What Is A Firm - Introduction To Business - Weebly

Home » What Is A Firm In Business » What Is A Firm - Introduction To Business - Weebly

Maybe your like

What is a Firm?

We can define a firm (company, enterprise) as an organization that employs productive resources to obtain products and/or services which are offered in the market with the aim of making a profit. A few keywords in this definition deserve further attention. First, firms are organizations, but not all organizations are firms. An organization is a complex social system created by people to cooperate in the achievement of some goal[1]. For instance, a political party is an organization, but its goal is to contribute to positively transform society by means of collectively exerting political power. What distinguishes firms from other organizations is the aim of obtaining a profit through selling products and services in the market. Second, firms fulfill the social role of production, transforming resources into finished goods and services. Typically, firms use four different basic types of resources in productive activities:
  • Natural resources: taken directly from nature without previous transformation (land, air, water, wood, etc.).
  • Capital: funds needed to invest in tools, machinery, equipment, technology.
  • Human resources: physical and intellectual capabilities of the workers.
  • Entrepreneurship: the innovative ideas that shape the business model.
Third, resources are combined and transformed into final products or services which are, in turn, commercialized in markets to customers who are willing to pay for them. If the firm produces something that customers like, it will certainly be able to set prices that can cover production costs and more. If not, covering costs will be difficult and firm survival will be threatened. The difference between the revenue raised from selling goods and services and the costs incurred in delivering them is the firms’ profit. If it is positive, it means that the production of the firm is more valuable than the resources employed. In that case, the firm is adding value to those resources. Alternatively, if profit is negative (i.e., a loss) then the firm would be destroying value, since the resources are worth more than the products and services obtained from them. Value creation is a continuous process in which a large number of interrelated firms take part. We can imagine the vertical chain of an industry as the sequence of stages that must be accomplished from raw materials to product delivery to end customers. For instance, the packaged milk industry is rooted in a vertical chain that is shared with the broader dairy products industry. The chain starts with raw materials such as feedstuffs, pastures and cows that farmers combine with veterinary services, chemicals, and capital goods (machinery and tools) to obtain raw milk, which is collected and transported in refrigerated trucks to processing plants. Here the milk undergoes some processing such as pasteurization, homogenization, vitamin fortification, etc. Then the different varieties of processed milk are packaged into appropriate containers (glass, carton, plastic) and transported to distribution points where it is finally delivered to end customers. [1] More technically we could say that organizations are artificial and goal-oriented social systems. Artificial because they are created by people and goal-oriented because they have an intended purpose. Powered by Create your own unique website with customizable templates. Get Started

Tag » What Is A Firm In Business