SHAFIQ FAKIR

EDEXCEL 9-1 BUSINESS GCSE

1.1 ENTERPRISE and ENTREPRENEURSHIP

1.1.1

The Dynamic Nature of Business

WHERE NEW BUSINESS IDEAS COME FROM

a) CHANGES IN TECHNOLOGY

 This module looks at how new business ideas come about

 For a business idea to be genuinely new, it must involve offering a good which has never been
offered to customers before

 This rarely happens and needs a major change in the external environment to allow a genuinely
new business to start

 One such major change is the emergence of a new technology

 A ‘new technology’ means a new way of doing things and usually leads to new products

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 For example, in 1971, the microprocessor was invented

 The microprocessor or ‘microchip’ reduced the size of computers from

to

 Companies like Dell and Apple were able to start as a result of this new microprocessor
technology

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 The internet is another example of a new technology

 The computer language of the internet is called HTML and was invented by Tim Berners Lee

 The new technology of the internet has allowed social media companies like Facebook and
search engine companies like Google to start and grow

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b) CHANGES IN WHAT CONSUMERS WANT

 Many businesses are based on fashion or customer tastes

 Fashions usually change gradually but sometimes fashion changes very radically and very fast

 This provides an opportunity for new businesses to start

 An example of this radical change in fashion and customer tastes is ‘green products’ like electric
vehicles

 Tesla is a firm which has been able to start and grow based on the growing awareness of
consumers about climate change which has encouraged them to switch to electric vehicles
even though they need a whole new charging infrastructure and are more expensive to buy than
petrol cars

 Starting a business based on a radical change in fashion carries similar risks to starting a
business based on a new technology

 When new technologies emerge or when fashions change radically, many products may become
OBSOLETE and this drives many businesses out of their markets which may cease to exist

 A product is obsolete when it is no longer in demand because it has been overtaken by a better
product using a new technology

 For example, when the microprocessor was invented, mainframe computers which took up whole
rooms (see picture above) became obsolete and many companies making mainframes went
bankrupt and many other like IBM made large losses

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c) ‘ORIGINAL IDEAS’ FROM ENTREPRENEURS

 An ‘original idea’ usually results in ‘creative businesses’

 An example of a creative business is a film production company which relies on the original
ideas of writers which are converted into scripts for films

d) ADAPTING EXISTING PRODUCTS

 Sometimes, entrepreneurs will adapt an existing product to make it relevant to a new market
and start a new business in this way

 An example of this is the ‘wind-up’ radio which does not need electricity to work and is sold in
developing countries where the supply of electricity is not guaranteed

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 New businesses can start from:

1. A change in technology (e.g. laptops --- APPLE)
2. A radical change in customer tastes (e.g. electric vehicles --- TESLA)
3. An original idea like an artistic creation (e.g. a film script --- UNIVERSAL FILMS)
4. An adaptation of an existing product to appeal to a new market (e.g. wind-up radios)

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1.1.2

Risk and Reward

RISK

e) RISK: BUSINESS FAILURE

 Business failure means the business has to stop trading because of financial reasons or legal
reasons

 All entrepreneurs risk business failure and there is no way to reduce this risk to zero because,
often, businesses fail due to factors beyond the control of the entrepreneur e.g. changes in the
law

 However, more often, new businesses fail because of:

1. Poor management of the business by the entrepreneur e.g. mismanagement of cash

2. Poor decisions by the entrepreneur e.g. spending too much on advertising

 A common financial reason for business failure is running out of cash

 If a business finds itself without the cash to pay interest on a loan it has taken, it is said to be
INSOLVENT. Insolvent businesses may be legally prevented from continuing to trade

 The lenders to the business (banks or bondholders) may force the business to sell (LIQUIDATE)
its assets to repay the whole loan and not just the interest

 This may leave the business without enough assets to continue doing business

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f) RISK: FINANCIAL LOSS

 Even if a business does not fail, there is always a risk that it will make losses for a
prolonged period

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 Not making a profit is a less serious than running out of cash but, if losses continue for an
extended period e.g. two or three consecutive years, there may be serious consequences
for the business

