BM Topic 1.1 (2, 3 & 4 / 4): Pri, Sec, Ter, Quar Sectors & Entrepreneurship & C/O of Starting a Business

Topic 1.1 BM - What is Business? [Subtopic 2, 3 & 4 /4 : Primary, Secondary, Tertiary, and Quarternary Sectors & Entrepreneurship & Challenges and Opportunities for Starting a Business

What is the ‘primary sector’ of business?

What is the ‘primary sector’ of business?

business activity involved with the extraction, harvesting & conversion of natural resources (e.g agricultural farming, forestry & logging, mining, fishing)

** as countries achieve sustained economic growth & development, there’s less reliance on the primary sector in terms of employment & national output

What is the ‘secondary sector’ of business?

business activity involved with the manufacturing or construction of finished products. It encompasses transforming primary sector output into finished goods, ready for sale or use by the consumer.

** medium-income countries tend to have a dominant secondary sector that accounts for a relatively large proportion of the country’s national output

What is the ‘tertiary sector’ of business?

business activity that involves providing services to customers, i.e., consumers and business clients/organisations (e.g retail, insurance, healthcare, tourism, entertainment, banking

*physical goods can be transformed into the process of providing a service (e.g restaurant when the chef prepares a meal with ingredients) but focus is on the people providing the service

**most substantial sector in terms of both employment and output as a percentage of GDP (value of country’s output per year)

What is the ‘quarternary sector’ of business?

sub-category of the tertiary sector - involved in the intellectual and knowledge-based activities that generate & share information. (e.g. R&D, consultancy services, information and communications technology)

** exists mainly in high-income countries as it requires a highly educated workforce. also the sector in which high-tech & e-commerce businesses invest for further growth & evolution

Define ‘entrepreneur’

the individual who plans, organizes & manages a business and its operations, taking on financial risks in doing so

Define ‘entrepreneurship’

the collective knowledge, skills, experiences & traits of individuals who run their own business(es) who tend to be distinctive in their temperament, attitude and outlook who drive the business to achieve it’s organisational goals.

Characteristics of an entrepreneur (RISER + more)

R - risk taker (willing to take calculated business risks)
I - innovative (creative/original thinking)
S - strategist (strategic thinking)
E - Enthusiastic (passion / energetic / drive)
R - Resilient (ability to accept constructive feedback and setbacks).

time management, risk management, creativity, effective communicator, teamwork, flexibility & open-mindedness, drive (motivation), leadership

Define ‘visionary’

an entrepreneur who has the foresight and driving force behind an organization’s growth and development. S/he can see market changes and trends before they actually happen or materialise, or even set the trends themselves.

10 Challeges of starting a business?

1. Lack of finance

2. Unestablished customer base

3. Cash flow problems

4. Marketing problems

5. People management problems

6. Production problems

7. Legalities

8. High production costs

9. Poor location

10. External influences

Challeges of starting a business (entrepreneur-specific)?

1. long hours - owner(s) often think they can do everything themselves, partly to help keep costs low. However, this if not likely to lead to long-term success for the business. work may be ineffective & they may lose motivation, low(er) productivity

2. lack of knowledge, skills, and experiences - may lack sufficient knowledge, skills or experience in the industry they are entering or lack knowledge of:
   - their target market, competitors and market trends.
   - best suppliers, which can cause higher costs and distribution problems
   - experience to make effective strategic decisions
   ** may/can result in business making huge (unneccessary) losses

3. limited human resources - difficult to attract suitable skilled and experienced staff for its operations without a well-established business model or corporate image

4. lack of market research - key to a successful business is having a commercially viable idea.

Challenge of starting a business: Lack of finance

all businesses need finance for the purchase of fixed assets, however start-up firms and most owners of new/small businesses do not have the credentials to secure sufficient funding without major challenges. even if they can borrow funds, may be insufficient or relatively high interest charges may seriously affect cash flow position of the business.

• new sole traders often have to remortgage their own homes to raise the finance needed, thereby offering the lender more collateral (financial security) in case they fail to repay the loan

Challenge of starting a business: Unestablished customer base

a major challenge facing new businesses is attracting new customers i.e. building a broad and loyal customer base. problem is intensified when there are well-established competitors already operating in the market.
- customer loyalty is built over a long period of time which may require marketing know-how & large amounts of money

Challenge of starting a business: Cash flow problems

financing working capital (the money available for the daily running of the business) is a major challenge for many start-ups. business might have a lot of stock, finished output or goods that cannot easily be turned into cash.
- customers might demand a lengthy credit period (typically between 30 to 60 days) enabling them to buy now & pay later, so the business will not receive the cash payment until the credit payment is over.
- during this time the business still needs to pay for its ongoing costs (e.g. wages, rent, utility bills, taxes, interest on bank loans)

Challenge of starting a business: Marketing problems

marketing challenges arises when businesses fail to meet customer needs, thereby resulting in poor sales and a lack of profitability. supplying the right products to the right customers at the right price is especially crucial for new businesses.
- however, small & new businesses may lack the expertise to do this. quite often, the key to small business success is to identify a niche (or gap) in the market and then fill it

Challenge of starting a business: People management problems

start-ups may lack experience in hiring the right staff with all the necessary skills → can lead to poor levels of labour productivity & the need to retrain staff & hire people which can be very expensive and time-consuming.

