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Key Features • Concise and straightforward coverage of the syllabus content to aid revision. • Progress Check questions to help you check your knowledge and understanding as you work your way through the book. • Definitions of key terms displayed alongside relevant text to aid accessibility and support international learners. • Revision tips to help you avoid common pitfalls. • Chapter summaries review each chapter and allow you to track your revision. • Exam-style questions at the end of every chapter help you apply your knowledge and skills at the end of the course.

This guide is endorsed for revision and supports study for syllabuses 0450 and 7115 from 2015.

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Build confidence during your exam preparation with Cambridge IGCSE® and O Level Business Studies Revision Guide, a comprehensive resource packed with specially designed guidance to help you apply your knowledge and skills.

Cambridge IGCSE® and O Level Business Studies Revision Guide

Cambridge IGCSE® and O Level Business Studies Revision Guide Second edition Medi Houghton

Cambridge IGCSE® and O Level

Business Studies Revision Guide

Second edition

Medi Houghton

Developed by subject experts

Original material © Cambridge University Press 2017

Cambridge IGCSEÂŽ and O Level

Business Studies

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Revision Guide

Second edition

Medi Houghton

Original material ÂŠ Cambridge University Press 2017

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Original material © Cambridge University Press 2017

Table of contents

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How to use this book iv Introduction vi Section 1: Understanding business activity 1 2 1: Business activity 2: Classification of business 5 8 3: Enterprise, business growth and size 4: Types of business organisation 14 5: Business objectives and stakeholder objectives 20 Section 2: People in business 25 6: Motivating workers 26 32 7: Organisation and management 39 8: Recruitment, selection and training of workers 9: Internal and external communication 45 Section 3: Marketing 51 10: Marketing, competition and the customer 52 57 11: Market research 12: Marketing mix: product and price 64 13: Marketing mix: place and promotion 70 14: Marketing strategy 77 81 Section 4: Operations management 15: Production of goods and services 82 16: Costs, scales of production and break even analysis 87 17: Achieving quality production 93 18: Location decisions 96 101 Section 5: Financial information and decisions 19: Business finance: needs and sources 102 20: Cash flow forecasting and working capital 108 21: Income statements 112 22: Balance sheets 116 23: Analysis of accounts 120 127 Section 6: External influences on business activity 24: Government economic policies and objectives 128 25: Environmental and ethical issues 132 26: Business and the international economy 137 Answers to progress check and examination-style questions Sample case studies

141 151

Index 161

Original material ÂŠ Cambridge University Press 2017

iii

Learning summary

ss. efers

TIP

• makethe raw materials into finished goods needs, wants, scarcity and Aconcepts businessofcan be one person, a large global company opportunity cost employing thousands of • branding people or even a charity. • packaging the importance of specialisation

ge y s of

cts. These more r price.

• packaging • add extra features to products the purpose of business activity • improve customer service. the concept of added value and ways to increase added value.

