Business Opportunities

Unit 1

Business Enterprise

By Mrs A Lacey

Enterprise and SMEs

• Enterprise is a term that can be applied to any business
• Enterprise is the starting point of any new business
• There are 4 factors of production:
• Land
• Labour
• Capital
• Entrepreneurial skill
• Here we are looking at enterprise as the willingness to undertake new ventures and show initiative with a view to gaining rewards

Enterprise and SMEs

• Small and medium size enterprises (SMEs)
• Defined by the number of employees, turnover and net worth shown on a balance sheet
• The European Union classification of business size is shown in the box below

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Enterprise and SMEs

• What is an Entrepreneur?
• A person who spots an opportunity and shows initiative and a willingness to take risks in order to benefit from the potential rewards
• Entrepreneurs make use of the resources available to them to set up or develop a business
• Creating and setting up a business starts with an idea, these can be the result of:
• Brainstorming
• Personal experience
• Business experience
• Market research

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Role of the entrepreneur

• Creating and setting up a business will involve a number of steps including:
• Generating an idea
• Asking if the idea can add value
• Conducting market research
• Drawing up a business plan
• Deciding on legal structure
• Raising finance
• Running and developing a business will involve a number of activities including:
• Generating a customer base
• Designing a marketing mix
• Sourcing supplies and managing stock
• Keeping financial records
• Abiding by legislation
• Employing staff

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Characteristics of an entrepreneur

What are the characteristics of an entrepreneur?

• Opportunity spotter
• Creative
• Show initiative
• Risk taker
• Positive thinker
• Hard working
• Self motivated
• Decision maker
• Visionary
• Enthusiastic
• Determined and persistent

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Skills of an entrepreneur

• Skills required to be an entrepreneur include:
• Communication
• Literacy
• Numeracy
• Information technology
• Organisation
• Problem solving
• Team working

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Stakeholders

• Stakeholders are anyone with an interest in the actions of a business
• These includes:
• Customers
• Employees
• Shareholders
• Government
• Community
• Suppliers
• Financial institutions

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Stakeholders

• Stakeholder needs should be considered when making decisions
• This can help avoid resistance to change
• Businesses use stakeholder mapping to help inform decision making
• Stakeholder mapping maps the relative power of each stakeholder group against the degree of interest
• This helps inform managers on how important each stakeholder group is and therefore how involved they should be in the decision making process

Exam Questions

Business Planning

Components of a business plan

• A business plan is an important part of setting up a business
• A business plan will be used both internally by the entrepreneur and externally by banks, external investors or those willing to provide grants
• The components of a business plan include:
• The executive summary - a synopsis of the entire plan looking at the most important points
• The business and products or services
• The market e.g. size, share, competitors
• The marketing strategy
• The skills of the entrepreneur and other key employees
• Operations
• Financial forecasts

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���Purpose of a business plan��

What is the purpose of a business plan?

• To secure external funding
• banks, potential partners, venture capitalists, business angels

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• To ensure that the firm develops a healthy financial structure

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• To help identify problem areas that the business might face

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• As a focus to set targets and check on the firms development

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• To provide realistic expectations of what can be achieved
• specific, measurable, achievable, realistic and time-based (SMART)

Markets

A market

What is a market?

A market is any place that buyers and sellers will come together to exchange goods or services. There will normally be an exchange of money at a set price.

What is the nature of the market?

Today, markets take numerous forms e.g. local, national, physical or electronic. Examples include the corner shop, the Stock Exchange, the housing market and the Internet for online retailing e.g. eBay or ASOS.

What is competition?

The number of firms that are operating in the same market. They are competing to sell similar products to the same target market.

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Types of markets

• Types of markets include:
• Local/global
• Is the business selling to a small geographical area e.g a local butcher or across the world e.g. a multinational business such as Nestle
• Mass/niche
• Large or small target market
• Trade/consumer
• Selling to other businesses or private individuals
• Product/service
• Products are physical or tangible products e.g. a car or a television
• Services are non physical or intangible e.g. financial consultancy or teaching
• Seasonal
• Sales peak at certain times of year e.g. B&B bookings in the summer months

��Market segmentation

• Market segmentation occurs when the market is split into subgroups of consumers with similar characteristics
• This helps to identify different types of consumer and different wants and needs
• Segmentation methods include:
• Demographic
• Geographic
• Income
• Behavioural

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�� Demographic segmentation

• Identifies subgroups of the population based on their demographic profile or characteristics
• Age
• Gender
• Level of education
• Race
• Religion
• Family size
• Stage in life e.g. empty nesters

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• Demographics looks at the social and economic characteristics of individuals and households

