Needs, Wants, Scarcity and Opportunity cost

 Businesses thrive when they are able to meet customer needs and wants

o Needs are considered to be essential e.g. shelter or food

o Wants are desires which are non essential, even if consumers
consider them to be essential e.g Nike trainers

 Due to the problem of scarcity, choices have to be made by producers, consumers,

workers and governments about the best (most efficient) use of these resources. This
is known as the economic problem

o These resources are known as the factors of production and

are land, labour, capital and Enterprise

 Opportunity cost is the loss of the next best alternative when making
a decision

 There is an opportunity cost in the allocation of resources

o When a consumer chooses to purchase a new phone, they
may be unable to purchase new jeans. The jeans represent
the loss of the next best alternative (the opportunity cost)
o When a producer decides to allocate all of their resources
to producing electric vehicles, they may be unable to
produce petrol vehicles. The petrol vehicles represent
the loss of the next best alternative (the opportunity cost)
o When a government decides to provide free school meals to
all primary students in the country, they may be unable to fund
some rural libraries which may have to close. The libraries
represent the loss of the next best alternative (the opportunity
cost)

The Importance of Specialisation

 Specialisation occurs when people and workers focus on one
particular role or task and thereby gain significant skill in doing it

 Division of labour is the separation of a work process into a number

of tasks that are completed by a separate person or group of persons
o Specialisation results in higher output per worker which
increases productivity
o Specialisation is now more common due to
specialised technology, machinery and increasing global
 competition

 Specialisation occurs on several different levels

o On an individual level
o On a business level e.g. one firm may only specialise in
manufacturing drill bits for concrete work
o On a regional level e.g. Silicon Valley has specialised in the tech
industry
o On a global level as countries seek to trade e.g. Bangladesh
specialises in textiles & exports them to the world

The Purpose of Business Activity

 The purpose of business activity can be broadly defined as the
activities that businesses engage in to produce goods or
services that meet customer needs while adding value
Diagram Showing the Purpose of Business Activity

The purpose of business activity is to take inputs, add value to them, and create products
which meet customer needs

To produce goods or services

 The primary purpose of business activity is to produce goods or

services that satisfy a need or demand in the market
o Goods are physical products, such as bicycles and T-shirts
o Services are non-physical items such as hairdressing, tourism
and manicures

Meeting customer needs

 The ultimate goal is to create products that meet the needs and
preferences of customers and provide value to them
  By meeting customer needs, businesses can build customer loyalty,
increase brand awareness, and generate revenue

To add value

 The third purpose of business activity is to add value to products or

services
 Value-added features can differentiate products from competitors,
create a unique selling point, and increase customer satisfaction
o E.g. a product that is easier to use, has a better design, or is of
higher quality than competitors can create a competitive
advantage for a business

The Process of Adding Value

 Adding value is the process of taking raw materials and using them in such a
way that the end product created is worth more than the cost of the raw
materials used to create it - value has been added

 The added value is the difference between the price that is charged to the
customer and the cost of inputs required to create the product or service
o E.g. customers are prepared to pay more for potatoes when they are
packaged as oven chips than they would be willing to pay for a bag of
potatoes
o If value is not added to the materials and components that a business
buys then fixed costs cannot be paid and no profit will be made
Diagram to Show Methods of Adding Value
 Some of the methods of adding value allow for product differentiation which
allows the business to charge a higher selling price

 Product and marketing teams will constantly explore ways in which to increase
the added value
o The most common methods have been summarised in the diagram and
include branding, offering more convenience to customers, improving the
product quality or design, and building out the unique selling points

Real World Examples of how Businesses have Added Value

 Adding value is an important concept for businesses. The greater the added the
value the more successful the business is likely to be and the higher their profits

Method Example

Branding  Apple has built a brand that many customers believe

is superior to other brands
 They have achieved this through the use of quality
materials, innovative design and good marketing
 This branding allows the firm to charge a higher price for
its products thus increasing the added value

