BUS1311/RN

UNIT 1: BUSINESS AND ITS ENVIRONMENT

TOPIC 1: ENTERPRISE
The Nature of Enterprise

What is a Business?
A business is any undertaking that changes/converts inputs into outputs to produce goods and
services that satisfy man’s needs and wants.

Important Definitions

a) Needs: These are items that are essential for man’s survival. They are necessary for
man to live. They may include food, shelter, water, medical care and clothing.

b) Wants: These are items that are not necessary for man’s survival but are necessary to
make life more comfortable. Examples include TV sets, jewels etc.
Wants differ from person to person and they also change over time for the same person,
they are many and therefore unlimited.

c) Goods: They are tangible products which satisfy human’s needs and wants.

d) Services: They are intangible products that satisfy human’s needs and wants. A service
is a non-physical product in the form of help, advice, information or labour. Examples:
medical care, insurance, transport, teaching, holidays, or the servicing of equipment.

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Types of Goods
i) Consumer Goods: These are tangible/physical products that are sold to the general
public for final consumption. They include durable products and non-durable
products. Examples are food stuffs, phones, shoes and others.

ii) Capital Goods: These are tangible/physical products that are sold to other
businesses/industries to be used in the production of other goods eg machinery.

iii) Consumer Services: These are intangible products that are sold to the general
public eg medical services, hairdressing, teaching, legal services, insurance services
etc.

How do Businesses Operate?

1. Businesses identify the needs and wants of customers and then they purchase inputs
which they transform into outputs that satisfy the identified needs.

2. In the process, they add value to the inputs which helps to sell the outputs at a higher
price and be able to make a profit.

Resources Needed by a Business to Produce Goods and Services

The resources (inputs) which businesses need to produce goods and services are referred to as
factors of production. There are basically four factors of production.

1. Land: This refers to all renewable and non-renewable resources of nature (gifts of
nature). For example soils, minerals, air, sunshine, water, vegetation etc.

2. Capital: This refers to all man-made resources that are used in the production process.
For example finances, machinery, equipment, buildings etc.

3. Labour: This refers to both physical and mental effort that is used by the workforce in
the production of goods and services.

4. Enterprise: This is the driving force and ability of individuals to combine other factors
of production into one unit that produce goods and services. Enterprise provides a
managing, decision making and coordinating role in the production process.

* There may be other needs which businesses should have so as to produce goods and services.
However the basic ones are the four mentioned.

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THE CONCEPT OF VALUE ADDED

Businesses transform inputs into outputs ie they turn factors of production (resources) into
goods and services (products). During the transformation process, businesses add value to the
resources to produce products.

Land
Transformation Process Goods
Labour (Add Value)

Enterprise
Capital Services

Adding Value is the main objective of all businesses so to make customers to pay a higher
price for the products, greater than that of the materials and components used.

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Added Value refers to the difference between the cost price of the bought in materials and
components and the selling price of the products.

Adding Value Example: Orange Juice Drinks Company

 Buy oranges (raw material) from supplier
 Process the oranges into orange juice
 Package and sell the new created orange juice to consumers

Calculations
Tardew Car Dealers buys a 6 year old Fiesta for £700 cash. One car seat is replaced and a new
exhaust fitted -the parts cost £105. After a thorough clean-up inside and out and a squirt of air
freshener inside (materials cost: £5), the Fiesta goes onto the forecourt at £1,495 and is sold for
£1,400 a week later.
a) Calculate the added value
b) Explain why this added value cannot be treated as pure profit.

HOW DO BUSINESSES ADD VALUE?

Businesses can add value to their products through many ways and some of them include the
following.
 By selling the products in good window displays. This gives the products an exclusively
luxurious outlook.
 By carrying out expensive and extensive advertising of the products. This makes the
product more popular hence increasing their value.
 Selling the products in attractive packaging materials. This makes the products to look
attractive to the customers and they will be ready to pay a higher price.

THE ROLE OF ENTREPRENEURS IN BUSINESS

An entrepreneur is a person who identifies a business idea/opportunity and takes financial risk
of starting and managing the new business venture. The idea identified may be totally a new
one or improving the existing one.

