1.

business activity
2. classification of businesses
3. enterprise, business growth and size
4. types of business organization
5. business objectives and stakeholder activities

UNDERSTANDING BUSINESS ACTIVITY

1. business activity

need→ good or service essential for living

wants→ a good or service which people would like to have, but which is not essential for
living. people’s wants are unlimited (so we need resources)

The economic problem

↳ there exist unlimited wants but limited resources to produce the goods and services to
satisfy those wants. This creates scarcity.

scarcity→ lack of sufficient products to fulfill the total wants of the population

Factors of production→ are those resources needed to produce goods or services

↳ are four factors of production and they are in limited supply

➢ Land → all of the natural resources provided by nature (includes fields and forests,
oil, gas, metals and other mineral resources)

➢ Labour → number of people available to make products (workforce I need to start a

business)

➢ Capital → this is the finance, machinery and equipment needed for the
manufacture of goods

➢ Enterprise → the skill and risk-taking ability of the person who brings the other
resources or factors of production together to produce a good or service, for
example, the owner of a business. These people are called entrepreneurs. ( the
ability that the entrepreneur has to make decisions- start up a business-)

These 4 factors of production combined together (inputs) will lead to a business

(outputs)!!!
↳ scarcity originates here, because the factors of production are limited

opportunity cost→ the best alternative given up by choosing another item

ex: choose between a holiday and a car. (if i choose the holiday, the car will be the
opportunity cost)
the best use of limited resources
specialization→ occurs when people and businesses concentrate on what they are best
at.
» specialized machinery and technologies are now widely available
» increasing competition means that businesses have to keep costs low
» most people recognise that higher living standards can result from being specialized
form of specialization:
division of labour→ when the production process is split up into different tasks and each
worker performs one of these tasks

advantages disadvantages

Workers are trained in one task and Workers can become bored doing
specialize in this – this increases just one job – efficiency might fall
efficiency and output
If one worker is absent and no one else can
Less time is wasted moving from one do the job, production might be stopped
workbench to another
Higher costs, since more workers are
Quicker and cheaper to train workers as
specialized
fewer skills need to be taught

(Time saving because production will be

faster since there are more workers
specialized in one job )

Purposes of business activity ↴

A business is an organization whose aim is to obtain money. It combines factors of
production to make products (goods and services) which satisfy people’s wants

business activity starts due to the following issues:

➢ People have unlimited wants.
➢ The four factors of production – the resources needed to make goods – are in
limited supply.
➢ Scarcity results from limited resources and unlimited wants.
➢ Choice is necessary when resources are scarce. This leads to opportunity cost.
➢ Specialization improves the efficient use of resources.

without business activity, it will lead to undeveloped economies, so businesses wouldn't

exist!!

business activity combines for:

➢ combines scarce factors of production to produce goods and services
➢ produces goods and services which are needed to satisfy the needs and wants of
the population
 ➢ employs people as workers and pays them wages to allow them to consume
products made by other people

added value⇉ is the difference between the selling price of a product and the cost of
bought-in materials and components
( a benefit that the consumer receives for that good or service)

why is it important? sales revenue is greater than the cost of materials bought in by the
business
meaning, business:
- can pay other costs such as labour costs, management expenses and costs
including advertising and power
- may be able to make a profit if these other costs come to a total that is less than
the added value.

Calculation method↴
= selling price - cost of the good
↳ added value is not the same as profit!!!
EXAMPLE: price $20 and cost $15, $5 is not the profit

How could a business increase added value?

1. Increase selling price but keep the cost of materials the same.
- if the business tries to create a higher quality image for its product or
service.
(but other costs might increase when trying to create this quality image)
2. Reduce the cost of materials but keep the price the same
- a building firm could use cheaper wood, bricks and other materials when
constructing a home or shop.
(lower priced materials might reduce the quality of the product)

Examples of added value:

1. A restaurant has added value in;
➢ When it provides you a better context, location or a touristic value
➢ When it gives you an extra service (for example I buy a dozen of medialunas and
they give me 1 more )
2. An hotel has added value in survey;
➢ they do a survey when customers leave so they can see where they can improve
and where they can add more value
3. Free delivery
➢ in mercado libre
 4. A car;
➢ after buying you have a guarantee