Convenience  Persil initially provided a bottle of dishwashing liquid for

dishwashing machine use
 This resulted in spillage as customers added the liquid to
their machines, so Persil then created tablets
 The tablets offered a much more convenient option and
Persil was able to charge a higher selling price for them

Quality  Jo Malone perfume products are well known for

their beautiful packaging which creates an exciting
opening experience for the customer
 This allows the firm to charge a higher price for its products
thus increasing the added value

Unique Selling  MoonPig birthday cards can be completely

Points (USPs) customised (size, colour, design etc.) and the level of
customisation has helped them to gain a competitive
 advantage
 This customisation allows the firm to charge a higher price
for its cards thus increasing the added value

Design  Samsung Galaxy Watch 5 has robust health tracking

tools built into it, along with an amazing screen, which has
helped it to gain a competitive advantage
 These features allow the firm to charge a higher price for
its products thus increasing the added value

Exam Tip
Businesses may use several methods of adding value. It's important to understand that
adding value adds raises costs, but it is worth it if the increase in selling price outweighs
the costs associated with the method e.g. if improving the packaging costs £1 per unit
and the firm is able to raise its selling price by £1,40 per unit, then the firm can improve
its profitability by changing the packaging.
 Primary, Secondary and Tertiary Sectors
The Three Main Business Sectors

 Businesses can be classified according to the type of business

sector in which they operate
 Classification into these sectors is a simplified way of categorising
industries
o It helps to provide a means of making comparisons between
firms in the same sector
o It does not capture the full complexity and interconnectedness of
the business world
o Many businesses operate across multiple sectors or may not fit
neatly into a single category

Diagram to Show Examples of Roles in the Primary, Secondary and Tertiary

Sector

Farming in the primary sector, manufacturing in the secondary sector and hairdressing in the
service sector

 The primary sector is concerned with the extraction of raw materials

from land, sea or air such as farming, mining or fishing
The secondary sector is concerned with the processing of raw
materials such as oil refinement, and the manufacture of goods such
as vehicles
 The tertiary sector is concerned with the provision of a wide
range services for consumers and other businesses such as leisure,
banking or hospitality

The chain of production

 The three sectors are linked in the chain of production which is the
series of steps taken to turn raw materials into a finished
product that can be marketed and sold

Diagram to show the Chain of Production in two Different Industries

Firms can often add value to their products throughout the chain of production
 Changes in Sector Importance
 As economies grow and develop, many of the firms within that
economy will change their sector of operation (sectoral change)
 Generally speaking, their are successively higher levels of profits to be
made in each subsequent sector
o The reason for this is that each sector adds more value than
the previous sector
o Higher added value equates to higher profits

Less Developed Economies

 A less developed economy will primarily be focused on the primary

sector – with most people employed in agriculture and the production
of food
o There has been a global trend away from employment in primary
sector industries over the last two decades
o Only in the least developed nations is the proportion of the
workforce employed in the primary sector consistently high
o This is partly as a result of lower participation rates in
education and a lack of infrastructure to support
manufacturing or service provision
Diagram to Show Employment in Agriculture in a Range of Economies since
1991

(Source: WorldBank)
The graph shows a comparison of levels of employment in the primary sector between
countries at varying stages of development

Diagram Analysis

 From these countries, Malawi still retains the highest proportion of

employment in the primary sector
 China has seen a significant decrease in primary sector activity
 Germany has had very low primary sector and will have likely been in
manufacturing and services well before 1991

Emerging Economies

 In emerging economies improved technology enables less labour to

be needed in the primary sector and more workers are incoved in
manufacturing
o The proportion of workers employed in manufacturing has risen
over the last few decades
 o Many businesses have relocated production facilities to take
advantage of the lower average wage rates in these
economies

 Emerging economies have experienced growth in the tertiary and

quaternary sectors in recent years, with many businesses now focused
on the provision of consumer services

