Business

Tema 1
1.1 What is Business?
The nature of business (AO1)
A business is someone or a group where people work together in a
structured way to achieve speci c goals, usually pro t. However, some
businesses may aim for other objectives such as providing services or
improving society (e.g., hospitals, schools). In essence, businesses involve
organized activities aimed at meeting a target.

The Business Transformation Process

The transformation process involves converting inputs (resources) into
outputs (goods or services). If customers value these outputs enough to pay
a good price, the business succeeds.
This process is often mutually bene cial because both the business and
the customer gain something valuable from the transaction.

• Inputs:
Inputs, also known as factors of
production, are the resources
businesses use to create products.
These are divided into four categories:

1. Land: Natural resources like oil,

minerals, water, physical land…
- Important for farming, mining, and energy industries.
- The quality of land or access to resources directly impacts the business.
2. Labour: The quantity (the number) and the quality (skills) of labour.
- The quality of employees (skills, attitudes, abilities) in uences success.
- For example, skilled actors make movies successful
3. Capital: Non-natural resources (equipment, vehicles…)
- The amount and quality of capital a ect the business. For example,
Amazon's warehouses and computer programs.

4. Enterprise: Entrepreneurial skills like creativity, innovation, and risk-

taking, (like Elon Musk bring new ideas and take risks to create businesses.)
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 • Outputs:
Outputs are the goods (tangible products) or services (intangible
experiences) that businesses produce.

- Goods: Physical items, like cars or laptops, that can be produced in

advance and stored for later sale.
- Services: Intangible experiences, like haircuts or education, which are
provided when needed.

In many cases, businesses provide a combination of goods and services. For

example, a restaurant serves food (goods) but also provides customer
service and ambiance (service).

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• Adding Value
Businesses add value when their products are worth more than the sum of
their inputs. A business can increase value by:

1. Reducing costs: Being e cient, minimizing waste, and negotiating better

deals for resources.
2. Increasing customer perception: O ering better quality, unique design,
or building a strong brand (unique selling proposition, or USP).
- A brand is a name, design, logo, or anything that makes a product stand
out and be recognizable to customers.
- A USP is something unique about the product that makes it better or
di erent from competitors in the eyes of customers.
- Example: Jeans companies: They may distress or alter jeans to make
them look worn, doubling their price.

Concepts
- Inputs: Land, labour, capital, and enterprise.
- Outputs: Goods or services produced by a business.
- Transformation process: Turning inputs into valuable outputs.
- Adding value: Making products more valuable than the cost of their inputs.
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 Primary, secondary, tertiary and quaternary sectors (AO2)

- Primary Sector: Involves acquiring raw materials like oil, coal, sh, and
crops. This sector includes industries such as agriculture, mining, and
shing. Resources can be renewable (e.g., wind, sh) or non-renewable (e.g.,
coal, oil).
- Secondary Sector: Refers to manufacturing and assembling products. For
example, car manufacturing and construction belong to this sector, where
raw materials are transformed into nished goods.
- Tertiary Sector: Involves services such as retail, transport, and nancial
services. Unlike physical products, services are intangible and cannot be
touched.
- Quaternary Sector: A subset of the tertiary sector that focuses on
knowledge-based services like consulting and research and development. In
highly developed economies, this sector often grows in importance

• Business/ Economic

Businesses are vital to any economy. They provide goods and services,
create jobs, and pay wages. When businesses grow, they employ more
people and generate income, contributing to the economy's growth.
Innovation is essential in businesses, as it leads to new products and
services that improve people's lives. Governments often encourage
businesses to grow, as business success is closely linked to economic
progress.
Market forces: are the forces of supply and demand which determine the
price of a product and the quantity sold in a market

The opportunity cost

It measure the sacrifice made by choosing one option in therms of the

next best alternative

• In an economy, there is a limited amount of resources, so choices must be

made about how to use them. If demand for a product goes up (market
force), businesses will focus their resources on making that product
instead of something else. The opportunity cost is what you give up
producing by choosing another option.

• Whenever we decide to produce one thing, we are giving up the chance to

produce something else. Opportunity cost measures what you sacri ce
when you pick one option over the best alternative.
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• When evaluating the success of a business, it's important to think about
the opportunity cost.

