Cambridge International AS & A Level Business Coursebook 4th edition PDF

Fourt edition Dig'ita I Access  Business for Cambridge International AS & A Level COURSEBOOK Peter Stimpson & Alastair Farquharson University Printing House, Cambridge CB2 8BS, United Kingdom One Liberty Plaza, 20th Floor, New York, NY 10006, USA 477 Williams...

Fourt edition Dig'ita I Access  Business for Cambridge International AS & A Level COURSEBOOK Peter Stimpson & Alastair Farquharson University Printing House, Cambridge CB2 8BS, United Kingdom One Liberty Plaza, 20th Floor, New York, NY 10006, USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia 314–321, 3rd Floor, Plot 3, Splendor Forum, Jasola District Centre, New Delhi – 110025, India 79 Anson Road, #06–04/06, Singapore 079906 Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/9781108921220 © Cambridge University Press 2021 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2002 Second edition 2010 Third edition 2014 Fourth edition 2021 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 A catalogue record for this publication is available from the British Library ISBN 978-1-108-92122-0 Coursebook with Digital Access (2 years) ISBN 978-1-108-92599-0 Digital Coursebook (2 years) ISBN 978-1-108-92598-3 eBook Additional resources for this publication at www.cambridge.org/9781108921220 Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. 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NOTICE TO TEACHERS IN THE UK It is illegal to reproduce any part of this work in material form (including photocopying and electronic storage) except under the following circumstances: (i) where you are abiding by a licence granted to your school or institution by the Copyright Licensing Agency; (ii) where no such licence exists, or where you wish to exceed the terms of a licence, and you have gained the written permission of Cambridge University Press; (iii) where you are allowed to reproduce without permission under the provisions of Chapter 3 of the Copyright, Designs and Patents Act 1988, which covers, for example, the reproduction of short passages within certain types of educational anthology and reproduction for the purposes of setting examination questions. Cambridge International copyright material in this publication is reproduced under licence and remains the intellectual property of Cambridge Assessment International Education. Exam-style questions [and sample answers] have been written by the authors. In examinations, the way marks are awarded may be different. References to assessment and/or assessment preparation are the publisher’s interpretation of the syllabus requirements and may not fully reflect the approach of Cambridge Assessment International Education. Cambridge International recommends that teachers consider using a range of teaching and learning resources in preparing learners for assessment, based on their own professional judgement of their students’ needs.  Contents How to use this series How to use this book Introduction Introduction to command words Getting started with Cambridge International AS & A Level Business 1 Business and its environment 1 Enterprise (AS Level) 2 Business structure (AS Level) 3 Size of business (AS Level) 4 Business objectives (AS Level) 5 Stakeholders in a business (AS Level) 6 External influences on business activity (A Level) 7 External economic influences on business activity (A Level) 8 Business strategy (A Level) 9 Corporate planning and implementation (A Level) End-of-unit exam-style questions 2 Human resource management 10 Human resource management (AS Level) 11 Motivation (AS Level) 12 Management (AS Level) 13 Organisational structure (A Level) 14 Business communication (A Level) 15 Leadership (A Level) 16 Human resource management strategy (A Level) End-of-unit exam-style questions 3 Marketing 17 The nature of marketing (AS Level) 18 Market research (AS Level)  19 The marketing mix – product and price (AS Level) 20 The marketing mix – promotion and place (AS Level) 21 Marketing analysis (A Level) 22 Marketing strategy (A Level) End-of-unit exam-style questions 4 Operations management 23 The nature of operations (AS Level) 24 Inventory management (AS Level) 25 Capacity utilisation and outsourcing (AS Level) 26 Location and scale (A Level) 27 Quality management (A Level) 28 Operations strategy (A Level) End-of-unit exam-style questions 5 Finance and accounting 29 Business finance (AS Level) 30 Forecasting and managing cash flows (AS Level) 31 Costs (AS Level) 32 Budgets (AS Level) 33 Financial statements (A Level) 34 Analysis of published accounts (A Level) 35 Investment appraisal (A Level) 36 Finance and accounting strategy (A Level) End-of-unit exam-style questions 37 Preparing for assessment Appendix: Key formulae Acknowledgements Copyright How to use this series  How to use this book Throughout this coursebook, you will notice recurring features that are designed to help your learning. Here is a brief overview of what you will find. LEARNING intentions Learning intentions open each chapter. These help you with navigation through the coursebook and indicate the important concepts in each topic. Business in context Business in context introduces you to the content in a chapter. These place some of the key ideas contained in the chapter into a real-world business context. They raise important issues for discussion, with questions that allow you to look in more detail at the topic. TIPS Tips are provided throughout this coursebook to help with your learning. The tips might cover how to avoid common errors or misconceptions, advice on essay-writing, evaluation and analysis, or guidance on how answers are arrived at. ACTIVITY There are various activities throughout this coursebook. These include short case studies with evaluative or analytic questions, as well as opportunities to produce your own work either individually, in pairs or in groups. REFLECTION Reflection questions direct you to look back on an activity and encourage you to think about your learning. You will reflect on and assess the process that you used to arrive at your answers. Extension: indicates content that extends beyond the requirements of the syllabus. You can find answers to the activities and exam-style questions in the digital coursebook. Note: Throughout the text, dollars ($) refer to US dollars, unless otherwise stated. KEY TERMS Key vocabulary and formulae are highlighted in the text when they are first introduced. An accompanying definition explains the meanings of these words and phrases. You will also find definitions of these words in the Glossary at the back of this book. There is also a separate appendix for all key formulae. KEY CONCEPT LINKS These explain how the coursebook’s topics are integrated with the key concepts in the Cambridge International AS & A Level Business syllabus. BUSINESS IN ACTION Business in action provides an invaluable insight into how businesses around the world apply some of the key concepts of the subject. Designed to encourage group discussion, the short case studies and accompanying questions will help you to make connections between employment and studying business. EXAM-STYLE QUESTIONS Questions at the end of each chapter provide more demanding exam-style questions, some of which may require you to use your knowledge from previous chapters. The questions focus on knowledge and understanding, application, analysis and evaluation. SELF-EVALUATION CHECKLIST At the end of each chapter, you will find a series of statements outlining the content that you should now understand. You might find it helpful to rate how confident you are for each of these statements when you are revising. You should re-visit any topics that you rated ‘Needs more work’ or ‘Almost there’.  Introduction Who is this book for? The fourth edition of this coursebook accurately and comprehensively supports the new Cambridge International AS & A Level Business syllabus (9609) for examination from 2023. If you are a learner following this syllabus, or a teacher guiding learners through it, you can be confident that the book fully covers the syllabus content to the appropriate level. Other learners of Business, or Business and Management, following different A Level or equivalent courses, should also be able to benefit from the subject content, activities and exam-style questions that this book contains. What makes this book different? The key distinctive features of this book are its: international perspective focus on decision-making. The book contains many case studies, examples of business data and business references. These are taken from many different countries. The case studies in particular show you how few large businesses operating today restrict themselves to narrow national borders. Business is truly global and this book reflects this fully with its international examples and case studies. Without any doubt, the most important element of this course is decision-making. This is also a central theme of the book. Decision-making is not confined to the chapters that focus on business strategy. The questions in every chapter give you opportunities to discuss, weigh up, recommend and justify business decisions. There are hundreds of activities and exam-style questions throughout this book that will put you into the role of decision-maker. You will have the responsibility of making a success of the company and explaining the consequences of your decisions to all groups interested in the business. This reflects the major responsibility of senior business managers. Using the book Even the keenest learner is unlikely to read this coursebook from cover to cover in one evening! Instead, use it to support and guide you in each section of the syllabus as you progress through this Business course. Attempt all of the many activities and discussion features as well as the end-of-chapter exam-style questions. You will find suggested answers for these in the digital edition of the coursebook. To support your progress even further, test your understanding and gain more experience at demonstrating the key subject skills, by using our Cambridge International AS & A Level Business Workbook. This has revision questions, exam-style case studies with questions, and sample answers for you to improve on and assess. The answers are also available in the Coursebook epub. Enjoy your studies in Business and use this book as an invaluable resource, guide and support towards achieving success on your course. Peter Stimpson  Introduction to command words The command words and definitions in the following table are taken from the Cambridge International syllabus (9609) for examination from 2023. You should always refer to the appropriate syllabus document for the year of your examination to confirm the details and for more information. The syllabus document is available on the Cambridge International website at www.cambridgeinternational.org. The guidance that appears in this table has been written by the author. Questions will often start with one of the command words in the table below. It is important that you understand what each command word is asking