1.

Understanding Business Activity

1.1. Business Activity
●​ Needs: goods or services that are essential for survival.
●​ Wants: goods or services customers desire but are not essential for survival.
●​ Economic Problem: unlimited wants but limited resources to satisfy the wants.
●​ Scarcity: the lack of sufficient products to fulfil the total wants of the population.
●​ Factors of production: resources needed to produce goods and services; they are:
●​ Land – any natural resource used in production.
●​ Labour – mental and physical efforts of employees.
●​ Capital – finance, machinery and equipment needed for the manufacture of goods.
●​ Enterprise – individual/s who manage/coordinate the three other factors, make decisions and take
risks.
●​ Opportunity Cost: the next best alternative is given up by choosing another item.
●​ Due to scarce resources, a choice has to be made; this leads to opportunity cost.

1.2. Importance of Specialisation

Specialisation: When people and businesses focus on what they are best at.

●​ Division of labour is when production is split into different tasks, and each worker performs one of these
tasks. It’s a form of specialisation.

Advantages Disadvantages

Workers are trained in one task and specialise repetitive tasks can cause boredom and
in this, increasing productivity and efficiency burnout for employees, reducing motivation and
job efficiency

Specialisation with division of labour will result If a worker is not present, production will be
in better quality output disrupted, causing a waste of time and
resources, as well as less output and efficiency.

An increase in efficiency will lead to economies Specialised workers require higher wages, and
of scale. training current employees will increase costs.

Workers become more skilled and experienced,

reducing waste of time and resources.

1.3. Purpose of Business Activity

●​ Businesses combine scarce factors of production to produce goods or services to satisfy people’s needs
and wants.
●​ Business Activity:
●​ Combines scarce factors
●​ Produces goods and services
●​ Employs people

1.4. Added Value

●​ Added value is the difference between the cost of purchasing bought-in material and the price of the finished
goods.

Added Value = selling price – total cost

●​ For example, by transforming cotton into a T-shirt, the business adds value to the cotton, as the same
material can be sold for more after the transformation.
 ●​ It is NOT the profit because added value does not include the expenses of producing this good (e.g. labour,
electricity, machinery, etc.)

Advantages Disadvantages

Maybe able to make a profit if these other costs Increasing the product's price can lead to lower
come to a total less than the added value sales and, perhaps, profit.

It can be used to pay other expenses.

To increase added value, a business can either:

●​ Increase the selling price by increasing the quality of goods and services to convince customers/consumers
●​ Reduce the cost of materials but keep the price the same.

1.5. Classification of Businesses

●​ Businesses can be classified into three sectors:
●​ Primary Sector: Industry extracts and uses the earth's natural resources to produce raw materials
for other businesses.
●​ Secondary Sector: The industry manufactures goods using the raw materials provided by the
primary sector.
●​ Tertiary sector: The Industry provides services to consumers and other industry sectors.
●​ Developing Countries: where the primary sector is the most important, as more employees and output are
produced than in secondary and tertiary sectors
●​ Developed Countries: where the output of the tertiary sector is often higher than the other two sectors
combined.
●​ De-industrialisation occurs when there is a decline in the importance of the secondary sector.
●​ Reasons for changes in the relative importance of the three sectors over time:
●​ When sources of some primary products become depleted
●​ Developed economies are losing competitiveness to newly industrialised countries.
●​ Due to the rise in living standards, consumers spend more of their income on services such as
travel and restaurants than on manufactured goods.

1.6. Mixed Economy

●​ Has both a private sector and a public sector.
●​ Private Sector: Businesses NOT owned by the government will decide what and how to produce.
The main aim is to make profits.
●​ Public Sector: Owned by the government. Government will decide what and how to produce (i.e.
healthcare, education, defence, public transport). The main aim is to provide a service to
customers.
●​ Privatisation refers to selling a public sector business to the private sector.

Arguments for Privatisation Arguments against Privatisation

Costs can be controlled because the private Increased unemployment as private sector
sector’s main objective is profit. businesses may want to cut costs.

More efficient use of capital Less likely to focus on social objective

Competition between private sector businesses

will help improve product quality.

