IB Business Management SLUnit 1 — Introduction to Business ManagementPaper 1 & 2Core idea~9 min read
What a Business Actually Does
Strip away the logos and the job titles and every business is doing the same thing: taking resources that are worth one amount, doing something to them, and selling the result for more. That gap is the whole point. Get this idea straight now and the rest of the course — marketing, finance, operations, people — is just four different ways of widening it.
📚 What you need to know
A business combines resources to supply goods or services that satisfy a want or need.
Goods are tangible and can be stored; services are intangible and are consumed as they are delivered.
Every business runs a transformation process: inputs go in, outputs come out, and value is added along the way.
The four resource inputs are land, labour, capital and enterprise — often written as physical, human, financial and enterprise resources.
Value added = selling price − the cost of bought-in materials and services. It is not the same as profit.
The four business functions are human resources, marketing, finance and accounts, and operations, and they are interdependent.
Wants, needs and what a business supplies
A need is something you cannot do without — food, shelter, clean water. A want is everything else: the brand of trainers, the streaming subscription, the flight to Bali. Businesses exist to supply both, but almost all the interesting business questions live in the wants, because wants are where customers have a choice and firms have to compete.
What gets supplied comes in two flavours, and the difference matters more than it first looks.
Goods
Services
Physical?
Yes — you can hold it
No — nothing changes hands physically
Storable?
Yes, in a warehouse
No. An empty airline seat at take-off is gone forever
The “cannot be stored” point is worth remembering, because it explains a lot of behaviour you will meet later. Hotels drop prices at the last minute and airlines overbook flights for exactly this reason: unsold capacity today is worth nothing tomorrow.
Business as a transformation process
Every business, from a one-person nail bar to a steelworks, can be drawn the same way. Resources go in, something happens to them, and something more valuable comes out.
Inputs are transformed into outputs. The gap between what the inputs cost and what the output sells for is value added.
The four resource inputs
Examiners like you to name these precisely, so learn the labels as well as the idea.
Input
What it covers
In a small bakery
Physical (land)
Natural resources, raw materials, premises, machinery
The shop unit, the ovens, the flour and yeast
Human (labour)
Workers and managers, with the right skills and in the right numbers
Two bakers, a counter assistant, the owner-manager
Financial (capital)
Money to buy everything else and to keep paying bills while stock sells
A $30,000 start-up loan plus cash in the till
Enterprise
The idea, the organising, and the willingness to carry the risk
The owner who spotted that the town had no artisan bakery
Capital intensive or labour intensive?
Businesses differ in which input dominates their costs, and this single fact shapes a lot of their decisions.
Capital intensive means machinery and equipment make up the larger share of costs. Think a bottling plant, a container port, a data centre. High fixed costs, low cost per extra unit, so these firms chase volume.
Labour intensive means wages dominate. Think a restaurant kitchen, a care home, a hand-finished furniture workshop. Costs rise almost in step with output, so these firms chase productivity and worry about wage rates.
Why it matters: a labour intensive firm is hit hard by a rise in the minimum wage; a capital intensive firm is hit hard by a rise in interest rates. Same shock, completely different exposure. That is exactly the kind of point that lifts an evaluation answer.
Value added is not profit
Students mix these two up constantly, and it costs marks. Value added looks only at what you bought in from outside and what you sold it for. Profit subtracts every cost, including your own wages, rent and interest.
Value added
value added = selling price − cost of bought-in materials and services
A business can add a great deal of value and still make a loss, if its own running costs are too high. A tailor who turns $40 of cloth into a $300 jacket adds $260 of value per jacket — but if the studio rent, wages and machinery cost more than that per jacket, the business is losing money.
✍ How businesses add value
Convert — physically change the input, as milling wheat into flour does.
Brand — a recognised name lets a firm charge more for a near-identical product.
Speed and convenience — same-day delivery, an app that saves the customer ten minutes.
Service — installation, a long warranty, real humans on the phone.
Quality and reliability — the customer pays more not to have to worry.