you to do. These are the command words used in the Cambridge International AS & A Level Business syllabus (9609), and in the exam-style questions and most of the activities in this book. In time, and with experience at answering questions, you will find it easy to understand what skills you have to demonstrate in your answers to each question. Command Definition Guidance How to approach these word questions Advise write down a suggested You should aim to make a Provide an evaluation of the course of action in a given reasoned judgement and points for and against a situation include a supported particular decision – perhaps conclusion. compared with an alternative course of action. The course of action to be taken must be clearly expressed and supported by evaluative comments which weigh up key arguments. Analyse examine in detail to show You need to give a detailed Develop the reasons for, meaning, identify elements answer with a clear line of causes of, impact of, or and the relationship between argument demonstrating the consequences of factors or them links/relationships between issues referred to in the factors or the consequences of question. an event or decisions. Assess make an informed judgement You should aim to compare An overall judgement or the advantages and decision needs to be made. disadvantages of a particular This must be supported by issue or decisions and come appropriate evaluation of the to a supported conclusion. key factors in the context of the business. Calculate work out from given facts, You are always advised to Give a clear final answer, figures or information show your working. with appropriate units, and show all working. Define give precise meaning You should use the key terms Ensure that the answer in the coursebook. explains the meaning of the term clearly. Evaluate judge or calculate the quality, You should aim to make a Provide a developed importance, amount or value reasoned judgement and judgement or conclusion in of something include a supported the context of the business conclusion. that draws together analytical and evaluative comments which weigh up key arguments. Explain set out purposes or reasons / You should aim to give more Show knowledge of one make the relationships detail than ‘define’ by, for relevant point and apply this between things evident / example, applying to the case effectively to a relevant provide why and/or how and study context. business context. support with relevant evidence Identify name/select/recognise You should state a relevant Make sure that the point point about a business term. identified is clearly relevant to the question set. Justify support a case with You are asked to make a The advice / decision / evidence/argument decision / come to a judgement given must be conclusion and support this supported with developed with evidence and argument. evaluative comments which weigh up the key arguments in the context of the business. Additional guidance, e.g. phrases such as ‘To what extent …?’, may also be seen in the assessment for this syllabus. The information in this section is based on the Cambridge International AS & A Level Business syllabus (9609) for examination from 2023. You should always refer to the appropriate syllabus document for the year of your examination to confirm the details and for more information. The syllabus document is available on the Cambridge International website at www.cambridgeinternational.org.  Getting started with Cambridge International AS & A Level Business The guidance in this section has been written by the author. References to assessment and/or assessment preparation are the publisher’s interpretation of the syllabus requirements and may not fully reflect the approach of Cambridge Assessment International Education. By choosing Business, you have chosen to study one of the most rewarding, topical and relevant subjects. Studying Business will not only enhance your chances of an excellent career but you will learn many skills that will help you throughout life. Many students of Business at AS Level and A Level have never studied the subject before. If you are one of these, this section of the book will prepare you for the challenges and opportunities that lie ahead. If you have studied Business before, perhaps at Cambridge IGCSETM level, then this section will still be of value to you. It will remind you of how best to approach the subject to achieve your best. If you have a Cambridge IGCSE Business qualification then well done – but do not become complacent. If you are really confident about your Cambridge IGCSE Business knowledge, it means you are well prepared to start the Cambridge International AS & A Level Business syllabus. However, there is quite a big step up in terms of subject content and the assessment demands. So, essentially, this section is for all learners who are starting to study Cambridge International AS & A Level Business. How different is AS Level and A Level from Cambridge IGCSE? Some of the subject content is very similar, such as different types of business organisations. However, AS Level and A Level require a higher level of understanding and application. Some content will not have been covered at Cambridge IGCSE, such as techniques for calculating the value of new investments (investment appraisal). The skills required are the same: knowledge, application, analysis and evaluation. However, at AS Level and A Level more emphasis is on analysis and evaluation, and less on knowledge and application. The importance of wide reading around business issues, both nationally and internationally, is even greater. Differences between AS Level and A Level There are two key differences between AS Level and A Level: more subject content is studied at A Level than at AS Level the assessment skills are weighted differently. Much more emphasis is placed on subject knowledge and understanding at AS Level, whilst A Level focuses more on the higher-order skills of analysis and evaluation. What will you need? In terms of resources, you will need: This coursebook and the accompanying workbook.  A means of keeping notes, exercises, assignments and other written resources. This could be file paper and a good-sized file or a laptop or tablet computer. A copy of the syllabus and past exam papers. These will not be that important to start with but you will find them of increasing value as you progress through this course. Access to business news reports and, if possible, the internet. How mathematical is Business? Some people might tell you, ‘Business is so mathematical!’ At AS Level and A Level, this is only somewhat true. There are some sections of this course that require numeracy skills, and the most frequently used ones are: calculating and interpreting percentages and percentage changes calculating and interpreting ratios interpreting tables of data, pie graphs, line graphs and bar charts drawing or completing simple line graphs reading off data from a line graph addition, subtraction and multiplication. What other skills will you need? Determination and ability to research information such as the profit of a company in your country. Willingness and ability to read a variety of written sources of information: this coursebook; newspapers, especially the business sections; and business case studies. Decision-making ability to form a judgement and to support it. Business managers are always taking decisions and, during this course, you will often be placed in the position of a senior manager taking a key decision. Enthusiasm and ability to discuss issues with others, such as fellow learners. During your course, there will be so many opportunities to express your views and listen to the views of others. Reflecting on what is said during discussions helps business managers take the best decisions. How will these skills be assessed? Chapter 37 contains details of the Cambridge International AS & A Level Business assessments you will need to prepare for. The assessments are based on the following Assessment Objectives (AOs). AO1 Knowledge and understanding Demonstrate knowledge and understanding of business concepts, terms and theories. AO2 Application Apply knowledge and understanding of business concepts, terms and theories to problems and issues in a variety of familiar and unfamiliar business situations and contexts. AO3 Analysis Analyse business problems, issues and situations by: using appropriate methods and techniques to make sense of qualitative and quantitative business information searching for causes, impacts and consequences distinguishing between factual evidence and opinion or value judgement  drawing valid inferences and making valid generalisations. AO4 Evaluation Evaluate evidence in order to make reasoned judgements, present substantiated conclusions and, where appropriate, make recommendations for action and implementation. How can I demonstrate skills of analysis and evaluation in Business? Many Business learners worry about not being able to use their knowledge and understanding of the subject when answering analysis and evaluation questions. This section gives you some examples of how to tackle these questions effectively. There are many more examples in the workbook. Here is a typical Business issue that requires analysis. Analyse two benefits to a business of setting clear objectives. Here is a typical Business issue that requires evaluation. ‘The most important role of human resource management (HRM) in a sports clothing and equipment retail business is to recruit the best employees.’ Evaluate this view. Key concepts All Cambridge International AS & A Level syllabuses have certain key concepts that underpin them and bind the subject together. The key concepts in the Cambridge International AS & A Level Business syllabus are: Change Change is the only constant. New enterprises and opportunities are created in response to change in the external environment. Change can also happen within a business, leading to success when change is handled correctly. Context Context is the basis for every business decision. What might be a suitable solution in one situation may be unsuitable in another. Businesses must understand and research their context to be able to make good decisions. Decision-making Decision-making affects all levels in a business. Stakeholders in businesses use their knowledge, apply it to a scenario, analyse the data, evaluate the arguments and then come to a decision. Enterprise Enterprise is the ability to seek out and successfully develop business opportunities. Innovation Innovation enables a business to re-invent itself and stay ahead of the competition. The business world is dynamic and companies must seek to innovate through product development, more efficient processes and finding better ways to do business. Strategy Strategy is about knowing where you are, where you want to get to and how you are going to get there. Being able to analyse a business situation, make choices given relevant data and then implement the decisions effectively is key to running a successful business. The information in this chapter detailing the Assessment Objectives and Key Concepts is taken from the Cambridge International AS & A Level Business syllabus (9609) for examination from 2023. You should always refer to the appropriate syllabus document for the year of your examination to confirm the details and for more information. The syllabus document is available on the Cambridge International website at www.cambridgeinternational.org. Getting started: you are almost ready! Hopefully, you should now feel confident about starting to learn about Business. During this course, and especially learning from this book, you will have many opportunities to ‘think like a business manager’. This means analysing information from many sources, taking key decisions and evaluating their impact on the business and other interested groups. These are challenging situations for any manager to be faced with. The rewards and satisfaction gained from your achievement in completing your course will hopefully encourage you to take up important decision-making roles in Business. There will be risks and uncertainties but also opportunities for great achievement and self-fulfilment. Welcome to the world of Business!  