UNIT 1 – BUSINESS AND ITS ENVIRONMENT

CHAPTER 1
1.1 ENTERPRISE
Definitions
Business: an organisation that uses resources to meet the needs of customers
by providing a product or service that they demand.
Entrepreneur: an individual who has the idea for a new business, starts it up
and carries most of the risks but benefits from the rewards.
Customer: an individual consumer or organisation that purchases goods or
services from a business.
Consumer: an individual who purchases goods and services for personal use.
Consumer goods: the physical and tangible goods sold to consumers that are
not intended for resale. These include durable consumer goods, such as cars and
washing machines, and non – durable consumer goods, such as food, drinks and
sweets #, that can be used only once.
Consumer services: the non- tangible products sold to consumers that are not
intended for resale. These include accommodation, insurance services and train
journeys.
Factors of production: the resources needed by business to produce goods or
services.
Capital goods: the physical goods used by industry to aid in the production of
other goods and services, such as machines and commercial vehicles.
Enterprise: the action of showing initiative to take the risk to set up a business.
The nature of business activity
The aim of business activity is to satisfy people’s needs using certain resources,
The purpose of business owners and management is to add value to resources
while meeting people’s needs.
Purpose of Business activity
 Business activity at all stages involves adding value to resources such as
raw materials and making them more desirable to and valued by the final
purchasers.
 Business activity uses the scarce resources of our planet to produce goods
and services that allow us all to enjoy a much higher standard of living
than would otherwise be possible if we remained entirely self – sufficient.
What businesses do
 They identify the needs of customers.
 They purchase necessary resources to allow production to take place.
 Businesses produce goods and services which satisfy customers’ needs,
usually with the aim of making a profit.
Factors of production needed by businesses.
For businesses to be able to operate and produce goods and services, they need
the following resources called factors of production.
 Land: this does not only include land itself but all the renewable and non -
renewable resources of nature such as coal, crude oil and timber.
 Labour: refers to manual and skilled labour which makes up the
workforce of the business.
 Capital: Finance needed to set up a business and pay for its operations, it
also includes all the manufactured resources used in production. These
include capital goods such as computers, machines, factories, offices and
vehicles.
 Enterprise: the initiative and coordination provided by risk
takers(entrepreneurs). They combine the other factors of production into a
unit capable of producing goods and services. Enterprise provides the
managing, decision making and coordinating roles.
Resources that businesses need.
 Land - (Site for buildings, raw materials)
 Customers
 Suppliers
 Labour - (skilled and unskilled, permanent and temporary)
 Capital – (Finance, factories/offices, Machines)
 Government – (roads, rail and airports, law and order and schools and
colleges)
 Enterprise – (risk takers, coordinators, decision makers)
The concept of adding value
Adding value: increasing the difference between the cost of brought – in inputs
(materials) and the selling price of the finished goods.
Added value: the difference between the cost of purchasing bought – in inputs
(materials) and selling price of the finished goods.
Branding: the process of differentiating a product by developing a symbol,
name, image or trademark for it.
 All businesses aim to create value by producing goods and services and
selling them for a higher price than the cost of bought -in materials and
this is called adding value.
 If a customer is prepared to pay a price that is greater than the cost of
materials used to produce a good or service, then the business has been
successful in adding value.
 The difference between the selling price of the products sold by a business
and the cost of the materials that it bought in is called added value.
 For a business to survive, it has to add value so that it can be able to pay
other costs and financial returns to the investors.
 The value added by the business is not rent as other costs such as rent,
and labour must be paid for.
Examples of how different businesses could add value to their products.
Jewellery shop
 A well-designed shop window display
 Attractive shop fittings
 Well dressed and knowledgeable shop assistants
 Beautiful packaging for each jewellery item
These features will allow for an increase in jewellery prices to cover the extra
costs involved.
Sweet manufacturer
 Extensive advertising of the brand of sweets to create an easily
recognised name and brand identity.
 Attractive packaging
 Selling through established confectionery shops rather than widely
available vending machines.
Higher prices as a result of successful branding will add value.

