Enterprise

Purpose of Business Activity

• Businesses aim to add value to raw materials and semi-finished goods in order to satisfy needs and wants. This helps raise living standards of the economy as businesses will employ people for production.

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Factors of production

1. Land - all natural resources used in production
   Return for land is “rent”

2. Labour - both manual and skilled work
   Return for labour is “salary” or “wages”

3. Capital - finance that is needed to set up and run the business as well as man made goods used in production (ex. machinery). These are known as capital goods.
   Return for capital is “interest”

4. Enterprise - the driving force that arranges all other factors of productions and takes the risk of the new business venture
   Return for enterprise is “profit”

Added value

• Added value = selling price - cost price

• Added value is not the same as profit

How to increase added value

1. Increase selling price by providing higher quality goods (higher quality raw materials), increasing advertising, changing packaging, making small improvements in the product.

2. Decrease cost price by reducing wastage through lean production methods, find cheap supplies, reduce quality of the product, increase efficiency by training workers and using advanced technology.

Scarcity

• It occurs as there are limited resources and unlimited wants.

• Due to the existence of scarcity, people are forced to make a choice

• Opportunity cost is the next best alternative forgone

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Entrepreneur

The role of an entrepreneur

• Produce a business idea

• Invest their own capital

• Accept responsibility of running and managing the business

• Accept the risks of failure

Characteristics of an entrepreneur

1.  Innovation

2.   Commitment

3.  Self-motivation

4.  Multiskilled

5.  Leadership skills

6.  Communication skills

7.  Self-confidence

8.  Ability to bounce back

Challenges faced by entrepreneurs

• Identifying successful business opportunities:

  • Entrepreneurs need to find markets which have enough demand in order to be profitable

  • People get their ideas from:

    • Own skills

    • Previous employment

    • Small-budget market research

• Sourcing finance:

  • Entrepreneurs face financial issues due to:

    • Lack of own finance

    • Lack of awareness of grants and subsidies

    • Lack of trading records in order to receive loans from bank

    • A poor business plan

• Determining a location:

  • An entrepreneur will have to decide the best location keeping in mind costs, potential target market, status of area, etc.

• Competition

• Building a customer base:

  • For a firm to survive it must build customer loyalty and brand image.

  • Businesses can do this by:

    • Offering pre and after sales services

    • Providing discounts and other sales promotions

    • Providing goods that meet specific needs (which a large firm will be reluctant to do)

Why do new businesses fail?

• Lack of record keeping

• Lack of cash and working capital:

  • Working capital is the capital needed to run the day-to-day business

  • Ways to avoid working capital shortage:

    • Make a cash flow forecast

    • Inject more capital into the business

    • Establish good relations with bank

    • Use effective credit control with customers

• Poor management skills:

  • Essential skills to avoid management problems:

    • Leadership skills

    • Cash handling and cash management skills

    • Planning and coordinating skills

    • Decision-making skills

    • Communication skills

    • Marketing, promotion and selling skills

• Changes in business environment:

  • A few changes include:

    • New competitors

    • Legal changes

    • Economic changes

    • Technological changes

Why may businesses fail in early stages?

• Internal problems – 

  • Weak business idea

  • Lack of managerial skills 

  • Lack of suitable employees

  • Lack of sufficient finance 

  • Lack of entrepreneurial skills 

  • Poor initial research

  • Over ambitious ideas 

  • Poor decisions 

• External problems –

  • Anticipated customers did not materialize 

  • Changes in business environment affected customer’s spending patterns 

  • Unexpected competition

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Types of entrepreneurial businesses

1. Primary sector – extracting materials like fishing and coal mining 

2. Secondary sector – manufacturing sector like craft manufacturing 

3. Tertiary sector – service sector like hairdressing

Impact of enterprise on an economy

• Employment creation

• Economic growth 

• Firm’s survival and growth 

• Innovation and technological change 

• Exports 

• Personal development 

• Increased social cohesion

Social enterprise 

Features:

• Directly produce goods and services

• Have social aims and ethical ways of producing them

• Need to make a surplus 

Objectives:

• Social 

• Economical               

• Environmental 

Together known as triple bottom line

Business Structure

Classification of business activity 

1. Primary sector – extracting natural resources. E.g. fishing, mining 

2. Secondary sector – manufacturing sector. E.g. car manufacturing, clothes-making 

3. Tertiary sector – service sector. E.g. banking, transportation

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Changes in business activity 

The importance of each sector changes as the economy develops. The importance of each sector is measured by employment levels or output levels. 