2. Classification of businesses

stage of economic activity

1. primary sector→ is where industries extract and use the natural resources of
Earth to produce raw materials used by other businesses
a. farming, fishing, forestry, extraction from raw materials (oil,copper,ore)

2. secondary sector→ is where industries manufacture goods using the raw

materials provided by the primary sector
a. baking, aircraft, building/construction, computers

3. tertiary sector→ is where industries provide services to consumers and the other
sectors of industries
a. banking, transport, hairdressing, hotels, travel/agents, catering, insurance

relative importance of economic sectors depend on:

- percentage of the country’s total number of workers employed in each sector
- value of output of goods and services and the proportion this is of total national
output.

developing countries
↳ countries where the manufacturing industry has only recently been established
- primary industries such as farming and mining, employ more people than
manufacturing or service industries

People in rural areas usually have lower income so there is little demand for services!!
↪ the levels of employment and output in the primary sector in these countries are likely
to be higher than in the other two sectors

In other countries, where manufacturing industries had started up many years ago, the
secondary and tertiary sectors are likely to employ more workers than the primary sector.

economically developed countries

↳ in these countries it is normal to find many manufacture goods which were bought in
from other countries
- most of the employees will be employed in the service sector
- the output of the tertiary sector is often higher than the other two sectors
combined

changes in sector importance

 industrialization → the primary sector was the largest sector in the world, where many
employees work there but until the industrial revolution, people started to move to the
city where it was a more industrialized and urban area where the manufacturing sector
increased (secondary sector)

de-industrialization → is where there is a decline in the importance of the secondary,

manufacturing sector of industry in a country

reasons for changes in the three sectors:

- Sources of some primary products, such as timber, oil and gas, become depleted.
- Most developed economies are losing competitiveness in manufacturing to newly
industrialized countries such as Brazil, India and China.
- As a country’s total wealth increases and living standards rise, consumers tend to
spend a higher proportion of their incomes on services such as travel and
restaurants than on manufactured products produced from primary products.

mixed economy
↪ has both a private and public sector

private sector→ businesses not owned by the government where they can make their own
decisions and aim to make a profit

- more efficient, reduced costs, more capital investment, usually better quality,
more unemployment than public sectors in order to cut costs, is less likely to
focus on social objectives

capital: is the money invested into a business by the owners

since these owners can afford more than public sector owners, competition between
private sector businesses can help to improve product quality

public sector→ businesses and organizations owned and controlled by the government

it makes the decisions about what to produce and how much to charge to consumers,
even though some are provided free of charge to consumers (state health and education
services)

- the money for these does not come from the user, but from the taxpayers
- since you maintain public sectors you have to apply taxes

privatisation ↴
when the government sell some public sectors businesses owned and controlled by the
government to private sector businesses
example: water and electricity supply, public transport systems, etc
privatization is done since it is said to be more efficient than public sectors. It might
be because their main objective is profit and therefore costs must be controlled.

3. enterprise, business growth and size

entrepreneur→ is a person who organizes, operates and takes the risk for new business
venture

characteristics of successful entrepreneurs:

➔ hard working
◆ long hours and short holidays are typical for many entrepreneurs to make
their business successful
➔ risk taker
◆ making decisions to produce goods or services that people might buy is
potentially risky
➔ creative
◆ a new business needs new ideas about products/services/ways of
attracting costumers to make it different from exiting firms
➔ optimistic
◆ looking forward to a better future is essential to succeed
➔ self-confident
◆ being self-confident is necessary to convince other people of your skills
and to convince banks, other leaders and customers that your business is
going to be successful
➔ innovative
◆ being able to put new ideas into practice in interesting and different ways
is also important
➔ independent
◆ they will often have to work on their own before they can afford to employ
others. They must be well motivated and be able to work without help
➔ effective communicator
◆ talking clearly and confidently to banks, other lenders, customers and
government agencies about the new business will raise the profile of the
new business

Contents of a business plan and how business plans assist entrepreneurs

business plan→ is a document containing the business objectives and important details
about the operations, finance and owners of the new business.
- helps you to organize your business and look forward to the interests and
adjectives of the business. It's useful if you want to ask for a bank loan

contents of the business plan:

1. description of the business
2. product and services
a. describes what the business sell or delivers, including how is
manufactured and distributed
 3. the market
a. shows total market size, predicted market growth, target market, analysis
of competitors, predicted changes in the market in the future, forecast
sales revenue from the product, market research data, marketing strategy
4. business location and how products will reach customers
5. organization structure and management
6. financial information
a. sources of capital, predicted costs, forecast cash flow and working capital,
projecting of profitability and liquidity ratios
7. business strategy
a. explains how the business intends to satisfy customer needs and gain
brand loyalty

without this detailed plan, the bank will be reluctant to lend money to the business

Why do governments support business start-ups?

most governments offer support to entrepreneur, encouraging them to set up new
businesses and to;

➢ reduce unemployment: new businesses will create new jobs

➢ increase competition: it gives more variety for consumers, where the products
compete with other establish businesses
➢ increase output: for the economy benefits from increased output of goods and
services
➢ benefit society: entrepreneurs may create social enterprises which offer benefits to
society other than jobs and profit
➢ can grow further: governments supporting today´s new firms may be helping
them to become very large and important in the future

How does the government support business start-ups?

➢ organizing training for entrepreneurs that gives advice, and support sessions
offered by experienced business people (to give business idea and help)
➢ enterprise zones, which provide low-cost premises to start-up businesses (to give
premises to businesses)
➢ gives loans for small businesses at low interest rates or grants if businesses start
up in depressed areas of high unemployment
➢ gives grants to small businesses to train employees and help increase their
productivity (for labour)
➢ encouraging universities to make their research facilities available to new
business entrepreneurs (for research)

methods of measuring business size and limitations of these methods

1. number of people employed
- easy to calculate and compare with other businesses
- larger firms have larger workforce employed
limitations:
capital intensive firms use few people to produce high levels of output with automated
factories, using the latest computer-controlled equipment. So the number of people
employed doesn't tell the size of the business since the value of capital employed is not a
reliable measure when comparing a capital-intensive firm with a labour-intensive firm.

2. value of output
- calculates an compares the business size between businesses in the same
industry (manufacturing industries)
- larger firms are likely to produce more than smaller ones
limitations:
A high level of output does not mean the business is large since I might have employed
few people but produce expensive items. These might give higher output than a firm
selling cheaper products but employing more workers

3. value of sales
- usually compares the size of retailing businesses (selling similar products )
limitations:
it could be misleading to compare the size of businesses that sell different products

4. value of capital employed

- is the total value of capital invested
limitations:
a company employing many workers may use labour-intensive methods of production,
having low output levels and use little capital equipment

why the owners of a business may want to expand the business

➢ the possibility of higher profits for the owners
➢ more status and prestige for the owners and managers (higher salaries often paid
to managers who control bigger businesses)
➢ lower average costs
➢ larger share of its market (big proportion of the total market sales)

ways in which businesses can grow:

● internal growth → occurs when business expands its existing operations

● external growth→ when a business takes over or merges with another business
(a business is integrated into another one)
➔ take over: when one business buys out the owner of another business,
which then become part of the predator business
➔ merger: when the owners of two businesses agree to join their businesses
together to make one business
examples of external growth:
1. horizontal integration→ when one business merges with or takes over another
one in the same industry at the same stage of production

2. vertical integration→ when one business merges with or takes over another one
in the same industry but at a different stage of production
can be:
vertical forward integration: when a business integrates with another business which is
at a later stage of production (closer to the consumer)

vertical backwards integration: when a business integrates with another business at an

earlier stage of production (closer to the raw-materials supplies)

3. conglomerate integration→ when one business merges with or takes over a

business in a completely different industry (diversification)

problems linked to business growth and how these might be overcome

why some businesses remain small?

❖ the type of industry the business operates in
If businesses that offer personal service or specialized products for a target audience, and
get too large, it would be too difficult to offer a close and personal service demanded by
consumers

❖ market size
if the market size is small (total number of customers) they usually remain small since it
is not necessary to expand (operating in rural areas or selling luxurious or expensive
products)

❖ owners objectives
some owners prefer to keep the business small to keep control of the business, knowing
all their staff and customers. They usually want to avoid the stress and worry of running a
large business

why some businesses fail?

