Unit 1: Business and its

environment
 This unit focuses on understanding the nature and purpose of
business activity.
 It identifies and analyses the structures, functions and objectives of
different business organisations.
 Enterprise

On completing this chapter, you will be able to:

■ understand what business activity involves

■ recognise that making choices as a result of the ‘economic problem’ always results
in opportunity cost

■ analyse the meaning and importance of creating value

■ recognise the key characteristics of successful entrepreneurs

■ assess the importance of enterprise and entrepreneurs to a country’s economy

■ understand the meaning of social enterprise and the difference between this

and other businesses.

 About this unit

 The central purpose of this whole unit, ‘Business and its environment’, is

to introduce the inter-relationships between businesses, the world in

which they operate and the limits that governments impose on business

activity.

 This first chapter explains the nature of business activity and the role of

enterprise in setting up and developing businesses

The purpose of business activity
What do businesses do?
 What is a Business ?
A business is a decision making organization involved in the
process of using inputs to produce goods and/or to provide
services .
Processe
Outputs
Inputs s

 Inputs are resources such as labour ,raw

material, machinery etc.
 Processes turns the inputs into provision of
goods or the manufacture of goods.
 Outputs are the final goods and services.
What is Business Activity

Resources
Land

BUSINESS IDENTIFY THE Labour

NEEDS OF CUSTOMERS PURCHASE
Capital
OR OTHER FIRMS
Enterprise

PRODUCTION OF GOODS OR SERVICES

Business activity is a continuous process

Key terms
 What do businesses need to
produce goods and services?
 Factors of production

 To produce goods or to provide services, resources must be

used.
 These resources are called factors of production. These are:
 Land
 Labour
 Capital
 Enterprise
This does not just mean the land that the business is built upon!
It also means anything that you get from the ground! Like
Fishing, oil, farming, logging, minerals.
Land: In general terms not only
include land itself but all the
renewable and non-renewable
resources of nature, such as coal,
crude oil, gold, diamond, timber,
etc.
You will need somebody to do the work!
 Labour: Manual and skilled
labour make up the workforce of
a business.
You will also need money to buy all the
things the business needs.
Capital: This is not just the finance
needed for the business and pay for
its continuing operations but also all
of the man-made resources used in
production.
This include computers, machines,
factories, offices and vehicles.
Finally, you need somebody to combine the
other factors of production. They also need
to be prepared to take a risk.
Enterprise/Entrepreneur:
This is the driving force, provided by
risk taking individuals, that combines
the other factors of production into a
unit that is capable of producing goods
and services. ‘
It provides a managing, decision
making, coordinating role.
The concept of creating or adding
value
 All businesses aim to create value by selling goods and services for a
higher price than the cost of bought-in materials, this is called
‘creating value’.
 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.
 This can also be referred to as ‘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’. Without creating value a business will not be able to
survive as other costs have
Key terms
What businesses need
How businesses create value
Here are two examples of how different
businesses could create added value to
their products:
 Jewellers – well-designed shop-window display, attractive shop
fittings, well-dressed and knowledgeable shop assistants and
beautiful boxes offered to customers to put new jewellery in.
 These features might allow an increase in jewellery prices above the
additional 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 and not
‘cheap’ vending machines. Higher prices as a result of successful
branding should create added value.
Homework 1
 Key concept

 Creating value requires effective management of resources.

