🏢 Business in the Real World

Purpose of business & enterprise

Business activity exists to provide the goods and services that satisfy customers' needs and wants. A need is something essential, such as food or shelter, while a want is something a customer would like to have but could live without, such as the latest phone. A business earns a profit when the money it takes from sales is greater than the costs of making and selling its products, and how much profit it can make depends on the value it adds along the way.

A business adds value when it makes a product more appealing than the raw materials it started from, so that customers are willing to pay more for it than those materials alone would cost. This can be achieved through strong branding, attractive design, or good customer service, all of which let a business charge a higher price than an identical, unbranded product would achieve.

New business opportunities keep appearing as the world changes. Changes in technology, such as new apps and online platforms, open up markets that did not exist before. Changing customer needs, such as the growth of an ageing population, create demand for new products and services. Growing ethical and environmental awareness among consumers also creates opportunities for businesses that can meet these concerns, such as recycled packaging or fair-trade ingredients.

Enterprise and the entrepreneur

An entrepreneur is a person who spots a gap in the market and takes on the financial risk of organising resources, such as staff, premises and materials, to set up and run a new business venture. Starting a business is risky because the entrepreneur commits their own savings and time to something that might fail. If the venture succeeds, however, the reward is both profit and the independence of running a business on their own terms.

Ownership types & business aims

Every business must choose a legal structure, and this choice affects who owns it, who makes decisions, and who is responsible if things go wrong. The biggest difference between structures is liability: whether the owner's personal possessions can be used to pay off the business's debts, or whether the owner's risk is limited to what they put into the business.

Unlimited liability brings both an advantage and a disadvantage for a sole trader. The advantage is that a sole trader is quick and cheap to set up, with few legal formalities to complete. The disadvantage is that the owner's personal assets, such as their home, can be used to pay off the business's debts if it fails.

Business aims and objectives

A business's aims commonly include survival, which matters most in its early stages when it is most likely to fail, profit, and growth, though some businesses also pursue ethical or social objectives alongside these. Aims often shift as a business develops: a new business typically aims for survival first, moves on to profit once it is established, and then aims for growth once its profit is secure. They can shift again later because of new competition or a changing economic climate.

Stakeholders & location

A stakeholder is any individual or group with an interest in what a business does. Stakeholders commonly include the owners, employees, customers, suppliers and the local community, and each group is affected differently by the business's decisions.

Stakeholder interests can conflict with one another. For example, owners wanting higher profit can conflict with employees wanting higher pay, since paying staff more raises costs and can reduce the profit owners receive. A business often has to balance several such conflicting interests when it makes a decision.

Choosing a location

When choosing where to locate, a business weighs up several factors together: the cost of the site, how close it is to its customers or suppliers, and whether a suitable workforce is available nearby. A site that is cheap but far from customers, or well placed but too expensive to run profitably, may not be the best choice overall.

An online business can need much less physical location than a shop, because it can reach customers anywhere rather than relying on passing trade. It typically needs only a warehouse or office rather than expensive high-street premises, which cuts its rent and overheads considerably.

Planning, growth & why businesses fail

A business plan sets out a new venture's aims and how it intends to achieve them. Writing one forces the owner to think ahead, which reduces the risk of failure, and a solid plan also helps to secure finance, since lenders and investors want evidence that a new venture has been thought through properly.

• Its aims and objectives.
• Its market research findings about customers and competitors.
• A cash-flow forecast showing the money it expects to have coming in and going out.

Growing a business

A business can grow in two different ways. Internal growth, also called organic growth, means expanding the existing business itself, for example by opening new outlets or increasing production. External growth, also called inorganic growth, means growing instead through a merger or takeover with another business.

Growing larger can bring economies of scale: the falling cost per unit a business enjoys as its output increases, for example because it can now bulk-buy materials more cheaply than before. A lower cost per unit means a business can either increase its profit margin or lower its price to compete more effectively.

Why businesses fail

Businesses fail for several common reasons, and most cases involve more than one of them together.

• Poor cash flow, so the business runs out of money to pay its day-to-day bills.
• Increased competition, which can take customers and sales away from the business.
• Poor management decisions, such as inadequate market research before launching a product.