Diagram Showing Secondary Sector Employment Since 1991

(Source: WorldBank)

The graph shows a comparison of levels of employment in industry between countries at

varying stages of development

Diagram Analysis

 From these countries, China has the highest proportion of employment

in the secondary sector
 Ghana and India have seen significant increases in secondary sector
activity
  Brazil and Turkey's secondary sectors have remained relatively stable
over the period 1991 to 2019

Developed Economies

 The most developed economies have a very high proportion of the

workforce employed in the provision of services, increasing focused on
the quaternary sector
o Developed economies use their wealth to fund
advanced education and higher-level skills training which
further supports the growth of these industries
o Some exceptions such as Australia (viticulture, or wine
production) and Norway (forestry and oil extraction) continue to
have significant primary sectors

Diagram to show Employment in Services in a Range of Economies since

1991

(Source: WorldBank)

The graph shows a comparison of levels of employment in services between countries at

varying stages of development
Diagram Analysis

 The most developed countries have the highest proportion of their

workforces employed in the service industry
 Thailand's service sector employees twice the number of employees in
2019 as it employed in 1991
 Around half of Ecuador's workforce is now employed in service delivery

Exam Tip
As economies develop, we see a movement away from the primary sector towards the secondary
sector. Post-industrial economies are focused on the tertiary and quaternary sectors.

It is easy to assume that tertiary sector employment is higher-paid than jobs in the secondary
sector. This is not necessarily the case. Value-added is certainly higher in most tertiary industries
than in secondary sector industries but in many tertiary sectors (such as hospitality and
healthcare) pay is very low and a cause for concern.

Portugal and Greece, whose economies depend upon tourism, as well as the UK suffer from low
pay in the tertiary sector with many workers relying on government support to cover basic living
costs.

In contrast, high-paid secondary sector engineering and construction sectors in economies such
as Germany and Norway make employees in these economies some of the highest-paid in the
world.

Differences between the Public and Private Sector

Public and Private Sector Firms

 Public sector firms are owned and controlled by the Government

 Private sector firms are owned and controlled by other firms and
private individuals (entrepreneurs and shareholders)
 Privatisation occurs when government-owned firms are sold to the
private sector
 Many government owned firms have been partially privatised
o The government retains a share in them so they can influence
decision-making and receive a share of the profits e.g. the shares
of Singapore Airlines are 55% government owned & 45%
privately owned
 The Characteristics of Public and Private Sector Firms

Public Sector Firms Private Sector Firms

 Their main goal is usually to  The objective of most private

provide a service sector organisations is profit
 Public sector firms can operate maximisation
on a local, regional or national  This often causes the private
government level sector to be more efficient than
o E.g. Transport for London the public sector with higher
(local); Agricultural levels of productivity
State Service in India  Types of business ownership vary
(regional); Caribbean from sole trader to partnerships
Airlines (national) to company shareholders

Reasons Why Public Firms Exist

 Public firms are government-owned
o They are often referred to as state-owned enterprises (SOEs)
or government corporations
o Public firms exist to ensure public service provision, protect
strategic industries and national security, create jobs, and
provide economic growth
Public Service Provision

 Government-owned firms are often established to provide essential

public services such as transportation, healthcare, education, and
utilities
 These entities are tasked with ensuring that critical services are
accessible to the public, and their operations may prioritise social
welfare over profit maximisation

Strategic Industries and National Security

 Governments may own firms operating in strategic industries, such

as defense, energy, telecommunications, and natural resources
 This ownership allows the government to exert control over sectors
vital to national security, economic stability, and long-term
development
 Market Regulation and Competition Control:

Employment and Economic Development

 Government-owned firms can play a role in promoting employment

and economic development
 By investing in and owning enterprises, governments can stimulate
economic activity, create jobs, and support industries that contribute
to the overall growth and stability of the economy
 Entrepreneurs Create & set-up a Business
 Businesses are usually started by an entrepreneur
 An entrepreneur is a person who is willing and able to create a new
business idea or invention and takes risks in pursuing success

o Successful entrepreneurs can identify and pursue

opportunities, create value for customers and build thriving
businesses

What do Entrepreneurs do?

