17/01/24 BUSINESS AND ITS ENVIRONMENT
Enterprise
The nature of business activity
Business activity aims to satisfy people’s needs, and the purpose of business owners
and managers is to add value to resources while meeting people’s needs.
Purpose of business activity
A business is an organisation that uses resources to meet customer needs by
providing products or services they demand.
What businesses do;
(i) They identify customer needs.
(ii) They purchase resources needed for production to take place.
(iii) They produce goods and services which satisfy customers’ needs, usually with the
aim to make a profit.
Factors of production needed by businesses.
These are resources needed by businesses which enable them to operate and produce
goods or services.
They include;
(i) Land – includes land itself and all renewable and non-renewable resources of nature,
e.g., coal, crude oil, and timber.
(ii) Labour – the workforce of the business made up of manual and skilled labour.
(iii) Capital – the finance needed to set up a business and pay for its operations.
Also includes manufactured resources used in production i.e., capital goods, e.g.,
computers, machines, factories, offices, and vehicles.
(iv) Enterprise – the initiative and co-ordination provided by entrepreneurs.
Entrepreneurs combine factors of production into a unit capable of producing
goods and services.
They manage and co-ordinate effort, and make decisions regarding the
enterprise.
The concept of adding value
Businesses add value by converting raw materials to produce goods and services,
and sell then them at a price higher than the cost of raw materials:
Added value describes the enhancement a company gives its product or service
before offering it to customers.
Added value is also the difference between the selling price of final products produced
and the cost of raw materials used to produce them.
Examples of how businesses add value;
(i) A jewellery shop uses attractive shop fittings, well-dressed knowledgeable shop
assistants, well-designed window displays and beautiful packaging for jewellery
items.
This allows the business to increase jewellery prices and cover costs involved.
(ii) A sweet manufacturer uses extensive advertising and attractive packaging on its
brand to create brand identity and loyalty.
The business thus adds value by increasing prices since it has a well-known
brand name.
The nature of economic activity and the problem of choice
The basic economic problem is scarcity. i.e., there are insufficient goods to satisfy all of
our needs and wants at any one time.
Due to scarcity, economic activity cannot provide for all wants at any one time.
Consumers choose things that give them the greatest benefit, leaving out those that
offer less value .
Choice is not limited to consumers since all economic agents make choices e.g.,
governments, businesses, workers, charities etc.
Choice leads to opportunity cost.
Opportunity cost is the next most desired product which is given up.
It is also known as the cost of the next best alternative forgone.
The dynamic business environment
The business environment is dynamic (constantly changing), and establishing a new
business is risky.
Changes in the business environment include;
new competitors entering the market.
legal changes – e.g., new safety regulations or limits on who can buy the product.
economic changes that leave customers with less money to spend.
technological changes that make the products or processes of the new business
outdated.
political changes which make operating business risky.
Changes in the business environment are a major reason why some businesses
succeed and why others fail.
Why some businesses succeed;
(i) good understanding of customer needs
(ii) efficient management of operations – keeps costs under control.
(iii)flexible decision-making to adapt to new situations – allows investment in new
business opportunities.
(iv) appropriate and sufficient sources of finance – prevents cash shortages and allows
for expansion.
Why some businesses fail;
(i) Poor record-keeping. - Small companies fail to keep records because they think
they are less important than meeting customers’ needs.
However record keeping has become easier with the use of computers, and business
owners need to be trained on computerised record keeping.
(ii) Lack of cash.
Finance (working capital) is needed for day-to-day cash, for buying inventories, paying
suppliers and to give trade credit to customers.
A lack of working capital leads to business failure.
However, cash flow problems can be reduced by;
(a) preparing and keeping an updated cash flow forecast.
(b) Injecting sufficient capital into the business at its start allowing it to operate during
the first months when cash flow from customers may be little.
(c) Establishing good relations with the bank so that short-term cash problems may be
financed with an overdraft.
(d) Ensuring effective credit control over customers’ accounts to make sure they pay
on time.
(iii) Poor management skills - most entrepreneurs lack management skills such as
leadership and decision-making, cash handling and cash management, planning,
coordinating and communication, marketing, promotion and selling.
A lack of these skills causes business failure.
However, entrepreneurs can minimise risk of failure by;
(a) gaining management experience beforehand through employment.
(b) obtaining advice and training from specialist organisations.
(c) employing people with management experience , which is expensive.
Local, national, and international businesses
(a) Local businesses – businesses which operate in small, well-defined areas.
Their owners do not aim to expand, and do not attempt to attract customers in
other areas(parts of the country).
e.g., small building and carpentry firms, single-branch shops, hairdressing
businesses and childminding services.
(b) National businesses – business which have branches or operations across a
country.
They do not attempt to establish operations in other countries or to sell
internationally. e.g., large car-retailing firms, retail shops with branches in just one
country and national banks.
(c) International businesses – businesses which sell products in more than one
country.
They sell products using foreign agents or online.
(d) Multinational businesses – businesses which have operations in more than one
country.
They establish branches for either producing or selling products outside their own
(domestic) economy.
