Cambridge IGCSE™ and 0 Level Business Studies aan tela)DYNAMIC LEARNING Dynamic Learning san onine subscription soliton that suport teachers and students with high ‘ual content and unique tol. Dynamic Learning incorporates elements that ll wrk together to give you the ultimate classroom and homework resource Onine Teacher's Guides incu a host of nformatve and practical teaching esoures, such as «Lesson planing support via edtable schemes of work ‘© Teaching materia, fr example worksheets or glossaries © Answers, extra teaching notes andor exam sie questions Cambridge IGCSE™ and O Level Business Studies Fifth edition is avalable as a Whiteboard ‘Textbook whichis an nine interactive version ofthe rind textbook that enables teachers to ‘© Display interactive pages to ther class ‘© Add notes an highlight areas ‘© Ad double-page spreads int lesson plans ‘Adonaly th Student Textbook of Cambridge IGCSE™ and O Level Business Studies Fifth editions 2 dowrioazabe version ofthe printed textbook that teaches can assqn to stunts so they can ‘© Dowmoad and vw on any device or browser ‘© Add, et and synchronise notes across two deicas ‘© Access thelr personel copy onthe move To find ut more and sign up fo feel vis: wwwwhoddereducation.com/dynamiclearningCambridge IGCSE™ and 0 Level Business Studies ian Lela) Berane’ QHLBRER AN HACHETTE UK COMPANYeptionnsame oe y iten by t t) ante y ‘stems and ads mene i Dos otc he pce Valea ad ae anon eft ho bes rae ote ote ede, bat if ay ee bee natant ck te alien vibe pasate my arngnets BeBe Atha ee ft been ae ett weber ae coe ie fas es i fluence hens he xe eb aon na soir {binds oad wpe by pg he seo OF me pge as etme vw oy ade Us a oe ae te atl acl pad me fon not oe ‘nat sts he ping nt atc pce rp onto oth enone ‘oti ofthe coy rp es tne i 30a i tion a Aigo, 0 4 SE. dep) 1238 ‘Rrra i i uc na eanateng bagi ew in ps tom 95 pn Ry Site wh Seour esas eng ve Yor Se ot rag ea ecehetesaaso cm "ae xii an te Sinan 18 fn i 98 ‘in on pte Far ator pn Ths an pb 08 Asis earn A om ay pee eet cpt ao pt of i pabcin my be ‘on uname enw mc ge ats eran on Cn ens ayy ite. 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Fs0 cto47a0Contents SECTION 1 SECTION2 SECTION 3 SECTION 4 SECTIONS SECTION6 Introduction How to use this book Exam preparation and technique Understanding business activity 1 Busines activity 2 Casfeation of businesses 3 Enterprise, business growth and ie “4 Types of busines organisation 5 Busines objectives and stalaholde objectives Case study People in business & Hatatng employees 17 ongnisation and management 88 Recrutmert,seleton and waning of employees nena and extemal communication Case study Marketing 410 Matetng, competition and the customer 41 Mat rsereh 12 The makeing ins poet 418 The marketing mix: pice 1 The maaing mis place 415 The marketing mc promotion 46 Technology and te makeing mi 17 Making satesy Case study Operations management 48 Production of goods and services 19 Costs, sal of production ad break-even analysis 20 Achieving eat production 21 Location decisions Case study Financial information and financial decisions 122 Business france: neds and sources 123 Cash ow forecasting and working capital 26 Income statements 25 Statement of fancal position 226 Analysis of accounts Case study External influences on business issues 27 Economic ses 28 Environmental ad ethical sues 29 Business and the international economy Case study Index ‘Acknowledgements a 75 92 1 12 13 158 170 va 135, 7 203 a au 228 2a 208 282 265 zal 203 303 an 323 326 340 351 382 364 368Introduction ‘This book has been writen forall students of Cambridge JGCSE™ and 0 Level Business Studies. Tt carefully and precsely follows the syllabus from Canbridge Assessment International Education. It provides the detail and guidance that are needed to support you throughout the course and help you to prepare for your examinations, It wll also prove to be of great use to anyone who wants to learn ‘more about the key concepts of business. This book wil prove to be valuable to students of Business Studies whether you are: »» studying the subject for the frst time through your school or college and need a comprehensive and cleariy written textbook »» rvising the subject before your examinations and need a study guide to help ‘you with key definitions, techniques and examination advice » learning the subject on your own through distance or open learning and need a complete programme of supportive questions, activities and suggested answers to these. Building on the successful formule of the previous four editions, this ith edition "updates all existing chapters including removing material which is no longer in the syllabus and adds new subject material with additional chapters ani new features. How to use this book To make your study of Business Studies as rewarding and successful as possible, this Cambridge International endorsed textbook offers the following imoortant features: Learning objectives Each chapter starts with an outine of the subject mater toe covered and ends with a checklist to confirm what you should have leamed and understood. Organisation ‘The content is in the same order asthe syllabus: chapter titles and chapter section headings match those ofthe Cambridge IGSE and 0 Level Bushess Stugis syllabuses Approach ‘The subject material is written in an informative yet lively way that allows for complete understanding of each topic to be gainedRevision summary j “Revision summaries inthe format alpt spider dagrams that alight [eines [Revision checktst Th celia ey oc and [etsyronrecomed Sect” Sly posted aoe ee “Study tips Tips toholp you make key pints when “anwering questions, international business in focus, Case stasis of businesses rom round he wort and cussion points tetelpeament understanding. [key into Keyhioboestroitetirier | Shanti eee Case study Cave sunbed ona range of ‘international businesses/examples put ew they work ngractee Exam-style questions Further case study examination syle ‘question atthe endo ach group of haplrs provide praiefr spec “needa kron with el wet Definitions to learn | Deinios fh ay wards ounend io row are gien, wth ere hgh Activity ] [Numerous ati support our learning an check your progress at _coehimpartat lage a evry lapte, Chapter review questions Banton se questions the [erdoteacnchapr allow you te Sain cssental practices onering Sieston ole ragured staExam preparation and technique Revision You shouldbe able to perform to the best of you ability you: > ensure that you have worked through all ofthe activities and examiration-style «questions in this book »» revise thoroughly before the examination ~ allow plenty of time for this and avoid leaving it until he last minute You can also help yourself greaty if you take the following steps. >» Obtain a copy ofthe syllabus. You should also be able to obtain past ‘examination papers and mark schemes. Itis very important that you check the progress of your learning and revision by ‘ticking of? each topic against the syllabus content. >» Make sure that you know the number and length of each ofthe examination papers you will have to sit. The style and nature of the questions often differ between papers so you must be quite clea about the type of questions likely ‘to appear on each paper. For Cambridge IGCSE™ and 0 Level Business Studies the examination papers are Length ‘ypeot paper Type of questions | Paper! Thour30 mins Dateresponse Four data response questions based en fourdferent busneses, The quesiowsare ‘Sricuradal toe] Paper? theurS0 mins Case study Four structured questions [Leal andl all based on scare study In the examination Make sure you check the instructions on the question paper, the length ofthe paper and the number of questions you have to answer. In the case of Cambridge TGCSE™ and O Level Busines Studies examinations you wll ave to answer every question as there wil be no choice. ‘Allocate your time sensibly between each question. Every year, good students let themselves down by spending too long on some questions and to itl ine (or no time at al) on others, You wil be expected to spend longer writing an answer to a auestion worth 12 mars than you would when writing an answer worth & mars. Remember that the most common ‘prompt’ words are ‘identify, ‘explain’, ‘consider’ and ‘justify. The following guide should help you. Key command words you need to know Define {is asking you to clearly show the examiner that you know what aterm means. A single sentence answer is nearly always sufficient.Inthe examination Identify As in “Identify two factors that could influence the price of a product! Identify means write dawn, without explanation or discussion, the required number of points. ‘So the answers to the question above might bet 1 Costs of production. 2 Prices of competitors’ products Calculate Asin “Using the figures provided, calculate the break-even level of producton! This means ‘using the figures provided, work out the following’. Explain As in “Explain two ways in which the hotel could promate its services: Here the examiner is asking you to give more detail than just identifying points. Your answer must also be applied to the business in question ~ inthis case, 1 hotel, So, advertising on TV would not be appropriate for one hotel given the high cast of TV time. A better answer would be: 1 The hotel could contact all quests who have stayed at the hotel before by email to give them details ofa special offer, 2 The hotel could also use a colourful and effective website to promote its, services to customers who book hotel accommodation online, Consider As in ‘Consider whether the car manufacturer should reduce prices to increase demand! This is asking you to show advanced skils. The best approach to answer ‘this type of question isto explain the advantages and disadvantages of reducing ‘ar prices - using any case material about the business to help you. You should ‘then weigh up these advantages and disadvantages applied to « car manufacturer and compare them before making a final conclusion. Sustify ‘sin Recommend to TelCom the best way to expand ~ taking over a phone manufacturer ora chain of shops selling mobile phones? Justify your answer/ recommendation’ Tn questions like this you need to consider both options for expansion, siving advantages and disadvantages for both. Finally, you should weigh up the points for and against each option and come to a fnal decision based on the most ‘important points. For longer questions also justify why the alternative(s) was, rejected. State Asin ‘State two examples of promotion for XYZ company’ This question only requires two examples to be given and no explanation is required. outline Asin ‘Outline two benefits to Jameel of operating his business as a sole trader! This is asking you to set out two benefits of operating as a sole trader and how they relate to Jameel and his business.Finally... Learning Business Stuies should be both rewarding and challenging. We hope that this textbook wil help you overcame the chalenges ofthe Cambridge IGCSE™ ad O Level courses so that you can achieve the success you ae seeking. In particular, we want the book to encourage you to develop areal interes in ~ tven a passion for ~ finding out more of how the world of business rely works. Business activity so crucial tothe future wellbeing of us al and tors great opportunities forall well-motivated