Business (9609) | Enterprise

Study Notes: 1.1 Enterprise – Business and its Environment (AS Level)

Welcome to the first chapter of your Business studies! This section, Enterprise, is fundamental. It explains why businesses exist, what they need to operate, and who drives them forward. Understanding these basics is crucial, as they are the building blocks for the rest of the syllabus!

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1.1.1 The Nature of Business Activity

The Core Purpose of Business Activity

In simple terms, a business exists to satisfy the needs and wants of customers. If people need something (like food) or want something (like the newest phone), a business provides it.

The main purpose is generally two-fold:
1. To produce goods (tangible items, like a car) or services (intangible actions, like a haircut).
2. For most private sector businesses, the ultimate goal is to generate profit (Revenue - Costs).

The Factors of Production (FOP)

To produce anything, a business needs resources. These resources are grouped into four essential categories – remember them using the acronym CELL:

• C - Capital: Man-made resources used in production, such as machinery, factories, computers, and tools. (Note: This is physical capital, not just money!)
• E - Enterprise: The skill and willingness to take risks, combine the other factors of production, and start a business. This is the role of the entrepreneur.
• L - Land: All natural resources, including the physical site of the factory, raw materials (oil, metal), and agricultural land.
• L - Labour: The human effort (physical and mental) required to produce the goods or services.

The Concept of Adding Value

Adding value is one of the most important concepts in AS Business. It is the difference between the selling price of the final product and the cost of the raw materials and components used to make it.

$$ \text{Adding Value} = \text{Selling Price} - \text{Cost of Inputs} $$

Why is adding value important?

It allows the business to cover all other costs (labour, rent, electricity) and, most importantly, generate a profit.

Example: A coffee shop buys raw coffee beans for \$1. They spend \$0.50 on milk and sugar. They sell the finished latte for \$5.
Value Added = \$5 - (\$1 + \$0.50) = \$3.50.
The value was added through branding, speed of service, location, and skilled labour.

Economic Activity, Choice, and Opportunity Cost

The foundation of all economic activity is scarcity – the idea that resources are limited, but human wants are unlimited. Because of scarcity, businesses (and governments) must make choices.

When a choice is made, something else is always given up. The benefit that is lost by choosing one option over the next best alternative is the Opportunity Cost.

• Analogy: You have enough money to buy either a new laptop or a new bike. If you choose the laptop, the opportunity cost is the enjoyment and utility you lose by not having the bike.
• Business Example: A farmer uses land to grow wheat. The opportunity cost is the profit they could have made by using that land to build a shopping centre instead.

The Dynamic Business Environment

Businesses do not operate in a vacuum. They exist in a constantly changing environment influenced by Political, Economic, Social, Technological, Legal, and Environmental factors (often remembered as PESTLE, which you will cover in depth later). This constant change is what makes the environment 'dynamic'.

Why businesses succeed or fail:

Success often comes from:

• Effective financial management (not running out of cash).
• Understanding customer needs and adding value.
• Strong leadership and motivated employees.
• Producing a high-quality product or service.

Failure often results from:

• Lack of market research (no demand for the product).
• Poor management or financial control.
• Stiff competition.
• Economic recession leading to low consumer spending.

Differences in Business Scale

Businesses vary massively in their reach and influence:

• Local Businesses: Serve a small, limited geographical area (e.g., a single bakery or a dry cleaner).
• National Businesses: Operate across the whole country, but do not trade internationally (e.g., a major national supermarket chain).
• International Businesses: Trade or operate in one or more countries outside their home nation.
• Multinational Businesses (MNCs): Businesses that have operations (production or service facilities) in more than one country, not just sales (e.g., Coca-Cola, Samsung).

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1.1.2 The Role of Entrepreneurs and Intrapreneurs

Who are Entrepreneurs and Intrapreneurs?

These two roles drive enterprise and innovation, but they operate in different spheres:

1. Entrepreneurs:

An individual who takes the financial risk of starting up and managing a new business venture. They are the creators of new organizations.

2. Intrapreneurs:

An individual who works inside a large organisation, using entrepreneurial skills (like innovation and risk-taking) to develop new products or new ways of doing business for the existing company.

Did you know? Google encourages intrapreneurship by allowing employees to spend 20% of their time working on projects they are passionate about. Gmail and AdSense were reportedly outcomes of this policy!

