Business activity involves producing goods and services that satisfy people’s needs and wants.
It transforms inputs (resources) into outputs (products or services) to create value and earn profit.
Factors of production:
Land: Includes natural resources (e.g., oil, forests). The return for land is rent.
Labour: Represents the workforce. The return is wages or salaries.
Capital: Machinery, finance, and equipment necessary for production. The return is interest.
Enterprise: The entrepreneurial effort that combines the other factors to produce goods or services. The return is profit.
1.2 Economic Problem & Opportunity Cost
The economic problem arises because resources are scarce, forcing businesses to make decisions about how to allocate them.
Opportunity cost refers to the value of the next best alternative that is foregone when a decision is made.
Example: A business choosing to invest in marketing over new machinery faces the opportunity cost of not upgrading its equipment.
1.3 Adding Value
Adding value refers to enhancing the worth of a product at each stage of production.
The difference between the cost of inputs and the price customers are willing to pay is the added value.
Businesses must add value to make a profit and remain competitive.
1.4 Characteristics of Successful Entrepreneurs
Entrepreneurs need several key traits to succeed:
Risk-taking: Willing to take risks to achieve business success despite uncertainties.
Innovation: Continuously seeking better processes or creating new products.
Multiskilled: Able to handle various aspects of business operations (e.g., finance, marketing, production).
Resilience: Able to recover from setbacks and persist towards goals.
1.5 Role of Enterprise in the Economy
Entrepreneurs play a critical role in the economy by creating jobs, encouraging innovation, and driving economic growth.
Governments often support entrepreneurial activities through subsidies, grants, and other incentives, recognizing their role in stimulating the economy.
1.6 Social Enterprise
Social enterprises are businesses with the primary goal of meeting social objectives rather than maximizing profit.
Any profits made are reinvested to further their social mission, unlike traditional businesses where profits are distributed to shareholders.
1.7 Division of Labour and Specialisation
Division of labour: Breaking down the production process into smaller tasks, each handled by individuals or machines.
Specialisation: Workers focus on specific tasks to increase productivity and efficiency.
Advantages of specialisation:
Efficiency: Workers become skilled in their specific tasks, increasing productivity.
Economies of scale: Specialisation allows for lower costs and faster production.
Disadvantages:
Boredom: Repetitive tasks may lower worker motivation.
Inflexibility: Specialised workers may not be adaptable to other tasks, causing delays if disruptions occur.
Chapter 2 : Business Structure
2.1 Classification of Businesses by Sector
Business activities are classified into three sectors: primary, secondary, and tertiary, based on their role in the production process.
Primary Sector: Involves extracting natural resources (e.g., farming, mining, fishing). Firms in this sector provide raw materials to other industries.
Secondary Sector: Engages in manufacturing and processing goods using raw materials from the primary sector (e.g., car production, construction).
Tertiary Sector: Provides services rather than goods (e.g., retailing, banking, insurance, education).
The distribution of economic activity across these sectors can vary depending on the level of a country's development:
Developed economies tend to have a smaller primary sector and larger tertiary sector.
Developing economies typically rely more on primary sector activities like agriculture and mining.
2.2 Private and Public Sector Enterprises
Private Sector:
Consists of businesses owned and operated by private individuals or groups with the primary aim of making a profit.
Examples include sole traders, partnerships, and corporations.
Public Sector:
Businesses and organizations owned and controlled by the government, often focused on providing essential services rather than making a profit (e.g., healthcare, education, public transportation).
In many countries, the public sector has diminished in size due to privatisation, which involves transferring public sector assets to private ownership to increase efficiency and reduce government spending.
2.3 Types of Business Organizations in the Private Sector
There are several types of business structures in the private sector:
Sole Trader:
Owned and operated by a single person.
Advantages include full control, privacy, and simplicity in setup.
Disadvantages include unlimited liability, where the owner is personally responsible for the business’s debts, and limited access to capital.
Partnership:
A business owned by two or more individuals who share profits, risks, and management responsibilities.
Advantages include shared decision-making and access to more capital.
Disadvantages include potential conflicts and unlimited liability (unless a limited liability partnership is formed).
Private Limited Company (Ltd):
Owned by shareholders, but shares cannot be sold publicly.
Provides limited liability, meaning shareholders’ personal assets are protected if the company fails.
It is more complex to set up than a sole trader or partnership and requires compliance with regulatory procedures like filing annual reports.
Public Limited Company (PLC):
A larger company that can sell shares to the public on a stock exchange.
Offers the advantage of raising substantial capital, but comes with significant regulatory requirements, greater public scrutiny, and pressure to satisfy shareholders.
Franchise:
A business arrangement where one business (the franchisee) pays another (the franchisor) for the right to operate under its name and system.
The franchisee benefits from brand recognition and an established business model, but must adhere to strict guidelines and pay royalties.
2.4 Cooperatives
Cooperatives are businesses owned and run by a group of individuals for their mutual benefit.
Members typically share profits equally and have a say in the decision-making process.
They are often set up by consumers, producers, or workers to improve their economic conditions by pooling resources.
