1.1.1 The nature of business activity
● Purpose of business activity:
- A business is an organisation that uses resources to provide products/services to meet customer needs.
- Business activity uses scarce resources to produce goods and services which allow a higher standard of living.
- All stages of business activity involve adding value to resources, making them more valued by customers.
● What do businesses do:
- Businesses identify customers’ needs.
- They purchase necessary resources to allow production to take place.
- They produce goods and services to satisfy customers’ needs, often to make profit.
● Factors of production:
1. Land: renewable and non-renewable resources (coal, timber, crude oil); land where business is based.
2. Labour: manual and skilled labour in the workforce.
3. Capital: finance needed to set up business and pay for operations; resources used in production (capital goods
e.g. machinery, factories).
4. Enterprise: managing the other factors of production efficiently in order to produce goods/services.
● Concept of adding value:
- Adding value is when businesses create value by producing goods/services and selling them for more than the
costs of bought-in materials.
- The difference between the selling price of the products and the cost of materials bought-in is added value.
- Without adding value, a business can’t survive as costs must be paid and investors expect financial return.
- Value added is not profit as other costs must be paid for.
- If a business can add value without increasing costs, then profits will increase.
● Economic activity & problem of choice:
- The purpose of economic activity is to provide for as many wants as possible, yet we still want more.
- This shortage of products/resources forces us to make choices. We must choose which wants to satisfy now
and which to give up.
- All economic decision-makers have to make choices.
● Opportunity cost:
- The need to choose goods leads to opportunity cost. When one item is chosen over another, the next most
desired product given up becomes the opportunity cost.
● The dynamic business environment:
- Running a business is risky due to changes in the business environment.
- Changes in the business environment include:
➢ new competitors entering the market
=
➢ legal changes e.g. new safety regulations
➢ economic changes leaving customers with less spending money
➢ technological changes making business’s products/processes outdated..
● Why 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 businesses fail:
, ➔ Poor record-keeping: Many small companies fail to pay sufficient attention to record-keeping, resulting in the
loss of important info and details (payments, deliveries). Most businesses now keep records on computer.
Paper records should always be kept as backups/checks.
➔ Lack of cash: Finance is needed for day-to-day cash, for holding inventories, and to give trade credit to
customers, who become debtors. Without working capital, the business can’t buy supplies, pay suppliers, or
offer credit to customers.
Cash flow problems can be reduced if:
➢ Cash flow forecasts are made and kept up-to-date. Cash needs can be assessed month by month.
➢ Sufficient capital is provided at start-up allowing it to operate during the first months.
➢ Good relations are established with the bank so short-term cash problems may be financed.
➢ There is effective credit control over customers’ accounts ro make sure they pay on time.
➔ Poor management skills: Entrepreneurs may lack experience/skills in:
➢ leadership and decision-making
➢ cash handling and management
➢ planning, coordinating and communication
➢ marketing, promotion and selling.
To minimise risk, an entrepreneur could gain management experience through employment, or obtain advice
and training from a specialist organisation.
Some entrepreneurs buy in experience by employing people with management experience. However, this can
be expensive, and many new businesses can’t afford it.
● Local, national & international businesses:
- Local businesses operate in small, well-defined parts of a country. Their owners often don’t aim to expand.
- National businesses have branches/operations across a country. They don’t attempt to establish operations
internationally.
- International businesses sell products in more than one country, sometimes using foreign agents or online
selling.
- Multinational businesses have operations in more than one country, meaning they have an established base for
producing/selling products outside their own domestic economy.
KEY TERMS:
★ Entrepreneur: an individual who has the idea for a new business, starts it up and carries risks but benefits from
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: physical/tangible goods sold to consumers not intended for resale (durable and non-durable
goods).
★ Consumer services: non-tangible products sold to consumers not intended for resale.
★ Factors of production: resources needed by a business to produce goods and services.
★ Capital goods: physical goods used by industry to aid production of goods and services.
★ Enterprise: the action of showing initiative to take risk to set up a business.
★ Adding value: the increasing difference between the cost of purchasing bought-in inputs (materials) and the
selling price of the finished goods.
★ Branding: the process of differentiating a product by developing a symbol, name, image or trademark for it.
★ Opportunity cost: the next most desired option that is given up.
★ Multinational business: a business organisation that has headquarters in one country, but operates branches,
factories and assembly plants in other countries.
1.1.2 Role of entrepreneurs & intrapreneurs
, ● Role of entrepreneurship:
- The role of an entrepreneur when creating/starting up a business is to:
➢ have an idea for a new business
➢ create a business plan
➢ invest some of their own savings and capital
➢ accept responsibility of managing the business
➢ accept possible risks of failure.
● Role of intrapreneurship:
- Intrapreneurship is the process of encouragement of risk-taking and enterprise by employees within a business
to help create and develop new opportunities, remain competitive, and adapt to new conditions.
- The benefits of intrapreneurship to existing businesses include:
➢ Injecting creativity & innovation into the business: developing new products to increase sales, or creating
exciting ways of selling existing products.
➢ Developing ways of doing business: creativity in solving problems such as low efficiency can be successful.
➢ Driving innovation & change within the business: generating excitement within the business about a new
opportunity makes change more acceptable.
➢ Creating a competitive advantage: by developing more innovative products.
➢ Encouraging original thinkers & innovators to stay in the business.
● Qualities of successful entrepreneurs & intrapreneurs:
➔ Innovation: Must be able to identify and fill a gap in the market, attract customers in innovative ways, and
promote their business as being different. This requires original ideas and an ability to do things differently.
➔ Commitment & self-innovation: Energy, focus, the willingness to work hard, to be keen, and to have
ambition to succeed are all important.
➔ Multi-skilled: Different business tasks (producing, promoting, selling) require someone who has many
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 workers.
➔ Self-confidence: Many start-ups fail, but this shouldn’t discourage an entrepreneur who has belief in
themselves and their business idea. They should also be able to bounce back from setbacks.
➔ Risk-taking: Must be willing to take risks in order to see results. They often take the risk of investing their own
savings.
● Barriers to entrepreneurship:
➔ Lack of business opportunity: Identifying a successful business opportunity is one of the most important
stages in becoming an effective entrepreneur.
The original idea for most businesses comes from sources such as:
➢ personal skills or hobbies
➢ previous employment experience
➢ franchising conference & exhibitions offering new business ideas
➢ small-budget market research
Many enterprises are set up in the following industries often because of personal skills and the low capital
required: fishing, hairdressing, computer repairs, jewellery making, market gardening, childminding, and so on.
➔ Obtaining sufficient capital: Lack of finance could be due to:
➢ insufficient savings
➢ no knowledge of financial support and grants available
➢ no trading record to present to banks as evidence of past business success
