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 William Collins’ dream of knowledge for all began with the publication of his first book in 1819. A self-educated
mill worker, he not only enriched millions of lives, but also founded a flourishing publishing house. Today,
staying true to this spirit, Collins books are packed with inspiration, innovation and practical expertise. They
place you at the centre of a world of possibility and give you exactly what you need to explore it.
Collins. Freedom to teach
Published by Collins
An imprint of HarperCollinsPublishers
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Hammersmith
London W6 8JB
Browse the complete Collins catalogue at www.collinseducation.com
© HarperCollinsPublishers Limited 2013
10 9 8 7 6 5 4 3 2 1
ISBN-13 978 0 00 750702 3
Andrew Dean, Mark Gardiner and Denry Machin assert their moral rights to be identified as the authors
of this work.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in
any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior
written permission of the Publisher or a licence permitting restricted copying in the United Kingdom issued by
the Copyright Licensing Agency Ltd., 90 Tottenham Court Road, London W1T 4LP.
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A Catalogue record for this publication is available from the British Library
Commissioned by Alexandra Riley
Project managed by Caroline Low
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Designed by Jouve India Private Limited
Edited by The Cambridge Editorial Partnership and Mitch Fitton
Proofread by Melanie Birdsall
Index by Annie Dilworth
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Cover picture research by Caroline Green
Cover design by Angela English
Printed and bound by L.E.G.O. S.p.A. Italy
With special thanks to Veenu Jain for carrying out a comprehensive peer review of the text.
With special thanks to the following teachers and subject experts for their guidance and help in reviewing the
text: Mr Kazeem Adegoke (Head of Business Studies, Greenfield Community School, Dubai), Ms Rina Biswas
(IGCSE Business Studies teacher, Vibgyor High School, India), Ms Karen Capel (Coordinator of International
Exam Courses, Dickens Institute, Uruguay), Ms Maria Fernanda Marquez (Head of English Studies and IGCSE
Business Studies teacher, St Brendan’s School, Uruguay), Ms Pamela Ng (Year 3 Curriculum Coordinator and
IGCSE Business Studies teacher, ACS International School, Singapore), Ms Zainab Sattar (IGCSE Business
Studies teacher, International School of Palmela, Portugal).

IGCSE_BS_FM_cs5.5.indd 2 13/06/13 9:17 PM

 Contents
Introduction ..........................................................................4 Section 4
Operations management......................236
4.1 Production of goods and services .....................238
Section 1 4.2 Costs, scale of production and
Understanding business activity .................6 break-even analysis ................................................250
1.1 Business activity............................................................8 4.3 Achieving quality production .............................265
1.2 Classification of businesses ................................... 17 4.4 Location decisions ..................................................268
1.3 Enterprise, business growth and size ................. 24 Exam practice ..................................................................273
1.4 Types of business organisation ............................ 41
1.5 Business objectives and stakeholder
objectives ..................................................................... 55 Section 5
Exam practice .................................................................... 67 Financial information and
decision making ........................................... 280
5.1 Business finance: needs and sources ...............282
Section 2 5.2 Cash flow forecasting and working
People in business...........................................74 capital ..........................................................................298
2.1 Motivating workers................................................... 76 5.3 Income statements .................................................307
2.2 Organisation and management........................... 93 5.4 Balance sheets ..........................................................315
2.3 Recruitment, selection and training 5.5 Analysis of accounts ...............................................321
of workers...................................................................108 Exam practice ..................................................................331
2.4 Internal and external communication .............130
Exam practice ..................................................................147
Section 6
External influences on business
Section 3 activity ............................................................. 338
Marketing...................................................... 154 6.1 Government economic objectives
3.1 Marketing, competition and and policies................................................................340
the customer .............................................................156 6.2 Environmental and ethical issues ......................353
3.2 Market research .......................................................170 6.3 Business and the international
3.3 Marketing mix...........................................................180 economy .....................................................................364
3.4 Marketing strategy..................................................217 Exam practice ..................................................................379
Exam practice ..................................................................229

Glossary..............................................................................386
Index ...................................................................................393
Acknowledgements ......................................................399
3CONTENTS

