1.1.1 Purpose and reasons for starting a business

What a business is

1. Every business, from a one-person window cleaner in Cardiff to a chain the size of Tesco, exists because somebody has a need or a want that is not being met.
2. To meet it, the business brings together resources and turns them into a good or a service that customers are willing to pay for.

The five reasons a business is set up

1. To produce goods: the business makes a physical product that customers take away and own.
   1. Warburtons bakes bread, JCB builds diggers, and a local joiner makes fitted kitchens.
2. To supply services: the business carries out an activity for the customer rather than handing over an object.
   1. A hairdresser cuts hair, Barclays looks after money, and Spotify streams music.
3. To distribute products: the business does not make anything itself, but moves goods from the producer to the customer.
   1. Wholesalers, shops, Amazon's warehouses and Deliveroo riders all exist because a product is worth nothing to a customer who cannot get hold of it.
4. To fulfil a business opportunity: somebody notices a need that no existing business is meeting properly and sets up to meet it.
5. To provide a good or service to benefit others: the aim is social rather than financial, so any surplus goes back into the cause instead of into an owner's pocket.
   1. Charity shops, community sports clubs and social enterprises are all set up for this reason.

Fulfilling a business opportunity: spotting the gap in the market

1. A gap appears when customers are unhappy with what is on offer, when a new technology makes something possible, or when tastes change faster than existing firms react.
2. Ben Francis started Gymshark in 2012 in Birmingham, screen-printing gym vests in his parents' garage, because young gym-goers could not buy fitted training kit that looked the way they wanted.
3. Spotting a gap is not the same as filling it, because the business still has to organise the money, the stock, the staff and the selling.

Providing a good or service to benefit others

1. In these organisations the person who pays and the person who benefits are often not the same, so the trading raises money that is then spent on somebody else.
2. The Big Issue sells a magazine like any other publisher, but vendors keep a share of the cover price, so the trading exists to give people an income rather than to enrich shareholders.
3. These organisations still have to cover their costs and still need customers who choose them over a rival, so being set up to benefit others does not make the money side stop mattering.

1.1.1b Goods and services, needs and wants

Needs and wants

1. Everything a business sells is bought to satisfy either a need or a want, and businesses meeting needs tend to have steadier demand because customers keep buying whatever happens to their income.
2. Wants are the first thing customers cut when money is tight, because nobody has to buy a meal out or a new phone this month.
3. The same product can be a need for one customer and a want for another, so a car is a need for a district nurse driving between patients in rural Cumbria and a want for someone who lives ten minutes from a station.

Goods and services

1. A good is tangible, so it can be physically touched, stored in a warehouse and sold on second hand.
2. A service is intangible, so it cannot be physically touched, cannot be stored for later and is produced at the moment the customer receives it.
3. An unsold good can be discounted next week, whereas an empty seat on the 8am train from Manchester is revenue that cannot be recovered.

Most businesses sell goods and services together

1. Greggs sells a sausage roll, which is a good, and speed of service, which is a service.
2. Currys sells a washing machine, which is a good, plus delivery, installation and a repair plan, which are services.
3. The distinction belongs to the item, not to the business, so Currys is not a goods business or a services business but a business selling some of each, and you classify each item separately.

1.1.2 Factors of production and opportunity cost

The four factors of production

1. Land is every natural resource the business uses, not just the ground it stands on.
   1. It includes the site of the shop or factory, farmland, fishing grounds, water, timber, oil and gas.
2. Labour is the workforce needed to produce the product or service.
   1. It covers the bakers, drivers, shop assistants and managers, and its quality depends on skills and training.
3. Capital is the equipment or machinery used to provide the goods or services.
   1. It includes ovens, delivery vans, tills, computers and the buildings themselves.
4. Enterprise is organising the resources to take a risk and capitalise on a business opportunity.
   1. It is supplied by the entrepreneur, who decides what to produce and carries the loss if it goes wrong.
5. All four are needed at once, so a bakery with a new oven but no baker sells nothing that morning, and the oven still has to be paid for.

Capital means equipment, never money

1. Capital is the equipment, machinery, vehicles and buildings the business uses to produce.
2. The money used to buy that equipment is finance, and it comes from savings, a bank loan or retained profit.
3. Judge a resource by what it does, so a field is land, the tractor on it is capital, the farmer's work is labour, and the decision to open a farm shop is enterprise.

Opportunity cost: the next best alternative given up

1. A business has a limited amount of money, time and space, so choosing to use a resource one way rules out using it another way.
2. Opportunity cost is not the money spent, and this is the most common error on this topic.
3. It is the one option the business sacrificed, so there is only ever one opportunity cost per decision, not a list.

Opportunity cost at every size of business

1. Opportunity cost applies at every size of business, because even Greggs has only a fixed budget for investment each year.
2. If Greggs spends that budget opening new high street shops, the opportunity cost is the extra bakery and distribution capacity the same money would have bought, which would have lowered the cost of making each sausage roll.

1.1.3 Basic functions and types of business

The three sectors of production

1. Primary businesses take raw materials out of nature, and nothing else can happen until they do.
   1. UK examples include farming in Lincolnshire, fishing off the Cornish coast, quarrying, forestry, and North Sea oil and gas extraction.
2. Secondary businesses process those raw materials into a finished product or a component another manufacturer uses.
   1. UK examples include Nissan building cars in Sunderland, JCB making diggers in Staffordshire, Warburtons baking bread, and firms making steel, cement and packaging.
3. Tertiary businesses do not make anything physical, but provide a service to customers or to other firms.
   1. UK examples include Tesco, the NHS, Barclays, Deliveroo, hairdressers, hotels, insurance brokers and Netflix.
4. Together the three form a chain of production, so a product usually passes through all three before it reaches you.

