Friday, October 24, 2014

The Textbook Answer

In business school, they teach you there are basically four ingredients you need if you want to produce something of value: land (or raw materials), capital (or money), labor (or work), and entrepreneurship (or know-how).

For example, if you want to make a car you're going to need things like a big factory, raw materials like steel for the body and rubber for the tires (land); you're going to need a lot of money to buy these things (capital); you're going to need workers (labor) and money to pay them (more capital); and you're going to need to know how to make a car (entrepreneurship).

If you want to open a barber shop, you'll need things like a store, barber chairs, scissors, electric clippers, razors, and shaving cream (land); you'll need money to buy all these things (capital); you'll need licensed barbers (labor) and money to pay them (more capital); and you'll need to know how to run a barber shop (entrepreneurship).

It's a little more complicated than this, but in business you basically try to control these four ingredients of production in order to produce your product or service at the lowest possible cost, then you try to sell your product or service at the highest possible price.  If your sales exceed your costs you'll make a profit (you're in the black); if your costs exceed your sales then you're losing money (you're in the red); if you continue to operate in the red you risk bankruptcy so you try to control the four ingredients of production in order to get yourself out of the red and into the black.

And it's not easy for a business manager to control these four ingredients of production.  For example, it's not easy to buy the raw materials (land) at the lowest possible price.  The cost to build a factory or the rent on a store are pretty much set in stone.  Once you've built a factory or signed the lease on your store that money is gone (it's a sunk cost).  The utilities to run your factory or store are also pretty much set in stone too.  You're going to have to pay your light bill if you want to stay in business.  The electric company doesn't care if you're losing money; they want to be paid at the end of the month.  Your know-how (entrepreneurial idea) won't make you a dime until your idea pays off and that could take awhile.  The only thing a business manager can really control is the amount and cost of labor which is why most businesses try to hire the fewest number of workers at the lowest possible salaries.

The textbook answer on how business works sounded really convincing didn't it?  When I went through business school I was convinced too, but as a grew a little older and wiser I saw a big hole in the textbook answer.

Workers (labor) are people, they're not units of production like land and capital.  People are made in the image of God.  They have hopes and dreams, spouses and children, and lives outside of work.  When you, as a business manager, follow the textbook answer of how a business should run and treat people like a line item on a spreadsheet or a unit of production, you're ethically running your business in the red and risk moral bankruptcy.



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