TERM

• add extra features to products the concept of liquidity •1.05 improve customer service. Adding Learning summary –value A summary list of key topics and concepts Added that youvalue: the difference between the selling how and why accounts are used. price of a product and the cost of raw materials will be looking at inand this chapter, to help with navigation through the book 1.01 Needs wants 1.03 Importance of specialisation used to make it. Most businesses buyofresources to make products. These and give a reminder what’s important about each topic for your revision. TERM raw materials arethat altered to make worth such more Needs are things we must havethem to survive Most production involves more than one person or money, so the business can sell them at a higher price. as shelter, clothing and food. Wants are things that we piece of equipment. People and businesses specialise, Added value: the difference between the selling would like to have to make our lives more enjoyable. to try not to waste limited resources. This can involve price of a product and the cost of raw materials division of labour where workers are given a specific used to make it. People live without their wants, but not owns restaurant the city centre. His For Zcan Foods in 2016,satisfying gross profi t was $90m, jobJian to do. Thisa should leadinto: without meeting their needs. menu changes daily, depending on what meat and revenue was $150m. Tickers make watches. The materials cost $50 and • less wastageare of available. scarce resources vegetables All ingredients are bought Tickers sell the nished watches for $150. Tickers To calculate the figross profi t margin: locally which helps to keep costs low. Jian is always pay workers $60. Other costs including rent are • lower production costs 1.02 Scarcity and opportunity cost 90 x 100 = 60 % trying to increase added value. $15. What is the added value? The answer is: $100. • greater output from same amount of resources. Jian owns a restaurant 150 in the city centre. His Identify and explain two ways that Jian could This is not all profi t.depending Only the amount afterand all Scarcity ofchanges resources a basic menu daily,creates on economic whatleft meat What doeshave thisbeen mean?covered It shows the business increase added value. [6] the costs is profi t: $25. problem. Resources are limited but people’s vegetables are available. All ingredients are wants bought made 60 cents in gross profit for every dollar of TERM arelocally not. Choices mustto bekeep made. Resources to which helps costs low. Jianused is always Sample answer: revenue in 2016. trying increase added value.for another purpose. make onetothing cannot be used Way 1: Jian can buy in the meat and vegetables Specialisation: peopleinto andfinished businesses focus Is this good? You would need to value compare theasthe Remember that added is NOT TheIdentify value of the option not selected is known the at low cost andwhen turn them dishes and explain two ways that Jian could result with 2015 to see if this has improved or on activities they are best at. same profit. for the customers, so there is a greater difference opportunity cost.asvalue. increase added [6] not: between the cost to make the dishes and price Sample answer: charged for them. [3] 2015 data: Way 1: Jian can buy in the meat and vegetables Way The 2: Provide a good customer service toactivity 1.04 purpose of business Gross profi = 60/120 x 100 dishes = 50% at low cost andt margin turn them into finished $ 150 customers in the restaurant. This adds to the Business A is a retailer. Next to the shop the for thevscustomers, so there is a greaterindicating difference 2016 2015: the ratio hasofimproved Profit $ 25 experience, so customers are willing to pay more business owns a large plot land. The business All businesses use factors of production to make goods between to make the dishes and price the marginthe hascost increased. for a meal rather than go to cheaper places. [3] can either use the space to extend the shop or or provide services, in order satisfy people’s needs charged for them. [3] Added Labour and $ 75 turn it into a customer and wants. valuecar park. It decides to other Way 2: Provide a goodopportunity customer service extend ist to the There are the twoshop. waysThe to improve grosscost profi margin: costs These factors of production can beexample classifiedofinto customers in the restaurant. adds to the a Worked example - Guidance onThis how to answer Sample question and answer –context. an a four car park. Always look at the Suitable • increase revenue (sell more increase prices) but main groups: $ 50 question, experience, so customers areor willing to pay more particular emphasising the different stages question with a suggested answer. options will vary with the type of product. maintain cost of sales for a meal rather than go to cheaper places. [3] you will need to work through to get to your answer. Use the context to improve your answer. Type of factor Description of factor • cut cost of sales by Cost lowering wages or material costs. of Remember: for application, you must link TERMS bought-in Land includes natural resources as well as the point to theallscenario. materials the space used for production Always look at the context. Suitable Always remember to include the formula options will varycost withofthe type product. Labour the workers Opportunity cost: the something in terms for ratios used. Check that you of have used Use the context to improve your answer. of the next best option. Capital the finance, machinery and buildings the figures for the right year. Simply using the name of the and business is Remember: for application, you must link used to produce goods services Figure 1.01 limited Summary chart: added value atto Tickers. Scarcity: availability of resources meet not classed as application. the point to the scenario. Tip – quick suggestions to remind you about key Enterprise the people who organise the land, the unlimited wants of people. and capital facts and highlight labour important points.

Worked example Worked example

Sample question

TIP

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0 and ckers are $100. cus on er all

• branding

and:

• make raw materials into finished goods

1 Business activity

By for theaend of thistounit you should understand: Ways business increase added value include:

Ways for a business to increase added value include:

TIP

Unit 1

Capital has many meanings in business. Make sure you understand what it refers to in a given situation.

1 Business activity

unts

How to use this book Business activity

ess sector se.

$ 25

after $ 75 nd

TIP

iv 2

TIP

ers.

