CHAPTER 1 : BUSINESS AND IT’S ENVIRONMENT (AS & A LEVEL)

Purpose of business activity

Business is a major economic activity. It can be defined as the production of goods and
services needed by people in this world to meet their basic needs. Its purpose is to identify and
satisfy the needs and wants of the people with the overall aim of earning profit.
To produce the goods and services the business will be using scarce
resources( resources that are limited in supply)

Economic resources( Factors of production)

Business enterprises are established where entrepreneurs combine productive resources
(factors of production) to produce an output. These four factors can be categorised as
Land: All natural resources provided by nature such as fields, forests, oil, gas, metals and other
mineral resources. It includes renewable and non-renewable resources. The reward for land is rent

Labour: The people who are used produce goods and services. Labour is rewarded with a wage/salary

Capital: Finance, machinery and equipment needed to produce goods and services. NB there is also
intellectual capital which refers to the intelligence of the workforce. It refers to the ability of the
workforce to develop new ideas, find new solutions to problems and spot business opportunities. The
reward for capital is interest
Enterprise: The skill and risk taking ability of the person who brings together all the other factors of
production together to produce goods and services. Usually the owner or founder of a business. In
return the entrepreneur will make a profit (or a loss)
Division of labour / Specialisation
Because there are limited resources, we need to use them the most efficient way possible. Therefore,
we now use production methods that are as fast as possible and as efficient (costs less, earns more) as
possible. The main production method that we are using nowadays is known as specialization, or
division of labour.

"Division of Labour is when the production process is split up into different tasks and each task is
done by one person or by one machine

Specialisation: is when a person, firm or economy concentrate only on the tasks it is best at.

Pros:
 Specialized workers are good at one task and increases efficiency and output. 
 Less time is wasted switching jobs by the individual. 
 Machinery also helps all jobs and can be operated 24/7. 
-repeating the same job can make the worker more skilled
-the business can enjoy economies of scale

Cons
 Boredom from doing the same job lowers efficiency. 
 No flexibility because workers can only do one job and cannot do others well if needed. 
 If one worker is absent and no-one can replace him, the production process stops. 

-Breakdown of a machine at one stage will affect all successive stages

-Use of machines may lead to unemployment

Goods and services

Goods –are divided into consumer and capital goods
i. Consumer goods: these are the tangible goods which are sold to the
general public. This include durable and non durable goods. Durable
goods such as machinery, garments and mobiles can last for a
longtime while non durable goods such as edible things soon become
damaged.
ii. Capital goods: they are physical products, manufactured specifically
to be sold to other industries for production of other goods and
services like commercial vehicles.

Services: They are non tangible products for the public to satisfy their wants.
They could be commercial or personal services. Commercial services include
banking, insurance, transportation which are done on a large scale. Personal
services are one to one services such as hair dressing, teaching, lawyer etc
NEEDS AND WANTS
NEEDS- are the things that we cannot survive without
-The basic human needs can be classified as:
(a) Social -entertainment
(b) Physical -food, warmth, shelter
(c) Status -sense of achievement, good job, large house etc
(d) Security -privacy, steady job, secure homes etc

WANTS-: are the things that we can survive without e.g cell phones, radios, jewellery etc Human
wants are unlimited but the resources to satisfy them are limited in supply. This gives rise to the basic
economic problem

Nature of economic activity

The nature of economic activity is that there are limited resources to satisfy
unlimited wants. Due to the limited resources everyone has to make choices
(individuals, businesses, governments)
Economic Problem
We have unlimited Needs and wants and there are limited resources. In economic terms we say the
resources are scarce. Scarcity refers to the fact that people do not and cannot have enough income,
time or other resources to satisfy every desire. Faced with this problem of scarcity, human beings,
firms and governments must make a choice.
Problem of choice: businesses must make a choice on how to use scarce resources to fulfil their
wants. Business must choose on whether to use labour or capital to produce their products. The
business must also choose the types of goods to produce. When something else is chosen, it means
something else is given up (sacrificed). Thus choice leads to opportunity cost.
Opportunity Cost-: this is the next best choice given up in favour of the alternative chosen from two
choices. E.g If a business has a choice of purchasing new machinery and new premises. If the business
chose to buy new machinery because of its greater utility, then the premises will be the opportunity
cost.