2.5 Public Sector Enterprises and Privatization
Governments own and operate public sector businesses to provide services that may not be profitable for the private sector but are necessary for the public good. These include healthcare, education, and utilities. However, many countries have undergone privatisation, where public services are sold to private companies to increase efficiency and reduce public spending.
Summary of Key Concepts:
Businesses can be categorized into primary, secondary, and tertiary sectors based on their role in production.
There are key differences between the private and public sectors. The private sector is driven by profit, while the public sector provides essential services.
In the private sector, businesses can take various forms, such as sole traders, partnerships, limited companies, and franchises, each with its own advantages and challenges.
Cooperatives are unique in that they are owned by their members and operate for their mutual benefit.
The trend towards privatisation has reduced the role of public sector enterprises in many countries, transferring their operations to private hands to improve efficiency.
Chapter 3 : Size of Business
3.1 Importance of Business Size
Businesses can vary greatly in size, ranging from sole traders to multinational corporations. Measuring business size is important as it provides insights into a firm's capacity, market power, and growth potential. However, there is no single definitive measure of business size, and different criteria are used depending on the context.
Methods of Measuring Business Size
Number of Employees: One of the simplest ways to measure business size. Larger businesses tend to have more employees. Small businesses typically have fewer than 50 employees, while large companies may have thousands.
Revenue/Turnover: The total value of sales generated by a business in a given time period. This method helps assess the scale of operations.
Capital Employed: The total value of a company's capital investment in assets, such as machinery, buildings, and technology. A larger capital base often indicates a larger firm.
Market Share: The percentage of total market sales controlled by the business. Large firms generally have a higher market share.
Market Capitalisation (for public companies): The total value of a company’s shares, reflecting investor confidence and business growth potential.
Limitations of Using Business Size Measures
Different measures may give different impressions of a company's size, depending on the sector or country. For instance, a firm might employ relatively few people but have high capital investment in machinery, making it a large company by capital employed but not by employees.
3.2 Significance of Small and Large Businesses
Small Businesses:
Small businesses play a crucial role in most economies. They are often agile, innovative, and able to respond quickly to changes in the market. Governments typically encourage the growth of small businesses through financial support, tax incentives, and special grants.
Advantages of Small Businesses:
Flexibility: Can easily adapt to changes in consumer demands and market conditions.
Personalized Services: Often provide tailored services and have closer customer relationships.
Lower Costs: Smaller businesses may have lower overhead costs, especially in comparison to large firms.
Disadvantages of Small Businesses:
Limited Access to Finance: Smaller businesses may struggle to secure sufficient funds for expansion.
Limited Buying Power: Unable to benefit from economies of scale like large companies.
Vulnerability to Economic Changes: They are more susceptible to downturns and market fluctuations.
Large Businesses:
Larger firms have significant advantages over smaller businesses due to their ability to exploit economies of scale, which helps reduce costs and improve efficiency.
Advantages of Large Businesses:
Economies of Scale: Bulk buying, financial savings, and specialized machinery lead to lower unit costs.
Market Dominance: Large businesses often have significant market power, which they use to influence prices and control market trends.
Access to Capital: Easier access to funds for expansion and innovation through loans or issuing shares.
Disadvantages of Large Businesses:
Inflexibility: It can be difficult for large businesses to change direction quickly due to bureaucracy.
Alienation of Employees: Workers may feel detached from the overall business goals due to the large scale of operations, which can reduce motivation.
3.3 Business Growth
Growth is a key objective for many businesses. Businesses can grow through internal expansion (organic growth) or external growth, such as mergers and acquisitions.
Internal Growth:
This involves expanding the business from within by increasing production capacity, launching new products, or entering new markets.
Advantages: Lower risk compared to mergers, more control over growth pace.
Disadvantages: Growth is often slower, and resources may be limited.
External Growth:
Involves merging with or acquiring other businesses. It can provide immediate growth, access to new markets, and synergies.
Advantages: Faster growth and immediate access to resources or markets.
Disadvantages: Cultural clashes between businesses, complex integration processes, and higher risk.
3.4 Family Businesses
Family-owned businesses are common, especially in sectors like retail and agriculture. These businesses are often passed from one generation to the next, and they play a significant role in economies.
Strengths of Family Businesses:
Commitment: Family members are often highly committed to the business's success.
Long-term Perspective: Family businesses typically focus on long-term success rather than short-term profits.
Weaknesses of Family Businesses:
Succession Issues: Handing over control to the next generation can be problematic, particularly if there is no suitable successor.
Conflicts: Personal family dynamics can interfere with business decisions, leading to inefficiency.
Summary of Key Concepts:
Businesses can be measured by employee numbers, turnover, capital employed, market share, and market capitalisation.
Small businesses are flexible and responsive but face challenges in accessing finance and growth.
Large businesses benefit from economies of scale but may lack flexibility and alienate employees.
Business growth can be achieved through internal or external strategies, with different risks and rewards.
Family businesses can be strong due to long-term vision and commitment but are prone to succession challenges and conflicts.
