1.1 – Business Activity
The word ‘business’ is very familiar to us. We are surrounded by businesses and we could not
imagine our life without the products we buy from them. So what is a business, or what is
business studies?
Businesses-are organisatons which combine factors of production to make products (goods and
services) which satisfy people’s wants.
Business studies-is the study of how organisatons which combine factors of production to make
products (goods and services) which satisfy people’s wants.
Not clear? Don’t worry; by the end of this chapter, you should be getting a clear picture of what
a business is.
The Economic Problem: Needs, Wants and Scarcity
Need– It is a good or service essential for living. Example: water.
Want-It is a good or service that people would like to have, but is not required for living.
Example: car.
Scarcity is the main economic problem. Limited supply of economics resources to produce
goods and services to satisfy human wants. It is a situation that exists when there are unlimited
wants and limited resources to produce the goods and services to satisfy those wants.
Opportunity cost
Opportunity cost is the next best alternative forgone by choosing another item. Due to scarcity,
people are often forced to make choices. When choices are made it leads to an opportunity cost.
Choice-Making of a selection out of the available alternative.
SCARCITY→ CHOICE →OPPORTUNITY COST
Example – The government has a limited amount of money (scarcity) and must decide on
whether to use it to build a road, or construct a hospital (choice). The government chooses to
construct the hospital instead of the road. The opportunity cost here is the benefits from the road
that they have sacrificed (opportunity cost).
Factors of Production
Factors of Production- Resources required to produce goods or services.
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Land-Land is the natural resources that can be obtained from nature. This includes
minerals , forests , oil and gas. The reward for land is rent.
Labour – It is the physical and mental efforts put in by the workers in the production
process. The reward for labour is wage/salary
Capital-These are manmade resources such as finance, machinery and equipment needed
for the production of goods and services. The reward for capital is interest received on the
capital
Enterprise-The skill and risk taking ability of the person who brings the other factors of
production together to produce a good or service. The reward for enterprise is profit from
the business. The people are called entrepreneurs.
Specialization and the division of labour.
Specialization occurs when a person or organisation concentrates on a task at which they
are best at. Instead of everyone doing every job, the tasks are divided among people who are
skilled and efficient at them.
Advantages
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Workers are trained to do a particular task and specialise in this- thus increasing
efficiency
Saves time and energy- production is faster by specialising.
Quicker to train labourers– Workers only concentrate on a task, they do not have to be
trained in all aspects of the production process.
Skill development- workers can develop their skills as they do the same tasks repeatedly,
mastering it.
Disadvantages
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It can get monotonous/boring for workers, doing the same tasks repeatedly.
Higher labour turnover as the workers may demand for higher salaries and company
is unable to keep up with their demands.
Over-dependency – if worker(s) responsible for a particular task is absent, the entire
production process may halt since nobody else may be able to do the task.
Division of labour-is when the production process is split up into different tasks and each
worker performs one of these tasks.
Why Business?/purpose of business activity.
So we’ve gone through factors of production, the problem of scarcity and specialization, but
what is business?
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So the purpose of businesses is to combine all the factors of production (resources) to create
goods and services to satisfy human wants and needs.
Business activity therefore:
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Combines scarce factors of production to produce goods and services.
Produces goods and services which are needed to satisfy the needs and wants of the
population.
Employs people as workers and pays them wages to all them to consume products made
by other people.
Added Value
Added value is the difference between the selling price of the product and cost of bought in
materials and components.
Which is, the amount of value the business had added to the raw materials by turning it into
finished products. Every business wants to add value to their products so they may charge a
higher price for their products and gain more profits.
How to increase added value?
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Reducing the cost of production. Added value of a product is it’s price less the cost of
production. Reducing cost of production will increase the added value.
Raising prices. By increasing prices they can raise added value, in the same way as
described above. This is possible if the business tries to create a higher quality image for
its product.
But there will be problems to both of this. To lower cost of production, cheap labour, raw
materials etc may have to be employed, which will create poor quality products and only lowers
the value of the product. People may not buy it. And when prices are raised, the high price may
result in customer loss, as they will turn to cheaper products.
In a practical example, how would you add value to a jewellery store?
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Design an attractive package to put the jewellery items in.
An attractive shop-window-display.
Well-dressed and knowledgeable shop assistants.
All of this will help the jewellery store to raise prices above the additional costs involved.