Classifying a business by its main activity

1. Most real businesses do more than one thing, so classify them by the activity that earns most of their revenue.
2. A bakery that bakes bread and sells it over the counter is doing secondary work in the kitchen and tertiary work at the till.
3. A few firms own more than one stage, so a Yorkshire farm that grows vegetables, makes chutney and sells both in its own farm shop operates in all three sectors.

1.1.4 Enterprise and entrepreneurship

Enterprise and the entrepreneur

1. Enterprise is one of the four factors of production, so it is a resource the business uses in the same way it uses labour or capital.
2. An entrepreneur is the person who provides it, so enterprise is the activity and the entrepreneur is the person doing it.
3. Enterprise is not the same as labour, because an employee sells their time for an agreed wage and is paid whatever happens to the profit, while the entrepreneur's own money is in the business.
   1. That is why a paid manager who runs a Tesco store is supplying labour, not enterprise, however many decisions they make in a day.

What an entrepreneur does

1. Sets up the business: they start it, open it and own it, either outright or by holding shares in it.
2. Spots the opportunity: they identify a gap in the market and bring a new idea to it.
3. Organises the other factors of production: they find the premises, raise the money for equipment, and hire the staff.
   1. Nobody else does this at the start, so a new entrepreneur is usually doing the buying, the selling and the bookkeeping in the same week.
4. Makes the decisions: what to sell, what to charge and who to hire are all their call, with no manager above them.
5. Takes the risk: they put their own money in, keep the profit if customers buy, and absorb the loss if they do not.

1.1.4b Characteristics of an entrepreneur

The characteristics of an entrepreneur

1. Hard working: a new business has no other staff to fall back on, so the owner does the buying, the selling and the accounts.
   1. Early mornings and weekend work are normal, because the business earns nothing while the owner is not working.
2. Innovative: they find a new product, or a better way of delivering an existing one, so customers have a reason to switch.
   1. Innovation does not have to mean inventing something, because opening on Sundays when every rival is shut is innovation too.
3. Organised: they keep track of stock, staff rotas, supplier payments and cash at the same time.
   1. A business that runs out of stock or forgets a tax bill loses customers or money it did not need to lose.
4. Willing to take a risk: they accept that their own savings, and often the salary from a previous job, could be lost.
   1. The risk is usually calculated rather than reckless, so a sensible owner researches demand and tests on a small scale first.
5. Determined: setbacks are normal, so they keep going after a supplier lets them down or a bank refuses a loan.
6. Confident: they convince customers to try an unknown business, suppliers to give them trade credit, and lenders to back them.

1.1.4c Objectives of an entrepreneur

The six objectives of an entrepreneur

1. To be their own boss: they want control over what the business does and how it does it, with no manager overruling them.
   1. This appeals most to people who have had decisions imposed on them at work that they disagreed with.
2. To have flexible working hours: running your own business can mean choosing when you work, which suits people fitting work around children, study or caring.
3. To pursue an interest: they turn something they already care about into a way of earning, such as a keen baker opening a cake business.
   1. Caring about the product also helps them keep going through the long unpaid hours at the start.
4. To earn more money: an employee receives a wage, but an owner keeps the profit, so there is no ceiling on what a successful business can pay them.
5. To identify a gap in the market: they have spotted a customer need nobody is meeting and want to be the one who meets it.
   1. This objective is the closest to a purely commercial one, because it starts from what customers want rather than from what the owner wants.
6. Dissatisfaction with their current job: boredom, a poor manager, low pay or redundancy pushes somebody out of employment and into starting up.
   1. This is a push factor, because the person is moving away from something rather than towards something.

Financial and non-financial objectives

1. Only one of the six, earning more money, is a financial objective, and the other five are non-financial.
2. The two groups often pull against each other, because being your own boss usually means earning less at first, since the owner takes what is left after costs rather than a guaranteed wage.
3. Flexible hours are often the first objective to slip, since a new owner tends to work longer and less predictable hours than they did as an employee.

1.1.5 Dynamic nature of business

The dynamic business environment

1. A business does not choose the conditions it trades in, because they are set by customers, rivals, governments and technology.
2. A business that does not adapt loses customers gradually to a rival that did.

The four sources of change

1. Technology: new products replace old ones and new ways of selling appear, so demand can fall away from a business that has done nothing wrong.
   1. Streaming removed the reason to buy CDs and DVDs, and HMV went into administration twice.
   2. New equipment can also cut the cost of making each unit, though it has to be paid for and staff have to be retrained to use it.
2. The economic situation: interest rates, the level of employment and consumer incomes decide how much customers can afford to spend.
   1. When UK incomes were squeezed, Aldi and Greggs gained customers trading down while casual dining chains closed sites.
3. Legislation: governments change the law on wages, health and safety and consumer rights, and businesses have to comply whether it suits them or not.
   1. A rise in the national living wage raises the wage bill directly, which hits retailers and care homes hardest.
4. Environmental expectations: customers now judge a business on how it produces, not only on what it charges.
   1. UK supermarkets cut plastic packaging and introduced refill stations partly because shoppers expected it.
   2. Acting on this usually costs money in the short term, and the return comes as reputation and customer loyalty.

How a business responds to change

1. Monitor the environment, by watching competitors, customer feedback and rules that are coming, so the change is seen before it arrives rather than after sales have fallen.
2. Adapt the product or the way it is sold, such as Greggs adding app ordering and delivery so customers could skip the lunchtime queue.