Fundamentals of Business: The view from 30,000 feet
March 4, 2023
14 min read
Overview of Business Administration
In running a business you interact with people and have processes and money to deal with, getting and spending, just like in your everyday life.
“There Are Two Classes of People in the World; Those Who Divide People into Two Classes and Those Who Do Not.”
- Robert Benchley
We can split business activities into two parts: internal and external. Internal are operations and external is marketing. Lets break it down in more detail below.
Fundamental Aspects of a Business
· You want to develop and deliver products and services that meet the needs of customers you have identified.
· You want to make them aware of what you are providing and the value it represents to them.
· You want to make and deliver in efficient and effective ways so you create sustainable profits.
· You want to develop goals and measure how effective you are in achieving them.
· And you need to keep track of the money coming in and going out of the business.
There are customers, employees, partners, vendors and suppliers, investors, contractors, people from the media, government, lawyers, accountants, your significant other, parents, friends… you get the idea. There are lots of different stakeholders and relationships and dynamics and personalities that you will have to assess, navigate, motivate, and negotiate.
You must learn to love dealing with people and develop a refined set of social skills and negotiation skills. These skills are the basis of Management, Leadership, Negotiations, Human Resources, Organizational Design, conflict resolution, and problem solving.
Tactical thinking is “doing things right,” while Strategic thinking is “doing the right things.” Strategic thinking is typically leadership: creating the vision. Whereas Tactical thinking is management: implementing the vision.
In some way, you are proposing to add value and solve problems with what you are selling and providing. It might be a product or a service, or some cool and exciting amalgam of both. How you make and deliver your product/service (let’s call it product for short) determines your costs. Managing those costs is crucial. That means measuring costs in an accurate and timely manner, and continually looking for ways to reduce them. This is the realm of Accounting, especially Cost Accounting and Management Information Systems (MIS) provide the reporting.
Effective Operations Management and Supply Chain Management does this through: implementing efficiencies in procedures and manufacturing, negotiating better pricing and quality control from suppliers, devising better distribution, analyzing what is better to do in-house and what is better to outsource. It includes improving and documenting processes with the rigor of ISO programs; Six Sigma; and Just In Time inventory control. It is the world of Quality Control and Assurance; Inventory Management; continual improvement programs; and linear programming (talk about Herbert Simon).
The details of Operations can get very technical, analytical, and quantitative. It is all in the service of very graspable and sensible goals however, and that is what we will focus on: the ends that justify the geeky means.
Computers, bar code readers and scanners and information systems have been instrumental in transforming this area of business into a strategic advantage. This area has provided probably the biggest advantage to scale that has led to the transformation of the retail landscape from small Mom and Pop operations to mega store chains like Walmart, and online retailer Amazon, dominating.
Making people aware of what you have to offer is the realm of Marketing. Funneling and converting that awareness into demand and purchases is what Sales is all about. Creating an identity to sustain those sales and leverage marketing through customer loyalty is Branding.
A business needs to be focused on Marketing and Sales. It needs to be focused on understanding customers and what their needs are. What problem are you solving, or what benefit are you providing, and is it really relevant to the potential customer? How can you make your offering continually better suited to customer needs? Can you charge a premium for it based on the perceived value? Feedback from customers on how they use your product should be analyzed early, often, and always. This external focus on delivering satisfaction to customers is crucial and it takes sustained continuous discipline to enact.
There are so many incredible new ways to engage potential customers and market your offerings through the web, social media and mobile platforms. You can create awareness campaigns that target and reach on a global scale, and measure the effectiveness of your messaging, for relatively little cost. We will go through a lot of tips on platforms and practice.
Another component of external focus is continuously monitoring and revising your understanding the competitive landscape. The speed of innovation is fast and constantly increasing. What works today will need to be re-imagined in order to be compelling tomorrow.
We all know lots of businesses and industries that have been disrupted out of existence like: videocassettes, cameras and film, rotary phones, cathode ray TVs. Strategy is the field of knowing who your competitors are and where to position your offerings, what technologies are on the horizon, and converging together, that will change your industry. It is also critical to assess how the industry is concentrated and segmented.
Strategy overlaps with Marketing, Operations, Economics, and really all the other disciplines and attempts to focus and marshal all of these resources and initiatives toward well defined and stated goals to increase the performance and results of the enterprise. Strategy is the big picture.
Goods and Services
In general, producing Goods and Services is the act of transforming raw materials into finished products that are delivered to customers. This is the realm of Operations & Supply Chain Management. As the world becomes more fluid and previous constraints are removed via mobile computing and communications, the differences and distinctions between a product and a service are becoming blurred.
