Bustess, tltat's easily defrrcd; it's other people's mone7,.

Alexandre Dunas

(1

802-1870), French author

Key topics

.
' .
.
.
.
'

What is a business?
Inputs, outputs and processes of a business
Factors of production
Business functional departments: production, marketing, frnance and
human resource management
Businqss activity in different sectors: primary, secondary and tertiary

High"r Level extension

Cha:rges in economic structure and their impact on business activity

l l. f l\dLUE

-,

-*-,

.---.

- -

IIUTRODUCTIOru
A

bu-siness is a decision-making organization involved in the process

.f using inputs to pr-ocluce
goods and/or to provide services (see Figure r.1a). Inputs
u." ih" ...ou...., such as ]abour and
raw materials' which a business uses in the production process.
nis pro.ess produces oLtt])rtr.t.
which are also known as products.

A product can refer to both goods and services. Goocls ae physical

prod'cts, such as cars,
computers, books and food. Sen'ices are intangible products
sucr, u, Jt ui..ut, a bus ride or a visil
to the cinema' Businesses may also provicle goods and ser,ices
to other businesses, such as
freight transportation and distribution.
Inputs

Processes

Examples: Raw materials,

cornponents, machinery,
equipment and labou

Tuming the inputs into rhe

provision ofservices or the
manufacturing ofgoods

Outputs
The output or provision

offinal goods anrl

sen1ces

Figure 1.la Inputs, processes and

outputs
This unit looks atthe nature of business acti'ity, i.e. wl.rat
businesses are, what they rJo ancl
whv
they do it. Many of the concepts cliscussed here are developecl
further rn the rest or ti.," t.*ruoor..
, ::l :r-

:'.

.,;,{ffAT 5 A BUSruESS?
Btsinesses and their pu!.pose
Put simply, a business is an organizxtion that is involved
in the production of g.ocls and/or f'e
provision of services' Management guru Peter Drucker
famously put forward fhe premise that
the
or.rly purpose of a business is to create customers. Businesses
ro satrsfy fhe,eecls an(l v,attt.r
of people, organizations and govemments.
""irr

'
.

Needs ae the basic necessities that a person

rvarmth, shelter and ciothing.

nt,st

have in order to sur'ive, e.g. food, ,arater.

that peopte have, i.e. things thauhey

wo'ld tke toha_,,e,such as a targcr
H*r,"::,,::r"Tii"r
rr'rrL. a truw rrruute phone orl foreign holiday. Wanls
are stid to U"l"f,"lr..,;;;;;,"''
always want more than they need.
,

As a business gets larger, it becomes more important to

have clearly deflned functions (or
processes), such as human resource manigement,
production, mark"ting and finance.
These
functions are likely to be carried out by specialist departments.
Businesses

are also affected by external factors, those

which are beyond its control (see unit
L5).
For example, businesses need to take account ofsocial
changes, ,..nnorog;.ul developmenrs,
the
levei of economic activity' erlvironmental issues, and
gouer.ent legislation and policies.
In
addition' they may be affected' from time to time,
from external snolt.s, sucb as an oil crisis,
a
hearrh scare. naturar disasrers or rhe outbreur.
,,It
of,1.yu:..The Chinese
is
easy
ro
or"".0
open
a
business but much more difficult to keep it open"
highlights tlr" .on;iions in which businesses
operate,

What is a busness7

The marketplace
A market is simply

a place or process u'hereby buy.ers

(customers) and sellers (busi'esses)
meet
to trade' This usualiy refers to a physical
outlet, such as a shop, restaurant or clnema.
However. a
iarket can also exist in a non-physical form, such
as .-"o.nrr,"0." (trading on the
internet, which
is covered in unit 4 8) o. using the terephone

to bu1, shar.es or motor i'surance.

customers

are the people or organizations

that actualiy qse the product. These

tlrat buy a product whereas consumers are

the ones
may be the same entity, e.-q. someone who buys
and eats a
"u,
burger meal. However, tliey are not necessarily
the sme, ,r.t
parents (customers) paying for
their children's (consumers) birthday presents.

Types

Exam Tip!
The words 'consumer' and 'customer,
are often used interchangeabry by
candidates, arthough they have different
,nuuningr. M"k" sur" that you
are able io distinguish beiween
tlre two .onc"ptrnd to use them in the
right context.

of products

AII businesses produce goods and,/or services.

consumer goods are products that are sold

to the general public, rather than to other businesses.

These can be further split into eitlter
consunrcr duiable goods lproaucts that last a
long time and
can be used repeatedly, such as electronic
gadgets, ciothes and home furniture), or non-durable
goods (tliose that need to be consumed
u"."y so.tty after their purchase as they do
not last, such
as fresh food and newspapers).

capital goods, or producer goods. are products

purchaserl by other businesses. Examples
illclude colllputers, rnachinery, specialisi
equipment and tools. These products are then
used.to
produce othel goods 0r ser-vices.
services are intangible products prol'ided
by businesses. The service is not tangible, but the
results are' Examples include the
services provided by doctors (health care), bus and
rail
companies (transportation), reslaurants (roo),
gyrns and sports centres (recreation), solicitors
(legai advice). and teachers (education).

