1.1 The Nature of Business
- How do businesses and not-for-profit organizations help create our standard of living?
Take a moment to think about the many different types of businesses you come into contact with on a typical day. As you commute to class or work, you may pass a gas station that is part of a major national oil company or a fast food chain such as Chipotle or Chick-Fil-A or the neighborhood pizza place. When you need to manage money, you can do your banking on a smartphone or other device via mobile apps. You don’t even have to visit the store anymore since online shopping brings the stores to you, offering everything from clothes to food, furniture, and electronics.
A business is an organization that strives for a profit by providing goods and services desired by its customers. Businesses meet the needs of consumers by providing medical care, autos, and countless other goods and services. Goods are tangible items manufactured by businesses, such as laptops. Services are intangible offerings of businesses that can’t be held, touched, or stored. Physicians, lawyers, hairstylists, car washes, and airlines all provide services. Businesses also serve other organizations, such as hospitals, retailers, and governments, by providing machinery, goods for resale, computers, and thousands of other items.
Thus, businesses create the goods and services that are the basis of our standard of living. The standard of living of any country is measured by the output of goods and services people can buy with the money they have. The United States has one of the highest standards of living in the world. The standard of living also incorporates the prices of goods and services. So although some countries may have higher average wages than the United States, their standard of living may not necessarily be higher because of higher prices for goods and services. They are able to buy less because of the higher prices, despite higher average wages. For example, in the United States, you can purchase a combo meal at a fast food restaurant often for less than $10, while in another country, a similar meal might cost nearly $20.
Businesses play a key role in determining our quality of life by providing jobs and goods and services to society. Quality of life refers to the general level of human happiness based on such things as life expectancy, educational standards, health, sanitation, and leisure time. Building a high quality of life is a combined effort of businesses, government, and not-for-profit organizations. In 2024, Luxembourg, Denmark, and the Netherlands ranked the highest in quality of life with Switzerland, Finland, and Oman close behind. It may come as a surprise that the United States is not one of the top 10 countries in terms of quality of life. The United States was ranked 14th. The majority of the top 10 countries are in western Europe, and the lower end of the scale includes Bangladesh, Venezuela, and Nigeria.1 Creating a quality of life is not without risks, however. Risk is the potential to lose time and money or otherwise not be able to accomplish an organization’s goals. Without enough blood donors, for example, the American Red Cross faces the risk of not meeting the demand for blood by victims of disaster. Businesses such as Procter & Gamble face the risk of falling short of their revenue and profit goals. Revenue is the money a company receives by providing services or selling goods to customers. Costs are expenses for rent, salaries, supplies, transportation, and many other items that a company incurs from creating and selling goods and services. For example, some of the costs incurred by Procter & Gamble in producing consumer products such as paper towels and diapers include expenses for salaries, manufacturing facilities, raw materials to make the products, and advertising. If Procter & Gamble has money left over after it pays all costs, it has a profit. A company whose costs are greater than revenues shows a loss.
When a company such as Procter & Gamble uses its resources intelligently, it can often increase sales, hold costs down, and earn a profit. Not all companies earn profits, but that is the risk of being in business. In U.S. business today, there is generally a direct relationship between risks and profit: the greater the risks, the greater the potential for profit (or loss). Companies that take too conservative a stance may lose out to more nimble competitors who react quickly to the changing business environment.