Concept of creating / adding value

Creating Value: the increasing the differences between the cost of purchasing
bought-in materials and the price the finished goods are sold. To add extra
features to a product and the customer is willing to pay more after the value has
been added.

Added value
-refers to the difference between the selling price of a product and the cost of
the raw materials used to make it.

Ways of adding value

There are different ways through which businesses can add value to their products and services.
Creating a brand: Brands represent quality and sometimes status. Consumers are prepared to pay
more for products which have a strong brand attached to it. Why does a pair of Nike sell costlier than
its counterpart Puma, though the cost of production may not be much different.
Advertising: Through advertising the business can create a strong brand loyalty among its customers
and in the process charge more for its goods or services.
Providing customised services: Business providing better quality personalised services to their
consumers add more value. Consumers are willing to pay a little extra for customised services
Providing additional features: A product or service with additional features or functionality can
make the consumers pay extra. This is very often seen in different version of a car model. Toyota has
12 versions of its Innovation model. The basic engine and build is the same, but the price increase as
additional features are added.
By offering convenience: Consumers love convenience. If you get a product or service without much
effort then you might happily pay a premium for it. For example, free home delivery of your weekly
grocery.
Benefits to a business of adding value
There are a number of benefits a business derives through adding value to its products or services.
First of all, it can charge more to its customers. This leads to more profitability for the business in
the long run.
A business can differentiate itself from its competitors. By adding more value to its goods or
services a business can stand out among its competitors as producer providing superior or premium
quality.
A business can save the cost on advertising and other promotional activities once it has created a
perception of high quality and brand loyalty among its customers. Thus, adding value helps cost
cutting in the long run.

Business environment is dynamic

- Business environment is divided into two categories and these include the
internal and external environment. Internal environment refers to the
operating environment of the business. Elements of the internal
environment are controllable and these include the firm’s organisational
structure, leadership and management style, organisational resources,
vision, mission, organisational culture. External environment is divided
into market and macro environment. Challenges from this environment
are not easy to control. This environment is dynamic i.t its elements keeps
on changing. Some of the elements includes the Physical environment,
Global/ International environment, Political environment, Economic
environment
NB Business environment is dynamic (ever changing) and the businesses
must adapt to the challenges and formulate strategies to cope with these
challenges

What a business needs to succeed

Labour- the business requires different types of workers i.e skilled, unskilled,
temporary or permanent etc
Land.- the business requires the site for buildings. The business also need
renewanle and non renewable resource to produce goods
Capital- the business is need of money to buy factories and machinery
Customers- these are economic agents which then purchases products made
by firms
Suppliers- the business will get raw materials or other services from other
businesses
Government-the government will provide roads, school, law and order and the
business will benefit in one way or the other
Why business fail early on (Why 9 out of 10 small businesses fail?)
Lack of experience
Many a report on business failures cites poor management as the number one reason for failure. New
business owners frequently lack relevant business and management expertise in areas such as finance,
purchasing, selling, production, and hiring and managing employees.

Insufficient capital (money)

A common fatal mistake for many failed businesses is having insufficient operating funds. Business owners
underestimate how much money is needed and they are forced to close before they even have had a fair
chance to succeed. They also may have an unrealistic expectation of incoming revenues from sales

Poor location
Whereas a good business location may enable a struggling business to ultimately survive and thrive, a bad
location could spell disaster to even the best-managed enterprise.

Poor inventory management

Poor inventory management might lead to too much of cash being blocked as stock. Excess stock also
brings in additional cost burden of maintaining it and the risk of getting obsolete or damaged.

Over-investment in fixed assets

Blocking too much of cash in fixed assets can again pose danger for the business and can contribute to
business failure.

Poor credit arrangement management

Business might take too much of debt and might find it difficult to service them. Poor credit management,
forward planning and cash flow problems might contribute to it.