Adding value
All businesses must add.r'alue in tl.re production process.
value added is the difference between
thevalueof inputs(i'e thecostsofpioduction)andthevalueof
outputs(i.e.thegoodsand

services tirat are sold to custorners). value

added allows a business to seli its products
for more
than its production costs, thereby
earning the business a profit. For exampre, suppose
that
the
ulput costs (such as labour, power and
cornponents) for producin-q a car totalred
$6,000. If
customers are willing to pay a price
of $18,000 for the car. then the value added is
$12,000. This
surplus will contribute towards the firm's
overall profits. The concept of value added also applies
to the service sector' In using the
sen'ices of a plumbe accountant, martial arts instructor
or
private dance tutor' custcmers ale paying
for the skills, expertise and experience that they do
not
personaJly have.
Customers are willingtopayprices
in excess of the costs of producing goods and services
due to
several reasons. Folexample, value
added can come in the form of:

.
.
.
.
.

Speed and/or quality of service

frestige

associated wjth the purchase

Feel-good factor
Perceived value for money

Quality of the finished producr

Brand ir-nage and/or brancl

lovalty,
Tasre or design

Inabilifl' to obrain such products

cheaper elseu,hcre

Qestion

ffi

Erplain how the folrowing

products have

a
b

.A 10O_page fashjon
magezine.

A photo of

a famous celchri,,, ,,,;.L

c A srare_or_rrre_arr il:H:il::r

'aiue

adcred.

[6 trtark.;J

a signecl a,ro-eraph.

Opportunity cost and busness

activity
Businesses ha'e to
make decisions that affect
thei clailv operations
ar

:,:*;.itit:"i!,;j,#r
sj:T:*:ii"+ij,""ilj1;
irom account"'t tot,:,]ll:']r,r..;,;;;;.r,, J,lf:,:;:ili;iT::
q",or rook a*he cosr (of
o
g o,, * o,Jj',',,-.', ull
T : iI l'".;'ff ::T: :r*:::
i :in : J Hi,*il*dl :i:

upporrunirl, cost cliffe

u"ru. or.g;;;,'.t
a c

nrin

,+fi:,*r"";r::;:f;i::",'i'-""T;;:ff",-'s
lhe .sudent would hooe
that

rrre

furure ro

rh e s ru riv of

tr,- ro,egol";;:':,,,"
rhar cou,d,ra'e been

choice) li'stead or,,u,rf

i,,g i.1u",:,.,

by ,rrl,i,r*

". ""u"r.". that he or she ivo

offser,r,;;1iii:j[1i!"t#Tt.arternative

l'ili],:.*

a'I a

rv

;*1*;;" ..;x

tnut ;;;::,
g'"",ir,"", ;;_ ,;;:;:::liTilill:,T::,T,.J,:liiL?,T_,1.fli,;l,i;
";;.j
:??;Jff::,,';Tr":il
B u s i n es

',':

"'

il*****.#Hil*i:;ilF''T:,'r:;,;fii jn,llrirklfi Flii"

.;;; ;,.,'lJ"?if

:f""iffi,'_",il:'{*i:f

Jn"rJli

rhe ,r ue

;,1;:ln":.'","'g
rr,. .on-."pt

o;;;ilillii ::i:il: l*:':t

;::,:,lli.T'l;
;l:

t:] - t t. L^qrrpres
Examptes ot
of opportunity
opportunity.ori
cost in
, - " 's
i,, business
i;;;;
' Mirors have lono h.
(erevators),
in horers an<i
3::lJ::.*"0:1',"-'Jl:llirts (elevators), such as n
' deparrmentstoe,i. crr,"-".,0"";'r;.:::t;,tttts
tl" waiting oo ,.r,.ri,ii,i.
u, ,t,.-r"ru., in the
mirror,
nTly^
nce -q:lt:
efrain from being annoyed
ji lL"^t-t,"*
business.
""0

il;;ffi:::i

n,

at tlie

Musjc and entetainmenl js

a major feature

:,"#,,:":j:i

,*:HHH il1,"f=ffii*;:i:H,,:
":::l

ti

J:

-. -. "ii

"l "

ffi :,: il:Jil Ji:ffi 5,1hll; :,,T:.'' *.

^11

[U

l*l'i*ffiff *ffi,tffi
a

Ui*n:t;br

wa

i, in

ne

frtffi *i+[:":*ffib- r

ry

\4/hat is a business?

(cont.)

.
.

Airlines companies often ovelbook the number of seats on a flight. This is because, ,
statisticall'. flights are rarely booked at full capaciry. Howeve as a result of the
policy, sometimes air'lines face the problem of overbooking and will need to 'bump
off' passengers. i.e. to offer them compensation for having to wait for the next
available flight. Passengers for rvhom time is not important can purchase a stand-by
ticket rvhich is cheaper but may be soinewhat incouvenientn 'Wonren's clothes retailing is a massive business- However, wonten are often
accompanied by tireir irusbands and boyfriends who tend to have less patience in a
shopping mall - look out for tlis trend next time you ae out shopping! Marketers
have noticecl this fact and have responded. Many renil outiets now provide
newspapers and rlale-orientated publications (such as motor vehicle or male fashjon
n'ra-eazines) so that the female partner can shop in peace! The retaj-l outlets, of course,
hope that this strategy rvili then ailou' lhe customers to spend much longer in their
sl-rops, thereby increasing the chance of lloie saies"

Question

ffi

Business opening hours

lt \^asn'r unril the nlid 1990s that supennukets went aglinst go\erntnent advice and begart to
trade on Sunda,s. Supermarkets in tlre UK rclized the opportunity cost of bein-q closed on
SrinJays. They u,cre fineti for such actions. os licerrsing to racle on Sundays ilad not been
cnacted. but the frnes were so insignificant compared to the revenues that they rvere earning by
opcrrirrs orr Sundavs rhit the superrnalkets eontilued with this pfactice. McDorlald's
Corporation have lbllo*,ed b, opcning some 24-hours stores aound the u'orld. Some barks in
Houg Korrg hare opened on Sunda's since 100.

a
b

Defrne the telrn opportunity

cost-

[2 mctrks]

Use the crse study to examine the reasons rviry opportur.rity cost is au
iinpoltant collcept in business decision-making.