1. Industrialisation is when the importance of secondary sector rises. This occurs in developing countries like India and China 

Advantages

Disadvantages

It increases the GDP if the country, helping raise living standards.

Causes a huge movement from rural to urban areas, causing social and housing problems.

It increases the employment opportunities available

Imports of raw materials will increase, increasing import costs.

Increases exports and reduces imports.

Manufacturing industries growth is usually occurred due to growth of MNCs

Firms will be more profitable, increasing tax revenue

Manufacturing sector goods have more value than primary sector goods.

2. De-industrialisation occurs when the importance of secondary sector declines. It occurs in developed countries like USA, UK.

• As a country develops, the average income per person increases. Rising incomes lead to increasing living standards as consumers will be able to spend more on services than goods, showing demand for services rises more quickly than physical goods

• As the world industrialises, more and more manufacturing businesses enter the market, increasing the competition and causing prices to fall. This makes it easier for developed countries to buy these goods rather than producing it themselves.

Public and Private Sector

1. Public sector – firms controlled and managed by the government/local authority.

2. Private sector – firms controlled and managed by individuals.

Types of Economies

1. Free market economy – only private sector and no government intervention.

2. Mixed economy – both private and public sectors. Governments and individuals make decisions together. Governments usually offer essentials like health care and education.

3. Command economy – economies that have only the public sector.

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Sole trader

• These are businesses owned by one person

• The one person owns and controls the business.

• It has no formal legal structure as business and owner are considered one and the same.

Advantages

Disadvantages

Easy to set up and manage

Limited finance (capital)

Owner has complete control

Unlimited liability

Ability to choose working times

May face intense competition

Easy to establish relations with employees and customers

Unable to specialise

Freedom of making own decisions

Lack of continuity

Insufficient skills

Partnership

• It is a business owned by a group of individuals

Advantages

Disadvantages

Each partner may specialise in different areas

Unlimited liability

Shared decision-making

Profits are shared

Additional finance (capital) injected by each owner

Risk of conflicts

Losses are shared

No continuity

Fewer legal formalities

Limited companies 

Features:

• Limited liability – each shareholder will only lose the amount invested if the business/idea fails 

• Legal personality – the company has a separate legal identity from its owners/shareholders

• Continuity – even after the death of a shareholder, there is no need for dissolution.

Private limited companies 

• It is a business owned by shareholders who are friends and family

Advantages

Disadvantages

Limited liability

High legal formalities

Separate legal identity 

Can’t sell shares to public 

Continuity

Difficult to sell shares

Original owner will be able to retain control 

Have to send accounts to companies’ house – less secrecy 

Ability to raise capital from sale of shares

Higher status 

Public limited company

• These are businesses which have legal rights to sell shares to the public. 

Advantages

Disadvantages

Limited liability

High legal formalities

Separate legal identity

Cost of hiring specialists

Continuity

High fluctuation in share prices

Easy to buy and sell shares

Less secrecy

Access to substantial capital sources due to the right to issue prospectus (flatation)

High risks of takeover

Directors influenced by short term objectives of major investors

Legal formalities in setting up a company 

1. Memorandum of association – name, address, contact number, maximum share capital, declared aims

2. Articles of association – name of director, procedures to be followed

• These documents must be submitted to the ‘registrar of companies

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Other forms of business organisation 

Cooperatives 

• These are organisations owned by their members 

• Features:

  • All members contribute to running and managing 

  • All members have a say in important matters 

  • Equally shared profits 

• Advantages –

  • Buying in bulk

  • Working together to solve problems 

  • Good motivation 

• Disadvantages –

  • Poor management skills 

  • Capital and finance shortage 

  • Slow decision making 

Holding companies 

• A business which owns and controls many different companies, but is not unified as one

Joint ventures

• When 2 or more businesses agree to join for one project 

• Reasons:

  • Shared costs and risks

  • Different companies’ different strengths 

  • Together more powerful 

• Risks:

  • Conflicts 

  • Errors or mistakes 

  • Business failure of one partner, risk the whole project.

