AS Business Studies 9609
Business Studies – 1.1 Enterprise
- Understand the purpose of business activity
- Specialisation and Division of Labour
- The concept of adding value and the economic problem (scarcity)
- The Dynamic Nature of Business and the Role of Entrepreneurs
Purpose of business activity
The purpose of business activity can be defined as the production of goods and services to meet the needs and wants of people. Without businesses, the economy will not function. Its purpose is to identify and satisfy the needs and wants of the people with the overall aim of earning profit. To produce goods and services the business will be using scarce (limited) resources.
Factors of production
Businesses are established when entrepreneurs combine factors of production to produce a product or service. These four factors are:
1). Land 2).Labour 3).Capital 4).Enterprise
All businesses use four factors of production, even highly technological businesses require land as this includes all natural resources such as the oil needed for energy.
The Economic Problem
Needs are products or services essential for living such as food and water. Wants are products and services people would like to have but are not essential for living. Wants are unlimited.
The economic problem – exists because people have unlimited wants but limited resources to produce the products and services to satisfy those wants. This creates scarcity.
Consumer goods are tangible (touchable) products which are sold to the general public. This includes durable and non-durable goods.
Capital goods are physical products, manufactured specifically to be sold to other (B2B) businesses for the production of other goods and services like commercial aeroplanes.
Durable goods such as machinery, garments and mobiles can last for a long time while non-durable goods such as edible products.
The Economic Problem
People have unlimited needs and wants however, resources on our planet are limited. This scarcity of resources means that people do not have enough income, time or money to satisfy every desire. Faced with this problem of scarcity, people, businesses and governments must make a choice. Businesses must choose 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). This choice leads to opportunity cost.
Opportunity Cost is the next best choice given up in favour of the alternative chosen. If a business has a choice of purchasing new machinery or new premises. If the business chooses to buy new machinery, then the premises will become the opportunity cost.
Specialisation and Division of Labour
Due to the limited resources on our planet, we need to use them in the most efficient way possible. Therefore, we use specialisation methods to produce products and services as fast and efficiently as possible (costs less, earns more profit). Specialisation occurs in business when employees and businesses focus on what they are best at. Dividing employee tasks they are best at will allow them to produce more, faster with less waste. Division of labour is when the production processes are split into different tasks, each done by one person or machine.
Disadvantages of Specialisation
- Boredom lowers employee motivation
- No flexibility workers do one task well
- The production process could stop when absent
- Breakdown of a machine affects all stages of production
- Using automation may lead to unemployment
Advantages of Specialisation
- Specialised employees increase efficiency and output.
- Less time is wasted switching between employees.
- Work can be automated and machines can operate 24/7.
- Repeating work makes employees skilled in that task.
- Businesses can gain economies of scale
Specialisation Defined [K]
Specialisation occurs in business when employees and businesses focus on what they are best at. Dividing the employee tasks into that each employee does well.
Analysis of Specialisation [AN]
One advantage of a business using specialisation is an increase in production because employees only perform tasks they are good at. This means that the business can be more competitive as output increases.
One disadvantage of specialisation is that employees can get bored from doing repetitive tasks. This can result in employees leaving and lacking motivation.
Evaluation of Specialisation [EVAL]
In conclusion, I think using specialisation will work well in some businesses like factories where employees can easily be trained to be good at one task. However, this depends on the type of business and tasks. Specialisation in my opinion is unlikely to work as well for a game-designing company as it would in a factory
Services are non-tangible (untouchable) and provided to satisfy the wants of people. Commercial services include banking, insurance, and transportation which are done on a large scale. Personal services are one-to-one services such as hairdressing, teaching and legal advice.
The concept of adding value
Businesses create value by increasing the difference between the cost of bought-in materials and the price the finished goods are sold. There are different ways through which businesses can add value to their products and services.
Creating a brand as consumers are prepared to pay more for branded products.
Advertising can create strong brand loyalty among customers.
Customised services or better quality personalised services.
Additional features or functionality can make the consumers pay extra.
Offering convenience, for example, free home delivery or fast food.
Added value is the difference between the cost of making a product and the price the business sells it at.
Added value = Selling Price – Total Cost.
Added value is NOT the same as profit.
Methods to increase added value include:
Designing – innovative products – Apple
Quality and Efficiency – Reputation of Mercedes
Marketing – Building a strong brand – Nike
Convenience – Delivery services – Grab.
What a business needs to succeed
Labour skilled or unskilled employees
Land includes buildings and renewable or non-renewable resources
Capital money needed to buy factories and machinery
Customers to purchase the products.
Suppliers for raw materials or other services
Government to provide roads, schools, law and order
The Dynamic Nature of Business
The business environment is dynamic (ever-changing) and businesses must adapt to the challenges and formulate strategies to cope with these challenges.
The business environment is divided into the internal and external environment. The internal environment refers to the operating environment of the business such as the business’s organisational structure, leadership and management style, resources, vision, mission, and organisational culture. The internal environment is within the control of the business. The external environment is divided into the market and macroeconomic environment. The external environment provides challenges because it’s not in the control of a business. This environment is dynamic due to the ever-changing physical environment which includes competition, global, international, political environment, and economic environment. Businesses conduct a PEST analysis to help manage the impacts of the external environment
Reasons for business failure
Many small businesses will fail within the first two years of trading. The reasons for this are:
- Lack of experience
- Insufficient capital (money)
- Poor location
- Poor credit (lack of credit rating)
- Poor inventory or cashflow management
- Personal use of business funds
The Role of Entrepreneurs
An entrepreneur is an individual who takes the risk of starting a business. Entrepreneurs bring together the factors of production to produce goods and services. It is important to understand the benefits that entrepreneurs bring to countries when there is an increase in businesses being started. There are challenges to being an entrepreneur such as competition, identifying successful opportunities, sourcing capital and then building a customer base. Not only do they have to face these challenges but they must also possess characteristics to become successful. Two important characteristics are the willingness to take a risk and not give up (resilience).
Role of businesses in developing a country
- Businesses provide employment
- They pay taxes (Income Tax and Corporation Tax)
- They increase the GDP of the country
- They satisfy the needs and wants of the people
- Businesses bring foreign currency if products are exported
- Reduce poverty levels and increase living standards
Characteristics of successful entrepreneurs
1). Risk taker and resilience
2). Positive attitude
3). Self-motivated
4). Innovative and resourceful
5). Hard-working and dependable
6). Good communication skills
7). Creative with good problem-solving
Section A 1.1 Enterprise Exam Practice for Paper One
Section B 1.1 Enterprise Exam Practice for Paper One
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Know your definitions to show clear knowledge and understanding.
Get the application marks by explaining how this will work in a business context.
To gain analysis marks you should aim to explain the impact or consequences to a business.
Evaluation is about your opinion, judgement and beliefs. You can evaluate throughout. Make your conclusion relevant to the exam question. You might need to recommend or advise in your conclusion.
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