Fundamentals of Business

Chapter 1:

Foundations of
Business
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Chapter 1
The Foundations of Business

Learning Objectives
1) Describe the concept of stakeholders and identify the stakeholder
groups relevant to an organization
2) Discuss and be able to apply the macro-business-environment
model to an industry or emerging technology
3) Explain other key terms related to this chapter including:
entrepreneur; profit; revenue.

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Why Is Apple Successful?
In 1976 Steve Jobs and Steve Wozniak created their first computer, the Apple I.1 They
invested a mere $1,300 and set up business in Jobs’ garage. Three decades later, their
business—Apple Inc.—has become one of the world’s most influential and successful
companies. Jobs and Wozniak were successful entrepreneurs: those who take the risks and
reap the rewards associated with starting a new business enterprise. Did you ever wonder why
Apple flourished while so many other young companies failed? How did it grow from a garage
start-up to a company generating over $233
Figure 1.1: Steve Jobs
billion in sales in 2015? How was it able to
transform itself from a nearly bankrupt firm to a
multinational corporation with locations all around
the world? You might conclude that it was the
company’s products, such as the Apple I and II, the
Macintosh, or more recently its wildly popular iPod,
iPhone, and iPad. Or, you could decide that it was its
dedicated employees, management’s wiliness to take
calculated risks, or just plain luck – that Apple simply
was in the right place at the right time.

Before we draw any conclusions about what made Apple what it is today and what will
propel it into a successful future, you might like to learn more about Steve Jobs, the company’s
cofounder and former CEO. Jobs was instrumental in the original design of the Apple I and, after
being ousted from his position with the company, returned to save the firm from destruction and
lead it onto its current path. Growing up, Jobs had an interest in computers. He attended
lectures at Hewlett-Packard after school and worked for the company during the summer
months. He took a job at Atari after graduating from high school and saved his money to make
a pilgrimage to India in search of spiritual enlightenment. Following his India trip, he attended
Steve Wozniak’s “Homebrew Computer Club” meetings, where the idea for building a personal
computer surfaced.2 “Many colleagues describe Jobs as a brilliant man who could be a great

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motivator and positively charming. At the same time his drive for perfection was so strong that
employees who did not meet his demands [were] faced with blistering verbal attacks.”3 Not
everyone at Apple appreciated Jobs’ brilliance and ability to motivate. Nor did they all go along
with his willingness to do whatever it took to produce an innovative, attractive, high-quality
product. So at age thirty, Jobs found himself ousted from Apple by John Sculley, whom Jobs
himself had hired as president of the company several years earlier. It seems that Sculley
wanted to cut costs and thought it would be easier to do so without Jobs around. Jobs sold $20
million of his stock and went on a two-month vacation to figure out what he would do for the
rest of his life. His solution: start a new personal computer company called NextStep. In 1993,
he was invited back to Apple (a good thing, because neither his new company nor Apple was
doing well).

Steve Jobs was definitely not known for humility, but he was a visionary and had a right
to be proud of his accomplishments. Some have commented that “Apple’s most successful
days occurred with Steve Jobs at the helm.”4

Jobs did what many successful CEOs and managers do: he learned, adjusted, and
improvised.5 Perhaps the most important statement that can be made about him is this: he
never gave up on the company that once turned its back on him. So now you have the facts.
Here’s a multiple-choice question that you’ll likely get right: Apple’s success is due to (a) its
products, (b) its customers, (c) luck, (d) its willingness to take risks, (e) Steve Jobs, or (f) some
combination of these options.

Introduction
As the story of Apple suggests, today is an interesting time to study business. Advances
in technology are bringing rapid changes in the ways we produce and deliver goods and
services. The Internet and other improvements in communication (such as smartphones, video
conferencing, and social networking) now affect the way we do business. Companies are
expanding international operations, and the workforce is more diverse than ever. Corporations
are being held responsible for the behavior of their executives, and more people share the

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opinion that companies should be good corporate citizens. Because of the role they played in
the worst financial crisis since the Great Depression, businesses today face increasing scrutiny
and negative public sentiment.6

Economic turmoil that began in the housing and mortgage industries as a result of
troubled subprime mortgages quickly spread to the rest of the economy. In 2008, credit
markets froze up and banks stopped making loans. Lawmakers tried to get money flowing
again by passing a $700 billion Wall Street bailout, now-cautious banks became reluctant
to extend credit. Without money or credit, consumer confidence in the economy dropped
and consumers cut back on spending. Unemployment rose as troubled companies shed
the most jobs in five years, and 760,000 Americans marched to the unemployment lines.7
The stock market reacted to the financial crisis and its stock prices dropped by 44 percent
while millions of Americans watched in shock as their savings and retirement accounts
took a nose dive. In fall 2008, even Apple, a company that had enjoyed strong sales
growth over the past five years, began to cut production of its popular iPhone. Without jobs
or cash, consumers would no longer flock to Apple’s fancy retail stores or buy a prized
iPhone.8 Since then, things have turned around for Apple, which continues to report
blockbuster sales and profits. But not all companies or individuals are doing so well. The
economy is still struggling, unemployment is high (particularly for those ages 16 to 24),
and home prices have not fully rebounded from the crisis.

