SECTION 1: UNDERSTANDING BUSINESS STUDIES ACTIVITY

1. Business activity
Business activity is the process of producing goods and services to satisfy
consumer demands.

The purpose and nature of business activity

Needs and wants
Needs: a good or service which is essential for living. Eg: Water, food, shelter,
clothing.
Wants: a good or service which people would like, but is not essential for living.
Eg: Cars, Holidays etc.

Scarcity and opportunity cost

Economic problem: Unlimited wants cannot be met because there are limited
factors of production. This creates scarcity.

Factors of production: The resources needed to produce goods and services-

land, labour, capital and enterprise.
Land: is all natural resources such as minerals, ores, fields, oil and forests.
Labour: is the number of people available to work
Capital: is machinery, equipment and finance needed for production of goods
and services
Enterprise: is people prepared to take the risk of setting up business – they are
known as entrepreneurs.

Scarcity: There are no enough goods and services to meet the wants of the
population.
Opportunity cost: the benefit that could have been gained from an alternative
use of the same resource.

Specialisation: people and business concentrate on what they are best at.
Importance of specialization:
- Reduce waste
- Reduce cost of production
- Reduced cost can lead for lower prices

Division of labour: production is divided into separate tasks and each worker
does just one of those tasks
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 The purpose of business activity: Without the activity of business there would be
no products and service. Business produces different goods and service. There are
known as Consumer goods, Consumer services, and Capital goods.

Consumer goods: Products which are sold to the final consumer. They can be
seen and touched, for example computers and food.
- Durable consumer goods can be used over and over again. Eg: Television,
computer, car table and chair.
- Non- durable consumer: can only be used once, for example food and drink.
Consumer services: Non-tangible products such as insurance service transport.
Capital goods: Physical goods such as machinery and delivery vehicles, used by
other business to help produce other goods and services.

Adding value: Businesses add value by taking raw materials and turning them into
a good or service which it sells to consumers at a price greater than the cost of
raw materials used in their production.

How businesses increase added value:

Branding: Branding increases added value because people want or feel they
should buy the item from this particular company.
Excellent service quality: In some industries providing a high quality, personalized
service can be the difference between able to charge a high price or one which is
much lower.
Product features: Products that have more features and functions than similar
products on the market will allow the producer to charge a high price.
Convenience: Consumers are often prepared to pay a high price for goods and
services which they can have immediately. Eg: Ready meals.

2. Classification of business
Primary sector: Business activity involves extracting or harvesting natural
resources from the land or sea. Eg: Farming, fishing, foresting and mining.
Secondary sector: business activity which takes the natural resources produced
by primary sector activity and turns these raw materials into finished goods. Eg:
refining, manufacturing, construction.
Tertiary sector: business activity which involves providing services to the final
consumers or business. Eg: Shop, restaurants, banks, cinemas, airlines.

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 Chain of production: the production and supply of goods to the final consumer
involves activities from primary, secondary and tertiary sector business. Eg: Oil
is extracted from underground (Primary), Oil then needs to be refined to
produce other products such as petro and gas (Secondary). Finally it has to be
transported and sold to the final consumer (Tertiary).

Industrialization: the growing importance of secondary sector business activity

and the reduced importance of primary sector business activity.
De- industrialization: the growing importance of the tertiary sector and the
reduced importance of the secondary sector.

Business enterprises in the private and public sectors

Mixed economy: an economy where the resources are owned and controlled by
both private and public sector
Private sector: the part of the economy that is owned and controlled by
individuals and companies for profit.
Public sector: the part of the economy that is controlled by the state or the
government

Private sector decisions:

- Businesses produce the goods and services that consumers wants if they can
make a profit
- Businesses decide best way to produce with the lowest possible cost

Public sector decisions:

- Decisions about what, how and to whom to produce are all made by the
government
- The decision is made based on providing service to the public rather than
making profit.

3. Enterprise, business growth and size

Entrepreneur: An individual, who has an idea for a business, takes the final risk
of starting and managing a new business.

