why businesses succeed or fail

Enterprise – The Nature of Business Activity

1. Purpose of Business Activity

Businesses exist to meet human wants by transforming the factors of production (land, labour, capital and enterprise) into goods and services that add value and generate profit.

• Satisfy wants – produce outputs that consumers desire (e.g., smartphones).
• Convert inputs into outputs – raw cotton → branded T‑shirt.
• Add value – the market price of the output exceeds the total cost of the inputs.
• Generate profit – the reward for taking opportunity cost (the value of the best alternative foregone).
  Example: A factory can make either smartphones or tablets. If it chooses smartphones, the profit foregone from not producing tablets is the opportunity cost.

2. The Dynamic Business Environment

The environment in which firms operate is constantly changing because of political, economic, social, technological, legal and environmental forces (PESTLE). These changes create new opportunities and threats, requiring businesses to adapt continuously.

Illustrative example: The COVID‑19 pandemic disrupted global supply chains, accelerated e‑commerce growth and forced many retailers to adopt contact‑less delivery.

Tools for Scanning the Environment

• PESTLE analysis – examines macro‑environmental forces.
• Porter’s Five Forces – assesses industry‑level competitive pressures.

3. Internal vs External Factors – Success and Failure

4. Types of Business Scope

5. Analytical Frameworks for Evaluating Success & Failure

1. VRIO analysis – assesses internal resources for Value, Rarity, Imitability and Organisation.
2. PESTLE analysis – scans macro‑environmental forces.
3. Porter’s Five Forces – evaluates industry‑level competition.
4. Financial ratio analysis – checks profitability, liquidity and solvency.
   • Gross profit margin = (Revenue – Cost of Goods Sold) ÷ Revenue
   • Current ratio = Current assets ÷ Current liabilities
   • Debt‑to‑equity ratio = Total debt ÷ Shareholders’ equity
5. Leadership & strategic decision review – examines vision, stakeholder communication and change‑management capability.

6. Case Study Illustrations

Case 1 – Successful Enterprise: TechCo Ltd

• Identified a niche for affordable smart‑home devices.
• Invested in R&D, securing a patented technology that cut production cost by 15 %.
• Maintained strong cash reserves, enabling rapid scaling.
• Result: Revenue grew from £2 m to £12 m in five years; profit margin rose from 5 % to 18 %.

Case 2 – Failed Enterprise: FashionFast

• Rapid expansion without adequate market research; opened 20 stores in low‑demand regions.
• High reliance on short‑term borrowing; interest expenses consumed 30 % of gross profit.
• Supply‑chain disruptions caused frequent stock‑outs, eroding customer loyalty.
• Result: Cash‑flow problems forced administration within three years of launch.

7. Suggested Diagram

8. Key Takeaways

• Business success is multi‑dimensional; it results from the interaction of internal capabilities and external conditions.
• Financial discipline, market insight and adaptable leadership are recurring themes in successful firms.
• Failure usually stems from a combination of poor internal management and adverse external shocks.
• Systematic analysis using VRIO, PESTLE, Porter’s Five Forces and financial ratios equips managers to anticipate risks and exploit opportunities.
• Understanding the scope of operation (local, national, international, multinational) helps firms tailor strategies to the appropriate market environment.