Contents Introduction Section 1: Understanding business activity 1 Business activity 2. Classification of businesses 3. Enterprise, business growth and size 4. Types of business organisation 5 Business objectives and stakeholder objectives Exam-style case study Section 2: People in business 6 Motivating workers 7 Organisation and management 8 Recruitment, selection and training of workers 9 Internal and external communication Exam-style case study Section 3: Marketing 10 Marketing, competition and the customer 11 Market research 12. Marketing mix: product and price 13. Marketing mix: place and promotion 14 Marketing strategy Exam-style case study Section 4: Operations management 15 Production of goods and services 16 Costs, scale of production and break-even analysis 17 Achieving quality production 18 Location decisions Exam-style case study rey 20 28 45 37 68 70 n 89 106 122 136 138 139 153 164 179 190 200 202 203 215 229 235 242Cambridge IGCSE Business Studies ence) Section 5: Financial information and decisions 244 19 Business finance: needs and sources 245 20 Cash-flow forecasting and working capital 258 21 Income statements 268 22 Balance sheets 27 23 Analysis of accounts 283 Exam-style case study 296 Section 6: External influences on business activity 298 24 Government economic objectives and policies 299 25 Environmental and ethical issues 313 26 Business and the international economy 327 Exam-style case study 340 27 Exam technique 343 Glossary 362 a Index 368 ‘Acknowledgements 373CT eens eT OM TCs ei Introduction ‘This book has been specifically written to support the latest Cambridge IGCSE® Business Studies (0450) syllabus, which will first be examined in 2015. Itis also suitable for the Cambridge O level Business Studies (7115) syllabus, and may prove useful for students following other courses covering similar topics. ‘Written in clear and accessible language, it will enable you to gain the knowledge, understanding and skills required to study successfully at tas level. Syllabus and examination ‘The Cambridge IGCSE syllabus consists of two separately examined papers. You must take both papers in order to be awarded the IGCSE. Paper 1 consists of short answer and structured response questions, while Paper 2 isa case study. “The book provides thorough support to tackle both papers. Exam-style short answer and structured response questions are included at the end of each chapter, with an exam-style case study at the end of each section, In addition, Chapter 27 explains the structure of each paper in more detail. This chapter also focuses on examination skills and technique. It includes acvice on how to approach all key exam question types. You should read the relevant section of the exam technique chapter before addressing practice questions to remind yourself of ‘the principles of answering each type of question, How to use this book ‘The book is designed to be a practical guide using questions and case studies to help develop understanding, and assumes no prior knowledge of the topics. The structure of the book is aligned to the syllabus order with sections and chapters ‘within the book following syllabus headings to aid learning. However, chapters do not need to be studied in this order. Each chapter has a similar structure, The content is introduced in a way that is relevant to rea life, and learning objectives set out the aims ofthe chapter. The main features are as follows: Key terms help you identify aud understand inupor taut concepts. A glossary ofall ‘the key terms and their definitions is included at the end of the book. Activities build key skills required by the learning objectives — applicat’on, analysis and evaluation ~ and will help to consolidate learning. Many of the activities include a case study-style scenario, followed by questions. Case studies from around the world put the topic into a real-life contex:oo ° ) Soa ag Bua COeukestsg Exam practice questions Fast forward/rewind show where concepts appear elsewhere in the book, providing. students with @ handy link to support their learning, ‘Top tips offer guidance and advice on key points. Explore! provides ideas for extra activities to broaden understanding of the topic. ‘Test yourself questions aid self-assessment and reinforce knowledge. Example boxes put theory in to context by providing worked examples. Summary points atthe end of the chapter consolidate learning, ‘Exam practice questions will help you to familiarise yourself with the style of ‘questions seen in examination, and assess your own understanding and skills to answer them. ‘Case study questions at the end of each unit offer extensive help to practice answering case study-style questions. The CD-ROM ‘The CD-ROM contains additional resources to help consolidate key concepts and check understanding, These include: ‘mind maps, revision questions ‘multiple choice questions crosswords, word searches and other fun activities.Section 1 Understanding business activity ‘Thie section introduces you to the basic building blocks of business studies. You will learn about the nature and purpose of business activity and the importance of needs, wants, scarcity, opportunity cost, specialisation and adding value. Youwill find out how business activities are classified, for example in the private sector or public sector, and how this classifi affects business objectives. You will also learn about the advantages and disadvantages of different forms of business and the role of entrepreneurs. The activities ofall businesses affect several different groups of people. These groups, or stakeholders, will have their own objectives for the business and you will learn what these are and how they may influence or be influenced by the activity of the business.Business activity: the process ‘of producing goods and services to satisfy consumer demand, Need: 2 go0d or senicewhichis cessentialto living Want: 2 good or service whieh people would lke, but isnot cessentialfor living. Itisimportant to learn key terms. They are nat only important when answering questions, tut ‘manyin this chapter will help you to understand topics in ater chapters. Introduction The business world is all around us. From the minute we get up in the morning to when we go to bed at night, we are using things made by businesses around the world. Think about the food you eat, the clothes you wear, the bus or train you came to school on this morning, the music CDs you listen to, even this book.- all these were made by businesses. Businesses provide us ~ consumers - with all the goods and services that we need and would like to have. Inthis chapter you will earn about the purpose of business. You will look at how businesses turn resources into goods and services to meet all our needs and wants. Needs and wants ‘The purpose of business activi with goods and services that meet our needs and wants. But what are needs? is to provide consumers ~ that's you an me ~ How are they different ftom wants? ‘A need is any good or service which people must have to be able to live. Water, food, shelter and clothing are essential needs for living ‘Wants are different. They are any goods or services which people wou'd like to have. They are not essential for living, Mobile phones, cars and holidays are good examples. Customersin a shop(erie a ceca TSS Sa Ret ie at ACTIVITY 1.1 2. Make list of your ten most important ‘wants 2. Doyou own any of these items? If not, why not? 3 Ifyouarelucky enough to own all ofthese iterns, does this mean that you no longer have any wants? You have probably ident have given for not having all of your wants is you may not have enough money to cd things that you still want. The main reason you may buy them, Even ifyou are able to buy these wants in the future, you may have other wants, Ths is because our wants are unlimited ‘Throughout the world there are many people who are so poor that shey cannot afford to buy the things they need for living, let alone afford their wants So, some people cannot afford to buy their basic needs. Others, who can afford their basic needs, cannot afford to buy what they want. Surely, then, tke cause of these problems is that consumers do not have enough money! Let's ee if this is the case. ‘Avery small island country has the following supplies ofthe four groups of goods and services identified The country has a population of 900 families. Each family unit must have the following quantities of each basic need for essential living “Food ——__—| 25kilos \ Gathng’ "| puisecnte | ean In small groups: 1 Usingthe information in the tables calculate whether there is enough supply of the essential ving ol the families. 