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 Characteristics of a successful entrepreneur

- Innovative: They are good at thinking up new ideas for goods and services or
new ways of presenting existing goods and services.
- Self-motivated and determined: they have the drive to keep going, even when
things get difficult
- Self-confident: they have a strong belief in their own ability and ideas.
- Multi- skilled: They have the ability to see an idea through from development to
profitable sales. This requires a good understanding of the functions of finance,
operations, human resource and marketing.
- Leadership qualities: they have good communication skills, the ability to
motivate others and are good decision makers.
- Initiative: they not only have good ideas, but are also able to develop a good
plan for achieving the business objectives.
- Risk – taker: they are prepared to take risks, knowing that failure is a possibility.
They see failure as a positive experience to be learned from.
- Result driven: They are focused on achieving results and make sure products are
sold for profit.
- Good at networking: they are prepared to learn from others.

Business plan: a detailed written document outlining the purpose and aims of a
business which is often used to persuade lenders or investors to finance a business
proposal.

Contents of a business plan

- The business
- The business opportunity
- The market
- The objectives of the business
- Financial forecast

How business plans assist entrepreneurs

- Can be used to persuade lenders

- It gives business a sense of direction
- It enable the business to monitor its progress

Business start-up: a newly formed business. They usually start small, but some might
grow to become much bigger.

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Why and how government support business start-ups

- Job creation
- To create greater consumer choice
- Create competition which result for lower price and better quality
- Small businesses often provide specialist goods and services needed by the large
firms
- Smaller business often has lower cost and can sell at a lower price.

Measuring business size:

Common methods of measuring the business size are;

Capital employed: This is the value of all long-term finance invested in a business. A
small business will invest less capital than large business in the same industry.

Using capital employed to compare the size of business in different industries is a

problem because some industries such as car manufacturing need a very large capital
investment in factories and machinery. Other such as computer software design does
not need.

Value of output: The amount businesses earn from selling their products is often used
to compare the size of the business in the same industry. A small business will have
lower revenue than large business.

However it is not a good measure when comparing business in different industry.

Number of employees: Large business usually employee many more employees than
small business in the same industry.

However two businesses can produce similar levels of output but if one business uses
more machinery than the other then they are likely to have far fewer employees.

Market share: The larger the share of the total market the larger the business.

However two firms in different industry, one may have high marker share percentage
and another may have a comparatively high market value. In this case the business
which has high market value may be much larger.

Why some businesses grow and others remain small.

Some businesses prefer to remain small, while others wish to expand. For example a
chocolate making specialist, hand-made chocolates may want to stay small while a
chocolate manufacturer who wants to produce chocolates for the mass market will
want to grow.
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Why owners may want to expand their business

- Increase in profit:
- Increase in market share
- Economies of scale
- Great power to control the market
- Protection from the risk of takeover

Different ways business can grow

Internal growth: Internal growth occurs when a business expands by

- Increasing the number of goods it can produce

- Developing new products
- Finding new markets for their product

External growth: External growth takes place when a business merges with or takes
over another business in the same or different industry. The process is known as
integration.

Horizontal integration: brings together two firms in the same industry who are also E:
Two wheat farmers (primary)

Forward vertical integration: brings together two firms in the same industry, but one
is the customer of the other. Eg: shoe manufacturer and shoe retailor.

Backward vertical integration: brings together two firms in the same industry, but
one is the supplier to the other. Eg: Chocolate manufacturer and cocoa producer.

Conglomerate integration: is the bringing together of two business who are in

completely different industries. Eg: a cosmetic manufacturer and soft drink
manufacturer.

Problems of growth:

- When two separate business are brought together, managers and workers in
each business may fear loss of their jobs or status
- If the business becomes too large diseconomies of scale may occur.
- Difference management of two business joined may create conflict and create
difficulty to manage.
- The integration of two business ( Eg: sole trader to partnership ) will change the
control of business.

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Why businesses remain small?

- Owners choice: Some owners does not want the responsibility or workload of
managing a large business
- Market size: Some business that serves only local market may not want to offer
their services beyond the local neighborhood.
- Access and availability of capital: One of the disadvantages of small businesses
is the difficulty they have in obtaining loans from banks and other lenders.
- Market domination: Some businesses are dominated by a few very large
companies and it is difficult for smaller businesses to compete.

Causes of business failure:

- Poor planning and lack of objectives

- Poor cash management
- Poor choice of location
- Failure to invest in new technologies
- Poor marketing
- Lack of finance
- Competition
- Economic influence

4. Types of business organization

Sole traders: A business that is owned and controlled by just one person who
takes all of the risks and receives all of the profits.

