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: when the production process is split up into different tasks and each task is done by one person or by one machine
- Specialisation: when a person, firm or economy concentrate only on the tasks it is best at
- 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
- 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 –divided into consumer and capital goods
- 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 long time while non-durable goods such as edible things soon become damaged.
- 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 humans cannot survive without. The basic human needs can be classified as:
- Social- entertainment
- Physical- food, warmth, shelter
- Status -sense of achievement, good job, large house, etc
- 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)
- 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 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- 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 are 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; its elements keeps on changing. Some of the elements includes the physical environment, global/ international environment, political environment, economic environment
- 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 needs renewable 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 DO BUSINESSES FAIL EARLY ON?
- 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.
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- 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 their team by demonstrating positive work qualities and confidence. They foster a positive environment and then pass on 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.
- 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
- 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.
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:
- Economic (Profit)
- Social (People)
- 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.