• Ethical Decisions in Business:

Businesses have to think about ethics when deciding what to produce and
how. For example, they might be able to produce goods cheaper in places
with poor worker safety, but they could choose not to because it's not the
right thing to do. Similarly, producing and selling tobacco can be pro table,
but a business might avoid it because it's bad for people's health.

Dynamic Business Environment (STEEPLE Analysis)

Businesses operate in an environment a ected by external factors. These
factors can be categorized as:

- Social: Population changes (size, age) can a ect product demand.

- Technological: Advances in technology, like faster internet, can improve
operations.
- Economic: Economic conditions, such as income levels or currency value,
impact business costs and demand.
- Environmental: Concerns about sustainability and environmental impact
may lead to changes in production methods.
- Political: Government policies and trade agreements can open new
markets or restrict business activities.
- Legal: New laws can change the way businesses operate, from production
to employee treatment.
- Ethical: Consumers increasingly demand businesses to act responsibly,
considering ethical practices in their operations.

These external factors in uence the demand for products, the cost of inputs,
and the overall business strategy.

Challenges of Starting a Business (AO3)

• Opportunities for starting up a Business
- Social issues: When a country's population grows or gets older, it can
change what people want to buy and how much they buy.
- Technological issues: Faster and more available internet can help
businesses easily nd suppliers and sell to people worldwide.
- Economic issues: Changes in income levels can a ect demand for
products. Currency values can change, impacting the cost of importing
goods. Also, borrowing costs may rise, making things more expensive for
businesses.
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 - Environmental factors: Concerns about pollution and sustainable
production can in uence how businesses operate and what resources
they use.
- Political factors: Governments may sign trade agreements that make it
easier for businesses to sell their products in other countries.
- Legal factors: New laws might limit the promotion of certain products,
like cigarettes, or dictate how businesses treat employees and manage
production to reduce environmental harm.
- Ethical factors: Consumers are more aware of how businesses act, and
businesses might avoid suppliers that treat their workers poorly.

1. Internal Problems:
- Lack of experience in managing nances, marketing, people, and
production. Entrepreneurs may not have all these skills.
- Raising money can be hard at the start because businesses are risky, and
new entrepreneurs may need to use their own limited funds.
- Building brand awareness can be challenging if there are already well-
known brands.
- Small businesses lack power in the market, meaning they might have to
wait longer for payments from clients, while suppliers demand payments
upfront.

2. External factors can a ect

● the demand for products

● the costs and avaiabillity of inputs
● the nature of the transformation process.

- Opportunities: Changes in the external

environment, such as an aging
population or environmental concerns,
create opportunities for new
businesses. For example, the rise of
electric vehicles o ers opportunities for
new businesses in that sector.

- Challenges: Start-ups face many challenges, such as a lack of experience

in di erent aspects of business, di culties in raising funds, and building
brand awareness. Competing with established brands can make it harder
for new businesses to gain customer attention and grow.
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 1.2 Types of Business Entities:
Distinction between the private and public sectors (AO2)
- Private Sector: Owned by individuals, focused on making pro ts.
- Public Sector: Owned by the government, with social objectives like
providing services (e.g., transportation to remote areas), not just making
pro ts.
- Nationalization: When a government takes control of a private business.
- Privatization: When a government sells one of its businesses to private
owners.

The government usually runs organizations important for the country, like
healthcare or energy, because these services are essential. Some services,
like education and health, bene t society, so the government helps provide
or subsidize them to ensure people can use them.

Changing Role of Private and Public Sectors:

Governments in di erent countries have di erent levels of control over
businesses, depending on political views. This can also change over time.
Finally, Cuba is an example of a country with heavy government involvement
in its economy.

Sole Traders (AO3)

• Sole Traders are individuals who run their own business. They might hire
others, but they are the main owner and fully responsible for the business.
They handle daily tasks and need a variety of skills, exibility, and self-
con dence to make decisions.

• Running a business as a sole trader can be challenging, requiring a wide

range of skills, hard work and good stress management. If mistakes are
made, they are responsible, but they also keep the pro ts. Being a sole
trader requires a high level self-discipline, as they are their own boss.