100 peoplein the country had a much higher income than the rest of the population, what may happen? needs in this country to support8 TOP TIP The term ‘capital’ has several meanings in business. Make sure you understand its meaning asa factor of production. Enterprise Figure 1.1 Factors of production Scarcity and opportunity cost In Activity 1.2, you may have worked out that money alone cannot solve the problem. There are just not enough goods and services to meet the needs and unlimited wants ofall consumers ~ this is known as the economic problem. If thisis the case, then the answer is simple ~ produce more goods and services! Unfortunately, the answer is not so simple. To understand why not, fist we need to look at factors of production “The production of goods and services requires four factors of production: ‘= Landis all natural resources such as minerals, ores fields, oll and forests, ‘= Labouris the number of people available to work. '= Capital is machinery, equipment and finance needed for production af goods and services. = Enterprise is people prepared to take the risk of setting up businesses they are known as entrepreneurs. FACTORS OF PRODUCTION Sore Labour -~eFa ee CapitalCen a ed cea ee Cea UPR Ceuta cee Cai Figure 1.2 Scarcity However, there are not enough of these factors of production in the world. This means that it is not possible to make all the goods and services needed or wanted by the world’s population. In other words, the uilimited wants of consumers cannot be satisfied because of limited factors of production required to produce the goods and services to meet those ‘wants. This is the problem of scarcity. We have seen that there are not enough resources to produce all the goods and services needed to meet consumen’ wants. So, choices have to be made. We all make choices in our everyday lives. Do you choose to go to the cinema with friends or spend the money on a new computer game? Perhaps you have enough money to buy the latest CD release from your favourite pop star, or you can use the money to buy a Business Studies revision textbook. Whichever decision you ‘make will mean that you will have to give up the chance of having the other. When making the choice you need to make sure that the product or service you choose is worth more to you than the one you give up. The next best alternative you give up is, known as the opportunity cost of your decision. cas ACTIVITY 1.3 Fatima works in abakery and earns $120 per week. Fatima’s grandfather has given her $5,000. Fatima is going to use this ‘money to start her own business, She is goingto make cakes for special occasions such as birthdays, weddings anc religious festivals, 1. Givean example for each of the four factors of production Fatima will use in her new business, 2. Whatis the ‘opportunity cost’ to Fatima of her decision to start her own business? 3 Is Fatima’s business meeting consumer ‘needs’ or consumer ‘wants’? Justify your answer. 5 Itis not only consumers like you who have to make choices about how to use 4 EEE scarce resources. Busineses and governments also ave limite resources and must choose between alternative uses of those resources, For example, a business might have to choose between using resources on an advertising campeign, or on a training programme for its workers. A government might have to choose between building a new school or a new hospital Importance of specialisation ‘We have seen how consumers, businesses and governments must make choices, ‘They must do this because of the scarcity of goods and services which results from limited factors of production. For this reason, it is very important that theSee eat 0 Figure 1.3 Asingle worker and the production process factors of production are not wasted on the production of goods and services that consumers do not need or want “Most goods and services are produced by more than one person. The production process often uses machinery and equipment which has been specially designed to produce a specific good. This is very different from the production that would have taken place hundreds of years ago. Then a product would have been produced by Just one person using machinery and equipment which was far less specialised. ‘The increasing specialisation of factors of production has meant that businesses are far more efficent than they once were. Specialisation reduces the costs of production. This benefits consumers by providing more goods and services at ower prices than before specialisation took place. A good example of specialisation in B business is Microsoft, which develops and produces computer software, A A F fy) Making footballs FH) Global Sports manufactures sports equipment. Their most popular Bef) producti footballs ‘To make one football equites five workers. Each worker completes a separate task usually with the aid of specialised machinery. ‘The five stages in making a football are: Panels are cut out of seets of leather. A design and logo is samped on panels. Panels are stitched together into the shape ofa football ‘The bladder is inserted into the bal. ‘The ball is moulded into the correct shape and inflated tothe correct pressure. ° ou Making a football TASK Identify an example ofthe factor of production, ‘capital’. 1b Use the information hereto explain what is meant by division of labour’ Identify two reasons why Global Sports benefits from specialisation. Identify and explain one benefit to Global Sports and one benefit to its customers of specialisation,Ce es eS © Labour productivity: see Chapter 15, page204, KEY TERM PSC ee ao Specialisation of labour is now commonplace in the workplace. Instead of ‘workers producing one product from start to finish, they focus on just ane skill. ‘The production of a product now requires several workers, each using their skill. ‘This isan example of the division of labour. Since each worker is now specialising in just one skill, they become far more efficient and this increases the productivity ofllabour. In the past, most products were made by workers with only basic tocls and ‘equipment. The development of machinery and advances in technology have changed the production process. Machinery and equipment have become far more specialised and this has greatly increased the efficiency of capital. ven entrepreneurs have realised the benefits of specialisation, There are many examples of businesses that specialise in the production or supply of just one type of produ. Purpose of business activity We have already learned that businesses take scarce resources ~ factors of production ~ and use these to produce the goods and services demanded by consumers. Without the