Franchise

• A business which uses the name, logo, trading methods of an existing successful business

• They have a legal agreement to do so

To the franchisor

Advantages

Disadvantages

Guaranteed income from franchisee

Poor management of one business, affecting reputation of all

Easy, risk-free way of expansion

Potential management issues

Easy to manage

Difficult to monitor

Still have some control

To the franchisee

Advantages

Disadvantages

Lower risks as business is established

Proportion of revenue sent to franchisor

Advice, training, supplies and advertising obtained by franchiser

Rigid business model already made

Economies of scale

Potential loss of large investment

Access to experts

Expensive initial fee

Franchiser won't open another outlet in the same area

Public-sector enterprises – public corporations

• Known as public corporation

• In the public sector

• Profit is not their main aim

Advantages

Disadvantages

Managed with social objectives rather than profit

High chances of inefficiencies

Still operate, even if making a loss

Subsidies may encourage inefficiency

Finance raised from government

Government may interfere in business decisions

Size of Business

Different methods of measuring size

1. Number of employees 

   1. The size is measured upon the basis on number of workers employed. 

   2. Problems- a firm may be capital intensive, making this method insubstantial.

2. Revenue 

   1. Used to compare businesses of same industry

   2. Depends on the total value of sales made. 

   3. Problem – less effective when comparing high-value and low-value firms. 

3. Capital employed 

   1. Depends on the total value of long-term finance available in the business

   2. Problem – can’t be used to compare firms in different industries

4. Market capitalisation 

   1. Market capitalisation = current share price * total number of shares issued

   2. Limited to public limited companies 

   3. Problem – share prices change on a daily basis making the comparison unstable

5. Market share 

   1. Market share = total sales of business/total sales in industry * 100 

   2. Problem – if the total market is small, results will not be accurate

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Measuring business size

Best form of measurement

• No ‘best’ measure 

• To choose which method to use, we need to known if we are interested in absolute size or comparative size. 

• Absolute size – test using at least 2 criteria and make comparison

Problems while measuring businesses:

• There are many different methods to measure business size and each method gives us different answers.

• There is no internationally agreed definition on the size of a business.

Small and micro-businesses

Significance of small and micro-businesses

• Benefits of encouraging development of small and micro-businesses:

• Many jobs created as small businesses won’t have funds to buy capital equipment

• Often run by dynamic entrepreneurs. Provides greater variety

• Will create competition for large businesses. Discourage monopoly

• May provide specialist goods or necessities

• Helps them grow and become large

• Will have lower costs as no diseconomies of scale

Government assistance for small businesses

• Governments may provide assistance to small businesses in the form of:

• Reduced rate of tax

• Loan guarantee scheme

• Information, advice, support

• Aid designed to overcome specific problems like:

  • Lack of specialist management expertise

  • Problems raising finance

  • Marketing a limited product range

  • Finding cost-effective premises

Small and large businesses

Advantages

Small Business

Large Business

Managed and controlled by owners

Ability to employ specialists

Flexible - adapt quickly to changes in demand

Can conduct through market research

Personal contact with employees and customers

Diversified risks

Offer personal service

Ability to sell at lower prices

Economies of scale

Disadvantages

Small Business

Large Business

Limited access to finance

Diseconomies of scale

Not diversifies, high risks

Divorce between ownership and management

Few economies of scale

Conflicts

Unable to afford specialists

Poor communication, slow decision making

Difficult to manage and control

Business Objectives

Aims are the long-term goals of a business. They act as a framework for a business to create further objectives and set a purpose of the business.