 Banks / bondholders may refuse to make new loans to the business or buy new bonds if it
is not making a profit and this may prevent the business from expanding

 Shareholders may refuse to buy new shares in the business and this will also stop the
business from expanding

 Making losses means the business has no profits to reinvest to by new assets and grow

 If losses go on for a prolonged period, the business will eventually have to stop trading
but this usually takes longer than if the business is having issues with its cash flows

g) RISK: LACK OF SECURITY

 Remember that the profit of the business forms the income of the entrepreneur

 Even if the business does not run of cash completely and does not make losses, it is possible
that the profits of the business may not be stable i.e. the profits may go up and down very
much from year to year

 This makes the entrepreneur feel insecure about his or her personal future and the
entrepreneur may decide to return to being a worker for someone else’s business where
he or she can earn a steady income in the form of a salary

 Also, unstable profits make it difficult for an entrepreneur to plan a programme of

reinvestment and growth for the business and this may lead to the business losing market
opportunities

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REWARD

a) REWARD: --- SATISFACTION FOR THE ENTREPRENEUR

 Entrepreneurs look forward to the personal satisfaction of starting and growing a business
which is profitable

b) REWARD: --- PROFITS FOR THE ENTREPRENEUR / OWNERS

 There is no upside limit to the profits of the entrepreneur

 The entrepreneur has what is called a RESIDUAL CLAIM on the profits of the business

 This means that after the expenses of the business have been paid as well as the interest on
loans and taxes, whatever is left belongs to the entrepreneurs and owners of the business.

 Therefore, entrepreneurs have the chance to make potentially unlimited income from their
business

c) REWARD: ---- INDEPENDENCE

 Usually, when running the business, entrepreneurs have freedom to make decisions
without having to explain themselves to others

 This gives entrepreneurs a feeling of independence which many of them enjoy

 Also, if the business is successful over a period of time, the entrepreneur can sell the
business and achieve financial independence which may mean that he or she may never
have to work again or may decide to start another business

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 Only a small minority of the population of any country decides to become entrepreneurs
suggesting that, for most people, the risks outweigh the rewards

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1.1.3

The Role of a Business Enterprise

a) TO PRODUCE GOODS AND SERVICES

 There are many ways to think about the purpose of businesses and perhaps the most obvious
purpose is to produce goods and services

 A good is a product that can be stored and consumed long after the consumer buys it e.g. a
packet of biscuits

 A service cannot be stored and must be consumed at the same time that it is bought e.g. a
haircut

 Usually we use the word ‘goods’ to refer to both goods and services

 Businesses combine INPUTS or FACTORS of PRODUCTION into goods

 The inputs or factors of production are:

1. LAND = natural resources like oil, water etc.

2. LABOUR = human resources e.g. workers
3. CAPITAL = machinery and buildings
4. ENTERPRISE = the skill of the entrepreneur in bringing land, labour and capital together

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b) TO MEET CUSTOMER NEEDS

 No business will survive unless the business’s products satisfy customer needs

c) TO ADD VALUE

 The idea of VALUE ADDED is a measure of the difference between the value of inputs and
the value of outputs of the business

 For example, assume that a unit of a good like a bottle of mineral water uses inputs or
factors of production which cost $3 as below:

LAND (e.g. electricity) = $0.70 per bottle

LABOUR = $1.50 per bottle
CAPITAL (e.g. rent on machine) = $0.30 per bottle
ENTERPRISE (e.g. entrepreneur’s profit) $0.50 per bottle
TOTAL: $3.00 per bottle

 Assume we can sell the bottle of mineral water for $4.20

 The value added is $4.20 - $3.00 = $1.20

 We can sell the bottle of mineral water for more than the total cost of production because
we have taken steps to add value

 These value adding activities persuade the customer to pay more for the bottle than it cost
the business to produce

 These value adding activities include:

1. Branding
2. Improving the purity (quality) of the product
3. Designing an attractive bottle
4. Adding unique selling points like donating 5% of profits to improving water supply
in developing countries

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 The job of the entrepreneur is to organize the resources or factors of production and accept
the risks of business

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