Learning Objective: Introduction to Enterprise
Chapter 1: Enterprise
Value creation is the sole main purpose of a business. By creating value businesses can then charge more for their products and services and consequentially be profitable.
To create value businesses go through various stage of business activity:
They identify customers' needs to be fulfilled so that they can meet that demand;
Resources are purchased (a.k.a. factors of production) so that products and services can come to life;
Businesses then create products and services to satisfy customer needs and make a profit.
Remember, though: not all products and services are the same:
Products (goods) can be durable (e.g. an automobile) or non-durable (e.g. a chocolate bar).
Services are considered non-tangibles sold to customers, as for example, education at the school you study at.
To create products and services businesses make use of so called 'factors of production', they are:
The value creation process, therefore, consists of selling products and services for a higher price than the cost of producing it. In other words, the difference between the cost of materials and the selling price is called value added. For example:
Keep in mind that value added is different than profit. Let's have a simple example to fully understand this idea:
Let’s say a business buys cloth, thread, zippers and buttons for $80, pays $10 for labour to produce a shirt and sells it for $100.
Cost of materials $80
Cost of Labour $10
Sales Price $100
Value Added = $100 -$80 = $20
Profit = $100 - ( $80 + $10 ) = $10
Different businesses add/create value differently:
A jeweler, for example, adds value by:
Having a fancy looking shop;
Having nice-feeling packaging;
Having good-looking and knowledgeable shop assistants;
Having catchy window-displays;
Providing up-level service to customers.
A candy manufacturing business, however:
Advertises to create a strong brand;
Makes sure to have its candies available in various places;
Provides options to customers with different packaging sizes;
Invests in R&D to improve its candy's taste.
We have all been there - options, options, options; and not enough time or money to pursue them all.
Say you are in the shop for new shoes. You browse through their collection and realize there are so many of them you liked.
Unless you hold a 500 pairs shoe-collection chances are you will choose one among the options that are interesting to you. This is called the opportunity cost: the loss of other alternatives (all the other shoes) when one alternative is chosen.
Another problem we all can relate to is called the problem of choice: never ending needs and wants that cannot be all covered simultaneously and therefore priorities need to be set.
The opportunity cost and the problem of choice are also common problems faced by businesses and governments (e.g. if government chooses to build the fighter plane, then the hospital becomes the opportunity cost.)
The opportunity cost and the problem of choice are just two of the many problems businesses face. Businesses don't operate in a black hole and therefore are greatly influenced by the environment:
Changes in the business environment include:
New competitors entering the market;
Legal changes (e.g. safety regulations);
Economic changes (e.g. a downturn);
Technological changes which can make products and businesses outdated.
Some businesses are able to succeed in such ever-changing environment and others are not.
Why do some businesses succeed?
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.
The bigger question so that we learn what to avoid, though, is: why do some businesses fail?
Lack of record keeping (e.g. deliveries, payments, receivables, salaries/hours):
Lack of cash and working capital - when a business doesn't maintain a healthy cash-flow or does not track cash-flow forecast it can quickly run out of cash to pay day-to-day business expenses. Sometimes inefficient credit control, small startup capital, and lack of a good relationship with financial institutions also lead to business failures.
Poor management skills such as leadership, cash management, planning, coordination, decision-making, communication, marketing, and selling can also pave the way to failure.
Changes in business environment as the raise of new competitors, legal, economic, and technological changes can bring businesses down too.
Key Terms:
Local Business: operates in a small and well-defined part of a country (e.g. hairdressers);
National Business: have branches across a country (e.g. a national bank);
Multinational Business: has headquarters in one country but operates (branches, factories) in other countries.
Are you now convinced that being an entrepreneur is no easy job? Successful entrepreneurs need a set of special skills and characteristics to lead them through challenges:
They are innovative;
They are committed and self-motivated;
They are oftentimes multiskilled;
They carry great leadership skills;
They are self-motivated;
They are risk-takers;
They have the ability to take a step back and restart:
I am sure you have heard the term entrepreneur before. Do you know what is an intrapreneur though?
Intrapreneurs are the innovative employees within a business who turn an idea into a profitable product. They are also responsible for encouraging innovators to stay within the business.
Innovation is important for the success of any new enterprise. Offering exactly the same goods or services as existing businesses might not lead to great success.
Entrepreneurs, therefore, are faced with many challenges that require strong decision-making. For example:
Identifying successful business opportunities such as markets to enter and products to launch.
Ideas for solving such problems can come from the entrepreneur's hobbies, previous employment experiences, market research, conferences, etc.
Sourcing capital (finance) can also be troublesome:
Maybe the entrepreneur lacks personal wealth; maybe there is no possibility for loans (no trading record or poor business planning); grants and support might be unavailable.
How to pick a business location is tough:
Rent can be one of the entrepreneur's highest costs (and it's a fixed - ongoing cost).
Location decisions also involve status, access to customers and suppliers, and even opportunity (or lack of) for growth.
Competition is obviously a problem:
Unless the enterprise is entering the market with a very unique idea, product, or service, chances are that there will be fierce competition for the customers' dollars.
Building long-term customer base (relationships) is no easy task:
Businesses can offer a personalized service, have knowledgeable and kind staff, and offer individual solutions to customers in order to retain and turn one-time customers in to returning (loyal) customers.
When entrepreneurs succeed in different sectors of the economy (primary, secondary, or tertiary), the impact their success cause on a country's economy can be substantial:
Not to say that a business' success also improves social cohesion through employment and wealth creation.
Business Plans provide evidence that entrepreneurs have thought throughout their idea and are ready to receive investors. The main elements of a typical business plan are:
The business objectives, the strategies themselves, and financial forecasts.
Structurally, a business plan is made of:
- Executive summary, an overview of the business and its strategies;
- Description of the business opportunity: details of the entrepreneur, product, and customers;
- Marketing and sales strategy: how the product will be sold and what triggers customers' interest into buying;
- Management team and personnel: skills and experiences of the people involved;
- Operations details: regarding facilities, premises, IT systems to be used, production methods;
- Financial forecasts: sales and profit projections alongside cashflow forecasts for at least one year.
Business plans, therefore, can be used to raise external finance, to provide business purpose and a course of action as well as it forces the entrepreneur to consider the idea's strengths and weaknesses.
Business Plans are not perfect:
They obviously don't guarantee success;
They may give a false sense of certainty;
They may lead to inflexibility;
They can be time-consuming to produce.
To-Do-List:
Short Answer Questions (Q1 to Q15), p. 14, p. 15
Self Evaluation Checklist (p. 16)
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