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Business activity Revision questions
1 a)= From the following list, decide which items are human needs and which are wants:
l luxury house
l shelter
l Coca-Cola
l car
l clean water
l designer jeans
l clothing. [3]
b) Explain briefly the reasons for your decisions in a). [3]
2 Explain what is meant by scarcity when referring to the economic problem. [3]
3 List the four factors of production and explain briefly why each is necessary for production to
take place. [8]
4 Explain, with the aid of an example, what the term opportunity cost means to a consumer. [3]
5 Give two other examples of opportunity cost that would affect groups other than consumers.
[2]
6 Explain what is meant by division of labour. [2]
7 Why is a business likely to increase output if it adopts division of labour? [3]
8 List four tasks involved in the making of cakes that could be given to different workers
through division of labour. [2]
9 State three benefits to society of business activity. [3]
10 What is meant by added value? [2]
11 Identify and explain two ways in which a retailer of clothes could add value to their products.
(Hint: the answer is not to buy more expensive clothes for the shop as this will not necessarily
add value.) [6]
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1.2 – Classification of Businesses
Primary, Secondary and Tertiary Sector
Businesses can be classified into three sectors:
Primary sector: this involves the use/extraction of natural resources. Examples include
agricultural activities, mining, fishing, wood-cutting, oil drilling etc.
Secondary sector: this involves the manufacture of goods using the resources from the primary
sector. Examples include auto-mobile manufacturing, steel industries, cloth production etc.
Tertiary sector: this consists of all the services provided in an economy. This includes hotels,
travel agencies, hairdressing, banks, insurance, catering etc.
Relative importance of economic sectors.
The importance of economic sector in any country depends on what is meant by ‘important’. The
three sectors are usually compared by;
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Percentage of the country’s total number of workers employed in each sector.
Or
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Value of output of goods and services and the proportion this is of total national output.
Changes in sector importance.
Up until the mid 18th century, the primary sector was the largest sector in the world, as
agriculture was the main profession. After the industrial revolution, more countries began to
become more industrialized and urbanised, leading to a rapid increase in the manufacturing
sector (industrialization).
Nowadays, as countries are becoming more developed, the importance of tertiary sector is
increasing, while the primary sector is diminishing. The secondary sector is also slightly
reducing in size (de-industrialization) compared to the growth of the tertiary sector . This is
due to the growing incomes of consumers which raises their demand for more services like
travel, hotels etc.
Give reasons for;
 Reducing importance primary sector,
 Reducing importance secondary sector and
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Increasing importance tertiary sector,
Private and Public Sector
Private sector: where private individuals own and run business ventures. Example: Nike is
a private sector business.
Public sector: where the government owns and runs business ventures. Business activities
controlled by governments in many countries include; health, education, defence, public
transport, water supply and electricity supply. For example: the Indian Railways is a public
sector organization owned by the govt. of India.
What are the advantages and disadvantages of each sector?
In a mixed economy, both the public and private sector exists.
Classification of businesses Revision questions
1 Explain the differences between the primary, secondary and tertiary sectors of industry. [6]
2 Which sector of business activity is often the most important in the most developed economies?
Explain one reason for this. [3]
3 Which sector of business activity is often the most important in the least developed economies?
Explain one reason for this. [3]
4 Identify and explain one reason why the secondary sector of business activity might become
less important to a country’s economy over time. [3]
5 Identify which sector of business activity the following businesses are in.
Copy out the list and place P, S or T alongside each one.
l Bus operator
l Bus manufacturer
l Forestry business
l Oil-drilling business
l Food canning business
l Bank [6]
6 Make a list of six other businesses, two each from the primary, secondary and tertiary sectors
of business. [6]
7 Explain what is meant by a mixed economy. [3]
8 What is meant by the private sector in mixed economies? [3]
9 What is meant by the public sector in mixed economies? [3]
10 Identify and explain two possible reasons why a government might decide to keep the
country’s postal service in the public sector. [4]
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1.3 – Enterprise, Business Growth and Size
Enterprise and entrepreneurship
An entrepreneur is a person who organizes, operates and takes risks for a new business
venture. The entrepreneur brings together the various factors of production to produce goods or
services.
Check below to see whether you have what it takes to be a successful entrepreneur!
Risk taker
Creative
Optimistic
Self-confident
Innovative
Independent
Effective communicator
Hard working
Making decisions to produce goods and services that people might
buy is potentially risky.
A new business needs new ideas-about products services, ways of
attracting customers- to make it different from existing firms.
Looking forward to a better future is essential – if you think only
of failure, you will fail!
Self-confidence is necessary to convince other people of your
skills and convince banks, other lenders and customers that your
business is going to be successful.
Being able to put new ideas to practice in interesting and different
ways is also important.
Entrepreneurs will often have to work on their own before they
can afford to employ others. Entrepreneurs must be well-motivated
and be able to work without help.