• Advantages of being a soler trader

- It is easy to start up in business.
- You do not receive orders from other people
- You make your own decisions (when and where to work)
- It can be incredibly motivating
- You keep all the rewards of the business, you do not share pro ts.
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 • Challenges of being a sole trader
- You carry all the responsibility if anything goes wrong
- It is quite lonely
- The work time is demanding
- You may not be able to take much time o for hollidays as you must close
- It is di cult to raise nance to set up and expand the business
- It is risky as if anything goes wrong : sole traders have unlimited liability:
they are responsible for any loses and they respond with their personal
possessions .
- They cannot share ideas with other people
- They do not receive regular income

Partnership
If you join with other people (sole traders) and set up a business to work
together.
Bene ts of partnership:
- You have other people to share ideas with
- There are more people to invest in the business and help nance it
- You can bene t from the other’s skills
- You can cover for each other if someone is ill or on holiday
Challeges of partnership
- Partners may disagree on business policies or direction, leading to
con icts.
- You rely on others, so if a partner makes a mistake or damages the
business’s reputation, it a ects everyone.
- Each partner is responsible for the actions of the others, which can be
risky.
- Most partnerships have unlimited liability, meaning if the business is sued,
partners could lose personal assets.Members can write a deed of
partnership to set the rules of the business: how the partnership would be
dissolved if someone wants to leave and what the person will receive, how
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 to resolve disputes if the votes against and for are equal and how pro ts
will be distributed it not pro ts will be divided up equally.

Private sector companies

- De nition: A company is a business with its own legal identity and limited
liability.

- Advantages over Sole Traders/Partnerships:

- Provides protection (limited liability) for owners.
- Personal belongings are protected if the business fails.

- Setting Up a Company:
- Owners must complete legal documents (Articles of Association,
Certi cate of Incorporation in the UK, Escritura de constitución in Spain).
- These documents are registered with authorities (Companies House in the
UK, Registro Mercantil in Spain).

- Ownership:
- Owned by shareholders who hold shares (each share represents part
ownership of the business).
- Owning more than 50% of the shares means controlling the company.

- Limited Liability:
- Shareholders can lose only the money they invested, not their personal
belongings.
- Encourages investment due to limited risk.

- Responsibilities:
- Companies must pay taxes on pro ts.
- Annual audits are required by independent accountants.
- Financial reports must be made public, meaning less privacy.
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Why become a shareholder in a company?
By investing in a company, shareholders become part owners of the
business, and this means:

- If the business is successful, the value of their shares should increase,

especially if the company is listed on the stock exchange
- Shareholders also receive a portion of the company's pro ts, called
dividends which are decided each year at the Annual General Meeting
(AGM). During the AGM, shareholders vote on the amount of dividends
and other important decisions, and they also receive the company’s
annual report.
- Shareholders have voting rights and can in uence the company's
policies. Each share represents one vote.

• This means that shareholders can bene t from both an increase in share
value and regular dividend payments while having some control over the
company’s direction
• Dividends are money that is paid out of pro ts to shareholder. They area
reward the owners of the business

Public sector companies

- Ownership: Public sector companies are owned or mostly owned by the
government.
- Goals: They usually have both social (serving the public) and nancial
(making money) goals.
- Examples in Spain: Companies like Adif, AENA, and Agencia EFE are
public sector companies.
- Public-Private Partnerships:
- Some companies are owned by both private and public sectors.
- These partnerships are used to build things like schools, hospitals, and
transportation systems.
- Both the government and private companies bene t from working
together.

• Private Limited Companies (SL)

These companies are owned by shareholders, but they can place restrictions
on who can buy or sell shares. This helps keep outsiders from becoming
involved. Shares are sold privately and are not available on the stock market.
If the owners of a privately held company want to keep control and don’t
need a lot of money from selling shares, they prefer not to make it public.
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 • Public Limited Companies (SA)
These are also owned by shareholders, but shares are sold openly on the
stock market, and there are no restrictions on who can buy them. This can
cause problems if another company tries to buy enough shares to take
control. Sometimes shareholders sell their shares to this company, leaving
others who want to resist unable to do much. Public companies must follow
more regulations and make more nancial information public.

