Economic sectors

1. The primary, secondary, tertiary and quaternary sectors and businesses within those sectors

The primary, secondary, tertiary, and quaternary sectors are categories used to classify different types
of economic activities and the businesses that operate within them. Here is an overview of each sector
and the businesses that fall under them:
1. Primary sector: The primary sector involves economic activities that involve the extraction of
natural resources or raw materials. This includes businesses engaged in agriculture, fishing,
forestry, mining, and oil and gas exploration.

2. Secondary sector: The secondary sector involves economic activities that involve the processing
and manufacturing of raw materials into finished goods. This includes businesses engaged in
construction, manufacturing, and energy production.

3. Tertiary sector: The tertiary sector involves economic activities that involve the provision of
services to individuals and businesses. This includes businesses engaged in retail, transportation,
healthcare, education, hospitality, finance, and other service-oriented industries.

4. Quaternary sector: The quaternary sector involves economic activities that involve the creation
and dissemination of knowledge and information. This includes businesses engaged in research
and development, information technology, media, and other knowledge-based industries.

2. The public and private sectors and businesses within those sectors

The public and private sectors are two different types of ownership and control of economic activities.
Here is an overview of each sector and the types of businesses that fall under them:

1. Public sector: The public sector refers to organizations that are owned and controlled by the
government. This includes government agencies, state-owned enterprises, and other publicly
funded institutions. Some examples of businesses in the public sector include public schools,
hospitals, police departments, fire departments, and government-run utilities.

2. Private sector: The private sector refers to organizations that are owned and controlled by
private individuals or entities. This includes businesses of all sizes, from small sole
proprietorships to large multinational corporations. Some examples of businesses in the private
sector include restaurants, retail stores, banks, law firms, and technology companies.

It's worth noting that there are also some businesses that operate in both the public and private sectors.
For example, a company that provides security services to government agencies would be considered a
private business, but its clients and revenue would come from the public sector.

3. The reasons for and consequences of the changing relative importance of economic sectors

The relative importance of economic sectors can change over time due to a variety of factors, including
technological advances, changes in consumer preferences, shifts in government policy, and changes in
the global economy. Here are some reasons for and consequences of the changing relative importance
of economic sectors:
 1. Technological advances: Technological advances can make certain types of jobs and industries
obsolete, while creating new opportunities in other sectors. For example, the rise of automation
has led to a decline in manufacturing jobs in many developed countries, while creating new jobs
in the technology sector.

2. Changes in consumer preferences: Changes in consumer preferences can drive demand for
certain products and services, leading to growth or decline in different economic sectors. For
example, the rise of e-commerce has led to a decline in traditional brick-and-mortar retail, while
creating new opportunities in online retail and logistics.

3. Shifts in government policy: Government policy can also affect the relative importance of
different economic sectors. For example, policies that encourage renewable energy can lead to
growth in the clean energy sector, while policies that restrict immigration can lead to labor
shortages in certain sectors.

4. Changes in the global economy: The global economy can also affect the relative importance of
economic sectors, as competition from other countries can lead to shifts in production and
trade. For example, the rise of China as a manufacturing powerhouse has led to a decline in
manufacturing jobs in many developed countries.

The consequences of these changes in the relative importance of economic sectors can be significant.
For example, a decline in a particular sector can lead to job losses, economic stagnation, and social
dislocation, while growth in a new sector can create new jobs, drive economic growth, and improve
living standards. The changing relative importance of economic sectors can also affect the distribution of
income and wealth, as some sectors may be more profitable or pay higher wages than others.
Ultimately, it is important for policymakers, businesses, and individuals to be aware of these trends and
adapt to the changing economic landscape to ensure long-term economic success and prosperity.
Different business structures

Sole traders

• Sole traders are the most popular form of business in the UK and are run by a single individual. A quick
examination of a business directory such as Yellow Pages will show that there are thousands in every
town or city.
• Sole traders are easy to set up; it is just a matter of informing the Inland Revenue that an individual
is self-employed and registering for class 2 National Insurance contributions within three months of
starting in business.
• Costs are low due to the simplicity of setting up and no legal formalities, so there is little administrative
cost.
• Also no formal audited accounts are required, though it makes good business sense to keep a full set
of business records.
• The sole trader benefits from fast decision-making and may (within employment law) hire and fire as
they please.
However, there are a number of problems that arise with the sole trader structure:
• Firstly there is often limited capital. Sole traders often rely on their own savings and perhaps secured
business loans.
• It is likely that the sole trader will have a limited range of skills. A sole trader may be an expert
plumber, but is he or she an expert at marketing, managing staff, and controlling cash flow? With the
need to be effective at all these tasks comes immense pressure.
• All the decisions and the future success of a business rest with one person.
• The sole trader has unlimited liability. This means that the business owner is liable for all the debts of
the business, up to and including the value of all assets held.

