Business

Unit 1: Enterprise
1.1 The nature of business activity:
Aims to satisfy peoples needs. In order to do this,
it requires resources. Businesses operate in a
constantly changing world, but the purpose of
business owners and managers remains the same
– to add value to resources while meeting peoples
needs.

Purpose of business activity:

A business is an organisation that uses resources
to meet the needs of customers by proving a
product or service that they demand. There are
several stages in the production of finished goods.
Business activity at all stages involves adding
value to resources such as – raw materials and
making them more desirable to – and value by –
the final purchaser. Without business activity, we
would all be entirely dependant on the goods that
we could make or grow ourselves. Business activity
uses the scarce resources of our planet to
produce goods and services that allow us all to
enjoy a higher standard of living than would
otherwise be possible if we remained entirely self-
sufficient.
KEY TERMS
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.

What do businesses do?

 Businesses identify the needs of customers
 Purchase necessary resources to allow production
to take place
 Produce goods and services which satisfy
customers needs, with the aim of making a profit

KEY TERMS
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.
Include durable
consumer goods, such
as cars and non-durable
consumer goods such
as food, that can only
be used once.
Consumer services Non-tangible products
sold to consumers that
are not intended for
resale. Including hotel
accommodation,
insurance services etc.
Business activity exists to produce goods or
services that meet the needs of customers. Many
of these customers will be consumers who
purchase consumer goods and consumer
services.

The factors of production needed by

businesses
All businesses need resources to be able to operate
and produce goods and services. These resources
are called factors of production. There are four
factors of production:
 Land – Not only land itself but all the
renewable and non-renewable resources of
nature, such as coal, crude oil and timber.
 Labour – Manual and skilled labour make up
the work force in the business.
 Capital – Not just the finance needed to set up
the business and pay for its continuing
operations, but also all the manufactured
resources used in production. These include
capital goods, such as machines, computers,
factories, offices and vehicles.
 Enterprise – Initiative and coordination
provided by risk taking individuals called
entrepreneurs. They combine other factors of
production into a unit capable of producing
goods and services. Enterprise provides the
managing, decision making and coordinating
roles.
 KEY TERMS
Factors of production The resources needed
by business to
produce goods and
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
Site for
buildings
Raw materials risk to set up a Factories/
finance
offices
business.

land Capital machines

Customers
Road/rail/ airport
Resources

Government Law and order

Suppliers

Schools/colleges
Labour

Enterprise
Skilled Permanent

Unskilled Temporary Risk - takers Coordinators

Decision-makers
The concept of adding value
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: This is called adding
value. If the customer is prepared to pay a price that is
greater than the cost of materials used to produce the
goods or service, then the business has been successful
in adding value. The difference in between the selling
price of the product sold by a business and the cost of
materials that it bought in is called added value.
Without adding value, a business will not be able to
survive as the other costs have to be paid and the
people investing in the business also expect a financial
return.

KEY TERMS
Adding value Increasing the difference
between the cost of
bought-in inputs and the
selling price of the
finished goods.
Added value The difference between
 the cost of purchasing
bought-in inputs and by
the selling price of the
finished goods.

The value added by the business is not profit as other

costs must be paid for; such as labour and rent.
However, if a business can add value without increasing
its costs, then its profit will increase.
KEY TERM
Branding The process of
differentiating a product
by developing a symbol,
name, image or
trademark for it.

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.
They have many unsatisfied needs and wants. Even
rich people may not be able to satisfy all their wants of
luxury goods. There are insufficient goods to satisfy all
our needs and wants. This is known as the economic
problem.
The purpose of economic activity is to provide for as
many of our wants as possible, yet we are still left with
wanting more. This shortage of products, and the
limited supply of resources needed to make them, force
us to make choices. As we cannot satisfy all of our
wants.
Opportunity cost
In deciding to purchase or obtain one item, we must
give up other goods as they cannot be afforded. The
next most desired product which is given up becomes
the lost opportunity or opportunity cost.

KEY TERM
Opportunity cost The next most desired
option that is given up.

The dynamic business environment

Setting up a new business is risky because the business
environment is dynamic/constantly changing. There is a
risk of change, which can make the original business
idea much less successful. This problem can be made
worse if the business plan is too inflexible to deal with
changes.
Changes in the business environment include:
 New competitors entering the market.
 Legal changes – examples include new safety
regulations or limits on who can buy the product.
 Economic changes that can leave customers with
less money to spend.
 Technological issues that can make the products
or processes of the new business outdated.

This can make owning and operating a business

quite risky. The changing business environment is a
major reason why some businesses succeed and
others fail.
 KEY CONCEPT
The dynamic business environment is a major
cause of change within businesses. 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?
Poor record-keeping:
The lack of accurate records is a common
reason for business failure. Many small
companies fail to pay sufficient attention to
record-keeping. They either believe it is less
important than meeting customers needs or
think they can remember everything. Most
businesses keep records on a computer. It is
always advisable to also keep hold of paper
records such as; receipts from suppliers or
details of big deliveries. Paper records act as
a check or back up system if the computer
should fail. These records can also provide
evidence to tax authorities if they dispute
the company’s own tax calculations.