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 Introduction
Many of the topics you will study during your Business Studies course
are ones that affect you every day; for example, why do cinema prices
vary at different times of day; why do firms use social networking to
promote their products; what motivates people to work hard? Business
Studies is a very real subject; as you learn about each of the topics in
this book try to relate them to reality – not only will this help you to get
a better grade but you will also find the course more interesting.
After successful completion of this course you will understand the
different forms of business organisations, the external environment in
which businesses operate, and different business functions such as
marketing, operations and finance. You will also have an understanding
of the important role people play in the success (or otherwise) of a
business, and be able to calculate, interpret and use basic business
data and basic financial information. You will develop the ability to
analyse different business situations and make recommendations about
what business actions might be appropriate in different contexts.
The book is laid out into the following sections:

Section 1: Section 1 examines the purpose of business activity, what form

Understanding business ownership can take and what businesses try and achieve.
business Other topics include: classification of businesses; enterprise,
activity growth and size; types of business organisation
Section 2: In Section 2 you will learn why people are critical to business success,
People in how firms can motivate staff and recruit staff, and what laws exist to
business protect workers. Other topics include: workforce organisation and
management; recruitment, selection and training of workers; internal
and external communication; employment protection legislation.
Section 3: Section 3 examines how businesses attempt to develop relationships
Marketing with consumers, how they communicate with them and persuade
them to buy more products. Other topics include: marketing; market
research; marketing strategy.
Section 4: Section 4 looks at how products are manufactured, the methods
Operations for improving the speed, quality and cost of production, and where
management businesses locate their operations. Other topics include: scale of
production and break-even analysis; achieving quality production
of goods and services; location decisions.
Section 5: Section 5 explores basic business accounting tools and examines
INTRODUCTION

Financial where businesses get money from. Topics include: business

information finance (needs and sources); cash flow forecasting and working
and decisions capital; income statements; balance sheets; analysis of accounts.
4

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 Section 6: Section 6 examines how the external environment in which a
External business operates can affect (both positively and negatively) its
influences on activities. Topics include: government economic objectives and
business policies; environmental and ethical issues; business and the
activity international economy.

Every topic starts by outlining the BUSINESS

IN
NIKE IS NOW OPEN
learning objectives – what you need PRACTICE

to know and be able to do for that topic. In 2010, Vietnam overtook China as the world’s largest
producer of Nike trainers. Nike has received heavy criticism
The content is supported by Business in recent years for its production methods and lack of
communication with customers and other stakeholders.
in Practice case studies, giving However, Nike now lists its suppliers and factories so that
customers can find out where their products were made.
relevant examples of the theory in This communication has been a positive move by Nike as
they look to improve relationships with their stakeholders.
action from around the world, and a
variety of Skills Activities. Each topic
concludes with Knowledge Check SKILLS ACTIVITY
questions to test your understanding Evaluation Application

of the key concepts. Key terms and Working in pairs, identify the key features of your favourite
e-commerce websites. These may be the colours, layout
difficult language are explained and range of activities or products.
Based on this research, produce a leaflet for businesses of all sizes on
throughout, and you can refer to the what they should remember to include when setting up their own
e-commerce website. Arrange your key points in order of importance,
extensive Glossary to double-check and ensure that you justify each point that you make. You may want to
refer to some websites by name and perhaps use images to highlight
your understanding of terms appearing your points.
in bold. Each section concludes with an
Exam Practice section that replicates
the format and style of the exam
questions you will encounter.
When it comes to the exam you will be assessed on the following:

Assessment You need to demonstrate knowledge and understanding of the

objective 1: theories and techniques, facts, terms and concepts included
Knowledge and throughout this book.
understanding
Assessment You must relate your knowledge and understanding to specific
objective 2: business problems and issues (for example, you must say how a
Application case study company is affected by a certain situation).
Assessment You must be able to distinguish between evidence and opinion
objective 3: and be able to interpret and analyse information whether in
Analysis written, numerical or graphical forms, as appropriate to a given
business context.
Assessment You need to present reasoned explanations, develop arguments,
objective 4: understand implications, and make sound judgements,
Evaluation recommendations and decisions based on a business context.
INTRODUCTION

We hope you enjoy the course and that you find this book a useful and
valuable companion on your journey of discovery. Good luck!
5

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 In this section, you will look at how businesses operate and
expand, and the main activities that a business goes through to
add value and profit. The key to the success of any business is its
ability to meet the needs and wants of its customers. If Apple only
made pink handsets, or McDonald’s produced only vegetarian
meals, neither company would be meeting the needs and wants of
its customers and, as a result, would see a decline in sales.
Every day, millions of people aim to set up and run a business in all
industries and sectors, but many do not succeed. This section will
look at what is needed to make a business successful, and how
enterprise plays an important role in making this happen. It will also
look at the different types of business structures and the risks and
decisions involved. Not all businesses have the same objectives or
targets. The different goals are supported by differences in business
approach, structure and philosophy – and you will examine why.
In this section, you will also investigate the different sectors in which
businesses operate: primary, secondary and tertiary. You will carry out
research into your own country, in order to understand the changes
that have occurred in each of these sectors over the years. Finally, this
section will look at the different ways in which business size can be
measured, and the problems associated with each method.