Unit 1 Business and its environment UNIT INTRODUCTION This unit focuses on understanding the nature and purpose of business activity. It identifies and analyses how businesses are set up, how businesses can be classified, the objectives of different businesses and the external factors that influence them. It is important to recognise that the world in which businesses operate is in a constant state of change. This key concept of change can also be linked to the idea of adding value, as the most successful businesses are able to continue to create value despite the impact of political, economic, social, technological and environmental changes.  Chapter 1 Enterprise This chapter covers syllabus section AS Level 1.1 LEARNING INTENTIONS In this chapter you will learn how to: analyse what business activity involves recognise that the ‘economic problem’ requires choices to be made which always result in an opportunity cost analyse the meaning and importance of adding value recognise the key characteristics of successful entrepreneurs and intrapreneurs evaluate the importance of enterprise, entrepreneurs and intrapreneurs to a country’s economy analyse the meaning, purpose, benefits and limitations of business plans. BUSINESS IN CONTEXT Entr epr eneur sees a gap in the market Mohammed Qamber Hussain is already a successful entr epr eneur at the age of 17. He is ambitious and plans to expand his business to help lower social barriers in his country. This young Pakistani lives in Karachi and has already set up two unusual restaurants there. He says that when he was growing up, he realised there was a gap in the market. There were plenty of exclusive restaurants – but with prices to match. The cheap option was to go to a dhaba. These are inexpensive roadside restaurants, often considered unhygienic and unsafe for women. Mohammed’s formula for success was to offer affordable restaurants that were much more female-friendly. Mohammed’s father gave him a loan to help finance his first restaurant. When a lack of business knowledge was a problem, he found training through Bank Alfalah. It provided guidance on how to run a small business successfully, including business planning, accounting, human resources, marketing and sales. With his new knowledge, Mohammed created a modern version of the dhaba. His restaurants, Chottu Chai Wala, serve traditional street food and tea, but in a clean and comfortable environment that is particularly appealing to women. His restaurants have become a great success. Discuss in a pair or a gr oup: Figur e 1.1: The entrepreneur identified an important gap in the market Why is it important for an entrepreneur to see a gap in the market? Does the success of an entrepreneur depend more on their ambition or on their business knowledge? 1.1 The nature of business activity Business activity aims to satisfy people’s needs. In order to do this, it requires resources. Businesses operate in a constantly changing world, but the purpose of business owners and managers remains the same: to add value to resources while meeting people’s needs. Purpose of business activity A business is an organisation that uses resources to meet the needs of customers by providing a product or service that they demand. There are several stages in the production of finished goods. Business activity at all stages involves adding value to resources, such as raw materials, and making them more desirable to – and valued by – the final purchaser. Without business activity, we would all be entirely dependent on the goods that we could make or grow ourselves, as some people in virtually undiscovered native communities still are. Business activity uses the scarce resources of our planet to produce goods and services that allow us all to enjoy a much higher standard of living than would otherwise be possible if we remained entirely self-sufficient. What do businesses do? Businesses identify the needs of customers. They purchase necessary resources to allow production to take place. They produce goods and services which satisfy customers’ needs, usually with the aim of making a profit. Business activity exists to produce goods or services that meet the needs of customers. Many of these customers will be consumers who purchase consumer goods and consumer services. The factors of production needed by businesses All businesses need resources to be able to operate and produce goods or services. These resources are called factors of production. There are four factors of production: Land – this general term includes not only land itself but all the renewable and non-renewable resources of nature, such as coal, crude oil and timber. Labour – manual and skilled labour make up the workforce of the business. Capital – this is not just the finance needed to set up a business and pay for its continuing operations, but also all the manufactured resources used in production. These include capital goods, such as computers, machines, factories, offices and vehicles. Enterprise – this is the initiative and coordination provided by risk-taking individuals called entrepreneurs. They combine the other factors of production into a unit capable of producing goods and services. Enterprise provides the managing, decision-making and coordinating roles. Figure 1.2: Timber is a natural resource Figure 1.3: All businesses need labour Figure 1.4: Capital equipment can be very complex Businesses have many other needs before they can successfully produce the goods and services demanded by customers. Figure 1.5 shows the wide range of these needs. Figure 1.5: The resources that businesses need The concept of adding value All businesses aim to create value by producing goods and services and selling them for a higher price than the cost of bought-in materials: this is called adding value. If a customer is prepared to pay a price that is greater than the cost of materials used to produce a good or service, then the business has been successful in adding value. The difference between the selling price of the products sold by a business and the cost of the materials that it bought in is called added value. Without adding value, a business will not be able to survive as other costs have to be paid and the people investing in the business also expect a financial return. The concept of adding value can be illustrated by an example taken from the building industry (see Figure 1.6). Figure 1.6: dding value by building a house from bought-in materials The value added by the business is not profit as other costs must be paid for, such as labour and rent. However, if a business can add value without increasing its costs, then its profit will increase. Here are two examples of how different businesses could add value to their products: 1 Jewellery shop: a well-designed shop window display, attractive shop fittings, well-dressed and knowledgeable shop assistants, and beautiful packaging for each jewellery item. These features might allow for an increase in jewellery prices greater than the extra costs involved. 2 Sweet manufacturer: extensive advertising of the brand of sweets to create an easily recognised name and brand identity, attractive packaging, and selling through established confectionery shops rather than widely available vending machines. Higher prices as a result of successful branding should add value. ACTIVITY 1.1 How to add value 1 Explain two ways in which the following businesses could add value to the goods they buy in: a hotel b car dealer c clothing manufacturer d fast-food restaurant. Economic activity and the problem of choice We live in a world of great wealth and great scarcity. People with lower levels of income are unable to obtain the basic requirements of life: food, clean water, shelter. They have many unsatisfied needs and wants. Even rich people may not be able to satisfy all of their wants for luxury goods and services. There are insufficient goods to satisfy all of our needs and wants at any one time. This is known as the economic problem. The purpose of economic activity is to provide for as many of our wants as possible, yet we are still left wanting more. This shortage of products, and the limited supply of resources needed to make them, force us to make choices. As we cannot satisfy all of our wants, we must choose those which will satisfy us now and those which we are prepared to give up. If we are careful and rational, we will choose those things that give us the greatest benefit, leaving out those things that provide less value to us. This need to choose is not exclusive to people as consumers. All economic decision-makers have to make choices: governments, businesses, workers, charities, and so on. Opportunity cost This need to choose the goods we want leads to the important principle of opportunity cost. In deciding to purchase or obtain one item, we must give up other goods as they cannot all be afforded. The next most desired product which is given up becomes the lost opportunity or opportunity cost. This concept exists for all economic decision-makers: consumers, businesses and governments. Figure 1.7: If consumers choose to buy the smartphone, then the trainers become the opportunity cost Figure 1.8: If government chooses to build the fighter plane, then the hospital becomes the opportunity cost The dynamic business environment Setting up a new business is risky because the business environment is dynamic, or constantly changing. In addition to the problems and challenges referred to below, there is also the risk of change, which can make the original business idea much less successful. This problem can be made worse if the business plan is too inflexible to deal with changes. Changes in the business environment include: new competitors entering the market legal changes – examples include new safety regulations or limits on who can buy the product economic changes that leave customers with less money to spend technological changes that make the products or processes of the new business outdated. There are