activity of business there would be no products and services. jh om Figure 1.4 The purpose of business activity Businesses produce different types of goods and services. These are known as = consumer goods m= consumer services = capital goods. ‘Consumer goods Consumer goods are those goods which are sold to the public that they can see (physical goods) and touch (tangible goods). These can be divided into durable and non-durable consumer goods: ‘= Durable consumer goods can be used over and over again, for example televisions, computers, cars, table and chairs. | Non-durable consumer goods can only be used once, for example foodand drink,BE eet Figure 1.5 Consumer goods Consumer services f dom Consumer services are products which are also sold to the public, but they cannot be seen ‘or touched (intangible), for example insurance, banking and bus journeys, You can see and touch the buildings where insurance and banking services take place and you can obviously see and touch a bus, bt you are not buying these items, you are using a service which they provide and this service cannot be seen or touched. Eagles puede. Figure 1.6 Consumer service Capital goods are products which are sold to other businesses to help them in their production process. These are physical goods such as machines, computers and delivery vehicles RI Products (RTP) isa manufacturer of printers It also manufactures replacement ink cartridges for its printers, Each ‘worker assembles all ofthe different components into making one computer. The Operations Director is considering introducing division of labour into the production of computers. RTP has recently invested in new computer-controlled equipment to help manufacture printer cartridges. Last year it produced 600,000 printer cartridges. RTP will be able o produce 30% more cartridges this year. RIP sells its printers to businesses and private individuals for use with their computers at home. Gest TASK ‘8 Calculate the number of printer cartridges RTP will be able to produce this year. 1b Use the information here to explain the difference between ‘consumer goods’ and pital goods’ € Do you think the Operations Director should introduce division of labour into the production of printers? Justify your answer.eri a ceca Teer} SPROUT] Figure 1.7 Adding value o How a business alculates profit: see Chapter 21, page 269. 8 ToPTIP Try to ead local ard national newspapers as often as you ‘ean. There are lots ofbusiness articles. You may not understand ‘everything, butitwillhelp you tohave abetter understanding of business, especially in your country. You could cut out any articles or advertisements you | think may be useful laterin the course. You couldbring them into school for your teacher to keep 35. | aresource for future lessons. ‘Subway outlet in Asia Adding value Whatever good or service a business produces, it will try to add value at every stage ofthe production process. It does this by taking raw materials and tarning them into a good or service which t sells to customers at a price greater than the costo the raw materials used in their production. Added value is one of the most important objectives of business. Figure 1.7 shows how value is added in the production of a cake. How businesses increase added value ‘Added value is not the same as profit. You will earn later how a business calculates profit. All you need to know now is that other costs such as workers’ wages and energy costs must be deducted from the added value to calculate profit. Profit wll increase ifa business is able to increase its added value without increasing its costs. In practice, it is difficult to increase value without increasing costs. Ifthe increase in added value is greater than the costs of achieving it, profits will rise. ‘There are a number of different ways a business can increase its added value. Branding Have you ever wondered why Coca-Cola, Sony, and other well-known companies spend huge sums of money on advertising and other promotional activties? They do this to build and then maintain their brand. The products produced by each of these companies all have close substitutes ~ that means you can buy other brands of drink and electronic goods. However, these companies are able to charge a higher price than their competitors, even though the costs of production are likely to be quite similar, Branding increases added value because people want or fel they should buy the item from this particular company.ACTIVITY Name your top ten brands. Then cut out advertisements from newspapers and magazines and make a poster. Excellent service quality In some industries providing a high quality, personalised service, can be the difference between able to charge a high price or one which is much lower. The price ofa made-to-measure suit will be higher than the price of a ready-made suit, The cost of the materials used will be very similar, but the personalised service increases the added value. Personalised service increases the cost of the product Product features Products that have more features and functions than similar products on ‘he ‘market will allow the producer to charge a higher price. Although these additional features will increase costs, consumers are prepared to pay a much higher price than they would pay for product with fewer features or functions. The mobile phone market is a very good example of how features and functions are used to increase the product's added value. Convenience Many consumers lead busy lives and they are often prepared to pay a higher price for goods and services which they can have immediately or which save them time, for example ready meals ACTIVITY Explain how these businesses add value: = restaurant = shoe manufacturer = house builder floristern ea cea eee Lg ion 1 Understanding business activity Making leather bags and belts in Ethiopia Leather bags and belts in Ethiopia ‘The Ethiopian government is encouraging young entrepreneurs to start small businesses in order to reduce the rate of youth unempleyment a In Hayeass City in southern Ethiopia, Mitike Paulos, her younger sister and thre friends are producing leather bags and belts na small workshop. Miike and her sister learned the craft fom their brother. They started business in 2011 with $2,000 loan rom a small-loan lender. They used the money to buy equipment, raw materials and torent their workshop. Today their business employs ten workers and as they expand production, they also hope tire more workers. The more we work, the more we grow says Mitike “Adapted from an article by Andualem Sisay, wwvtheaficareport.com/East-Horn-Afrca/how.