Take Sony, for example. The Japanese electronics giant, once a leader with its Walkman music player and Trinitron televisions, steadily lost ground—and profits—over just a short time period to other companies by not embracing new technologies such as the digital music format and flat-panel TV screens. Sony misjudged what the market wanted and stayed with proprietary technologies rather than create cross-platform options for consumers. Apple, at the time an upstart in personal music devices, quickly grabbed the lion’s share of the digital music market with its iPods and iTunes music streaming service. As a result, Sony had to restructure its business portfolio and has since experienced substantial success with its gaming console and original gaming content.2
Not-for-Profit Organizations
Not all organizations strive to make a profit. A not-for-profit organization is an organization that exists to achieve some goal other than the usual business goal of profit. Organizations such as Feeding America, the Smithsonian Institution, and Amnesty International are not-for-profit organizations, as are most hospitals, zoos, arts organizations, civic groups, and religious organizations. The number of nonprofit organizations—and the employees and volunteers who work for them continues to increase. Government is our largest and most pervasive not-for-profit group. In addition, nearly 2 million nongovernmental not-for-profit entities operate in the United States today and contribute more than $1 trillion annually to the U.S. economy.3
Like their for-profit counterparts, these groups set goals and require resources to meet those goals. However, their goals are not focused on profits. For example, a not-for-profit organization’s goal might be assisting with food security, preserving the environment, increasing attendance at an arts center, or preventing drunk driving. Not-for-profit organizations do not compete directly with one another in the same manner as, for example, Walmart and Target, but they do compete for talented employees, people’s limited volunteer time, and donations.
The boundaries that formerly separated not-for-profit and for-profit organizations have blurred, leading to a greater exchange of ideas between the sectors. As discussed in detail in the ethics chapter, for-profit businesses are now addressing social issues. Successful not-for-profits apply business principles to operate more effectively. Not-for-profit managers are concerned with the same concepts as their colleagues in for-profit companies: developing strategy, budgeting carefully, measuring performance, encouraging innovation, improving productivity, demonstrating accountability, and fostering an ethical workplace environment.
In addition to pursuing a museum’s artistic goals, for example, top executives manage the administrative and business side of the organization: human resources, finance, and legal concerns. Ticket revenues cover a fraction of the museum’s operating costs, so the director spends a great deal of time seeking major donations and memberships. Today’s museum boards of directors include both art patrons and business executives who want to see sound fiscal decision-making in a not-for-profit setting. Therefore, a museum director must walk a fine line between the institution’s artistic mission and financial policies.
Factors of Production: The Building Blocks of Business
To provide goods and services, regardless of whether they operate in the for-profit or not-for-profit sector, organizations require inputs in the form of resources called factors of production. Those factors are categorized into four groupings: land (including natural resources), labor (people and the skills they bring), capital (money used to purchase needed assets), and entrepreneurship (business acumen to bring it all together). By using the factors of production efficiently, a company can produce more goods and services with the same resources.
Commodities that are useful inputs in their natural state are known as natural resources. They include farmland, forests, mineral and oil deposits, and water. Sometimes natural resources are simply called land, although, as you can see, the term means more than just land. Companies use natural resources in different ways. Procter & Gamble uses cotton to make diapers and Exxon Mobil may use water and oil to produce gasoline. Today urban sprawl, pollution, and limited resources have raised questions about resource use. Conservationists, environmentalists, and government bodies work toward creating legislation to require land-use planning and resources conservation that help ensure responsible usage of our natural resources.
Labor, or human resources, refers to the economic contributions of people working with their minds and muscles. This input includes the talents of everyone—from a restaurant cook to a nuclear physicist—who performs the many tasks of manufacturing and selling goods and services.
The tools, machinery, equipment, and buildings used to produce goods and services and get them to the consumer are known as capital. Sometimes the term capital is also used to mean the money that buys machinery, factories, and other production and distribution facilities. However, because money itself produces nothing, it is not one of the basic inputs. Instead, it is a means of acquiring the inputs. Therefore, in this context, capital does not include money.
Entrepreneurs are the people who combine the inputs of natural resources, labor, and capital to produce goods or services with the intention of making a profit or accomplishing a not-for-profit goal. These people make the decisions that set the course for their businesses; they create products and production processes or develop services. Because they are not guaranteed a profit in return for their time and effort, they must be risk-takers. Of course, if their companies succeed, the rewards may be great.
Today, many individuals want to start their own businesses. They are attracted by the opportunity to be their own boss and reap the financial rewards of a successful firm. Many start their first business from their dorm rooms, such as Mark Zuckerberg of Meta, or while living at home, so their cost is almost zero. Entrepreneurs include people such as Amazon's founder, Jeff Bezos, as well as Elon Musk of Tesla and SpaceX, and Walt Disney. Many thousands of individuals have started companies that, while remaining small, make a major contribution to the U.S. economy.