many other examples of changes, indicating that the business environment is very dynamic. This can make owning and operating a business quite risky. The changing business environment is a major reason why some businesses succeed and why others fail. KEY CONCEPT LINK The dynamic business environment is a major cause of change within businesses. Decision-making by entrepreneurs is often focused on responding to change. Why do some businesses succeed? These are the main reasons why some businesses thrive and achieve success in meeting their objectives: good understanding of customer needs – leads to sales targets being achieved efficient management of operations – keeps costs under control flexible decision-making to adapt to new situations – allows investment in new business opportunities appropriate and sufficient sources of finance – prevents cash shortages and allows for expansion. Why do some businesses fail? Success in business is never certain. This is particularly true when starting up a new venture. The following are the most common reasons why new businesses fail. Most of these reasons also apply to the failure of established businesses. Poor record-keeping The lack of accurate records is a common reason for business failure. Many small companies fail to pay sufficient attention to record-keeping. They either believe it is less important than meeting customers’ needs or think that they can remember everything. For example, how can the owner of a new, busy florist shop remember: when the next delivery of fresh flowers is due? whether the flowers for last week’s big wedding have been paid for? when or even if a business customer has paid for the display of flowers in its reception area? how many hours the shop assistant worked last week? With the falling cost of computing power, most businesses, even new start-ups, keep records on computer. It is always advisable to also keep hold of paper records, such as receipts from suppliers, or details of big deliveries. Paper records act as a check or back-up system if the computer should fail. These records can also provide evidence to the tax authorities if they dispute the company’s own tax calculations. Lack of cash Running short of cash so that day-to-day business operations become difficult is the most significant reason for the failure of businesses. Many new businesses fail to survive the first year of operation due to the lack of cash. Finance is needed for day-to-day cash, for the holding of inventories, and to give trade credit to customers, who then become debtors. Without this working capital, the business will be unable to buy more supplies, pay suppliers or offer credit to important customers. All these factors could lead to the business closing down. Cash flow problems can be reduced if: A cash flow forecast is made and kept up-to-date. The cash needs of the business can be assessed month by month. Sufficient capital is injected into the business at start-up allowing it to operate during the first months when cash flow from customers may be slow to build up. Good relations are established with the bank so that short-term cash problems may be financed with an overdraft extension. There is effective credit control over customers’ accounts to make sure they pay on time. Poor management skills Most entrepreneurs have had some form of work experience, but not necessarily at management level. They may not have developed skills in: leadership and decision-making cash handling and cash management planning, coordinating and communication marketing, promotion and selling. Entrepreneurs are often enthusiastic, willing to work hard and have abilities in their chosen field. However, these qualities alone will rarely be enough to ensure success. An entrepreneur opening a restaurant might be an excellent chef but may lack management skills. Some entrepreneurs manage to learn management skills very quickly once their business is up and running, but this can be a risky strategy. To minimise the risks, a new entrepreneur could gain management experience beforehand through employment or obtain advice and training from a specialist organisation offering management support. Alternatively, some entrepreneurs buy in experience by employing people with management experience. However, as this can be expensive, many newly formed businesses cannot afford this option. Local, national and international businesses Local businesses operate in small, well-defined parts of a country. Their owners often do not aim to expand so do not make attempts to attract customers across the whole country. Typical examples are small building and carpentry firms, single-branch shops, hairdressing businesses and childminding services. National businesses have branches or operations across a country. They make no attempt to establish operations in other countries or to sell internationally. Good examples include large car-retailing firms, retail shops with branches in just one country and national banks. International businesses sell products in more than one country. This may be done by using foreign agents or online selling. Multinational businesses have operations in more than one country. This means they have an established base for either producing or selling products outside their own domestic economy. 1.2 The role of entrepreneurs and intrapreneurs A new business idea might have the best available land and labour and be well financed, but without the enthusiasm and creativity of an entrepreneur or intrapreneur, it will almost certainly fail. New business ventures started by entrepreneurs or intrapreneurs can be based either on an innovative product idea or on a new way of offering a service. These ventures can be a new location for an existing business idea or an attempt to adapt a product in ways that no one else has tried before. The role of intrapreneurs in the ongoing success of a business is considered later in this section. The role of the entrepreneur when creating and starting up a new business is to: have an idea for a new business create a business plan invest some of their own savings and capital accept the responsibility of managing the business accept the possible risks of failure. Qualities of successful entrepreneurs and intrapreneurs It is not easy to start up a successful new business. The personal qualities and skills needed to make a success of a new business venture include: Innovation: The entrepreneur does not have to be an inventor in the traditional sense. They must be able to identify and fill a gap in the market, attract customers in innovative ways and promote their business as being different from others in the same market. This requires original ideas and an ability to do things differently. This is the skill of innovation. Commitment and self-motivation: It is hard work to set up and manage a new business. It may take up many hours of each day. Energy, focus, the willingness to work hard, to be keen and to have the ambition to succeed are all essential qualities of a successful entrepreneur. Multi-skilled: An entrepreneur will have to make the product (or provide the service), promote it, sell it and keep accounts. These different business tasks require someone who has many different qualities, is keen to learn technical skills, is able to get on with people, and is good at handling money and keeping accounting records. Leadership skills: If the business has employees, the entrepreneur must lead by example and will have to have a personality that encourages and motivates those workers. Self-confidence and an ability to bounce back: Many business start-ups fail, yet this would not discourage a true entrepreneur who would have such belief in themselves and their business idea that they would be able to bounce back from any setback. Risk-taking: Entrepreneurs must be willing to take risks in order to see results. Often the risk they take is by investing their own savings in the new business. KEY CONCEPT LINK Innovation is important for the success of any new enterprise. Offering exactly the same goods or services as existing businesses might not lead to great success. ACTIVITY 1.2 Flower enterprise blossoms Pedro Mendes gained the idea for his rose-growing business when he searched, without success, for a bouquet of roses for his wife in Punta Arenas. The city seemed to be a rose-free zone, so he  decided to start growing them himself. Initially, he opened two greenhouses growing just roses. He used his own savings, so took a considerable risk, but his confidence in the growth of flower-giving at times of major festivals encouraged other investors too. He sold the flowers in Chile, but his business also became one of the first in Chile to start exporting flowers on a large scale. Pedro worked long hours to make his business a success. The business, called Mendes Blooms, has grown at a tremendous rate, helped by Pedro’s allround business skills. He recently bought out a large rose grower in Africa and his business is now one of the world’s largest cultivators of roses – and Pedro achieved this in just over ten years. 1 Analyse four characteristics that Pedro has that have made him a successful entrepreneur. BUSINESS IN ACTION 1.1 Kashaf Shaikh started up the website, Dealivore. Consumers can search for valid coupons for numerous stores. This website allows users to find the best deals and coupons to use for hotels, recharge websites, grocery shopping and travel. It is now the marketleading coupon website in India. Kashaf became an entrepreneur at a young age when she realised that fulfilling the needs of another company was not enough for her. Now Kashaf gives lectures to motivate other women to become entrepreneurs. Discuss in a pair or a group: How can Kashaf maintain her business success as competitors enter the same market? Barriers to entrepreneurship There are many barriers that every entrepreneur must overcome to turn their business ideas into reality. Every entrepreneur needs to address the following barriers to turn their business idea into reality. These barriers include: Lack of a business opportunity Identifying successful business opportunities is one of the most important stages in becoming an effective entrepreneur. The original idea for most new businesses comes from one of several sources, including: an entrepreneur’s own skills or hobbies, such as dressmaking or car bodywork repairing previous employment experience franchising conferences and exhibitions offering a wide range of new business start-up ideas small-budget market research: for example, the internet allows any user to browse business directories to see how many businesses are offering certain goods or services in the local area. Many new enterprises are set up in the following industries, often because of the entrepreneurs’ own skills and the small sums of capital required: fishing – from a small boat owned by an entrepreneur market gardening – producing cash crops to sell at local markets jewellery making, dressmaking and craft work building trades hairdressing computer repairs cafés and restaurants childminding. Obtaining sufficient capital (finance) In an International