One of the major problems of running a small business is the likelihood of falling into debt. With one in three
businesses failing within two years of starting, it is probable that a good proportion of those unsuccessful
entrepreneurs will not only lose the money that they initially invested, but additional money too.

Imagine a situation where a sole trader opens a shop selling fashion accessories. The shop premises are let
on a two year lease; she (the entrepreneur) arranges a phone contract for the shop, leases equipment like
a checkout till and shop fittings – all for the same two years. The total amount payable per month comes
to £1300. Unfortunately after 9 months she has run out of cash, sales were dismal and she can’t afford to
continue.

She tries to walk away, handing the keys back, cancelling the phone contract and the lease deals. However, it
is not that easy, she is in fact liable for ongoing costs – paying for a further 15 months charges, a total of
£19 500 (15 months times £1300). Her creditors (those she owes money to), will chase her through the
courts for payment, and if she has assets, the creditors can ask the courts to seize and sell these assets to pay
the money owed. Assets can be anything of value – a car, computer, TV or even a house. The problem is that
sole traders (and most partnerships) have unlimited liability – the owners of the business are liable for all the
debts of their business, and have to pay those debts if they are able.
Partnerships

• Partnerships involve the joint ownership of a business. Normally there can be between two and 20
partners, but in certain businesses such as accountancy firms, there can be many more partners than
this.
• Partnerships are often found in professions such as lawyers, accountants and doctors, but can be
found in any type of business activity.
• The rules of partnership are laid down in a Partnership Agreement, or the Deed of Partnership. The
Deed of Partnership lays out such rules of operations as the amounts of capital invested, the share of
profits each partner is to receive, the roles and responsibilities of each partner, the voting shares of the
partners, what is to happen on the death of a partner and the rules for dissolution of the partnership.
• Should a dispute arise without a partnership agreement giving methods of settling the dispute, then
the dispute would be settled according to the 1890 Partnership Act. This is best avoided, particularly
where unlimited liability is involved, as the act states that each partner is equally responsible for any
debts – each partner is ‘jointly and severally’ liable.
• There are a number of advantages of the partnership structure over that of a sole trader. These include
a wider range of skills, greater availability of capital, shared decision-making, and pressure is likely to
be reduced with different partners having separate key roles.

However, becoming a partner does not overcome all the disadvantages of being a sole trader:

• Capital can still be limited, with the same problems of raising external capital that a sole trader has.
• The partners still have unlimited liability of partners (sleeping partners who invest, but take no part in
the day-to-day running of the business can have limited liability).
• Also partnerships are dissolved on the death of a partner and this can cause complications in re-
establishing the partnership.
• Although there are many advantages when partners become involved in a business for the first time
(such as increased capital, greater input into decision-making, a wider spread of skills), new partners
can, and do, cause strains within a business.

Limited companies

There are two types of business structure that have limited liability:

• private limited companies (Ltd);

• public limited companies (PLC).

These businesses exist separately from their owners, who are known as shareholders. Employees are
employed by the Ltd or PLC, and assets (buildings, machinery) are owned by the Ltd or PLC. This separate
legal existence is known as incorporation – the business exists in the eyes of the law. Any legal action is taken
against the business and not the shareholders. Shareholders are only liable to lose the amount of money
they have invested in the business – hence, their liability is limited.
Although they have the same type of liability there is one major difference. Public limited companies trade
their shares on the stock market. In the UK there are two main stock markets. These are:

• The Alternative Investment Market (AIM) – for smaller companies;

• The London Stock Exchange (LSE) – for larger businesses.

Shares on these stock markets are freely bought and sold: so in effect the ownership of PLCs are changing all
the time. This change of ownership normally has very little impact on the running of the business. One small
shareholder sells their shareholding, another small shareholder buys, and this happens thousands of times a
day.

Advantages of private limited companies include:

• limited liability;
• shares can only be sold if all the shareholders agree – control is not lost to outsiders;
• capital can be raised through increasing shareholders;
• other businesses and lenders are more likely to trade and invest;
• the business continues if one of the owners dies;
• possible tax advantages for the owners.

However, disadvantages include:

• legal procedure in setting up, increases costs;

• profits have to be shared with shareholders;
• shares cannot be sold to the public which may restrict the investment of additional capital;
• financial information is in the public domain.

Advantages of public limited companies include:

• limited liability;
• the business continues if one of the owners dies;
• capital can be raised through selling shares to the public;
• it is easier to raise finance from banks and other lenders who are more willing to lend to PLCs;
• they are likely to have economies of scale;
• increased market presence and dominance.