-s-group-ol young: ethioplans-beat-unemploymeat html TASK ‘a_Identify examples from the case study for each ofthe four factors of production. Use the Lave study rnatesal to explain what is meant by ‘business ¢ Howisthe business helping to satisfy the needs of the Mitike's, a How does this business add value? ‘What is meant by scarcity’? Whats meantby ‘the economic problem’? Identify two ways a business might benefit from using specialised machinery.Business activity combines the factors of ‘production to produce goods and services that meet consumer needs and wants. ‘The economic prablem ard the problem of scarcity are due to unlimited needs and wants of consumers which cannot be met by businesses because they have limited factors of production. chsices must be ‘made and this creates anopportunity cost. Specialisation of both latour and capital helps businesses to produce more goods and services at a lower cost, Businesses add value by taking raw ‘materials and turning these into goods and. services that they can sellto consumers Jonah is employed as a joiner by a firm whose main business ‘activity is building houses. The firm also employs bricklayers, plumbers, painters and other skied tradesmen. Other factors ‘of production are used when building houses. The cwner of the firm, Jack, believes that specialisation of labour brings many benefits to the business and its workers. In his spare time Jonah makes wooden toys which his sister sells on her stall at the local market. He buys the wood and ‘other resources from a local supplier. The wooden toys have ‘been so successful that Jonah has decided to leave hs job a a joiner to set up his own toy-making business, Identity two stages of business activity ey b What is meant by ‘factors of production’? a) © Using the information in the case study, explain tre meaning of ‘opportunity cost’ 4 Identity and explain two ways Jonah could add value to his toys. jo Do you agree with Jack that ‘specialisation of lakour brings many benefits to the business and its workers"? Justify your answer, @ Company X is a manufacturer of pottery products, such as plates and bowls, which are mainly sold to hotels and restaurants. The company employs 50 workers, Each worker receives a good wage and this helps them to meet their neads. Production is broken down into nine processes. Workers specialise in just one process, ‘The Marketing Manager of Company X has been ‘asked by the directors to look at ways of adding value to the company’s products. Identify two factors of production a 1b What is meant by ‘needs"? a © Using the information in the case study, explain the meaning of ‘specialisation’ 4 Identity and explain two stages of Company X's production process. @ @ Suggest two ways the marketing manager might increase Company X's added value. Justify your answer, @ Total available marks 40Objectives er err eran Sn) ees Ces cen Pena Pea Needs and wants: see CChapter 1, page 1s. ACTIVITY 2. Make alist of the primary sector business activities found in your country, including the natural resources they procuce, Classification of businesses Introduction Intthe last chapter you looked at the purpose of business activity. In thischapter you are going to learn how business activity can be used to classify all the businesses in an economy and why itis important to classify businesses in this way. \Whatiis an economy? The country where you live has an economy. Itis a measure of all the wealth and resources in your country. includes the things that your country produces and the goods and services that consumers buy. Primary, secondary and tertiary sectors How businesses are classified Businesses produce a wide range of goods and services to meet the needs and wants of consumers ‘The goods and services they produce can be used to classify all ofa country’s businesses into one of three different sectors. We call these: = the primary sector = thesecondary sector m= thetertiary sector. Primary sector Primary sector business activity involves extracting orharvesting natural resources from the land or sea. These include agricultural products such as rice, fish, wood, coal and oil. Examples of primary sector business activity are: farming fishing forestry ‘mining, Harvesting in a ice field Primary sector business activity often provides raw materials for secondary sector business activity. An example i the extraction of oil which is used to produce petrol or plastics. However, some primary sector business activity produces final products. For example, consumers can buy raw vegetables, fruit and fish2: Classification of businesses Secondary sector Secondary sector business activity takes the natural resources produced by primary sector activity and turns these raw materials into finished goods. The Secondary sector: firms thal activities of the secondary sector include: process and manufacture goods from natural resources, = refining, = manufacturing = construction, Examples of secondary sector business activity include food canning, furniture making, car manufacturing and house building. Acar manufacturing plant Sia, Make a list ofthe secondary sector business activities found in your county, Including the products they make, Tertiary sector Tertiary sector business activity involves providing services to the final consumers or businesses. Examples of tertiary sector businesses include: Tertiary sector: firms that supply a service to consumers and other businesses, = shops = restaurants = banks = cinemas = airlines,ferent aces Te SSO od SPM cua ono aia oe These busineses provide services uch asretaling, mance, entertainment oo ) and transport Yourustbeatetdtneand precromplsofbshesses feunaincachsed ations arakoqutecomonon thetoicincinton for cromplcatltig the ramber cfenployeesinacet Fas: food ata cinema earn Make list ofthe tertiary sector business activities found in your country, including the services they provide. How the sectors depend on each other Although an economy canbe divided into primary secondary and tertiary sectors, the different sector of busines activity ae oflen dependent upon each ater. This ° isknownas chain of prodaction, Let’ lookat ol for example, Oi isextacted prosuclonandsvppWyofeeeds om underground ands a busines activity of the primary sector. Onc ithas been Seer an) extracted ol needs to be refined to produce other products suchas pettol orgs edterlnystCoreiiesen | ‘Tis isa proces carried out by busineses inthe aecondary sector Final tertiary of production: sector activity is needed to bring the petrol to your nearest petrol or gas station, for sale to the final consumer. Dring for ot-primary sect Refining the oll-secondary sector Petrol or gas station Figure 2.1 Primary, secondary and tertiary sectorseasy Diamonds in South Africa etra Diamonds is aleading independent mining group in South Arica. It has eight producing mines in Africa and is exploring for diamonds in Botswana. Source: www petradiamonds.com Browns area leading South [African jewellery store. They sll a wide range of diamond rings, bracelets, necklaces and earrings. For over 28 years, Mark Solomon has been manufacturing beautiful pieces of damond jewellery. Breathtakingly beautiful South African diamonds are set in designs ranging from stunning individually crafted diamond engagement rings through to highly prized tanzanite jewellery. —e Source: www:marksolomonjewelles.co.2a Mark Soloman is also a retailer of diamond jewellery and Browns is also a manufacturer of diamond jewellery. What do you think arethe benefits to both businesses of being both manufacturers and retailers? Changing importance of business classification Countries are often described as developing or developed. A developing country, ‘or less ceveloped country (LDC), aften has a small industrial sector and lower standard of living compared to other countries. A developed country, or more developed country (MDC), has high levels of industrialisation and its people have higher average incomes and enjoy a higher standard of living compared to less developed countries ‘The classification of business activity by sector is not used to class a country as developing or developed. However, the size of a country’s different sectors of business activity often indicates if it has a developing or developed ‘economy.Cambridge IGCSE Business Studies Pear Cec urinr dat nae ‘The data below shows countries which are currently classified as having developing or developed economies. Country data for business activity by sector none ped rere Cooney Cece Developing economies Rwanda 333 139 529 Vietnam 215 407 307 Zimbabwe 20.3 I 254 546 Developed economies Bermuda 07 70 923 Japan 12 205 ma Norway 27 41s 55.1 1. Which country has the lowest percentage of activity inthe primary sector, but the highest percentage of business activity inthetertiarysector? 