The role of

[6 ntarks]

protit in business actvty

a firm's f otal reven.tLes and its tolal cosls (see

UniL 5.2). pel period of tinte. Ilevenues ale the inflorvs of money, usually fi'om the sale of
plocluct-s. Costs ale the outflors of mone1,, to fittance production activities. By conlrast, if
busiucss costs are greater thau Lerenues, the ol'ganlzation makes a loss. Most businesses wiil ail
to plor,icle goods and services (to satisfy their customers' needs ar.rd wants) at a profit. This will
ensure that they earn a return on their itlvestntetlt.

Profit lel'ers to the positive difference between

'lhe role of profit is inrpoltant for a busincss. The furrctions of profit include:

.
.
.
'
.
.

Plollt

rcts as

tn ittcenrit'c fo

srttdLtce-The

profit utotive is plobably the key tinving force for

rnost businesses to provide -goods and services.

It acts as tlre zr.r,rd for .sk lokers engaged in business activity.

and innot,aroru. Coming up rvith new technological ideas and

prodLrction rvill result in higher profits for the owners of a business.
that
cut
costs
of
1rro."rr.,
Profit acts as an indicator of grov,tlt (or decline). Hence, it signals to the o'ners and investors
of a business to switch fiom low profitability to liigh-prohtability business activities.
It is a ,toL'L'e of Jinanc'e and used to fund the intemal growth of a business (see Unit 1.7)'

1t encot.trctgc.s nv-enriott.

A1l businesses must make prorrts in

order to surr,e in the rong run. Even for.non-1,,-oft
organtzatiotts lsee unit 1.2) it is important
to make a surplus ir.r,"n,,-, exceedinc
costs). The
difference between profit and surplus is that
any surplus generared is all ploughed
back
into the
business' rather than having sorne of it
being distibuted it, orn"., (as in the
case of profits).
,

FAGTORS OF PRODUGTIOru

To produce a good or to provide a service,

resources must be used. These resources
are calleci
factors of production or factor inputs. Books,
are froduced b1, using resources
{o_r.example,
such as paper' ink and equipment for printing
and bindini. Hu-an resources (such as
trre a'tiror.
editor and agents or distributors) *" ulro needed
in additin to the other factor inputs. To produce
any good or service, tlrere are four vital factors
ofprocluction that are u
required:
iand, rauoLlr'
labour,
lu'!u' 14rru'
capital and enterprise.

' Land'

Land refers to all naturai resources found on

the planet that are a'ailabie for
production' Examples include wood, water,
fish, crude oil, minerals, metal ores and p.hysical
land itself' some countries have an abundance
of raw materials and theefore they specialize
in the extraction and production of these natural
resources. For example, many Middle
Eastern countries such as Iraq and saucii
Arabia are r,ell

'

endowed in oil supply. Lancl

resources can be categorized as being eitirer
renewable esources e non-renew.able
resources.
Renewable resources are those thatiepienish
themselves, ,u.h u, fish stocks, trees and
r,ater.
Non-renewable resources ae those that cannot
be replaced once consumed, such as
mineals
and fossil fuels.

' Labour'

Labour means the physical and mental effort

of people used in the production of a
good or service' For example, rtorkers
are needed to opera n.rach,n.s and to
sell pro<jucts to
customers' However, the quantity of people
available to work is not always as esirable
as the
quality of work that is clelivered. Some people
are better educated and trained and
ha'e more
experience
than others.

' capital'

capital refers to all non-natural (manufactured)

resources rhat are used in the
creation and production of othe products.
Examples include money, builclings, equipment,
tools' machinery and vehicles. when firms
increase their spending on .up,ru, stock,
this is
called investment' Investment increases the.productive
.apacity oirh"
and is crucjal
for the growth of an economy (see unit 1.5).
".ono,ny
Governmeni also contribute
to investment
expenditure' For example' they might buiid
new schools, hospitals, museulns, llbraries
ancl
They might also spend money to expand.oad
and mororu,a),(highway)

;:rffi?!r:r

' Enterprise'

Enterprise. also knorvn as entrepreneurship,

r-efers to the nranagernenr,
olganization and planning of the other thee
factors of proluction. Entrepreneurs have
the
skills needed to oversee the whore production process,
whirst having the ability and
willingness to take potentially higtrrisks.
Successful entrepreneurs tend to be creati'e,
innovative and passionate. Attho;gh .,rr."p."n"urs
are essentially people, they are categorized
separately from labour because the success
or failure or a business rests on the abilites
of rhe
entrepreneur' Famous.examples of entrepfeneurs
include Sir Richard Branson (virgin Group)
and Anita Roddick (The Body Shop)
who both built business .*fir., from scrarch.
Different products will require varying
amounts of factor inputs. rn labour-ttensiye
industries.
such as reaching or consurrancy, rabow
is usec] in proporrionrrry I;g;; qr"r,lri.,
,i,r;';;.;'"
factors of production ' rn capital-inter,sive
industries, such as .u, ,r,rfu.turing, capital
is useri
more than any other factor input. Nevertheless,
all products need a combjnation of all four
faclor
inpurc (see ?able l. la).

