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Chapter 1: ENTERPRISE

Aims
This chapter aims to cover the following:
 The nature of business activity
o purpose of business activity
o the concept of creating value
o the nature of economic activity, the problem of choice and opportunity cost
o business environment is dynamic
o what a business needs to succeed
o why many businesses fail early on
 The role of the entrepreneur
o qualities an entrepreneur is likely to need for success
o the role of business enterprise in the development of a business and a country
 Social enterprise
o the range and aims of social enterprises
o triple bottom line – economic (financial), social and environmental targets
 Purpose of business activity:

The purpose of business activity is to identify and satisfy the needs and wants of the people with the overall
aim of earning profit.
It can be classified into 2 ways:
1. Transformation of inputs into outputs. The inputs are resources, factors of production (land, labour,
capital, enterprise). These incur financial costs; rent, wages, interest on loans and payments to
business owners. The outputs are the physical products or services represented by sales revenue or
profits.
 Land (all natural resources: site for buildings and raw materials),
 Labor (all human resources: skilled, unskilled, permanent, and temporary),
 Capital (finance and all the man-made resources. These include capital goods such as
machines and commercial vehicles),
 Enterprise (which brings all the previous resources together for production).
2. The use of resources to supply goods and services to meet the needs and wants of consumers and
society. These maybe private needs from individuals and households or social needs like medical
services, transport and education. The business activity exists to provide consumer goods (physical
and tangible, which include; durable and non-durable goods) and consumer services (non-tangible
products).

 Creating or adding value:


Creating value means increasing the difference between the cost price of purchasing bought-in materials and
the price the finished goods are sold for. Each stage of the production process that the product passes
through becomes more valuable than the one before, as extra features are added. This process tends to be
customer- focused so that the customers are prepared to pay relatively high prices for products which exactly
meet their needs.

Example of value addition:


selling
packed in
sugar, all mixed chocolate through
Cake is an extensive
wheat, into a topping established
baked attractive advertising
eggs batter added confectionary
box
shops

 Economic activity, problem of choice and opportunity cost:


Economic activity means taking decisions about the transformation of inputs into outputs which always
involves choice because of the economic problem (There are insufficient resources to satisfy all of our needs
and wants at any one time). The need of choice leads to opportunity cost faced. Opportunity cost or lost
opportunity is the next best alternative forgone. The concept exists for all economic decision makers:
consumers, businesses and government. Thus decision should be made carefully and rationally for the thing
that will give the greatest benefit, leaving out the choice of less value.
Examples of Opportunity Cost:
Individual examples Opportunity cost
Buying a T-shirt Not buying a DVD
Studying A levels Not taking a job
Business examples Opportunity cost
Spending on research and development Not increasing advertising
New workers Delivery van
Society Examples Opportunity cost
Lower taxes Lower government spending on education
More Unemployment benefits Less hospital beds

 What business needs to succeed:


 Enterprise- qualities and skills needed to take risk, start up and create a new business venture. It involves
understanding the nature of business activity, the conditions required for business success and
transforming inputs into outputs with possible opportunities
 Organization- ability to choose the appropriate resources and combine them together profitably to
produce products at a price the consumer is willing to pay
 Financial Monitoring- Recording, analyzing and summarizing data. Keeping track of cash flows so
decisions made can be based on accurate knowledge of opportunity cost.
 Human Resource Management- Ensure Relevant number of workers with relevant skills are available
 Marketing- so that the products meet the consumers’ needs in terms of product, price, place and
promotion (4 Ps)
 Objectives- Aims and targets of business are met in a planned way with appropriate strategies used
 Coordination- All the functional departments work together to achieve corporate objectives (finance,
marketing, operations, HRM)

 Why do new Businesses fail?