They Organise They make Business They take Risks

Resources Decisions

 An entrepreneur  Entrepreneurs
must be able to must be able to
gather make decisions  Entrepreneurship
and coordinate the that will involves taking
resources necessary determine risks - financial,
to start and operate the success or personal, or
a business failure of their professional
 E.g. When Michael business  E.g. An
Dell started his  E.g. A restaurant entrepreneur may
 computer company owner may need invest their life
from his garage, he to decide what savings into a new
had to organise type of food to venture or quit a
resources such as serve, where to secure job to
space, computers, locate the start their own
software tools, and restaurant, business
employees, and and what prices o They may
manage the finances to charge. These also take
decisions require risks
a combination of by introduc
market research, ing new
creativity, and products or
business skill entering
 Making the wrong new
decisions can markets
lead to wasted  These risks can
resources, lost pay off with great
opportunities, rewards, but they
and ultimately can also lead to
business failure failure and
financial loss

Characteristics & Skills Required by Entrepreneurs

 Entrepreneurs require a unique set of characteristics and skills
Diagram Listing the Skills and Characteristics of Entrepreneurs

The skills and characteristics required by entrepreneurs

 Successful entrepreneurs tend to be very persuasive in their

communication and decisive in their decision-making

Examples and Explanations of the Characteristics of Successful Entrepreneurs

Entrepreneu Explanation
rial
Characterist
ic

Risk taker  Entrepreneurs take risks - financial, personal, or

professional
 An entrepreneur may invest their life savings into a new
venture or quit a secure job to start their own business
o They may also take risks by introducing new
products or entering new markets
 o These risks can payoff with great rewards, but they
can also lead to failure and financial loss

Decision maker  Entrepreneurs must be able to make decisions that will

determine the success or failure of their business
o E.g. A restaurant owner may need to decide what
type of food to serve, where to locate the restaurant,
and what prices to charge
o These decisions require a combination of market
research, creativity, and business skills
o Making the wrong decisions can lead to wasted
resources, lost opportunities, and ultimately
business failure

Organised  An entrepreneur must be able to gather and coordinate

the resources necessary to start and operate a business
o E.g. When Michael Dell started his computer
company from his garage, he had to organise
resources such as space, computers, software tools,
employees, and finances

Creative  Developing new solutions to solve existing or emerging

problems is a key entrepreneurial role that helps a
business stand out from rivals and achieve success
o During the 2020 COVID-19 pandemic, many
businesses used their creativity to switch production
techniques to cater for what the market wanted
o E.g Harrogate Gin switched from producing gin to
hand sanitiser

Great  Entrepreneurs need to be persuasive communicators

communicator  Persuading lenders, investors and customers to support
their business is central to achieving financial success

Independent  Starting a business is often the sole responsibility of a

single entrepreneur, who will need to be able to solve
problems with limited support
o E.g. The owner of Gymshark, Ben Francis, started off
the company by buying a sewing machine and
making gym clothes in his parents garage with a few
school friends
 This led to the growth of a multi million pound
company employing hundreds of people
Exam Tip
Think about why successful entrepreneurs are important in the country that you are based in.
You should be able to explain why governments want to encourage more entrepreneurs to set up
in businesses there. Entrepreneurship drives business growth and innovation, and knowing some
examples of real life entrepreneurs who have inspired you may help you to remember their skills
and qualities (Mark Zuckerberg or Elon Musk?)