 The most successful businesses in terms of creating value tend to be
customer-focused.
 Many customers are prepared to pay relatively high prices for
products which exactly meet their needs – creating more value for
the business
 Economic activity and the problem of
 choice
We live in a world of great wealth and great scarcity.
 Very poor people are unable to obtain the basic requirements of life –
food, clean water, shelter – and they have many unsatisfied needs and
wants.
 Even very rich people may not be able to satisfy all of their wants for
luxury goods and services.
 It should be clear to us all that there are insufficient goods to satisfy all of
our needs and wants at any one time; this is known as ‘the economic
problem’.
 It is the purpose of economic activity to provide for as many of our wants
as possible, yet we are still left wanting more.
 This shortage of products – together with the resources needed to make
them – lead to us all 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.
 If we are careful and rational, we will choose those things that give us the
greatest benefit, leaving out those things of less value to us. This need to
choose is not exclusive to people as consumers.
 All economic units have to make choices – governments, businesses,
workers, charities and so on.
Opportunity cost
 The dynamic business environment
 Setting up a new business is risky because the business environment is
dynamic, or constantly changing.
 In addition to the problems and challenges referred to below, there is also the
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 leave customers with less money to spend
 • technological changes that make the products or processes of the new
business outdated
Why do some businesses succeed?
 These are the main reasons why some businesses thrive and achieve
success in meeting their objectives:
 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
 The role of the entrepreneur
 New business ventures started by entrepreneurs can be based on a
totally new idea or a new way of offering a service.
 They can also be a new location for an existing business idea or an
attempt to adapt a good or service in ways that no one else has tried
before.
 In this chapter, we will be looking at several examples of people who have
set up their own new business and have shown skills of
‘entrepreneurship’.
 They have:
 ■ had an idea for a new business
 ■ invested some of their own savings and capital
 ■ accepted the responsibility of managing the business
 ■ accepted the possible risks of failure
 Entrepreneur: someone who takes the financial risk of starting
and managing a new venture
Characteristics of successful
entrepreneurs
 The personal qualities and skills needed to make a success of a new business venture
include:
 Innovation: The entrepreneur may not be an inventor in the traditional sense, but they
must be able 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. This
requires original ideas and an ability to do things differently – this is the skill of
innovation.
 Commitment and self-motivation: It is never an easy option to set up and run your own
business. It is hard work and may take up many hours of each day. A willingness to work
hard, keen ambition to succeed, energy and focus are all essential qualities of a
successful entrepreneur.
 Multiskilled: An entrepreneur will have to make the product (or provide the service),
promote it, sell it and keep accounts. These different business tasks require a person
who has many different qualities, such as 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: The entrepreneur will have 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 an ability to bounce back: Many business 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 bounce back from any setbacks.
 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.
Major challenges faced by
entrepreneurs
Identifying successful business opportunities.
 Identifying successful business opportunities is one of the most important
stages in being an effective entrepreneur.
 The original idea for most new businesses comes from one of several
sources including:
 Own skills or hobbies – e.g. dress-making or car bodywork repairing. Very
often, 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 – working for a successful hairdresser,
for example, 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 – these offer a wide range of new
business start-up ideas, e.g. fast-food restaurants, which also give the
potential benefits of the support of a much larger franchiser business.
 Small-budget market research – the Internet allows any user to browse
business directories to see how many businesses there are in the local area
offering certain goods or services. Such small-scale research might indicate
gaps in local markets that could be profitably filled by the entrepreneur
Sourcing capital (finance)
 Once the entrepreneur has decided on the business idea or
opportunity, the next task is to raise the necessary capital. So why is
obtaining finance such a major problem for entrepreneurs?
 Lack of sufficient own finance – many entrepreneurs have very
limited personal savings, especially if they are setting up their own
business because they were previously made redundant.
 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
 Perhaps the most important consideration when choosing the location
for a new business is the need to minimise fixed costs.
 When finance is limited, it is very important to try to keep the break-
even level of output – the output level that earns enough revenue to
cover all costs – as low as possible.
 This will greatly increase the business’s chances of survival.
Operating from home is the most common way for entrepreneurs to
establish their 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 prestigious premises tends to
generate confidence.
 It may cause family tensions.
 It may be difficult to separate private life from working life
Competition