Qualities needed for Success (E & I)

While the setting is different, the mental qualities required are similar:

• Innovative and Creative: Finding new ideas or new ways to solve problems.
• Risk-takers: Willing to invest time and money without guaranteed success.
• Determined/Perseverant: Not giving up when faced with obstacles or failure.
• Self-Confident/Motivated: Believing in their idea and having the drive to succeed without constant supervision.
• Organised and Efficient: Excellent planning and management skills.

The Role of Enterprise in Starting Up and Ongoing Success

In Starting Up (Entrepreneurship):

The entrepreneur is the catalyst. Their role involves:
1. Identifying a gap in the market or a need that is not being met.
2. Combining the Factors of Production (Land, Labour, Capital).
3. Providing the vision and leadership needed to turn an idea into a functional business.

In Ongoing Success (Intrapreneurship):

Once a business is running, intrapreneurs help ensure it doesn't become stagnant:
1. Developing new products or services to keep the company competitive.
2. Improving efficiency and internal processes.
3. Ensuring the large business maintains an innovative culture.

Barriers to Entrepreneurship

Starting a business isn't easy. Common barriers include:

1. Lack of Finance: Difficulty securing loans or investment capital.
2. Legal Barriers/Red Tape: Complex registration processes or licensing requirements.
3. Fear of Failure: The psychological barrier of losing personal savings or reputation.
4. Economic Conditions: High interest rates or recession making the market unfavourable.
5. Lack of Skills/Experience: Not having the necessary business or technical knowledge.

Business Risk and Uncertainty

It is vital to distinguish these two terms:

• Business Risk: Risks that can often be calculated, anticipated, and sometimes insured against. They are inherent to business operations.
  (Example: A factory fire, predictable sales fluctuations, inventory loss).
• Uncertainty: External factors that cannot be foreseen, predicted, or calculated with accuracy. They are often macroeconomic or political.
  (Example: A sudden global pandemic, unexpected government policy changes, a major technological disruption like AI).

The Role of Business Enterprise in the Development of a Country

Enterprise is crucial for national prosperity:

1. Job Creation: New businesses employ people, reducing unemployment.
2. Increased GDP: Production of goods and services boosts the country's economic output.
3. Tax Revenue: Businesses pay taxes (corporate tax) and employees pay taxes (income tax), which the government uses for public services (health, education).
4. Innovation: New technologies and products improve the standard of living.

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1.1.3 Business Plans

The Meaning and Purpose of Business Plans

A Business Plan is a detailed, written document that describes a new business, its objectives, its strategies, its market, and its financial forecasts.

The Purpose: Why create a plan?

1. Attract Finance: The primary use—banks or investors will not provide money without a credible plan showing viability.
2. Roadmap: Provides a clear strategy and operational targets for the managers and owners.
3. Forecast: Forces the entrepreneur to predict potential problems and costs, improving the chance of success.
4. Control: Allows the business to measure actual performance against predicted outcomes.

The Key Elements of Business Plans

While plans vary, they usually contain these critical sections:

• Executive Summary: A short, powerful overview of the entire plan. (Often the most important part, as lenders may only read this first).
• Business/Product Description: What the business does, what the product/service is, and why it's unique (USP).
• Market Analysis: Detailed information on the target market, customers, competitors, and market size. (This section shows demand exists).
• Marketing Strategy: How the product will be priced, promoted, and distributed (The 4 Ps).
• Operations Plan: Where the business will be located, equipment needed, and production processes.
• Management and Personnel: Details on the owners, managers, their skills, and staffing needs.
• Financial Forecasts: Crucial section including:
  • Expected Cash Flow Forecasts.
  • Projected Profit and Loss statements.
  • Required capital investment and sources of finance.

Benefits and Limitations of Business Plans

Benefits (The Good Stuff):

• Reduced Risk: By forcing detailed analysis of the market and finances, the entrepreneur is better prepared for challenges.
• Secures Funding: Essential tool for convincing external sources of finance (banks, venture capitalists).
• Sets Objectives: Provides clear, measurable targets for the business to aim for.

Limitations (The Challenges):

• Based on Estimates: Financial forecasts and market projections rely heavily on assumptions, which may turn out to be inaccurate (especially for start-ups).
• Time Consuming: Writing a detailed plan takes significant time and resources away from actually running the business.
• Static Document: The business environment is dynamic (remember 1.1.1?). The plan might quickly become outdated if market conditions change rapidly.
• Bias: The entrepreneur writing the plan may be overly optimistic about sales and profit margins.