Goods used to be considered tangible and Services as intangible. This made for a nice clear distinction. Now, many goods are electronic copies like many games, music, movies and eBooks that are sold directly as digital downloads. A lot of content consumption is done completely virtually without any physical exchange. And in many cases now, even ownership of electronic copies is being replaced with a model of access on demand like streaming music and movie services.
A new broader definition might be a product that is uniform and homogeneous in its production and sale. Quality issues in goods usually center on concepts of achieving zero variability. Digital copies provide very high fidelity of reproduction and by definition, achieve this ideal goal of quality assurance.
Digital copies sold directly as downloads have three other advantages as a business model. First, they scale. Scale is a short hand term for economies of scope and scale. This means after you hit your breakeven point, it doesn’t take much expense to produce and sell additional copies, so more money falls to the bottom line as profit. Second is there is no working capital tied up in inventory. You don’t have to estimate (guess) how many copies to produce (supply) to meet potential sales (demand). As many copies of a downloadable product can be sold as the market wants instantaneously. Third is that distribution is virtually costless. Your market does not have to be concentrated or rely on physical stores or outlets or even mail delivery. A small percentage of a diffuse population of customers can add up to a big market.
Its important to take some time here and think about these concepts. These new digital business models should influence your thinking about what to develop and how to deliver it. Whether you are an entrepreneur or working in a large company, we always need to be thinking if there is a better, more efficient way to do things.
Services can be categorized as something that is customizable and molded to the needs of customers on a case-by-case basis usually scoped around subject matter or domain expertise. Consultants provide services. They also differ in the level of interaction with the customer. Service assets are more skewed towards human resources that go down in the elevator each evening.
Traditionally it has been difficult to scale service oriented companies and offerings, but as Artificial Intelligence capabilities of computers continues to develop, more ways of automating services are becoming feasible; especially services that are rule based. Think of how Turbo Tax has automated and scaled a business in tax return preparation. Tax accounting used to be thought of as a white-collar profession not vulnerable to automation. Also think of the travel agent business. Most of us now make our own travel arrangements after consulting aggregators like Travelocity or matching engines like AirBnB.
Most product offerings and strong business models are based on a combination of goods and services. Product offerings that are primarily at core Goods can create more customer engagement and loyalty by adding service components. Think of Apple Computer and their network of retail stores. Not only do those stores help brand Apple with high profile visibility; and provide Apple with the ability to capture the retail markup of their products, the retail stores also help Apple understand its customers and what they like and dislike about their products. This information is extremely valuable in helping to continuously improve their products and identify what to work on and roll out next. These stores also act as forums to help users understand and better utilize their products. This creates loyal customers by providing more value.
Apple’s type of business model of controlling the entire chain from raw materials through design and manufacturing and marketing and sales is called Vertical Integration. Companies can improve their strategic position by integrating either upstream or downstream of their initial offering or competency. These are powerful concepts to keep in mind.
Business models based on Core Service Providers can gain advantages and achieve additional revenue streams by providing complementary Goods that enhance their services. They can create businesses that scale rapidly and hugely by providing a uniform goods component, especially an electronic goods component that can be marketed on line and through social media and sold as a download or app. These goods can be priced very attractively as they cost little to reproduce and covering the development costs can be spread across the volume of units sold. It can even make good business sense to provide a basic initial good or service for free in order to get potential customers engaged and familiar wth your offering. This is a marketing approach called a Freemium model. I am sure you are familiar with and use many products of this type especially on your mobile device where there is a free version and if you want more capacity or additional features there is a paid version.
Green grease makes the world go round. Money is how business transacts and sustains itself. It is the vehicle for how business operates and determines how needful your value proposition really is.
Bills need to be paid, supplies purchased, funds raised, and salaries met. Running a business is all about Revenues (sales), Expenses (costs), and Net Income (profit/loss). These are organized and measured by accounting for money. The goal is to sell things for more than they cost you to make or procure; simple.
This simple statement can get complicated as operations grow and a business scales up. Even in a small business there are many costs that are not directly related to the product like: the building or workspace and the utilities and computers and receptionist and secretaries and travel. Decisions need to be made as how to allocate those indirect costs to the units sold. This is the realm of Accounting and Bookkeeping, and as painful or boring as it may seem, it is the fundamental lifeblood of business. Accounting is how you can tell how the business is performing: whether you are making money or not and how much. Accounting is the measuring stick and, as the famous management guru Peter Drucker said, “what gets measured gets managed”. So we need to measure what matters.