students, Sucessn Cambridge IGGSE™ and 0 Level Business Studies can help you take the frst important steps towards playing a leading role n managing and directing business activity in your cour. We are confident that this book wil fully support you daring your course. Wishing you all the best in your studies, Karen Borington Peter Stimpson~~ SECTION 1 Understanding business activity Peed cere Cee eee Enterprise, business growth and size eee) Business objectives and stakeholder objectives“there eit unlined rants but ited resources toproduce the goods ndserices to saisty those wants Ths cretee scarcity Business activity Ss eee rate re eee ee eee The economic problem: needs, wants, scarcity and opportunity cost | yourneeds ~ those things you tink are necessary for ving Your want things you would Uke tobe able fo buy and own. For example on our ads ist you wll probably include clean water, and on your wants ist you may include a xury house \What do you notice about your two lists? Probably the rally important items are fn the needs list - water, clothing for warmth and protection, food and some form of housing or shelter. And on your wants list? That willbe up to you and your Interests and tastes, but you could probably have written a very long list indeed. Do you already own all ofthe items on your wants list? If you do, then you must be wery lucky and very rich! Most people in the world cannot afford to buy everything they want because our wants are unlimited. In many countries, same people cannot afford to buy the things they need and they are likely tobe very poor. iy ae there so many wants and needs that we cannot satisfy? Why are millions of people living in poverty in many countries around the world? Most peep will, answer these questions by saying, ‘Because there is nat enaugh money Is the real economic problem caused by a shortage of money? An example ‘may help to show you why more money is not the answer to the problem of many people's wants and needs not being satisfied. is worried about arge numbers of people who realy unuries that they want to Wy to ‘soe these problems by printing mare bank notes, doubting everyone's incomes, Hos the government soled the economic problem ofthe county? Are there now ‘more good forthe people to buy? More houses? Mare schools? Mor cars? Inproved Standard af ving ofthe population? “The answer toa of thets questions is 'No’ Printing more maney does nt produce ‘more goods and services, itil ust ead to pries rng so more goods cannt be $Hordd = you just pay mor forthe same amaunt af goods,Definitions to learn Factors of production are hoe sources needed to Produce goods o services There ae tour factors of reduction andthey aren ited supe. Scares the ack ot sufciet products to oli the ta ante othe ation, [Definitions to earn Opportunity cots the neat bt alternative given up by hoesing onthe en Limited resources the need ts choose The economic problem ~ the real cause ‘The real cause ofthe shortage o scarcity of goods and services is that thee are not enough factors of production to make al of te goods and services thatthe population needs and wants. Tete ae for factors of production »» Land - this term is used to cover all of the natural resources provided by nature and includes fields and forests, ol, gas, metals and other mineral »» Labour - this isthe number of people available to make products. >» Capital - this is the finance, machinery and equipment needed for the ‘manufacture of goods. »» Enterprise ~ this isthe sill and risk-taking ability ofthe person who brings the other resources or factors of production tagether to produce a good or service, for example, the owner of a business. These people are called entrepreneurs, In any one country and in the world asa whole, these factors of production are limited in supply. As there is never enough land, labour, capital or enterprise to produce all ofthe needs and unlimited wants of a whole population, theres an ‘economic problem of scarcity. ‘A The rel cause of he economic problem Limited resources: the need to choose We make choices every day. We have to, as we have limited resources but > many wants. We therefore have to decide which wants we will satisfy and which we mill nat. All choices involve giving something up ~ this leads to opportunity cost Should I take a bus to school or use the money fo anew pen to write clear Business Studies nots? Do I buy anew pair of trainers ar spend the money on a ew smartphone? ‘We do not have the resources to satisfy all our wants, so the next best alternative that we give up becomes our oppertunity cost. This problem of ‘hat to give up’ exists not only for consumers like us but for governments and businesses too. In making choices we need to consider carefully the opportunity cost to make sure it snot worth more tous than the item we ae buying,1. BUSINESS AcTIviTY Inviduat Business Government Holiday or car? Now road ar rew school? The individual chooses to The company decides The government chooses buy the holiday sothe car tobuyMachine A so to buld the roxd 80 the becomes the ppertunity. -Machine'B becomes the school becomes the fost ‘oppartunity cost, Dppertunty cost ‘A Examples of opportunity cost SeeDefinitions to learn Specialeation curs when eancerrate ont they The importance of specialisation: the best use of limited resources In ll societies the factors of production are in Limited supply. Its therefore important to use these esources in the most efficient ways possible. The ways in hich these resources are used have changed greatly inthe Last 250 yeas. Very few products are now made just by the efforts and skills of one worker. Neary all workers specialise in particular sils and many businesses specialise in one type of product. Specialisation is now very common because: »» specialised machinery and technologies are naw widely available >» Increasing competition means that businesses have to keep costs low >» most people recognise that higher living standards can result from being specialised, This is how Joe Shorma, a carpenter, wen! about making a table 250 years ago: 3 Me poten the ule yard What do you ntie abou theee methods of production? + Joe id everything himslt including the cting ofthe timber andthe sale anc ‘elvery at he inished table, + Production was very tow ~ only ane table per week * Compare this wih typical moder production methods. Two hundred and fity ears later, Jack Sharma owns the famiy business. This show production is organised ‘ames ane the ping parent tose hm oo fru es1. BUSINESS ACTIVITY [Definitions to learn Division of tabour i when he rection pence is spl up into erent tasks nd each worker performs fone ofthese ack, hie form of speciation. [Definitions to earn Businesses combine factors of production make product gods an Seca when sty peoples wants. Specialisation and the division of labour ‘Jack Sharma is using the principles of specialisation and division of labour. He is dividing up the making of tables into different jobs and making each worker a specialist at just one task. Division of labour has advantages and disadvantages: fama "Disadvantages + Workers are trained in ane task and specialise in this this neeases efficiency and cut + Les times wasted moving rom one workbench ‘+ Workers can became borsd dog Just one job effoncy might al + fone worker i absent anno one Cuicker and cheaper to train workers as tener | mah be stopped "hie need tobe taught | ‘Activity 1.2 Using another prec, or example, bead of lay pts, expan, with simple ilesrations howatsionof abour or specialstion could be used to make the pratuc. Explain the possible advantagesciesdvantages of using dion o! about lr specialisation of labour! othe business you chose, The purpose of business activity We have identified the following issues: >> People have unlimited wants. >» The fou Factors of production ~ the resources needed to make goods - are in Limited supply. >» Scarcity results fom limited resources and unlimited wants. >» Choice is necessary when resources ae scarce. This leads to opportunity cost. >» Specialisation improves the efficient use of resources So far, we have hardly mentioned businesses and yet this is the purpose ofthis book! Where does business activity fit into the ideas we have already looked at? ‘The purpose of all businesses isto combine the factors of production to make products which wil satisfy people's wants. These products can either be goods ~ Drysical items such as cars and shoes which we can touch and see ~ or they can be services, such as insurance, tourism or banking. Businesses canbe small - jist one person, for example - or large. Some businesses employ thousands of people with operations in many different countries. Businesses can be privately owned or owned by the state/government. They can be owned by one person ar by thousands of shareholders Whatever ther size and whoever owns them, all businesses have on thing in ‘common - they combine factors of production to make products which satisfy people's wants. ens <—Study ts Definitions athe kay terme inthis book can be fund in the let hand marine. Sugy the course sts portant tha yo earn these heart Definitions t learn fiference between the Seling price af a product nd te ost of baugh-n mateale and component, Factores tices inallsectrs ol industry produce goods and senices by combining 1 of production ‘What would life be like without business activity? In simple, undeveloped ‘economies, businesses do not exist. Everyone attempts to do everything for themselves - they are self-sufficient. With their own plot of land and by their own efforts, such as hunting, they attempt to survive and produce enough for their ‘own neds. This is avery basi existence and living standards are Low. By a slow process of specialisation, people began to concentrate on what they were best at. They then traded those goods for others made by people who had different sil. In this way, businesses began to be formed, and trade and ‘exchange of goods expanded, In today’s world, most people specialise by working in one job for a weekly wage. With this money, they are able to purchase a wide range of goods and services produced by many different businesses ~ specialising in different products Business activity therefore: >» combines scarce factors of production to produce goods and services »» produces goods and services which are needed to satisfy the needs ané wants of the population »» employs people as workers and pays them wages to allow them to consume products made by other people, Added value This is avery important idea. All businesses attempt to add value. If values nat added to the materials and components that a business buys in, then: »» other costs cannot be paid for >» no profit will be made. 7 4 Diagram showing value acd1. BUSINESS ACTIVITY ig, bamole: »» The sling price ofa newiy built house s $100000. > The value of the bought-in bricks, cement, wood and other materials was $15000. replays wthmaremsi |, The added value of the building frm was $85000, This isnot all proft- out of E20 pane an tere” his the bulder must pay wages and other costs too. ‘pane the LEco orp i “Gélabyeuinattce | Why is added value important? eee st Added value is important because sales revenue is greater than the cost of materials bought bythe busines. Ths means the business: Key info ire around the world >» can pay other costs