TIP TIP

TIP

Worked example

T the

Table 1.01 The four factors of production. Simply using the name of the business is not classed as application. Original material © Cambridge University Press 2017

anding business activity

• less wastageSpecialisation of scarce resources production. can help. A business will try to add value at every stage of production as • lower production costs this canoutput help make profit.amount of resources. • greater froma same

1.02 Scarcity and opportunity cost

TERM

What is meant by ‘factor of production’? [2] Example: 2 What is the difference between a need and a Postwant? Now is a private limitedofcompany. It is a Sample answer: Give an example each. letter delivery service in the private Its The things needed to make goods and sector. services [1] 1.04 The purpose of purpose business activity 3 as Explain what is the[1] main business such land and labour. main competitor, MPO, is in the publicof sector. activity. anduse explain twoofdifferences All Identify businesses factors productionbetween to makethe goods 4 State two factors of production for a market two businesses. [6] orExample provide services, in order to satisfy people’s needs 2: trader. and wants. TGA is a leading Sample answer:manufacturer of mobile phones. Difference 1: Post Nowways iscan owned byTGA individuals These factors of production classifi ed could into four Identify and explain two in be which Progress check –value. check own knowledge [1]groups: who bought shares in the private limitedand main increase added [4]your MPO isonowned by the seecompany how well[1], youwhile are getting by answering Sample answer:[1] government. regular questions. Type of factor Description of factor Way 1: add new features [1] such as better Land includes all natural resources as well as Difference Post Now’s objective is to make camera zoom.2:a[1] NSN makes range of luxury cars. People like the space used for production profit [1] from delivering letters [1] while MPO’s its handmade seats and car warranty. This is Way 2: create a strong brand image [1] so thata Labour the workers priority will be to provide a service. [1] knows competitive market. Themore Finance Director people are willing to fipay for its phones. [1] Capital the nance, machinery anduse buildings that –resources scarce, and he must factors Terms clear andare straightforward used to produce goods and services of production carefully. He explanations are provided for believes the mostthat for every Enterprise the people who organise the land, decision he makes, there will be an opportunity cost. important words in eachand topic. Key terms labour capital The Finance Director is looking for appear in bold within the main text. ways to increase Table 1.01value. The four factors of production. added

Worked example

Progress check

What is meant by scarcity?

Examination-style questions

What is the difference between a need and a TERMS Summary want? Give an example of each.

Businesses beis grouped threeofsectors. The 3Opportunity Explain can what the purpose business cost: the main cost into of something in terms activity. importance of each sector for an economy can of the next best option. change. Goods and services be for provided by 4Scarcity: State limited two factors of production ato market availability ofcan resources meet trader. either public or private sector businesses. the unlimited wants of people.

Examination-style questions questions Examination-style

Identif increa

Sample questions Progress check Specialisation: when people and businesses focus Sample question Example 1: is they 1 activities What meant scarcity? on arebybest at.

Progress check

Examp TGA i How2 to use this book Classification of businesses

Section 1: Understanding business activity

Scarcity of resources creates a basic economic problem. Resources are limited but people’s wants are not. Choices must be made. Resources used to make one thing cannot be used for another purpose. Summary The value of the option not selected is known as the This unit covers opportunity cost. a number of basic ideas. The fact that resources are limited thata businesses 1 In which sector wouldmeans you find public havecorporation? to decide how best to use the factors of production. Specialisation help. A business 2 Give two examples ofcan a secondary sectorwill try to add value at every stage of production Business A is a retailer. Next to the shop the as business. this can help make a profit. business owns a large plot of land. The business 3 Using a ring as an example of a product, show can either use the space to extend the shop or the link between the three sectors. turn it into a customer car park. It decides to 4 What the difference between public and extend The opportunity islearned the Summary –the Aisshop. summary of what you cost have private sector businesses? car park. within the chapter.

The th such a

Sampl Way 1 camer

Way 2 people

Ident Facto Facto

Ident incre Bene Bene

Ident incre Way Way

a What is meant by ‘opportunity cost’? [2] • primary sector of production. Identify two factors Factor 1: • secondary sector. [2] Factor 2: [2] b Calculate the number of people employed c Identify and explain two benefits to NSN of in the tertiary sector in country A. [2] increasing added value. c Benefit Identify 1: and explain two possible reasons for the difference Benefit 2: in the percentage of labour employed [4] in different sectors in each country. [8] d Identify and explain two ways that NSN could increase added value. Question Way 1: 2 Way 2: a wide range of paints. These are sold[8]to SRT makes

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Question 1 a range of luxury cars. People like NSN makes its handmade seats and car warranty. This is a Ravel is a farmer in The country A. He has been looking competitive market. Finance Director knows at some data, shown in Table 2.02. He cannot that resources are scarce, and he must use factors understand why there He is a believes difference employment of production carefully. thatin for every between countries. Both countries have a mixed decision he makes, there will be an opportunity cost. economy. The Finance Director is looking for ways to increase added value. a

Country A

Country B

What is meant by ‘opportunity cost’?