 The main aim of producing a business plan is to reduce the risk

associated with starting a new business

 A business plan is a document produced by the owner at start-up,

which provides forecasts of items such as sales, costs and cash flow

Diagram to show the Elements of a Business Plan

The main elements included in a business plan, although some differ slightly depending on
the nature of the business

 Producing a business plan forces the owner to think about every aspect
of the business before they start which should reduce the risk of
failure

Explaining the Main Elements of a Business Plan

Section Explanation

The  A clear explanation of the goods or services provided by

business the business which will help to attract investors
idea o This may also include the history of the business idea

Business  What the business wants to achieve in the medium and

aims & long term
objectives o These aims may be both financial and non-financial
depending on the business

Target  This section will discuss who the business is aimed at e.g.
market age, gender, income and will form part of the firms marketing
strategy

Forecast  This will project how much income the business plans to
revenue make through sales
o Sales Revenue = Price x Quantity Sold
o This can help plan for break even levels of output

Forecast  Firms need to forecast their fixed, variable and total

costs costs in order to manage their spending
o Some new businesses may have high start up costs
e.g. new stock

Profit  Investors will be interested to see the firms profit

forecasts forecasts to see whether the business will have the
ability to pay back loaned funds e.g. bank

Marketing  Provides an explanation of the firms marketing strategy

 mix for the product/service which will outline how the firm
plans to attract customers
o This includes Product, Place, Price and Promotion

Cash-flow  This explains how the firm plans to manage its inflows
forecast and outflows of cash on a monthly basis in order to avoid
liquidity problems

Sources of  This section will show the sources of finance used to

finance fund the new business e.g. loans, owners funds or venture
capital

Business  The location of the business will be proposed including

location a map along with an explanation of potential advantages
such as transport links or proximity to customers

How Business Plans help Entrepreneurs

 The main aim of producing a business plan is to reduce the
risk associated with starting a new business and help the owners
to raise finance

 Having carried out research to support the plan, the business will
be well-informed about the potential problems and chance of
success and can select the most appropriate source of
finance based on this information

 A well-written business plan can help a business to obtain finance

o Lenders (e.g. banks) and other investors will be able to explore
the plan and make an informed decision about whether the
business is credible and worth the financial risk
o Investors (e.g. venture capitalists) will use the business plan to
explore whether there is an opportunity to increase the value
of their investment and make a worthwhile profit
o The business, having carried out research to support the plan,
will be well-informed about the potential problems and
chance of success and can select the most appropriate source
of finance based on this information

 A clear action plan provides direction for the business and helps
lenders and investors to have confidence in the future success of the
business
  Most high street banks can provide a detailed template for business
owners to complete when applying for finance

Government Support of Business Start-ups

 Governments often provide support to entrepreneurs so as to
encourage them to set up new businesses or take steps to grow their
business

 Reasons for providing government support include, to

o Increase the country's level of output to achieve economic
growth
o Reduce the level of unemployment as new or growing
businesses create jobs
o Improve choice for consumers by providing competition for
existing businesses
o Encourage entrepreneurs to set up social enterprises which
may support disadvantaged groups or improve communities

How Governments Support Business Start-ups

Suppor
Explanation
t

Training  Advice regarding finance, operations and marketing can

and often be accessed through local authorities
support
sessions  Support sessions offered by business mentors allow
entrepreneurs to ask specific questions related to their
business

Enterpris  Enterprise zones are geographic areas which provide tax

e zones breaks and Government support to help businesses grow

o Enterprise Zones can provide access to low-cost

premises and incentives such as reduced business
rates
 o They are often linked with universities who share
expertise and facilities, especially in less economically-
developed regions

Finance  Some governments provide low-interest start-up

loans and grants for new or growing businesses that create
jobs or invest in training workers

Methods of Measuring Business Size

 A simple way to classify businesses is to consider their size

Diagram with the Criteria for Determining Business size

Business size can be measured in several ways, including the size of the
workforce, the value of capital employed and the value of sales or output

Size of the workforce

 A measure of how many workers are in the business

 Small and medium-sized businesses (SMEs) employ less than 250 employees
 Large businesses have 250 or more employees