Specia{ zati on

Table 1.1a Examples of factors inputs used in teaching and car manufacturing
Car manufacturilg
\\/crod (for ploducing r.r,riting p:rper,
books and furniture) and physical land
(for the building)

Naturai rcsource for producing

plastics. ilbber,
-Qlass and steel

I-abour

Teacher, teaching assistanL,

technicians, cleaners and support staff

Assembly Iine workers. engineers.

designers, qulity controllers and
di stributors/agents

Capitai

Equiprnent such as tables, chairs.

whiteboad, stat.ionery and textbooks

Ir4anufacturing plant, machinery,

technology and stock of components
(e.9. tyres and windscreens)

Enterprse

Heads of Department
learn

/ l\4anagement

Production managers and Chief

Executive

The fou factors ofproduction have a financial return for thei part in the production process:

'

l'he reward for tl.re use of land is known as rent. Land owners earn rentai income for lettins
out tllcir ploperty.

'

The return fol the use of capital is called interest. Capital that is hired out to others earns
lt)tcfesl.

'

The remuneration for labour is n'ages or salaries in return fbr therr physical arld mental
elfot ts ilrto rlrc ploduction ploccss.

'

Entrepreneurs eceivc

profit (if there is any) for their responsibilities and nsk-trking in the

ploductiorr process.
'i'he four eturlts 1or the factor inputs are collectively known
as income (sec Fignre i.1b). I{ence.
the rnore factol inputs a person or business has, the higher their income tends to be,

fI .*--]
rrolrt
tl

l
I
I

Figure 1.1b Factors of production and their retums

rsPECtA!-ZATtOn
Specialization means that a business concentrates on the productiorr of a particular good or
a
srvlce or a small range of similar products. For example, an Italian restaurant specializes in the
provision of food such as pastas and pizzas.In the production of a particular product, rhere can be
further speciaiization of a particular activity-there are likeiy to be different speciahsts. such as
chefs, waiting stafl cleaners and drivers (fbr hone delir,eries). Specialization will tend to

lncrease the level of employee

efficiency because thel, beconre
rrore proficient in their
ro assume rhat a cher courd erncienrrl,

::ili:Tg

",TJ:J';I:ffi:Hi,"l;",::*",",abre

tarie

Specialization occurs t different

levels:

'

t!,t"',J!,','Z;;,ll3,T:ili:';tffj:.Stroression,

'

Departntenfal

ror exampre. rawyers. teachers.

ra'rrers

'

-Departments within an organizarion specialize in

various firnctions. These are
typtcally the marketing, personnel.
finance ond p.od;;;;;'u.u,,,r,.,
of a business.
Corporat - Most firms specialize
in the provision of a linited range
of products. For
example' Dell manufacture computer
harware, rrilton sp.ciuir.,
,n lne
the provislon
provision of
'trs rl
services and Sony produce electionic
of'lir
riorel

'

Regional- certain regions within

goods.

and

a country also specialize.

For exa'ipre, tbe City of London

wall street' New York both speciaiize
in financiar ,"rui..r. Murano, Itary
is we r<nou,n

[:il: :ffilXTJt'

cheddar'

ur

is ramous for its cheese: unJchu,,.,p"gne,

France is famons

National - Countlies also specialize,

son
renowned for their manufa*uring,
tndustries' French wines' Germui
.-r, Japanese

,hik;;;;:: llT;:l:::iixT

LX1,'"".JT::J,I:*,

electronics, Brazilian coffee,

South Afl-ican

gold, Scottish whiskey and Belgian

chocojates u." uff
""u*pf"r,Division of labour is the term is
used to refer ro the speciarization
of people, rather than
or; job o''u'rJn u'signing diffeent
peopre
ifl::::'#pects
labour the nnar reiJorprod'ction
di'ision or

:t#rlff:,iil::l$'i:t[:lf

,ourJu";fii"'"r?::::-"T,ti:#:L';,:n.o"tn

Advantages of specialization

'

x:;;:,'",ii'::y::;i::r;3J3,Lffiffi#:::'"

rhe b.,siness uses speciarizecrmachinery

"

Increased efficiet"cy- There

is better use of scarce resources
rvitli specializatio'. Less time
are more.o-p.,.n, Average
cosrs or

"

standardizatioz

;L1'"'"HT:"TiJfi:?jiTiyj::i:'"'n'p'ov"'s

- Specialization resurts in procruct specifications t

consistertry net.
speciarized machinery, for instance,
wit mean that output i, or rn.'"tns

,;T]:HH:.i;JI

and services' Highly specialized

professionais are therefo.e
i" rnake a relati'el), large
amount of profit, e.g. suppriers
of custom-mad.e cars,.divor.."ul.
l;;;;.r, cosmetrc srleons,
architects, interior designers
and professional fbotballers.