Primary sector Secondary sector Tertiary

45 20 35

10 20 70

[2]

Table 2.02 Percentage of labour force employed in each country. 4 NOTe: Population of each country is 60 million. a

Identify one type of business that could be found in the:

businesses and customers in many countries. Market research is important. The Managing Director said, ‘Different countries have different legal standards for paint. Customers want different colours and sizes of tins.’ SRT uses the services of many businesses from the tertiary sector. Suggest three important businesses SRT might use from the tertiary sector. Justify your choices. [12]

Examination-style questions – Exam-style questions for you to test your knowledge and understanding at the end of each chapter. The answers are provided at the back of the book. 7 Original material © Cambridge University Press 2017

Introduction This revision guide has been written to help students studying for Cambridge International Examinations IGCSE and O Level Business Studies. Each chapter includes: • summary charts or diagrams to highlight important ideas • tips and notes to provide helpful guidance on key points • progress checks to allow you to test your understanding

• definitions and explanations of key concepts

• sample questions and answers to highlight common mistakes or misunderstandings

• sample examination-style questions for your practice.

The difference between paper 1 and paper 2

Both papers assess all four skills. Each paper is marked out of 80. All questions are compulsory.

Paper 1 contains short answer/structured response questions. Each of the four questions is based on a different scenario. There are five parts to each question, and each part is worth 2, 4 or 6 marks.

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Paper 2 is based on a case study scenario. All the information is provided in a separate insert. There is a short introduction to the business and three appendices. There are fewer questions, but each question is worth more, either 8 or 12 marks. This means you will need to develop points in more detail to access the additional marks available.

Assessment objectives (AOs)

This is the technical term for the skills that will be tested in the examination. Business Studies is a skills-based subject so you must demonstrate more than knowledge to do well. 1 Knowledge – showing your knowledge and understanding of terms, concepts, theories and techniques. • Be precise with any definitions.

• Learn the main facts and issues.

2 Application – using knowledge and understanding of terms, concepts, theories and techniques for a variety of business problems or issues. • Avoid making general statements.

• Not all points may be relevant, so focus your answer on the given scenario.

3 Analysis – selecting, explaining or interpreting information to show good understanding of terms and effects of decision. • Do not just list points. • Try to develop your answer to show the consequences of what the points might mean for the business.

Original material © Cambridge University Press 2017

Introduction

4 Evaluation – presenting developed arguments or reasoned explanations, and being able to make judgements and decisions. • Make a decision, and explain how or why you hold this view. • Focus on developing relevant points (for and/or against) to support what YOU are saying. Remember: a decision on its own is not enough.

Command words

These phrases act as a guide to help you answer the question. Each will tell you which skills are being tested in each question. Typical command words include:

AO1: knowledge

What is meant by Identify Calculate Using the information in Appendix 1, identify two factors that ABC ... Identify and explain Explain why or how Do you think Recommend Do you agree Justify

AO2: application

AO3: analysis AO4: evaluation

Assessment objective

Assessment objectives and their command words.

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Use the marks as a guide to how much you should write. More marks available for a question means that a wider range of skills is likely to be assessed. Let’s look at a sample answer to highlight how each skill could be shown:

Sample question

KOKO has ten seafood restaurants in the city. The Human Resources manager is looking to recruit a new manager for one restaurant. He cannot decide whether to use internal or external recruitment.

Do you think KOKO should use internal or external recruitment? Justify your answer. [6]

analysis

knowledge

Sample answer With internal recruitment the owners will know what the person is like so will know that the person has the relevant experience and is suitable for the job. If the person has worked for them in the kitchen for several years, it will be clear whether they will be able to do the job of restaurant manager. Recruiting someone from outside could be a risk. They might have new ideas but these might not be appropriate for this type of restaurant, so damaging its reputation. So I think it is better to use internal recruitment to ensure the standards are maintained.

