C1: Enterprise

1.1 Purpose of Business Activity 1.3 Economic Problem

• Businesses identify the needs of customers (MR) Need is a good or service essential for living.
• They purchase necessary resources to allow
production to take place. Want is a g/s which people would like to have, but which
• They produce g/s which satisfy customers’ needs, is not essential for living. People’s wants are unlimited
usually with the aim of making a profit.
Economic problem – there exist unlimited wants but
Customer: an individual consumer or organization that limited resources to produce the goods and services to
purchases goods or services from a business satisfy those wants. This creates scarcity.

consumer markets: Market where final users Scarcity: economic problem that It occurs as there are
purchase g/s for their own use not for resale (B2C) limited resources and unlimited wants

industrial markets: Business that sells g/s to other businesses

Opportunity cost: is the next best alternative given up
rather than the final customer (B2B). by choosing another item

How business decisions involve opportunity cost?

1.2 Factors of production • Businesses have limited resources and need to choose
• The allocating of scarce resources between competing
FOP: resources needed to produce g/s demands is at the heart of most business decision
making
1. Land- natural resources • The item of lesser value is left out when making a
2. Labor- human skills; manual and skilled labor choice.
3. Capital – finance needed to set-up business and • A decision to invest in a particular asset means that
all the manufactured resources used in alternative capital expenditure choices have been
production forgone.
4. Enterprise- action of showing initiative to take
the risk to set-up a business
1.4 Added Value
What Products are made?
creating value: increase the difference between cost of
1. Consumer goods: the physical and tangible purchasing bought-in materials and SP of finished good
goods sold to the general public − they include
durable consumer goods, such as cars, and non- added value: the difference between the cost of
durable consumer goods, such as food that can purchasing materials and the price the finished goods
only be used once.
AV = SP - cost of materials
2. Consumer services: the non-tangible products
sold to the general public − they include hotel AV = output value – input value.
accommodation,insurance services
Value added is not the same as profit;
3. Capital goods: the physical goods used to aid in
the production of other goods and services, Profit: TR- TC
such as machines, vehicles.
Transformation process: Activity that “converts inputs 1.5 Business Locations
into outputs in either manufacturing/service industries”.
Local business: operate in a small part of the country.
Aim of the transformation process is to AV that can lead They do not have expansion objectives
to high profit. Extent of profit gained will depend on the
efficiency and effectiveness of the ‘transformation National market: business with branches throughout
process’ and hence require constant management the country but they do not operate in other countries
attention.
International market: a business will target consumers
(1) Input stage — select raw materials at home and overseas which might give access to more
(2) Transformative stage - when resources are customers.
processed to form a different output (steel
made to car) MNC: business that has headquarters in one country,
(3) Output stage – add value to raw materials by but has operating branches in another country
changing characteristics to outputs that
consumers value
Advantages of selling in international markets:
How to increase added value:
• access to more customers.
1. Increase selling price • allow economies of scale – lower AC so more profit.
• Larger scale activity than a local/national market thus
2. Decrease material cost price spreading risk.
• Might avoid competing in a saturated national market

Operations Dept can add value by:

• Reduce costs by changing supplier

• Purchase in bulk - reduces AC
• Reduce wastage of ingredients – use JIT
• Produce more unique goods – sell at high price

Marketing Dept can add value by:

Marketing: understand customer needs and satisfy it

profitably

• Use of high-quality packaging to persuade customers

to pay more
• Create an exclusive retail environment to persuade
consumers to pay higher prices – superior ambience
• Create a premium brand perception that customers
will pay premium price
• Create a USP to differentiate it from the competition
so can increase price for enhanced product
• Provide exceptional service and delivery
• Increase convenience of purchasing (e-commerce)
• Provide expert advice and information alongside the
product
• Focus on customer perceptions and customer
satisfaction
1.6 Entrepreneur 1.7 Barriers/ Challenges to Entrepreneurship