➢ lack of management skills
lack of experience can lead to bad decisions (locating the business where there are high
costs but low demand)

➢ changes in the business environment

there is uncertainty of operating a business such as new technology, new competitors,
major economic changes, etc that can lead to business failure if they are not responded
effectively

➢ liquidity problems/poor financial management

when the business is short of cash and can't pay what is owed to the workers, suppliers
and the government. Failure to plan or forecast cash flow lead to fails

new businesses might fail due to:

- lack of finance and other resources
- poor planning
- inadequate research
- lack of experience and decision making compared as managers of larger
managers

4. types of business organization

1. sole traders→ a business owned and controlled by one person (is a form of business
organization)
- is an unincorporated business

advantages:
- easy to set up since there are few legal regulations
- He is his own boss and has complete control over his business. Decision-making
is easy
- close contact with his own customers, creating customer loyalty knowing their
exact need
- ke keeps all the profit to himself, after he pays taxes

disadvantages:
- has no one to discuss business problems
- has unlimited liability so the owner is fully responsible for any debts that the
business may have. If he can pay them, the people he owes money can force him to
sell his possessions in order to pay them

2. partnerships→ is a form of business in which two or more people agree to jointly own a
business (at least 2 people agree to own and run a business together)

↪ in order to create a partnership business, a partnership agreement is needed

partnership agreement→ is the written and legal agreement between business partners.
(It is not essential but it is recommended )

advantages:
 - more capital investment can be invested allowing expansion of business
- responsibilities are shared in order to run the business and roles and task are
distributed (partners can provide new skills or ideas)
- both would be motivated to work hard since both would benefit from the profits,
also losses would be shared

disadvantages:
- partners don't have limited liability (they will be forced to pay their debts by
selling their properties)
- decision making can be difficult so it takes long time
- losses in the business can be created if one of them is inefficient and dishonest
- there is a maximum amount of capital investment (smaller than it could be with
other bigger business or sole trader ones)
- does not have a separate legal identity (if one dies, the partnership ends) is
unincorporated business

unincorporated business: is one that does not have a separate legal identity

a limited partnership business is impossible in some countries but it means it is a

separate legal unit which still exist after a partner's death

3. private limited companies→ are businesses owned by shareholders but they cannot
sell shares to the public
↳ is a separate legal unit from its owners
incorporated business→ are companies that have separated legal status from their
owners

limited companies are usually jointly owned by the people who have invested in the
business, called shareholders
shareholder→ are the owners of a limited company. They buy shares which represent part
ownership of the company

advantages of private limited companies :

- shares can be sold to large number of people so therefore expand more rapidly
- all shareholders have limited liability (encourages people to buy shares knowing
that the amount they invested is the maximum they can lose, so the business
raises the amount of capital, becoming a large business)
- can take control as long as they do not sell to many shares)

disadvantages of private limited companies:

- significant legal matters have to be deal before the company is formed (are
documents that show if the business is correctly run)
- shares cannot be transferred or sold to anyone else without the agreement of
the other shareholder
- accounts are less secret since each year the latest accounts has to be send to the
Registrar of companies and members of the public to inspect them)
- the company cannot offer its share to the general public
two other types of private limited companies:
➔ franchising
franchise→ is a business based upon the use of the brand names, promotional logos and
trading methods of an existing successful business. The franchisee buys the license to
operate their business from the franchisor

➔ joint ventures
◆ is where two or more business start a new project together sharing capital,
risk and profits together
advantages:
- sharing of costs (efficient for expensive projects)
- local knowledge when joint venture company is already based in the country
- risks are shared
disadvantages:
- if the new project is successful, profits have to be shared with the other partner
- the decision making process might be difficult
- the two partners might have different ways or culture when running a business

4. public limited company→ businesses owned by shareholders but they can sell shares
to the public and theirs shares are tradable on the shock exchange

advantages of a public limited company:

➢ shareholders have limited liability
➢ is an incorporated business
➢ very large capital sums can be invested, so rapid expansion (possible
managers/specialist appointed)
➢ there is no restriction on buying, selling or transferring shares (can sell shares)
➢ has a high status so it finds it easier banks willing to lend a credit
➢ continuity
disadvantage of a public limited company:
 ➢ complicated legal formalities
➢ more regulations and controls over public companies to protect the interests of
the shareholders
➢ selling shares to the pubic is expensive
➢ the owners might lose control if selling shares goes public
➢ divorce between ownership and control

in public limited companies the shareholder owns the business but the directors and
managers control it. Meaning a divorce can happen between the ownership and control.
- the directors and managers may run the business to meet their own objectives:
- increase status, growth of the business to justify higher salaries, reducing
dividends to shareholders to pay for expansion plans
dividends→ are payments made to shareholders from the profits of a company. Are the
returns to shareholders for investing in the company