Original material © Cambridge University Press 2017

evaluation application

vii

Introduction

Preparing for the examination 1 Know what you need to learn. Ask your teacher for a copy of the syllabus. This outlines all the content you need to focus on when you revise. 2 Make a revision timetable. Set aside time every week for study. If you have examinations in more than one subject, allow time to revise for everything. 3 Revise effectively. Split up your time into smaller revision periods, say 30 to 40 minutes. Breaks can give you time to reflect on what you have learnt.

5 Test yourself regularly to check that you have understood.

4 Make your revision active. Make notes, summary charts, mnemonics, think of picture associations for key themes so you can remember ideas later.

6 Practise past or sample questions so you are familiar with examination-style questions. It will also help you to time your answers accordingly.

Five things to remember in the examination 1 Read each question carefully. Look for the command words. 2 Always show your workings for calculations.

3 Develop points to show how or why they might matter. 4 Try to base your answers on the scenario given.

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5 If a question asks for a decision, make one, and support it.

viii

Original material ÂŠ Cambridge University Press 2017

Section 1

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Section 1: Understanding business activity

Original material ÂŠ Cambridge University Press 2017

Unit 1

Business activity Learning summary By the end of this unit you should understand:

the importance of specialisation

the concept of added value and ways to increase added value.

1.03 Importance of specialisation

1.01 needs and wants

the purpose of business activity

the concepts of needs, wants, scarcity and opportunity cost

Needs are things that we must have to survive such as shelter, clothing and food. Wants are things that we would like to have to make our lives more enjoyable. People can live without satisfying their wants, but not without meeting their needs.

Most production involves more than one person or piece of equipment. People and businesses specialise, to try not to waste limited resources. This can involve division of labour where workers are given a specifi c job to do. This should lead to: • less wastage of scarce resources

1.02 Scarcity and opportunity cost

• greater output from same amount of resources.

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• lower production costs

Worked example

Business A is a retailer. Next to the shop the business owns a large plot of land. The business can either use the space to extend the shop or turn it into a customer car park. It decides to extend the shop. The opportunity cost is the car park.

TERM

Specialisation: when people and businesses focus on activities they are best at.

1.04 The purpose of business activity All businesses use factors of production to make goods or provide services, in order to satisfy people’s needs and wants. These factors of production can be classifi ed into four main groups: Type of factor Description of factor

TERMS

Land

Opportunity cost: the cost of something in terms of the next best option.

Labour Capital

Scarcity: limited availability of resources to meet the unlimited wants of people.

Enterprise

includes all natural resources as well as the space used for production the workers the fi nance, machinery and buildings used to produce goods and services the people who organise the land, labour and capital

Table 1.01 The four factors of production. 2

Original material © Cambridge University Press 2017

TIP

1 Business activity

Ways for a business to increase added value include:

Capital has many meanings in business. Make sure you understand what it refers to in a given situation.

• make raw materials into fi nished goods • branding

TIP

• packaging • add extra features to products

A business can be one person, a large global company employing thousands of people or even a charity.

• improve customer service.

1.05 Adding value

Added value: the difference between the selling price of a product and the cost of raw materials used to make it.

Most businesses buy resources to make products. These raw materials are altered to make them worth more money, so the business can sell them at a higher price.

TERM

Sample question

Worked example

Jian owns a restaurant in the city centre. His menu changes daily, depending on what meat and vegetables are available. All ingredients are bought locally which helps to keep costs low. Jian is always trying to increase added value.

This is not all profi t. Only the amount left after all the costs have been covered is profi t: $25.

Identify and explain two ways that Jian could increase added value. [6]

$ 150

Added value

Profit

$ 25

Labour and other costs

$ 75

$ 50

Way 2: Provide a good customer service to customers in the restaurant. This adds to the experience, so customers are willing to pay more for a meal rather than go to cheaper places. [3]

TIP

Remember that added value is NOT the same as profi t.

Sample answer: Way 1: Jian can buy in the meat and vegetables at low cost and turn them into fi nished dishes for the customers, so there is a greater difference between the cost to make the dishes and price charged for them. [3]

Always look at the context. Suitable options will vary with the type of product. Use the context to improve your answer. Remember: for application, you must link the point to the scenario.