Why Entrepreneurs Change the Legal Structure

At rst, it’s easier to start a business without a lot of paperwork, but there’s
no limited liability, meaning the owner’s personal assets are at risk. As the
business grows, entrepreneurs may need more people or money. To raise
funds and limit liability, they may turn the business into a limited liability
company, which means publishing nancial reports and following stricter
rules.

For-Pro t Social Enterprises

Unlike typical businesses that only focus on pro t, social enterprises aim to
improve the world. They may make a pro t, but much of it is reinvested to
support social or environmental goals.

Cooperatives
These businesses are owned and run by their members, with each member
having one vote, creating a democracy. Members, such as farmers, taxi
drivers, or community residents, join together to improve their situation.
Pro ts are shared equally. There are di erent types of cooperatives:
employee cooperatives, where workers own the business; community
cooperatives, where local residents unite for services; and retail
cooperatives, where independent shops work together under one brand

Non-Pro t Social Enterprises

Non-pro ts aim to make money but reinvest it to support society rather than
paying owners. The most common types are NGOs and charities. NGOs
focus on social and political issues, raising awareness and pressuring
governments to act. They are often funded by donations or governments.
Charities focus on causes like child welfare or mental health, raising money
through donations and events to support their work.

Economies of scale
The average cost of producing one unit more decreases as the xed foot is
shared among all the unit produced. Also as we produce great amount of
unit suppliers give me discounts that help me to produce cheaper.
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1.3 Bussines Objectives
Vision and Mission Statements (AO2)
• Who Determines Them:
- Mission and vision statements are created by the owners and senior
managers.
- - They often consult employees to ensure the statements are relatable
and motivating.
• Broad but Useful:
- These statements are usually broad but can still help guide long-term
planning and decision-making in the business.
• Purpose:
- The mission helps employees understand what the business is.
- The vision helps employees see where the business is heading.
- They can also be used in promotional materials to inform stakeholders,
like suppliers, about the business’s goals.
• Challenges of Measurement:
- These statements are general, so it's hard to measure whether they have
been achieved.
• Objectives/Targets:
- To make them measurable and speci c, businesses set objectives (or
targets) that are tied to timeframes.
• Strategy:
- The strategy is the long-term plan that helps a business achieve its
objectives.
• Mission Statement:
- Explains why a business exists and what it aims to do.
- Example: An airline might want to be the "best airline in the world"; a
computer company might aim to help people work more e ectively.
- Often includes information about customers and how the business
operates.
• Vision Statement:
- Describes what a business wants to become in the future.
- Sets out the long-term goals and aspirations of the business.

Common business objectives

• Good objective example: "Increase pro ts by 25% over the next four
years"clear and measurable.
• Bad objective example: "Do much better" – vague and unclear on what
success looks like or how to achieve it.
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 • Business objectives: De ne what the business wants to accomplish,
providing focus for decisions and actions.
• Employees: Objectives help employees know what they need to achieve
and make appropriate decisions regarding resource use.
• Without objectives: Employees lack direction, don’t know priorities, and
can’t measure success.
• Importance of objectives: They help businesses coordinate, monitor, and
control activities in both private and public sectors.

• Communication and Impact of Objectives

- Motivation: Clear objectives give employees direction and targets, helping
them understand their role in the company.
- Demotivation risk: If employees don't believe in the objectives or feel they
can't achieve them, they may feel demotivated.
- Involvement: Engaging employees in setting objectives helps ensure they
are realistic and encourages commitment.

• Business and Functional Objectives

- Corporate objective: An overall goal, e.g., doubling pro ts in ve years.
- Functional objectives: Department-level goals, e.g., marketing may need to
increase sales by 40%, while operations may reduce costs by 20%.

• Business Objectives in the Private Sector

- Pro ts: Measured by the di erence
between revenue and costs; important
for rewarding shareholders and
reinvesting in the business.
- Pro t maximization: Aim to maximize
the di erence between sales revenue
and costs.
- Growth: Business expansion can
reduce costs (economies of scale) and
o er better salaries and job security.
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 • Business Objectives in the Public Sector
- Service to the community: Public sector
businesses aim to provide essential services
like transport and utilities to everyone, even in
unpro table areas.
- Financial objectives: Public sector
organizations often aim to cover operating
costs or generate a nancial surplus for
reinvestment.
- Development of poorer regions: Public sector businesses may operate
in low-income regions to raise living standards.