Personal use of business funds

Owners of small business usually don’t differentiate between business funds and their own funds. The risk
of utilizing business funds for personal use by the owner might lead to cash shortage for the business.
1.1.2 THE ROLE OF THE ENTREPRENEUR
Who is an entrepreneur?: An entrepreneur is an individual
who organizes and operates a business or businesses, taking on financial risk to do so.
A more technical definition of entrepreneur is ‘a person who brings together the factors of productions to
produces goods and services.’ It is one of the factors of production.

Characteristics of successful entrepreneurs

Self motivation
They are also often very passionate about their ideas that drive toward these ultimate goals and are
notoriously difficult.to.steer.off.the.course.

Positive attitude
There might be initial hurdles and failures in ventures. A successful entrepreneur learns from his mistakes
and does not get dismayed by initial failures. He always sees the light at the end of the tunnel and continues
with his journey. Positive attitude also helps in making a strong team which might be very instrumental in
the ultimate success of the venture.

Risk taker
"nothing ventured, nothing gained". Successful entrepreneurs are risk takers who have all gotten over one
very significant hurdle: they are not afraid of failure.

Excellent leadership qualities

A successful entrepreneur must have excellent leadership qualities. It earns the trust and respect of his
team by demonstrating positive work qualities and confidence. They foster a positive environment and then
proliferates these values through the team.

Innovator
Successful entrepreneur are innovators and usually have an ‘out of the box’ approach to solving problems.
They usually identify gaps in consumer demands or needs which have been ignored for long. They welcome
change and are consistently innovating with the changing demand patterns.

Dependable
Successful, sustainable business people maintain the highest standards of integrity because, at the end of
the day, if you cannot prove yourself a credible business person and nobody will do business with you, you
are out of business. Therefore, a successful entrepreneur should have Strong sense of basic ethics and
integrity. In short, he should be dependable.

Resourceful
Most new businesses have limited resources such as money, information and time. Successful
entrepreneurs figure out how to get the most out of these resources. They are masters at stretching a dollar
and making a few resources go a long way.
Communicators
A successful entrepreneur must be a good communicator. Excellent inter-personal and networking skills go
a long way in business success.

Achievement oriented
Successful entrepreneurs are achievement oriented. They value accomplishment and the intrinsic rewards
that go along with achieving difficult goals.

Role of business enterprises in the development of a country

Business enterprises provide employment
They pay taxes
They increase the GDP of the country
They satisfy the needs and wants of the people
They bring foreign currency if the products are sold outside the country
Reducing poverty levels

Major challenges faced by entrepreneurs

 Identifying successful business opportunities
 Sourcing capital
 Determining suitable location
 Competition from established firms
 Building customer base

1.1.3 SOCIAL ENTERPRISE

SOCIAL ENTERPRISE
Refers to a business with mainly social objectives that reinvests most of its profits
into benefiting society rather than maximising returns to owners. Social
enterprises are businesses whose primary purpose is the common good.
They use the methods and disciplines of business and the power of the
marketplace to advance their social, environmental and human justice
agendas.

THE RANGES AND AIMS OF SOCIAL ENTERPRISES

Basically these are the characteristics of social enterprises
They operate for the well being of the society
Making profit is not the main aim
Main aim is to solve social problems faced by people
Profit is kept to provide more services
They normally provide education and health
Generate the majority of their income through trade

Triple bottom line

Social enterprises have three main objectives. These aims are often referred to
as the triple bottom line. Triple bottom line is used to measure the performance
of a business:
a. Economic (Profit)
b. Social (People)
c. Environment (Planet)

Benefits of Social Enterprises

Social enterprises produce higher social returns on investment than other
On one hand, they produce direct, measurable public benefits. A classic employment-focused social
enterprise, for example, might serve at least four public aims:

 Fiscal responsibility: It reduces the myriad costs of public supports for people facing barriers, by
providing a pathway to economic self-sufficiency for those it employs.
 Public safety: It makes the community in which it operates safer, by disrupting cycles of poverty,
crime, incarceration, chemical dependency and homelessness.
 Economic opportunity: It improves our pool of human capital and creates jobs in communities in
need of economic renewal.
 Social justice: It gives a chance to those most in need.