2. Which country has the smallest percentage difference between primary business activity and secondary business activity? 3. Using data from the table to support your answer, isit true to say that countries whose tertiary sector is larger than their other two sectors of business activity are always developed economies? ‘4. What does the data in the table tell you about the relationship between primary business activity and developing and developed economies? ‘The importance of business classifications has changed for many counties There are two main reasons for this: ‘= Industrialisation - the growing importance of secondary sector business activity and the reduced importance of primary sector business activity. The emerging economies of both China and india are good examples. = De-industrialisation - the growingimportance of the tertiary sector ard the reduced importance of the secondary sector. The UKand USA are good examples of this type of economic activity. However, the changing importance of business classification may also be due to the following: ‘= Achange in consumer behaviour as a result of both industrialisation and de-industrialisation, Consumers have a higher income and they demand better quality and a wider choice of products. Better education - consumers expect better products and know that they can ‘buy goods from suppliers in a different region or country through e-commerce. 12 More leisure time - consumers work fewer hours than they used to. The demand for leisure activities, such as cinemas, restaurants and holidays, has increased,Et eS 1 Achange in business behaviour resulting from: 2. therneed for finance to fund expansion so that businesses can compete in global markets a theneed tobe able to communicate internally and externally quickly nd as cheaply as possible to take advantage of the opportunities of wider markets the need to provide better services for their employees, for example canteens; this in turn increases business demand forthe goods and services of ther businesses. Poaaceeats 1 Giveone example of primary, secondary and tertiary sector business activity. A Explain the difference between primary sector and tentiary sector business activity 3 Whatis meant by ‘secondary sector business activity”? 4 Using an example, explain the relationship between business activities inte primary, secondary and tertiary sectors 5 How mightthe classification of business activity by sector be used totellthe difference between a developing and developed economy? Business enterprises in the private and public sectors B ‘Most countries in the world have mixed economies. These are economies that have both private sector and public sector organisations. In the private sector, businesses are owned and controlled by individuals or ‘groups of individuals, for example Sony, Tata Corporation and Apple. In the public sector, organisations are owned by the country as a whole and controlled by the state or government; for example, most countries have publicly owned television and radio broadcasting services such as SABC in South Africa. Figure 2.2 shows the main types of organisations found in a ‘mixed economy. us Figure 2.2 Organisations in amixed economyCerna ed lesa ea Pea URE i Mena Sole traders, partnerships, private and public limited ‘companies, franchises and joint ventures: see Chapter 4, page 4. 8 ToPTIP Knowing your ewn country’s ‘economy, and thebusiness within t, will help youto better understand manyof the key terms and concepts you will study inthis and later chapters ag Ina mixed economy decisions about: what to produce, how to produce, and for whom to produce are made by both the private sector and public sectors ~ see Table 2.1 Er ens ‘What to produce Consumer choices The government decides How to produce [ Firms want to make profit | The government decides Forwhomto produce | Customers buying power | The government decides Table 2.1 Choices in the private and public sectors Private sector decisions In the private sector consumers want to buy certain goods and services. Consumer choices help businesses to decide what they produce. Businesses only produce the goods and services that consumers want ifthey can ‘make a profit from doing so. Businesses decide the best way of producing their products ‘Thisis atthe lowest cost so that they can make a profit when the products are sol. ‘The goods and services produced by private sector businesses will only be bought by people who have enough money to pay the price charged. Some consumers will not be able to buy products they want because they do not have enough money. Public sector decisions ‘The decisions about what, how and for whom to produce in the public sector are all made by government. ‘The public sector in many countries produces goods and services that all people in the population need, for example electricity, roads, education and health care. Government departments make decisions about how to produce these goods and services. The decision is based on providing a good quality service to the public rather than making profit Some of the goods and services provided by the public sector are provided free at the point of use, for example primary and secondary education and hospital treatment. Other goods and services are sold to consumers. Ifsome consumers do not have enough money to buy these goods and services, the government ‘might sell them at a lower price, or provide them free of charge. secondary school classroom State four forms of private sector business organisation. Identify and explain the role of four public sector organisations in your country. Identify and explain two differences between the private sector and the public sector. What's meant by ‘mixed economy’? Ina mixed economy how is the decision made about ‘what’ to produce?Businesses in every country can be classified, according to their activities, into primary, secondary and tertiary. ‘The primary, secondary end tertiary sector businesses are linked because one provides ‘the resources required by another. The classification of businesses by activity is often used to classify the economies of countries into developing ordeveloped Most economies have a private sector and a puble sector. Paul owns a fishing boat with his father John. They have been ir business together for over 15 years, Paul is thinking of investing money ins friend's fish canning company ~ Pisces Products (PP) PP sells most of its canned products to local supermarkets, but about 10% of the output is sold to public sector organisations such as schools and hospitals. Identify two forms of business organisation (other than supermarkets and fish canning) found in the private sector. 