Talking clearly and confidently to all stakeholders about the new
business will raise the profile of the new business.
Long hours and short holidays are typical for entrepreneurs to
make their business successful.
Benefits and possible disadvantages of starting up your own business (entrepreneur).
Benefits of being an entrepreneur.
 Independence-able to choose how to use
time and money.
 Able to put own ideas into practice.
 May become famous and successful if the
business grows.
 May be profitable and the income might be
higher than working as an employee for
another business.
 Able to make use of personal interests and
skills.
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Disadvantages of being an entrepreneur.
 Risk-many new entrepreneurs’
businesses fail, especially if there is
poor planning.
 Capital-entrepreneurs have to put their
own money into the business and
possibly find other sources of capital.
 Lack of knowledge and experience in
starting and operating a business.
 Opportunity cost-lost income from not
being an employee of another business.
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Business plan
A business plan is a document containing the business objectives and key details about the
operations, finance, and owners of the new business.
Making a business plan before starting the business can be helpful. By documenting the various
details about the business, the owners will find it much easier to run it. There is a lesser chance
of losing sight of the mission and vision of the business as the objectives have been written
down. Moreover, having the objectives of the business set down clearly will help motivate the
employees. A new entrepreneur will find it easier to get a loan or overdraft from the bank if
they have a business plan.
A business plan means more than its definition. Some people perceive a business plan as a necessary
requirement for business success, and others think it is necessary when trying to raise money.
“The primary purpose of a business plan is to help you gain clarity and hold yourself accountable for
moving your business in the direction of what you want”
“The secondary purpose is to attract investors or get a loan or get buy-in from your spouse, partner,
parent, kid, team members or whomever. “Unless you have your intentions for your business written
down, you might miss the opportunity to communicate it to someone else or even to clarify things for
yourself.”
The business plan should tell a compelling story about your business, explaining who, what, when,
where, how and why.
A business plan is a roadmap to your business destination.
The business plan should define specific business objectives and goals with general parameters to guide
the organization.
A good business plan is a living document and should be updated regularly. A business plan is drawn for
a startup or an expanding business. Though, some people think that only startups need a business plan.
Even existing businesses need to have a well-drawn business plan especially when they need to change
direction.
Benefits/uses of a business plan.
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Provides a focus on the business idea - is it really a good one, and why?
A business plan is essential to raising finance from outside providers - particular
investors and banks
Producing a document helps clarify thoughts and identify gaps in information
The plan provides a logical structure to thinking about the business
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It encourages the entrepreneur to focus on what the business is about and how customers
and finance-providers can be convinced.
It helps test the financial viability of the idea - can the business achieve the required level
of profitability and not run out of cash?
The plan provides something which can be used to measure actual performance
Contents of a business plan.
EXECUTIVE SUMMARY
This section provides an interesting snapshot of your company, explaining who you are, what you do and why.
This section should be written last but presented first.
This section should enable the reader to want to learn more about your business and should have a basic
understanding of your business.
NB; Should be limited to between a half a page to two pages. 
Company Description
This section covers the following;
The basic details of your business such as;
Company name, address, and location.
Form of ownership and legal status [sole proprietorship, partnership, or limited liability, company].
Date when the company was founded. 
Development stage of the company (startup or expanding).
Benefits of the business to your country
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After viewing this section, the reader should be able to know; who the business is and what it stands for, your
perception of the company’s growth and potentials, broad goals and specific objectives of the business and
background information about the company.
Product Description
The section specifically describes all your products and services, explains how your products and services are
competitive and all the unique features. If applicable, reference a picture or a brochure, which will be included in
the plan’s appendix.
After reviewing this section, the reader should know; why you are in business, what your products and services
are and how much they sell for and how and why your products and services are competitive.
Definition Of the Market
This section should; describe your business industry and outlooks, define critical needs for your perceived or
existing market, identifying your target market, provide a general profile of your targeted clients and describe
the share of the market you currently have and/ or anticipate. 
After reviewing this section, the reader should know the basic information about the industry you operate in and
the customer needs you are fulfilling, and the scope and share of your business market, as well as who your
target customers are.
Organization and Management
This section should describe how your company is organized, an organization chart, if available, identify
necessary or special licenses and/or permits your business operates with, describe the legal structure of your
business. This section should also provide a brief bio-description of key company team members and the
management positions you need to fill soon.
After reviewing this section, the reader should know; the legal form of ownership for your business, who the
leaders are in your business as well as their roles and the general flow of operations within the firm.