ACTIVITY 1.1
Economic activity and the problem of choice
 People with lower levels of income are unable to obtain the basic
requirements of life (food, clean water, shelter) and they have many
unsatisfied needs and wants.
 Rich people may not be able to satisfy all of their wants for luxury goods
and services.
 There are insufficient goods to satisfy all our needs and wants at any one
time, this is known as the economic problem.
 The purpose of economic activity is to provide for as many of our wants as
possible.
 The shortage of products and limited supply of resources needed to make
them force us to make a choice as we cannot satisfy all our wants.
 We make choices that will satisfy us now and those we prepared to give
up.
 If we are careful and rational, we will choose things that will benefit us
most and give up on things that provide us with less value.
 The need to make a choice is not exclusive to consumers but to all
decision makers such as governments, businesses, workers, charities etc.
Opportunity cost: it means the next most desired option that is given up.
 The need to choose the goods we want leads to the opportunity cost
principle.
 As we decide to purchase one item, we give up on other goods as we
cannot afford all of them.
 The next most desired product which is given up becomes the lost
opportunity or opportunity cost.
 The concept of opportunity cost exists for all economic decision makers
that is consumers, businesses and governments.
The dynamic business environment
 Because the business environment is dynamic or constantly changes, it is
risky to start a new business. The risk of change can make the original
business idea much less successful. The problem becomes worse if the
business plan is not flexible to deal with change.
Changes in the business environment
 New competitors entering the market.
 Legal changes for example new safety regulations or limits on who can
buy the product.
 economic changes that leave money with less money to spend
 Technological changes that make the products or processes of the new
business outdated.
There are many other examples which indicate the dynamic business
environment which makes owning and operating a business risky. The changing
business environment is the major reason why some businesses succeed and
why others fail. Decision making by entrepreneurs is often focused on
responding to change.
Why do some businesses succeed?
 Good understanding of customer needs – leads to sales targets being
achieved.
 Efficient management of operations – keeps costs under control.
 Flexible decision making to adapt to new situations – allows
investment in new business opportunities.
 Appropriate and sufficient sources of finance -prevents cash
shortages and allows for expansion.
Why do some businesses fail?
Success in business is never certain. Most of the following reasons apply to
failure of both new and established businesses.
 Poor record keeping
 Lack of cash
 Poor management skills

Poor record keeping

 1Failure to pay sufficient attention to record keeping is the common
reason for business failure.
 Some small companies suppose it is less important to keep accurate
records than to meet customer’s needs or they think they can
remember everything.
 Many businesses keep their records in computers. It is always good to
keep paper records such as receipts from suppliers, details of big
deliveries etc.
  Paper records acts as a check or back up system if the computer fails.
Paper records also provide evidence to the tax authorities if they
dispute the company’s tax calculations.
Lack of cash
 When a business runs short of cash, it makes it difficult for it to run its day
– to day operations and this is a great sign of business failure.
 A business needs finance to hold inventories, give trade credit to
customers who then become debtors, buy more supplies, pay suppliers,
offer credit to important customers and all this is possible when the
business has enough working capital. Lack of cash therefore leads to the
business closing.
Cash flow problems can be reduced if:
 A cash flow forecast made and kept up to date. The cash needs of a
business can be assessed month by month.
 Sufficient capital is injected into the business at start -up allowing it to
operate during the first months when cash flow from customers may be
slow to build up.
 Good relations are established with the bank so that short term cash
problems may be financed with an overdraft extension.
 There is effective credit control over customers’ accounts to make sure
they pay on time.
Poor management skills
Poor management skills also lead to business failure. It is important that
entrepreneurs have the following management skills even if they might have
some work experience.
 Leadership and decision making
 Cash handling and cash management.
 Planning, coordinating and communication.
 Marketing, promotion and selling.
Some entrepreneurs manage to learn management skills quickly once their
business is up and running but this is very risky.
To avoid such risks,
 a new entrepreneur could gain management experience beforehand
through employment or obtain advice and training from a specialist
organisation offering management support.
 Entrepreneurship can buy in experience by employing people with
management experience though its expensive and many new businesses
cannot afford this option.
Local, national and international businesses
Local businesses - operate in small, well-defined parts of a country. Their
owners often do not aim to expand so do not make attempts to attract
customers across the whole country. Examples are small building and carpentry
firms, single-branch shops, hairdressing businesses and child-minding services.
National businesses - have branches or operations across a country. They
make no attempt to establish operations in other countries or to sell
internationally. Examples include large car-retailing firms, retail shops with
branches in just one country and national banks.
International businesses - sell products in more than one country. This may
be done by using foreign agents or online selling.
Multinational businesses - have operations in more than one country. This
means they have an established base for either producing or selling products
outside their own domestic economy.
Multinational businesses - are business organisations that have headquarters in
one country, but with operating branches, factories and assembly plants in other
countries.
The role of entrepreneurs and intrapreneurs
A new business idea might have the best available land and labour and be well
financed but without the enthusiasm and creativity of an entrepreneur or
intrapreneur, it will almost certainly fail.
Intrapreneur – a business employee who takes direct responsibility for turning
an idea into a profitable new product or business venture.
New business ventures started by entrepreneurs or intrapreneurs can be based
either on an innovative product idea or on a new way of offering a service. These
ventures can be a new location for an existing business idea or an attempt to
adapt a product in ways that no one else has tried before.
The role of the entrepreneur when creating and starting up a new
business
 Have an idea for a new business.
 Create a business plan.
 Invest some of their own savings and capital.
 Accept the responsibility of managing the business.
 Accept the possible risks of failure.