SKILLS BUILDER
Good progress Excellent progress
Knowledge: You show sound Knowledge: You define and identify
knowledge of the key terminology all of the key terms relating to the
detailed in the section’s glossary. business environment, using this
terminology in your written answers.
Application: You demonstrate good
understanding of the key terms that Application: You show a clear ability
you have mentioned through to apply your knowledge to a given
explanations and application to business situation, using detail such
businesses. as the business aims, objectives and
classification of the business.
Analysis: You develop the
consequences of the points that you Analysis: You show the ability to classify
have mentioned for the type of and comment on information presented
business in question, commenting on in various forms, distinguishing
the advantages and disadvantages for between evidence and opinion.
the business.
Evaluation: You make judgments and
Evaluation: You make reasoned suitable recommendations justifying
judgments when they are required. your reasoning, where possible using
data in your judgments in an accurate
and logical manner.

SECTION CONTENT
1.1 Business activity 1.4 Types of business
1.2 Classification of businesses organisation

1.3 Enterprise, business growth 1.5 Business objectives and

and size stakeholder objectives

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 1
Understanding
business
activity

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 1.1 Business activity
Purpose and nature of business activity
LEARNING OBJECTIVES (1.1.1)
By the end of this section, you should:
✓ Understand the concepts of needs, wants, scarcity and opportunity cost
✓ Understand the importance of specialisation
✓ Understand the purpose of business activity
✓ Understand the concept of adding value and how added value can be increased.

NEEDS, WANTS AND SCARCITY

A successful business will need to create a product or service that
people actually want or need. There is a difference here. A need is for a
product you could not live without, for example, heating, food or drink.
In contrast, a PlayStation is a want: you don’t have to have it, nor do
you really need it, but you would like it all the same. Usually, essential
items (items you must have) are needs, whereas non-essential items
are often wants.
1 UNDERSTANDING BUSINESS ACTIVITY

∆ A Bugatti Veyron is a very desirable want for some, but not an essential need

A Bugatti Veyron? Latest iPhone? Concert tickets? Whatever it is you

really want, there will often be a limited amount of it. This is because
there is only a limited supply of the resources needed to make it.
This could be a limited number of:
• seats in the arena for a concert
• diamonds to make rings
• parts and components that are needed to make a product
• staff with the skills that are needed to make a product.
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 Scarcity is the shortage of a resource, such as oil, wheat or land. The
scarcity of resources can often make products more expensive as the
demand is greater than the supply.
Scarcity of a product is often caused by a limited supply of land, labour,
capital or enterprise. These are called the factors of production. They
are the key inputs that businesses need to produce goods and services.

Land The price of land is often more expensive the closer

a business is to large cities. This is because land is
scarce (in short supply). As businesses often wish to
be close to city centres, the land that is available is
very expensive. Some businesses also need large
amounts of land (for warehouses), which reduces
the options available.
Labour Some parts of the labour force are scarce. For
example, pilots are highly-skilled employees who
have undergone years of training. They are paid
high salaries because their skills and expertise
are scarce.
Capital Capital refers to cash or goods that a business uses
to generate income. This could be property or
money used to purchase materials.
Enterprise Karachi-born Gulu Lalvani set up Binatone, one of
the world’s largest manufacturers of cordless
phones. His innovative (creative) mind and hard
work allowed the product sales to grow. Without his
enterprising attitude, it would not have succeeded.
This set of skills is rare, and many businesses
struggle to find staff who can help improve their
performance.

SKILLS ACTIVITY
Analysis

Focus on your own needs and wants.

• Identify and then write down your top three wants and your top
three needs.
• In pairs, discuss how your wants and needs might differ from those
1.1 BUSINESS ACTIVITY

of people in other countries.