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Competition

• The competitive environment is the degree of competition in the market and the buying and selling power of customers and suppliers within that market
• Market structure is the number of firms within an industry and the way in which those businesses behave e.g. differentiating products
• Monopoly occurs when one firm dominates the market
• Oligopoly occurs when a few firms dominate the market
• Monopolistic competition occurs when there are many firms in the market but there is some form of product differentiation

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�Monopoly�

• Price leaders - they can charge high prices but are often restricted from doing so by government regulation
• New product development is not effected by competitors
• Monopolies will use promotion to inform and persuade customers
• They can increase sales revenue through increasing market size
• How monopolies distribute and sell goods and services depends on the type of product
• For example, the water companies must supply water to their region

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�Duopoly�

• A duopoly exists where there are only two firms in the market
• Like monopolies, duopolies can also exploit consumers by charging high prices
• Similar barriers to entry that exist in monopoly markets also affect duopolies
• Duopolies tend to compete on non-price competition such as promotion
• Duopolies are often accused of collusion (making agreements between each other that restrict competition). This is illegal and firms that collude can be heavily fined

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�Oligopoly�

• An oligopoly exists where there are only a few firms in the market. Like monopolies and duopolies, oligopolies can exploit consumers by charging high prices
• Barriers to entry exist in oligopolistic markets, particularly through advertising
• Oligopolies tend to compete on non-price competition such as promotion and there may also be an element of collusion
• It is important for oligopolists to take into account the reaction of competitors when making decisions regarding pricing. For example, if one firm cuts price, then others are likely to follow suit, resulting in a lower income for the market as a whole
• Therefore, oligopolists are unlikely to lower price as a long term strategy

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�Monopolistic competition�

• Monopolistic Competition exists where there are a large number of firms in the market selling differentiated products. This leads to a small degree of monopoly power as each firm offers something different to the others
• In this type of market barriers to entry are very low. Therefore, it is easy for firms to enter the market. This creates strong competition
• This mix between monopoly power and competition leads to the term monopolistic competition
• Firms within this market will try to brand their product. This might be through the building up of a reputation
• There are numerous examples of this type of competition such as hairdressing, restaurants and the health and beauty industry

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demand

• Demand is the amount society is willing and able to buy at a set price at a given point in time
• A normal good is one where, if price rises, demand will fall and vice versa i.e. there is a negative correlation
• The two variables price and demand move in the opposite direction to each other
• The relationship between price and quantity demanded can be shown using a demand curve
• A demand curve is a graphical representation of the relationship between price and quantity demanded
• The demand curve shows the quantity demanded for a good, at any given price, over a period of time
• As price falls quantity demanded rises
• As price rises quantity demanded falls

The demand curve

Rules for drawing a demand curve:

1. label the y axis price and the x axis quantity
2. draw the demand curve downward sloping from left to right and label it demand (or D)
3. to find the quantity demanded at any given price:

a) select a price (P), shown on the y axis

b) draw a dotted line towards the demand curve

c) draw a dotted line down towards the x axis to show quantity (Q)

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The demand curve

A change in price from P to P1is shown by a movement along the demand curve lowering quantity demanded form Q to Q1.

A change in price is shown by a movement along the demand curve.

The demand curve

A change in price from £10 to £15 is shown by a movement along the demand curve with quantity demanded falling from 100 to 120 units.

Price elasticity of demand (PED)�

• Price elasticity of demand is a measure of how responsive demand is to a change in price
• There is an inverse relationship between price and demand
• As price goes up demand goes down
• As price goes down demand goes up
• But the question is by how much? Is the change in demand more than proportional to the change in price or less than proportional?

Price elasticity of demand (PED)

• Price elastic demand means that a change in price will lead to a more than proportional change in demand i.e. demand is sensitive to price changes
• Price inelastic demand means that a change in price will lead to a less than proportional change in demand i.e. demand is not so sensitive to changes in price

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Price elasticity of demand (PED)

In the A-level examination you can be asked to do a calculation. This will be covered again in Unit 3.

Factors influencing PED

A number of factors affect the value of the PED coefficient including:

• The availability of substitutes – the closer the substitutes and the more that are available the higher the price elasticity of demand
• The price of competitor goods – if the price of goods in competition with a product increase this will affect demand and price elasticity of demand
• Time – the longer the time period the higher the price elasticity of demand. Given more time other firms have the ability to produce similar products and customers have more chance of adapting their buying habits

Factors influencing PED

• Branding – firms spend time and money building up their brand image. By creating brand loyalty firms know that their customers will be willing to pay more for the product and they can therefore raise prices as the PED is lower
• Income - if consumer incomes are higher then the issue of price becomes less important to the consumer and it is easier for firms to raise price as the PED is lower
• Nature of the good
• a luxury good will be price elastic as demand will be more sensitive to changes in price
• a necessity good will be price inelastic as demand will be less sensitive to changes in price