As you go through the course with the aid of this text, you’ll explore the exciting
world of business. We’ll introduce you to the various activities in which business people
engage—accounting, finance, information technology, management, marketing, and
operations. We’ll help you understand the roles that these activities play in an
organization, and we’ll show you how they work together. We hope that by exposing you to
the things that businesspeople do, we’ll help you decide whether business is right for you
and, if so, what areas of business you’d like to study further.

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 Getting Down to Business
A business is any activity that provides goods or services to consumers for the
purpose of making a profit. Be careful not to confuse the terms revenue and profit.
Revenue represents the funds an enterprise receives in exchange for its goods or
services. Profit is what’s left (hopefully) after all the bills are paid. When Steve Jobs and
Steve Wozniak launched the Apple I, they created Apple Computer in Jobs’ family garage
in the hope of making a profit. Before we go on, let’s make a couple of important
distinctions concerning the terms in our definitions. First, whereas Apple produces and
sells goods (Mac, iPhone, iPod, iPad, Apple Watch), many businesses provide services.
Your bank is a service company, as is your Internet provider. Hotels, airlines, law firms,
movie theaters, and hospitals are also service companies. Many companies provide both
goods and services. For example, your local car dealership sells goods (cars) and also
provides services (automobile repairs). Second, some organizations are not set up to
make profits. Many are established to provide social or educational services. Such not-for
profit (or nonprofit), organizations include the United Way of America, Habitat for
Humanity, the Boys and Girls Clubs, the Sierra Club, the American Red Cross, and many
colleges and universities. Most of these organizations, however, function in much the
same way as a business. They establish goals and work to meet them in an effective,
efficient manner. Thus, most of the business principles introduced in this text also apply to
nonprofits.

Business Participants and Activities

Let’s begin our discussion of business by identifying the main participants of business
and the functions that most businesses perform. Then we’ll finish this section by discussing the
external factors that influence a business’ activities.

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 Participants
Every business must have one or more owners whose primary role is to invest money
in the business. When a business is being started, it’s generally the owners who polish the
business idea and bring together the resources (money and people) needed to turn the idea
into a business. The owners also hire employees to work for the company and help it reach its
goals. Owners and employees depend on a third group of participants— customers.
Ultimately, the goal of any business is to satisfy the needs of its customers in order to generate
a profit for the owners.

Stakeholders
Consider your favorite restaurant. It may be an outlet or franchise of a national chain
(more on franchises in a later chapter) or a local “mom and pop” without affiliation to a larger
entity. Whether national or local, every business has stakeholders – those with a legitimate
interest in the success or failure of the business and the policies it adopts. Stakeholders
include customers, vendors, employees, landlords, bankers, and others (see Figure 1.2). All
have a keen interest in how the business operates, in most cases for obvious reasons. If the
business fails, employees will need new jobs, vendors will need new customers, and banks
may have to write off loans they made to the business. Stakeholders do not always see things
the same way – their interests sometimes conflict with each other. For example, lenders are
more likely to appreciate high profit margins that ensure the loans they made will be repaid,
while customers would probably appreciate the lowest possible prices. Pleasing stakeholders
can be a real balancing act for any company.

Figure 1.2: Business Stakeholders

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Functional Areas of Business

The activities needed to operate a business can be divided into a number of functional
areas. Examples include: management, operations, marketing, accounting, and finance. Let’s
briefly explore each of these areas.

Management

Managers are responsible for the work performance of other people. Management
involves planning for, organizing, leading, and controlling a company’s resources so that it can
achieve its goals. Managers plan by setting goals and developing strategies for achieving
them. They organize activities and resources to ensure that company goals are met and staff
the organization with qualified employees and managers lead them to accomplish
organizational goals. Finally, managers design controls for assessing the success of plans
and decisions and take corrective action when needed.

Operations

All companies must convert resources (labor, materials, money, information, and so
forth) into goods or services. Some companies, such as Apple, convert resources into tangible
products—Macs, iPhones, etc. Others, such as hospitals, convert resources into intangible
products — e.g., health care. The person who designs and oversees the transformation of
resources into goods or services is called an operations manager. This individual is also
responsible for ensuring that products are of high quality.

Marketing

Marketing consists of everything that a company does to identify customers’ needs (i.e.
market research) and design products to meet those needs. Marketers develop the benefits
and features of products, including price and quality. They also decide on the best method of
delivering products and the best means of promoting them to attract and keep customers.
They manage relationships with customers and make them aware of the organization’s desire
and ability to satisfy their needs.