Labour Organisation survey of new business start-ups, most entrepreneurs said that lack of finance was their main difficulty. So why is obtaining finance such a major barrier for entrepreneurs? This could be due to: insufficient savings – many entrepreneurs have limited personal savings no knowledge of the financial support and grants available no trading record to present to banks as evidence of past business success a poor business plan that fails to convince potential investors of the chances of a business’s success. Cost of good locations When finance is limited, an expensive location should not be considered. It is important to keep the level of output at which revenue covers all costs as low as possible. This increases the business’s chances of survival. Operating from home is the most common way for entrepreneurs to establish their business. This keeps costs low, but there are drawbacks: It may not be close to the area with the biggest market potential. It lacks status – a business with its own impressive premises tends to generate confidence. It may cause family tensions. It can be difficult to separate private life from working life. New businesses that offer a consumer service need to consider their location carefully. A website designer could operate from home very effectively, as communication with customers will be by electronic means, but a hairdresser may need to obtain premises in an area with the biggest number of potential customers. Competition A newly created business will often experience competition from established businesses with greater resources and market knowledge. The entrepreneur may therefore have to offer a more unusual product or better customer service to overcome the low-cost advantages that bigger businesses usually have. Lack of a customer base A new business must establish itself in the market and build up customer numbers quickly to survive. The long-term success of the business will depend on encouraging customers to return to purchase products repeatedly. Good customer service could be provided by: personal customer service knowledgeable pre- and after-sales service supplying one-off customer requests that large firms may be reluctant to provide. ACTIVITY 1.3 Farah branches out on her own Farah is a well-qualified dressmaker. She works for one of the best-known dress shops in town. She is always arguing with her shop manager, who is very jealous about Farah’s superior dress-making skills. Farah is now determined to set up her own business. She is lucky that her mother is able to invest $5 000 in it. She will have to find the rest of the capital needed – about $10 000. She will use her own savings and ask for a bank loan. Farah has already investigated the prices of shop premises. She was surprised to find how expensive the city-centre locations were. Her mother suggested a cheaper but less busy out-of-town location. She contacted an accountant to look after the financial side of the business. They would charge at least $2 000 per year. Farah thinks she could learn to keep the accounts herself if she attended classes  at the local college in the evening. Farah wants to make her shop very different from all of the competitors. She has had the idea of offering lessons in dressmaking as well as selling finished dresses. Having been asked so many times by customers, ‘How did you do that?’ when they were pleased with her latest dress designs, Farah is sure that this is a great business opportunity. What Farah did not realise was the amount of paperwork she had to complete before her business could even start trading. Figure 1.9: Dressmaking lessons in action 1 Analyse three barriers that Farah must overcome before setting up this new business. 2 Evaluate whether Farah seems to have the right qualities to be a successful entrepreneur. Business risk and uncertainty There are some differences between business risk and business uncertainty. All business decisions involve risk. For example, there is a chance that a new business selling clothing will fail. If, in the last 12 months, 10 clothing retailers have been established in a city and 3 fail by the end of the year, the risk of failure was 30%. A new entrepreneur could possibly reduce the risk of their new clothing business failing by studying why these three businesses did not survive. This would allow the entrepreneur to reduce business risk by avoiding the errors made by the failed businesses. Business planning (see below) is used to reduce risk. Business uncertainty is different. Uncertainty cannot be foreseen, measured or calculated. Plans may be made by entrepreneurs for the future, but some events will always be unforeseen and impossible to predict. The 2020 COVID-19 epidemic caused such a fall in spending by consumers that many small and newly set-up businesses were forced to close. This is an excellent example of uncertainty that was impossible to forecast and very difficult for any business to prepare for. Role of enterprise in a country’s economic development All governments use policies that aim to encourage more people to become entrepreneurs. What are the claimed benefits to an economy from successful business enterprise? Employment creation: In setting up a new business, an entrepreneur is employing not only themselves (self-employment), but also, very often, employing other people too. These workers can include family members or friends. When a new business creates jobs, the national level of unemployment will fall. If the business survives and expands, additional jobs are created in suppliers’ businesses. Economic growth: Any increase in output of goods or services from a start-up business will increase the gross domestic product of the country. This is called economic growth. If enough small businesses are created, economic growth will lead to increased living standards for the population. Increased output and consumption will also result in higher tax revenues for the government. Business survival and growth: Although a high proportion of start-ups fail, some survive, and a few expand to become very important businesses. These businesses will employ large numbers of workers, boost economic growth and take the place of businesses that may be in decline or closing due to changing consumer tastes or technology. In Trinidad and Tobago, the decline of the sugar industry has been balanced out by the growth of the tourist industry. Tourism has itself been boosted by small guesthouse owners becoming entrepreneurs. Innovation and technological change: New businesses can be very innovative. This creativity adds dynamism to an economy. Creativity can stimulate other businesses and help to make the nation’s business sector more competitive. Many new business start-ups are in the technology sector. The IT services they provide to other businesses can help industries in a country become more advanced in IT applications and therefore more competitive. Exports: Most business start-ups offer products that meet the needs of local markets. Some will expand their operations to the export market in other countries. This will increase the value of a nation’s exports and improve its international competitiveness. Personal development: Starting and managing a successful business can aid in the development of useful skills and help an individual towards self-actualisation – a real sense of personal achievement. This creates an excellent example for others to follow and can lead to further successful new enterprises that will also boost the economy. Increased social cohesion: Unemployment often leads to serious social problems and these can be reduced if there is a successful and expanding small business sector. By creating jobs and career opportunities and by setting a good example for others to follow, entrepreneurship can help to achieve social cohesion. TIP Some questions may ask you to make references to businesses in your own country. While you are studying this course, take a close interest in the activities of new and well-established businesses in your country. The role of intrapreneurship Consider these questions: Do enterprise, creativity and innovation end once a start-up business has become successful? If they do, then the business will fail to adapt to new conditions and create new opportunities. Is there any scope for the qualities and characteristics of successful entrepreneurs to be used within existing businesses? Many successful businesses allow people to take risks and show initiative – just as entrepreneurs do – even when the business is established. Large companies face many problems in rapidly changing economic times. Businesses must be innovative and need to keep their best managers. Rapid advances in technology allow new business start-ups to disrupt existing markets and business operations. The attractions of entrepreneurship can lead to many dynamic employees leaving a business that does not encourage them to be creative. Hence the development of intrapreneurship. This is the process of encouraging risk-taking and enterprise by employees within a business to help create and develop new opportunities. ‘Intrapreneur’ is the term given to people who have the same qualities as entrepreneurs and are encouraged to demonstrate the same skills as entrepreneurs within an existing business. There are three key differences between an entrepreneur and an intrapreneur (see Table 1.1).  Entrepreneur Intrapreneur Main activity Starting up a new business Developing an innovative product or project within an existing business Risk Taken by the entrepreneur Taken by the business Rewards To the entrepreneur To the business Table 1.1: Key differences between entrepreneurs and intrapreneurs The benefits of intrapreneurship to existing businesses include: Injecting creativity and innovation into the business – developing new products to increase sales or creating exciting ways of selling existing products. Developing new ways of doing business – creativity in solving problems such as low efficiency can be more successful than continuing to use the old ways. Driving innovation and change within the business – generating excitement within the business about a new opportunity makes change more acceptable. Creating a competitive advantage – by developing more innovative products. Encouraging original thinkers and innovators to stay in the business – this is summed up by the expression: ‘You don’t have to leave our company to become an entrepreneur!’ BUSINESS IN ACTION 1.2 Google takes intrapreneurship more seriously than most businesses. Its ‘20% time’ encourages software engineers and other specialist employees to interact and spend 20% of their work time on projects that interest them. Google claims that the following products would not have been created without this intrapreneurship: Gmail, Google News, Adsense and Google Now. ‘20% time’ works at Google because employees can be creative without the usual organisational and management controls. None of the new ideas have to be cleared with a senior manager. Good ideas spread fast and collaboration is encouraged. Discuss in a pair or a group: Would ‘20% time’ be so effective in all businesses? Be prepared to defend your answer. ACTIVITY 1.4 Caribbean cook tastes success Levi Roots, a Jamaican reggae musician, appeared on a famous British TV programme called Dragons’ Den. On this programme, he persuaded a wealthy businessman to invest $100 000 in his new business idea, Reggae Reggae Sauce. In return, Levi promised to give 25% of the future profits of his business to the investor. All the banks he asked for finance turned him down. Reggae Reggae Sauce is based on an old family recipe. Levi identified the market opportunity for this sauce when he started selling jerk chicken with the sauce at music festivals. Originally, Levi made the sauce at home, but he used the $100 000 to obtain new production facilities. He quickly needed to establish a customer base. A large UK supermarket company was impressed by Levi’s personality and the unique taste of his sauce. It bought enough of his sauce to stock in all of its stores. The new investor in his business said, ‘Levi is a great guy and he has created a unique product which he is passionate about. I am sure that this supermarket deal will be the first of many fantastic contracts on the way to business success and making his dreams a reality.’ Levi is now in discussion with an export company that wants to sell the sauce back to the Caribbean. Figure 1.10: Levi had an original idea for a new business, and he is now a successful entrepreneur 1 Analyse two possible benefits to the UK economy from Levi’s enterprise. 2 Analyse two barriers that Levi had to overcome. 3 Evaluate the factors that contributed to the success of this business. REFLECTION In preparing your answer to Q3 in Activity 1.4, how did you evaluate the factors that led to success in this case? Did you consider several factors or just focus on one? Is Levi’s success unusual for an entrepreneur? Discuss your conclusions with another learner. Did your partner reach different conclusions? How would you defend your own conclusion? Or can you now criticise your own conclusion? 1.3 Purpose and key elements of business plans Without some evidence that entrepreneurs have thought about and planned for the future, it is unlikely that bankers, venture capitalists or potential shareholders will invest money in a new business. An effective business plan provides this evidence. The main elements of a typical business plan are: executive summary − an overview of the new business and its strategies description of the business opportunity − details of the entrepreneur’s skills and experience; nature of the product; the target market at which the product is aimed marketing and sales strategy − details of why the entrepreneur thinks customers will buy the product and how the business will sell to them management team and personnel – details of the entrepreneur’s skills and experience and the people they intend to recruit operations − premises to be used, production facilities, IT systems financial forecasts − the future projections of sales, profit and cash flow for at least one year ahead. Benefits of business plans Business plans are most important when setting up a new business. The main purpose of a business plan for a new business is to obtain finance for the start-up. Potential investors or creditors will not provide finance unless details about the business proposal have been written down clearly. The business-planning process provides essential evidence to investors and lenders. It makes the finance application more likely to be successful. Business planning also: forces the owner to think seriously about the proposal, its strengths and any potential weaknesses gives the owner and managers a clear plan of action to guide their actions and decisions in the early months and years of the business. If an entrepreneur started a business with no clear sense of purpose or direction, no marketing strategy and no idea of which employees to recruit, then its chances of success would be much reduced. Limitations of business plans Even a detailed business plan does not guarantee a successful business. In fact, it could create a false sense of certainty in business owners. They might rely so much on the plan that they overlook the fact that it is based on forecasts and predictions. The business plan must be detailed and supported by evidence such as market research. If it is not, then prospective creditors and investors can delay in making a finance decision until the plan is brought up to the required standard. The plan might lead entrepreneurs to be inflexible. If the dynamic business world throws up new opportunities that are not in the plan, these could be rejected. This could mean that options for future profits and growth are rejected. The best business plans allow for some flexibility as external events change. ACTIVITY 1.5 Developing a business plan 1 Read Activity 1.4 again. Prepare an outline business plan for your own new barbecue sauce. 2 Present your plan to the class or another learner. 3 Use feedback from the class or another learner to improve your plan. EXAM-STYLE QUESTIONS Short answer questions 1 Define the term ‘adding value’. 2 Define the term ‘entrepreneur’. 3 Analyse one characteristic of successful entrepreneurs. 4 Explain one barrier faced by entrepreneurs, apart from limited finance. 5 Explain one example of opportunity cost for an individual planning to become an entrepreneur. 6 Analyse one way a country is likely to benefit from the expansion of its business enterprises. 7 Explain one role of an intrapreneur in an existing business. 8 Analyse one benefit of a detailed business plan to an entrepreneur. 9 Explain one limitation of business plans. 10 Explain one reason why a new hairdressing business will need a factor of production of your choice. 11 Explain one need that a new business must fulfil if it is to be successful. 12 Analyse one way a supermarket could add value to the food and other goods it buys in. 13 Explain one reason why there are so many new business enterprises providing consumer services. 14 Explain one way in which an entrepreneur could overcome the barrier of having no savings to invest. 15 Analyse one benefit of entrepreneurship to your country’s economy. Essay questions 1 a Analyse two ways a bakery could increase added value. b Evaluate whether the success of an entrepreneur depends more on luck rather than personal qualities and skills. 2 a Analyse two benefits to your country’s economy of an increase in the number of new business start-ups by entrepreneurs. b Evaluate the barriers that business entrepreneurs experience in your country. Data response questions 1 Rivelino ‘We are a global business,’ states Rivelino, one of three partners in Total Fintech Solutions (TFS). This is a fast-growing business. It responds to the changing needs of other businesses by developing the latest software to facilitate payment systems for e-commerce transactions within the global marketplace. TFS has four full-time computer programmers. This is not Rivelino’s first business venture. He also started up a herbal tea business and arranged boat tours for tourists. He is always looking out for business opportunities. TFS is his biggest success by far. He discussed setting up a software development company with a school  friend who was trained in software design and development. There have been opportunity costs. Rivelino gave up time to start the new business venture and he used all his savings. His friend had a marketing qualification and many business contacts. They were joined by another partner who brought financial skills and further software design experience. Rivelino encourages his employees to become intrapreneurs. He wants his employees to show enterprise and initiative by developing their own business ideas. After much success in the Caribbean market, he wants TFS to provide advanced customised software on a global scale. Rivelino has vision, a drive to succeed and a love of software development. He recognises the strength of competing businesses and the changes occurring in the business world, especially in e-commerce. a i Identify one quality of successful intrapreneurs. ii Explain the term ‘opportunity costs’. b Explain two qualities Rivelino has that make him a successful entrepreneur. c Analyse two ways the partners’ management skills contributed to the success of TFS. d Evaluate the likely impact of a dynamic business environment on the future success of TFS. 2 Wesley’s laundry Six months ago, Wesley was congratulated on his detailed business plan for a new laundry by the bank manager. She agreed to lend him $30 000, half of the capital he needed for starting the business. Wesley planned to offer a premium laundry service for local hotels and guesthouses. His promise was ‘RETURNED NEXT DAY, or NOTHING TO PAY’. There were few customers at first, as forecast in the business plan. But news of Wesley’s service standards and next day promise soon spread. By the end of month three, the laundry was working to full capacity. His business plan had not allowed for this level of demand. Wesley needed more factors of production. He recruited three workers to help him. It is now the end of month four. The bank manager has asked to see Wesley. He is shocked by what he is told: ‘You have reached your overdraft limit. Cash coming into the business is not enough to ensure survival. I want to see all of your accounting and sales records next week,’ she tells him. Wesley knows this will be a problem. He has been so busy that his accounting records are three weeks out of date. Customers have not paid during this period. No bills have been sent out. Some customers are claiming that they should not pay. Their laundry has taken three days to be returned. The workforce is another problem. The workers often argue because there are some jobs no one wants to do, such as handling chemicals and cleaning the boiling tanks at the end of each day. Wesley has not clearly allocated jobs and the workers cannot decide themselves. Wesley sat down with all the company’s paperwork and wondered why he had not gained some experience in computer-based accounting. His own business skills were mainly in marketing. No wonder the sales of the laundry were doing so well. a i Identify one factor of production. ii Explain the term ‘customers’. b Explain two problems that Wesley now faces in managing his business. c Analyse two reasons why Wesley would benefit from understanding the concept of opportunity cost. d Evaluate the benefits and limitations to Wesley of the detailed business plan. SELF-EVALUATION CHECKLIST After studying this chapter, complete a table like this: You should be able to: Needs more Almost there Ready to work move on Understand that business activity uses resources to satisfy customers’ needs Understand that businesses aim to add value to the resources they buy in Understand that entrepreneurship is about taking risks to set up new businesses Analyse the characteristics of successful entrepreneurs and intrapreneurs Analyse the benefits to an economy from entrepreneurship Understand the challenges and barriers faced by entrepreneurs, including a dynamic business environment