Disadvantages of specialization

'
'

Boredon

- People are likely to become fed.up with doing the same

repetltjve tasks. This can
negatively affect the level of
staff productivity and motivation.

hflexibili4' - Employees wlro (over)

specia lz.e willbe Iess flexible
opportunities

as rhey lack the skills anct

to adapt to different roles and
responsibirities. workers who
overspeciarize miiy
o'"upu'ions ir there is an adverse
change in

lJ#il?.fiTiii:'.""::J:1,3#:*;;'iuJ

' ! lacJ( of autonomy - Specialization results in interdependence

Dreakdo*n
'

in the production process. A

or delay in one parf. of the process
wilr cause p.obremsfo, rhe entire
business.

costs

- The purchase and maintenance of specialist machinery

and equipment may be
expensive. This lvil herefoe
much of a firm,s finances.
r,i.c
"^huur,
,..-l
irri

'''capital
extremery

r.-

10

Business functiorrs

:BUSIruES5 FUIUCTONS
A business must carry out several vital functions if it is to operate effectively. These functions

are

carried out by functional areas or departments that must work together to achieve the objectives
of the organization. The four functional areas of a business organization are production,
marketing, finance and human resources.

Production (Operations)
The Production department is responsibie for the process of converting raw materials into
finished goods, ready for delivery to customers. The term also applies to the process ofproviding
services to customers. Examples of production include the extraction of crude oil, the
construction of roads and provision of financial services.

Functions of the production department will be coordinated and monitored by the production
manager. These tasks may inciude:

'
'
'

Detetnining how the good will be manufactured or how the service wilt be delivered
Deciding on the resources needed for production, e.g. technical and specialist equipment
Planning the timescale of production, e.g. when prociuction should occur and how iong the
process

.
.
.
.
'

will take

Stock management and control

Performing quality control and inspections

An'anging for delivery of l'inished srocks to customers
Meeting production targets and deadlines
Carryir.rg out esearch and development (R&D) into new products and work processes.

The operations manager has a vital role jn ensuring that production plans are carefully planned
oul to ensure that there is efficient production. Poor planning and control may lead to a delay or
halt in the production process and this could cost the business a lot of money. Operations
management is covered in Units 5.1-5.8.

Marketing
The marketing department is responsible for identifying and satisfying consumer wants and
needs. They are ultimately in charge of ensuring that the firm's products sell. This is done through
a series of activities such as market research, test marketing, packaging andadvertising.
Functions of the marketing department can be summed up as the four P's of marketing:

'

Product - ensuring that goods or services meet the customer'S requirements, such as a
product's various sizes, colours, packaging and core functions. Other activities related to the
product include market research, branding and product development (see Unit 4.3).

'

Price - using various pricing methods to sell the products of a business. There are numerous
pricing stratcgies (see Unit 4.4) that can be used depending on factors such as the lcvel of
demand. the number of substitute products and the costs of producing the good or service.

'

Promotion

- t.r.raking sure that customers know about the hrm's products (see Unit 4.5). This
is often done through the mass rnedia, such as on television or in newspapers. Alternatively,
cheaper methods of informing and persuading customers about a product include the use of
sales promotions, special discounts and free samples.
Place - ensuring that goods and services are available in convenient places for consumers to
buy. Marketing managers must ensure that they seiect appropriate ways to distribute products
1o the

marketplace (see Unit 4.6;.

11

Finance
The finance department is ir.i charge of i.nanagins rhe
organization's moner,. .fhe finance rarlaser
must ensure that accurate recording and reportine of financial
documenr"tion rut., fio... il;;,.
to comply'q'ith lega1 requiren']ents (such as to prevent
deliber-ate understating of profit figures in
order to avoid corporation taxes) and to inform rhose interested
in the financial posirion of the
business. Finance is covered in Units 3.1_3.6.

Fluman resources (personne!)

The human resources department is responsible for rnana-gine
the personnel of the organization.
In managing people, the HR department is likely fo deal rvith
rhe follotvln-q rssues: ivorkforce

planning. recruitment, training, appraisal, pav and

benefits, equai opportunities, health ancl safer),
working rerarions. Human Resource Munug.r.nt is co'ered
in
:tlt.T'..ldJbstering
UIIIS ',.1-'.6.

A large br-isiness organization is able to allocate resources to each

function and so rhe functi.ns
wouid be easily identified' In a smali business. orvned by jLrst
one person, each fnction u,oulci
need to be carried out by the_same person. In practice.
these four functional areas of a business arc
trighly interrelated' The production depament, for example,
r-eljes on the talents o1. effective
marketing staffto sell their products. Equall,, marketers
can only do therr;obs if they,heve a
decent product to sell and the relevant fi'ancial resources
to do so.

r^rreqrrnn

!$$!

The business

of education

Education is a big business-,Schools can earn revenue

p"ijl
from numeroui sorces; buch as fuition fees (for fee_
s
paying,schools), grants fro- tt
zurrd_ F*l
E5
raising events; They.migh_t also ".go*.n"r",J""0
hire out thei facilities, F{
They use revenues to finance their costs, such as wages wl
ffii
to the teaching staff parnts have;to pay for: atlost
of
rtems such as uniforms, books, spons equipment
ano lood.
'

t. "'r:l:'

1 :;:-

::

.',

|'

:l.

ffi

'

Examine how business functions operate in an organizarion

such as schoojs.