Competitor Analysis
This section should provide details for direct and indirect competitors, have their names, products or services,
their distinctive features (what makes them unique), prices, location, and promotional strategies. Identify any
weaknesses that can be exploited in the product development cycle.
After reviewing this section, the reader should know very clearly who your target market is, what your market
niche is, exactly how you will stand apart from your competitors and why you will be successful in doing so.
Marketing Plan 
This section should; identify and describe your market- who your customers are and what the demand is for your
products and services, describe your channel of distribution and should explain your sales strategy, specific
pricing, promotion, product, and place (4Ps) for tangible products and for services, plus people, process, and
physical evidence (7Ps). Describe the avenues you are going to use to advertise and promote your product or
service.
After reviewing this section, the reader should know; who your market is and how you will meet it, how your
company will apply pricing, promotion, product diversification and channel of distribution as well as people,
process, and physical evidence to sell your products and services competitively.
Financial Plan
This section should include;
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the investment plan,
the financing plan,
the projected income statement, 
the statement of financial position, more specifically; 
For new business
Estimate of startup costs,
Projected statement of financial position (1year forward),
Projected cash flow statement (1year forward).
For existing business
Statements for financial positions (last 3years)
Income statement (last 3years),
Cash flow statement (1year backwards).
After reviewing this section, the reader should have a good understanding regarding the financial capacity and/or
projections for your company.
Operation Plan
This section should include factor inputs (location, premises, furniture, machinery, among others), production/
manufacturing process, output and performance indicators, delivery and payment, quality control, and potential
problems and prevention measures.
Development Plan
This section includes an overview of the work that remains to be completed before you can launch your business.
Critical Risks
This section should identify critical risks that you are likely to face before you start your business and after you
have started the business. It should also identify measures you will take to minimize the market or effects of the
markets on your business.
Appendices
This section should be included as an attachment of the following.
Company brochures
Resumes of key employees.
Copies of press articles and advertisements if available.
Comparing business sizes
Businesses come in many shapes and sizes. They can be owned by a single individual or have up
to 50 shareholders. They can employ thousands of workers or have a mere handful. But how can
we classify a business as big or small?
Firms can be owned and run by a single individual, or they can have hundreds of thousands of
workers all over the world. Investors, governments, banks, competitors, and workers would find it
useful to compare business sizes.
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Investors - how safe it is to invest in businesses
Government –For knowing the amount of tax to charge from a company
Competitors - compare their firm with other firms
Workers - job security, how many people they will be working with
Banks - can they get a loan back from a business?
Business size can be measured in the following ways:
Business sizes can be measured by the number of employees, value of output, value of sales and
value of capital employed that all have advantages and limitations.
 Value of capital employed – It is the total value of capital used in the business.
Limitation: A company employing many workers may use labour-intensive methods of
production. These give low output levels and use little capital equipment.
 Number of employees – a high level of output does not mean that a business is large.
Limitation: A firm employing a few people might produce several awfully expensive
computers each year and have higher output figures than a firm selling cheaper products
but employing more workers.
 Value of sales –this is often used in comparing the size of retailing business – especially
retailers selling related products (for example, food supermarkets).
Limitation: It can be very misleading when comparing the size of businesses that sell very
different products.
 Value of output-calculating the value of output is a common way of comparing business
size in the same industry- especially in manufacturing industries.
Limitation: A high level of output does not mean that the business is large when using the
other methods of measurement. A firm employing a few people might produce several
awfully expensive computers each year. This might give higher output figures than a firm
selling cheaper products but employing more workers. The value of out in any period might
not be the same as the value sales if some goods are not sold.
Business growth
Why business owners want to expand them.
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The possibility of higher profits.
More status and prestige for owners and managers.
To enjoy economies of scale.
To obtain larger market share.
How can a business grow?
There are two ways in which a business can grow- internally and externally.
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Internal growth
This occurs when a business expands its existing operations. For example, when a fast food
chain opens a new branch in another country. This is a slow means of growth but easier to
manage than external growth.
External growth
This is when a business takes over or merges with another business. It is sometimes called
integration as one firm is ‘integrated’ into the other.
A merger is when the owner of two businesses agree to join their firms together to make one
business.
A takeover occurs when one business buys out the owners of another business , which then
becomes a part of the ‘predator’ business.
External growth can largely be classified into three types:
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Horizontal merger/integration: This is when one firm merges with or takes over
another one in the same industry at the same stage of production. For example, when
a firm that manufactures furniture merges with another firm that also manufacturers
furniture.
Benefits:
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Reduces number of competitors in the market, since two firms become
one.
Opportunities of economies of scale.
Merging will allow the businesses to have a bigger share of the total
market.