1.7. Enterprise, Business Growth and Size

●​ An entrepreneur is a person who organises, operates and takes risk to make the business better
●​ Characteristics of Entrepreneurs:
 ●​ Hard-working
●​ Risk Takers
●​ Creative
●​ Effective Communicators
●​ Optimistic
●​ Self-confident
●​ Innovative
●​ Independent.

Advantages and Disadvantages of being an Entrepreneur:

Advantages Disadvantages

Independent, able to choose how to use time entrepreneurs will have to put their own money
and money into the business.

Able to put own ideas into practice many entrepreneur’s businesses fail (risky)

It may become successful and very profitable if Lack of knowledge and experience in starting
the business grows and operating a business

Able to make use of personal interests and Lost income from not being an employee for
skills another business (Opportunity cost)

Profits to themselves, no need to share them They will have to invest their savings as well as
with anyone find other sources of finance, which is
time-consuming and expensive

Income is higher than a regular employee

1.8. Business Plans

●​ Business Plan: a document containing the business objectives and essential details about operations,
finance and owners of the new business.
●​ Contents of business plan:-
●​ Description of the product
●​ Products and services
●​ The market
●​ Business location and how products will reach customers
●​ Organisation structure and management
●​ Financial information
●​ business strategy
●​ Business plans assist entrepreneurs because:
●​ It helps gain finance. Banks will ask for a business plan before agreeing to a loan or overdraft for
the business
●​ It forces the entrepreneur to plan carefully, which reduces the risk of the business failing.

1.9. Government Support for Start-Ups

●​ Governments encourage entrepreneurs to set up a business because start-ups:
●​ reduce unemployment
●​ Increase competition
●​ Increase output
●​ Benefit society
●​ Further growth of the economy
●​ Governments may give support to entrepreneurs by:
●​ Business ideas & help, organising training for entrepreneurs that gives advice, and support
sessions.
●​ Finance, they may lend loans at low-interest rates or grants, as well as low-cost premises
 ●​ Governments provide grants for training employees to make them more efficient and productive
●​ Governments allow entrepreneurs to use research facilities in Universities

1.10. Business Size

●​ Why is it beneficial to compare business size?
●​ Investors can decide which business to invest in.
●​ Government, different tax rates for small and large firms.
●​ Competitors, to compare size and importance with other firms.
●​ Workers, to have an idea of the number of employees needed.
●​ Banks, the importance of the loan compared to business size.
●​ There are several different measurements of business size, and they all have limitations:

Measurements Limitations

The number of people employed in the Capital-intensive firms employ fewer people but
business (accessible to calculate) produce high levels of output.

The value of the output of the business (useful Does not take into account the value of goods
for same industry Businesses) sold and the sale of goods.

The value of sales (useful for retail businesses, different businesses sell different products
especially if similar products) (expensive and cheap)

The total value of capital employed (takes into Some businesses use Labour-intensive
account all values of capital) methods, which require less capital, more
workers

●​ Capital Employed: the total value of capital used in the business

●​ No method of measuring the size is considered correct, as each method gives different answers.
Businesses choose the method they think is the best. Therefore, businesses may use more than one
method.

1.11. Business Growth

●​ There are several ways of measuring the size of the business
●​ Number of Employees
●​ Capital Employed
●​ Output or sales
●​ Market Share
●​ Benefits of the expansion of the business:
●​ The possibility of higher profits for the owner.
●​ More status and prestige for owners and managers.
●​ Lower average costs.
●​ A larger share of its market portion of total market sales it makes is greater.

Ways of Business Growth

Disadvantages Caused by Business Growth
●​ Control and management get harder with expansion (can be prevented by carefully planning expansions
and adjusting management style and hierarchy).
●​ Larger businesses lead to poor communication (stronger and more efficient communication channels can
prevent it).
●​ Expansion costs are high and can result in a shortage of finance for businesses (A financial plan must be
prepared in anticipation of expansion; it can include short/long-term loans to compensate for financial loss).
 ●​ Integrating with another business can cause conflicts and difficulties, such as business culture and style of
management. (Compromises will have to be made, or a new style of management can be applied altogether,
which can help reduce conflicts)

Why Small Businesses Remain Small?

