Chapter 1: Enterprise
- Created by: Crystal Parsons
- Created on: 29-11-21 06:13
1.1 Business activity
Business aim: To meet the needs of customers by using resources to make goods and services that they will buy.
Products can be capital/intermmediate goods or consumer goods.
Resources needed (factors of production:
- Land - location
- Labour - human effort to produce goods or provide servicese
- Capital - equipment, machinery
- Enterprise - risk-taking and decision-making undertaken by an entrepreneur
1.2 Opportunity cost
The basic economic problem is that there is scarcity - finite resources to meet infinite needs and wants.
As a result, we have to make choices.
Every choice involved an opportunity cost: the value of the next-best alternative forgone.
1.3 Added value
Business activity aims to increase added value because it has benefits including increased profits.
Added value is the difference between the cost of purchasing raw materials and the price of the finished good.
To do so:
- Raise the price whilst keeping raw material costs constant... (is PED inelastic enough to do so)
- Purchase cheaper raw materials and keep price the same... (is the quality worth the price)
- Increase efficiency... (maybe need more accurate machines or better trained staff)
1.4 Entrepreneurs
Someone who takes the financial risk of starting and managing a new venture.
Multiskilled
- must be able to make product, promote it, sell it and keep accounts
- Not being able to do one of these will make it impossible to run the business productively
Risk-takers
- Innovative ideas are often more successful than copies.
- But a new idea comes with a risk.
- They don't need to invent, only carve a new nich in the market, attract customers innovatively and present their business as being different
Self-confident
- believe in their business idea and their own abilities
- this will attract investors which is important because sourcing capital is one of the largest challenges facing entrepreneurs
- will make them a good leader which will help them attract customers as well as maintaining good relations with suppliers and employees if they have them
1.5 What do businesses need to succeed and why do
Business success requires:
- adequate factors of production
- customers
- suppliers
- government - legal framework, infrastructure, education
Challenges faced by entrepreneurs:
Identifying successful business opportunities that will generate sufficient demand to allow the business to be profitable.
Sourcing capital - they lack personal savings, knowledge of government grants, trading record for banks, good business plan which inspires confidence of investors
Determining a location is perhaps one of the most important considerations. There is a need to keep fixed costs low so that breakeven level of output is low so as to increase the chances of business success.
Competition from already established businesses which have more resources and more market knowledge can be very acute. The way to overcome is an innovative product or excellent customer service to overcome cost and pricing advantages of bigger competitors.
Building a customer base fast is essential to surviving but in competitive markets it is very difficult and often they can't beat competitors except through better service because the business can be more personalised due to its smallness - an advantage a bigger business doesn't have.
Reasons for not succeeeding:
Lack of capital
- Most common reason for failure
- capital is needed for day-to-day cash, holding inventory etc.
- To overcome they can create cashflow forecasts so that the liquidity and working capital needs of the business can be assessed month by month. There is need to keep this update and show it to the bank manager.
- Also, have more capital at start up, good relations with banks, effective credit control over customers' accounts.
Lack of record keeping
- Accurate and up-to-date records of business transactions and other matters are essential
- Use computers with paper records e.g. receipts
Poor management skills
- Most entrepreneurs have work experience but few have it at every level of management so they may not have developed leadership skills, cash handling and management skills, planning and coordinating skills, decision-making skills, communication skills, marketing, promotion and selling skills.
- Some learn the skills but that is risky
- Some buy in ths skills but this is expensive
Changes in business environment
- Dynamic, only constant is change
- Examples of this include new competitors, legal changes (outlawing product), economic changes (customers have less disposable income), technological changes (methods of doing business get out of date)
1.6 Benefits for the entrepreneurs' countries
Social cohesion
- Employ workers and themselves
- Business survives and expands then more jobs created in the businesses that supply them
- More jobs and career opportunities
- National level of unemployment falls
- Reduced poverty and crime
- Increased social cohesion
Increased competitiveness
- New businesses tend to be innovative
- This creativity adds dynamism to an economy
- It rubs off onto other businesses and helps to make the nation's business sector more competitive.
- In addition, many start-ups expand their operations to the export market
- This increases the value of a nation's exports and improves it's international competitiveness
Economic growth
- Starting up a company increases the output of goods and services in the country which drives up GDP
- If enough small businesses are created then living standards for the population will increase.
- Although some will fail, some will expand to become really important businesses which will employ large numbers of workers and add to considerably to economic growth.
- With extra output, there is also more tax revenue for the government to invest back into the economy which may including more grants for entrepreneurs
1.7 Social enterprises
A business with mainly social objectives that reinvests most of its profits into benefiting society rather than maximising returns to owners.
They often have three main aims:
- Economic - make a profit to reinvest back into the business and provide some return to owners
- Social - provide jobs or support for local, often disadvantaged, communities
- Environmental - to protect the environment and to manage the busienss in an environmentally sustainable way
= triple bottome line (the three objectives of social enterprises: economic, social and environmental)
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