Business as a transformation process
All organisations are involved in some form of transformation process. They take inputs such as land, labour, capital and entrepreneurship and turn them into outputs such as physical goods and intangible services. In many cases the output of a business is a combination of goods and services; for example in a restaurant you are buying a meal but also the environment and the service. The aim of all organisations is to add value i.e. to create outputs that are worth more than the inputs. In many cases the value of inputs is measured in financial terms in which case we say that organisations aim to make a profit. A profit occurs when the revenue generated by sales exceeds the costs of providing the product. In the case of non profit organisations such as schools and hospitals, other indicators are used to measure the value added. League tables of schools' performances, for example, might measure exam results and compare the grades achieved by students with their levels of achievement when they joined the school to measure the progress.
The nature of the transformation process obviously differs enormously from business to business. For example, it may involve manufacturing or providing services, it may be capital or labour intensive or be based on a single site or multi site. However whatever the nature of the business managers are constantly looking for new ways of adding value either by providing benefits and products that customers are willing to pay more for or by combining resources more efficiently to reduce costs.
To increase efficiency managers are always seeking ways of producing more with the same level of inputs or producing the same amount with less inputs. This can be achieved in a variety of ways: changing working practices, investing in new technology, motivating and inspiring staff more effectively and changing the way items are produced. For example, an important development in manufacturing in the last twenty years is known as lean production. This seeks to reduce wastage at all stages of the production process. It includes Just in Time production in which items are produced to order rather than in advance. This reduces stock levels because materials are only ordered and used when needed - they do not wait around in stock. Similarly finished goods are made to order and despatched immediately rather than being produced and then waiting for someone to buy them. Just in time production therefore removes the costs involved in storing and protecting stock. Lean production also includes a technique known as kaizen which aims to use the knowledge of employees to find ways of continuously improving the way things are done. Small, incremental changes are used to reduce costs on an ongoing basis.
Adding value can also occur by generating outputs that customers are willing to pay more for. In marketing the role of the brand has become even more important in recent years as firms attempt to get customers to identify with particular values, a lifestyle and a set of aspirations. Through effective branding items can be sold for more. Just think of a basic, plain T shirt and the effect on the price that can be charged if you add a particular brand name or logo to it. Think Prada, think Armani, think Gucci and you can see the value of a brand. Also the design features of a product can generate benefits that customers will pay more for (think of Dysons vacuum cleaners, Duralit toasters and Jimmy Choo shoes) as well as factors such as the speed of delivery (1 hour opticians and photo processing), convenience (think home delivery) and flexibility (think top restaurant compared to a fast food chain).
Organisations are continually reviewing what they provide and how they provide it to try and add more value. Given ongoing changes in the competitive environment with new competitors, new demands and new technologies adding value is a dynamic process. Your parents probably bought a CD and played it at home on a CD player. You download and listen on an iPod. The world of music provision and retailing has changed radically forcing organisations such as EMI to rethink their business model. Your parents probably went to a travel agent to book their holiday with a package holiday company. You go online and tailor make your own holiday. They probably went on holiday mainly within their own country or to relatively few locations overseas. You travel the world.
Organisations operate in a restless world and managers need to be looking constantly at the business environment to identify changes that could be of value to them or could possibly harm them. Interestingly any change will have different effects on different organisations. The banning of smoking in public places may damage sales of tobacco but boost sales on patches to help you give up smoking, for example. Later on we will examine the external environment of business in more detail but first we examine the different forms of business that exist and the internal activities that occur within an organisation.