Entrepreneur: someone who takes the financial risk of • Identifying successful business opportunities:
starting and managing a new venture to benefit from Entrepreneurs need to find markets which have
the rewards enough demand in order to be profitable.
People get their ideas from:
The role of an entrepreneur: 1. Own skills
2. Previous employment
1. Develop and pursue a business idea 3. Small-budget market research
2. Invest their own capital • Sourcing finance: Entrepreneurs face financial
3. Combine land, labor, and capital to develop issues due to:
goods and services that satisfy wants /needs 1. Lack of own savings
4. Accept responsibility of running and managing 2. Lack of awareness of grants and
the business subsidies
5. Accept the risks of failure 3. Lack of trading records in order to
receive loans from bank
Qualities of Entrepreneur 4. A poor business plan
• Determine location: An entrepreneur will have
• Risk taker –take a calculated financial risk to invest in to decide the best location keeping in mind
business costs, potential target market, status of area,
• Multi-skilled – able to undertake many roles and tasks etc.
to get the business idea up and running. • Competition: new entrepreneur must compete
• Innovative /creative: identifies new ideas and products with stablished bz by offering an unusual
and are able to do things different from rivals. product, better customer service to gain
• Motivator/Leader – Ability to lead and inspire customers
employees • Building a customer base: For a firm to survive it
• Committed: hardworking, persistent and determined. must build customer loyalty and brand image.
• Self-confident and able to promote the business idea; Businesses can do this by:
• Strong personality – energetic and driven. 1. Offering pre and after sales services
• Resilient: Ability to bounce back from any setback 2. Providing discounts and other sales
• Passionate: passion about their products/services promotions
• Dynamic: willing to change- aware of latest technology 3. Providing goods that meet specific
and ideas needs
• Goal setting – able to decide between urgent and
important matters and make the best use of limited
resources to guarantee success.
• Planner – able to put together a thoughtful, realistic
business plan taking account of the business’ strengths
and weakness and considering contingencies.
• Be Persuasive and provide a vision for the future
• Ambitious: set big goals, inner drive to succeed
• Good Communicator: ability to raise finance and
convince investors
• Hardworking: put in long hours
• Visionary: future centric
• Prioritization – able to decide between urgent and
important matters and make the best use of limited
resources to guarantee success.
1.8 Why some Business Succeed? Internal Reasons for Failure

• Good understanding of customer needs-do MR • Lack of record keeping: no track of inventory, TR, TP
before making products (product oriented) can lead to CF Problems
• Efficient management operations (lean • Lack of finance: new business might have to finance
production) that keeps costs under control its operations for some time before income is sufficient
• Adaptability: flexible decision-making to new to cover costs; If a business runs out of cash for day-to-
situation- bz is responsive to consumer and day operational needs (WC) it can lead to closure. WC is
market the capital needed to run the day-to-day business.
• Appropriate Source of Finance – no cash flow • Lack of financial control – cash flow forecasts are
problems inadequate or not used – unable to negotiate cash
shortages
• Poor management skills: Owner needs essential skills
to avoid management problems. - A lack of management
1.9 Why some New Business Fail? experience causes poor decisions to be made.
Entrepreneur’s not always good operational managers.
Business failure is when a business ceases to operate a) Leadership skills
because of inability to bring in enough revenue to cover b) Cash handling and cash management skills
costs. c) Planning and coordinating skills
d) Decision-making skills
Success in business is never certain. This is particularly e) Communication skills
true when starting up a new venture. The following are f) Marketing, promotion and selling skills
the most common reasons why new businesses fail. • Lack of business visibility – no website – inability to
effectively market the business;
A new business needs to focus on: • Lack of focus – unclear objectives – priorities not
determined
• establish and build a customer base of loyal returning • Uncompetitive production: costs of production too
customers. high so sell at high price
• establish itself in the market. • Poor market research resulting in flawed information
• effectively manage cash flow – generate sufficient meaning that the expected demand does not happen.
working capital. • Insufficient demand: product being offered is not
• establish good relations with suppliers. wanted by consumers. Failure to understand customers
• follow an effective pricing strategy that allows the – too ‘product led’.
business to compete effectively. • Flawed business plan – inadequate information and
too ambitious objectives.
• Lack of USP - No real differentiated product/service
External Reasons for Failure: and no real understanding of the competition.
• Weak Marketing – poor MR at outset – Inability to
• Too much red tape – bureaucratic restrictions. effectively market the business: low marketing budget
• Competitors – perhaps competitors increase their to promote
advertising costs or reduce the prices of their products, • Limited portfolio of products: Business model is
making it more difficult for the new business to survive; defective – demand for product falls – no alternative
large companies/competitors squeeze new firms product
• Unable to respond to external changes: economic, • Failure to attract and retain customers – may be
legal – lacks agility and flexibility dependent on a few big customers, or a limited niche
• New bz also fail to secure external finance as banks are market segment
unwilling to lend due to lack of collateral, lack financial • Poor marketing mix
history • Poor internal and external communication
• Lack of reputation/brand
• Over expansion – grow too soon
• Staffing problems: fail to recruit workers
Problems of New Business to Raise Finance Failure of Small Business