TIP

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Tickers make watches. The materials cost $50 and Tickers sell the fi nished watches for $150. Tickers pay workers $60. Other costs including rent are $15. What is the added value? The answer is: $100.

Simply using the name of the business is not classed as application.

Cost of bought-in materials

Figure 1.01 Summary chart: added value at Tickers.

Original material © Cambridge University Press 2017

Sample questions

This unit covers a number of basic ideas. The fact that resources are limited means that businesses have to decide how best to use the factors of production. Specialisation can help. A business will try to add value at every stage of production as this can help make a profit.

Example 1: What is meant by ‘factor of production’? [2] Sample answer: The things needed to make goods and services [1] such as land and labour. [1]

Section 1: Understanding business activity

Summary

Example 2: TGA is a leading manufacturer of mobile phones.

Identify and explain two ways in which TGA could increase added value. [4]

1 What is meant by scarcity? 2 What is the difference between a need and a want? Give an example of each.

Sample answer: Way 1: add new features [1] such as better camera zoom. [1]

3 Explain what is the main purpose of business activity.

Way 2: create a strong brand image [1] so that people are willing to pay more for its phones. [1]

Progress check

4 State two factors of production for a market trader.

b Identify two factors of production. Factor 1: Factor 2:

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Examination-style questions

NSN makes a range of luxury cars. People like its handmade seats and car warranty. This is a competitive market. The Finance Director knows that resources are scarce, and he must use factors of production carefully. He believes that for every decision he makes, there will be an opportunity cost. The Finance Director is looking for ways to increase added value. a What is meant by ‘opportunity cost’?

[2]

c Identify and explain two benefits to NSN of increasing added value. Benefit 1: Benefit 2: [4] d Identify and explain two ways that NSN could increase added value. Way 1: Way 2: [8]

Original material © Cambridge University Press 2017

Unit 2

Classification of businesses Learning summary By the end of this unit you should understand:

reasons for the changing importance of business classifi cation

All three sectors are linked together. If any part of the chain breaks down, the customer will not get the fi nished products.

2.01 Classification of business

the difference between the private sector and public sector.

the difference between primary, secondary and tertiary sectors

Businesses are grouped into three main types of business activity (sectors):

Primary sector

This involves the extraction, growing or collecting of raw materials. Examples include mining, farming and fi shing.

Secondary sector

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This includes any business involved in assembly, processing or construction. Businesses will either make a fi nished product or make parts for another business to use. Examples include manufacturing and refi ning.

TERMS

Primary sector: businesses that extract or collect raw materials. Secondary sector: businesses that take raw materials and turn them into fi nished goods. Tertiary sector: businesses that provide services to other businesses and individuals.

Tertiary sector

Name of sector Primary

Secondary Tertiary

Main activity

Extract

Make

Service

Example

Cotton farmer

Clothing factory

Transport company or retailer

TIP

Table 2.01 Summary of the three sectors.

Sample question PVN is a printing business in the secondary sector. What is meant by ‘secondary sector’? [2] Sample answer: It is where things are made. For example, PVN will take wood pulp and use it to make paper.

TIP

Other businesses need to use services such as transport, retailing, warehousing and fi nance to get products to consumers. Examples of services for individuals include health care, education and restaurants.

You do not need to use a textbook defi nition as long as you can clearly explain what the term means.

Some businesses can be involved in more than one stage of production.

Original material © Cambridge University Press 2017

• Deindustrialisation – there is a decline in manufacturing while the tertiary sector increases. • Raw materials are discovered/depleted in different countries. • Specialisation – some countries are good at making certain products or services.

Change 2: Fall in secondary sector by 15%. This could be due to the fact that some goods can be made cheaper in other countries. [3]

Most countries have both a public sector and private sector: this is called a mixed economy. Examples of public sector organisations include health care, education, defence, public transport and energy. Sole traders and limited companies are examples of private sector businesses (see 4.01 and 4.04).

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The employment minister in country C has been looking at some employment data, as shown in Figure 2.01. He said, ‘We used to be a country known for growing sugar. Now it’s all hotels and shops. What has happened?’

2.03 The public and private sectors

TIP

• Rising living standards – people have more time and money for leisure activities.

Sample question

% of GDP by sector

70 60

2000

If you are asked to interpret charts or tables, use the numbers to support your answer.