Vertical merger/integration: This is when one firm merges with or takes over
another firm in the same industry but at a different stage of production. Therefore,
vertical integration can be of two types:
 Backward vertical integration: When one firm merges with or takes over
another firm in the same industry but at a stage of production that is
behind the ‘predator’ firm. For example, when a firm that manufactures
furniture merges with a firm that supplies wood for manufacturing
furniture.
Benefits:
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Merger gives assured supply of essential components.
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The profit margin of the supplying firm is now absorbed by the
expanded firm.
The supplying firm can be prevented from supplying to
competitors.
 Forward vertical integration: When one firm merges with or takes over
another firm in the same industry but at a stage of production that is
ahead of the ‘predator’ firm. For example, when a firm that
manufactures furniture merges with a furniture retail store.
Benefits:
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Merger gives assured outlet for their product.
The profit margin of the retailer is now absorbed by the expanded
firm.
The retailer can be prevented from selling the goods of
competitors.
Conglomerate merger/integration: This is when one firm merges with or takes over a
firm in a completely different industry. This is also known as ‘diversification’. For
example, when a firm that manufactures furniture merges with a firm that produces
clothing.
Benefits:
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Conglomerate integration allows businesses to have activities in more than one
country. This allows the firms to spread its risks.
There could be a transfer of ideas between the two businesses even though they
are in different industries. This transfer o ideas could help improve the quality and
demand for the two products.
Why businesses stay small
Not all businesses grow.Some stay small, employ a handful of workers and have little output.
Here are the reasons why.
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Type of industry: Some firms remain small due to the industry they operate in.
Examples of these are hairdressers, car repairs, catering, etc, which give personal services
and therefore cannot grow.
Market size: If the firm operates in areas where the total number of customers is small,
such as in rural areas, there is no need for the firm to grow and thus stays small.
Owners’ objectives: Not all owners want to increase the size of their firms and profits.
Some of them prefer keeping their businesses small and having a personal contact with
all of their employees and customers.
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Why businesses fail
For lack of a better way to start this paragraph….Not all businesses are successful. For new firms
especially, the rate of failure is rather high. The main reasons why they fail are:
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Poor management: This is a common cause of business failure for new firms. The main
reason is lack of experience which could lead to bad decision making. New entrepreneurs
could make mistakes when choosing the location of the firm, the raw materials to be used
for production, etc, all resulting in failure.
Over-expansion: This could lead to diseconomies of scale and greatly increase costs.
This could happen if a firms expands too quickly or over their optimum level.
Failure to plan for change: The demands of customers keep changing with change in
tastes and fashion. Due to this, firms must always be ready to change their products to
meet the demand of their customers. Failure to do so could result in losing customers and
loss.
Poor financial management: If the owner of the firm does not manage his finances
properly, it could result in cash shortages. This will mean that the employees cannot be
paid and enough goods cannot be produced. Poor cash flow can therefore also cause
businesses to fail.
Enterprise, business growth and size Revision questions
1 Explain what is meant by the term entrepreneur? [2]
2 Identify and explain any two common characteristics of successful entrepreneurs. [4]
3 Identify any two elements of a business plan and outline why they are important. [4]
4 A government decides to offer small grants and a business advice service to entrepreneurs
planning to start up new business. Explain two possible reasons why the government is doing this.
[4]
5 List two groups that are interested in comparing the size of businesses and explain why they want
to do this. [4]
6 Two business owners cannot agree on which of them owns the larger business. One owner, who
runs a printing firm using the latest expensive equipment, considers his firm to be larger. The other
owner, who has a fruit farm that uses only manual labour to pick the fruit, considers her business to
be larger.
Which method of measuring business size would you advise the two owners to use, and why? [2]
7 Identify and explain any two reasons why a business owner might want to expand the business. [4]
8 What is the difference between a takeover and a merger? [2]
9 Give two examples of horizontal integration of businesses. [2]
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10 Give two examples of forward vertical integration of businesses. [2]
11 Outline two benefits to Business A of vertically integrating forwards with another business. [2]
12 The owner of a small hairdressing business asks for your advice. She is planning to expand the
business. New branches will be opened, and many more staff will be employed. She asks you to list
all the possible advantages and disadvantages of this decision.
a) Is this an example of internal or external growth? Explain your answer. [2]
b) Make the list asked for by the owner. [4]
13 Identify two reasons why some businesses remain small. [2]
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4 – Types of Business Organizations
Sole Trader/Sole Proprietorship
A business organization owned and controlled by one person. Sole traders can employ other
workers, but only he/she invests and owns the business.