What do you notice about wants and needs around the world?
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 OPPORTUNITY COSTS
Every day people go to work, earning money to help them buy a range
of goods and services. There will be some essential items that they
need to buy such as food, but they will also choose to buy other items
such as iPods, cars and jewellery. They have to decide what to spend
their money on.
With so many wants and needs, businesses also need to make choices
about what they spend their money on. This may be simply deciding to
order a different product from a supplier or a decision about where to
spend excess (extra) cash. The decision may be to stop spending money
on one part of the business and focus it on another. Every decision has
an opportunity cost.
Every day businesses experience opportunity costs. Businesses invest in
a new machine rather than spend that money on a new TV advert.
The opportunity cost here is the extra customers that might have
resulted from the TV advert. With some resources so scarce,
governments have to make the same sort of decisions.
Each year the governments in many different countries have to decide
what they are going to spend the money on that they raise from tax or
trade. For example, some people may feel that a new hospital is
needed in a certain area, whereas the local businesses may feel that
a new road system is more important. Whichever decision the
government makes will mean an opportunity is missed, therefore
creating an opportunity cost.
1 UNDERSTANDING BUSINESS ACTIVITY

∆ The Dubai government chose to build the palm islands, hoping they would create new
investment and tourism in the country: the opportunity cost was investment in the country’s
roads, sewage system and other upgrades. Every decision has an opportunity cost.
10

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 BUSINESS
IN
PRACTICE KODAK IS A PICTURE OF CHANGE

After a fall in sales, Kodak has decided to sell off its digital
camera business and has chosen instead to continue
with printers, cinema stock and chemicals. The move is
the latest big decision to be made by the once-famous
camera company. Kodak’s choice to move into the other
areas is the opportunity. The opportunity costs are
Kodak losing its reputation for cameras, as well as the
sales. This news has caused a major shock to customers
who have seen Kodak dominate the camera market for a
long time. With competitors finding cheaper alterna-
tives, Kodak has made the decision to help save the
business’s long-term future.

SKILLS ACTIVITY
Analysis

Using your research skills, identify three different businesses or

industries that are government-funded. Try to find out the exact
amounts of funding and how the level of funding has changed over time.
Try using the following key words to help in your research: public sector,
government support for business, government funding and government run.
• Now analyse them. Discuss whether they are successful. Are they
using the funding well? Does the funding achieve its purpose?
• Now try to describe each business or industry to your class, but only
give them three clues.

SPECIALISATION
Specialisation is when a person, business, region or country focuses
on producing a limited range (small number) of goods or services.
People all have different skills so different people are best suited to do
different jobs. A good business will understand this and place their
workers on the tasks that best suit their skills. This division of labour
(dividing up the workers into groups) allows the employee to focus on
performing a few tasks. For example, if you went into The Penisula
1.1 BUSINESS ACTIVITY

Tokyo Hotel, there would be a range of staff. Some work on reception,

others in the kitchen. The staff are divided up based on their skills and
which task they specialise in. This is a very important aspect of
business activity as it allows employees, businesses, regions and
countries to focus on the products or services they are best at.
It is not only businesses that focus on one or two tasks – countries do
too. Many countries only produce one or two products because they
are very good at making that specific product.
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 Some examples of specialisation, at the different levels, are shown in
the table.
Employee
• A skilled carpenter who focuses on producing high-quality
violins
• A pastry chef who only makes the desserts and cakes for
the restaurant
• A mortgage adviser for a bank
Business
• Audi specialises in making cars
• The local accountants who focus on doing other people’s
tax calculations
• Nestlé specialises in chocolate production
Region
• The Champagne region in France specialises in making ...
champagne!
• The Santos region in Brazil specialises in coffee production
• Nuwara Eliya in Sri Lanka produces some of the world’s best tea
Country
• Saudi Arabia specialises in extracting oil
• The Ivory Coast specialises in the production of cocoa
• Japan specialises in technology and computing