such as labour costs, management expenses and costs ‘including advertising and power >» may be able to make a profit if these other costs come to a total that is less than the added value. rice forthe bulging sets. How could a business increase added value? There are two main ways in which @ business can try to increase its adved value: ‘8 Increase selling price but keep the cost of materials the same. This might be possible ifthe business tres to create a higher quality image fr its product or suave ing alu a 8 fe er atta ned service. If consumers are convinced by this then they might be prepared to pay ‘erysucesshtl Wren some | higher prices and buy the same quantity as before the price rise. A jevellery Disnesses try taincrease shop could employ very experienced and knowledgeable sales staff, decorate doe ee can od ‘the shop to look luxurious and use high-quality packaging. Note though: other serousdinbarionesFor | costs might increase when trying to create this quality image. fsamsiejrtinereasngthe | momo iusterrasoa’ | ty Reduce the cost of materials but keep the price the same. A building frm could (Ctawersctesanc pease, | use cheaper wood, bricks and other materials when constructing a home of loner pot shop. Ifthe price charged to customers stays the same then a higher added value will be made. Note though: lower priced materials might reduce the study tps ‘quality of the product. Will customers be prepared to pay the same price fora eusnouidiso vey canes | produc that they believe is of lower quality? toaplyyour anonestothe busines inthe quvsien A vale afro ways foahteltusinessora cot risks manfecuree CTT, Aesing vatue x aon of einesRakesh owns smal bakery sling bread, cakes and heels. His busines just making enough money to Some af hicustomers not ony baught eas anoles but survive His wile, Neca, adhe idea of serving customers they pid higher prices for the cakes and biscuits hey bought tesand cole at two smal tablesthot could be ited nto. theyware served them on lal! the bakery shop. Customers wl pay mere fo each cake Rakesh had increased the value added tothe flour, fn biecut Fe se them wth tenor cafe jst he aie sugar and butler he used to make these cakes and (até: Rakesh bough some second-hand ca ‘uentureandtred what Nesta had suggested, Sho was rghit! Activity 1.3, Ifthe best-seling cake inthis bakery uses 30 cons’ worth flour, sugar and utter and Rakesh sells each one fr $1, calculate the value added i eustomers are prepared to pay $1.50 when this cake is served ona pate at table witin the bakery, what i the new value added par cake? ‘ees the opening af the smal café mean that Rakesh must have increased his weekly profi? Expain your answer. Xin a pees ae aT Recaateceoe: eee Smt dope a ee eee ee Sen are given much training in the tasks that they vil become eed at me speed and efficiency of McDonald's workers means that customers are served very quickly with freshly cooked food, Coats are kept very low and this helps to keep prices low. McDonalds and other fast-food restaurants often make great efforts to reduce the high labour turnover in this industry this means they are trying to reduce the high number of workers that leave the industry each year Discussion points ‘¢ Why do you think a large business such as McDonalds uses specialisation? «Think about as many advantages as you can to MeDonald’s ofusing specialization «Ifyou onmed a fast-food restaurant, consider two ways in which you cauld increase the value acded tothe food ought in by the restaurant,Exam-style questions: Short answer and data response 4 Gowri plans to startup her own business using her savings. She warts to produce fashion clothes for women. She isa very good clothes designer but she does not lke stitching clothes together. Two fiends have offered to help Gowri. abha is an experienced material or fabric cutter ~ she can cu: lengths of material or fabric for clothes with very little wastage. Aditi fs quick at sewing fabric together. 8 Define ‘business. fa gp ame a er ce en business, Ql «Outline two possible opportunity costs that Gowri may have from her decision to start her awn business. ro «Explain one advantage and one disadvantage to Gowns business of using division of labour in making clothes. 6] «© Do you think that Gowr’s business wil be able to sell ll ofthe cothes ‘that it makes? Justiy your answer, (6) 2 Mohammed owns a bakery. He makes bread and cakes. He employs three workers who help him mix the dough forthe bread and cakes, put the dough into tins, bake the bread and cakes, and serve customers. Mokammed has calculated thatthe ‘added value’ of his business is low. His customers complain when he tries to increase his prices. We can buy the same bread. and cakes at lower prices’ they tell him. 2 Define ‘added value. (2 'b Identify the opportunity cost to Mohammed of buying a new over. [2] «© Outhne two benefits to Mohammed's business of all of his worker, being able to do all of the jobs in the bakery. 4 «Explain two ways in which Mohammed could increase the value added of his bakery business. (6) «© Afriend told Mohammed, ‘Your business would be more successful it ‘you only served in the shop and let your workers make the bread and Do you agree? Justify your answer. (6) Romer unset eter? eerie of resources results in choices and opportunity co arene ont ene ioentn ioe eet NOW - test your understanding with the revision questions in the Student textbook and the Workbook.Classification of businesses + the differences between primary ary and tert my ta Bee eeeny Ok: a el sector and private sector busin Stages of economic activity ‘As you read this book you ae probably siting at a deskor table. Most tables are made of wood, How many diferent types of businesses might have been involved ‘converting the wood Int a fished table ready tobe sod oa inal consumer? What stages of production has the wood passed through to arrive a the fished ube? The diagram below shows the most ikely stages in the production and sale ofa wooden table stage activity business involved primary woodcut secondary furniture maker tertiary retailer | The stages ited in making an Sling a wooden table ‘You will notice that there are three main stages from the cutting down of the timber to the sale of the completed table. These stages are typical of nearly all, production and they ae called the levels of economic ~ or business ~ activity. ‘Stage 1 is called the primary stage of production. This stage involves the Earth’s natural resources. Activities in the primary sector of industry include farming, fishing, forestry and the extraction of natural materials, such as cil and copper oe. Definitions olearn The primary sector of Industry extracts and uses the natural reeoureas of Erin produce raw Businesses2. CLASSIFICATION OF BUSINESSES ‘Stage 2 i called the secondary stage of production. This stage involves taking the materials and resources provided by the primary sector and converting them into manufactured or processed goods. Activities inthe secondary sector of industry include building and construction, aircraft and car manufacturing, computer assembly, bread baking, [Definitions toleara The secondary sector of industry manufactures goods using the raw Patras provided by the {ye tertiary sectr of ndsty proves sarees ta consumers andthe other Secor f industry _A examples of acts inthe diferent sectors of industry rc farming in Vietnam, cethes Stage 3 is called the tertiary stage of production, This stage involves providing services to both consumers and other businesses. Activities in the tertiary sector of industry include transport, banking, retail insurance, hotels and haiuressing, py tia tabl. cate tna ek insert nny each bus areas Computer sseemy Travel agent Bakery Car showroomSean Relative importance of economic sectors Relative importance of economic sectors Which sector of indus is mast important in your county? This depends on what i sant by “important. Usually the three sectors ofthe economy are compared ty > percentage ofthe country total number of workers employed in each sector »» value of output of goods and services and the proportion ths is of total rational output. {In some countries, primary industries such as farming and mining employ many more people than manufacturing or service industries. These tend to be countries ~ often called developing countries ~ where manufeturing industry has only recently been established. AS most people stil ive in rural areas with {ow incomes, thee is litle demand for services such as transport, hotels and insurance. The levels of both employment and output inthe primary sector in ‘these countries are likely to be higher than inthe other two sectors. Th countries which started up manufacturing industries many years ag, the secondary and tertiary sectors ae tikly to employ many more workers than the primary sector. The level of output inthe primary sector is often small compared to the other two sectors, In economically developed countries, i is now ccmmon to find that many manufactured goods are bought in from other countries. Most ‘ofthe workers willbe employed in the service sector. The output ofthe tertiary sector s often higher than the other two sectors combined. Such countries are ‘often called the most developed countries. ‘Tha relate importance af the three economic sectorsin fom the timber eatraced fom ts forests, secondary Indias very leon that n Papua New Guinea. aia. production could increase ‘does not have large reserves of primary products oaturat "The terry sectors expanding in bth counties — ‘resources wheres Papua New Gunen'srichin mineral torimis starting gain importance in Papua NeW Guinea ‘epost ncn coper, ols and ol ad also has butts sll inits erty stages of development anditsmain ‘rloneiveorest covering mucha the country producing Service industries ae inked tothe transport and expat of timber products Extracting these valuable reaources makes te minerals Providing services to businestes ale the huge contribution othe economy/of Papua New Guinea. worlds nda largest service industry. Inds textile, steel and ear manufacturing industries aad _arerapily growing, but the secondary sectr in Papua New Guinea's smal ~ palm processing, plywood production and woodchip production are the most, Important secondary industries. Papua New Guinea ‘developed a formu industy making tables and chairs Activity 2.2 4 Explain what ‘tertiary production’ means by using examples frm the case stu 3 Explain two rensans wy the primary sector flatly mare important to PaFua ‘Naw Gunes than to Ind, { In2017, twas estimated that 47 par cent of Indians worked inthe primary sector mainly in agricultre. Why was this sector the least important ofthe three in ferme of output? 