●​ The size of their market is small
●​ Access to capital is limited
●​ Personal Choice of the owner
●​ The size and cost of technology

1.12. Why Businesses Fail

●​ Lack of Management Skills – from lack of experience, poor choice of managers (family business), bad
decisions can occur
●​ Failure to plan for change – businesses must adapt to an ever-changing business environment. It would
be best if risks were taken.
●​ Over-Expansion – (diseconomies of scale)
●​ Poor financial management and liquidity issues
●​ Competition with other businesses – intense competition in the market can make it hard for new
businesses to set up, as already established businesses can drive newly established businesses out of the
market with their low, competitive prices.

1.13. Legal Identity

●​ Unincorporated Business: A business that does not possess a separate legal identity from its owner.
These Businesses usually have:
●​ Unlimited liability: the owner can be held responsible for the business's debts.
●​ Greater risk, as owner is putting his personal possessions and living at risk.
●​ Incorporated Business: Business with a separate legal identity. Private/Public limited companies. These
Businesses usually have:
●​ Limited liability: the liability of shareholders in a company is limited to only the amount they
invested
●​ Less risk, as the owner is only risking the capital they invested, as well as any legal charges effect
only the business and not the owner directly

1.14. Sole Trader

●​ It is a business owned and controlled by one person- the owner, who is the sole proprietor. It is a form of an
unincorporated business.

Advantages Disadvantages

Few legal regulations (Easy to set up) Decisions can be hard to make

Complete control No separate legal identity, unlimited liability

Flexible working time May not be able to raise funds to expand

business

Ability to respond quickly to the needs and wants May have to work long hours
of customers

All profit goes to the owner Difficult to compete with large firms

Complete secrecy in Business matters May not have the proper skills to run a
business
1.15. Partnerships
●​ Partnerships: A form of business in which two or more people agree to own a business jointly. It can be set
up by creating a partnership deal. It’s a form of unincorporated business.
●​ Deal of partnership: The written and legal agreement between business partners. It is not essential but is
recommended
●​ Contents of Partnership Agreement:
●​ Amount of capital invested by all partners
●​ Tasks to be done by each partner
●​ The way profits are shared out
●​ How long partnership will last
●​ Arrangements for absence, retirement and how partners could be let known

Advantages Disadvantages

Easy to set up a deed of partnership Unlimited liability

Greater access to funds Share the profit

shared decision-making Business ceases to exist if one partner leaves

shared management and workload Decisions binding on all partners

Difficult to raise finance

1.16. Private Limited Company (LTD)

●​ Private Limited Company: Business owned by shareholders but cannot sell shares to the public (can only
sell to family and friends).
●​ Shareholders: Owners of a limited company who buy shares represent part-ownership of the company.
●​ Articles of Association: Contains the rules for managing the company.
●​ Memorandum of Association: Contains vital information about the company and the directors.

These also apply to a public limited company.

1.17. Public Limited Company (PLC)
●​ Public Limited Company: Businesses owned and controlled by the shareholders, but they sell to the
public, and their shares are tradeable on the stock exchange.

Advantages Disadvantages

Can sell shares to the public Legal Formalities

Rapid expansion possible/specialist managers Disclosure of accounts and other

appointed information

Limited liability Divorce between ownership and control

Continuity Expensive to ‘go public‘

●​ Annual General Meeting (AGM): A yearly meeting where shareholders may attend to vote for a Board of
Directors for the upcoming year.
●​ Dividends: Payments made to shareholders from the profit of a company. They are the return for investing
in the company.

1.18. Franchise
 ●​ Franchise: An agreement of a business based upon an existing brand/business
●​ Franchisee: the company that received permission to conduct business using the company’s name and
brand. Have to pay an original fee to the franchisor and a percentage of its profit for the privilege
●​ The Franchisor: the company that allows another company to conduct business using the company’s name
and brand.

Advantages to franchisor Disadvantage to franchisor

Franchisee buys the licence, which means another Bad reputation if one branch has poor management
source of finance

Expansion is faster The franchisee keeps some profit

Management is the responsibility of the franchisee Training, some aspects of administration, and advertising
are paid by the franchisor

Percentage of sale revenue is given to the franchisor

every year

Advantages to franchisee Disadvantages to franchisee

Chances of business failure are reduced Less independence

The franchisor pays for advertising Unable to make decisions that would suit the local area

Fewer decisions to make with an independent business The franchisor has the power to withdraw the agreement
and can prevent the use of the premises

The franchisor provides training for staff and

management

Banks are often willing to lend to franchisees due to the

low risk.