Benefits of specialisation Drawbacks of specialisation

For ✓ By specialising, an ✘ Training of employees will
businesses improvement in quality and often be more varied and
efficiency can lead to larger expensive.
profits. ✘ The employees may become
✓ Businesses may develop a bored with the tasks they do
positive reputation for a each day as they tend to be
1 UNDERSTANDING BUSINESS ACTIVITY

particular product or service. the same. This may cause them

For example, a wedding dress to leave the business.
shop may become well known ✘ The product or service in
because of its specialist which the business specialises
products. can become out of date or no
✓ It may be able to charge longer required, causing it
higher prices if it is one of the to close.
only businesses to offer the
product or service.
✓ The employees become faster
at producing the goods.
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 Benefits of specialisation Drawbacks of specialisation
For ✓ Employees may be paid more ✘ Machines that can do the
employees if their skill is in short supply. same tasks more quickly and
✓ The skills they have may mean cheaply may replace
they can choose the job they employees.
want and the benefits that ✘ The employee may become
come with it (e.g. a car, flexible bored with only focusing on
working hours). one or two skills.
For the ✓ Scarce resources are used ✘ Some countries struggle to
world more effectively. produce a product or service
✓ A country that specialises can that is required globally.
trade (exchange) with other ✘ Countries can suddenly
countries for goods and become beaten on price,
services that they don’t or meaning that their entire
can’t produce. workforce is no longer in
✓ People benefit from the jobs demand.
and incomes that come from
producing specialised
products or services.

TOP TIP
Specialisation takes place at various levels, from that of a person up to
a country. Remember to use examples from all appropriate levels.

KNOWLEDGE CHECK
Audi now has a global reputation for comfort and quality. Its range of cars
can cost up to $500 000 and is only targeted at the richest customers. Its
products include the Audi R8 and Audi RS, two very exclusive cars with only
a few thousand of each being made.
1. What is meant by the term scarcity? (2)
2. Explain the opportunity costs to Audi of producing the R8 and RS cars. (4)
3. Explain how specialisation benefits an employee of Audi. (4)
4. Do you believe that specialisation will benefit Audi when making
their cars? Justify your answer. (6)
Total marks 16
1.1 BUSINESS ACTIVITY
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 PURPOSE OF BUSINESS ACTIVITY
All businesses exist to fulfil a need or want of a customer. Many
businesses aim to make a profit from doing this, with the money going
to the owners. There are also businesses that invest any profits they
make into social activities and projects that try to help society. For
example, ‘Unltd’ in India helps people set up and run businesses.
However, a business cannot exist unless it has customers who want to
buy what it sells, whatever this may be.
Some of the purposes business may have are to:
• create new products
• generate large amounts of sales
• educate the local and global community to reduce pollution and
damage to the environment
• create large brands across the world
• listen to the different stakeholders
• support community projects and social activities.
Different business structures have a direct impact on the aims and
objectives set by a business (see Types of business organisation). For
example, a sole trader will decide on his or her own business aims
and objectives, while in a public limited company, each business
owner, shareholder and director will have her or his own ideas and
aims for the business. How the business is organised therefore shapes
the purpose and activity of the business.
Consider the following examples:
• Wal-Mart (USA). One of the world’s largest
businesses, estimated to have a $351 billion
revenue, Wal-Mart meets the needs and wants of its
customers by selling a wide range of goods in its
stores. Its purpose is to provide these goods and
make large profits.
• Divine Chocolate (UK + Ghana). Its purpose is to
sell its chocolate worldwide, but also to boost the
Fairtrade production of cocoa and the communities
that it works with.
• UNICEF (global). UNICEF aims to support
1 UNDERSTANDING BUSINESS ACTIVITY

children worldwide, through donations and business

activities that focus on promoting its cause, rather
than generating large profits.
• Chao Chung (China). A local family-run restaurant
in China aims to support the local community by
∆ Barcelona FC help to promote UNICEF
providing affordable meals. The business makes a by putting its name on their shirts for free
profit but not at the expense of losing customers.
• Tannura (Japan). Brian Tannura set up a vending machine business
in Japan and runs it as a sole trader. His purpose is to generate
enough revenue to do this full-time. He plans to bring in a variety of
different vending machines and expand his business.
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 ADDING VALUE
Businesses sell on a product or service in order to add value. The key
here is to create a product that is worth more than the cost of making
it. If the business can encourage customers to pay more than the total
costs, then it will be able to make a profit.
If the production of a new Mazda car costs $6000 and each car is sold
for $12 000, then Mazda is adding $6000 value. Once Mazda has paid
off all its overheads, marketing, insurance and other costs, the company
will make a profit.

SKILLS ACTIVITY
Evaluation

In small groups or pairs, discuss the benefits for a business of adding

value. You should aim to come up with four different benefits. Write
each benefit on a separate sheet of paper.
• Now arrange the benefits in order of importance. Be ready to justify
what you think is the biggest benefit.
• How could a business achieve some of these benefits?
Extension: Using your research skills, find out which business has the
highest added value.