4 iscuss the ly impact on Papua New Guin ‘exhausted the capper and gold runs out if ts capper and gold mines be-ome2 CLASSIFICATION OF BUSINESSES. Definitions to tearm Changes in sector importance Inthe UX and other developed economies there hasbeen a det inthe {nporance of ranufacuring nds = rte secondary sector = sce the 19¥0s The tea setor tre Uk Wow empl nel over 75 percent fall weft, Many woves who ls bso ctor Cosed fave found att ‘Sata oh a eprint, Teac car = seconaay sector of nausea de ndusrtoaion, Key info In China and India, the relative importance of the secondary sector has tne increased since the 1960s, compared fo te primary sector However In both See coinccs, mary ofthe tertay sector itunes ae now copaning noe PSG pty han thee in bmn te priery and secontny sector. Tere are sore enors fr charges n te retve importance ofthe tee cts eee wee ras Sear es De-indutraistion occurs tahen three adetine nth importance of the secondary, manufacturing Secor of industry ina cai By 2017 speared ‘This has been true for Somalia with the cutting down of most of its forests. sherry induses Host developed economies are losing competitiveness in manufacturing to aggimsctetste! newly industralised counties such as Bavl India and China. seen peeresic? As a countrys total wealth increases ad living standards rise, consumers tend fera@votauparservce to spend a higher proportion oftheir incomes on services suchas travel and insriestertan/predves restaurants than on manufactured products produced from primary products. ans Seer Mesico naw has nearly 25 per cenafitslabourforce employed in manufacturing ana it ts making a malor Cariebsion othe hanging enemy fhe aur. ts secondary Sector produces ever [id of t3$22llen GOP. Itisnow the USA seconds largest export market and tilargest source sFimporte The mais Secondary nasty is cor “manufacturing 35 cane © eniyexport tare USA also oso, Ausvalisand aw Zeatan rom ports 99 thePacie coast. However, strespace manulaclusrg fing at 20 percent “per year isthe ithe (ergat exporter of medical = devcesinthe wor te domestic applancs such Be refigerators washers and Te make op al of at fala panes “salgin he USA In 1970, Bangladesh had an economy largely based on agriculture. Ahigh proportion of the population worked in farming, eter to preduce crop for their own consumption oF toselin lost markets, Secondary manulacluring actives were not very important and the tertiary sector was alo smol a incomes were very low and people had ile spare ‘ash to spend on ‘serves By 2017, Bangladesh had undergone significant changes. Although 40 percent ofthe workforce sil werks in agrcuture, primary production of goods such asjute, tobacco 23nd food has fallen in relative terms. Manufacturing industries ~ mainly food processing Sand clothing - have expanded rapidly, Tertiary serces such as telecommuricatons, transport and finance now contribute approxmately Palo otal national op Ecanomi sectors in Bangladesh - World Bank estimates of share of P| Activity 2.3 fer to the case study above, 2 Explain twe possible reasons why he relative importance of primary outpu has fale, 'b Would workers who formery worked in agriculture ing it easy to obtin jobs inthe Escondary or tertiary sectors of industry’? Explain your ave. «© What do you expect to happen tothe relate importance of tertiary industri Incomes continue ie in Bangladesh? Explain your answerStudy tins at iteret pattems of ecanomifbusines tity ten exist between Ton Income’ high-income’ Definitions to learn Amines economy has both» pte rector an 2 publi atl sector Mined Mixed economy Nearly every county inthe wold has a mixed economy with private sector anda public sector >» Private sector ~ businesses not owned by the government. These businesses vill make their own decsions about what to produce, how it should be broduced and what price shoud be charged frit, Most businesses inthe Frivate sector wll im to make a profit. Even so there ae Likely tobe some Government contol over these decisions and these are explained in ater Chapters in this book. »» Public sector ~ government (or state) owned and controlled businesses and ‘organisations, The government, or other publi sector authority, makes decisions about what to produce and how much to charge consumers. Scme ‘goods and services are provided free of charge tothe consume, such a state health and education services. The money fr these comes not from the ser but from the taxpayer. Objectives of private sector and public sector businesses are often cifferent (see Chapter 4) Which business acti sector? In many countries the government controls the fllowing important industies or activites: ies are usually in the public >» health »» public transport »» education »> water supply >» defence »» electricity supply. Activity 2.4 Fo each othe examples of kay industries or activites tse above, suggest three ‘possible reasons why the government of country might decide To wn and corral that Indistry or serace Activity 2.5 in out whether, your own country, the government owns and controls the follwing businesses: | clay system 4 lect supply local bus services fe TVandradio stations water supB) hospital. Mixed economies - recent changes In recent years, mary governments have changed the balance between the private sector and the publi sector in ther economies. They have done this by sling Some public sector businesses owned and controle by government ~ to private Sector businesses. Ths is called privatisation, In many European and Asi Countries the water supply, electricity supply and public transport systems have been privatised,2 CLASSIFICATION OF BUSINESSES eG Why have governments done this? It is often claimed that private sector -captatis the mo businesses are more efficient than public sector businesses. This might be because eee seat cs by | their main objective is profit and therefore costs must be controled. Als, private theconers. sector owners might invest more capital inthe business than the government an afford. Competition between private sector businesses can help to: mprove Product quality. 8 However, a business in the private sector might make more workers unemployed The adrntnoe ond than a public sector business in order to cut costs. private sector business is Gessarogess' | | alo lee ily to focus on socal objectives. ered Changes in the balance between the private sector andthe public sector are eee ___/” tialy 10 continue in many mixed econamies. Activity 2.6 ur governments considering the privatisation of your counts postal serve. You Beno cone ‘decide otf the government minister cherge. explaining your vews on this, pratt wih | J mater an stating yur epnon tour leer shed cna ntoa pate ited ‘+ an explanation ofthe diference between private sector businesses and put sector eompany Sle trodersané | J businesses grime tinted companies, | [+ the possible benefits ofthe postal service beng in the privat sector 1 the possible disadvantages ofthe postal service Being in he pivte sector + yout recommendation tthe minister on whether to Keep the posta ericein the Pubic sector or no CEUSTIETITUU sectors of industry “Grits Canary ‘ae naa Prat sector, owned ‘bli sector, owned by Crpmtinds orient ore soitWine ene Tourism in Mauritius “Mauritius isa small island in the Indian Ocean witha land area of just 2000kam?. The Mauritian economy is dominated by the tertiary sector. In 2017, tourism, finance and other services accounted for 74 per cent of otal national output (gross domestic product). In contrast, the secondary sector accounted for 22 per cent and primary industries — mainly eugar production ~ just 4 per cent. The government is planning for 2 milion foreign visitors and the number of tourists is increasing by 9 per cent per year, These touriss spend a great deal of money on food, drink, travel and holiday gifs, Air Mauritius is one ofthe businesses that has benefited greally from the expansion of tourism in he country The airline is partly owned by private ‘owners and the Mauritian Government, thas won the Indian Ocean's Leading Airline’ prize ten times in recent years. Air Mauritius not only has an extensive network of ar routes butt also offers services to other ailines operating in te region and owns holiday companies such as Mauritian Holidays UK There are hundreds ofhotels and guesthouses in Maurits and these employ many local workers. Some ofthe largest hotel groups inthe world operate in Maurtias, such as Radisson and le Merion Discussion points Why do you think the primary sector ofthe Mauriian economy is rlaively small? © Explain three ways in which tertiary sector industries contribute to te ‘Mauritian economy. Do you thnk that increasing numbers of tourists will bring only benefits to Mauritius 6 Way do youthink the Mauritian Government il une apart of Air Maursus?2. CLASSIFICATION OF BUSINESSES Exam-style questions: Short answer and data response 1 Ade's Engineering Company (AEC) makes parts fr cars and bucks. These ae sold to eat manufacturers in many countries. The pats include etal brake components and rubber seals to ft around windows. AEC operates ‘nountryX, which, until afew yeas ago, had an economy dominated by agriculture and coal mining. Over the last 20 years the relative importance ‘ofthe primary sector has declined. To be successful AEC requites natural resources to make car parts and services provided by other businesses. Consumer incomes ae rising rapidly in Country X. 2 Define ‘primary sector. 2) Identity two examples of services that a business such as AEC requires. [2] © Outine two reasons why a business such as AEC could not be sucessful without other firms providing natural resources. iO) «Explain two likely reasons why the relative importance of the primary sector of Country X's economy has declined. (6) © A government minister in Country X recently sad: ‘The secondary sector of industry wil always be more important than the tertiary sector to our economy! Do you agree with this view? Justify your answer. [6] 2 The government of Country ¥ owns and controls many businesses. ‘The public sector always produces goods and services more efficiently than privately ‘owned businesses’ a government minister recently said. Other minisiers disagree and want to privatise many state-owned businesses. The private sector businesses in Country Y produce 55 per cent of total output ~ mainly in services such as transport tourism and finance. The secondary sector of ‘industry produces 35 per cent of total output. Define public sector. ra 'b Identity two industries in the secondary sector. ta Outline two reasons why the tertiany sector of industry is becoming ‘more important in most economies. (4) «Explain two possible reasons wity some ministers want to privatise some businesses in the public sector «© Do you agree with the government ministers view that: The public sector always produces goods and services more efficiently than privately ‘owned businesses” Justify your answer. 6 (6 Revision checklist Poesia? Pee eee ae om the reasons why the ea the differences between the private sector and public sector in mixed NOW - test your understanding withthe revision questions in the Student textbook and the Workbook.Enterprise, business growth and size ery pater limitations of the methods of measuring busin ome nr Pee ee er Bree, Peace eae nc Enterprise and entrepreneurship ‘What will you do when you leave school or college? Maybe you wil go to university or get a job. Some of you may decide to take the risk of setting up your om business ~ this could be flor part-time, I you do decide to do this then you will become an entrepeneu What ae the benefits ~ and possible disadvantages ~ of starting up your own business? Definitions Yo learn Entrepreneurs person ho organises, operates nd takes te isk ora new business venture Benefits of being an entrepreneur Disadvantages of being an entrepreneur + independence -ableto choose how tse” rek~many new ntreprencurs’ businesses te and one fal especially i heres poor planing + ale put own ieasiot practice + capital - entrepreneurs have to put heir ina become fomousandsuccesttitte _S¥M money note busines and pss bashes owe, find other cures of apt + tack at knowtedge aod experiance it maybe profitable andthe income might Figher hon working ws an employe for arethor business + opportunity cst est incame from nat eng an employee of another busin le to make use of persona Interests and For many successful entrepreneurs, starting up their own businéss has led 20 great wealth and fame. How many of these business leaders have you heard of? They all started out as entrepreneurs with their own business idea.2. ENTERPRISE, BUSINESS GROWTH AND SIZE yp Enirepreneur | Naionatty Think about wy sucees6t | Rena Bronco UK een ‘hrabaiAmban nda shoudbe abe toetan fy comrnmentswart” || FanShi | China teneourage more Carls Slim evco Mark Zuckerberg (US Jerry Warg—Tananis VeaWang US ‘ASiRenord Bronson “Believe in Your Ideas!’ - an. Jstna Kavale ie a ‘young entrepreneur passion in soaps End cosmetics and turned into 3 reconty started a mal business focus on manufacturing soaps, detergents and cosmetics. Running her business part-time, Justina hapes tbe able 1a eventually focus on growing her business and leaving hor regular rine-to-fve jb. Her dream ito become @ fulltime entrepreneur and he son her way to Susiness Main busines interests iin grup of companies incluting airtine, mobilephone and ai series Reliance group of companies incling chemicals IT and Telecemminicatione Soci networking ste Facebook ashen desgna entrepreneur's success story wanted to ofera service or product that helps in meeting areas Uke catering, car, entertainment tell aspired {aerate business where focus on making my cv product ard not buying andre-seling. Eventual Ianto be Sbatoofer employment opportunities to others end make a ffference nour economy. ust think the ime has come to have Namib ‘made products | thik we heavy rely on pars and Fave very few products made locally. thought saps and cosmetics have nat really Been explred in Namibia 351 know of tess than four companies that do scape in Nanna, tie amar nt realy expired ae lms 3 big retail shops hae soaps rom other counties. Characteristics of successful entrepreneurs Would everyone make a good entrepreneur? Probably nat ~ some people do not like risk or working independently they might prefer to be an employee ofa large business instead,Enterprise and entrepreneurship “Characteristics Reasons why important | ofauccessut | feral erie oe paces “Hard working| Lang hours and shert haley are typical for many etreprereurs to nS mae thelrbusinesssvecesetul “Wikies aking decisions o produce goods or Serco hat people might ee eres “Creative "Anew business needs new ideas - about products, serwces, ways af pa ia ted Fe tegen ae : sierra a ee / f ame rea live canmariaor Tong cri and conn tak bar das cotoere } motgearoren opergnesbeatve metoanen ol i te Lackotbusness capa a ““egemnte eed Selicontidentcreatie Innovative Independent etectve Hard Riker Optmisic3 ENTERPRISE, BUSINESS GROWTH AND SIZE Key info (hinge over 15 “lon, Meat ol these are ecsaflenrepraneuts rena been 2 ne ar-up Boom by Chinese entrepreneurs who have sia ronda urned Cina eee have gui this to art thai own Business, grant workers who te gone back eter rmetoum and started er enn business, and [Defntions te learn A business plan's a document conainng the business objecties and {he operations, nonce ndowmers ofthe ew &, Contents of a business plan and how es business plans assist entrepreneurs ‘Acank will almost certainly ask an entrepreneur fora business plan before agreeing toa loan or overdraft to help finance the new business. By completing a business pian (most banks are able to give business owners @ reay-printed form to fill out) the entrepreneur is forced to think ahead and pian ‘carefully forthe first few year. The entrepreneur will have to consider the following: >» What products or services do T intend to provide and which consumets am I ‘aiming at? >» What wil be my main costs and will enough products be sold to pay for them? >» Where will the firm be located? >» What machinery and how many people willbe requited in the business? Every business plan might be different, but generally business plans contain similar headings. The contents ofa business plan wil usually include the following: 1 Description of the business Provides a brief history and summary ofthe business, and the objectives of the business. Products and services Describes what the business sells or delivers, and strategy for continuing of veloping products/services in the future to remain competitive an grow the business. This section may also include full details ofthe product and how it is to be manufactured and distributed. The market Describes the market the business is targeting. The description should include: ‘© total market size ‘predicted market growth * target market * analysis of competitors predicted changes in the market inthe future forecast sales revenue from the product. ‘There should also be a marketing strategy (which is considered in Chapter 17). Market research data should also be included. “4 Business location and how products will reach customers Describes the physical location if applicable, internet sales or mal onder. Also describes how the firm delivers products and services to customers. 5 Organisation structure and management Describes the organisational structure, management and details of enployees required It usually includes the number and level of skills required for the employees. 46 Financial information Include * projected future financial accounting statements for several years or more ‘into the future; these should include income statements and statements of financial positionContents af a business plan and how business plans assist entrepreneurs + sources of capital, for example, owners’ capital, revenue, bank loans and any other funding sources * predicted costs ~ fixed costs and variable costs * forecast cash flow and working capital * projections of profitability and liquidity ratios. 7 Business strategy Explains how the business intends to satisfy customer needs and gain buand loyalty. A summary should be included to bring together all the points fiom above that should demonstrate the business will be successful Without this detailed plan, the bank will be reluctant to Lend money to the business, This is because the ovners of the new business cannot show that they hhave thought seriously about the future and planned forthe challenges that they will certainly meet. Even with a detailed business plan, the bank might not offer a loan ifthe bank manager believes thatthe plan is not well completed (for example, poorly forecasted cashflow). ‘An example of a business plan is shown on page 24. It was completed by two entrepreneurs planning to open a takeaway pizza restaurant. Business plans Toho ant panna3 ENTERPRISE, BUSINESS GROWTH AND SIZE You need tokio what he ‘main parts of business plan are and beable to explain wy & particular business might bene rom developing such pan ‘ies ia Pace “Type. organisation Private limited company “Recearchin the area conducted using questionnaires ‘Als, research no nainal trends in takeaway soles an oat _compators The two business owners to be the only workers tobe ermployed incall “Details of business Peter Yang cha of 15 years experience “owners _Sebria Hau - deputy manage ofa resaurant for heey Production details Main suppliers ~ P&P Wholesalers sedis cnt ag coef ines ~ $5000 pr yer | race =p Spe ote ination af business Stein stoping sre ca Masel site (10 year) - “Waineqlpment ——Seconétanahcnen eqn = eee Sacon-handmetortte- $3000, ‘See financial appendix otis plan | ‘Summay: atheist year of operations the ota ease ae forecast o be $75000 with revenue of $105000, Prete prot = 30000, Love f output to break even ~ 10000 units per yer, ‘See tnancial appendix to this plan ‘ve othe high set-up and promotion costs there will be negatve | eae fon n the rat oar " $10000 invested by sac ofthe owners Request io tank fora further $15000 plus an overdraft 9 $6000 per month Grune’ Avene] ust away rom re own | Forecast profit Pad the busines pan fo Paz Place Lid above. Explain wy, if you were = bank ‘manager reeing thi plan, eac of the elowing would be impertant to you Beloe you ‘ave the entrepreneurs a loa: 1-market research results * experiance of business owners forecast roiMethods of measuring business siz ad limitations ofthese methods Activity 3.2 ‘up anather business pln. It should be based on yur own idea for a business that iopertd tin or sol or calege for tampa tony stp, conecinry shore or cake shop esearch the background and business activites of two well-known entrepreneurs in your gm entry. dently the personal characterises that you believe cach tntrepreneur has vnich hava helped them to suceed, Write bret report on each one land be prepared to present your roports tothe est of your clas. Why governments support business start-ups Most governments offer support to entrepreneurs. This encourages them tose up new businesses, There ae several reasons why this suport is gen: >» To reduce unemployment ~ new businesses will often create jobs to help reduce unemployment. >» To increase competition ~ new businesses give consumers more choice and compete with already established businesses. >» To increase output - the economy benefits from increased output of goods ard services. »» To benefit society - entrepreneurs may create socal enterprises which offer benefits to society other than jobs and profit (for example, supporting disadvantaged groups in society). »» Can grow further all large businesses were small once! By supporting today's new firms the government may be helping some firms that grow to becone very large and important in the future. How governments support business start-ups Premises “Finance "Loans fr small businesses at low interest rates | Grant if businesses startup in depressed areas high LC themplaynen eee iatour rants to smal businesses rain rplayees an help inerease Eneauraing unre ma ti serch als “Research Methods of measuring business size and limitations of these methods Businesses can vary greatly in terms of size. On the one hand, firms can be owned and run by a single individual. At the other extreme, some businesses employ hundreds of thousands of workers all over the world. Some firms produce oxtput2. ENTERPRISE, BUSINESS GROWTH AND SIZE worth hundreds of dallas a year, while the biggest businesses sell goocs valued at billions of dollars each year. Who would find it useFul to compare the size of businesses? >» Investors ~ before deciding which business to put their savings into. >» Governments ~ often there are different tax ates for small and large businesses. »» Competitors - to compare their size and importance with other firms. >» Workers ~ to have some idea of how many people they might be working with. >» Banks ~ to see how important a loan to the business is compared to its overall Business size can be measured in a number of ways. The mast comman are »» number of people employed » value of output > value of sales >» value of capital employed. They each have advantages and limitations. Number of people employed This method is easy to calculate and compare with other businesses. Limitations: Some firms use production methods which employ very few people but produce high