[2 marks]
[6 ntarks]

SECTORS
Businesses can be classified according to the
stage ofproduction that they are engaged in. There
are thee main sectors of business activity.

Primary sector
Businesses operating ir.r the primary sector
are involvecl with the extraction, harvesting and
conversion of land (i'e' natural resources)
as a f'actor ofproduction. These resources are
then usecl
in the secondary sector. Examples of business
activities in the primary sector include: agriculture,
fishing, min4lg, forestry and oil extraction.

Employment and output in the primary

sector tends to dominate in less ecottnticalllt deyeltlted
as in many African countries. Farming,
for exampJe, accounts rbr a rarge
percentage of employment in these
countries. Hoqever, in ntore econonticarl, creveropecr

couries. such

tt

'U5rness sectors

(outxiries. businesses operating in the p|imar'),industry are more developed through the
Lrse of
ruechanization and automatiot-t such as tractors. coi-nbine harvesters and automatic u.,aterirtg
r\ s{cnl5.

Ai

economies develop, there is less reliance on the primary sector in terms of emp)oyme't and
luational output. Part of the reason for this trend is that there is little value added in primarv
production. Less economically developed countries, for example. can only sell tea i"aues nd
coffee beans at reiativelr, low prices.

5econdary sector
Businesses that operate in the secondary sector are involved in usir.rg raw materials and other
resources for the manufactudng or construction of finished and useable products. An example
would be an aircraft manufacture using steel. rubber and plastics to produce aeroplanes. Oiher
examples of businesses in this sector include: construction firms, pharmaceuticaj companies,
clotlies manufacturers, publishing f,rrrns, electronics manufacturers and enel) productio
compauies. The output is ther.r sold to custolners, be they oer business, foreign buver-s or
dolnestic customers.

Developing countries tend to have a dominant secorrdary sector that accounts for a relatively large
percentege of the country's national output. Economists argue that the secondary sector of the
ecollolny is the wealth creating sector because manufactured goods can be exported worldwide to
eat'n itlcolre for the countr)/. Value is added to the natur-a! and raw resources during the
production process. The mass-pr,eduqtiaD-?nd-expolt-of,nrotor-vehi'cles and consumer electronic
pr-orluc.ts, for example, have helped nations such as South Korea to develop. Nevertheless, as
a
econorny develops, there is a tendency for the manufacturing sector to decline in importance in
terms of enrployment and output in the economy.

Tertiary sector
Businesses and people that work in the tertiary sector provide services to ther piivate and
corporte customers. An exarnple would be a worker in a bookstore selling a book to a custourer:
no book is actually produced in this sector but the u'orker provides a scrvice to the customer who
purchases the book. I-lertce, the tertiary sector is also known as the Service sector. Exa.rples of
indush'ies in the tertiary sector include: retailing, education, travel and tourisrn, entertainmet.
lnsurance, transport, banking. fiuance, healthcare and catering.

Note that goods can be transformed in the process of providing a service.'fhis happens in a
restaurant when the chefprepares a meal rvith fresh ingredients. The focus is, nevertheless, on the
People rvho are providing the service - the c.hef ancl the waiting staff who serve the diners.
In t.nore economically developed countries (MEDCs), such as Canada and Italy, the tertiary sector
tends to be tlie most substantial sector in terms of both employment and as a percentage
of Gross

Domestic Product (the value of the country's output each year). The decline in the
t.nanuf'acturing sector in these nations also helps to explain a MEDC's increasing reliance
sel

vice sectol'.

o the

The three sectors of production are linked through tl"re chain of production. This tracks the
stages of an item's production, from the extraction of raw materials used to produce the product
ali the way through to it being delivered to the consumer. For instance, the construction of a house
may require the following process in the chain of production:

'
'

* Timber workers, miners and farmers extract materials such as wood, stones. sand
tal ies.

Pinta.n'

jlnd

rne

Secondarl'

Engineers and builders use machinery and equipment to turn the rau, materials

into usable items, such as doors, bricks, windows and so forth.

krriary,

Sales agents, financiers and solicttors

:i:::::Jf;;;;;;products,

distriburion

";:l?i"','j"T.',?j",lliiji::iil1T1ilifl,.J::

The final stage in the chain ofproduction

is the product actually getting
to trre consu'rer.
Primary production

'fertiary

\4anufacturng

Figure

l.lc

All threeproduction sectors are said robe

procJuction

The chain of producrion

irerdetettclenf

.This

is because each sectorrelies on

the other two to remain in existence.
For example, raw materials su.h
us crude oil rvould
extracted if there were no need for
be
oil refinery. At the same ti,r,., ih...
'ot for
wourd not be any neecr
oil refiners if there were no customers
of the oil, such as motorists an
airrine conrpanies i' trre
tertiary sector' Likewise, businesses
in the secondary sector rely on ,h.il.
suppliers for stocks to
ensure that their production targets
are met. Businesses u.. dr interctep"naent
as they alr need
energy, manufactured producer goods
and financlal services.