• Ethical Objectives
- Examples: Sustainable production, fair payment
to suppliers.
- Stakeholder interest: Ethical objectives can
attract more sales and investment but may also
reduce pro ts, e.g., paying more than the
minimum wage or choosing not to exploit tax
loopholes.

Corporate Social Responsibility (CSR)

- Impact on society: Businesses are increasingly aware of the e ects of
their activities on society and aim to reduce harm and increase positive
contributions (e.g., employment, training, providing goods and services).
- CSR approach: Businesses with CSR aim to make the world a better
place, not just pro t, by thinking about the positive e ects on society and the
environment.
- Beyond legal requirements: A business with CSR responsibilities goes
beyond legal obligations to ensure work is meaningful, employees have
career paths, suppliers are paid fairly, and they invest in the community.
- Corporate citizen: A responsible business sees itself as a corporate
citizen with obligations to society and sets goals to do more than what is
required by law.

• CSR and Triple Bottom Line

- Triple bottom line: Businesses measure performance using three
- Pro t: Still important but balanced with other goals.
- People: Fair treatment of employees and suppliers.
- Planet: Environmental sustainability and reducing harm.
- Sustainability: This encourages businesses to produce sustainably
without damaging the environment and focus on long-term social and
environmental goals.
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 Objectives and Business Decisions
1. Setting objectives: Businesses need clear
objectives to guide decision-making and
measure success (e.g., making $100,000 in
pro t).
2. Information gathering: Collect data to
understand the current situation before
making decisions.
3. Choosing strategy: Decide on a long-term
strategy (e.g., expand into new markets).
4. Implementation: Tactics are used to
implement the strategy, including setting
short-term goals.
5. Review: Evaluate progress and adjust
objectives as needed.

Strategic and Tactical Objectives

- Strategic objectives: Long-term goals that involve signi cant resources,
such as entering a new market or launching a product.
- Tactical objectives: Short-term goals to implement the strategy, like
opening stores in a speci c region.
- Example: A company wants to increase pro ts by 20% in ve years, and
part of the strategy involves expanding into China with ve new stores by
year-end.

• Changing Objectives Over Time

- Internal factors: New managers or leaders may change business goals
(e.g., faster growth or better environmental practices).
- External factors: Economic changes or new competitors may force
businesses to adjust targets.

• Business Objectives and Ethical Behavior

- Ethical behavior: Acting in a morally correct way, such as using
environmentally friendly materials, even if it’s more expensive.
- Unethical behavior: High targets can pressure employees to mislead
customers, which can result in scandals (e.g., selling unnecessary insurance
policies).
- Code of ethics: Businesses may create a code of ethics to ensure
employees follow ethical practices while achieving business goals.
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 1.4 Stakeholders in Business
Stakeholders are individuals or groups who are involved with or a ected by
a business’s activities. Businesses need to consider their stakeholders when
making decisions. The main stakeholders include:

- Owners (shareholders): They are the people who have invested in the
business and expect pro ts in return.
- Employees: The workers who carry out the tasks needed to run the
business.
- Managers: These people make the business's decisions, both long-term
(strategic) and short-term (tactical).
- Suppliers: They provide the materials or services the business needs to
operate.
- Banks and nancial institutions: These provide the business with
funding, like loans.
- Customers: People who buy the business’s products or services.
- The local community: This includes people living near the business, who
may be concerned about issues like pollution or employment.
- The government: They bene t from taxes the business pays and are
interested in high employment rates.
While some stakeholders may not have direct control over a business, it is
usually in the business’s best interest to consider their needs. A business
that takes care of its stakeholders often builds a positive reputation.

Internal and External Stakeholders

Internal Stakeholders:
- Owners (shareholders): They are directly connected to the business and
are concerned with how well the business performs. - Employees: They
work within the business and want job security, good pay, and safe working
conditions.
External Stakeholders:
- Suppliers: They provide the goods and services that the business needs.
- Customers: They buy products or services from the business.
- The government: They regulate businesses and collect taxes.
- Banks:They lend money to businesses and expect repayment.
- The local community: They may be concerned about how the business
a ects the environment or local jobs.