Advantages:
1. Easy to set up: there are very few legal formalities involved in starting and running a
sole proprietorship. A less amount of capital is enough by sole traders to start the
business. There is no need to publish annual financial accounts.
2. Full control: the sole trader has full control over the business. Decision-making is quick
and easy, since there are no other owners to discuss matters with.
3. Sole trader receives all profit: Since there is only one owner, he/she will receive all of
the profits the company generates.
4. Personal: since it is a small form of business, the owner can easily create and maintain
contact with customers, which will increase customer loyalty to the business and also let
the owner know about consumer wants and preferences.
Disadvantages:
1. Unlimited liability: if the business has bills/debts left unpaid, legal actions will be taken
against the investors, where their even personal property can be seized, if their
investments don’t meet the unpaid amount. This is because the business and the investors
are the legally not separate (unincorporated).
2. Full responsibility: Since there is only one owner, the sole owner has to undertake all
running activities. He/she doesn’t have anyone to share his responsibilities with. This
workload and risks are fully concentrated on him/her.
3. Lack of capital: As only one owner/investor is there, the amount of capital invested in
the business will be very low. This can restrict growth and expansion of the business.
Their only sources of finance will be personal savings or borrowing or bank loans
(though banks will be reluctant to lend to sole traders since it is risky).
4. Lack of continuity: If the owner dies or retires, the business dies with him/her.
Partnerships
A partnership is a legal agreement between two or more (usually, up to twenty)people to own,
finance and run a business jointly and to share all profits.
Advantages:
1. Easy to set up: Similar to sole traders, very few legal formalities are required to start a
partnership business. A partnership agreement/ partnership deed is a legal document
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that all partners have to sign, which forms the partnership. There is no need to publish
annual financial accounts.
2. Partners can provide new skills and ideas: The partners may have some skills and
ideas that can be used by the business to improve business profits.
3. More capital investments: Partners can invest more capital than what a sole trade only
by himself could.
Disadvantages:
1. Conflicts: arguments may occur between partners while making decisions. This will
delay decision-making.
2. Unlimited liability: similar to sole traders, partners too have unlimited liability- their
personal items are at risk if business goes bankrupt
3. Lack of capital: smaller capital investments as compared to large companies.
4. No continuity: if one of the partners or all retire(s) or die(s), the business also dies with
them.
Joint-stock companies
These companies can sell shares, unlike partnerships and sole traders, to raise capital. Other
people can buy these shares (stocks) and become a shareholder (owner) of the company.
Therefore they are jointly owned by the people who have bough it’s stocks. These shareholders
then receive dividends (part of the profit; a return on investment).
The shareholders in companies have limited liabilities. That is, only their individual investments
are at risk if the business fails or leaves debts. If the company owes money, it can be sued and
taken to court, but it’s shareholders cannot.
The companies have a separate legal identity from their owners, which is why the owners have
a limited liability. These companies are incorporated.
Companies also enjoy continuity, unlike partnerships and sole traders. That is, the business will
continue even if one of it’s owners retire or die.
Shareholders will elect a board of directors to manage and run the company in it’s day-to-day
activities. In small companies, the shareholders with the highest percentage of shares invested
are directors, but directors don’t have to be shareholders. The more shares a shareholder has, the
more their voting power.
These are two types of companies:
Private Limited Companies: One or more owners who can sell its’ shares to only the people
known by the existing shareholders (family and friends). Example: Ikea.
Public Limited Companies: Two or more owners who can sell its’ shares to any
individual/organization in the general public through stock exchanges
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Advantages:
1. Limited Liability: this is because, the company and the shareholders have separate legal
identities.
2. Raise huge amounts of capital: selling shares to other people (especially in Public Ltd.
Co.s), raises a huge amount of capital, which is why companies are large.
3. Public Ltd. Companies can advertise their shares, in the form of a prospectus, which tells
interested individuals about the business, it’s activities, profits, board of directors, shares
on sale, share prices etc. This will attract investors.
4. The companies have a separate legal identity from their owners, which is why the
owners have a limited liability. The business can sue and be sued in its own right. These
companies are incorporated.
5. Companies also enjoy continuity, unlike partnerships and sole traders. That is, the
business will continue even if one of it’s owners retire or die.
Disadvantages:
1. Required to disclose financial information: Sometimes, private limited companies are
required by law to publish their financial statements annually, while for public limited
companies, it is legally compulsory to publish all accounts and reports. All the writing,
printing and publishing of such details can prove to be very expensive, and other
competing companies could use it to learn the company secrets.