• Lack of financial history – therefore a lack of evidence Business failure is when a business ceases operations
that the business will be able to repay any finance because of inability to bring in enough revenue to cover
loaned. costs.
• Lack of experience of the owner may lead to a lack of
confidence of banks to lend Small businesses have limited resources, especially in
• Lack of security (collateral) to offer any potential relation to working capital – they may make slower
lender. This can lead to higher rates of interest being payment of goods supplied as managers do not give
charged due to perceived risk to the lender. enough attention to managing WC. They often have few
• Bank overdrafts can often be negotiated but usually at employees, low start-up costs but low revenue and small
high rates of interest – this would impact on the costs of profits, serve a small market area. They are high-risk
the business. businesses, have defective business models, poor
• Credit purchases – a new business might try to arrange management, fail in early months.
to buy its goods on credit, but suppliers might be
reluctant to do this due to the lack of credit history and Working capital is a measure of the liquidity (difference
knowledge of the new business.• If the new business is between the CA – CL
selling goods on credit and has to wait for its customers
to pay before it pays its suppliers, this could add Reasons for failure of small businesses:
significant delay to the payment to suppliers – this might
mean that suppliers will not extend credit to the • Business model is defective — lack of market research
business until it is more established. – wrong target market is targeted
• Family and friends might offer financial support, but • Management is inadequate – poor multi-skilling – poor
this is likely to be limited and might cause some entrepreneurial skills
interference in the business from those • Marketing is inadequate — limited resources for
friends and family. effective marketing activities
• Difficulty of persuading lenders that the business if • Capital— limited and likely inadequate to respond to
viable if the product/service is very new to a market. market changes
• Problems can be reduced by producing a realistic and • Fashion changes — small niche businesses have very
well thought out business plan. small product portfolio
• Poor Working capital Management - prime reason for
business - a disconnect between revenue generated
and funds needed. Insufficient capital to fund current
operations can lead to late payments are made to
suppliers resulting in business relationships breaking
down, as suppliers lose confidence in a business.
Supplies may be stopped, meaning that a business is
unable to trade.
1.10 Role of Enterprise in Country Development 1.11 Intrapreneur

Business enterprise – any business activity that Intrapreneurs: Business employee tasked to develop an
makes/sells products that makes profit innovative idea or product but does not face the same
risks and gain the same rewards as an entrepreneur
• Jobs are created, Increase living standards –
• Economic growth - add value, make g/s available Entrepreneur Intrapreneur
• Economic development comes from economic Start up a new business Develop innovative
growth which is significantly supported by Takes Risks- use savings products
business enterprise – countries become Gains Rewards-Profits Do not take risks
industrialized through sustained business Do not gain rewards
enterprise activity.
• Pay taxes - revenues for governments to spend Qualities an intrapreneur
on infrastructure
• Stimulating business enterprise is the engine of • Risk taker: – willing to take risks and make
economic progress mistakes
• Businesses grow, expand, diversify and support • Creative thinker – thinks new and big ideas.
a more developed economy. Always seeking ways to refresh business activity –
• Adds innovation – increased use of I.T. and new seeks transformational change nor marginal
technology. change
• Helps improve international competitiveness – • Motivates others Inspires others to think as an
intrapreneur – sets example of enthusiasm
possibility for exports.
• Problem solver: Sees problems as opportunities/
• Helps achieve social cohesion in a country and
Intrapreneur acquires knowledge of the internal
supply important social goods
and external business environment – uses it to
• Support infrastructure development and
remove opposition and blocks to innovation and
progress.
change
• Fostering entrepreneurial spirit – innovation – • Innovator: Uses knowledge and experience to set
change. out a vision for a project –challenges the current
• Entering into partnerships with government- way of doing things - enjoys seeking new solutions
funded structures and organizations. • Ability to convince others to accept ideas:
• Educating people of the potential benefits of Skilled in internal politics – ignores or
market activity and private sector commerce overcomes opposition – seeks & gets support
• Personal development – leads to skilled worker from senior management—builds coalitions
• Politically adept: Builds and leads cross–
Evaluation: Some BE have potential disadvantages such functional teams – more ideas contributed
as unrestricted profit making or unregulated capitalism. • Passionate and hard working
• Project leader–matrix organization
The contribution they make to the future development • Ability to communicate ideas
of a country is likely to depend on factors such as: • Determination/perseverance
– The stage of development (economic) that a country is • Lateral &holistic thinker – thinks outside the box
presently in
– The quality of the skills of the entrepreneurs. Benefits of Intrapreneurship
– The support and encouragement given to the
entrepreneurs by the government of a country. • Inject creativity and innovation to the business-
– The external issues that may affect a country in the develop new products
future, given a dynamic and political-external • Develop new ways of doing business to make bz
environment. more efficient
• Create a competitive advantage by making
innovative products
• Encourages original thinkers/innovators to stay
within the business.
1.12 Dynamic business environment 1.13 Business Plan