BUSINESS
IN
PRACTICE SAMSUNG VS APPLE

With the success of the iPhone unrivalled (unmatched),

Samsung is soon to release three new models of mobile
phones, each costing around $100. Consumers have already
indicated that they would be willing to move on to these
handsets and away from Apple simply because of the price.

Samsung has decided to beat Apple on price. By buying its

components in bulk (large quantities) or producing them
itself, Samsung can add value and still sell its phones for a
cheaper price than the iPhone.
1.1 BUSINESS ACTIVITY

How to add value

Businesses can add value to their products in numerous ways:
by design, quality and efficiency, marketing and convenience.
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 Design
This can make your product unique and different to the competition.
For example, Dyson uses ‘cyclone’ technology to maintain market
leadership due to their design. Customers will pay a higher price for
this innovative and effective design.

Quality and efficiency

‘The better the quality, the higher the price.’ Products that are of a high
quality can often sell for more. In China, Omnialuo is seen as a luxury
clothing range. In contrast, Primark in the UK adds value through
efficiency rather than quality. The lower the costs of making the
product, the higher the value added.

Marketing
If you think of a product that you want to buy, it will be due partly to
the marketing of the product. This has made you more willing to buy
the product and perhaps even pay more for that brand. A brand is
created through intense (a lot of) marketing, which allows the customer
to recognise a product, logo or packaging and associate this with a
business. For example, the Van Cleef and Arpels luxury retailer logo is
recognised all over the Middle East. This adds value to the product.

Convenience
If you go to a concert or sporting event, such as the Formula 1 Chinese
Grand Prix, the food, drink and merchandise will always be more
expensive than elsewhere outside the venue. This is because it is
conveniently located for customers to purchase it. This means that those
companies can add value because of their location. Customers will be
forced to pay higher prices due to the lack of alternative products.

KNOWLEDGE CHECK
1 UNDERSTANDING BUSINESS ACTIVITY

1. What is meant by the term added value? (2)

2. Identify and explain two ways in which a business can add value. (4)
3. Explain why businesses can have different purposes. (4)
Total 10 marks

TOP TIP
Adding value through their brand is easier for larger businesses that
have established and popular products, but it can be difficult for
smaller start-up businesses.
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 1.2 Classification of
businesses
Primary, secondary and tertiary sectors
LEARNING OBJECTIVES (1.2.1)
By the end of this section, you should:
✓ Understand the basis of business classification
✓ Understand the reasons for the changing importance of business classification.

THE THREE SECTORS

There are three different sectors in which businesses
operate: primary, secondary and tertiary sectors.

Primary Secondary Tertiary

The primary sector is made up of businesses that

extract raw materials from the land or sea ready to be
used by other industries.
For example, Saudi Aramco is the world’s largest oil
producer, with up to $1 billion revenue each day.

The secondary sector takes the raw materials and

transforms them into a product. This can be sheets of
metal, touch screens, bottles or clothing. A factory that
makes a product, and the construction industry that
produces a building, are also in this sector.
For example, oil extraction is then refined (changed/
1.2 CLASSIFICATION OF BUSINESSES

cleaned up) and eventually sold at petrol stations.

The tertiary sector sells finished products and

services to the consumer.
For example, Chinese fast-food retailer Manfadu and
the world’s largest department store, Shinsegea in South
Korea, are both in this sector. The tourism and
entertainment industries are also tertiary.
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 The number of employees in each of these sectors differs from country
to country. Here are a few examples.

USA Brazil Nepal

3%

2% 16%
53%
75%
23% 23%
81%
24%

Primary Secondary Tertiary

It is very important for a country to have businesses in at least one

sector that are doing well. Some countries have the majority of
employment in one sector. As countries develop, they aim to change
the structure of their economy. This will involve developing the tertiary
sector, creating more retail outlets and other industries, which
increase money being spent. Developing countries are often mainly
primary and secondary producers and so – through investment in
airports, tourism venues, and events such as the Olympics – they try
to move into the tertiary sector. This helps to boost the countries’
revenue and allows them to employ in all three sectors. However,
many developing countries also try to increase other sectors, as this
will help to secure the long-term production of goods and services.

BUSINESS
IN
PRACTICE CAN SOUTH KOREA KEEP DEVELOPING?