2 b What is meant by ‘public sector’? a ¢ Explain how the decisions about ‘what to produce’ and ‘how to produce’ are made in the private sector of a mixed economy. [4] d Identify and explain two differences between primary sector and secondary sector business activity. Use the information in he question to help with your explanation. (6) Do you think Paul should invest in his friend's fish canning ‘company? Justify your answer. a Consider the following data for two countries X and Y. Primary 61% 3% Secondary 24% 2% Tertiary 15% 5696 Size of private sector 28 9 Size of public sector R 51 ‘a Country X has a working population of 40 milion. How many people work in the tertiary sector? ia b_ What is meant by primary sector? a © Identity and explain two differences between the public sector and private sector "4 d_ Using data from the tables, identify and explain two differences between Country X and Country Y. i) The people who live in Country Y are likely to have a higher income and better standard of living than people who live in Country X. Do you agree? Justify your answer, 6) Total available marks 40Objectives ee err learn about: preety how to measurebusiness size eee Entrepreneur: 2> individual who has an idea fra business takes the fnanciaris of starting ‘and managing anew business. Working in small groups, use newspaper, magazines library resources orthe internet to research an entreoreneur from your country, or exe who your {group thinks has nad abig luence on business activity inyour country. Make sure all ‘groups are researchinga different ‘entrepreneur, then prepare a short presentation tothe rest ‘of your lass about your chosen ‘entrepreneur. \Whatis theirrame? What ‘qualifications and work experience did they have before going nto business? How did they startin business? What business did they start? Whatis thehistory ofthis business? These ae just some of ‘the things you could includein your presentatior. Enterprise, business growth and size Introduction Do you know anyone who has their own business? Maybe a member of your family or a friend? Many businesses start from small beginnings. A person hasan idea for a business. A bank or members oftheir family loan them some money to get started. Before they know it, the business is growing fast, and they need to employ other people to help them. In this way, both large and small businesses play an important part in the economy of a country. Inthis chapter you willlearn about the people who are responsible for business start- Ups and the importance of these to the economies of the world. You will also look at ‘why and how governments, including your country's government, support business start-ups through a variety of different financial and non-financial schemes. Once a business exists, how do we work out its size? The next part of this chapter, looks at how to measure the size of a business, and the problems involved. Some businesses decide to remain small. Other businesses set growth as an objective. ‘You will learn how businesses achieve their growth objective, the advantages and drawbacks of growth and why some businesses fail, Enterprise and entrepreneurship New businesses are started by people called entrepreneurs. They include people such as Ekta Kapoor from India, Kagiso Mmusi from Botswana, Mo Ibrahim from the Sudan, Richard Branson from the UK and Pan Shiyi from China Although the ideas for a business are often different, entrepreneurs usually have an idea for a new business are prepared to invest their own savings accept the risks of failure want to make all the decisions about the ‘management of the business. ‘The idea for an enterprise - meaninga projector business ~ may be any of the following ‘anew idea for a good or service offering an existing good or service in a way that hasnot been offered before ‘= offering an existing good orserviceinanew UK entrepreneur Richard Branson, location. founder of the Virgin GroupReon neuer eu Figure 3.1 An entrepreneur needs certain skills and qualities Market research: see Chapter 1, page 153, Cash-flow forecast: see Chapter 20 page 259, Business (SMART) objectives: see Chapter 5, pages7. Characteristics of successful entrepreneurs Entrepreneurs come in all shapes and sizes, young and old, male and female, quiet and showy. There is no such thing asa typical entrepreneur! All successful entrepreneurs have the ability to take an idea and turn it into a good or service ‘hich can be sold for profit. Successful entrepreneurs share similar characteristics. |= Innovative -they are good at thinking up new ideas for goods and services or new ‘ways of presenting existing goods and services 1 Self-motivated and determined - they have the drive to keep going, even when things get dificult, 1 Self-confident - they havea strong beliefin their own ability and ideas. 1 Multi-skilled - they have the ability to see an idea through from development to profitable sales. This requires a good understanding of the functions of finance, ‘operations, human resources and marketing. = Leadership qualities - they have good communication skills, the ability to motivate ‘others and are good decision-makers. ‘= Initiative - they not only have good ideas, but are also able to develop a good plan for achieving the business's objectives. ‘= Results driven - they are focused on achieving results and make sure preducts are sold for profit. ‘= Risktaker- they are prepared to take risks, knowing that failure is a possibility. They see failure as a positive experience to be learned from. = Good at networking - they are prepared to learn from others. ‘These skills and qualities help to turn ideas into real and profitable business. Contents of a business plan A business plan describes: ‘= the business - this part ofthe plan includes details ofthe entrepreneur, the idea for the business and information about the skills and expertise of managers or workers who need to be recruited ‘= the business opportunity - here you will find information about the product and why the entrepreneur believes customers will uy it; this part ofthe planincludes market research ‘= the market - the current size, potential for growth and the product's main competitors 1 the objectives ofthe business - this s what the business hopes to achieve ‘= financial forecasts ~a cash-flow forecast and projected sales, revenue ard profit forat least the frst year of trading. How business plans assist entrepreneurs ‘The business plan is important to new (and existing) businesses, 1 Theinformationitcontains canbe used to persuade lenders such as banks and investors to provide finance tothe business. s= Theplan gives the business a sense of purpose and direction. it sets outtre resources required by the business suchas finanee, the number and sl of workers needed, and how the goods and services will be marketed to consumers. 1» The objectives and financial forecasts provide the business with targets to ai at and enable the business to monitorits progress.ee a ea ees Section 1 Understanding business activity TopT start-up. A business plan is also important for the planning and development Dor'tjustlearnthemainfeatures | of existing businesses. An up-to-date business plan may also be needed when ofabusinessplan.tisimportant | 4 business wants lenders or investors to provide finance for expansion or other Geri foryou to know why the features are important tonew and existing businesses, long-term projects. These plans are often known as the corporate plan and are often more long-term than the business plan produced for a new business start-up. Mama Meals on Wheels ‘When Naisiadet Mason moved back to Kenya from working abroad she realised that no one delivered food from all the restaurantsin Nairobi. A few restaurants did have their own delivery service but this was limited to how close customers’ hones were to the restaurants. Naisiadet loves good food, as opposed to ‘junk food’, and thought that delivering meals from restaurants in [Nairobi directo the homes of customers was a good business idea, She carried out market research and found that only 5% of people in Nairobi could afford the services she was going to offer. These were mostly middle income earners ‘ho get home tired after work and do not want to goto the trouble of making their own meals, Naisiadet set up Mama Meals on Wheels in 2010 using her own savings to buy delivery motorbikes and other start ‘up costs. The business has been successful and now employs fourteen workers. Grocery delivery has been added