Problems of forecasting price elasticity of demand

• The price elasticity of demand for a product is constantly changing in a dynamic world
• It is very difficult for firms to measure because:
• Difficulty in finding accurate information
• Price elasticity changes over different price ranges
• Price elasticity will change over the period of the economic cycle e.g. it will be affected in a recession
• Tastes and fashions are constantly changing
• Competitors don’t stand still
• They are continually improving existing products, bringing out new products and trying to promote their products

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Exam Question

Market Research

Market research

• Market research is the collection and analysis of data and information to inform a business about its market
• Data collected and analysed is used to:
• identify and anticipate customer needs and wants
• quantify likely demand
• plan resources to match anticipated demand
• gain insight into consumer behaviour
• spot trends in the market
• Inform the marketing mix

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Primary market research

• Primary market research (field research) involves the collection of first hand data that did not exist before and therefore it is original data
• Examples of primary market research include:
• Surveys and questionnaires
• Postal
• Telephone
• Face–to-face
• On-line
• In depth interviews
• Focus groups
• Observations

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Secondary market research

• Secondary market research (desk research) is research that has already been undertaken by another organisation and therefore already exists
• Examples of secondary market research include:
• National and Local Government e.g. Office for National Statistics
• Market Research organisations e.g. MORI, MINTEL
• Professional bodies e.g. ACCA
• Trade unions and Confederation of British Industry (CBI)
• International bodies e.g. EU, OECD
• Academic organisations e.g. universities
• Newspapers and magazines
• The Internet

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Limitations of market research

• Past data and trends may not be a fair indication of the future
• Accuracy of research findings
• Dependent upon ability to correctly analyse findings
• Financial and opportunity costs
• Bias:
• Questionnaire bias
• Sampling bias
• Respondent bias e.g. exaggerating or not telling truth

Exam Question

Business Structure

Business structure

• Different forms of business include:
• Sole traders
• Private limited companies and public limited companies
• Private sector and public sector organisations
• Non-profit organisations such as charities and social enterprises

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Private sector and public sector organisations

• The private sector is that sector of the economy that is owned and controlled by individuals or groups of individuals rather than by the government
• Sole traders
• Private limited companies
• Public limited companies

• The public sector is that sector of the economy that is owned and controlled by the government rather than individuals or groups of individuals
• State education
• National Health Service
• Other services such as police, army, navy and air force

Sole traders�Benefits and disadvantages of being a sole trader

• Benefits
• Cheap and easy to set up
• All profits go to the sole trader
• Autonomy in decision making
• Financial records remain private
• Motivation is high as the success of the individual and the business are one and the same

• Disadvantages
• Unlimited liability
• Limited capital for investment
• Little specialist skills as the owner is a ‘jack of all trades’ or will have to buy in specialists
• Difficult to find cover when ill – although sole traders often do employ people

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Partnerships�

• Benefits
• Risks, costs and responsibilities are shared
• More scope for specialist skills
• Simple and flexible
• Financial records remain private
• More capital can be raised than as a sole trader

• Disadvantages
• Unlimited liability
• Arguments can occur with decision making
• If a partner dies, resigns or goes bankrupt the partnership is dissolved
• Trust becomes a significant element between partners – a written agreement between the partners should be drawn up

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Private Limited Companies�

• Advantages
• Limited Liability
• Separate legal identity
• More flexible than a Plc.
• Financial records remain relatively private
• More capital can be raised through the sale of shares

• Disadvantages
• More complex to set up due to increased legal requirements
• Some loss of control as shareholders have voting rights
• Unable to sell shares to the public

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Public Limited Companies�

• Advantages
• Limited Liability
• Separate legal identity
• Perceived status of having Plc after the name
• More capital can be raised through the sale of shares

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• Disadvantages
• Lack of privacy as financial performance is available for all to view
• More complex to set up due to increased legal requirements and ongoing administrative costs
• Some loss of control as shareholders have voting rights
• Risk of hostile takeovers

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Business Location

Factors influencing start-up location decisions�

• There are several factors that affect where a new business chooses to locate
• These include:
• Costs
• A small business faces a number of costs that it will try to reduce
• Costs will include the costs of buying or renting premise as well as business rates
• Costs will vary based on whether the location
• Infrastructure
• Infrastructure will include transport links such as roads, railways and airports
• It also include communication links and local services e.g. street lights and refuge collection
• The market
• The market is where buyers and sellers come together to exchange goods or services
• The significance of the market to a firm’s location decision will depend upon the nature of the business
• Technology
• New technology has allowed the small business to communicate from home, gathering, processing and sending information through, for example, the Internet
• Teleworking means that the small business can work from home with instant communication methods
• Qualitative factors
• These factors are based on the personal desires and needs of the owner
• They are very important for the small business, but their significance will depend upon the owner of the business

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