The entrepreneurs have particular skills that include the following:

 Ability to have new ideas for new businesses.
 Investing own saving and capital
 Accepting responsibility of managing a new business
 Accepting the possible risks of failure

CHARACTERISTICS OF SUCCESSFUL ENTREPRENEURS

1. Innovation: Innovation may include coming up with a brand new idea of business, or
it may be improving the existing one, finding a new niche market and location.
Entrepreneurs should be able to present their businesses as unique, different from others
in the same market. They should be able to present things differently.

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2. Commitment and Self-Motivation: They should have a willingness to work hard,

keen ambition to succeed and be focused. For a business to succeed, the entrepreneur
may sacrifice of his leisure hours each day.

3. Leadership Skills: The successful entrepreneur must have a personality that

encourages people in the business to follow him/her and should motivate them thus
leading by example.

4. Risk taking: In order to see results of success, the entrepreneur must be willing to take
risks. The main risk is investing their own savings into the business, which may fail
sometimes.

5. Multi-skilled: The entrepreneurs do a variety of tasks in business. They should have as

many skills as possible. They have to produce the product, promote it, sell it, count the
money etc. They also need to know how to handle people, money and accounting
records.

6. Self-confidence and ability to bounce back: Even if the business fails at start,
entrepreneurs should not be discouraged but be able to bounce back from such setbacks.
This needs self-belief and confidence in themselves.

MAJOR CHALLENGES FACED BY THE ENTREPRENEURS

1. Identifying successful business opportunities: Inability to identify a market need that can
be turned into a business opportunity hinders many people from being entrepreneurs. Some
may identify needs that can offer sustainable demand for the product, so after starting, the
business may shortly fail. Therefore, the biggest challenge for entrepreneurs is to find a
successful business opportunity that will be profitable.

Business ideas may come from any of the following sources:

 The entrepreneur’s own skills and talents which can be sold to friends and relatives
hence becoming a starting point for the business.
 Previous employment experience which equips people with experience and they
start their own business.
 From market research and this can be done using the internet or locally to discover
how many businesses are offering the same products.
 From trade fairs and exhibitions; from these, a potential entrepreneur can obtain the
necessary skills, or he can buy a franchise to produce the same goods from other
existing businesses.

2. Sourcing of Finance or Capital: Capital (Finance) ranks top on the list of difficulties that
potential entrepreneurs have. Many people who have bright business ideas fail to bring
them to reality because of lack of capital. This is because of:
 Lack of sufficient own finance; Many entrepreneurs have little personal savings.

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 Lack of information of the financial support and grants offered.

 Lack of any trading/accounting records to present to banks as evidence of past
business success so as to obtain loans.
 Poor business plans that fail to attract potential investors.

3. Challenges of determining a suitable location: Because of the high costs for a new
business, entrepreneurs fail to find a suitable location where they will get revenue which is
high enough to cover the high costs. As a result, they resort to working from home.
However, this has drawbacks.

The home may be too far from the potential market. A home based business may lack status
like the one that owns its prestigious premises. The new businesses especially service
businesses need to choose their locations wisely usually near to the market depending on
the nature of the business.

4. The Challenge of Competition: Unless the business idea is so unique, completion is

always very high to new businesses. Older well established firms with more resources and
market knowledge always suffocate new businesses. Thus a new business to prosper, it may
need to have better customer service so as to survive.

5. Challenges of Building a customer base: For any new business to survive, it will need to
quickly build a loyal customer base that will return to purchase the products again and
again. To achieve this, a small business may need to have good customer service which
may be in two ways:
a) Personal customer service
b) Offering a knowledgeable after-sales service

FACTORS THAT LEAD TO FAILURE OF NEW BUSINESSES

Success for new businesses is not always a guarantee even if the entrepreneur has all the desired
characteristics. Some businesses fail due to:

1. Lack of record keeping: It is impossible to remember everything in business records.

Records are necessary because they are used reference for proper business running and as
evidence to tax authorities.

2. Lack of adequate working capital to run the daily business affairs. Purchasing of stock
needs cash and without enough working capital the business may fail to purchase more
stock.