!!

business organization in the public sector

public corporations → is a business in the public sector that is owned and controlled by
the state (government)
- government ministers appoint a board of directors who will be given the
responsibility to manage the business

advantages:
- Some businesses are considered too important to be owned by an individual.
(electricity, water, airline)
- Other businesses, considered natural monopolies, are controlled by the
government. (electricity, water)
- Reduces waste in an industry, by reducing competitors (two railway lines in one
city)
- Rescue important businesses when they are failing and collapsing through
nationalization
- Provide essential services to the people such as TV and radio

disadvantages:
- profit motivation might not be as powerful as in a private sectors since there
are not shareholders to insist on high profits and efficiency since its not their
objective
 - inefficiency in business since they could thought the government will always
help them with government subsidies if the business make a loss
- no close competition to the public corporations, so there is no incentive to
improve
- governments can use these business for political reasons

5. business objectives and stakeholder activities

need for an importance of business objectives

business objectives→ are the aims or targets that businesses work towards
its essential since (advantages):
- it motivates employees to work more efficiently since they have a clear target to
work towards
- every decision would be focused to achieve the objectives proposed
- helps unite the whole business towards the same goal
- managers can compare how the business has performed to their objectives

different business objectives

1. business survival
if the company is new or the economy is moving into recession or there are new
competitors, the objective of the business would be to survive. By lowering prices even
though it would lower the profit on each item sold

2. profit
if the business is owned by private individuals, the aim is usually to make profit
profit→ total income of a business (revenues) less total costs
is needed to:
- pay a return to the owners for the capital invested
- provide finance for further investment in the business

3. growth (usually measured by value of sales or output)

in order to:
- make jobs more secure if the business is larger
- increase the salaries and status of managers as the business expands
- opens up new possibilities and help to spread the risks by moving into new
products/markets
- obtaining a higher market share from growth in sales
- obtaining economies of scale from business expansion
can grow internally or externally in order to last over time

4. market share
is the percentage of total market sales held by one brand or business
market share= company sales/ total market sales x 100
it gives:
- good publicity, as it claims is getting more popular
 - increase influence over suppliers since they will be very keen on selling to a
business that is becoming larger
- increased influence over customers

providing a service to the community – the objective of social enterprise-

social enterprise→ has social objectives as well as an aim to make a profit to reinvest
back into the business (operated by private individuals)

social enterprise objectives:

❖ social: to provide jobs and support for disadvantaged groups in society
❖ environmental: to protect environment
❖ financial: to make a profit to invest back into the social enterprise to expand the
social work that it performs

the main internal and external stakeholder groups and their objectives:
stakeholder → is any person or group with a direct interest in the performance and
activities of a business
- they have an interest in how the business is run
it can be internal: if they work for it or own it
it can be external:they are groups outside of the business
objectives of public sector businesses
financial→ meet profit targets set by the government
service→ provide a service to the public and meet quality targets set by the government
(health and education services)
social→ protect or create employment in certain areas (poor or unemployment areas)

conflicts of stakeholder objectives

businesses always try to satisfy the objectives of more than one group, so managers
usually have to decide on the best objectives or the business they are running.
Therefore, if a business tries to satisfy the objectives of one stakeholder, it might mean
that another stakeholders’ objectives could go unfulfilled.
- they have to be prepared to change objectives over time

objectives depending the group:

directors ⇔ growth of the business since their salary depends on these
workers ⇔ jobs with a high wage with security of employment
local community ⇔ environmental/low pollution and providing jobs
consumers ⇔ price and quality

these stakeholder objectives could conflict with each other. For example:
• it could be that a cheap method of production increases profits but causes more pollution
• a decision to expand the plant could lead to a dirtier, noisier local environment
• a decision to introduce new machines could reduce the jobs at the refinery but lead to higher
profits
• expansion could be expensive, reducing payments to owners, and this could reduce
short-term profits.

Differences in the objectives of private sector and public sector enterprises

as said before, the objectives of each sector are:

private sector objectives→ survival, profit, growth and market share

public sector objectives→ financial, service and social