As many as 60% businesses fail during the first 2 years. Common reasons include:
 Lack of record keeping- which aids as backup system, evidence and reference. Hence inaccurate or
incomplete records can lead to wrong interpretations and decision making.
 Lack of cash and working capital- for day-to-day running of business, holding inventories, allowing
trade credit to customers. Working capital deficiencies can be avoided by:
o Constructing and updating a cash flow forecast (working capital needs of business can be
assessed month by month)
o Inject sufficient capital initially into the business
o Establish good relations with banks and other financial institutes in order to gain overdraft or
borrowing facilities.
o Use effective credit control over customers’ accounts.
 Poor management skills- For example:
o Leadership skills
o Cash handling and management skills
o Planning and coordinating skills
o Decision-making skills
o Communication skills
o Marketing, promotion and selling skills
Entrepreneurs are hence encouraged to attend training programs or to first seek management
experience in order to gain some of these skills
 Changes in the dynamic business environment
Business operates in an environment that includes:
 Actions of other businesses
 Labor market
 Government economic and social policies
 Consumer tastes and demand
 Legal framework
 Political factors
 Social and demographic factors
 Changing technology
All these change over time which can be problematic. Some changes may take place slowly, such as an
ageing population, major changes in legal framework, increasing incomes or consumers wanting
increasingly better quality products. Some changes are quick, such as a new competition law or
competitor decreasing price in order to gain more market share or to fight the competition.
Entrepreneurs have to monitor the environments and be ready, able and willing to adapt to changes
when needed. Carrying on the same way is an option that can lead to failure.
 Lack of well-researched objectives and business plan - before a business comes into operation, an
entire plan is developed and objectives set. If the objectives of the business themselves aren’t well
defined or realistic and to make it worse, the business plan is not efficient enough, it can never
succeed in achieving its objectives and will fail miserably.

 Too much borrowing leading to high interest payments i.e. the business is unable to retain profits,
that can be reinvested for future growth

 Unexpected growth too soon which stretches resources, so the business does not have enough
expertise to manage and sustain its own growth

 The Role of Entrepreneur:


Entrepreneur: Someone who takes the financial risk of starting and managing a new venture and bringing all
the necessary resources for success. This may be done by:
 Producing and selling a new product
 Building an existing business in a different way
 Extending an existing brand into different markets

 Characteristics of successful entrepreneurs:


1. Innovation: Carve a new niche in the market, attract customers in innovative ways and present their
business different from others in the same market.
2. Commitment and self- motivation: Willingness to work hard, keen ambition to succeed, energy and
focus.
3. Multi-skilled: technical skills, skills to deal with humans, good at handling money and keeping records.
4. Leadership skills: Must own a personality that encourages and motivates people in business to follow
them.
5. Self-confidence and ability to bounce back: Failures do not discourage a true entrepreneur as they
believe in themselves.
6. Risk-taking: Calculated risks need to be taken with entrepreneur’s investment in order to see results.

 Major challenges faced by entrepreneurs:

1. Identifying Successful business opportunities


Identify a market need that will offer a sufficient demand. The original idea can come from: own
skills or hobbies, previous employment experience, franchising conferences and exhibitions and
small budget market research.

2. Sourcing Capital (Finance)


This is most important problem because entrepreneurs often lack in:
 Sufficient own finance
 Awareness of financial supports and grants available
 Efficient business plan, collateral, security and past trading records to present to banks in
order to gain their confidence.

3. Determining a location
Entrepreneurs need to minimize fixed costs and keep the break-even level of output to cover total
costs in order to survive. Operating from home is a common way of keeping costs low, but is also
fraught with numerous problems:
 May not be close to the area with biggest market potential (closeness to suppliers or
customers)
 Lack status or prestigious premises
 It may cause family tensions

4. Competition
Newly created business often face competition from older, established businesses with more
resources and market knowledge in the form of extensive advertising, product development,
destructive pricing, price wars etc. In order to keep ahead of competition, entrepreneur needs to
offer better customer service, create USP (Unique Selling Point) and carry out efficient marketing
5. Building a customer base
Entrepreneurs need to increase market share, ameliorate their brand image and build customer
loyalty. This can be done by offering personal customer service, knowledgeable pre- and after sales
service and providing one-off customer requests.

