ESSENTIALS OF BUSINESS

Introduction to Business Administration

Topic 1. Introduction to
Business Administration

Important Note: these slides are designed to support and reinforce teachers explanations. The content of
these slides are neither a summary nor a briefing of the corresponding official course agenda items. The
final exam of the course might include any unit, chapter, section or single item included in the official course
agenda regardless it is included, in full or partial, or even not included in these slides.

1. General concepts

TOPIC 1. General concepts

Concept and nature of business
Business functional areas
The business environment. Generic and specific
environment

Concept and nature of business

Macroeconomic view: The business

in the economic system
It is an economic activity that transforms a set of
inputs (factors of production) into outputs (goods
and services aimed to satisfy customers needs
and wants)
Value, value added, GNP, GDP
The term circular flow of income refers to a simple economic
model which describes the reciprocal circulation of income
between producers and consumers.
The continuous interaction of the markets of goods and services
and factors determine a double flow: monetary and real, through
which the economy of a country decides about what to produce,
how and to whom.

EXAMPLE: Production process of bread

INPUTS

?
OUTPUT

Concept and nature of business

CIRCULAR FLOW OF INCOME:
MACROECONOMIC VIEW
Goods and services
Market of
goods and
services

Expenditures
(Revenues)
FIRMS

HOUSEHOLDS

Market of
factors of
production

Wages, rents, dividends

Factors of production

Profit

Basic economic agents that act in the economy

are two:
Households

Firms

Households play a double role:

On one side, they are the owners of the
production factors (land, labor, capital,
technology and know how).

On the other side, they are the elemental units of

consumption

Moreover, firms use the production factors from

households

To produce goods
and services that
households demand

Exchange between firms and households

happen in the markets
Households deliver inputs to firms
And get incomes:
incomes wages,
rents, dividends
The exchange is done in the market
of production factors:
factors labor
market, stock exchange market

that exchange
with households
in the markets
of goods and
services

Firms produce
goods and
services

Getting the money spent

by households

In the economic system we can

distinguish two types of flows:
Real flows
Which are goods, services
and factors,
and their monetary
compensations
Financial flows

2. Business functional areas

BUSINESS FUNCTIONS
Functions related to supply
(acquisition of inputs)
-

REAL
FUNCTIONS

Functions related to production

-Functions related to marketing

FINANCIAL
FUNCTIONS
MANAGEMENT
FUNCTIONS

Financing and investing

Planning, control and

organization

3. The business environment

Everything that is external to the company, it is
not under business control.
Factors of diverse nature that are not under the control of the firm
and affect or could affect to the behavior business and its
performance.
Success requires:
- Adaptation to environment
- Changing it through the strategy

Final objective: What factors are relevant?

Analysis of opportunities and threats

The business environment

Generic Environment : affect in a similar way to all those

companies operating in a given economic space at a given
moment of time
Political-legal issues

Economical issues
Sociological issues
Cultural issues
Technological issues

Specific or industrial environment: Part of the

environment closest to firms. Variables that affect one or one
group of firms in a specific way

The business environment

GENERIC ENVIRONMENT
Economic factors
- Macroeconomic variables
- Business cycle period
- Type of economic policy
- Country resources

Socio-cultural factors
- Value system
- Level of education
- Class structure
- Income distribution
- Population distribution
- Etc...

Generic
environment

Political-legal factors
- Monetary and fiscal policies
- Labour market regulation
- Industry regulation

Technological factors
- Basic technologies
- Key technologies
- Incipient technologies

The business environment

SPECIFIC ENVIRONMENT

Barriers of entry
Rivalry within
the industry

Barriers of exit

Specific
environment
Substitutes

Relationship with
customers
Relationship with
suppliers

The business environment

PORTERS FIVE COMPETITIVE
FORCES (Porter, 1982)
SUPPLIERS
Bargaining power of suppliers

Threat of new entrants

INDUSTRY
COMPETITORS

POTENTIAL
ENTRANTS

Threat of substitutes

SUBSTITUTES
Rivalry among
existing firms

Bargaining power of buyers

BUYERS

The business environment

PORTERS FIVE COMPETITIVE
FORCES (Porter, 1982)
SUPPLIER POWER
Suppliers price sensitivity
Relative bargaining power

THREAT OF
ENTRY
Capital requirements
Economies of scale
Absolute cost
advantage
Product differentiation
Access to distribution
channels
Legal/ regulatory
barriers

INDUSTRY RIVALRY
Concentration
Diversity of competitors
Product differentiation
Excess capacity & exit
barriers
Cost conditions

BUYER POWER
Buyers price sensitivity
Relative bargaining power

SUBSTITUTES
Buyers propensity to
substitute
Relative prices &
performance of
substitutes

Exercise : The business environment

Generic environment factors affecting companies in Spain:
Economic factors

- Macroeconomic variables
- Business cycle period
- Type of economic policy
- Country resources

Political-legal factors

- Monetary and fiscal policies

- Labour market regulation
- Industry regulation

Technological factors

- Basic technologies
- Key technologies

Socio-cultural factors

- Value system
- Level of education
- Class structure
- Income distribution
- Population distribution
- Etc...