Japan saw large amounts of growth in its tertiary

sector during 2007–2012. It now sits as the
second-largest tertiary sector country in the world.
One of the companies helping this change is GREE,
a mobile social gaming firm.

By contrast, South Korea’s tertiary sector is only

1 UNDERSTANDING BUSINESS ACTIVITY

around a sixth of the size of Japan’s. Also, as the

country had the world’s lowest birth rate in 2009,
South Korea may struggle to maintain its tertiary
sector employment due to a lack of young,
innovative employees. In the future, it will have fewer educated
workers able to help continue the progress of the technology
industry. Instead, it may have to rely on older employers with fewer
skills to generate primary and secondary sector jobs.
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 BUSINESS
IN
PRACTICE COCA-COLA BUYS GREAT PLAINS BOTTLERS

In 2011, Coca-Cola bought Great Plains bottlers in an

attempt to own all the companies that bottle its cola.
This move involves Coca-Cola purchasing companies
that are in the secondary sector, before Coca-Cola sells
its products in the tertiary sector. Many people believe
that this is so that Coca-Cola can maintain control over
its products from start to finish.

SKILLS ACTIVITY
Analysis Evaluation

Using your own country or one you have chosen, find out how the
employment structure in the primary, secondary and tertiary sectors has
changed in that country over the past 10 years.
You should then write a short statement, of no more than 100 words,
which explains why your chosen country has that particular balance of
primary, secondary and tertiary sectors. This statement should make it
very clear so that others can fully understand.
Be ready to read your statement to the class. You may have to convince
some of your classmates, so really emphasise the key points.
Finally, in pairs or small groups, discuss the following questions:
• Why does the number of people in each sector change?
• What does this mean for the economy of the country?

KNOWLEDGE CHECK
1. What is meant by the term primary sector? (2)
2. Identify two businesses that operate in the tertiary sector.
1.2 CLASSIFICATION OF BUSINESSES

(2)
3. Identify and explain two key differences between the primary and
secondary sectors. (6)
Total 10 marks

TOP TIP
You should be able to give a range of different examples for each of
the sectors. You should also be able to give examples of countries that
operate mainly in one of the three sectors.
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 Private sector and public sector
LEARNING OBJECTIVES (1.2.2)
By the end of this section, you should:
✓ Be able to classify business enterprises, in a mixed economy, as either private sector
or public sector.

MARKET ECONOMY AND MIXED ECONOMY

A market is where a seller and a customer come together to perform
business activity. There are many different types of markets.

Geographic
Electronic
This may a town, region
This is an online place
or country but it is referred to
that allows buyers and sellers
as a market. For example,
to interact, for example,
the Middle East is seen as
Rediff shopping
a market for some
or eBay.
businesses.

Different types
of markets

Physical Black
This is where customers Some products are only
can actually go to and see the available in a black market –
products they are buying. they are illegal and uncommon,
For example, a for example drugs.
shopping centre.

Often, the government will influence the market by creating rules and
laws that structure the way in which buyers and sellers meet and
interact. The government can do this by:
• imposing a ban on certain products, so there is no market for them
• putting a tax (extra charge) on certain goods or services to limit their
1 UNDERSTANDING BUSINESS ACTIVITY

supply and demand (for example, cigarettes)

• supplying them itself, for example, governments often supply medical
care so that everyone has an equal chance of using it.
The level of government intervention determines in which type of
economy the businesses and customers operate.

A market economy A mixed economy

Here the government has no Here the buyers, sellers and
role at all. It is only the buyers government all have an
and sellers who determine the influence. This type of economy
price and make trading is common in nearly all
decisions. countries.
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 There are no market economies, as the government often has to
intervene. However, the degree (amount) of intervention varies between
countries. For example, China and North Korea have a large amount of
government intervention, whereas the USA has little. However, the US
government has recently intervened in the motor industry, supporting
USA-based companies with grants (financial support that does need to
be paid back) to help the businesses to continue to trade.
Not all businesses are owned and run by private individuals. This is
because some businesses are run by the government or state. This will
determine whether they are in the private or public sector.

The private sector

The private sector is formed of businesses that are run by private
individuals or groups. They often have shareholders (people who own
a part of the business) who want the business to generate (make) large
amounts of money. Private sector businesses are often profit driven (aim
to make large profits).
The following are all types of private enterprise:
• a sole trader
• a private limited company (Ltd)
• a public limited company (PLC)
• a partnership
• a social enterprise
• a charity.
(For more information, see Types of business organisation.)