Catching the Entrepreneurial Spirit
StickerGiant Embraces Change
Entrepreneurs typically are not afraid to take risks or change the way they do business if it means there is a better path to success. Company founder John Fischer fits the profile.
The drawn-out U.S. presidential election in 2000 between Bush and Gore inspired Fischer to create a bumper sticker that claimed, “He’s Not My President,” which became a top seller. As a result of this venture, Fischer started an online retail sticker store, which he viewed as possibly the “Amazon of Stickers.” Designing and making stickers in his basement, Fischer’s start-up would eventually become a multimillion-dollar company, recognized in 2017 by Forbes as one of its top 25 small businesses.
The StickerGiant online store was successful, supplying everything from sports stickers to ones commemorating rock and roll bands and breweries. By 2011, the business was going strong; however, the entrepreneur decided to do away with the retail store, instead focusing the business on custom orders, which became StickerGiant’s main product.
As the company became more successful and added more employees, Fischer once again looked to make some changes. In 2012 he decided to introduce a concept called open-book management, in which he shares the company’s financials with employees at a weekly meeting. Other topics discussed at the meeting include customer comments and feedback, employee concerns, and colleague appreciation for one another. Fischer believes sharing information about the company’s performance (good or bad) not only allows employees to feel part of the operation, but also empowers them to embrace change or suggest ideas that could help the business expand and flourish.
Innovation is also visible in the technology StickerGiant uses to create miles and miles of custom stickers. The manufacturing process involves digital printing and laser-finishing equipment. Fischer says only five other companies worldwide have the laser-finishing equipment StickerGiant uses as part of its operations. Because of the investment in this high-tech equipment, the company can make custom stickers in large quantities overnight and ship them to customers the next day.
This small business continues to evolve with an entrepreneur at the helm who is not afraid of making changes or having fun. In 2016, StickerGiant put together Saul the Sticker Ball, a Guinness World Records winner that weighed in at a whopping 232 pounds. Fischer and his employees created Saul when they collected more than 170,000 stickers that had been lying around the office and decided to put them to good use. StickerGiant, now part of Resource Label Group (acquired in 2021), operates with roughly 50 to 200 employees and estimated revenue well above $10 million.
- How does being a risk-taker help Fischer in his business activities?
- If you were a small business owner, would you consider sharing the company’s financial data with employees? Explain your reasoning.
Sources: “All About StickerGiant,” https://www.stickergiant.com, accessed May 29, 2017; Bo Burlingham, “Forbes Small Giants 2017: America’s Best Small Companies,” Forbes, https://www.forbes.com, May 9, 2017; Karsten Strauss, “Making Money and Breaking Records in the Sticker Business,” Forbes, https://www.forbes.com, January 26, 2016; Emilie Rusch, “StickerGiant Does Big Business in Tiny Town of Hygiene,” Denver Post, April 19, 2016, https://www.denverpost.com; Eric Peterson, “StickerGiant,” Company Week, https://companyweek.com, September 5, 2016; Resource Label Group, "Resource Label Group Completes Acquisition of StickerGiant.com" Business Wire, https://www.businesswire.com, October 7, 2021.
A number of outstanding managers and noted academics emphasize knowledge as a key factor of production. Knowledge refers to the combined talents and skills of the workforce and has become a primary driver of economic growth. Today’s competitive environment places a premium on knowledge and learning over physical resources. Statistics suggest that the number of U.S. knowledge workers is over 70 million and represents nearly 50 percent of the total workforce. Although some jobs and tasks have been replaced by automation or outsourced globally, technological advancements have actually created more jobs that require specialized knowledge and skills.4
Concept Check
- Explain the concepts of revenue, costs, and profit.
- What are the five factors of production?
- What is the role of an entrepreneur in society?