 This is nearly always a problem for new enterprises unless the

business idea is so unique that no other business has anything quite
like it.
 A newly created business will often experience competition from
older, established businesses, with more resources and more market
knowledge.
 The entrepreneur may have to offer better customer service to
overcome the cost and pricing advantages that bigger businesses can
usually offer.
Building a customer base
 This is linked to the previous point about competition.
 To survive, 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.
 This better service might include:
 personal customer service
 knowledgeable pre- and after-sales service
 providing for one-of customer requests that larger firms may be
reluctant to provide for.
Why do new businesses often fail?
 Lack of record keeping
 Lack of cash and working capital
 Construct a cash flow forecast so that the liquidity and working capital needs of the
business can be assessed month by month.
 Keep this updated and also show it to the bank manager.
 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, at least
temporarily, overcome with an over draft extension
 Poor management skills
 They may not have developed:
 leadership skills
 cash handling and cash management skills
 planning and coordinating skills
 decision-making skills
 communication skills
 marketing, promotion and selling skills
Changes in the business
environment
 Setting up a new business is risky because the business environment
is dynamic, or constantly changing. In addition to the problems and
challenges referred to above, there is also the risk of change, which
can make the original business idea much less successful.
 A businesses may fail if any of the following changes occur:
 new competitors ■
 legal changes, e.g. outlawing the product altogether
 economic changes that leave customers with much less money to
spend
 technological changes that make the methods used by the new
business old-fashioned and expensive.
Common types of entrepreneurial
businesses
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.
 These include:
 Primary sector
 fishing – e.g. a small boat owned by an entrepreneur
 market gardening – producing cash crops to sell at local markets.
 Secondary sector
 jewellery-making
 dress-making
 craft manufacture, e.g. batik cloth
 building trades.
 Tertiary/service sector
 hairdressing
 car repairs
 cafés and restaurants
 child-minding
Impact of enterprise on a country’s
economy
 All governments around the world are following policies that aim to
encourage more people to become entrepreneurs.
 What are the claimed benefits to the economy of business enterprise?
 Employment creation
 Economic growth
 Firms’ survival and growth
 Innovation and technological change
 Exports
 Personal development
 Increased social cohesion
Social enterprise
 Social enterprises are not charities, but they do have objectives that are
often different from those of an entrepreneur who is only profit motivated.

 Social enterprise: a business with mainly social objectives that reinvests

most of its profits into benefiting society rather than maximising returns to
owners.
 Most social enterprises have these common features:
 ■ 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.
Social enterprise – objectives
 Social enterprises often have three main aims. These are:

 1 economic – make a profit to reinvest back into the business and provide
some return to owners
 2 social – provide jobs or support for local, often disadvantaged,
communities
 3 environmental – to protect the environment and to manage the business
in an environmentally sustainable way.
 These aims are often referred to as the triple bottom line.
 This means that profit is not the sole objective of these enterprises.
 Triple bottom line: the three objectives of social enterprises: economic,
social and environmental
Role of enterprise in a country’s
economic development
 Role of enterprise in a country’s
economic development
 Innovation and technological change: 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 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 –
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
The role of intrapreneurship
Purpose and key elements of business
plans
 The main elements of a typical business plan are:
 executive summary − an overview of the new business and its
strategies
 description of the business opportunity − details of the
entrepreneur’s skills and experience; nature of the product; the
target market at which the product is aimed
 marketing and sales strategy − details of why the entrepreneur
thinks customers will buy the product and how the business will sell
to them
 management team and personnel – details of the entrepreneur’s
skills and experience and the people they intend to recruit
 operations − premises to be used, production facilities, IT systems
 financial forecasts − the future projections of sales, profit and cash
flow for at least one year ahead.
Benefits of business plans
 Business plans are most important when setting up a new business.
The main purpose of a business plan for a new business is to obtain
finance for the start-up. Potential investors or creditors will not
provide finance unless details about the business proposal have been
written down clearly.
 The business-planning process provides essential evidence to
investors and lenders. It makes the finance application more likely to
be successful. Business planning also:
 forces the owner to think seriously about the proposal, its strengths
and any potential weaknesses
 gives the owner and managers a clear plan of action to guide their
actions and decisions in the early months and years of the business.
Limitations of business plans

 Even a detailed business plan does not guarantee a successful business.

In fact, 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.
 The business plan 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.
 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. The best business plans allow for some flexibility as
external events change
Homework