output lvels. This is true for automated factories which use the latest computer-controlied equipment. These firms ae called capita-intensivefims - they use a great deal of capital (ngh-cost) equipment to produce ther output. Therefore, ‘a company with high output levels could employ fewer people than a busiess which produced less output. Another problem is: shoul two parttime workers, who work half of a working week each, be counted as one employee — or two? Value of output Calculating the value of output is a common way of comparing business size in the same industry ~ expecially in manufacturing industries. Limitations A high eve of tou doesnot mean that business large when using the other methods of measurement. A finn employing few people mgt produce ‘even vey expensive computes each yea Tis might give higher output Faues an 2 firm sang cheaper products bt employing more works. The valu Of euput in any fine period might not be the same athe value of sales some gods se i 0a Value of sales This is often used when comparing the size of retailing businesses ~ especially retailers selling similar products (for example, food supermarkets). Limitations: It could be misleading to use this measure when comparing the size of businesses that sel very different products (for example, a market stall selling sweets and a retailer of lnxury handbags or perfumes). Value of capital employed This meas te total value of capital invested into the business, Limitations: This has a similar problem to that ofthe rumber of people employed measure. A company employing many workers may use abou-intensve methods of production. These give low outpt levels and wse lite capital equipmentThere is no perfect way of comparing the size of businesses. It is quite common to.use more than one method and to compare the results obtained 22. coptalntensive anda labour-intensive business ‘Activity 3.4: Comparing business size Fou are employed by Company A which makes moterecles. You have been askedto ‘wate bri rar tothe Managing Ditectar comping the sizeof your company vith three other nthe seme industry. Use the follving information in your report. tte the Benefits and drawbacks af each ofthe ways of comparing business sie | merterseniyed| pl omg Ye oi Company” 20000, so 100 mparing busines3 ENTERPRISE, BUSINESS GROWTH AND SIZE idiness, Wie tten eallad Integration as one business ISintegrated into another [takeover or acquisition fewer one basnese pe ot the ners of rather business ich then becomes part ofthe ‘predator busines the business wie ha aken Rove. ‘Amergericwhen the fumers ot businesses spre fo inter Businesses together to Same nds tthe some sage of production. then one business merges ith takes over another nein the same industry Butta diferen sage of production Verteat Integration can be forward orbackwar, Why the owners of a business may want to expand the business ‘The owner of businesses often want their business to expand. What advantages willa business and fs owners gain from expansion? Here are some likely benefits >» The possibility of higher profits for the owners. > Mare status and prestige forthe owners and managers ~ higher salaries are often paid to managers who contol bigger businesses. » Lower average costs (explained in Chapter 19, page 231, Economies of scale). > Larger share of its market the proportion of total market sales it males is ‘greater. This gives a business more influence when dealing with supplies and tistibutors, and consumers are often attracted tothe big names im an industry. Different ways in which businesses can grow Businesses can expand in two main ways: >» By internal growth, for example a restaurant owner could open other restaurants ‘in other towns ~ this growth is often paid for by profits from the existing busines. ‘This type of growth is often quite slow but easier to manage than exteral growth. »» By external growth, involving a takeover or a merger with another ausiness. ‘Three examples of external growth are shown below. »» Horizontal merger (or horizontal integration) - when one frm merges with or ‘takes over another one in the same industry at the same stage of production. 2h example of horizontal iteration »» Vertical merger (or vertical integration) - when one business merges with or takes over another one in te same industry but at a different stage of production. Vertical integration can be forward ~ when a business integrates with another business which is at a later stage of production (closer to the consumer) — of backward - when a business integrates with another 2usiness at an ealier stage of production (closer to the raw material supplies, in the ‘ase of a manufacturing business).Definitions to learn Conglomerate integration Tewhen ane business merges th o takes over business in completely ffteren industry Thiet alco known as vers | Bachar and forward integration »» Conglomerate merger (ar conglomerate integration) - when one business merges with or takes over a business in a completely different industry. This is also known as diversification. ada ‘4 business bung houses merges witha business making thes You should notice that the three examples of integration are very different, even ‘though they all involve two businesses joining together. The likely benefits of integration Horizontal integration »» The merge reduces the number of competitors in the industry. >» There are opportunities for economies of scale (see Chapter 19). >» The combined business wil have a bigger share ofthe total market than either business before the integration Forward vertical integration For example, a car manufacturer takes over a car retailing business. >» The merger gives an assured outlet for its product. »» The profit margin made by the retailer is absorbed by the expanded business. »» The retailer could be prevented from selling competing models of car. »» Information about consumer needs and preferences can now be obtained directly by the manufacturer. Backward vertical integration For example, a car manufacturer takes over a business supplying car body panels. »» The merger gives an assured supply of important components. »» The profit margin ofthe supplier is absorbed by the expanded business. » The supplier could be prevented from supplying ather manufacturers. »» Costs of components and supplies for the manufacturer could be controLed.su Fu Ch Internationa Conglomerate integration » The business now has activities in more than one industry. This meas thatthe business has diversified its activities and this wil spread the risks tacen by the ‘nusiness. Fr example, suppose that a newspaper business took over socal reviorking company. If sales of newspapers fell due to changing consumer demand, sales from advertising on social network sites could be rising atthe same time due to increased interest inthis form of communication. ‘There might be a transfer of ideas between the different sections ofthe business even though they operate in different industries. For exampe, an ‘insurance company buying an advertising agency could benefit from better promotion of its insurance activities asa result of the agency’s new ideas. entify the form of business growth which s used in each ofthese situation. "2 Agarageagroos to merge with another garace. Bb Abiycle retailer expands by buying 3 bicycle shop in another town, ical busines Daye fut farm, 1 -business making electrical goods bprees to jin with a business with retal shops Specialising i electrical goods ‘2 Aimining company takes aver company supslyng mining equipment. {A construction company bus aholiday company. Activity 3.6 each ofthe cases in Activity 35, explain the lkely reasons] or the expansion. Nests the largest food and confectionery manufacturer in the word. The compony trade the decision to take over Hsu FuCh Intemational [based in Guandong, China ‘This Chinese company makes sweets and snacks. The takeover cost USS1 7 lion it vill now be easier fr Nestlé to sells products in China. Tere shoud also be cost ‘ovings from the takeover Some consumers are worried that there might e es choice of sweets and snacks than before the tener Alo. perhaps Westie mht inaease prices a there wil be less competition nthe sweet and snack marke. ‘Activity 3.7 ead the case study above, 2 Ie this takeover an example of horizontal or vet integration? Explain your Explain two possible reasons why Nestlé ok over the Hsu Fu Chi company. © Doyou think consumers in China will bene rom this takeover? Explain yourProblems linked to business growth and how these might be cvercome Problems linked to business growth and how these might be overcome Nt al business expansion leads to success. There are several reasons why business expansion can fil to increase profit or achieve the other objectives set by managers Lag buses fete coose Operate te bine ns ots sina Sted ose Soper 9 trot decent Larger busin see Chapter) L use problems ee j Pe aces eee | | Integrating with anather business is more. Introducing a different style of management SRgnenthace oedegaegh ied aetach aeWhy some businesses remain small Not al businesses grow, Some stay smal, employing few people and using relatively Ute capital. There are several reasons why many businesses remain small Snluding »» the type of industry the business operates o> the market size »» the owners’ objectives. The type of industry the business operates in Here are some examples of industries where most businesses remain small hairdressing, car repairs, window cleaning, convenience stores, plumbers, catering. Businesses in these industies offer personal services or spectdlised products. If they were to grow too large, they would find it dificult to offer the close and personal service demanded by consumers. In these industries, iti often ‘very easy for new businesses to be set up and this creates new competion. This helps to keep existing businesses relatively small Market size Tf the market ~ that is, the total numberof customers ~ is small, the businesses are likely to remain smal. This is true fr businesses, such as shops, which operate in rural areas faraway from cites. Its also why businesses which produce coods oF services of a specialised kind, which appeal only to a Limited number of consumers, such as vey Lnurious cars or expensive fashion clothing, remain small. Owners’ objectives Some business ovmers prefer to keep their business small. They could be more ‘interested in keeping control ofa small business, knowing all their staff and customers, than running a much lager business. Owners sometimes wish to avoid the stress and worry of running a large business. ‘Activity 3.8 aps, vil or eserch the central aesin your nearest town oy Ls the main Duslnesecs inthis area Which ofthese are large businesses and whch ae sna businesses? You ray beable ent ths by whether he are prt chal af hops or bsieszesorsgle inal bsesres Wha prodtsor series doe smal Eusinesees oer? Can you cncude wat makes these businesses smal? rate ecto tucnensos the UK in 2016 Sa Emilion, whens 8 por “Cant of ll prnate ecto etployent inthe UK How | any smal businesses re there nour country? mal buses heres Causes of business failure Nt all businesses are successful. The rate of failure of newly formed businesses is high ~ in some countries, over 50 per cent close within five years of being setup. Even old-established businesses can clase down because they