However, disadvantages include:

• increased costs in setting up;

• anyone can buy shares so there is an increased threat of losing control;
• increased legal requirements;
• the company accounts are in the public domain – more information has to be published than private
limited companies;
• divorce of ownership and control;
• the increased size may result in inefficiencies, increased costs and distance from their customers.
Not-for-profit organisations

There are a growing number of business organisations that are not in business for the money – they are
not out to maximise profits. Instead their focus is on social or ethical objectives. Within this group of
organisations we find charities, co-operatives and social enterprises, between them providing a range of
goods and services, and more often than not competing with ‘for-profit businesses’. These not-for-profit
organisations cannot just sell on the basis of who they are or what they stand for – if they just did this it is
unlikely they would last for long. They have to provide a quality and value-for-money service, just like any
other business.

Charities

Charities are established with the aim of collecting money from individuals and spending it on a cause, which
is usually specified in its title. Although they are not established to make profits, they can earn surpluses.
Many well-known charities such as Oxfam, Friends of the Earth and Save the Children have been around for
a long time and employ many people. Oxfam was started in 1942; the RSPCA began over 100 years earlier, in
1824. Charities can often have a narrow focus (single issue) in what they are trying to achieve. For example,
the Big Issue’s mission statement is:

Our mission as a UK charity for people who are homeless, is to connect vendors with the vital support and
personal solutions that enable them to rebuild their lives; to find their own paths as they journey away from
homelessness.

Other charities have a broader perspective (multi-issue). Greenpeace state that their mission is to:

Defend the natural world and promote peace by investigating, exposing and confronting environmental
abuse, [and] championing environmentally responsible solutions.

Charities still raise the majority of their finances through voluntary donations, but more and more charities
now operate retail outlets as well. Oxfam have been doing this for a number of years and their shops contain
new items often produced as a result of their development projects, as well as donated items such as books
and clothes. There are hundreds of local charities who operate handfuls of shops within specific areas, all
relying on donated goods. These shops have thrived as vacant premises have appeared on high streets up
and down the country. Rents are cheap, and costs are low – often volunteer staff work in the shops.

Co-operatives

Business co-operatives were initially set up in the 19th century as part of a social movement by working
people. They were established around workplaces or in districts of industrial towns, and were designed to
prevent profiteering and exploitation by company shops and tallymen (door-to-door lenders).

The historic background of British Co-operatives can be found on the Guardian newspaper website. To find
out much more just enter the term ‘co-operative history’, in the Guardian website search box.
A co-operative is an organisation owned by its members. Employees of co-operatives automatically become
members after a short probationary period, and shoppers at co-operative shops such as ‘the Co-op’, can
apply to become members: acceptance is automatic. Members benefit through the payment of a dividend
(their share of the co-operatives profits) in the form of money-off vouchers. Just like any business,
co-operatives have managers and there is a business hierarchy, but it is much flatter than that found in a
typical business – there are fewer layers to the hierarchy. Pay differentials between the most senior and most
junior workers may be just 2 or 3 times (it is likely to be 30 times or more in a PLC). When major decisions
need to be made, each member has an equal vote. Shoppers at the ‘Co-op’ have the right to vote for elected
members and can actually stand in the election for representatives of the Co-operative Group.

Worker co-operatives are businesses which are owned and controlled by those who work in it. They often
take the form of producer co-operatives, where people work together to produce a good or a service. As
owners of the business, all employees are likely to be well motivated because they are all working towards
the same goal. Some examples in the UK include various farmers’ co-operatives and the Edinburgh Bicycle
Co-operative, which retails bicycles.

A joint venture (jv) is a type of business arrangement where two or more parties agree to pool their
resources and expertise to carry out a specific business project or enterprise. Here are some of the main
features of a joint venture:

Shared ownership: A joint venture is owned and operated by two or more parties, who contribute capital,
assets, or other resources to the venture. Each party typically holds an ownership stake in the venture,
which determines their share of profits and losses.

Limited duration: A joint venture is typically established for a specific project or purpose, and has a limited
duration. Once the project is completed or the purpose is achieved, the joint venture may be dissolved, or
the parties may choose to renew or extend the arrangement.

Shared control: In a joint venture, each party typically has a say in the management and operation of the
venture, and decisions are made jointly. This requires a high level of communication and collaboration
between the parties to ensure that everyone's interests are taken into account.

Shared risk: As with any business venture, a joint venture involves a certain level of risk. However, in a
joint venture, the risk is shared among the parties, which can help to reduce the financial burden and
increase the likelihood of success.
Social enterprises

Social enterprises are a booming organisation structure. They are businesses with clear social objectives and
are currently thriving in a number of industries and sectors of the economy.

