Role of an Entrepreneur
What an Entrepreneur Does
Entrepreneur: a person who spots a business opportunity, brings together the resources needed to exploit it and accepts the risk that it might fail.
Land, labour and capital do nothing on their own. Organising them and taking the risk is enterprise, the fourth factor of production (unit 1.2.3). If the business works, the entrepreneur's reward is profit. If it doesn't, they can lose what they put in.
Creative Destruction
Creative destruction: the process by which new products, methods and firms replace older ones, as resources move away from businesses that have fallen behind and into new ones.
The idea comes from Joseph Schumpeter, who argued in Capitalism, Socialism and Democracy (1942) that this constant churn is how capitalist economies grow. The entrepreneur drives it. The process has two halves:
- Creative: an entrepreneur offers something better or cheaper → customers switch their spending → the new firm's sales grow → new jobs, and more choice and better value for consumers.
- Destructive: firms that fail to adapt lose customers → revenue falls → they close → their workers lose their jobs, and those whose skills were specific to the old industry may struggle to find new ones.
Over time the economy gains. Labour and capital leave firms that use them poorly and end up in firms that use them well, so the country can produce more with the same resources.
Video rental is a clear UK case. Blockbuster's high-street DVD shops lost their customers to online rivals such as LOVEFiLM and Netflix, and its UK business went into administration in 2013. Jobs were lost, but the spending had moved to services customers preferred.
Creative destruction gives you both sides of an evaluation. Consumers and new firms gain, while workers and owners of the old firms lose, at least in the short run. Say who wins, who loses and over what time period, and you have a balanced answer built from one concept.
Decisions to Operate, Expand and Develop a Business
Setting up is only the start. An entrepreneur keeps making decisions, each one with an opportunity cost and a risk attached.
- Operating the business day to day: what to sell, what to charge, how many staff to employ and how to keep enough cash coming in.
- Expanding it: producing more of what already works, such as opening a second shop. Expansion usually needs finance, which adds debt or brings in new owners.
- Developing it: changing what the business does, by launching new products, improving existing ones or moving into new markets. This is where innovation happens, and where the risk of getting it wrong is highest.
A small bakery shows the difference. Deciding tomorrow's bake is operating. Opening a second branch in the next town is expanding. Starting a wholesale line of gluten-free bread for local cafés is developing.
Adding Value
Added value: the selling price of a product minus the cost of its inputs.
A business only survives in the long run if customers will pay more for its output than its inputs cost. Entrepreneurs add value by turning inputs into something customers want more, through:
- Design and quality that make the product better than the alternatives.
- Branding, so customers trust the name and will pay more for it.
- Convenience, such as delivery, longer opening hours or an easy online checkout.
- A unique selling point (USP) that no rival offers.
Worked Example: Added Value on a Candle
A small business makes scented candles at home. For each candle it buys in wax, a wick, a glass jar and fragrance oil, then sells the finished candle online for £14.
| Selling price | £14.00 |
| Cost of inputs (wax, wick, jar, fragrance) | £1.20 + £0.30 + £1.10 + £0.60 = £3.20 |
| Added value per candle | £14.00 − £3.20 = £10.80 |
The owner has turned £3.20 of materials into a product customers will pay £14 for. That £10.80 is not profit: it still has to pay for the owner's time, advertising, website fees and delivery. Profit is whatever is left after those costs too.
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