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Unit 1: Business Environment
What do businesses do?
• Businesses identify the needs of customers.
• They purchase necessary resources to allow production to take place.
• They produce goods and services which satisfy customers’ needs, usually with the aim of making
a profit
The factors of production needed by businesses
All businesses need resources to be able to operate and produce goods or services. These resources are
called factors of production. There are four factors of production:
• Land – this general term includes not only land itself but all the renewable and non-renewable
resources of nature, such as coal, crude oil and timber.
• Labour – manual and skilled labour make up the workforce of the business.
• Capital – this is not just the finance needed to set up a business and pay for its continuing
operations, but also all the manufactured resources used in production. These include capital
goods, such as computers, machines, factories, offices and vehicles.
• Enterprise – this is the initiative and coordination provided by risk-taking individuals called
entrepreneurs. They combine the other factors of production into a unit capable of producing
goods and services. Enterprise provides the managing, decision-making and coordinating roles.
The concept of adding value
All businesses aim to create value by producing goods and services and selling them for a higher price
than the cost of bought-in materials: this is called adding value. If a customer is prepared to pay a price
that is greater than the cost of materials used to produce a good or service, then the business has been
successful in adding value. The difference between the selling price of the products sold by a business
and the cost of the materials that it bought in is called added value. Without adding value, a business
will not be able to survive as other costs have to be paid and the people investing in the business also
expect a financial return.
The dynamic business environment
Setting up a new business is risky because the business environment is dynamic, or constantly changing.
In addition to the problems and challenges referred to below, there is also the risk of change, which can
make the original business idea much less successful. This problem can be made worse if the business
plan is too inflexible to deal with changes. Changes in the business environment include:
• new competitors entering the market
• legal changes – examples include 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.
, 2
Why do some businesses succeed?
These are the main reasons why some businesses thrive and achieve success in meeting their objectives:
• good understanding of customer needs – leads to sales targets being achieved
• efficient management of operations – keeps costs under control
• flexible decision-making to adapt to new situations – allows investment in new business
opportunities
• appropriate and sufficient sources of finance – prevents cash shortages and allows for
expansion.
Why do some businesses fail?
Success in business is never certain. This is particularly true when starting up a new venture. The
following are the most common reasons why new businesses fail. Most of these reasons also apply to
the failure of established businesses.
• Poor record-keeping: The lack of accurate records is a common reason for business failure.
Many small companies fail to pay sufficient attention to record-keeping.
• Lack of cash: Running short of cash so that day-to-day business operations become difficult is
the most significant reason for the failure of businesses. Many new businesses fail to survive the
first year of operation due to the lack of cash.
Cash flow problems can be reduced if:
o A cash flow forecast is made and kept up-to-date. The cash needs of the business can be
assessed month by month.
o Sufficient capital is injected into the business at start-up allowing it to operate during
the first months when cash flow from customers may be slow to build up.
o Good relations are established with the bank so that short-term cash problems may be
financed with an overdraft extension.
o There is effective credit control over customers’ accounts to make sure they pay on
time.
• Poor management skills
Most entrepreneurs have had some form of work experience, but not necessarily at
management level. They may not have developed skills in:
o leadership and decision-making
o cash handling and cash management
o planning, coordinating and communication
o marketing, promotion and selling.
Local, national and international businesses
• Local businesses operate in small, well-defined parts of a country. Their owners often do not
aim to expand so do not make attempts to attract customers across the whole country. Typical
examples are small building and carpentry firms, single-branch shops, hairdressing businesses
and childminding services.
, 3
• National businesses have branches or operations across a country. They make no attempt to
establish operations in other countries or to sell internationally. Good examples include large
car-retailing firms, retail shops with branches in just one country and national banks.
• International businesses sell products in more than one country. This may be done by using
foreign agents or online selling.
• Multinational businesses have operations in more than one country. This means they have an
established base for either producing or selling products outside their own domestic economy.
The role of entrepreneurs and intrapreneurs
A new business idea might have the best available land and labour and be well financed, but without the
enthusiasm and creativity of an entrepreneur or intrapreneur, it will almost certainly fail.
The role of the entrepreneur when creating and starting up a new business is to:
• have an idea for a new business
• create a business plan
• invest some of their own savings and capital
• accept the responsibility of managing the business
• accept the possible risks of failure.