Lack of cash
Running short of cash so that day-to-day
business operations become difficult is the
most significant reason for the failure of
businesses. Due to lack of cash many new
businesses fail to survive.
Finance is needed for day-to-day cash
 For the holding of inventories
 To give credit to customers, who then
will become debtors.
Without this working capital businesses
will be unable to buy more supplies, pay
suppliers or offer credit to important
customers. All these factors could lead to
the business closing down.
Cash flow problems can be reduced if:
 A cash flow forecast is made and kept
up to date. The cash needs of the
business can be assessed month by
month.
 Sufficient capital is injected into the
business as 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

Most entrepreneurs have had some
form of work experience, but not
necessarily at management level.
They may not have developed skills
in:
 Leadership and decision making
 Cash handling and cash management
 Planning, coordinating and
communication
 Marketing, promotion and selling
Entrepreneurs are often enthusiastic,
willing to work hard and have abilities in
their chosen field. However, these
qualities alone will rarely be enough to
unsure success. View page 8 for
examples.
Local, national and international
businesses
Local – operate in a small town. 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. Eg: small
 building and carpentry firms, single-
branch shops, hairdressing businesses.
National – have branches or operations
across a country. They make no attempt
to establish operations in other
countries or to sell internationally. Eg:
large car retailing firms, retail shops
with branches in just one country and
national banks.
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.
KEY TERM
Multinational A business
business organisation that has
its headquarters in
one country, but with
operating branches,
factories and
assembly plants in
other countries

1.2 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 fail.
 KEY TERM
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 entrepreneur or

intrapreneur can be based either on an innovative
product idea or on a new way of offering service.
These ventures can be new location for an existing
business idea or an attempt to adapt a product in
ways that no one else has attempt to adapt before.
The role of the entrepreneur when creating and
starting up a new business is to:
 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
The personal qualities and skills needed to make
a success of a new business venture include:
 Innovation: The entrepreneur doesn’t 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.
 Commitment and self-motivation: Energy,
focus, the willingness to work hard, to be
keen and to have the ambition to succeed
are essential qualities of a successful
entrepreneur.
 Multi-skilled: 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-confident and an 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 that they would be
able to bounce back from any set back.
 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.
 KEY CONCEPT LINK
Innovation is important for the success of
any new enterprise. Offering exactly the
same goods or services as existing
businesses might not lead to great
success.

Barriers to entrepreneurship
Every entrepreneur needs to overcome
barriers to turn their business ideas into a
reality. These barriers include:
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 body 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 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
 Cafés and restaurants
 Childminding
Obtaining sufficient capital (finance)
Obtaining finance is a major barrier for entrepreneurs
due to:
 Insufficient savings – many entrepreneurs have
limited persona, 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
 businesses 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.
 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 their website
very effectively as communication with
customers will be by electronic means, but a hair
dresser 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. Therefore the
entrepreneur will 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 new
market and build up customer numbers quickly to
survive. The long-term success of a business will
depend on encouraging customers to return to
purchase products repeatedly.
Good customer service could be provided by:
 Personal customer service
 Knowledgeable pre – and after sales service
 Supplying one-off customer requests that large
firms may be reluctant to provide.
Business risk and uncertainty
There are some differences between business risk and
business uncertainty. All business decisions involve risk.
Eg: 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 a city and 3 fail by
the end of the year, the risk of failure was 30%. A new
entrepreneur could potentially reduce the risk of their
new clothing business failing by studying why these
three businesses did not survive. This will allow them to
reduce business risk by avoiding the errors made by
the failed businesses. Business planning is used to
reduce risk.
Business uncertainty is different. Uncertainty cannot be
foreseen, measured or calculated. Plans may be made
for the future, but some events will always be
unforeseen and impossible to predict.
Role of enterprise in a country’s economic
development
All governments use policies that aim to encourage
more people to become entrepreneurs. What are the
claimed benefits to an economy from successful
business enterprise?
Employment creation: In setting up a new business,
an entrepreneur is employing not only themselves (self-
employment), but also employing other people too.
These workers could include family members or friends.
When a new business creates jobs, the national level of
unemployment will fall. If the business survives and
expands, additional jobs are created in suppliers’
businesses.
Economic growth: Any increase in output of goods or
services from a start-up business will increase the gross
domestic product of the country. This is called economic
growth. If enough small businesses are created,
economic growth will lead to increased living standards
for the population. Increased output and consumption
will also result in higher tax revenues for the
government to.
Business survival and growth: Although a high
proportion of start-ups fail, some survivor and few
expand to become very important businesses. These
businesses will employ large numbers of workers, boost
economic growth and take the place of businesses that
may in decline or closing down due to changing
consumer tastes or technology.
Innovation and technological changes: New businesses
can be very innovative. This creativity adds dynamism
to an economy. Creativity can stimulate other
businesses and help to make the nation’s business
sector more competitive. Many new business start-ups
are in the technology sector. The IT services they
provide to other businesses can help industries in a
country become more advanced in IT applications and
therefore more competitive.
Exports: Most business start-ups offer products that
meet the needs of local markets. Some will expand
their operations to the export market in other countries.
This will increase the value of a nations 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 – a real sense of personal achievement.
This creates an excellent example for others to follow
and can lead to further successful new enterprises that
will also boost the economy.
Increased social cohesion: Unemployment often leads
to serious social problems and these can be reduced if
there is a successful and expanding small business
sector. By creating jobs and career opportunities and by
setting a good example for others to follow,
entrepreneurship can help to achieve social cohesion.