• Roles, Rights, and Responsibilities of Stakeholders

Each stakeholder has certain roles, rights, and responsibilities:
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 - Employees: Have the right to receive fair pay and are responsible for
completing their work well.
- Owners/Shareholders: Have the right to be informed about the business’s
performance and activities.
- Suppliers: Are responsible for providing the agreed-upon goods or
services at the right quality and quantity.
In return, businesses have responsibilities to their stakeholders, creating a
two-way relationship where both the business and stakeholders rely on each
other.

• The Importance and In uence of Stakeholders on Business

Decisions
Any decision a business makes can impact its stakeholders in di erent ways:

- Employees might be a ected if the business decides to downsize or close

locations.
- Shareholders will be impacted if the business’s pro ts are lower than
expected.
- Suppliers might bene t if the business places larger orders, which could
help their own business grow.
- The community might bene t if the business expands, bringing more jobs
and income to the area.
-The government bene ts if more jobs are created and taxes increase.

Business decisions can have positive or negative e ects on di erent

stakeholders. Sometimes, one group may bene t at the expense of another.
For example, reducing employee wages might increase pro ts for
shareholders, but make employees unhappy. Similarly, moving production to
a cheaper country could upset the local community but lower production
costs for the business.

• If stakeholders are unhappy with decisions, they can respond in

di erent ways:
- Shareholders can sell their shares and invest in other businesses.
- Banks can refuse to lend money or increase interest rates.
- Employees can leave the company or go on strike, refusing to work.
- Suppliers can stop providing goods or ask for better payment terms.

• Impact of Stakeholder Aims on Business Decisions

Di erent stakeholder groups have their own goals. Here are a few examples:

- Employees want higher pay, better working conditions, and job security.
- Customers want quality products at a ordable prices.
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 - Suppliers want timely payments and long-term partnerships.
- Owners/Shareholders want higher pro ts and returns on their investment.

• Businesses need to take these goals into account when making

decisions. For instance:
- Employees: A company like Google, which hires highly skilled workers,
needs to provide good working conditions and attractive pay. Otherwise,
they may struggle to hire and retain talented sta .
- Customers: If a supermarket raises prices, customers may shop
elsewhere. Businesses often make decisions that focus on giving the best
value to their customers to keep them loyal.
- Suppliers: Businesses depend on their suppliers for raw materials. If they
don’t manage their relationship with suppliers well, such as delaying
payments, it could hurt their operations.

• Shareholder Concept vs. Stakeholder Concept

- Shareholder Concept: This approach focuses mainly on rewarding the

business’s owners (shareholders). It aims to make as much pro t as
possible to keep shareholders happy. This could mean paying employees
just enough to keep them, bargaining hard with suppliers, and paying only
the necessary taxes. The focus is on meeting legal obligations, but
nothing more.
- Stakeholder Concept: This is a more cooperative approach where
businesses try to treat all stakeholders well. For example, a business
might pay suppliers more than necessary to ensure they get the best
quality products. It might also invest in employee development to
encourage loyalty and increase productivity. This approach is linked to
corporate social responsibility (CSR) because it emphasizes ethical
behavior and long-term sustainability over short-term pro ts.

• Stakeholder Con ict

Con icts often arise because di erent stakeholders have di erent goals. For
example:
- Investors may want to reduce costs to increase pro ts, but this could
mean lower wages for employees.
- Customers may want cheaper products, but this could mean the
business needs to move production overseas, impacting the local
community
- The government may push for more environmentally friendly practices,
but this could increase production costs, which might lead to higher prices
for customers.
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 • Stakeholder Map
A Stakeholder Map helps businesses prioritize stakeholders based on two
factors:
1. Interest in the business’s activities
2. Power to in uence the business

Stakeholders are divided into four

quadrants:
- Quadrant A: Low power, low interest –
Businesses don’t need to focus much on
these stakeholders (e.g., small suppliers).

- Quadrant B: High interest, low power –

These stakeholders are interested but not
very powerful (e.g., local residents).