Qualities of successful entrepreneurs and intrapreneurs
• Innovation
• Commitment and self-motivation
• Multi-skilled
• Leadership skills
• Self-confidence and an ability to bounce back
• Risk-taking
Barriers to entrepreneurship
• Lack of a business opportunity
• Obtaining sufficient capital (finance)
• Cost of good locations
• Competition
• Lack of a customer base
Role of enterprise in a country’s economic development
• Employment creation
• Economic growth
• Business survival and growth
• Innovation and technological change
• Exports
• Personal development
• Increased social cohesion
, 4
The role of intrapreneurship
The benefits of intrapreneurship to existing businesses include:
• Injecting creativity and innovation into the business – developing new products to increase sales
or creating exciting ways of selling existing products.
• Developing new ways of doing business – creativity in solving problems such as low efficiency
can be more successful than continuing to use the old ways.
• Driving innovation and change within the business – generating excitement within the business
about a new opportunity makes change more acceptable.
• Creating a competitive advantage – by developing more innovative products.
• Encouraging original thinkers and innovators to stay in the business – this is summed up by the
expression: ‘You don’t have to leave our company to become an entrepreneur!’
Purpose and key elements of business plans
An effective business plan provides this evidence. The main elements of a typical business plan are:
• executive summary − an overview of the new business and its strategies
• description of the business opportunity − details of the entrepreneur’s skills and experience;
nature of the product; the target market at which the product is aimed
• marketing and sales strategy − details of why the entrepreneur thinks customers will buy the
product and how the business will sell to them
• management team and personnel – details of the entrepreneur’s skills and experience and the
people they intend to recruit
• operations − premises to be used, production facilities, IT systems
• financial forecasts − the future projections of sales, profit and cash flow for at least one year
ahead
Benefits of business plans
• forces the owner to think seriously about the proposal, its strengths and any potential
weaknesses
• gives the owner and managers a clear plan of action to guide their actions and decisions in the
early months and years of the business.
Limitations of business plans
• It could create a false sense of certainty in business owners. They might rely so much on the
plan that they overlook the fact that it is based on forecasts and predictions.
• The business plan must be detailed and supported by evidence such as market research. If it is
not, then prospective creditors and investors can delay in making a finance decision until the
plan is brought up to the required standard.
• The plan might lead entrepreneurs to be inflexible. If the dynamic business world throws up new
opportunities that are not in the plan, these could be rejected.
Unit 1: Business Environment
What do businesses do?
• Businesses identify the needs of customers.
• They purchase necessary resources to allow production to take place.
• They produce goods and services which satisfy customers’ needs, usually with the aim of making
a profit
The factors of production needed by businesses
All businesses need resources to be able to operate and produce goods or services. These resources are
called factors of production. There are four factors of production:
• Land – this general term includes not only land itself but all the renewable and non-renewable
resources of nature, such as coal, crude oil and timber.
• Labour – manual and skilled labour make up the workforce of the business.
• Capital – this is not just the finance needed to set up a business and pay for its continuing
operations, but also all the manufactured resources used in production. These include capital
goods, such as computers, machines, factories, offices and vehicles.
• Enterprise – this is the initiative and coordination provided by risk-taking individuals called
entrepreneurs. They combine the other factors of production into a unit capable of producing
goods and services. Enterprise provides the managing, decision-making and coordinating roles.
The concept of adding value
All businesses aim to create value by producing goods and services and selling them for a higher price
than the cost of bought-in materials: this is called adding value. If a customer is prepared to pay a price
that is greater than the cost of materials used to produce a good or service, then the business has been
successful in adding value. The difference between the selling price of the products sold by a business
and the cost of the materials that it bought in is called added value. Without adding value, a business
will not be able to survive as other costs have to be paid and the people investing in the business also
expect a financial return.
The dynamic business environment
Setting up a new business is risky because the business environment is dynamic, or constantly changing.
In addition to the problems and challenges referred to below, there is also the risk of change, which can
make the original business idea much less successful. This problem can be made worse if the business
plan is too inflexible to deal with changes. Changes in the business environment include:
• new competitors entering the market
• legal changes – examples include 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.
, 2
Why do some businesses succeed?
These are the main reasons why some businesses thrive and achieve success in meeting their objectives:
• good understanding of customer needs – leads to sales targets being achieved
• efficient management of operations – keeps costs under control
• flexible decision-making to adapt to new situations – allows investment in new business
opportunities
• appropriate and sufficient sources of finance – prevents cash shortages and allows for
expansion.
Why do some businesses fail?
Success in business is never certain. This is particularly true when starting up a new venture. The
following are the most common reasons why new businesses fail. Most of these reasons also apply to
the failure of established businesses.