The four business functions
In a very small firm the owner does all of these before lunch. As a business grows, they become departments with their own budgets and targets.
Four functions, four sets of targets, one set of overall objectives. When they pull in different directions, the business underperforms.
Interdependence
The functions are not four separate businesses sharing a car park. A decision in one lands immediately in the others. Suppose marketing research shows customers now want a lighter, recyclable version of the firm’s flagship product:
Finance has to find and approve the budget for redesign and new tooling.
Operations has to source a different material and re-sequence the production line.
Human resources has to retrain the line staff and possibly recruit a materials engineer.
Marketing then has to relaunch the product and explain the change to loyal customers.
Break any one link and the whole thing stalls. In a case study, look for evidence that the links are broken — a marketing promise operations cannot deliver, or a training need nobody funded. That is usually where the marks are hiding.
In an exam, avoid writing about a function in isolation. “Operations should introduce quality circles” is worth one mark. “Operations should introduce quality circles, but HR will need to fund and run the training first, and the payback will not show in the accounts for two quarters” is analysis and evaluation.
Worked examples
WORKED EXAMPLE
Calculating value added
A workshop makes hardwood chairs. Per chair it buys in timber and fittings costing $180, and pays $95 in wages to the carpenter. Each chair sells for $420. The workshop completes 60 chairs a week. Calculate the value added per chair and the total value added per week.
Step 1: check what countsValue added compares the selling price with bought-in materials and services only. Wages are the firm’s own cost of transforming the inputs, so the $95 does not come off here. It is a deliberate distractor.Step 2: value added per chair420 − 180 = 240$240 of value added per chairStep 3: weekly total240 × 60 = 14,400$14,400 of value added per weekNote what this is not: after paying the carpenter, the margin is only $145 a chair, and rent and overheads still have to come out of that. Value added is a measure of transformation, not of profit.
WORKED EXAMPLE
Which function owns this problem?
A mid-sized cosmetics firm has four issues on the table this month. Identify the function that leads on each, and name one other function it must involve.
(a) Complaints about late deliveries have tripled. (b) Staff turnover in the packing team has reached 40% a year. (c) The bank has queried the firm’s overdraft limit. (d) A rival has launched a cheaper competing range.
(a) Late deliveriesOperations leads.Must involve marketing, who face the customers and manage the brand damage.(b) Staff turnoverHuman resources leads.Must involve finance, because better pay or better conditions needs budget.(c) Overdraft queryFinance and accounts leads.Must involve operations, since holding less stock is the fastest way to free up cash.(d) Cheaper rivalMarketing leads.Must involve operations, because matching a lower price is only possible if unit costs can fall.Name the lead, then name the link
💡 Exam tip
Define value added with the formula, not with a vague phrase like “making things worth more”. The formula is what earns the second mark.
When asked to describe a business, say what it transforms, not just what it sells. “It converts raw cocoa into packaged chocolate bars” beats “it sells chocolate”.
Use capital intensive / labour intensive as an evaluation tool. It instantly tells you which cost changes threaten a firm.
Apply to the case study business by name. Generic answers about “a business” sit in the bottom band.
For any recommendation, name the function that has to act and the function it depends on. That single sentence is often the difference between analysis and evaluation.
Do not forget enterprise when listing inputs. Most students name three and lose the fourth mark.
⚠️ Common mix-up
Value added = profit. It does not. Value added ignores the firm’s own labour, rent and overheads.
Calling all businesses “companies”. A company is one legal form. A sole trader is a business but not a company.
Treating services as second-class. In developed economies services are the majority of output and often the higher value-added activity.
Listing “money” as the only input. Money buys inputs; it is the financial resource, not the whole set.
Assuming capital intensive means “modern” and labour intensive means “backward”. A Michelin-starred kitchen is deliberately labour intensive.
Writing about one function alone. The syllabus explicitly wants interdependence, and questions are written to test it.
Up next: Primary, Secondary, Tertiary and Quaternary Sectors — where a business sits in the chain of production, and why economies keep shifting along it.
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