• new businesses might not know the ideal organisational structure or the most practical methods of staff motivation that best suits their organisational needs

Challenge of starting a business: Production problems

can be challenging for start-ups to accurately forecast levels of demand so they are more likely to either over-produce or under-produce
1. overproduction leads to stockpiling, wastage & increased costs
2. underproduction leads to dissatisfied customers & a loss of potential ales

Challenge of starting a business: Legalities

it’s necessary for businesses to comply with all necessary legislation, including:
- business registration procedures
- insurance cover for staff & buildings
- consumer protection laws
- rules about intellectual property such as copyrights, patents & trademarks

• paperwork and legal requirements of setting up a new business can be cumbersome, confusing and expensive. any oversight could result in the business having to pay compensation or financial penalties → damage the already vulnerable cash flow position of start-ups

Challenge of starting a business: High production costs

new businesses are likely to have high set-ups costs & running costs due to the large amount of money needed to purchase or pay for capital equipment, machinery, stocks, rent, advertising, insurance, etc
- smaller businesses will also be at a cost disadvantage as they cannot benefit from economies of scale
- by contrast, economies of scale allow larger & more established businesses to benefit from lower average costs of production due to the size of operations (e.g. being able to get discounts from suppliers for large bulk purchases or being able to borrow money at a lower interest rate because of their larger size & financial collateral)

Challenge of starting a business: Poor location

businesses face a dilemma in the location decision: busy areas offer the highest potential number of customers, but the premises in these areas will also cost the most

- fixed costs, such as rent or mortgage payments, account for a large percentage of total costs for many businesses
- an aim for any new business is to reach break-even as soon as possible, by keeping fixed costs down
this is one reason why many entrepreneurs set up small businesses that operate initially from their own home (also has some tax advantages)
**this option is not suitable for businesses where location plays a key factor in business survival

Challenge of starting a business: External influences

all businesses, irrespective of size or how long they have been in operation, are prone to exogenous shocks that create a challenging trading environment (such as a global financial crisis or outbreak of a pandemic)
- however, larger and more established firms tend to be better resourced to handle these external influences. hence, new businesses face the added challenge of being more vulnerable to external shocks → potential for business failure is greater

8 Opportunities for starting a business

1. Growth

2. Money

3. Transference & inheritance

4. Challenge

5. Autonomy

6. Security

7. Hobbies

8. Make a difference

Opportunities for starting a business: Growth

entrepreneurs tend to benefit personally when there is an appreciation in the value of their businesses, especially as property & lend tend to increase in value over time (this called capital growth)
- chance to grow the business → earn more profit

*it is quite common for the capital growth of a business to be worth more than the value of the owners’ salaries

Opportunities for starting a business: Money

key driving force for a person to start their own business is the ambition or motivation to earn profit for themselves. A firm earns profit by selling its products at a price that is higher than its production costs. The owner(s) get to keep the profit as a reward for risk-taking and their entrepreneurship talents.
- the potential returns from setting up your own business can easily outweigh the costs, even though the risks are high

Opportunities for starting a business: Transference & Inheritance

in many societies, it is the cultural norm to pass on assets, including businesses, to the next generation. many self-emplpyed entrpreneurs view their business as something they’re able to pass on (transference) to their children (inheritance) to give them a sense of financial security that might not be possible if they chose to work for someone else
- For some, running the(ir) own business is part of a family tradition (they may have inherited it)

Opportunities for starting a business: Challenge

some people might view setting up and running a business as a personal challenge. that’s what drives them to perform & what gives them particular satisfaction. they enjoy the satisfaction of achieving what they perceive to be greatness and striving for self-actualisation.

Opportunities for starting a business: Autonomy

being self-employed means that there is autonomy (independence, freedom of choice & flexibility) in how things are done within the organisation.
- speeds up decision-making if you are the ‘boss’
- allows business owners to have greater flexibility, in theory, so they can have a better work-life balance.
- a great sense of satisfaction in being the “boss”

*essentially, this opportunity refers to the benefits of being your own boss. some people may not like working for others

Opportunities for starting a business: Security

greater sense of job security for someone who is their own boss. although the risks are great, being self-employed also makes it potentially easier to accumulate personal wealth (financial security) to provide higher funds for (early) retirement

• by contrast, employees can be dismissed, made redundant, or even replaced by technology.

• some people become self-employed if they cannot seek paid employment elsewhere (Alex in MAID became self-employed after being fired from Value Maids)

Opportunities for starting a business: Hobbies

some people might want to pursue their passion or turn their hobby & interests into a business opportunity.

*successful entrepreneurs have a passion for what they do & this is made easier if the nature of the work is directly related to their personal interests

Opportunities for starting a business: Make a difference

some people start their own enterprises in order to be able to make a difference to others. (e.g. providing a service to the local community such as a medical clinic, a day-care centre, or nursing home for the elderly)