1.1 Enterprise

The Nature of Business Activity

Purpose of Business Activity:

• Business: any organisation that uses resources to meet the needs of customers by providing a product or service that they demand
• Business activity: involves creating and adding value to resources (such as raw materials and semi-finished goods) and making them more desirable – and thus valued by – the final purchaser
  • Businesses identify the needs of consumers or other firms
  • They purchase the resources – or factors of production – in order to produce goods and services that satisfy these needs, with the aim of making a profit
    • Factors of Production: resources needed by business to produce goods or services
      • Land: encompasses all renewable and non-renewable resources of nature
      • Labour: manual and skilled labour that make up the workforce of the business
      • Capital: the finance needed to set up a business and pay for its continuing operations and the man-made resources used in production (capital goods)
      • Enterprise: the driving force, provided by risk-taking individuals, that combines all other factors of production into a unit capable of producing goods and services
• Business activity uses scarce resources to produce goods and services that allow us to enjoy a higher standard of living
• Business activity exists to produce consumer goods or services that meet the needs of customers
  • Consumer goods: the physical and tangible goods sold to the general public
    • Durable consumer goods: cars and washing machines
    • Non-durable consumer goods: food, drinks and sweets
  • Consumer services: non-tangible products sold to the general public (example: hotel accommodation, insurance services and train journeys)

The Concept of Creating Value:

• Creating value: increasing the difference between the cost of purchasing bough-in materials and the price the finished goods are sold for
  • If a customer is prepared to pay a price that is greater than the cost of materials used in making or providing a good or service, then the business has been successful in creating value
  • Without creating value, a business will not be able to survive as other costs have to be paid and a profit must be made to justify staying in operation
• Added value: the difference between the cost of purchasing bought-in materials and the price the finished goods are sold for

The Nature of Economic Activity, the Problem of Choice and Opportunity Cost

• Economic Problem: there are insufficient goods to satisfy all of our needs and wants at any one time
• Purpose of Economic Activity: to provide for as many of our wants as possible
• Problem of Choice:
  • The shortage of products – together with the resources needed to make them – lead to having to make choices
  • As we cannot satisfy all of our wants, then we must choose those which we will satisfy now and those which we will forgo
• Opportunity Cost: the benefit of the next most desired option which is given up
  • In deciding to purchase or obtain one item, we must give up other goods as they cannot all be purchased

Business Environment is Dynamic

• Setting up a new business is risky because the business environment is dynamic, or constantly changing
  • There is also the risk of change, which can make the original business idea much less successful
• New businesses may fail if any of the following changes occur which may turn the venture from a successful enterprise to a loss-making enterprise:
  • New competitors
  • Legal changes
  • Economic changes that leave customers with much less money to spend
  • Technological changes that make the methods used by new business old-fashioned and expensive

What a Business Needs to Succeed

• Identifying successful business opportunities
  • There is difficulty in leaping towards successful entrepreneurship because there is the inability to identify a market need that will offer sufficient demand for their product to allow the business to be profitable
  • Original ideas for most new businesses come from several sources:
    • Own skills or hobbies – these skills will enable an entrepreneur to offer them to friends and relatives and this could be the start of the business
    • Previous employment experience – allows a potential entrepreneur to see the working of such a business and judge whether they could set up a similar business themselves
    • Franchising conferences and exhibitions – offering a wide range of new business start-up ideas which also give the potential benefits of the support of a much larger franchiser business
    • Small-budget market research – can indicate gaps in local markets that could be profitably filled by the entrepreneur
• Sourcing capital (finance)
  • Once the entrepreneur has decided on a business idea, the next task is to raise the necessary capital
  • Obtaining finance is a major problem for entrepreneurs because:
    • Lack of sufficient own finance
    • Lack of awareness of the financial support and grants available
    • Lack of any trading record to present to banks as evidence of past business success – a trading record would tend to give a bank confidence when deciding to lend money or not for a new venture
    • A poorly produced business plan that fails to convince potential investors of the chances of a business’s success
• Determining a location
  • Choosing the location for a new business has the need to minimise fixed costs
  • When finance is limited, it is very important to keep the break-even level of output as low as possible
  • The cost and position of the location chosen can have a big impact on the business entrepreneur’s chance of success
• Competition
  • A newly created business will often experience competition from older, established businesses, with more resources and more market knowledge
• Building a customer base
  • A new firm must establish itself in the market and build up customer numbers as quickly as possible
  • The long-term strength of the business will depend on encouraging customers to return to purchase products again and again
    • Many small businesses try to encourage this by offering a better service than their larger and better-funded competitors