Advantages of sole trader are:

- Quick and easy to set up a business
- Makes all of the decisions so has complete control.
- Small amount of start-up capital needed.
- Owner keeps all profits

Disadvantages of sole trader are

- Unlimited liability – risk of losing personal wealth

- Difficult to raise funds to expand the business
- Difficult to compete with large firms in the same industry
- Owners often lack some of the important skills needed for running a business
- Sole traders often have to work long hours to make living from their business.
- If a sole trader retires or dies the business no longer exists.
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 Partnership: A business formed by two or more people who will usually share
responsibility for the day today running of the business.

Advantages of partnerships are:

- Partnerships usually have a greater access to finance than sole traders
- Decision making is shared and can lead to better decisions
- Management and day today running of the business is also shared which
reduces workload of each owner
- It is easy to setup than a limited company

Disadvantages of partnerships are

- Unlimited liability – Partners may have to use their personal wealth to pay the
debts
- Partners must share profit
- If one partner leaves, the business ends and will need to reform.
- Partnerships are often small and find it difficult to raise finance compare to
limited companies

Unincorporated business: a business that does not have legal identity separate
from owners. Eg: sole trader, partnership.

Unlimited liability: If an unincorporated business fails, then the owners might

have to use their personal wealth to finance any business debt.

Private and public limited companies

Private limited company: Often a small to medium sized company, owned by

shareholders who have limited liability. They cannot sell share to the general public.

Public limited company: Often a large company, owned by shareholders who have

limited liability. They can sell shares to the general public.

Ordinary Shareholders: the owners of a limited company

Limited liability: In case of a limited company fails, shareholders lose only the amount
they invested and not any of their personal wealth.

Dividend: a payment out of profit to shareholders as a reward for their investment.

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Features of private and public limited company

- Legal documents such as articles of association and memorandum of association

must be completed when setting up the business.
- Shareholders invest their capital by purchasing shares in the company
- Ordinary shareholders are the owners of the company
- Shareholders have limited liability.
- Business continues even if one or more shareholders die.
- Can raise finance by selling shares
- Profit belong to the ordinary shareholders
- Profit is shared between the shareholders through payment of dividends
- Financial statements must be produces at the end of the year.

Difference between private and public limited companies

Private limited company Public limited company

Usually less number of Usually very large number of
Owners shareholders. Often family or shareholders.
friends
Size Usually fairly small Usually very large
Difficult to sell. Must be sold Quick and easy to sell as they
Sale of shares by the
with the agreement of the can be offered for sale to the
company
other shareholders. public.
Sale of shares by the Only a few shareholders Often thousands of
shareholders shareholders
One shareholder may own Major decisions are
51% of the shares in the controlled by the Board of
Control
company and so has control directors appointed by
over major decisions. shareholders.
Raising additional Difficult to raise additional Can often raise large sums
capital through share capital as shares cannot be easily through the sale of
issue sold to the general public. additional shares
Often find it difficult to raise Can often raise large sums
finance because they are because of the reputation and
Borrowing finance
usually small business with valuable collateral.
low value assets.

Collateral: non-current assets offered as security against borrowing.

Franchises: A business system where entrepreneurs buy the right to use the name,
logo and product of an existing business.

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Benefits of franchise business

- There is less chance of business failure because the product and brand are
already well established.
- The franchisor often provides advice and training to the franchisee as part of the
franchise agreement.
- The franchisor will finance the promotion of the brand through national
advertising
- The franchisor will already have checked the quality suppliers, so the franchisee
is guaranteed quality supplies.

Limitations of franchising:

- The initial cost of buying into a franchise can be very expensive.

- The franchisor will take a percentage of the revenue or profits made by the
franchisee each year.
- There are very strict controls over what the franchisee is allowed to do with the
product, pricing and store layout.
- The franchisee will still have to pay for any local promotions they decide to do.

Joint venture: Two or more business agrees to work together on a project and set up a
separate business for this purpose.

Advantages of Joint venture

- It reduces the risk for each business and cut costs.

- Each business brings different expertise to the joint venture.
- Market and product knowledge can be shared to the benefit of the business in
the joint venture.

Limitations of joint venture

- Any mistake made may damage the reputation of all firms in the joint venture,
even if they were not the cause of the mistake.
- The businesses may have different business cultures or styles of leadership,
making decision making difficult.

