The nature of business activity

Added value is the difference between the selling price of a product and the cost of the bought-in materials and components used to make it. For example, if a bag is sold for $50 and the materials cost $18, the added value is $32.

Capital as a factor of production means the man-made aids to production — the machinery, tools and buildings a firm uses. A clothing manufacturer uses capital in the form of sewing machines, cutting equipment and the factory building. These allow the firm to transform bought-in cloth (raw materials) into finished garments more quickly and in larger quantities, which is essential for production to take place at all.

Adding value means increasing the price customers will pay above the cost of the bought-in ingredients. A small restaurant could add value in two main ways.

First, through the quality of the dining experience — attentive service, attractive presentation of dishes and a pleasant atmosphere. Because customers are paying for far more than the food itself, they will accept a higher price for the same ingredients, raising added value per meal.

Second, through a distinctive brand or speciality — for example, a signature dish or a reputation for locally-sourced food. This differentiates the restaurant from rivals, so it can charge a premium rather than competing only on price.

In both cases the selling price rises while the bought-in ingredient cost changes little, so added value increases — giving the restaurant more to cover wages and rent and to generate profit.

Enterprise is the factor of production that organises land, labour and capital and bears the risk of the business. For a new business it is arguably the most important factor for several reasons.

First, without enterprise the other factors stay idle: land, labour and capital only become productive when an entrepreneur decides what to produce, hires staff and buys equipment. The quality of these decisions — choosing the right market, controlling cash — strongly shapes whether the new firm survives.

Second, enterprise drives the risk-taking and innovation that a new business needs to enter a market and differentiate itself, for example by spotting a gap and adding value in a way rivals do not.

However, enterprise alone is not sufficient. A brilliant entrepreneur still fails without adequate capital (finance and equipment) to operate, skilled labour to deliver quality, and a suitable location (land). A new café with an inspired owner but no funds for ovens or staff cannot trade.

Therefore enterprise is the organising and decision-making factor that is critical at start-up, but its impact depends on the other factors being available in sufficient quality and quantity — they are complementary rather than ranked in isolation.

Adding value — raising the selling price above the cost of bought-in materials — has strong claims to be a priority for a new small business. Higher added value per sale generates more cash from each transaction, which directly helps with the cash-flow problems that are the most common cause of new-business failure. It also allows the firm to differentiate itself (through branding, quality or service) so that it competes on more than price, protecting its margin in a crowded market. In this sense, focusing on added value supports both survival and competitiveness.

However, treating it as the main priority is questionable. First, adding value usually costs money — better materials, marketing or staff training — and a cash-strapped new firm may not be able to afford the investment, or customers may simply refuse to pay the premium, so the spending worsens cash flow rather than improving it. Second, for a brand-new business other priorities may matter more in the short term: securing enough finance, managing cash flow day-to-day, and building a customer base. A firm with high added value per unit but too few customers will still fail. Third, the right priority is context-dependent: a luxury craft business lives or dies by added value, whereas a new low-cost convenience store may succeed mainly through location and volume.

Judgement. Adding value is one of the most important goals because it underpins both survival and competitiveness, but it should not automatically be the single main priority for every new firm. The most defensible position is that the owner's overriding priority should be survival through positive cash flow, with adding value pursued as the principal means of achieving it — and only where the extra price customers will pay clearly exceeds the extra cost of creating the value. For a differentiated or premium business, added value and survival are effectively the same goal; for a cost-driven business, it is secondary to volume and cost control.

Success means a business achieving its objectives — typically survival and profit for a new firm, and growth or market share as it matures. Enterprise — the entrepreneur's skill in organising the other factors and bearing risk — has a powerful claim to be the decisive factor.

The case that success depends mainly on enterprise. Enterprise makes every other factor productive: it decides what to produce, how to combine resources, and whether to take a given risk. Good entrepreneurial judgement — spotting a market gap, controlling cash, motivating staff, adapting to a dynamic environment — repeatedly explains why one firm thrives while a rival with similar resources fails. Because the business environment is constantly changing, the ability to make good decisions under uncertainty (a quality of enterprise) is arguably more important than any fixed stock of land, labour or capital.

The case against — the other factors are decisive too. Even excellent enterprise cannot succeed without the other factors of adequate quality: skilled, motivated labour to deliver consistent quality; sufficient capital (finance and modern equipment) to produce efficiently and at scale; and a suitable location (land) for access to customers or materials. Many well-led start-ups fail not through poor decisions but through lack of finance or a shortage of skilled workers. Moreover, much success is shaped by external factors outside all four — the state of the economy, competitor behaviour, or changes in the law — which even outstanding enterprise can only respond to, not control.

Weighing it up (criterion). The honest answer is that the factors are complementary, not substitutes, so success rarely depends on one alone. The relative importance of enterprise depends on the stage and type of business: at start-up, enterprise is usually the binding constraint, because nothing happens until the entrepreneur organises resources and takes the risk; for a capital-intensive firm (e.g. manufacturing), the quality and quantity of capital may matter as much as enterprise; for a service or knowledge business, the quality of labour can be decisive.

Judgement. On balance, the quality of enterprise is the most important single factor at the start of a business and in a fast-changing environment, because it determines how well all the other factors are chosen, combined and adapted. But it is not sufficient on its own: success depends on enterprise together with sufficient quality of the other factors and a favourable response to external conditions. The most defensible conclusion is that enterprise is the leading factor that unlocks the value of the others, rather than the sole cause of success — so success depends on enterprise to a large but not total extent, and most of all at start-up.