Qualities of successful entrepreneurs and intrapreneurs

Personal qualities and skills needed to make a success of a new
business venture.
 Innovation
 Commitment and self – motivation
 Multi – skills
 Leadership skills
 Self-confidence and the ability to bounce back.
 Risk taking
Innovation -The entrepreneur does not have to be an inventor in the traditional
sense. They must be able to identify and fill a gap in the market, attract
customers in innovative ways and promote their business as being different from
others in the same market. This requires original ideas and an ability to do things
differently. This is the skill of innovation.
Commitment and self – motivation - It is hard work to set up and manage a
new business. It may take up many hours of each day. Energy, focus, the
willingness to work hard, to be keen and to have the ambition to succeed are all
essential qualities of a successful entrepreneur.
Multi - skills - An entrepreneur will have to make the product (or provide the
service), promote it, sell it and keep accounts. These different business tasks
require someone who has many different qualities, is keen to learn technical
skills, is able to get on with people, and is good at handling money and keeping
accounting records.
Leadership skills - If the business has employees, the entrepreneur must lead
by example and will have to have a personality that encourages and motivates
those workers.
Self-confidence and the ability to bounce back - Many businesses start -
ups fail, yet this would not discourage a true entrepreneur who would have such
belief in themselves and their business idea and that they would be able to
bounce back from any setback.
Risk taking - Entrepreneurs must be willing to take risks in order to see results.
Often the risk they take is by investing their own savings in the new business.
Barriers to entrepreneurship
Every entrepreneur needs to address certain barriers in order to overcome and
turn their business idea into reality. The barriers include:-
 Lack of business opportunity
 Obtaining sufficient capital
 Cost of good locations
 Competition
 Lack of customer base
 Business risk and uncertainty
Lack of business opportunity
Identifying successful business opportunities is one of the most important stages
in becoming an effective entrepreneur. The original idea for most new
businesses comes from one of several sources, including:
 An entrepreneur’s own skills or hobbies such as dressmaking or car
bodywork repairing.
 Previous employment experience
 Franchising conferences and exhibitions offering a wide range of new
business start-up ideas.
 Small-budget market research for example, the internet allows any user to
browse business directories to see how many businesses are offering
certain goods or services in the local area.
Many new enterprises are set up in the following industries, often because of the
entrepreneurs ‘own skills and the small sums of capital required:
  Fishing-from a small boat owned by an entrepreneur.
 Market gardening-producing cash crops to sell at local markets.
 Jewellery making, dressmaking and craft work.
 Building trades
 Hairdressing
 Computer repairs
 Cafes and restaurants
 Childminding
Obtaining sufficient capital (Finance)
Why obtaining finance is a major barrier for entrepreneurs. This could
be due to:
 Insufficient savings -many entrepreneurs have limited personal savings.
 No knowledge of the financial support and grants available.
 No trading record to present to banks as evidence of past business
success.
 A poor business plan that fails to convince potential investors of the
chances of a business ‘s success.
Cost of good locations
When finance is limited, an expensive location should not be considered. It is
important to keep the level of output at which revenue covers all costs as low as
possible. This increases the business’s chances of survival. Operating from home
is the most common way for entrepreneurs to establish their business. This
keeps costs low, but there are drawbacks.
 It may not be close to the area with the biggest market potential.
 It lacks status -a business with its own impressive premises tends to
generate confidence.
 It may cause family tensions.
 It can be difficult to separate private life from working life.
New businesses that offer a consumer service need to consider their location
carefully. A website designer could operate from home very effectively, as
communication with customers will be by electronic means, but a hairdresser
may need to obtain premises in an area with the biggest number of potential
customers.
Competition
A newly created business will often experience competition from established
businesses with greater resources and market knowledge. The entrepreneur may
therefore have to offer a more unusual product or better customer service to
overcome the low-cost advantages that bigger businesses usually have.
Lack of customer base
A new business must establish itself in the market and build up customer
numbers quickly to survive. The long-term success of the business will depend
on encouraging customers to return to purchase products repeatedly. Good
customer service could be provided by;
  Personal customer service
 Knowledge
 pre- and after-sales service
 Supplying one-off customer requests that large firms may be reluctant to
provide.
Business risk and uncertainty
Differences between business risk and business uncertainty.
Business risk - All business decisions involve risk. For example, there is a
chance that a new business selling clothing will fail. If, in the last 12 months,10
clothing retailers have been established in city and 3 fail by the end of the year,
the risk of failure was 30%. A new entrepreneur could possibly reduce the risk of
their new clothing business failing by studying why these three businesses did
not survive. This would allow the entrepreneur to reduce business risk by
avoiding the errors made by the failed businesses, Business planning is used to
reduce risk.
Business uncertainty - Uncertainty cannot be foreseen, measured or
calculated. Plans may be made by entrepreneurs for the future, but some events
will always be unforeseen and impossible to predict. The covid-19 epidemic
caused a fall in spending by consumers. And this is an excellent example of
uncertainty that was impossible to forecast and very difficult for any business to
prepare for.

1 business uncertainty risk is excellence in Chennai for SBI manager old castle