Choice of forms of business organizations

- Number of owners: A sole trader can only have one owner. If there is more than
one owner then the choice will usually be between a partnership and an
incorporated business.

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 - Owner’s role in the management: Some owners may only want to invest and
have nothing to do with the running of it. If this is the case then an incorporated
business organization may be a better choice.
- Attitude towards financial risk: If owners do not want to risk their personal
wealth, then they are more likely to set up an incorporated business.
- How quickly the owners want to start operation: Sole traders and partnerships
are much quicker to setup than incorporated ones.
- The potential size of the business: Most business start small and remain small
so because of the factors such as the size of the market, or owners choice.

Business organizations in the public sector

Public corporations: A business organization that is owned and controlled by

the state.

Features of public corporations:

- They are owned and controlled by the state
- They are financed mainly through taxation
- In many countries they have social objectives rather than profit objectives.
- The service of public corporations is often provided free or at a lower price to
the population.

5. Business objectives and stakeholder objectives

Objectives: a statement of a specific target to be achieved. They should be

SMART.

- Specific: For example, an airline may set an objective about the level of seat
occupancy on its planes.
- Measurable: The airline may set an objective of achieving an average 85% seat
occupancy across all of its flights.
- Achievable: The airline seat occupancy objectives needs to be discussed with the
marketing department as it will need to decide on promotional activities to see
that the objectives is met.
- Realistic and Relevant: The airline seat occupancy objectives will need financial
resources, perhaps for an advertising campaign. The objective is relevant to the
marketing manager, but less relevant to the human resources manager.
- Time-specific: the airline may set an objective to achieve average seat
occupancy of 85% within the next 18 months.

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Different business objectives

Survival: Many new businesses fail in their first or second year of trading, so
survival is an important short term objective for these businesses. Once they are
established they can focus on long term objectives such as profit and growth.

Profit: Businesses aim to produce and sell the level of output where there is the
greatest difference between revenue and total cost.

Growth: A business that decides to expand in order to increase output may

benefit from economies of scale. This will reduce the cost of producing each
item and help to increase the firm’s competitiveness, revenue and profit.

Market Share: Market share is the revenue of a business expressed as a

percentage of total market revenue. Increased market share often benefits a
business in that it helps develop a strong brand image which makes it easier to
sell the product to consumers.

Corporate Social Responsibility (CSR): CSR is businesses taking responsibility for

the impact their activities might have on society and the environment. The
businesses that ignore their social responsibility run the risk of bad publicity and
possible legal action.

CSR has become an important objective for businesses as a result of:

- The activity of Pressure groups

- The media, which has created a great awareness of social, ethical and
environmental issues among consumers
- The role of the unions and other worker representative groups
- The role of governments and the laws they pass at local, national and
international level.

Pressure groups: Organisations of like- minded people who put pressure on businesses
and government to change their policies or reach a predetermined objective.

Social enterprises: a business with social objectives that reinvest most of its profits
back into the business or into benefiting society at large.

Objectives of social enterprises are related with social objectives. Their activities relate
to the needs of the community and the environment.

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The role of stakeholder groups

Stakeholders: an individual or group which has an interest in a business because they

are affected by its activities and decisions.

Internal stakeholders:

Owners and shareholders: They are interested in the performance of the business.
Profit belongs to the owners and is their reward for risking their investment.
Shareholders are the owners and the higher the profits the higher the dividend they
will receive.

Managers: Managers are responsible for the performance of a business. If the

business does well, then the managers may receive bonuses or a salary increase.

Employees: are also interested in the performance of a business. If the business is

profitable, it can mean better job security and the chance of pay rise.

External stakeholders:

Lenders: Lenders such as banks will want to know that the business can repay the
amount borrowed with interest. Existing lenders will want to know that the business is
making enough profit and has enough cash to make these payments.

Suppliers: Suppliers will want to know if they will get paid on time for any goods they
have supplied to the business on credit.

Customers: Customers may have an interest in business continuity and profitability

because they may then receive a better quality and better variety of products.

Government: The government receives taxes on the profits of businesses. The higher
the profits, the higher the tax revenue paid to the government.

Local community: The business may offer local people employment opportunities. A
business may also provide financial support or other benefits to the local community.
Businesses may also have negative impact on the local community, for example
through noise or air pollution resulting from the production process.

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