to the service Mama Meals on Wheels offers to its customers. Naisiadet puts the success of the business down to offering good customer service. (Quality on time delivery every time’ isthe business's motto. However, despite the early success of her business, Naisiadet realised that not having a business plan when she set up her busines may have been a mistake. Source: adapted from http www youtube.com/watch?v=AmRSLOMHxD0 and www.mnamamealsonwheels.com TASK. a Mama Meals on Wheelsisin the tertiary sector. Identify the ather two sector: _ Identify two reasons why Naisiadet might be described as an entrepreneur. © Identity andes fi ‘of researching the market for her proposed business, 4 Doyou think it was. mistake for Naisiadet not to have a business plan for her business? Justify your answer lain two be 0 Naisiat Why and how governments support business start-ups ‘Small businesses are important to most economies throughout the wor’. In the UK, for example, in 201 = There were 4.8 million businesses. |= More than 9996 of these businesses were small or medium-sized businesses, employing fewer than 250 people. = There were 4.6 million micro-businesses (96% of all businesses), empleying fewer than ten people. Governments are keen to encourage new start-up businesses because of the benefits they bring to the economy. These benefits include: '= Job creation - although small firms may not individually employ many workers, together they employ a very large percentage of the working population.Se eet cer ‘= Theentrepreneurs who startup new businesses bring ideas for ods and services that increase the variety of products available. This helpsto create a greater consumer choice in the market. = Themore businesses there arein the marketplace the greater the competion Competition usually resuitsin lower prices and better quality of goods and services. ‘= Small businesses often provide specialist ‘goods and services to consumers waich larger businesses are ess interested in supplying because they are only interested in mass marketing. Also, these smaller businesses often provide the goodsand services needed by the larger firmsin the industry, for example a small firm that produces electronic components used by large computer manufacturers. ‘= Startup businesses begin life as asmall business, but some will grow anc become the larger businesses ofthe future. The country will benefit from the advantages larger businesses bring to the economy. ‘= Some startup and smaller businesses often have much lower costs 5 ‘An example of a small business ‘than larger businesses and can pass this on to the consumer through lower prices. ‘Many governments provide financial and other support to new business start-ups. ‘These vary from country to country and even within a country the support may vary depending on the activity of the business and its location, ‘The most common types of government support include: ‘rants and interest free or low interest loans lower taxation rates on profits in the early years rent-free premises for a certain period of time {ree or subsidised training for workers information, adviec and support from specialist agencies. aun Use newspapers, magazines library resources or the internet to research the assistance the government provides to start- Up businesses in your county. Why do you think governments should provide financial and other support to stert-up businesses in your country? ad 1. Identify two characteristics of an entrepreneur. 2. Identify and explain two features of a business planCambridge IGCSE Business Studies PR SU ce Measuring business size ‘There are several ways of measuring and comparing the size of businesses. ‘The ‘most common methods are shown in Figure 3.2. Capital employed Number of Market Share Employees Value of Output Figure 3.2 Measuring business size Capital employed “This is the value of all long-term finance invested in a business. Its used to buy the things that a business needs before it can produce goods and services, for example factory/ofiice buildings, machinery and inventory ~ these are known as assets ‘A small business will invest less capital than a large business in the same industry. For example, a small baker will only need one shop, one food mixer, cone oven and a small inventory of raw materials. A large bread manufacturer will need production lines, industrial mixers, large ovens and a large inventory of raw materials. ‘Using capital employed to compare the size of businesses in different industries {s a problem because some industries, such as car manufacturing, need a very large capital investment in factories and machinery. Others, such as computer software design, do not3: Enterprise, business growth and size Think about the two businesses below, Figure3.3a Awindow cleaner Figure 3.3b Ahelicopter rental business Both of these businesses ar= small and have ust one owner, but the helicopter rental business requires a much greater capital investment than that needed by a window cleans, Value of output The amount businesses an frm sling thi products soften wed to compare the size oftusnesses inthe same nt A stl basins wl hve one teenie cerning fom aler-than ager businas Ter example aallgncel stor il have ewer uromers hen lp supe en, tree ms ge ig seteaee is ines toe alacant cae the busine sly to arn, However isnot» good menue whcaconparing basins in ieren induc Think about the twa businesses below. Figure 3.4a A designer dress shop Figure 3.4b A sweet shop The designer dress shop sels a high value product compared to the low value products sold by the sweet shop. The revenue ofthe designer dress shop i likely to be much greater than that ofthe sweet shop,Cer ed [cca OT Ct eS CPR Ur ue Tog TOP TIP Profitis net an acceptable measure of business size Number of employees Large businesses need to produce a much greater output or provide theit services to a much larger market than smaller businesses. They will also have more departments and managers. Therefore, larger businesses usually employ many more ‘employees than smaller businesses in the same industry, for example a local general store and a large national supermarket. However, this measure may be misleading, Two businesses can prodace similar levels of output, but if one business uses more machinery than the other then they are likely to have far fewer employe Let’s look at the example of two drinks manufacturers. They both produce the same level of output. However, one firm has invested in an automated p-oduction process, but the other still uses more traditional methods of production, The firm with automated production will require far fewer workers than the one that is using traditional methods. Market share ‘The larger the share of the total market the larger the business. However, this ‘measure can also be misleading. Look at the data for three firms shown in ‘Table 3.1. Firm A and Firm Bare in the same industry. Firm C is ina different industry from A and B. a Market share % 10 60 6 Total marketvalueSooos | 500 | 500 | 8500 Table 3.1 Data for firms A, B and C Firm Bis larger than Firm A because its market share is six times bigget. However, can we describe Firm B as a large business? The answer is yes if we use market share as a measure, However, does this mean that Firm C with a market share of just 6% isa small business? The answer lies not in the market share of each business, but in the value of each firm's share of the market: So, if we work out Firm B's share of the market 60% of $500,000 = $300,000 and Firm C’s share of the market: 6% of $850,000 = $510,000 We can see that the value of Firm C’s market share is much higher than the value of Firm B's market share. Therefore, Firm C is larger than Firm B, Limitations of methods of measuring business size Although all of the above methods can be used to measure and compare the size of businesses, you have seen that it isnot quite a straightforward as it frst seems. Take care before drawing any conclusions about the sizeof a business, because different measures can produce different results, Before a good idea to use more deciding on how to describe the size of a business it than one measureReece ne Ee ACTIVITY 3, The table below shows datafor three companies which are all manufacturers of home entertainment appliances suct as televisions and DvD players. Er on oa Company ¢ Revenue $280,000 $380,000 410,000 Capital employed $200,000 $800,000 $350,000 ‘Number of employees 6 35 50 Each company claims tobe the largest in the industry. Why can they do this? 2- Why might the number cf employees NOT be a good measure ofsize in this industry? 