Chapter 4 : Business Objectives
4.1 The Importance of Business Objectives
Business objectives are specific, measurable goals that a business aims to achieve over a defined period. Objectives are important because they provide a direction and purpose, guide decision-making, and help businesses measure their performance. Without clear objectives, it can be difficult for a company to evaluate success or failure.
Main Reasons for Setting Business Objectives:
Direction: They provide a clear focus for employees and management.
Planning: Objectives help in planning resources and strategies.
Motivation: Clear goals motivate employees by giving them targets to work towards.
Performance Measurement: Businesses can evaluate their success by assessing how well they meet their objectives.
4.2 Types of Business Objectives
Profit Maximisation:
The goal of making as much profit as possible over a period.
Important for many businesses to reinvest, pay dividends, and survive long-term.
Survival:
Especially crucial for start-ups and businesses in competitive markets.
Businesses might prioritize survival over profit in tough economic times.
Growth:
Businesses aim to expand in terms of sales, market share, or operations.
Growth helps a company benefit from economies of scale and gain market dominance.
Market Share:
Increasing market share (the percentage of an industry’s sales that a company controls) can be a major objective, especially for businesses in competitive sectors.
Greater market share often leads to increased brand recognition and influence over market prices.
Corporate Social Responsibility (CSR):
Businesses increasingly aim to achieve objectives related to social responsibility, such as reducing environmental impact or supporting community projects.
CSR objectives can enhance a company’s public image and improve relationships with stakeholders.
Customer Satisfaction:
High levels of customer satisfaction can lead to customer loyalty and repeat business.
Businesses often set objectives around improving customer service or product quality.
Maximising Shareholder Value:
This is a key objective for public companies, where the goal is to maximise dividends and share price for shareholders.
4.3 Changing Business Objectives
Business objectives are not static and may change over time due to various factors:
Economic Conditions: In a recession, a business might shift its objective from profit maximisation to survival.
Market Changes: If competitors introduce new products or services, a business may focus on innovation or growth.
Stakeholder Influence: Pressure from stakeholders such as employees, customers, or the government may lead to a change in business objectives (e.g., focusing more on CSR).
4.4 Mission and Vision Statements
Mission Statement: A concise explanation of a business’s purpose, outlining what the company does, its goals, and how it serves its customers.
Vision Statement: Describes a company’s future aspirations and long-term objectives, often focusing on what the business hopes to become or achieve in the future.
Summary of Key Concepts:
Business objectives guide companies toward achieving measurable goals such as profit maximisation, growth, or CSR.
Objectives can change over time based on market conditions, economic challenges, or stakeholder demands.
Mission and vision statements offer broader, long-term perspectives on the purpose and direction of a business.
Chapter 5 : Stakeholders in a Business
5.1 Definition of Stakeholders
Stakeholders are individuals or groups that are affected by, or can affect, a business’s operations. They have an interest in the business and its activities and are either internal (within the company) or external (outside the company).
Types of Stakeholders
Internal Stakeholders:
Owners/Shareholders: They invest capital and expect returns in the form of dividends or increased share value.
Managers: Responsible for the day-to-day running of the business and are interested in job security, salaries, and career progression.
Employees: They provide the labour and expect fair wages, job security, and safe working conditions.
External Stakeholders:
Customers: Seek high-quality products or services at reasonable prices.
Suppliers: Provide raw materials or services and expect prompt payments and long-term relationships.
Government: Interested in ensuring the business complies with regulations, pays taxes, and contributes to economic stability.
Local Community: Impacted by the business’s operations, particularly with regards to employment opportunities and environmental practices.
Creditors: Provide loans or financial support and expect timely repayment.
5.2 Conflicts Between Stakeholder Interests
Different stakeholders often have competing interests, which can create conflicts:
Owners vs Employees: Owners may seek to cut costs to increase profits, while employees seek higher wages and better working conditions.
Customers vs Shareholders: Customers want low prices, but shareholders seek high profits, which can be achieved by charging higher prices.
Government vs Business: Governments may impose environmental regulations or taxes that increase business costs, while businesses want to maximise profit.
5.3 Influencing Stakeholders
Businesses need to manage their relationships with different stakeholders carefully. Some stakeholders have more influence over the business than others:
Shareholders: Hold significant power in public companies as they can vote on key decisions.
Customers: Through their purchasing decisions, they can impact a company’s revenue and reputation.
Government: Can impose regulations and taxes that directly affect how businesses operate.
5.4 Stakeholder Engagement
Engaging with stakeholders is crucial for maintaining good relationships and avoiding conflicts. This can be done through:
Consultation: Involving stakeholders in decision-making processes, such as seeking employee input on workplace changes or customer feedback on new products.
Corporate Social Responsibility (CSR): Addressing environmental and social concerns can improve relations with the community, government, and customers.
Summary of Key Concepts:
Stakeholders are individuals or groups affected by business activities and include both internal (employees, managers) and external (customers, government) parties.
Conflicts can arise when different stakeholders have competing interests (e.g., owners vs employees, customers vs shareholders).
Businesses must engage with stakeholders through consultation and CSR efforts to maintain positive relationships and manage conflicting interests.