- Quadrant C: High power, low interest –

These are powerful stakeholders who
don’t show much interest (e.g., investors focused on nancial returns).

- Quadrant D: High power, high interest – These stakeholders are very

in uential and highly engaged with the business (e.g., major customers).

• Changing Business Objectives and Stakeholders

As a business’s objectives change, its relationship with stakeholders can
also change:

- A focus on higher pro ts might lead to cutting costs, which could hurt
employee wages and reduce investment in training.
- A shift toward environmental goals might lead to more sustainable
practices, bene ting society but possibly increasing costs.
Balancing stakeholder interests is a challenge, especially during times of
change. Managers must decide how to satisfy as many stakeholders as
possible without causing too much harm to others.
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1.5 Growth and Evolution:

Internal and External Economies and Diseconomies of

Scale
- Economies of scale happen when a business lowers its average costs by
expanding its operations. This means the bigger the business, the cheaper it
becomes to produce each unit.
- Diseconomies of scale occur when a business grows too large and
becomes inef cient, leading to higher costs. Problems like poor
communication and bad management can make production more expensive.

• Internal Economies of Scale

- Internal economies of scale happen when a business grows and reduces
its costs. These savings come from operating on a larger scale, speci c to
the business itself, not the whole industry.
- When you are producing more and grow, the average cost decreases
- Is when the company safes costs as a result of operating on larger scale ,
such as … company
- For example, if a company hires an advertising agency, the cost is spread
over more sales in a bigger business
- As a company expands, it can lower production costs and overheads,
allowing it to reduce prices and attract more customers, gaining a
competitive advantage.
- As businesses grow, production costs per unit decrease (economies of
scale).

Types:
- Technical Economies: Bigger businesses can adopt production
techniques like assembly lines, spreading the cost over many units (e.g.,
Mars produces 3 million bars/day).
- Specialization: Larger businesses break tasks into smaller, repeated jobs,
increasing ef ciency.
- Purchasing Economies: Larger rms buy more, allowing them to
negotiate discounts (e.g., Walmart gets better deals with suppliers).
- Marketing Economies: Costs of campaigns spread over more units,
making advertising cheaper.
- Managerial Economies: Bigger rms can hire specialists (e.g.,
accountants) to make better decisions, lowering costs.
- Financial Economies: Larger rms can borrow at lower interest rates
because they’re seen as less risky. Experience also improves ef ciency.
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 • Internal Diseconomies of Scale
- After growing too big, unit costs can rise (diseconomies of scale).
Causes:
-Communication Problems: Harder to ensure messages get to the right
people in big businesses.
-Coordination Issues: Different parts of the company may not work well
together.
-Motivation Problems: Employees may feel isolated or less motivated in
larger organizations, leading to inef ciency.

• External Economies and Diseconomies of Scale

- External factors outside the business affect costs:
- Economies of Scale: Can occur if suppliers expand and lower costs, or if
the government invests in infrastructure.
- Diseconomies of Scale: Occur if suppliers get too big and pass on higher
costs to the businesses they supply.

Reasons for Business Growth

- Gain more power over suppliers/customers.
- Bene t from internal economies of scale.
- Reach more customers and increase pro ts.
- Owners can have a sense of achievement and raise the business’s value.

• Types of Growth
- Internal Growth (Organic Growth): Expanding operations by increasing
sales, developing new products, or nding new markets.
- External Growth (Mergers, Acquisitions, and Takeovers): Joining with or
buying another company.
- Horizontal: Joining with a company in the same production stage (e.g., car
manufacturers merging).
- Vertical: Joining with a company in a different stage (backward = supplier,
forward = retailer).
- Conglomerate: Joining with a company in a different industry (e.g., car
manufacturer merges with a confectionery company).

Impact on Stakeholders
- Investors: Can bene t from higher returns if deals succeed, but many fail to
meet expectations.
- Employees: Some may lose jobs if roles overlap, but successful deals may
create more jobs over time.
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 - Suppliers: May gain from a bigger, successful business, but the new
company might demand lower prices.
Here’s a simpler version with bullet points for easier studying:

Why a Merger/Takeover May or May Not Achieve Objectives

- External growth through mergers/takeovers helps businesses grow quickly
by entering new markets or expanding their presence.
- Problems with mergers/takeovers include:
- High costs (legal, nancial, reorganization).
- Clashes between different working styles, priorities, and decision-making
processes.
- Inef ciencies if the business becomes too large, leading to communication
and coordination problems.

