Edexcel GCSE Business

Why business ideas come about

Business is dynamic: the things people buy and the ways they buy them keep changing, and each change leaves room for a new business. Three pressures produce most new ideas.

• Changes in technology make things possible that were not possible before. Smartphones created the market for app developers, phone-case makers and food-delivery apps, and cheap online selling lets one person run a shop from a bedroom.
• Changes in what consumers want open gaps for someone who notices them first. A rise in people choosing plant-based diets led to new food brands, and a growing interest in fitness led to new gyms and equipment makers.
• Products and services becoming obsolete leaves customers without something they still need. When DVD rental shops lost customers to streaming, the demand for films remained and was met in a different way, and businesses that saw this early moved into streaming.

How new ideas arise

An original idea is a product or service that did not exist before, such as the first business to sell a new kind of device. Original ideas carry the most risk because nobody can be sure that customers will want them, but the entrepreneur has no direct rivals at the start.

Many more ideas are adaptations of something that already exists: a café with a new theme, a cheaper version of a known product, or a service that adds a feature competitors lack. Adapting an existing idea is usually safer, since the market has already shown that customers will pay for something similar, although the new business then has to compete with those who got there first.

Risk and reward

Starting a business is a gamble with the entrepreneur's own money, time and security, and the possible gains have to be set against the possible losses.

Risk

• Business failure: many new businesses do not survive their first years, often because sales are lower than expected or cash runs out.
• Financial loss: an owner who has put in savings or borrowed money can lose it all. A sole trader or partner who does not have limited liability can also lose personal belongings to pay the business's debts.
• Lack of security: there is no guaranteed wage, no paid holiday or sick pay unless the business can afford to give itself these, and income can change from month to month.

Reward

• Business success: seeing an idea grow into something customers value, with the business perhaps expanding.
• Profit: the owner keeps what is left after all costs are paid, which can be far more than an employee's wage if the business does well.
• Independence: the owner decides what to sell, who to work with and when to work, rather than following an employer's instructions.

An entrepreneur has to judge whether the likely rewards are big enough to justify the risks. Careful planning and market research do not remove risk, but they make failure less likely.

The purpose of business activity

Businesses exist to produce goods or services and sell them to customers. A good is a physical product such as a bicycle, and a service is something done for the customer, such as a haircut or a repair. Customer needs are what buyers want from a product, and a business only survives if it meets them well enough for people to choose it over the alternatives.

Adding value

Added value is the difference between what a business pays for the materials and other inputs it uses and the price customers pay for the finished product. A business adds value when it makes its product worth more to the customer than the raw materials were, and customers are willing to pay a higher price for the things below.

• Convenience: the product is easy to get or use, for example a shop open late at night, a delivery service or a ready-made meal. Customers pay extra to save time and effort.
• Branding: a recognised name signals quality or status, so customers will pay more for a branded trainer than for an unbranded one that is almost identical.
• Quality: better materials or finish and a longer life justify a higher price, and they bring repeat customers.
• Design: attractive or well-made products stand out, and good design can also make a product easier to use.
• Unique selling points: a unique selling point (USP) is a feature that competitors do not offer, such as a patented mechanism or a recipe only one café uses. It gives customers a reason to choose this business and can allow a higher price.

Adding value is how a business earns more than its costs. A coffee shop that buys beans, milk and cups for £0.60 per drink and sells the drink for £3.00 has added £2.40 of value per cup, and the pleasant setting, the skill of the barista and the location are what make customers willing to pay it.

Entrepreneurs

An entrepreneur is a person who sets up and runs a business. The role has three parts.

1. They organise resources, which means bringing together the money, equipment, premises, materials and people needed to produce something.
2. They make business decisions, such as what to sell, where, at what price, and whom to employ.
3. They take risks, because they put their own money and reputation behind the idea, and accept that they may lose both.

An entrepreneur usually needs qualities such as determination, because early months can be hard, and willingness to learn from mistakes. Entrepreneurs do not all start a business for profit alone; the reward can be independence or satisfaction from doing work they care about, and some set up businesses to solve a problem they have noticed.