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Importance of business objectives

• An objective helps to direct, control and review any business activity.

• For any aim to be achieved successful, there have to be strategies in place which will guide the business to achieve the goal. These strategies must be reviewed constantly to know if it is effective.

• Every business’s aims and strategies change over time.

SMART criteria

• Every business objective must meet the SMART criteria

  • S – SPECIFC: the aim must focus on what the business does and must directly relate to the business’s activities.

  • M – MEASUREABLE: every aim must have quantitative values to prove targets are being met effectively.

  • A – Achievable: aims which are impossible to achieve in a time period must not be set. Such aims will demotivate the employees.

  • R – realistic and relevant: aims should be realistic according to the resources available and must be relevant to the people carrying it out. 

  • T – time-specific: there must be time limits to the objectives established.

Benefits of objectives

• They provide a sense of direction

• Helps improve focus of individual employees and departments

• Provides a framework for decision making

• Acts as a motivation tool

• Acts as a means of assess performance, progress and identify training needs

• Helps plan for future in terms of resources required

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Hierarchy of objectives

• This shows the balance and dependencies between the different stages of setting aims and objectives.

Corporate aims

• These are long terms business goals and provides the central purpose of the business.

• These are objectives that translate the aims into achievable targets.

Advantages of corporate aims

• Help develop a sense of purpose and direction for the business

• Help check progress

• They help development of successful tactics and strategies

Vision statement

• Vision statement is the desired future of the company

• It is a company’s road map indicating what the company wants to become in the future.

Mission statement

• Mission statement is a statement of a business’s core aims, phrased in a way to motivate employees and to stimulate interests by outside groups.

• It is a summary on how they intend to support/achieve their vision

• Businesses communicate their mission statement through – publishing it in their accounts, websites, banners, advertising posters, company newsletters, etc.

Benefits –

• Helps inform the external stakeholders about the aims and vision quickly

• It helps attract employees, potential investors, shareholders, etc.

• Help motivate employees

• Help guide and direct individual employee behaviour and conduct

Limitations –

• Can be easily adopted by any business of any size

• It is not specific to a business

• They are too vague and general

• Used as a PR activity

• Impossible to analyse

Stakeholders in a business

• Stakeholders: People or groups of people that are affected by, and therefore have an interest in the activities of a business.

• Stakeholder concept: The view that businesses and their managers have responsibilities to a wide range of groups- not just their shareholders

• The roles, rights and responsibilities of stakeholders:

Roles

Rights

Responsibilities

Customers

Purchase goods and services

Receive goods and services that meet local laws

Honesty

Provide revenue

Offered replacements, repairs, etc- as legally obligated

Not stealing

Not make false claims

Suppliers

Supply goods and services

On-time payment

Supply goods in time and condition already decided

Fair treatment

Employees

Provide manual and other labour services

Treated within minimum legal limits

Honesty

Employment contract payment and treatment

Meet employment contract

Join a trade union

Cooperate with management for reasonable requests

Observe Ethical code of conduct.

Local Community

Provide local services and infrastructure

Consulted about major changes

Cooperate

Not have lives badly affected

Meet reasonable requests

Gov.

Laws- restrain business activity

Businesses to meet requirements

Treat businesses equally

Law and order- allow activity to take place

Prevent unfair competition

Achieve economic stability

Good trading links internationally- allow international trade

Lender

Provide finance in different forms

Repaid on agreed dates

Provide agreed finance on agreed date and time

Paid finance charges

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Corporate social responsibility – an evaluation

• It is the concept that accepts that businesses should consider the interests on the society in their activities and decisions, beyond the legal obligations that they have

  • CSR distracts businesses from their key role of using scare resources to their maximum and produce goods and services

  • CSR is a form of WINDOW DRESSING

  • If it is found that CSR is used as a PR activity, it will lead to bad word of mouth

  • CSR maybe expensive in the short run, but will help the business raise profits in the future

  • As it will lead to better reputation, lower regulations, chances of subsidies and grants, customer loyalty, etc.