Why Many Businesses Fail Early On

• Lack of record keeping
  • Many entrepreneurs fail to pay sufficient attention to accurate records as either they believe that it is less important than meeting their customers’ needs, or they think they can remember everything
  • With the falling cost of computing power, most businesses, even newly formed ones, can keep records on computer
• Lack of cash and working capital
  • Capital is needed for day-to-day cash, for the holding of inventories and to allow the giving of trade credit to customers, who then become trade receivables
  • Without sufficient working capital, the business may be unable to buy more supplies, or pay suppliers offer credit to important customers
  • Serious working capital deficiencies can be avoided if several simple, but important, steps are taken as the business is being established:
    • Constructing a cash flow forecast so that the liquidity and working capital needs of the business can be assessed month by month
    • Inject sufficient capital into the business at start-up to last for the first few months of operation when cash flow from customers may be slow to build up
    • Establish good relations with the bank so that short-term problems may be overcome with an overdraft extension
    • Use effective credit control over customers’ accounts
• Poor management skills
  • Entrepreneurs may have not yet developed the skills needed at a management level (such as leadership skills, cash handling and cash management skills, decision-making skills, communication skills, planning and coordinating skills and market, promotion and selling skills)
  • Potential entrepreneurs are usually encouraged to attend training courses to gain some of these skills before putting their hard-earned capital at risk, or to first seek management experience through employment

The Role of the Entrepreneur

Qualities an Entrepreneur is Likely to Need for Success

• Innovation
  • The ability to carve a new niche in the market, attract customers in innovative ways and present their business as being different from others in the same market
  • Requires original ideas and an ability to do things differently
• Commitment and Self-Motivation
  • Requires the willingness to work hard, keen ambition to succeed, energy and focus
• Multiskilled
  • An entrepreneur will have to make the product (or provide the service) promote it, sell it and keep accounts
  • Requires a person who has many different qualities: being keen to learn technical skills, being able to get on with people and being good at handling money and keeping accounting records
• Leadership skills
  • Requires the entrepreneur to lead by example and must have a personality that encourages people in the business to follow them and be motivated by them
• Self-confidence and the ability to bounce back
  • Requires the entrepreneur to have such belief in themselves and their business idea that they would bounce back from any setbacks
• Risk taking
  • Must be willing to take risks in order to see results

The Role of Business Enterprise in the Development of a Business and a Country

• New business start-ups can be found in nearly all industries, yet it is true to say that there are some industries and sectors of industry where there is a much greater likelihood of new entrepreneurs entering
• Common types of entrepreneurial businesses:
  • Primary sector: firms engaged in extracting natural resources so that they can be used and processed by other firms
  • Secondary sector: firms that manufacture and process products from natural resources
  • Tertiary / Service sector: firms that provide services to consumers and other businesses
• Claimed benefits to the economy of a business enterprise
  • Employment creation:
    • In creating such employment, the national level of unemployment will fall
    • If the business survives and expands, then there may be additional jobs created in the businesses that supply them
  • Economic growth:
    • Any increase in output of goods or services from a start-up business will increase the gross domestic product of a country
    • If enough small businesses are created, economic growth will lead to increased living standards for the population
    • Increased output and consumption will also lead to increased tax revenues for the government
  • Firms’ survival and growth:
    • The survival of new firms will expand and become important businesses
      • These will employ large numbers of workers, add considerably to economic growth and will take the place of declining businesses that may be forced to close due to changing consumer tastes or technology
  • Innovation and technological change:
    • New businesses tend to be innovative and this creativity adds dynamism to an economy
      • This creativity can rub off on to other businesses and help to make the nation’s business sector more competitive
  • Exports
    • Firms will expand their operations to the export market and this will increase the value of a nation’s exports and improve its international competitiveness
  • Personal development
    • Starting and managing a successful business can aid in the development of useful skills and help an individual towards self-actualisation
      • This creates an example for others to follow and lead to further successful new enterprises that will boost the economy
  • Increased social cohesion
    • By creating jobs and career opportunities and by setting a good example for others to follow, entrepreneurship can help to achieve social cohesion in the country

Social Enterprises

The Range and Aims of Social Enterprises

• Social enterprise: a business with mainly social objectives that reinvests most of its profits into benefitting society rather than maximising returns to owners
  • Social enterprises compete with other businesses in the same market or industry, using business principles to achieve social objectives
• Common features of social enterprises:
  • They directly produce goods or provide services
  • They have social aims and use ethical ways of achieving them
  • They need to make a surplus or profit to survive as they cannot rely on donations as charities do

Triple Bottom Line – Economic (Financial), Social and Environmental Targets

• Triple Bottom Line: the three objectives of social enterprises
  • Economic: make a profit to reinvest back into the business and provide some return to owners
  • Social: provide jobs or support for local, often disadvantaged, communities
  • Environmental: to protect the environment and to manage the business in an environmentally sustainable way

Reference: Stimpson, P., Farquharson, A., & Stimpson, P. (2015). Cambridge international As and A level business coursebook. Cambridge: Cambridge University Press.