Value of capital employed by the business

 A measure of all the capital (money, equipment, buildings) that is currently

invested in a business
Value of business sales

 The total sales revenue achieved during a trading period

 It is calculated using the formula Price x Quantity

Value of business output

 The financial worth of goods produced, even though they may not all be sold
 It is calculated using the formula Total Costs x Quantity

A Comparison of the size of two Businesses

Compan Size of the

Capital Employed Value of Output
y Workforce

Futuristic  4 Designers  High tech  500 Microchips at

Microchip  5 Maintenance production $100 = $500,000
s staff line -
 9 Total $100,000
employees

Tasty  500, 000 oranges at

Satsumas $1= $500,000
 400 Farm  Basic fruit-
workers picking tools

 18 Managers
 418 Total  $20,000
employees

 Futuristic Microchips is the largest organisation using the measures of number

of employees and capital employed
 Tasty Satsumas is the same size as Futuristic Microchips in terms of the
value of output

Stakeholder interest in business size

 Banks wish to know how likely any loans will be repaid

o Larger businesses may be less of a lending risk

 Employees wish to know how secure their jobs are

 o A growing business is likely to offer job security

 Suppliers may prefer to sell products to larger businesses

o Large business are likely to purchase in greater quantities

 Investors compare business size to distinguish between investment

opportunities

 Competitors may set growth objectives or benchmark their progress against

similar-sized rival businesses

 Governments apply different tax rates for small and large businesses
o Larger firms may need careful monitoring to ensure they do not abuse
their market power

Exam Tip
When comparing business size, it is best to compare like with like, such as weighing up an
orange producer with other fruit producers
Limitations of the Methods of Measuring Business
size
 Each method of measuring business size has both benefits and
limitations

The Limitations of each Method

Method Limitations

Size of  The method of production can influence this metric

the significantly
workforc o Capital-intensive businesses produce high levels of
e output with few employees
o Labour intensive businesses have many employees
that may generate a small volume of output

 The nature of workers' contracts can mean this measure is

unreliable
o Some businesses hire many part-time workers whilst
some businesses prefer full-time workers
o Short-term, zero hours or agency worker contracts
 may not be included in workforce measurement

Value of  Not accurate when comparing labour-

capital intensive and capital intensive production methods
employed o European manufacturing businesses tend to have high
levels of capital such as robots or advanced
machinery compared to those located in countries
such as Vietnam and Indonesia
o Property values differ significantly across the world,
and even between regions
 E.g. The value of property in Singapore is
significantly greater than property in mainland
China

Value of  Businesses sell very different products

sales o Comparing a market stall selling sweets and a retailer
of luxury handbags would be unrealistic as their prices
and volumes sold are very different

 Selling prices vary between markets

o Businesses may sell products to customers in low-
income markets at a lower price than in a higher-
income market

 High value output can be produced by businesses with very

few employees or with limited capital employed
Value of o E.g. A bespoke jewellery maker may produce only a
output few expensive items each year

 The value of output does not measure how successful a

business has been at selling goods produced. If they are left
unsold they are a poor measure of business size

Exam Tip
Profit is not a measure of business size. If a multinational like Netflix makes a loss, it does not
mean that a sole-trader hairdresser which earns a profit is a larger organisation.
 Reasons for Business Growth
 Many firms start small & will grow into large companies or even multi-
national corporations (Amazon started in a garage)

Reasons why Businesses grow

 Owners/Shareholders/  Owners/  The desire

Managers desire to run shareholders for stronger
a large business & desire higher le market
continually seek to grow vels of market power (mon
it share and profit opoly) over
ability its customers
and suppliers

 Desire to reduce costs  Growth provides  Larger firms

by benefitting from opportunities often
lower unit costs as for product have easier
output increases e.g diversification access to
suppliers offer bulk finance
order discounts