make losses or run ut of cash, The main reasons why some businesses fail include the following: >» Lack of management skills - this is a common cause of new business failures. Lack of experience can lead to bad decisions, suchas locating the business in an area with high costs but low demand. Family businesses can fail because the ‘sons and daughters ofthe founders of a business do not necessarily nake good managers ~ and they might be reluctant to recruit professional managers. »» Changes in the business environment failure to plan for change isa feature in many of the later chapters This add to the risk and uncertainty of‘operating a business. New technology, powerful new competitors and major economic changes are just some ofthe factors that can lead to business failures ifthey are not responded to effectively. »» Liquidity problems or poor financial management - shortage of cash (lack of Liquidity) means that workers, supplies, landlords and government cannot be paid what they are owed. Failure to plan or forecast cash flows can lead to this problem and is a major cause of businesses of al sizes failing »» Over-expansion — as was seen above (page 31), when a business expanis too ‘quickly it can lead to big problems of management and finance. If these are not solved, the difficulties can lead to the whole business closing down. Why new businesses are at greater risk of failing Many new businesses fail due to lack of finance and ather resources, poor planning and inadequate research. In addition, the owner of a new business may lack the experience and decision-making skills of managers who work for larger businesses. This means that new businesses are nearly always more at risk of failing than existing, well-established businesses. Activity 3.9 sing he internet, esearch ane business you kno that has stopped operating or gone ankrupt. Try to find out why it ald. Share your ndings with thereto he cles AS ‘Tata grows through takeovers ‘The success of Tata’ car division isin great ‘ThoTta grup isone ofthe yest companies in contrat to SAAB, the Swedish car maker: This Asia measured by valve ofounpt Iisa conglomerate business fled and stopped making cars ts new ‘sitopertes Inman industries ching leony Modes were too expensive and dc not mes steal, cars, chemical, hotels and — teal Much of Tata's growth has resulted from takeovers of other businesses, For example, i ought out Daewoo's truck division in South Korea and Jaguar land Rover inthe UK. Tata car making uses many products, such as stee) and plastics, produced by ther Tata factories, Each division ofthe vast Tata empire is given much noe in how ite managed - this means ions are not taken centrally at head office, ccustomers' changing needs — and the business simply ran out of ca Discussion points ‘¢ What are some of the benefits to Tata ofbeing a ‘conglomerate”? ‘© Why do you think Tata's managers have used takeovers as a method of growth? (9 tie Tata car division was to take ovor a chain of garages selling cars, what form of integration would thie be? Do you think this would be a good idea?3 ENTERPRISE, BUSINESS GROWTH AND SIZE Exam-style questions: Short answer and data response 1 Sabrina was bored with her job in a clothing factory. Her main passion was fashion and she had always been good at sling since helping her fetier on his market sta. She encouraged her parents and some friends to invest in her {dea for opening a shop selling good quality women’s clothes. Sabrina. as the entrepreneur behind the idea, was prepared to rsk her own saving too. She hhad some exciting ideas forthe shop layout and presentation of clothes. «Define ‘entrepreneur. (2 'b Identify two benefits to Sabrina of starting her own business. @ © Outtne two characteristics that Sabrina seems to have that might lead to the success of her business. 1] «Explain two benefits to Sabrina of keeping her business small. (6) ‘© think I should draw up a business plan before I start! said Sabrina to frend. ‘I think it would be best if you set the business up now ~ you don't needa plan as the shop will be so small said her fren. Which view do you agree with? Justify your answer. (6) 2 TelCom owns a phone network and provides phone network services to many consumers. The business does not manufacture phones and it does nat own ‘etait stores seling them. Senior managers at TelCom are considering & takeover of either a phone manufacturer ora chain of phone shops. TelCom ‘employs 4000 workers and, last year, recorded total sales of $300 milion. In contrast, the largest manufacturer of mobile phones, PhonTec, has “450 workers and recorded total sales last year of §1200 milion. 2 Define ‘takeover. (2 Identity two other ways, apart fom takeover, that a business migh: grow. [2] Outline two reasons wiy extemal groups would be interested in measuring the size of businesses such as TolCon, ro] 4 Explain two possible reasons why senior managers at TelCom want to ‘expand the business. (6 «© How should TelCom expand - taking over a phone manufacturer of 8 chain of shops selling mobite phones? Justify your answer, 16] ee Ceo See ec ee es ee ee eer eet ore res een ce an grow OR Se cate cd reasons why some businesses remain small and why some businesses fal NOW - test your understanding with the revision questions in the Student textbook and the Workbook.Types of business organisation en eRe oe ee eee ee eee ene ee een ee Ayes ee ee ain PA aE Business organisations: the private sector ‘There are several main forms of business organisation inthe private sector. These are: » sole traders >» partnerships >» private Uimited companies » publi Limited companies > franchises >» joint ventures. Sole traders Sole trader is the most common form of business organisation. It isa business ‘owned and operated by just one person ~ the owner isthe sole proprietor. One of ‘the reasons itis such a common form of organisation is because there are so fw legal requirements to set it up. There are only a few legal regulations which must be followed »» The owner must register with, and send annual accounts to, the Governnent Tax Office, »» The name ofthe business is significant. In some countries the name must be registered with the Registrar of Business Names. In other countries, such as the UX, its sufficient for the owner to put the business name on all of che business's documents and to puta notice in the main offce stating who owns the business. »» In some industries, the sole trader must observe laws which apply to all businesses in that industy. These include health and safety laws and obtaining a licence, for example, to sell alcohol or operate a taxi. What are the benefits and disadvantages to sole traders of running their own business rather than having ather people join in with them? If you wanted to set up your own business, why might you chose to create a sole tiader organsation? We can answer these questions by looking at the following case study.TYPES OF BUSINESS ORGANISATION J ste decided to start is own ax business. He setup the business a a sole trader. | Tse are the advantages to Mike of being a sole trade Advantages of being a sole trader «There wer few lgalraglations for hen to worry about when he et up the business ¢ Hels his own bass He Ras complete cantrl over his businass and thee is no need to ‘consult with oraskathers before making decisions Hea te fresdom to choose ne own holgaye, Hours of work, prices tobe charge and whom to employ i he finds that he cannot doa the work by mse + Mike hos close contact wih hs own customers, the personal satisfaction of knowing his regular eustemers andthe ality to respond quickly otheir needs and demands + Mie nas an incentive to work hard as he is able to keep alo he profits, afer he pays tx. He doesnot hove ta share these profits, Herdocsnot have tog information about fis Business te anyone else ~ other than the Tax Ofce He enjoys complete serecy in business mattrs. ‘tor operating the business for several months, Mike realised that there are also some ‘sadvantages to being sole trader: He made ast of them. Disadvantages of being a soe trader + {have no one to discuss business matters with as | am the sole owner Befninetotarn | | Lora ett tye neat sept ean am | Limited bitty means that ina companys ited 3 nly the amount hey Invest, Unlimited uabity roan thatthe oaners ofa busines an be held therefore fly espensbiefor ny debs that te business may have. Unlimited lability ‘means that my business cant pay ts dbs, then tha people lowe money tly (redtors can force ma te sal lo my own pssessonsin order to pay them «Tanto expand the business by buying otras = Bt dont have enough mney to {doth he sources onan fora ele trader are ied tthe owner's savings, ros ‘made bythe business and small nk oars, Tere ae oar curser caput capital Ino the busines, Banks ae often reluctant lend large amaunt to businecses he mie, My busines ikely to remain smal because capital for expansion es restricted, Mybusines is unl to benaft rom econamies of scale. cannot offer much traning or opportunities fr my workers future careers. Feeisbiiosrottnmnea | | fT'amit there sna one who wil tke control of the Susiness for me. Icancot pass on the busines to my ans - hon Ia the busines wil legally nol ens any lnger: toh investment hey | Seabees [__thisis because teres ne comin ofthe business after the deathf the set.other peopl but here is ony one person who ons the business Definitions to learn Partnerships form of business in hie wo oF more prope ore ony partnership agreement isthe writen and agsl Srcement between bisiness partners snot assent or partners te have uch an yreement butts aways Business organisations: the private ‘These disadvantages are typical for all sole traders. Did Mike take the correct decision to set up a sole trader business? He still thinks so. He would recommend ‘a sole trader structure to people who: »» are setting up a new business »» do not need much capital to get the business going » willbe dealing mainly with the public, for example, in retailing or providing services like hairdressing ~ personal and direct contact between the customer and the owner is often very important forthe success of these businesses. But, as his business began to expand, Mike wondered if another form of business ‘organisation would now be more suitable Partnerships {partnership isa group or association of at Lest two people who agree t> ‘om and un a busines together In some counties such as Indi, there fa maximum init of 20 people. The partners wl contribute tothe capital ofthe Bosiness wil usually havea sayin the runing ofthe business and wl share any praits made. artnrships can be st up very easily, Hike could just ask someone he knows to become his partner in he tod busines. This would be called a verbal agresment Hike would be advised to create a writen agreement with a parte called a Dartnership agreement or dee of partnership. Without this document, partners may disagree on who pit most capital into the business or who sented to inte ofthe profits, A writen agreement wil etl alo these mates. Mike ered is rend Gta the chance te became parner nhs to business They prepared sien partners green which coed + the aunt f cpm in the busines by each partner + tetas oe undertaken yeah garter 5 thewayin whch he rote wel snared ot + how ng the partnership wu ast 1 tPingrnent foresee reternent and ow nw parnrs could