Analyse the main elements, benefits and limitations of business plans  Chapter 2 Business structure This chapter covers syllabus section AS Level 1.2 LEARNING INTENTIONS In this chapter you will learn how to: classify industries into levels of economic activity – primary, secondary, tertiary and quaternary – and analyse changes in their relative importance understand the differences between the private sector and public sector in your country identify the different forms of legal structures of business and evaluate the most appropriate one for different businesses analyse the advantages and disadvantages of changing from one type of business ownership to another. BUSINESS IN CONTEXT India’s booming stock exchange leads to rise in IPOs Century Metal Recycling Ltd is just one of the private limited companies in India that are taking advantage of rising share prices. The existing owners and directors of this business have applied to launch an initial public offering of some of its shares. This converts the business into a public limited company. This means that the company can raise finance by selling shares to the public. The company will raise around $100 million from the sale of shares. This share capital will be used to pay off some existing debts and invest in advanced equipment at its metal smelting plants. India has a vibrant and growing private sector with 1.9 million registered companies and millions of sole traders and partnerships. About 95% of companies are still private limited businesses, but some of these are – like Century Metal Recycling – considering going public. Discuss in a pair or a group: Why do you think that about 95% of Indian companies are private limited companies? What might be the benefits to Century Metal Recycling of becoming a public limited company? 2.1 Economic sectors Business activity and ownership can be classified in a number of ways. One of these is by identifying which type of product or service is being produced. Primary, secondary, tertiary and quaternary economic sectors Business activity produces a vast range of different goods and services. It is possible to classify these into four broad types of business activity. These broad categories are based on the stages involved in turning natural resources, such as oil and timber, into the finished goods and services demanded by consumers. The stages take place in primary, secondary, tertiaryand quaternary sectors of industry. Figure 2.1: Primary production – dairy farm in New Zealand Figure 2.2: Secondary production – clothing factory in China Figure 2.3: Tertiary sector – the breathtaking Burj Al Arab hotel in Dubai Figure 2.4: Quaternary sector – research laboratory in India The balance of these sectors in the economies of different countries varies substantially. It depends on the level of industrialisation in each country. Table 2.1 shows the differences between three countries – and the change in importance of these sectors in Ghana since 2008. Country Primary Secondary Tertiary and quaternary United Kingdom 1.2 18.1 80.7 China 26.1 27.6 46.3 Ghana 33.8 (52.5) 18.6 (14.2) 47.6 (33.3) Table 2.1: Employment data in 2019 (2008) – percentage of total employment (quaternary data is included in the tertiary figures) Changes in relative importance of economic sectors The classification of business activity by economic sectors has two important features: changes over time and variations between different economies. The importance of sectors changes over time The importance of each sector in an economy changes over time. In Ghana (as shown in Table 2.1) the primary sector reduced and the secondary sector increased between 2008 and 2019. The growing importance of secondary sector manufacturing industries in developing countries is called industrialisation. The relative importance of secondary sector activity is increasing in many countries in Africa and Asia. The relative importance of each sector is measured in terms of either employment levels or output levels as a proportion of the whole economy. Consequences of industrialisation: benefits Total national output (gross domestic product) increases and this raises average standards of living. Increasing output of goods can result in lower imports and higher exports of such products. Expanding manufacturing businesses will result in more jobs being created. Expanding and profitable firms will pay more tax to the government. Value is added to the country’s output of raw materials, rather than just exporting these as basic, unprocessed products. Consequences of industrialisation: problems The chance of work in manufacturing can encourage a huge movement of people from the countryside to towns, which leads to housing and social problems. Imports of raw materials and components are often needed, which can increase the country’s import costs. Much of the growth of manufacturing industry is due to the expansion of multinational companies. These can have a negative impact on the economy too. In developed economies, the situation is reversed. There is a decline in the importance of secondary sector activity and an increase in the tertiary sector. This process is termed deindustrialisation. In the UK, the proportion of total output accounted for by secondary industry has fallen from 38% to 20% in 25 years. Causes of this change include: Rising incomes associated with higher living standards have led consumers to spend much of their extra income on services rather than more goods. There has been substantial growth in tourism, hotels and restaurant services, financial services and other services. However, spending on physical goods has risen more slowly. Manufacturing businesses in developed countries face much more competition as a result of increasing global industrialisation. These rivals tend to be more efficient and use cheaper labour. Therefore, rising imports of goods are taking the market away from the domestic secondary sector firms. Consequences of deindustrialisation The consequences of the decline in the relative importance of the primary and secondary sectors and the increase in relative importance of the tertiary and quaternary sectors include: job losses in agriculture, mining and manufacturing industries  movement of people towards towns and cities job opportunities in service industries – tertiary and quaternary sectors increased need for retraining programmes to allow workers to find employment in service industries. The importance of sectors varies between economies The importance of each sector varies significantly between different economies. Table 2.1 gives details of the differences that exist between three different countries’ economies and the share of total employment accounted for by sectors of industry. Public sector and private sector of the economy Industry may also be classified in other ways, for example by public or private sector, or by type of legal structure. These two types of classification are interlinked, as some types of legal structure are found only in the private sector. What is the difference between the private sector and public sector of the economy? In nearly every country with a mixed economy, most business activity is in the private sector. The relative importance of the private sector compared to the public sector is not the same in all countries. Those economies that are closest to a free-market system have very small public sectors. Those countries with central planning command economies will have very few businesses in the private sector. The types and sizes of businesses in the private sector vary considerably. The legal structure of firms in the private sector is covered in Section 2.2. Public-sector enterprises: public corporations In most mixed-economy countries, important goods and services are provided by government-owned or state-run organisations as it is argued that they are too significant to be left to private businesses. These public-sector enterprises usually include health and education services, defence, and public law and order (police force). In some countries, important strategic industries, such as energy, water supply and public transport, are also owned and controlled by the state as public corporations. Another reason for the state or public sector, rather than the private sector, to provide products is the existence of public goods. These are goods and services that cannot be charged for, so it is impossible for a private-sector business to make a profit from producing them. A good example is street lighting. It is impossible to exclude people from obtaining the benefit of streetlights even if they have not contributed to paying for them. Why then should anyone contribute directly towards paying for them? Taxes have to be used to raise revenue to pay for a street-lighting system as the lights can only be provided by the public sector. Public-sector organisations do not often have profit as a major objective. In many countries, the main priority of publicly owned TV channels is to produce public service programmes. State-owned airlines have safety as a priority. If public corporations are sold off to the private sector there will nearly always be a change of objectives towards the profit motive. Table 2.2 contains a summary of the potential advantages and disadvantages of public corporations. Advantages of public corporations Disadvantages of public corporations They are managed with social objectives There can be a tendency towards inefficiency rather than solely with profit objectives. due to lack of strict profit targets. Loss-making services might still be kept Subsidies from government can also operating if the social benefit is great enough. encourage inefficiencies. Finance is raised mainly from the government. Government may interfere in business decisions for political reasons, for example by opening a new branch in a certain area to gain popularity. Table 2.2: Advantages and disadvantages of public corporations 2.2 Business ownership Businesses in the private sector may be owned by one person or by many thousands. There are various forms of business ownership, as shown in Figure 2.5. Figure 2.5: The legal structure of private-sector businesses Sole trader This is the most common form of business ownership. Although there is a single owner in this type of business organisation, it is common for sole traders to employ others. However, such firms are likely to remain very small. Because of this, although they are great in number, sole traders account for only a small proportion of the total business turnover of a country. All sole traders have unlimited liability. This means that the owner’s personal possessions and property can be taken to pay off the debts of the business, should it fail. This can discourage some potential entrepreneurs from starting a business. Another significant problem is finance for expansion. Many sole traders remain small because the owner wishes to remain in control of their own business, but another reason is the limitations in raising additional capital. As soon as partners or shareholders are sought in order to raise finance, then the sole trader becomes another