I designed this section to provide a big picture. I find thinking like this useful when trying to develop a business idea. You do not need this information to get started. It is merely helpful in providing a framework for individuals who have not taken economics or business classes. If you start reading and find you already understand the material, move on.

I want you to take a step back and think about our global economy.

The purpose of all organizations is to create value. Businesses can exchange that value for profit. A non-profit organization will sustain itself and give all extra value away for the public good.

Let’s look at General Motors. GM is a car company. However, GM provides only one stage of value creation in our economy.

GM buys parts, labor, and product development. The parts will come from another company that has already created value by turning raw materials into say, a wheel. The labor comes from an employee, who adds value by bolting that wheel to the car. The product development comes from a team of employees who add their value by creating a design, concept or technology.

When everything gets bolted together, GM now has a car. GM has created a profit if it can sell the car for more than it cost to make it. The profit is equal to the value that GM has added by putting everything together.

Say GM sells a truck to the company that makes stereos that go inside other GM cars. The stereo company uses the truck to transport parts for their stereos. The truck is an ingredient for the final product, the stereos. When GM buys the stereos, they are effectively buying back part of their truck.

Although the global economy has far more than two companies, the premise is the same. Money changes hands but at the end of the day, people are trading products, which have value. Money is simply a way of assigning value to a product. The company that comes out on top creates the most value for the smallest cost.

GM is proof that even companies that create the most complex products can’t do everything. When you are deciding what kind of business you want to create, try to envision where you are going to fit in the big picture. Remember that you are going to have suppliers and customers. How do you add value? What will adding that value cost, and what is it worth on the market?

Remember that there is no such thing as a finished “end user” product. Everything can be used to create further value. Even wasteful luxury goods create value. Take something that to most people would be useless and unless they could afford it a waste of money, say a 300 thousand dollar car. To a movie producer, it might be a useful prop and a fantastic investment that helps create profit for the film. You can look at the economy as a giant circle of life.

When you work for a company, they are going to pay you whatever wage you are worth on the market. Because there are many people who could also do your job, this wage is always less than the actual value of your work. As a business owner, you take all of the extra value that people create and it becomes YOUR profit.

Now, you are excited to start your own business so you can make your link in the global economic chain bigger and more profitable. You can see the cash piling up and you are already deciding what to buy first.

Don’t get too excited though because there is one last thing to do before you start doing the real hands on work.

Lets Set Some Goals.