Methods of Business Growth

 Business growth can be achieved by growing organically,
or inorganically (mergers and takeovers)

Organic (Internal) Growth

 Organic growth is growth that is driven by internal expansion using

reinvested profits or loans

 Organic growth (internal) is usually generated by

o Gaining a greater market share
o Product diversification
o Opening a new store
o International expansion (new markets)
o Investing in new technology/production machinery
 Examples of Organic Growth

Busine Example
ss

Apple  International Expansion (new markets)

Apple expanded into new markets by opening its stores in new
countries, such as China and India, and by partnering with
telecom providers to sell its products. This helped them
to organically increase their market share, sales revenue
and profitability

Google  Product Innovation

Google introduced new products such as Google Drive and Google Maps to
complement its search engine and advertising businesses. This helped them to
organically increase their market penetration, sales revenue and profitability

Disney  Product Diversification

Disney has diversified into several areas such as theme parks,
cruise lines, television networks, and movie studios. The brand
strength has helped them to organically increase market
penetration in each of these markets resulting in higher sales
revenue and profitability

 Product diversification opens up new revenue streams for a

business
o Firms may spend money on research and development, or
innovation to existing products to help create a new revenue
stream

 Firms will often grow organically to the point where they are in a
financial position to integrate (merge or buy) with others
o Integration speeds up growth but also creates new challenges

An Explanation of the Advantages & Disadvantages of Internal Growth

Advantages Disadvantages
  The pace of growth is  The pace of growth can be slow
manageable and frustrating

 Less risky as growth is financed  Not necessarily able to benefit

by profits and there is existing from lower unit costs (e.g. bulk
business expertise in the industry purchasing discounts from
suppliers) as larger firms would
 The management knows & be able to
understands every part of the
business  Access to finance may be
limited

Inorganic (External) Growth

 Firms will often grow organically to the point where they are in a
financial position to integrate (merge or takeover) with others
o Integration in the form of mergers or takeovers results in rapid
business growth and is referred to as external or inorganic
growth

 A merger occurs when two or more companies combine to form a

new company
o The original companies cease to exist and their assets and
liabilities are transferred to the newly created entity

 A takeover occurs when one company purchases another

company, often against its will
o The acquiring company buys a controlling stake in the
target company's shares (>50%) and gains control of its
operations

 Inorganic growth usually takes place when firms merge in one of two
ways
o
 Vertical integration (forward or backwards)
 Horizontal integration
Diagram showing forward and backward vertical integration

Firms can integrate at various stages in the supply chain

 Forward vertical integration involves a merger or takeover with a

firm further forward in the supply chain
o E.g. A dairy farmer merges with an ice cream manufacturer

 Backward vertical integration involves a merger/takeover with a

firm further backwards in the supply chain
o E.g. An ice cream retailer takes over an ice cream manufacturer

An Explanation of the Advantages & Disadvantages of each type of Growth

Type of
Advantages Disadvantages
Growth

Vertical
Integration
(Inorganic  Reduces the cost of  Diseconomies of
growth) production as middle man scale occur as costs
profits are eliminated increase e.g. unnecessary
 Lower costs make the firm duplication of management
more competitive roles
 Greater control over the  There can be a culture
supply chain reduces clash between the two firms
risk as access to raw that have merged
materials is more certain  Possibly little expertise in
 Quality of raw materials running the new firm results
can be controlled in inefficiencies
  Forward integration  The price paid for the new
adds additional profit as firm may take a long time to
the profits from the next recoup
stage of production are
assimilated
 Forward integration can
increase brand visibility

Horizont
al
Integrat  Rapid increase of market  Diseconomies of
ion share scale may occur as costs
 Reductions in the cost per increase e.g. unnecessary
(Inorgani
unit due to economies of duplication of management
c growth) scale roles
 Reduces competition  There can be a culture
 Existing knowledge of the clash between the two firms
industry means the merger that have merged
is more likely to be
successful
 Firm may gain
new knowledge or
expertise

