Fundamentals of Business, Second Edition

Chapter 2

The Foundations of
Business
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2. Chapter 2 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 PESTEL macro-business-environment model to an industry or
emerging technology
3. Explain other key terms related to this chapter including: entrepreneur; profit; revenue.

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 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.

22 | Chapter 2 The Foundations of Business

 Figure 2.1: Steve Jobs

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 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:

Chapter 2 The Foundations of Business | 23

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 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.

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

24 | Chapter 2 The Foundations of Business

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.

To check your understanding in an online quiz, visit the eBook at:

https://otn.pressbooks.pub/fundamentalsofbusiness/?p=29

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.

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

Chapter 2 The Foundations of Business | 25

and the policies it adopts. Stakeholders include customers, vendors, employees, landlords, bankers, and others
(see Figure 2.2). 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 2.2: Business Stakeholders

26 | Chapter 2 The Foundations of Business

 To check your understanding in an online quiz, visit the eBook at:
https://otn.pressbooks.pub/fundamentalsofbusiness/?p=29

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.

Chapter 2 The Foundations of Business | 27

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 external to a company over which the business exerts
very little if any control. Figure 2.3 “Business and Its Environment” sums up the relationship between a business
and the outside forces that influence its activities. One industry that’s clearly affected by all these factors is the
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

28 | Chapter 2 The Foundations of Business

 Figure 2.3: Business and its Environment –PESTEL

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

PESTEL Analysis

One useful tool for analyzing the external environment in which an industry or company operates is the
PESTEL model. PESTEL is an acronym, with each of the letters representing an aspect of the macro-environment
that a business needs to consider in its planning. Let’s briefly run through the meaning of each letter.
P stands for the political environment. Governments influence the environment in which businesses
operate in many ways, including taxation, tariffs, trade agreements, labor regulations, and environmental
regulations.
E represents the economic environment. As we will see in detail in a later chapter, whether the economy

Chapter 2 The Foundations of Business | 29

is growing or not is a major concern to business. Numerous economic indicators have been created for the
specific purpose of measuring the health of the economy.
S indicates the sociocultural environment, which is a category that captures societal attitudes, trends in
national demographics, and even fashion trends. The term demographics applies to any attribute that can be used
to describe people, such as age, income level, gender, race, and so on. As a society’s attitudes or its demographics
change, the market for goods and services can shift right along with it.
T is for technological factors. In the last several decades, perhaps no force has impacted business more
than the emergence of the internet. Nearly instantaneous access to information, e-commerce, social media, and
even the ability to control physical devices from remote locations have all come about due to technological
forces.
The second E stands for environmental forces, which in this case means natural resources, pollution
levels, recycling, etc. While the attitudes of a society towards the natural environment would be considered
a sociocultural force, the level of pollution, the supply of oil, etc. would be grouped under this second E for
environment.
Finally the L represents legal factors. These forces often coincide with the political factors already
discussed, because it is politicians (i.e., government) that enacts laws. However, there are other legal factors that
can impact businesses as well, such as decisions made by courts that may have broad implications beyond the
case being decided.
When conducting PESTEL analysis, it is important to remember that there can be considerable overlap
from category to category. It’s more important that businesses use the model to thoroughly assess its external
environment, and much less important that they get all the forces covered under the “right” category. It is
also important to remember that an individual force, in itself, is not inherently positive or negative but rather
presents either an opportunity or a threat to different businesses. For example, societal attitudes moving in
favor of green energy are an opportunity for those with capabilities in wind, solar, and other renewables, while
presenting a threat, or at least a need to change, to companies whose business models depend exclusively on
fossil fuels.

To check your understanding in an online quiz, visit the eBook at:

https://otn.pressbooks.pub/fundamentalsofbusiness/?p=29

Key Takeaways

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

30 | Chapter 2 The Foundations of Business

 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 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. The PESTEL model is a useful tool for analyzing these forces.

Chapter 2 Text References and Image Credits

Image Credits: Chapter 2

Figure 2.1: “Steve Jobs.” (2011) CC by 2.0. Image retrieved from: https://www.flickr.com/photos/8010717@N02/
6216457030

References: Chapter 2

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 computerIndustry.”
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

Chapter 2 The Foundations of Business | 31