, hotel stays, or roller-coaster rides.
Business can generate profits from the sale of goods and/or services, and profits are the financial reward that comes from taking the risk of running or owning a business. More specifically, profit is the amount of revenue or income that a business owner retains after paying all the expenses associated with the operation of the business. If the expenses of the business exceed the revenue or income generated from operations, then the business will suffer a loss. Businesses that suffer extraordinary losses during a short period of time, or slowly see their profits decline, may end up closing or filing for bankruptcy.
Clearly, the goal of most businesses is to generate a profit by increasing revenue while holding expenses in check, and one of the best ways they do this is by providing their customers with value. When businesses talk about value, they are referring to the relationship between the price a customer pays for the good or service and the perceived benefits the customer receives in exchange for their time and money.
Value has become such a key component of today’s business model that if you go to almost any fast-food restaurant, you’ll find a “value meal” or “value menu” advertised. Such businesses are sending the message to their customers that they’ll receive the most “bang for the buck” or the highest value in terms of quantity obtained in exchange for money spent. It’s a business model based on the belief that if you give your customers value, then profit will follow. While all businesses seek to increase their revenue, what a business actually does with those funds can vary and depends on whether it’s a for-profit or nonprofit organization.
For-Profit vs. Nonprofit
We defined business earlier as an organization that provides goods, service, or both to its customers, clients, or consumers in order to make a profit. That definition, although accurate, does not account for those organizations and businesses that aren’t driven by the “bottom line” or profitability. Instead, some organizations provide their goods and services in order to generate revenues (income) that can be used to further their purpose or mission. It is highly likely that you have been involved with a nonprofit organization, and though it may not have seemed like it at the time, you were actually working with a business!
Profits and Purpose
A nonprofit or not-for-profit business is one that provides goods or services to consumers, but its primary goal is not to return profit to the owners of the business (as is the case with a for-profit business). Instead, it uses those profits to provide a public service, advance a cause, or assist others. The American Red Cross, the local SPCA, and the American Cancer Society are all examples of nonprofit businesses. They use any revenue generated from operations to support the continued mission of the organization. In addition, most nonprofits also rely on donations from individuals and businesses, grants, and government funding to help fund their work, since the revenue they raise rarely covers all of their operating costs.
Much of what differentiates a for-profit business from a nonprofit business goes on behind the scenes and isn’t very visible to the customer. For example, a nonprofit organization is subject to government regulation and oversight in ways that differ significantly from a for-profit business: nonprofits do not pay taxes on their revenue, but how their funds are disbursed and how their operations are managed is tightly regulated.
PROFIT AND NON-PROFIT LEMONADE STANDS
Despite their differences, nonprofits and for-profits have some fundamental business principles and practices in common. Let’s explore these shared aspects by comparing two businessesone for-profit and one nonprofit.
Molly’s For-Profit Lemonade Stand
Molly opens a lemonade stand in front of a local museum and intends to use her profits to purchase a new bike at the end of the summer. There are expenses associated with Molly’s business, such as lemons, sugar, cups, and ice. She also spends money on advertising when she prints up flyers and makes directional signs to alert customers to her location. She hires Jamie to help her on busy weekends and pays her a percentage of the stand’s revenue on the days she works. She has T-shirts printed at a local shop with her slogan on the back: “When life gives you lemons, Molly makes lemonade.” She sells the shirts at her stand for $10 each. A local bakery owner sees that Molly’s business is thriving and asks if she can sell her cookies at the lemonade stand. Molly arranges to sell the cookies for the bakery and keep 25 percent of the revenue generated from cookie sales.
Molly is running a for-profit business and generates revenue from several sources (lemonade, T-shirts, and cookies). Every day, after packing up her stand, she goes home and calculates her profit by subtracting her expenses (wages to Jamie, advertising, T-shirts, and supplies) from her revenue. She takes the profit and deposits it in the bank account her father helped her open.
At the end of the summer, Molly can withdraw the money from the bank account and buy the bike she wants. If she has profits left after she buys the bike, she can do whatever she wants with that money. As a for-profit business owner, she owns all the profits.
Emma’s Nonprofit Lemonade Stand
Emma opens a lemonade stand in front of a local museum and intends to donate her profits to the local Humane Society to support their Feline Hope program. Besides that difference of purpose, Emma’s business is nearly identical to Molly’s. There are expenses associated with Emma’s business, such as lemons, sugar, cups, and ice. Emma spends money on advertising when she prints up flyers and makes directional signs to alert customers to her location. She hires Linda to help her on busy weekends and pays her a percentage of the stand’s revenue on the days she works. She has T-shirts printed at a local shop with her slogan on the back: “When life gives you lemons, Emma makes lemonade.” She sells the shirts at her stand for $10 each. A local bakery owner sees that Emma’s business is thriving and asks if she can sell her cookies at the lemonade stand. Emma arranges to sell the cookies for the bakery and keep 25 percent of the revenue generated from cookie sales.
Emma is running a not-for-profit business and generates revenue from several sources (lemonade, T-shirts, and cookies). Like Molly, after packing up her stand, she goes home and calculates her profit by subtracting her expenses (wages to Linda, advertising, T-shirts, and supplies) from her revenue. She takes the profit and deposits it in the bank account her father helped her open.
At the end of the summer, Emma can withdraw the money from the bank account and deliver a check to the Humane Society. If the business has profits in excess of what she promised to donate to the Humane Society, then Emma can pay herself a small wage for running the business all summer, but the majority of the profits will either need to stay in the bank account to fund future causes or be used to expand the business to support charitable or social causes later on. Emma isn’t really a business “owner,” because she doesn’t own the profit generated by the business. We’d expect to hear Emma say that she’s running a not-for-profit (or nonprofit) organizationin contrast to Molly, who would probably say that she owns a business.
Although these may be very simple examples, they show that, from a customer’s perspective, there is virtually no difference in the way the two businesses operate. Emma might decide to advertise that her proceeds support an important cause (the Humane Society’s Feline Hope program) as a way of attracting customers. If not, the two lemonade stands would seem nearly identical from the outside.
It’s not until you look behind the scenes that you will see the differences between a for-profit and nonprofit business. The following table compares the attributes of for-profit and not-for-profit businesses and highlights some of the “hidden” differences.
For-Profit vs. Not-for-Profit/Nonprofit
For-Profit
· Incurs expenses for operations
· Provides goods and services to customers
· Generates revenues from sales
· Owned by individuals, partners, or shareholders
· Profit is used to pay owners, partners, or shareholders
· Pays salaries to employees and managers
· Profits are subject to taxation by local, state, and federal authorities
Not-for-Profit/Nonprofit
· Incurs expenses for operations
· Provides goods and services to customers
· Generates revenues from sales and/or contributions
· Operated by board of directors, trustees, or managers
· Profit is used to further the mission of the organization
· Pays salaries to employees and managers
· Profits are NOT subject to taxation by local, state, and federal authorities
Business Ownership
Synthesis
Now that you have come to the end of this module, you should understand that there is a range of possibilities for structuring, starting, and growing a business. Each choice has its advantages and disadvantages, and there is no single set of choices that will accommodate all businesses. Just knowing that there are choices to be made and a variety of possible paths is critical to the success of any business venturelarge or small.
“summariza three things learned from the chapter and how you would use this information to create your business plan or use this information to assist with your business needs”