The difference between what you sell something for and the costs it took to make it is the Net Income. It can also be thought of as the value you have created. Business operations are ultimately focused on value creation and Marketing and Branding is about making people aware of you value proposition, creating needs and desires for your product and enhancing the perceived value.
Marketing practices can devolve into cynical and duplicitous practices of creating psychological connections between a product and deep aspirations in order to move superficial goods. This touches on issues of a philosophical nature related to Business Ethics. Our aspirations and goals should be to use business methods and models to create sustainable enterprises that actually help people and meet genuine needs. It is easy to be seduced and get caught up in the desire to make lots of money, acquire the prestige and command the respect we seek. We shouldn’t give into these less than virtuous motives and add to the consumer frenzy in less than meaningful ways. Let’s keep this in mind as we study and implement these concepts and as we go about our career and making meaning in our lives and the lives of others. The section on Business Ethics delves into this area in more detail.
How do you get the money to start? When and how should you expand? Should you perform certain operations in-house or outsource? Should you lease or purchase? The tools and techniques of Corporate Finance will help you answer these questions.
Corporate Finance also provides us with tools for valuation and decision making based on the concept of the Time Value of Money.
“The importance of money flows from it being a link between the present and the future.” — John Maynard Keynes
Putting it All Together
Orchestrating all these disciplines is the realm of the C-level executives: the CEO, COO, and CFO. It is also the skill set required of entrepreneur/founders. Codifying these elements into a coordinated plan is the realm of Strategy. Strategic thinking can be broken into long term planning (5 year plan), short term tactical planning, and budgeting for the coming year.
How are you planning to grow your business and deal with competitors and alternative products? The challenges arise in how to keep planning as part of an organic, continual process and how to implement strategy and manage strategic momentum which means keeping employees and contractors on task and focused on the right actions. It’s easy to get complacent and start to drift or lose focus and become diluted in your efforts by chasing too many goals.
According to Steve Jobs, “People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying ‘no’ to 1,000 things.”
Communications is the skill set of clearly defining, articulating, and relating the goals of the organization so that people know precisely and explicitly what is expected of them, how their performance will be measured, and how to know if we are moving in the right direction at a satisfactory pace. Communications is integral to the leadership skill of how to motivate people by aligning their aspirations with those of the enterprise.
Incentives are the systems and plans that motivate behavior and they must be aligned with the messaging. Rational beings will do what they perceive is best for them and we must make sure that their behavior is aligned with our targets and goals for the company.
Strategy and Leadership also includes a discussion of decisions relative to your Business Model. How do you make and market your products and services, and how do you protect and expand your markets and profit margins? What do you do in-house and what do you contract out?
Having a good handle on Economics will provide you with a context in which to analyze and explain what is going on in the larger world in which your enterprise operates and which surrounds our lives. It will also help provide the ability to make more accurate and reasoned predictions about future. This is important for planning, budgeting and strategy. And it will help you react quicker and smarter, in a reasoned fashion, to unforeseen changes in the environment.
Business economics can be divided into three disciplines:
· Micro Economics: the study of individual behavior and purchasing decision, the theory of the firm and production, and the study of competition and market structures.
· Managerial Economics: the study of applying Micro Economic theory to managerial decision-making.
· Macro Economics: the study of economies as a whole including: interest rates, monetary policy, banking, government regulation, and international trade.
Summary of Overview
Some of the topics introduced above spilled from one section into the next and may have seemed a bit redundant or repetitive in places. The fact is, these subjects all overlap and knit together in an operation. A well functioning organization cannot have each discipline and division operating in a silo. It is the role of the senior executives, the “C” level executives, to have a vision and overview that incorporates all the elements in a smoothly running manner. This book is here to help you become prepared for such a role and to understand the concerns of the big picture wherever you currently reside in an organization.
Occam’s Razor is a principle from the Middle Ages that essentially states “the simpler the better.” It is easy to get tied up in all the complications that can arise out of such a seeming large bunch of competing interests and concerns. How can one keep all of this in one’s head and make decisions taking it all into account on the fly in real time. That is where William Occam’s advice always helps to clear the air — the fewer assumptions that are made, the better.
In the interest of keeping it simple and being concise, here is a short summary of the above section. There are four areas to keep in mind when you are analyzing a business proposal or business performance, or when questioning the direction of your destiny for that matter:
· Strategy: develop and articulate a clear and compelling goal
· Structure: are we organized to meet that goal
· People: do we have the right people and capabilities to meet our goal
· Process: do we have the operations and supply chains we need to meet our target goals. Can we improve them?
Keep it Simple. Keep it Clear.
Much of effective communication and leadership hinges on clarity.
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