..HIGIdER LEVEL EXTENSIOIU;

IrITUIE !IU EC@ruOMI
"'E IIAIUGES
STRUCTURE
structural change refers to a shift in the
relative sbare of nationar outp't
and emproynrenl that is
attributed to each business sectorstructurar change can be observed
rvpicatlv' countries develop bv moving
the rnajoriy or nurio,,ui outpJi;ffi::Tlrll"T
primary sector-(such ut ug.i.uitu..,
nrf,ing and mining) ,o
-unufuring and then eventuaily ro
the tertiary sector' Economists argue
tir"t p-.in-,u,y sector production yields
low value aclcled, so i'
uuJn",, a*iviry to manuraturing
and service ,".io,,
;'f,L'l"1iTlT
"t

i|i,-

lfi:H*::j!]o

when a country moves away-from primary

productior.r towards manuf'acturing
as its principal
sector for nationai output and empltyn.,"ni,
i"n rt is said to have experienced industrjarization.
However' some developed counfries
are stiil able to exploit their
natural advantage and
specialization in the srrpply of agricultural
and primary p.oou.tr. Ror."u,rrpi",
even though only
2Va of the French population
woik in th. fJrl,u.y. sector, rhe countD/
has
benefited
immensell,
from its export of agricurturar products
uti aroun the worid.
Similarly' countries that are able to
exploit the tertiary sector as the
key contributor to nationar
output and empioyment are.said to
be deverop"
;;r,n";r;,
such as Lenovo see
themselves as operating in the
"q,rnt.i",
service sector,iespite
also producing computer hardware.
realize that rhere is lnol'e varue added
Lerovo
in the terriar-y sector. Rahe, t-han r...iuing
one_off
pa)/ments from seliing manufaclured
equipmerrt. ir cn receive a flowof
rnoney from offel.ing
alter-sales services such as
maintenance and support services.
Hence,
the
ter-tiary activities
generate more profit for the
business than the manufacturing
activities.
The shilt towal.ds the te
predorninant sector in developed
counrries has
occurred due to chang.XtT?:r""tt::J;:1*"

'

Higher household incomes

As a nati.n develops, consumers

demancl more services simply
r.*ir.
is positivery;or,r"rut.d to changes
income levels' such as eating out
in
at restaur-ants, visits ,o ti," t'ulr"sser
or flnancial planning.
More leisure time one feature
of higher standards of living is the
increase in leisure time.
natlons
because they can afford to.
The demanJo.

'

deverop, peopre rend ro

haveLor"

gd*,,..

As

ti-" i;;;;;;,:-:,'::.:

H"?::rilr::i jiff::: ::.

sector.

participaring in ,io'-tr, visiting

trre meatre or
has provided many opportunities
for the service
14

',is

rrencr

t\dLUre o, uustless dcrtvLy ailu Dustness srtecv

l-at'-{el focus tll cLrstollet lelations nranage nrcnt - Busillesses have realizecl tllat gooci
custLrlrel service br:fore. durin-q and after the sale of an item can be an irnportant source

o1'

col.upetit iVe 1ci\antage.

Increasing reliance ot support sen,ices - Businesses need ever inore sophisticated sr-rpport
seryices. For exauirle. advances rn e-conmterce (see Unit 4.8) have nteant a need for aftersales -seLvices such as technical support. Finrs ale increasingly lel ing on the services of
ot|ei'businesses. such as subcontractors. adveriisrng agencies. lrlrket research analysts and
tla-qelret consultants. As businesses gro\ internationallY. thel' will also relv more heavily
on the services of financial lettder-s. accoulltants alld la\\yel's.
ffi

euestion

\,

ffi

ffii
ffi

Froduction sectors

Table

1.lb

Structure of Employrnent (7o)

,42

Industn

13

25

40

Services

44

13

56

ldentif,v the countr-ies A. B anci C.

Use the data in Table i. 1b to justif,v )'our atlswer to Question 4a.

lr

[3 tnarks]

[7 marks]

ruAT&'ME @F B['SEruEsg &TEWSTW AruD BA5!UF55

STffiATffiGY
Blrsiness activit)'is the process of turnir.rg factorinputs (land, labour, capital and etttei'prise') into
outputs ol gootls and services in order to rneet tire needs and wants of different customel's. l'he
l-cst of tiris textbook will explore wavs in which businesses strive to add velue in the pr:oduction
and provision of good,s and services. Iror exanrple, lhe functional areas of a busirless (such as
rnarketing, hrintan resource nlanagelnent, nance, and operations managetrettt) are all
instrunrental in deter.nrining the natnte of bttsiness re tjvity.
Essentially, tite pr-rrpose of business is to satisfy the needs and clesiles of custoiners whilst also
fulfriling the organization's own objectives (see Unit 1.3), such as profit ntaximizaliou. ln the
long lun, all businesses must generate a profit or sutplus in order to survive. Hou'evet', the
coltp)exitics of Lrusiness organizatious mean that the chances of- a new business succeeding are
,

'ftcn i t l) lou.

L)pltoi.tunity cost is at the heart of business decision-rnaking, wl-rether thele is o eotlscious ol'
subcouscious a\\,areltess of the concept. Due to scarce resources. including time and finairce.
competing decisions need to be lnade and an' decision that involves a cl-roice betwecn options
u'ill incur an oltportunity cost. Managers will take opporlunity cost into consideratioll wiren
looking at areas such as luvesttnent Appraisal (see Unit 3.2), Product Life Cycles (see Unit 4.3)
nd the Working Capitai Cycle (see Unit 3.3). to name but a feiv.
E,xteiltal forces (see Unit 1.5) will also affect the nature of busit.iess activity. Char.rges rn economc
strllctureE oi,er tire. for example, u'ill plesent both opporrunities and threats to organizations and
u'ill tlterefore iitfl-rence the activities underlaken by businesses.