• Poor record-keeping: The lack of accurate records is a common reason for business failure.
Many small companies fail to pay sufficient attention to record-keeping.
• Lack of cash: Running short of cash so that day-to-day business operations become difficult is
the most significant reason for the failure of businesses. Many new businesses fail to survive the
first year of operation due to the lack of cash.
Cash flow problems can be reduced if:
o A cash flow forecast is made and kept up-to-date. The cash needs of the business can be
assessed month by month.
o Sufficient capital is injected into the business at start-up allowing it to operate during
the first months when cash flow from customers may be slow to build up.
o Good relations are established with the bank so that short-term cash problems may be
financed with an overdraft extension.
o There is effective credit control over customers’ accounts to make sure they pay on
time.
• Poor management skills
Most entrepreneurs have had some form of work experience, but not necessarily at
management level. They may not have developed skills in:
o leadership and decision-making
o cash handling and cash management
o planning, coordinating and communication
o marketing, promotion and selling.
Local, national and international businesses
• Local businesses operate in small, well-defined parts of a country. Their owners often do not
aim to expand so do not make attempts to attract customers across the whole country. Typical
examples are small building and carpentry firms, single-branch shops, hairdressing businesses
and childminding services.
, 3
• National businesses have branches or operations across a country. They make no attempt to
establish operations in other countries or to sell internationally. Good examples include large
car-retailing firms, retail shops with branches in just one country and national banks.
• International businesses sell products in more than one country. This may be done by using
foreign agents or online selling.
• Multinational businesses have operations in more than one country. This means they have an
established base for either producing or selling products outside their own domestic economy.
The role of entrepreneurs and intrapreneurs
A new business idea might have the best available land and labour and be well financed, but without the
enthusiasm and creativity of an entrepreneur or intrapreneur, it will almost certainly fail.
The role of the entrepreneur when creating and starting up a new business is to:
• have an idea for a new business
• create a business plan
• invest some of their own savings and capital
• accept the responsibility of managing the business
• accept the possible risks of failure.
Qualities of successful entrepreneurs and intrapreneurs
• Innovation
• Commitment and self-motivation
• Multi-skilled
• Leadership skills
• Self-confidence and an ability to bounce back
• Risk-taking
Barriers to entrepreneurship
• Lack of a business opportunity
• Obtaining sufficient capital (finance)
• Cost of good locations
• Competition
• Lack of a customer base
Role of enterprise in a country’s economic development
• Employment creation
• Economic growth
• Business survival and growth
• Innovation and technological change
• Exports
• Personal development
• Increased social cohesion
, 4
The role of intrapreneurship
The benefits of intrapreneurship to existing businesses include:
• Injecting creativity and innovation into the business – developing new products to increase sales
or creating exciting ways of selling existing products.
• Developing new ways of doing business – creativity in solving problems such as low efficiency
can be more successful than continuing to use the old ways.
• Driving innovation and change within the business – generating excitement within the business
about a new opportunity makes change more acceptable.
• Creating a competitive advantage – by developing more innovative products.
• Encouraging original thinkers and innovators to stay in the business – this is summed up by the
expression: ‘You don’t have to leave our company to become an entrepreneur!’
Purpose and key elements of business plans
An effective business plan provides this evidence. The main elements of a typical business plan are:
• executive summary − an overview of the new business and its strategies
• description of the business opportunity − details of the entrepreneur’s skills and experience;
nature of the product; the target market at which the product is aimed
• marketing and sales strategy − details of why the entrepreneur thinks customers will buy the
product and how the business will sell to them
• management team and personnel – details of the entrepreneur’s skills and experience and the
people they intend to recruit
• operations − premises to be used, production facilities, IT systems
• financial forecasts − the future projections of sales, profit and cash flow for at least one year
ahead
Benefits of business plans
• forces the owner to think seriously about the proposal, its strengths and any potential
weaknesses
• gives the owner and managers a clear plan of action to guide their actions and decisions in the
early months and years of the business.
Limitations of business plans
• It could create a false sense of certainty in business owners. They might rely so much on the
plan that they overlook the fact that it is based on forecasts and predictions.
• The business plan must be detailed and supported by evidence such as market research. If it is
not, then prospective creditors and investors can delay in making a finance decision until the
plan is brought up to the required standard.
• The plan might lead entrepreneurs to be inflexible. If the dynamic business world throws up new
opportunities that are not in the plan, these could be rejected.