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Accounting

Managers need accurate, relevant and timely financial information, which is provided by
accountants. Accountants measure, summarize, and communicate financial and managerial
information and advise other managers on financial matters. There are two fields of
accounting. Financial accountants prepare financial statements to help users, both inside and
outside the organization, assess the financial strength of the company. Managerial accountants
prepare information, such as reports on the cost of materials used in the production process,
for internal use only.

Finance

Finance involves planning for, obtaining, and managing a company’s funds. Financial
managers address such questions as the following: How much money does the company
need? How and where will it get the necessary money? How and when will it pay the money
back? What investments should be made in plant and equipment? How much should be spent
on research and development? Good financial management is particularly important when a
company is first formed, because new business owners usually need to borrow money to get
started.

External Forces that Influence Business

Activities

Apple and other businesses don’t operate in a vacuum: they’re influenced by a number
of external factors. These include the economy, government, consumer trends, technological
developments, public pressure to act as good corporate citizens, and other factors.
Collectively, these forces constitute what is known as the “macro environment” – essentially
the big picture world outside over which the business exerts very little if any control. Figure 1.3
"Business and Its Environment" sums up the relationship between a business and the external
forces that influence its activities. One industry that’s clearly affected by all these factors is the

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fast-food industry. Companies such as Taco Bell, McDonald’s, Cook-Out and others all
compete in this industry. A strong economy means people have more money to eat out. Food
standards are monitored by a government agency, the Food and Drug Administration.
Preferences for certain types of foods are influenced by consumer trends (fast food
companies are being pressured to make their menus healthier). Finally, a number of decisions
made by the industry result from its desire to be a good corporate citizen. For example, several
fast-food chains have responded to environmental concerns by eliminating Styrofoam
containers.9

Of course, all industries are impacted by external factors, not just the food industry. As
people have become more conscious of the environment, they have begun to choose new
technologies, like all-electric cars to replace those that burn fossil fuels. Both established
companies, like Nissan with its Nissan Leaf, and brand new companies like Tesla have
entered the market for all-electric vehicles. While the market is still small, it is expected to grow
at a compound annual growth rate of 19.2% between 2013 and 2019.10

As you move through this text, you’ll learn more about these external influences on
business.

Figure 1.3: Business and its Environment

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Key Take-Aways

1) The main participants in a business are its owners, employees, and

customers.

2) Every business must consider its stakeholders, and their sometimes

conflicting interests, when making decisions.

3) The activities needed to run a business can be divided into functional

areas. The business functions correspond fairly closely to many
majors found within a typical college of business.

4) Businesses are influenced by such external factors as the economy,

government, and other forces external to the business.

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Chapter 1 Text References and Image Credits
Image Credits: Chapter 1
Figure 1.1: “Steve Jobs.” (2011) CC by 2.0. Image retrieved from:
https://www.flickr.com/photos/8010717@N02/6216457030

References: Chapter 1
1
This vignette is based on an honors thesis written by Danielle M. Testa, “Apple, Inc.: An
Analysis of the Firm’s Tumultuous History, in Conjunction with the Abounding Future” (Lehigh
University), November 18, 2007.
2
Lee Angelelli (1994). “Steve Paul Jobs.” Retrieved from: http://ei.cs.vt.edu/~history/Jobs.html
3
Ibid.
4
Cyrus Farivar (2006). “Apple’s first 30 years; three decades of contributions to the computer
Industry.” Macworld, June 2006, p. 2.
5
Dan Barkin (2006). “He made the iPod: How Steve Jobs of Apple created the new millennium’s
signature invention.” Knight Ridder Tribune Business News, December 3, 2006, p. 1.
6
Jon Hilsenrath, Serena Ng, and Damian Paletta (2008). “Worst Crisis Since ’30s, With No End
Yet in Sight,” Wall Street Journal, Markets, September 18, 2008. Retrieved from:
http://www.wsj.com/articles/SB122169431617549947
7
Steve Hargreaves (2008). “How the Economy Stole the Election,” CNN.com. Retrieved from:
http://money.cnn.com/galleries/2008/news/0810/gallery.economy_election/index.html
8
Dan Gallagher (2008). “Analyst says Apple is cutting back production as economy weakens.”
MarketWatch. Retrieved from: http://www.marketwatch.com/story/apple-cutting-back-iphone-
production-analyst-says?amp%3Bdist=msr_1
9
David Baron (2003). “Facing-Off in Public.” Stanford Business. August 2003, pp. 20-24.
Retrieved from: https://www.gsb.stanford.edu/sites/gsb/files/2003August.pdf
10
Transparency Market Research (2014). “Electric Vehicles Market (on-road) (hybrid, plug-in,
and battery) - Global Industry Analysis, Size, Share, Growth, Trends and Forecast, 2013 – 2019.”
Retrieved from: http://www.transparencymarketresearch.com/electric-vehicles-market.html

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