Setting up a new business is risky because the business Business Plan: is a written document that describes a
environment is dynamic, or constantly changing because business, its objectives and its strategies, the market it is
of changes in: in and its financial forecasts

1. Competitors Actions Contents of a business plan: Executive summary -

2. Legal changes overview of the business, Description of the business
3. Economic changes: intertest, tax rate, inflation opportunity, Marketing and sales strategy, Management
4. Technological changes: lead to obsolescence team and personnel, Operations, Financial forecasts

Effects of a dynamic business environment include: Purpose of Business Plan

• increased or decreased demand/revenue • Helps obtain finance. Potential entrepreneurs

• increased or decreased costs. will need to convince potential financial
• increased or decreased profit. investors that their business proposal is both
• increased or decreased competition. sound and potentially profitable. Potential
• increased or decreased market share. investors or creditors will not provide finance
• increased uncertainty unless details about the business proposal have
• difficult to forecast inventory needs been written down clearly
• must change and adept
• Provides a sense of direction and clear plan of
Impact on Business action to guide their action - Helps set targets /
clear aims [k] as can see what actions to take
• Change in government policy e.g. treatment of achieve aims [an] so they know what they have
employees, ethical behavior can affect costs. New to do to get there [an]
policies can change business behavior which may alter
objectives and production methods • Forces owners to think about the potential
• Competitor actions affect pricing, promotion, product strength and weakness of business. It forces
development strategy – rival’s actions can affect the entrepreneur to plan ahead carefully, which
demand/revenue reduces risk of the business failing. The
• Increase or decrease in competition may alter pricing managers have time think about possible
strategy and therefore profit. solutions to problems
• Technological changes e.g. availability and speed of
the internet can make it easier to find local and global; • Aids in Financial Planning: Provides an estimate
new technology can lead to production possibilities. of costs/what type of finance they need [k] so
• Changes in economy affect spending power and better able to raise necessary funds [an] help to
choice of products chosen e.g. needs vs luxuries / cheap set budgets
vs expensive; inflation, interest rates,
• Legal changes may have cost implications for the • Original forecasts can act as budgets and control
business and affect revenue and profits benchmarks
• Changing customer needs might affect demand
leading product development, extension strategies and
altering production. Regular MR needed to adapt to
changing demand therefore increasing costs and
possibly profit.
• Managers will need to change some of their decisions
about inputs, the transformation process or the outputs
they produce. They might switch production to another
country; become more capital intensive; sell products to
other countries. Changes may have cost implications for
the business and affect revenue and profits
Limitation of BP:

X Plans do not guarantee success. it could

create a false sense of certainty in business
owners. They might rely so much on the plan
that they overlook the fact that it is based on
forecasts and predictions.

X BP must be detailed and supported by

evidence such as market research. If it is not,
then prospective creditors and investors can
delay in making a finance decision until the plan
is brought up to the required standard.

X Some managers are too wedded to the plan.

The plan might lead entrepreneurs to be
inflexible. If the dynamic business world throws
up new opportunities that are not in the plan,
these could be rejected. This could mean that
options for future profits and growth are
rejected.

X BP gets outdated [k] so time spent preparing it

is wasted [an]

Evaluation: The best business plans allow for some

flexibility as external events changes.