3. Which ofthe three companies do you think i the largest? Give reasons for your answer. poaceead 1. Identify three methods of measuring the size ofa business. 2 Explain one problem of measuring business size. Why some businesses grow and others remain small Growth isa long-term objective of most, but not all businesses. Some businesses prefer to remain small, while others wish to expand, For example, a chocolatier ‘making specialist, hand-made chocolates may want to stay small, while a chocolate ‘manufacturer who wants to produce chocolates for the mass market will waat to grow. Figure 3.5 Some business prefer to remain small, while others will want to grow Why owners may want to expand their business Expanding a business can bring many benefits, including increased profits and a larger share ofthe market.Cen gt ed ces PSO eee Mea Increase in profits ‘When a business grows, its profits may inerease. Growth must result in an increase in output - goods and services produced. Ifthis output is sold, then sales increase. Increased sales usually increase revenue and, ifthe business has kept control of ts costs during its growth, then this should also increase profits Increase in market sha ‘An increase in market share may also result from business growth, This benefits the business because its products and brand become more widely knowa and this makes it easier for the business to continue to grow. Launching new products onto the market is less risky. However, the growth in the value of a business's sales does not automatically increase its market share. Look at the data for Company Z.in Table 3.2. emer PSCC ecto) 20 100 100,000 {200/100,000) = 10% 2012 120 [144,000 (220/144,000) = 8.59% ‘Table 3.2 Data for Company Z You can see that Company Z has increased its sales between 2011 and 2012, although its market share has fallen from 10% to 8.5%. This is because the growth gi in Company market share isles than the growth in the total marke. Economies of scale o- . ‘The concept of economies of seal willbe studied in alter chapter. For now, Econ aimlegetsrateared all you need to know is that as a business grows it may benefit from reduced eed average cons ana rns of economies of ele. Ifa business can lower the cost of producing its products its profits will increase. Instead, it may decide :0 lower the price of its products and become more competitive ~ resulting in higher sales. Greater power to control the market Larger businesses in an industry have greater power to control market ] © Business plan: see Chapter3, page 29. Objectives: see Chapters, pages7. Cash flow management: see Chapter 20, page 258. Marketing: see Chapter 10, page 129. Finance: see Chapter9, age 245. Chapter 26, page 333. Poor planning and lack of objectives ‘The lack of a detailed business plan, covering aspects such as marketing and finance, as well as detailed costings and profit predictions is often a cause of, business failure, Clear objectives are essential for business success, New business owners often fail to set objectives and as a result the business lacks focus and direction, Poor cash management ‘A business receives cash from the sale of its products. However, most businesses sell their products on a credit basis. This means that they will receive the cash from sales ata later date, for example 30 days after delivery to the customer, Cash will leave the business when it pays for expenses such as supplies of raw materials, workers’ wages and other business expenses, ‘There must be enough cash coming into the business to pay the expenses and other debts. Sometimes businesses do not manage the inflow and outflow of cash effectively and they do not have enough cash to pay their expenses and debts. Poor choice of location Choosing the right business location isa very important business decision and ‘one that could be the difference between success and failure. This is often true for businesses such as retailers, restaurants and leisure facilites, which need to be located close to their market Poor management Many owners of new businesses may have excellent ideas and products, but they ‘ofien lack the management skills and experience to run thetr business efficiently. Failure to invest in new technologies A business that does not invest in the latest technologies will often find itis unable to compete in terms of price, design and quality. Instead, consumers may buy their competitors’ products, and the business will fil to survive Poor marketing Successful businesses are ones that identify and then meet the needs of their customers, Market research is essential to new businesses for identifying the potential size of the market, the level of competition and finding out what consumers want. Businesses that do not carry out market research are likely to fail Lack of finance ‘New businesses often lack the finance they need to take full advantage of the opportunities available to them Competition All businesses face competition. However, one of the reasons for business failure is the effect of the globalisation of markets. Globalisation - the growth of multinational businesses and increased international trade — gives businesses access to wider markets, but this also means that competition is increased, Businesses that are unable to compete on price and quality are unlikely to survive in the long-run.Ra ee eT ee Er Economic influences Interestrates and taxation: consumers have to spend on goods and services produced by businesses. This, in pee Cheeta Zanes ‘turn, will reduce businesses’ earnings from sales and profits. Fiems that are well established may have the finance to continue even when they are making a loss. However, new businesses may fail when the economic condition is difficult. ae) Misaki is worried, Her business, designing and selling wedding dresses, has made a loss forthe fist time in 12 years. She knows her esses are more expensive than those of her main competitors, buther customers have always been prepared to paya little more to have the dress oftheir dreams! She has telephoned her accountant for some advice. He told Misaki ‘the economic conditions are not good. Many people are losing their jobs and those that are sill working are having to pay higher taxes on their earnings” “But people are still getting married, said Misaki “Yes they are, but they have less money to spend on dresses and other wedding items,’ he replied Identify two economic factors that may have affected Misaki’s business, 2. Identify and explain two reasons that might explain why Misaki’s business has made a loss, 3. Doyou think that Misak''s business is at risk of failure? Justify your answer. aa aad 1. Identify two causes of business failure, longtime?