• Joint Ventures and Strategic Alliances

- Joint ventures: Two businesses create a new legal entity to work together on
a speci c project or market, sharing resources, expertise, and pro ts.
- Strategic alliances: Two businesses collaborate on speci c projects while
staying independent.

Bene ts:
- Share skills, resources, and knowledge.
- Easier and less costly than a full merger.
- Useful for entering new markets with local expertise.

Challenges:
- Disagreements over pro t division.
- Differences in decision-making and priorities.

Franchising
- Franchise: One business (franchisor) sells the right to use its products and
brand to another business (franchisee). Example: McDonald’s, Domino’s
Pizza.

• How it works:
- Franchisee pays fees and a percentage of pro ts to the franchisor.
- Franchisee follows strict rules about products, pricing, branding, etc.

• Advantages:
- Franchisees bene t from the franchisor’s experience, support, and
marketing.
- Less risky than starting a business from scratch.
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• Disadvantages:
- Franchisees pay fees, reducing their pro ts.
- Franchisees depend on the brand’s overall reputation, which can be
affected by other franchisees.
- Limited freedom in decision-making.

• Selling a Franchise
- Franchisors bene t from fees and percentages of pro ts from franchisees,
allowing fast growth without self-funding.
- Example: Domino’s grew rapidly through franchising.
- Franchisors may have more motivated managers, as franchisees treat it as
their own business.

Reasons for Businesses to Stay Small

- Avoid attention from bigger businesses: Growth can attract aggressive
competition.
- Avoid government scrutiny: Big businesses can face investigations for
monopolistic behavior.
- Simplicity: Small businesses are easier to control and manage.
- Avoid external investment: Growth may require selling shares, leading to
loss of control. Small family businesses may prefer to stay private to retain
control.
This summary retains the essential concepts while simplifying the language
for clarity.

1.6 Multinational Companies (MNCs)

The Impact of MNCs on Host Countries
- MNCs: Businesses with headquarters in one country but operations in
several others (e.g., Ford, Google, Shell).
- Advantages of MNCs to host countries:
- Economic growth and employment: Foreign investment creates jobs and
boosts local businesses.
- Skills and technology: MNCs bring new production techniques, ideas, and
offer training to local workers.
- Improved goods and services: MNCs can make high-quality products
available to local consumers at better prices.
- Infrastructure investment: MNCs may invest in infrastructure (roads, rail,
communications), bene ting the entire country.
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 - Disadvantages of MNCs to host countries:
- Minor impact on employment: MNCs may hire skilled workers from abroad
or use capital-intensive methods, reducing local job creation.
- Footloose nature: MNCs might relocate if taxes or regulations change,
limiting long-term bene ts.
- Environmental damage: Poor regulation in some countries can lead to
pollution or accidents, causing long-term harm.
- Pro ts leaving the country: MNCs often send pro ts back to their home
country, reducing reinvestment in the host country.

Reasons for Companies Becoming Multinationals

- Reduce transport and distribution costs: By producing goods closer to
growing markets.
- Access to new markets: Establish a brand presence in different regions.
- Secure raw materials: Avoid export controls by operating where raw
materials are found.
- Low labor costs: Take advantage of cheaper production in countries like
Vietnam.
- Overcome trade barriers: Locating within a country helps avoid export taxes.
- Reduce risks: Having multiple bases in different regions limits the impact of
political unrest or natural disasters.

Relationships Between MNCs and Governments

- Tax issues: MNCs often minimize taxes by reporting pro ts in low-tax

countries, causing governments to lose billions in revenue.
- Part ownership: Some governments own shares in large multinationals,
earning pro ts and gaining in uence.
- Governments as customers: Governments increasingly rely on MNCs,
especially for technology services.

Examples:
- Walmart’s revenue is bigger than most governments' budgets, making
MNCs powerful and in uential.
- Governments struggle to agree on how to fairly tax MNCs, with companies
like Amazon and Google being criticized for paying too little tax.
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