The public sector

The public sector is very different. This is often run and funded by
the country’s government. In India, the government runs the train line,
subsidising it (making it cheaper) so the people can use it. Other
examples are the police, education and the military. Governments use
taxation to help fund these services and so are often criticised if they
are not spending money effectively.

Aims of a business
• BP is a multinational PLC that produces gas and oil to be made into
1.2 CLASSIFICATION OF BUSINESSES

petrol and other useful products. Its goals are: profit; shareholder
returns.
• The Indian railway is run by the government as part of the public
sector. The organisation's aims are to give affordable access to train
travel and to link up the country via the train line.
• VisionSpring is an organisation that sells reading glasses to the
developing world. So far, it has sold 600 000 pairs. Its aim is to help
developing countries improve reading.
• Oxfam is a worldwide charity that operates in over 90 countries.
Oxfam aims to give power to people in developing countries and
reduce global poverty.
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 The reason why businesses have such different goals is mainly due to
their structure. A public limited company, such as BP or Microsoft,
has shareholders. These shareholders expect a return on their investment
(money they have paid to buy shares) and so these companies strive
(try hard) to make large profits. A charity or not-for-profit organisation
tries to put all of its money into projects that help achieve its aim. Public
enterprises such as the National Health Service in the UK are set up by
the government to run organisations for the people, therefore they do not
have to make a profit.

◁ PLC businesses use markets such

as the Shanghai stock exchange to
sell their shares

Private and public enterprises in a mixed economy

A mixed economy has both public and private sector enterprises. The
majority of a mixed economy will be privately owned businesses, with
the government regulating (monitoring) industries through policies
(laws and regulations). Within a mixed economy, the government will
often run the education, healthcare and military.

BUSINESS
IN
PRACTICE INDIAN GOVERNMENT HAVE THE POWER
1 UNDERSTANDING BUSINESS ACTIVITY

In 2009, the Indian government set up the

Ghogarpalli Integrated Power Co. Ltd to help
support India’s energy system. Based in New
Delhi, the organisation provides electricity for
millions of people. The government set it up
so that more people could access this service
for a reasonable price. As the government are
not aiming to make large profits, they can
lower their prices. This shows how, in a mixed
economy, the government can intervene to
run public sector businesses to provide
goods or services for the public.
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 Nationalisation is the process by which the government takes over a
privately run business or industry. During the recession of 2009, many
countries used government money to support their banking industry
but without taking it over fully. Nationalisation usually occurs when
an important business or industry starts to fail. This may mean the loss
of thousands of jobs and a large amount of income through tax. The
government will want to stop this happening, so they take over
the business.
For example, in May 2012, the Japanese government put 1 trillion Yen
($12.5 billion) into TEPCO (Tokyo Electric Power Company). This
industry has historically been a private one, so this government
intervention and nationalisation came as a surprise. The company is
now government-run, which means that the government can change
the company’s board members, policies and aims.

SKILLS ACTIVITY
Analysis

Identify two businesses in your country. One should be from the public
sector and the other from the private sector. How do the aims and
objectives of these two businesses differ? Write these down in two
columns – one for similarities and one for differences.
Then carry out research into a social enterprise in your area. What does
this business do? How do its aims and objectives differ from those of
large private enterprises?
Discuss your findings as a class and see what general conclusions you
can draw. Then work in small groups to create a class display based on
your research. You will need to think about how best to organise your
findings and how to use images, captions and headings to good effect.

KNOWLEDGE CHECK
Savages is a leading clothing brand which sells mainly in its own country.
However, it is looking to expand into new markets. To do this, Ali, its owner,
wants the business to become a public limited company (PLC). Ali is keen to
expand the business while maintaining the excellent reputation he has
1.2 CLASSIFICATION OF BUSINESSES

created with his management skills, high-quality products and happy staff.
1. Explain why Ali is operating in the private sector. (4)
2. Identify two differences between the public and private sector. (2)
3. Identify and explain two benefits of Ali’s business becoming a PLC. (4)
4. Explain why a government may nationalise an industry or business. (4)
Total 14 marks

TOP TIP
Make sure you can link the different types of businesses with the public or
private sector. You should be able to explain the different aims and objectives
23

businesses have and how these relate to the sector in which they operate.

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