 Sectors of Industry :
1. Primary Sector (extraction of raw materials from the Earth. E.g. farming, coal mining, hunting)
2. Secondary Sector (transformation of raw materials into goods. E.g. wood made into furniture)
3. Tertiary Sector (supplying of services to consumers and businesses. E.g. hairdressing, car repairs)
 Impact of enterprise on a country’s economy:
 Employment creation
 Economic Growth and GDP (Gross Domestic Product) increase
 Firms’ survival and growth will benefit economy
 Innovation and technological change
 Exports (improvement in international competitiveness)
 Personal development (helps an individual towards self-actualization)
 Increased Social Cohesion (people of the society will be more willing to cooperate with each other
in order to survive and prosper)

 Social Enterprise
A social enterprise is a business with mainly social objectives that reinvests most of its profits into
benefiting society rather than maximizing return to owners. Social enterprises:
 Are set up to make a difference to society with a clear social/ environmental mission
 Need to make a surplus or profit by all ethical means to survive as they do not rely on
donations as charities do
 Reinvest profit for social purpose
 Operate in a range of size and structures
They must have a business structure that is different from the normal partnership, or joint stock companies,
because of their social motive, so the use of profit, and the trading of products or services might be different
from that of the other normal enterprises that have a profit motive.
Examples include cooperatives, community enterprises and non-profit organizations. These:
o Provide employment for drug addicts and recovering them
o Increase employment for women
o Recycle furniture to low income households
o Improve local environment by clearing litter and landscaping etc.

 Triple Bottom Line:


The ‘triple bottom line’ approach goes beyond the traditional measures of profits, return on investment, and
shareholder value. The triple bottom line organization (social enterprise) has the capacity to temper the extremes of a
purely capitalist / profit-centred approach to business activity. TBL offers much more socially responsible and valuable
business performance taking into account the welfare of the community. It includes economic, social and environmental
dimensions – profits, people and the planet.

1. Economic (Profit): make profits to reinvest back into the business and the local / national economy as well
as to shareholders.
2. Social (People): provide jobs or local support to disadvantaged sections of the community
3. Environmental (Planet): protect the environment and manage the business in an environmentally
sustainable way.
Past Paper Questions
Q1.Discuss the problems a new business might experience in its first year of trading. [8](j9)

Q2.Explain why many businesses fail within the first year of trading. [5] (j11 3)

Q3.(a) State two aims of a social enterprise organisation. [2](b) Briefly explain how entrepreneurs could benefit your
country. [3] (j12 1)

Q4.Explain the main qualities of a successful entrepreneur. [5] (j12 2)

Q5.Explain why a business environment might be described as dynamic. [8](j13 1)

Q6.(a) Explain the likely conflict between the ‘triple bottom line’ objectives of a social enterprise operating in your
country. [8](b) Discuss the role business entrepreneurs could play in the future development of yourcountry. [12] (j13
3)

Q7.Discuss the differences and similarities between ‘business enterprise’ and ‘social enterprise’.[20] (w13 1)

Q8.Define the term ‘social enterprise’. [2](b) Briefly explain two ways in which the objectives of a social enterprise
might besimilar to those of other types of business. [3](s15 12)

Q9(a) Define the term ‘entrepreneur’. [2](b) Briefly explain two reasons why new businesses often fail. [3](s16 12)

Q10(a) Analyse problems a business could experience in its first year of trading. [8] [MJ 17/12]

Q11(a) Define the term ‘opportunity cost’. [2]


(b) Briefly explain how business decisions involve opportunity cost, using an appropriate example. [3] [MJ 17/13]

Q12(a) Define the term ‘social enterprise’. [2]


(b) Briefly explain two aims of a social enterprise. [3] [ON 17/12]

Q13 (a) Define the term ‘entrepreneur’. [2] (b) Briefly explain two qualities of a successful entrepreneur. [3] [MAR
18/12]

Q14(b) Discuss why a new business should focus more on managing its cash than making a profit. [12] [MJ 18/11]

Q15 (a) Analyse the potential advantages to a community of a business with triple bottom line targets. [8] (b) Discuss
the role of business enterprise in the development of a country. [12] [MJ 18/13]

Q16 (a) Analyse the qualities of a successful entrepreneur. [8] [ON 18/11]

Q17(b) Discuss the view that a new business should be more concerned with cash flow than with profit. [12] [ON
18/11]

Q18 Discuss the extent to which the stakeholders of a large clothing retailer might want the business to become more
ethical and socially responsible. [20] [ON 18/12]