be adie res iin eral Mare kad oes pati ‘he tine bce en teh hati had several oeoges oer beg sole rade. avalon of aprtership + Mor capital ould rob nested into the business ro G's savings and th ‘ouldallow exponen othe buses Aasonel ns cola new be prchesee ‘he esposbitess rung the Bsiese wore now sare. Gta specie nthe nuns an adtraten lhe bse Mike conentrted on marketing he {Sir ofthat rand on rng Absetes nd Pays ot ado rar proves on ofthe porters was aye salable Bh partners ere aad oer hard becouse thy wold beth nat rom be pratima ay loses rae ts bss wolsnow be hares ye pr Aout tox busins expanded and pots mere deing made aber word ‘ostahatsuldhappe te busines es, parope ecsae 9 many ne ome ‘rere orering the mart Gs espana a Wie at alte tr aera ‘orig wl hs trm sf bosnessorgenaon thas ramber of deasrantages4 _ TYPES OF BUSINESS ORGANISATION Definitions to teara An unincorporated business one that oes not hae separate gat entity. Sele traders Sod partnership sre Sninerporste businesses Dicadvantages ofa partnership + The pariners eid not have lite ability the busines fled, then creiters could sil fore the partners o sol thai own propor to pay businese debs + The business id rot havea separate egal iden. one ofthe panes ied. ben the partnership would end (Bath ole aders and partnerships are sao be unincorporated businesses becouse they do nat havea separate egal identi fram the owners] Partners can dlsagree an business decisions and consulting al parinerstaes time. Ivone a the partners is very inefcient or actually dishonest, then the other partners could suffer by lsing money inthe business Most coutries limit the numberof parinersto 20 and ths means that busiress growth would be limited bythe amount of epital that 20 people could ives. ‘Mike and Gita discussed these points with ther slctor. They agreed that parnershirs lore very suitable in certain stations, sueh as «= when people wished to form a business vith ater but wanted to avd egal complications + there the prelessonal body, suchas medicine andthe lw in some countries, only ‘lowed professional people ta form a partnership, nat a company there the partners are well known ta each ether, pessiby inthe same famiy, and want a simple mears of naling several of them Inthe running ofthe Business. (teed Mike made i lear that they wanted to expan the busines further but wanted to reduce personal isk. They wanted to protect thei on possesion from Business, ‘reitorsin the event offre ‘bs parner, Mike a Gl ten sacuss important business iesues together They share “The solicitor advised them to consider forming # pra limited company. She explained that thie typeof business organeation woula be very ferent forma partnership and ‘would have ts own Benelts and drawbacks. ‘Activity 4.1 eur rian, Amini an expert computer engineer He current works fora large computer manufacturer that operates in an expanding industry. He thinks that Fe could Fur his oom successful business. He hae no experience of running a business. Fe hs very few savings to nest into. busines, ‘Amin has a rich uncle who knows nothing about computers! He is aretired businessman, He sendy but rather bossy ache avays thinks he knows bet, Din aks for your abvica about hether he sould setup hie on usiness ane what form of erganisation he should choose, He asksfor your help on three issues that are worrying him, Explain two advantagoe and two disadvantages to Amin of running his own business Father than working fer the computer manulacturer '» Doyouthink he shoud stupa sol trader business? Explain your answer. Histuncle woul tke to become his partner inthe business if Amin decides io ‘jo anead. Explain we advantages and two csadvantages to Ain of ormieg 3 Partnership with is uncleBusiness organisations: th priv sector Limited partnerships In some countries its possible to creat a Limite Latitty Partnership, The abbreviation for his new form of laa structre LLP. T offers partner ited ability but shores in such busineses cannot be bought and sold. This type of partnership is a separate legal unit which til exists after a partne’ death, Unlike ordinary partnerships that end with the death of one ofthe partner. Ty owrerin, “RRR ven conte ean aay to ently new peters) "specie Private limited companies There sone essential difference between a company and an unincorporated business, suchas a sle trader or partnership. k company isa separate egal unit from is owners ~ i's an Incorporated business, Ths means that: »» a company exists separately fom the owners and will continue to exist fone ofthe owners should die »» a company can make contracts o egal agreements >> company accounts are kept separate from the accounts ofthe owner. Definitions to learn Incorporated businesses are companies that hve Separate eal status rom their owners. Shareholders ace he ‘oumers ofa ites ompany. The by shares hich represent part Samerahip ol he compan. Private Ud cempanies | Companies are jointly owned by the people who have invested inthe business These rebusiesses owned y | people buy shares in the company and they are therfore called shareholders. These sharhldersbt thoy cnet | shareholders apoint directors torn the business. Ina private limited company, the allshares tothe publ cirectos are usually the mast important or majority shareholders. This is usualy not ‘the case ina pubic limited company, as we shall se inthe next section. Mike and Gita asked the solitr to st the benefits of ‘themselves. The business could therefore expandmore Forming a privte Limited company co, eee +All shareholders have limited tail. This i an ‘Advantages of privat limited company important advantage. means that the company + Shares can be sldtoa large number of peopl in fled with debts cwing to creditors, the sharehaders ome countries there ea maximum number) These could not be foread to sell thet possessions to ay the would be kay tobe frends or relatives of Mike and —_» This form of business organisation stl offers limited Wabilty to shereholdes. > It is an incorporated business and has a separate legal identity to te owners or shareholders. Is accounts are kept separately from those of the owners and there is continuity should one of the shareholders die. >» There is now the opporturity to raise very large capital sums to invest in the business. There is no limit to the numberof shareholders a public Limited ‘Uskwith 4381 Thetewest | company can have “honservosnenats | |» There sno restriction on the buying, sling or transfer of shares. “ere there were >» A business trading asa pubic tinited company usually has high status and should find it easier to attract suppliers prepared to sell goods on credit and banks wing to lend to it than other types of businesses. 2015 the toa number ot ic lited companies the wold was 63508 rere number of “sted companies on stock {i Disadvantages of a public Limited company >» The Legal formalities of forming such @ company are quite complicated and ‘time-consuming, > There ate many more regulations and controls over public limited cempanies ‘in order to try to protect the interests ofthe shareholders. These include the publication of accounts, which anyone can ask to see.Definitions learn An Annual Genera. Meeting is leat requirement oa ompanies Shareholders ay attend ae vote an wh thay want tobe onthe Board af Directors lr the, snes organisations: the privae sector » Selling shares to the public is expensive. The directors will often ask 2 specialist merchant bank to help them in this process. It wil charge a ‘commission for its services. The publication and printing of thousands of copies of the prospectus is an aditional cost »» There is a very real danger that although the original owners of the business might become rch by selling shares in thei business, they may lose control ‘ver it when it goes publi. This isan important point which we wil investigate further Control and ownership in a public limited company Inall sole trader businesses and partnerships the oymers have contol aver haw their busines sun. Tey take all the decisions and ty to make te busines achieve the ais thatthe set This also the casein most privat inited companies which have relatively few shareholders. The directors ae often Une majority sharehoders so they can ensure that thei decision are passed at all metings. ‘With a publi United company the etuation is very different. There are often thousands of shareholders even milion inthe case ofthe largest companies Tes impossible fr all these people tobe involved in taking decisions ~ although they are all invited to attend the Annual General Meeting (AGM). The only decision that shareholders can have areal impact on atthe AGH is the election of professional managers as company director. They are given the responsibilty of running the business and taking decisions. They wil only meet withthe other shareholders atthe annual AGM, The directors cannot possibly Control all ofthe business by themselves so they appoint other managers who tay not he shareholders at al to take day-to-day decisions. The diagram below txplains this situation. shales pe may ated AGM (ew do) omneetie Definitions te learn Dividends are payments fade fo shareholders rom the pros ater tal of ‘Teampany They ae the rotor to shareholder for appanage fe ay 0-day uses decsons ‘A Control and ownership ina publi Limited company So, the shareholders own, but the directors and managers contol. Sometines, this ‘scaled the divorce betneen ownership and contro Does this matter? Tt might be important for the shareholder. t means that the directors and managers may run the business to meet their ont objectives, These could be increased statu, growth a the business to jstify higher management salaries, or reducing dividends to shareholders to py fr ‘expansion plans. The shareholders ae nt able to influence these decisions ~ ther than by replacing the directors atthe nest AGM, Doing this wuld give the company vey bad publicity and cause the business tobe unstable athe new rectors may be inexperienced.‘4 _TYPESOF BUSINESS ORGANISATION Mike ond Gita had decided to convert the company into a public one ~ Express Taxi nd Bus ple By selling shares in hele company, they had not only raised the capital ‘they needed but they had also become ver rich. They were elected as directors alte first AGM forthe new plc. The expansion nto buying the privatised bus {Companies was successfut~ at fist, Profits rose and management salariee si 00 However new bus competitors were forcing bus fares down, Profits startec to fal. ‘The accounte published last year showed the lowest profit for thee years Nike and Gita were voted off the Board 9 Directors, They no longer had @ majority of the Shares ~ when it asa private Limited company they owned 50 per cent ofthe shares {2ch. Since going pubLt thay owned only 20 percent of he total shares issued ‘They ad lost contol af what Rad been their business. The new directors owned few shares. They reduced dividends to shareholders and announced 3 new expension| programme to increase profits {Ake and Gita nou nae to explain the performance of he company toa age nimber ot fharholders atthe ACM Mike and ite were rich but they no longer controlled the business that rad once Belonged just ta them. Mike missed being In control. He was thinking of setting up his own business by buying a luxury hotel. He planned to operate as a sole trader!