• Social enterprises trade to help solve social problems, improve the communities they operate in, and
improve the environment.
• Many social enterprises aim to make profits from selling goods and services in the open market; but
then, instead of paying dividends, they reinvest these profits, towards achieving their social objectives.
• The chef Jamie Oliver has had great success with his ‘15’ chain of restaurants, providing training in
a range of cooking and catering skills for homeless and unskilled young people. Profits from the first
restaurant go towards opening new restaurants and spreading the benefits to a larger number.
• The government is looking at the social enterprise model as a way of providing services such as child
protection. Other social enterprises operate in the housing, drinks and holiday sectors, as well as many
other sectors, and the number of social entrepreneurs is rapidly growing.
• Many young people, fresh out of university, are looking for a type of satisfaction from work that
cannot come from employment in a large business, and the social enterprise structure offers them this
motivational opportunity.
Franchising

Franchising is a growth strategy used by some businesses.

A franchise is the legal right to use the brand name, products and business style of an existing business. McDonald’s
restaurants, for example, often operate as franchises: a business person has paid McDonald’s a fee to open a
franchise of McDonald’s. The franchisee (the person who has bought the franchise) now has the right to use the
business model, brand, business style etc. in a specific area.
The British Franchise Association is an organisation that promotes and supports franchising; the following
information is taken from their website:

What is franchising?

Business format franchising is the granting of a license by one person (the franchisor) to another (the franchisee),
which entitles the franchisee to own and operate their own business under the brand, systems and proven
business model of the franchisor.

The franchisee also receives initial training and ongoing support, comprising all the elements necessary to
establish a previously untrained person in the business. The legal contract, or franchise agreement, between the
two parties sets out the obligations and rights of both franchisor and franchisee, and determines how long the
franchise arrangement will last (including renewal options).

The principle is simple – rather than developing company-owned outlets, some businesses instead expand by
granting a franchise to others to sell their product or service. There are clear advantages to both franchisors and
franchisees, just some of which are:

• You don’t have to come up with a new idea - someone else has had it and tested it too!
• Larger, well-established franchise businesses will often have national advertising campaigns and a solid
trading name
• Good franchise businesses will offer comprehensive training programmes in sales and, indeed, all business
skills
• Good franchise businesses can also help secure funding for your investment as well as, for example,
discounted bulk-purchases for outlets when you are in operation
• If customers are aware that you are running a franchise business, they will understand that you offer the
best possible value for money and a consistent quality of service - although you run your ‘own show’, you
are part of a much larger organisation
• You grow the business and, when you are ready to move on, can sell it for a profit

Who is in control?

Each franchise business outlet/unit is owned and operated by the franchisee. However, the franchisor retains
control over the way in which products and services are marketed and sold, and controls the quality and
standards of the business.

What are the cost implications?

The franchisor will receive an initial fee from the franchisee, payable at the outset, together with ongoing
management service fees - usually based on a percentage of annual turnover or mark-ups on supplies. In return,
the franchisor has an obligation to support the franchise network, notably with training, product development,
marketing and advertising, promotional activities and with a specialist range of management services.

http://www.thebfa.org/about-franchising
Franchising is a method of achieving growth, often in a quick way since the business model is duplicated by selling
the rights to other people to run the business rather than the owners having to organically grow the sales. In the UK,
the franchise industry is worth £10 billion a year to the economy and now employs over 360 000 people.

The option of growth through franchising is only possible if the business has a successful business, with an efficient
business model, a good reputation, a recognisable brand and a good supply chain.

The advantages from the franchisor’s (the person selling the franchise) point of view are:

• Fast growth – with lower risk. The franchisee finances the growth. Franchisees have to pay the franchisor for
the right to join the franchise

• Economies of scale can happen quickly; the franchisor now is involved in bulk buying for the franchises

• Increased income from franchise fees, this includes upfront payments and on-going royalty payments

• The franchisees who are committed to the success of the business and are likely to be hardworking, helping
to give a greater chance of successful growth, not least because they have had to pay for the franchise.

However, there can be problems with using the franchise model of growth. These include:

• Loss of control – franchisees may be harder to manage than appointed managers

• Not all profits return to the franchisor, representing an opportunity cost

• Potential loss of reputation if franchisors act unprofessionally

• Growth may occur too quickly, with the possibility of diseconomies of scale.

Examples of businesses who have used franchising as a growth strategy include Dominos Pizza, Autoglym, Marston’s,
Thorntons, Cash Converters, Toni&Guy, CeX, Clarks Shoes, Stagecoach and Subway.

Past Papers