2. Private Limited Companies cannot sell shares to the public. Their shares can only be
sold to people they know with the agreement of other shareholders. Transfer of shares is
restricted here. This will raise lesser capital than Public Ltd. Companies.
3. Public Ltd. Companies require a lot of legal documents and investigations before it can
be listed on the stock exchange.
4. Public and Private Limited Companies must also hold an Annual General Meeting
(AGM), where all shareholders are informed about the performance of the company and
company decisions, vote on strategic decisions and elect board of directors. This is very
expensive to set up, especially if there are thousands of shareholders.
5. Public Ltd. Companies may have managerial problems: since they are very large, they
become very difficult to manage. Communication problems may occur which will slow
down decision-making.
6. In Public Ltd. Companies, there may be a divorce of ownership and control: The
shareholders can lose control of the company when other large shareholders outvote them
or when board of directors control company decisions.
A summary of everything learned until now, in this section, in case you’re getting confused:
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Types of business organisation Revision questions
1 Which form of business organisation do you think is most suitable for each of the following
businesses? Explain your answer fully.
a) A business with many hotels is planning to expand abroad. A substantial sum of money will be needed
to finance this expansion. Expert managers will be needed to run the business. [2]
b) A young student is planning to offer his services to neighbours as a gardener. He will purchase only
cheap tools to start with. [2]
c) A TV and radio broadcasting business aims to provide services to the whole population regardless of
their ability to pay. It will require finance from government. [2]
d) A small group of lawyers wish to set up in business together. Their professional association does not
allow lawyers to have limited liability. [2]
e) The owner of a small garage business is planning to retire. He hopes that his son will be able to take
over the business at this time. [2]
2 Outline two disadvantages of a partnership. [2]
3 Identify and explain two benefits to a sole trader of converting to private limited company status. [4]
4 State three possible drawbacks to converting a private limited company into a public limited company.
[3]
5 Explain the difference between the public sector of industry and public limited companies. [3]
6 State two reasons why two businesses might decide to set up a joint venture. [2]
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7 ‘Sometimes there is a conflict between the management of a public limited
company and its owners over how the profits should be used.’ Explain what is meant by this statement.
[2]
8 Explain what is meant by a franchise. [2]
9 Tom Shah has just gained a qualification in catering. He wants to run a small fast food outlet. He is not
sure whether to run it as an independent sole trader or as a franchise.
a) Identify and explain one advantage and one disadvantage for Tom if he decides to run the business as
a sole trader. [4]
b) Identify and explain one advantage for Tom if he decides to run the business as a franchise and one
advantage for the franchisor. [4]
10 Identify and explain two possible benefits to society of having the main TV service operated as a
public corporation. [4]
1.5 – Business Objectives and
Stakeholder Objectives
Business objectives:
Business objectives are the aims and targets that a business works towards to help it run
successfully. Although the setting of these objectives does not always guarantee the business
success, it has its benefits.
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Setting objectives increases motivation as employees and managers now have clear
targets to work towards.
Decision making will be easier and less time consuming as there are set targets to base
decisions on. i.e, decisions will be taken in order to achieve business objectives.
Setting objectives reduces conflicts and helps unite the business towards reaching the
same goal.
Managers can compare the business’ performance to its objectives and make any
changes in its activities if required.
Objectives vary with different businesses due to size, sector and many other factors. however,
many business in the private sector aim to achieve the following objectives.

Survival: New or small firms usually have survival as a primary objective. Firms in a
highly competitive market will also be more concerned with survival rather than any
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
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other objective. To achieve this, firms could decide to lower prices, which would mean
forsaking other objectives such as profit maximization.
Profit: This is the income of a business from its activities after deducting total
costs. Private sector firms usually have profit making as a primary objective. This is
because profits are required for further investment into the business as well as for the
payment of return to the shareholders/owners of the business.
Growth: Once a business has passed its survival stage it will aim for growth and
expansion. This is usually measured by value of sales or output. Aiming for business
growth can be very beneficial. A larger business can ensure greater job security and
salaries for employees. The business can also benefit from higher market share and
economies of scale.
Market share: This can be defined as the proportion of total market sales achieved by
one business. Increased market share can bring about many benefits to the business such
as increased customer loyalty, setting up of brand image, etc.
Service to the society: Some operations in the private sectors such as social enterprises
do not aim for profits and prefer to set more economical objectives. They aim to better
the society by providing social, environmental and financial aid.
A business’ objectives do not remain the same forever. As market situations change and as the
business itself develops, its objectives will change to reflect its current market and economic
position. For example, a firm facing serious economic recession could change its objective from
profit maximization to short term survival.