1.19. Joint Venture

●​ Joint Venture: is when two or more businesses join together to create a new business

Advantages Disadvantages

Sharing of costs Profits have to be shared if the project is successful

Knowledge and experience can be Conflict in decision-making

shared

Risks shared Different methods of running a business can create

conflict

1.20. Public Corporations

●​ Public Corporations: a business in the public sector owned and controlled by the state of government (By
appointing a board of directors and setting objectives).

Advantages Disadvantages

Government ownership may be The profit objective is not as powerful or

essential to some countries' industries, important as in private-sector industries.
such as water supply and electricity
generation.

Ensure consumers are not taken Inefficiency because managers rely too
advantage of much on the government
 Reduce wasteful competitors It can be unfair to the private sector if
subsidies are provided to the public
sector.

Can help stabilize failing businesses to Lack of close competition can decrease
create job opportunities many activities

Important public services It can be used for political reasons,

preventing the business from
opportunities like other profit-making
businesses.

1.21. Business Objectives

●​ Business Objectives are aims or targets a business works towards
●​ Businesses need objectives to help them be successful. However, they don’t guarantee success.
●​ Benefits of having business objectives:
●​ A clear target to work towards, thus improving Motivation.
●​ It can help in decision-making.
●​ It helps unite the whole business towards the same goal.
●​ It can be used to compare how the business performs through objectives.
●​ Private sector business objectives:
●​ Business Survival - Adjust to business environment, change price of products if necessary
●​ Generating profit (total income of business revenue subtracted by total cost)– pay a return to
owners or provide finance to invest further in business
●​ Returns to shareholders - discourage shareholders from selling their shares. This can be done by
increasing profit or increasing the share price
●​ Growth of business – increase salaries, economies of scale. This is only achieved if customers
are satisfied with the product
●​ Market Share (the total percentage of total market sales held by one brand or business) - gives
good publicity and more influence over suppliers and customers.
●​ Calculation=100×Company SalesTotal market Share
●​ Calculation=100×
●​ Total market Share
●​ Company Sales
●​ ​

●​
●​ Why business objectives can change:
●​ It will work towards profit after being set up and stable.
●​ After achieving a high market share, it aims to “return to shareholders”.
●​ A profit-making business hit with a crisis now has the short-term objective of survival.
●​ Changes in consumer tastes and spending patterns
●​ Technological changes
●​ New Sources of Competition

1.22. Social Objectives

Objectives of Social Enterprise
●​ Social Enterprise: an enterprise with social objectives and aims to make a profit to reinvest in the business.
It has three objectives:
●​ Social: to provide jobs and support for disadvantaged groups
●​ Environmental: to protect the environment.
●​ Financial: to make a profit to reinvest in the enterprise and expand its social work.

Objectives of Public Sector Businesses

 ●​ Financial: Meet profit targets set by the government - either reinvested or funded back to the government.
●​ Service: meet quality targets the government sets and provide services to the public.
●​ Social: protect or create employment in certain areas.

1.23. Stakeholder Objectives

●​ Stakeholder: any person or group with a direct interest in the performance and activities of a business
●​ There are two types of stakeholder groups:
●​ Internal Stakeholders work/own the company (owners, managers, workers)
●​ External Stakeholders are outside the business (consumers, government, banks,​
suppliers, Wider community, Pressure groups, and competitors)
●​ Each stakeholder group has different objectives for the performance of the business
●​ Internal Stakeholder (Owners, managers and employees) objectives are payments or profits; they want
business growth, so the value of investment increases, or they get higher status/power
●​ Customers' objectives are reliable products, value for money, good quality, good design and good service
●​ Government objectives include money from taxes, employing more people, increasing the country’s output
●​ The bank’s objectives are to make a profit out of loans and the payback of interest.
●​ Since different stakeholders have different objectives, it may cause conflict, to try to please all the
stakeholders
●​ For example, customers want cheap products, but workers want higher salaries.
●​ Therefore, managers must compromise to decide which objectives are best for the company.