Working capital problems can be avoided through the following:

 The business should construct a cash flow forecast to plan and monitor for the
cash needs of the business.

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 The entrepreneur should be ready to inject enough capital into the business
during start-up at least for the first six months of operation until cash from the
customers builds up.
 Businesses should build good customer relations with banks so as to secure bank
overdrafts.
 The business should establish an effective credit control to the customers and
chase up late payers.

3. Poor Management: Managers, entrepreneurs may lack leadership skills, cash handling
skills and cash management skills, planning and coordination skills, decision making skills,
communication skills and promotional and marketing skills yet they are key for the success
of the business. However hardworking they may be but if the management skills are
lacking, the business is bound to fail.

Therefore if the entrepreneurs lack such skills, they should seek the help of organisations
that provide such services, or hire specialized managers, though this may be costly.

4. Changes in the business environment: The following changes in business environment

can lead to the failure of new businesses;
 Emergency of new competitors for the business takes away customers
 Economic changes like inflation or depression makes businesses perform
poorly.
 Technological changes that may make the product produced old fashioned.

IMPACT OF BUSINESS ENTERPRISE ON THE ECONOMY OF THE COUNTRY

a) Creation of employment: New business set up by entrepreneurs create self employment
for the entrepreneurs and employ other people as well. This reduces the rate of
unemployment in the country.

b) Economic Growth: Businesses produce goods and services leading to a high level of
national output hence a high gross domestic product. This leads to economic growth,
better standards of living for the population and high taxes for the government.

c) Innovation and technological change: New businesses are always innovative and their
creativity improves the economy making it more competitive.

d) Production of Exports: This increases the value of a country’s exports hence improving
the international competitiveness and better balance of payments.

e) Increases social cohesion: When businesses create employment, there is improvement in

national and social togetherness which reduces the rate of crimes that would result from
unemployment.

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SOCIAL ENTREPRISES
A social enterprise is a business undertaking that makes money in socially responsible ways
with the objective of investing most of its profit for the benefit of society rather than
maximizing the returns to the owners. They therefore make profits normally from business
operations but invest a bigger percentage of the profits for the benefit of society and then
provide some minimal returns to the owners.

Social enterprise carry out proper businesses, therefore they are not charities, but most of the
profit is used to benefit society.

Social enterprises have three main objectives:

1. The Economic Objective: They aim at making a profit to re-invest back into the business
for expansion and also provide some returns to the owners as their reward for risk taking.

2. The Social Objective: The aim at supporting the local disadvantages communities in the
society and also provide employment to the community.

3. The Environmental Objective: They aim at protecting the environment and to manage
the business in an environmentally friendly way.

The three objectives of social enterprises are referred to as the triple bottom line

DIFFERENCES BETWEEN BUSINESS ENTERPRISES AND SOCIAL

ENTERPRISES
Business enterprise defined as activity where the primary motive is profit – production of
goods/services to consumers at a profit. They create wealth for the owners.

On the other hand, Social enterprise more narrowly defined are social mission-driven
organisations applying market based strategies to achieve a social purpose/ environmental
purpose – re-investment of profits into community or back into business.

BUSINESS ACTIVITIES AND THE ECONOMIC PROBLEM

Businesses provide goods and services that satisfy human needs and wants. Needs are essential
items and wants are non essential items but they are necessary to make life more comfortable.

However, the factors of production (inputs) or the resources that are used to produce the goods
and services that satisfy the needs and wants are few, therefore limited in supply. This means
that limited goods can be produced to satisfy our needs and unlimited wants at any one time.
This is the major economic problem called scarcity.

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a) Scarcity: This is an economic problem where there are limited (insufficient) resources
and goods that are needed to satisfy the unlimited needs and wants. Because of scarcity,
people has to wisely make a choice of which needs and wants to satisfy at a time using
the available resources. So scarcity leads to choice.

As choice is being made, people foregoes or sacrifices the satisfaction of other wants.
They satisfies one need that give him the highest benefit and leaves out those needs that
are less valuable to them. Therefore, the second best alternative choice is left out. This
is called an opportunity cost.

b) Opportunity Cost: This is the second best alternative benefit foregone/ given up when
a choice is being made.

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