form of organisation altogether. In order to remain a sole trader, the owner must be dependent on their own savings, profits and loans for injections of capital. This type of business ownership is most commonly established in the construction, retailing, hairdressing, car-servicing and catering trades. It has several advantages and disadvantages (see Table 2.3). Advantages of a sole trader Disadvantages of a sole trader easy to set up – no legal formalities unlimited liability – all of the owner’s assets owner has complete control – not answerable are potentially at risk to anybody else often intense competition from bigger firms, owner keeps all profits for example in food retailing owner can choose times and patterns of owner is unable to specialise in areas of the working business that are most interesting – is responsible for all aspects of management owner can establish close relationships with staff (if any are employed) and customers difficult to raise additional capital business can be based on the interests or skills long hours are often necessary to make the of the owner – rather than working as an business pay employee for a larger firm lack of continuity – as the business does not  have a separate legal status, when the owner dies, the business also ends Table 2.3: Advantages and disadvantages of the sole trader legal structure Partnership Partnershipsare formed in order to overcome some of the drawbacks of being a sole trader. It is usual with all partnerships, although not a legal requirement, to draw up a formal Deed of Partnership between all partners. This provides agreement on issues such as voting rights, the distribution of profits, the management role of each partner and who has authority to sign contracts. However, a partnership agreement does not create a separate legal unit; a partnership is just a grouping of individuals. When planning to go into partnership, it is important to choose business partners carefully – the errors and poor decisions of any one partner are considered to be the responsibility of all the partners. This also applies to business debts incurred by one partner – in most countries there is unlimited liability for all partners should the business venture fail. Unlimited liability can act as a disincentive for people to become partners in a business. This can limit the capital that partnerships can raise. See Table 2.4 for a summary of the advantages and disadvantages of partnerships. Advantages of a partnership Disadvantages of a partnership Partners may specialise in different areas of All partners have unlimited liability (with business management. some exceptions). They share decision-making. Profits are shared. Additional capital is injected by each partner. There is no continuity and the partnership will Business losses are shared between the have to be reformed in the event of the death partners. of one of the partners. There is greater privacy and fewer legal All partners are bound by the decisions of any formalities than in corporate organisations one of them. (companies). It is not possible to raise capital from selling shares. A sole trader, taking on partners, will lose decision-making independence. Table 2.4: Advantages and disadvantages of partnership business structure Partnerships are the most common form of business organisation in some professions, such as law and accountancy. Small building firms are often partnerships, too. Many other owners of businesses prefer the company forms of organisation and these are considered next. Limited companies There are three distinct and important differences between companies and the two forms of unincorporated business organisation that we have just studied. These are limited liability, legal personality and continuity. Limited liability for owners The ownership of companies is divided into small units called shares. People can buy these and become shareholders: part-owners of the business. It is possible to buy just one share, but usually shares are owned in blocks, and it is possible for one person or organisation to have complete control by owning more than 50% of the shares. Individuals with large blocks of shares often become directors of the business. All shareholders benefit from the advantage of limited liability. Nobody can make any further claim against shareholders, should the company fail. This has two important effects: People are prepared to provide finance to enable companies to expand. The risk of the company failing to pay its debts is transferred from investors to creditors such as suppliers and banks. Creditors, as a result, are very interested in analysing the company’s accounts for signs of potential future weakness. Legal personality A company is recognised in law as having a legal identity separate from that of its owners. This means, for example, that if the food sold by a company are found to be dangerous or contaminated, the company itself can be taken to court – not the owners, as would be the case with either a sole trader or a partnership. A company can be sued and can itself sue through the courts. This does not take all legal responsibilities away from the managers and owners. For example, directors can be legally responsible if they knowingly act irresponsibly. This includes continuing to trade when the company is illiquid, which means it does not have cash to pay bills. Continuity In a company, the death of an owner or director does not lead to its break-up or dissolution. All that happens is that ownership continues through inheritance of the shares, and there is no break in ownership at all. Private limited companies The protection that comes from forming a company is substantial. Small firms can gain this protection when the owner(s) create a private limited company. Table 2.5 contains a summary of the advantages and disadvantages of this form of business ownership. Advantages Disadvantages Shareholders have limited liability. There are legal formalities involved in The company has a separate legal personality. establishing the business. There is continuity in the event of the death of Capital cannot be raised by the sale of shares a shareholder. to the general public. The original owner is still often able to retain It is quite difficult for shareholders to sell control. shares. The company is able to raise capital from the End-of-year accounts must be sent to the sale of shares to family, friends and government office responsible for companies, employees. and are available for public inspection (so there is less secrecy over financial affairs than The company has greater status than an for a sole trader or partnership). unincorporated business. Table 2.5: Advantages and disadvantages of private limited company structure The word ‘Limited’ or ‘Ltd’ (‘Pte’ in some countries) tells us that the business is a private limited company. Usually the shares will be owned by the original sole trader, relatives, friends and employees. The former sole trader often still has a controlling interest. New issues of shares cannot be sold on the open market and existing shareholders may sell their shares only with the agreement of the other shareholders. Certain legal formalities must be followed in setting up such a business and these are explained in the section after public limited companies. Public limited companies These can be recognised by the use of ‘plc’ or ‘inc.’ after the company name. It is the most common form of legal organisation for very large businesses, for the good reason that they have access to very substantial funds for expansion. TIP To avoid one of the most common errors made by learners, remember that public limited companies are in the private sector of industry, but public corporations are not. A public limited company (plc) has all the advantages of private company status, plus the right to advertise its shares for sale to the general public and have them quoted on the stock exchange. This means that: public limited companies can raise very large sums from public issues of shares existing shareholders may also quickly sell their shares if they wish to. This flexibility of share buying and selling encourages the public to purchase the shares when they are sold by initial public offering (IPO). The other main difference between private and public companies concerns the separation of ownership and control. The original owners of a business that converts to private company structure are usually still able to retain a majority of shares. They can continue to exercise management control. This is most unlikely with public limited companies because most shares will be issued to a large number of individuals and institutions as investors. These shareholders own the company, but at the annual general meeting they appoint a board of directors who control the management and decision-making of the business. This clear distinction between ownership and control can lead to conflicts; for example, over business objectives and the direction the business takes. The shareholders might prefer measures that aim for short- term profits, whereas the directors may decide to aim for the long-term growth of the business, perhaps in order to increase their own power and status. Many private limited companies convert to plc status for the reasons given in Table 2.5. It is also possible for the directors or original owners to convert a business back from a plc to private limited company status: Richard Branson and the Virgin group is one of the best-known examples. The reasons for doing this are largely to overcome the problems of separate ownership and control. In a private limited company, it is normal for the senior executives to be the majority shareholders. In addition, the owner of a private limited company can take a long-term planning view of the business. It is often said that the major investors in a plc are only interested in short-term gains. ‘Short-termism’ can be damaging to the long-term investment plans of a business. See Table 2.6 for a summary of the advantages and disadvantages of public limited companies. Advantages Disadvantages Shareholders have limited liability. Formation entails legal formalities. The company has a separate legal identity. There can be high costs of paying for advice There is continuity. from business consultants when creating a plc. It is easy for shareholders to buy and sell Share prices are subject to fluctuation, shares, encouraging investment. sometimes for reasons beyond a business’s control (e.g. the state of the economy). Substantial capital sources can be accessed due to the ability to issue a prospectus to the There are legal requirements concerning public and to offer shares for sale (called a disclosure of information to shareholders and flotation). the public (e.g. annual publication of detailed report and accounts). There is a risk of takeover due to the availability of the shares on the stock exchange. Directors may be influenced by the short-term  objectives of the major investors. Table 2.6: Advantages and disadvantages of public limited company structure BUSINESS IN ACTION 2.1 In 2019, there were 94 205 registered limited co