 Conglomerate integration involves a merger with or takeover of a

firm in an entirely different industry
o e.g An ice cream manufacturer buys a clothing company
o Conglomerate integration spreads business risks and
allows entry into new growth markets

Problems Caused by Business Growth

 In some cases, growing the size of a business can fail to improve
its profitability and can lead to cash flow problems and poor coordination
Diagram with the Problems of Business Growth

Businesses are faced with many challenges when they grow, especially if they
grow inorganically

The Problems Caused by Business Growth and Possible Solutions

Problem Explanation Solution

Poor  Longer chains of  Use the latest

communication command and communication
wider spans of technologies, such
control for managers may as instant video
lead to slower decision- calls, to improve
making times and communication
inefficiency between managers
and workers

 Decentralisation
may help to
delegate decision-
making

Larger firms are  As a business grows in  Operate as a series

harder to control size, it can of smaller
experience diseconomies units which allows
 of scale such as poor co- local or functional
ordination of resources area managers to
have more control

 Increase delegatio
n in order
to empower worker
s and get jobs done
more quickly

High costs &  Expansion can be very  Grow slowly using

cashflow problems expensive as it may profits rather than
involve developing a new loans to fund
product range or buying a gradual and less
new factory risky expansion
o High costs in the
short/medium  Manage cash
term means the flow carefully,
business may need making use of
additional finance to retained profits and
avoid cashflow short-term
problems borrowing to counter
cash flow shortfalls

Difficulties of  A culture clash may  Ensure good

mergers/acquisition occur if a merger or communication so
s acquisition takes place employees are less
between two different likely to be resistant
firms due to different to change
management styles
 Take time to
carefully negotiate
and plan
mergers/acquisitions
to reduce 'teething
problems'
 Why Some Businesses Remain Small
 Many firms start small and grow into large companies or even multi-national
corporations (Amazon started in a garage)

 Some businesses remain small - this may be intentional

o In 2021 98.9% of businesses in the European Union (EU) were classified

as small firms with less than 49 employees

o Small businesses dominate some industries such as hair and beauty,

home improvement and childcare services

Reasons why Small Firms Exist

They offer a personalised They are unable to access They provide a product that is in
service and focus on building external finance for expansion a niche market - small market
relationships with customers size but potential for high profits
(excellent customer service)

By remaining small they are Rapid growth can Small business owner's goal
able to respond quickly to cause diseconomies of is (satisficing) rather than profit
changing customer scale which can be avoided by maximisation
needs/preferences remaining small

 Changes in technology often benefit large businesses but some can work to the
advantage of small firms
 The Internet offers low cost access to market for many firms
o Social media allows even the smallest business to achieve an online
presence and target specific groups of customers
o Online storefronts such as Amazon Marketplace, Etsy and Ebay provide
low-cost distribution options

An Evaluation of Remaining Small

Advantages Disadvantages

 Small firms often provide highly  Small firms are unlikely to

customised or unique goods/s benefit from economies of
 ervices which are sold profitably scale as the level of output is
in small quantities at high prices lower than that of larger firms
e.g. pet grooming in the
customer's home  Access to finance such as bank
loans or trade credit is likely to
 Personal relationships can be be limited
developed with loyal customers
which helps to generate word-  Recruiting/retaining high
of-mouth advertising quality staff can be challenging
as wage & non-wage benefits are
 Smaller firms can respond less competitive than those
quickly to changing market offered by bigger firms
conditions such as changes in
fashions/trends  Small business owners
may struggle to
take holidays/sick leave as the
business relies on their presence
to function

Exam Tip
Do not focus too much on making a judgement about whether businesses are better big
or small. Businesses of all sizes can - and do - succeed

It is more important consider whether the size of the business allows it to achieve its
overall aim and whether other factors such as its culture and organisational structure
contribute to its success