#
KJ

a
b

!1'

Stucl)/ the clata beloq, and then ansrver the questions that follow. A, B and C represent tirree
crour.l{ues: Belgium. Czech Republic aud Indonesia (althougir nof in that order).

1
2
3
4

Wha is a .business.?

What

ar.e the

pu{poses of business
activity?

Djstingush between ,cusr6grr.

,"0 .o,
of a business.
what are the four fctors
of production u',ttu*"'-t'
rd
their
respective
production
p.o."rr?

5
6
7
I

reu,ards for being

used in the

Outline hee advanrages

and three disadr, lnages
of specialization
what are the four f'uncllonaJ
areas

of r birsiness.l

Describe the three business

sectors of the economy.
What is meant by the .chain
of pr.oduction,?
Higher Level exfension

9
I

How has the structr

u tr

in

e,h. i"'pr i.";;""rr"bftt;;.,

# ;:::,":: il;

Businesses are organizations

that are
rrYurvEu in
-^" in'orved
Lrt tne
the production of
ofgoods and/or the provisron
Capital refrs to all
non-naturai resources
t
of capirar l.s-money,
but the,",;,iff?i:li::x,':,T;,::li,1lll.,^,
lamnre
rhe besr
u rncludes lesources
equlpment and factoies
such as f.lbabrr

servlces.

,"o.lrin".v, iooiJ,

Division of Iabour
refes to the specializatir

bv breaking a3ob down

in the provision of
;nto pu.ti.,,i.l-ll,l:i*t,'
Hdr.ruurar roles or componenrs
-qoocrs

::]11:"t
workers.

rhar are

*i*;

:;

;'

r'

d u c'[

i'

];:Tf r,j :':"H :i$l;n";iJ)

usuallv named u' ,h"
sections or a business.
;;;;;;ffi:"J:fi,:";'l'^_ol**nt
and

Indusrriariza,t;;;,[;i:.'ft

hurnan

...ou..",

r'

renewable naturaj

opporruniry

."ro,rou..",
such

found on the planet

as water, fish,

to cost measured
,n ,r',
when a choice "orr."r.uttts
is beins
_ made, .

rurure

;,lflr,"ymenr

, *i";::T;j:h:ru!jii;j,,:j.11ti1

ilt;;,',i]f,,s

Ian

arv

;n;;;
renewable
rooo and phlrsil rand
w"o";'r,ii,i";tilil;:t]Yo.'
itserf.

rbr rhe
PrimarS, secfor refers
to hrrsino."-^
:--. ,
businesses invol'ed
i, the currivarion or extrar
such as
fishing, oir exproratio"
private

clepartrnenrs.
p

narurar.J,jj,T:Ilil1,"r:::l
that can be

cess

rirese are

#*::iJ; l"'""
rr'
::. -"- ; : ffi; :1 Y-"v nr *
:J':::,T.i;il::* *{*t 3:l
iii
errorr used," *.;;;;;J"
Land means

:#

,"r"

of production-

i" *r,;;;;;ptli;;facrors

Facrors orproauctir"ho

anct/ot

*;;;;#;,;,"

peopre who manage,

org
ur$i1lZe
lhey ae dsk takers wr-.,"
and plan the other
""lj.i1n-:"1:us.are
exploit
business oipo.u,ni,i.,
".^i^1.'r.l'ta5c'

f,**"T*

and non-

tnlt is roregone

of natural r.esources,
*"rrri.ho,
orrhe
econom, ,'0.'.1]]::onj,ur ""0
"r-,quarrying,
;;;Juo;,].ivitruars rnd
'",h.;,;;;',n".;il:#"ent. -Examples mighr include ,oi" t.o.rr,
b,si,,esses,
poirn.,*t.,ip. and comran jes..
sectdr i,

Li, ,-_.

.f

t.

tlie paii. cf the econc,rny under tire coiltrol of ibe golierument. Exanrpt", ,;rr;,
al-rd cducation selvices. ihe ernergency seti.ices (police, hre ser'ice ar;ci
defence.
ancl
lratiorial
anbulancte)
.Secondar.r,, sector rctels.to tire section of the econi,rttly where business activity is concernetl ivrrh
the construcii<-'n and mariufactuling of physical products. Aforratiori and mechanization in
riroilel'n societies l.ias seen tiris sector deciine ill iarins of empiovtrent.

l ublic seclot'ts
include state

lierlth

Stctural change refers tc a shift in the relatileitlrete of nalional output and eilployineiti

thar

:i.;

alri.buted to each business sectot', i.e. primary, seon.',ar.y and t-ertiaiy sectors.
Tertiary sector t'efcrs to tlle section cf the ecorolrtiy where l:usiness activity is r:onccmed with the
pr.ovisiou oservices to cllstomers. In nodern societies. it is the largest sector in terms of
urtrplol'nt,--rtt lat.l r,ittPut.
\alue adtled is tlir: difference betrveen a llroduct's pljce anC thc total cost of the inputs thar rveni :
i
i1to nlaking it. It is the extra \ /oiih created irr the protltrctiort rrocess.

1t+ts

PFGE

ww*tas

'f,o upt- 1:L

it