Stakeholder groups:
A stakeholder is any person or group that is interested in or directly affected by the
performance or activities of a business. These stakeholder groups can be external – groups that
are outside the business or they can be internal – those groups that work for or own the business.
Following are some of the stakeholders groups and their objectives:
Shareholder/ Owners:
These are the risk takers of the business. They invest capital into the business to set up and
expand it. These shareholders are liable to a share of the profits made by the business.
Objectives:
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Shareholders are entitled to a rate of return on the capital they have invested into the
business and will therefore have profit maximization as an objective.
Business growth will also be an important objective as this will ensure that the value of
the shares will increase.
Workers:
These are the people that are employed by the business and are directly involved in its
activities.
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Objectives:
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Contract of employment that states all the right and responsibilities to and of the
employees.
Regular payment for the work done by the employees.
Workers will want to benefit from job satisfaction as well as motivation.
The employees will want job security– the ability to be able to work without the fear of
being dismissed or made redundant.
Managers:
They are also employees but managers control the work of others. Managers are in charge of
making key business decisions.
Objectives:
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Like regular employees, managers too will aim towards a secure job.
Higher salaries due to their jobs requiring more skill and effort.
Managers will also wish for business growth as a bigger business means that managers
can control a bigger and well known business.
Customers:
Customers are a very important part of every business. They purchase and consume the goods
and services that the business produces/ provides. Successful businesses use market research
to find out customer preferences before producing their goods.
Objectives:
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Price that reflects the quality of the good.
The products must be reliable and safe.i.e, there must not be any false advertisement of
the products.
The products must be well designed and of a perceived quality.
Government:
The role of the government is to protect the workers and customers from the
business’ activities and safeguard their interests.
Objectives:
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The government will want the business to grow and survive as they will bring a lot of
benefits to the economy. A successful business will help increase the total output of the
country, will improve employment as well as increase government revenue through
payment of taxes.
They will expect the firms to stay within the rules and regulations set by the government.
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Banks:
These banks provide financial help for the business’ operations’
Objectives:

The banks will expect the business to be able to repay the amount that has been lent along
with the interest on it. The bank will thus have business liquidity as its objective.
Community:
This consists of all the stakeholder groups, especially the third parties that are affected by the
business’ activities.
Objectives:
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The business must offer jobs and employ local employees.
The production process of the business must in no way harm the environment.
Products must be socially responsible and must not pose any harmful effects from
consumption.
Public- sector businesses:
Government owned and controlled businesses do not have the same objectives as those in the
private sector.
Objectives:
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Financial: Although these businesses do not aim to maximize profits, they will have to
met the profit target set by the government. This is so that it can be reinvested into the
business for meeting the needs of the society.
Service: The main aim of this organization is to provide a service to the community that
must meet the quality target set by the government.
Social: Most of these social enterprises are set up in order to aid the community. This can
be by providing employment to local citizens, providing good quality goods and services
at an affordable rate, etc.
Conflicts of stakeholders’ objectives:
As all stakeholders have their own aims they would like to achieve, it is natural that conflicts of
stakeholders’ interests could occur. Therefore, if a business tries to satisfy the objectives of one
stakeholder, it might mean that another stakeholders’ objectives could go unfulfilled.
For example, workers will aim towards earning higher salaries. Shareholders might not want
this to happen as paying higher salaries could mean that less profit will be left over for payment
of return to the shareholders.
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Business objectives and
Stakeholder objectives Revision questions
1 What is meant by business objectives? [2]
2 Give three examples of the kinds of objectives that a business owned by private individuals could
establish. [3]
3 Identify and explain two benefits to a business of having clear objectives. [4]
4 Identify and explain two reasons why business managers might set growth as a business objective. [4]
5 Identify and explain two reasons why business managers might set profit as a business objective. [4]
6 Identify and explain two possible objectives for business in the public sector. [4]
7 List three examples of the stakeholders in a business. [3]
8 Identify and explain two examples of how conflict might occur between the objectives of these
stakeholder groups. [4]
9 Purbeck plc owns and manages a major leisure complex. The directors of the company are considering
demolishing the complex and building a new shopping centre. The directors have different opinions
about this plan.
l The Human Resources manager says that too many groups of people would suffer from the plan. He
thinks that the plan should be dropped.
l The Chief Executive says that his main responsibility is to the owners of the business and that profits
should come first.
a) How would the workers in the leisure centre be affected by the decision? [2]
b) Do you agree with the Chief Executive that profits should be the main aim of the business? Explain
your answer. [6]
10 Identify and explain one other business decision that might result in conflict between stakeholders.
[4]
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