• Some countries have large workforces so can make products at a lower cost.

The size of each sector varies between different countries. It can also change over time. Reasons for this include:

Sample answer: Change 1: Fall in primary sector by 20%. People may have moved to tertiary sector in search of higher wages. [3]

TIP

Section 1: Understanding business activity

2.02 The changing importance of business classification

2015

All public and private sector organisations are involved in some form of business activity – it is only the objectives (what, for whom and why they produce goods and services) that differ.

40 30

TERMS

20 10 0

Primary sector Secondary sector Tertiary sector

Figure 2.01 Country C percentage of Gross Domestic Product (GDP) by sector.

NOTe: GDP has risen from $500m in 2000 to $700m in 2015.

Public sector: any business owned, run or controlled by the government. Private sector: any business owned, run or controlled by private individuals. Public corporation: a business organisation owned and controlled by the government.

Identify two changes shown by the data in Figure 2.01. For each one, explain a possible reason for the change. [6]

Original material © Cambridge University Press 2017

Sample question

1 In which sector would you find a public corporation?

Example: Post Now is a private limited company. It is a letter delivery service in the private sector. Its main competitor, MPO, is in the public sector.

2 Give two examples of a secondary sector business.

Identify and explain two differences between the two businesses. [6]

3 Using a ring as an example of a product, show the link between the three secto rs.

Sample answer: Difference 1: Post Now is owned by individuals [1] who bought shares in the private limited company [1], while MPO is owned by the government. [1]

4 What is the difference between public and private sector businesses?

Difference 2: Post Now’s objective is to make profit [1] from delivering letters [1] while MPO’s priority will be to provide a service. [1]

Summary

Businesses can be grouped into three sectors. The importance of each sector for an economy can change. Goods and services can be provided by either public or private sector businesses.

Examination-style questions

• primary sector

• secondary sector.

b Calculate the number of people employed in the tertiary sector in country A.

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Question 1

Ravel is a farmer in country A. He has been looking at some data, shown in Table 2.02. He cannot understand why there is a difference in employment between countries. Both countries have a mixed economy. Country A

Primary sector Secondary sector Tertiary

45 20 35

Country B 10 20 70

Table 2.02 Percentage of labour force employed in each country. Note: Population of each country is 60 million.

a Identify one type of business that could be found in the:

2 Classification of businesses

Progress check

[2] [2]

c Identify and explain two possible reasons for the difference in the percentage of labour employed in different sectors in each country. [8] Question 2

SRT makes a wide range of paints. These are sold to businesses and customers in many countries. Market research is important. The Managing Director said, ‘Different countries have different legal standards for paint. Customers want different colours and sizes of tins.’ SRT uses the services of many businesses from the tertiary sector. Suggest three important businesses SRT might use from the tertiary sector. Justify your choices. [12]

Original material © Cambridge University Press 2017

Unit 3

Enterprise, business growth and size Learning summary By the end of this unit you should understand:

the contents and importance of a business plan the different methods and problems of measuring business size

why some businesses grow and others remain small

the characteristics of successful entrepreneurs

why some businesses fail.

3.02 How business plans assist entrepreneurs

Entrepreneurs invest their time, skill and money to set up a business. Anyone can be an entrepreneur if they have the necessary qualities.

A business plan can help a business. It can:

3.01 Characteristics of successful entrepreneurs

Risk-taker Strong leader

Creative

• support loan applications (for example, a bank is more willing to lend if can see it is likely to be repaid) • give a sense of purpose and direction so the employees know what to do to achieve the plan

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• help decision-making so time and resources are not wasted

Effective communicator

Motivated/ determined

TIP

• help understand possible risks, especially if it is a new business.

Characteristics

Innovative

A business plan is not just for new businesses.

Initiative

TIP

Figure 3.01 Characteristics of an entrepreneur.

An entrepreneur can be categorised under ‘enterprise’ in the factors of production (see 1.04).

TERMS

Entrepreneur: someone who organises, operates and takes the risk for a new business venture. Business plan: this contains the aims and objectives of a business, and important details about its operations, fi nance and owners.

How it is measured

Number of Number of employees workers in the business

– Aims and objectives – Details about the product – Market information, for example size of market,

Capital employed

customer information, competitors – How and where product is to be made

What happens if a business uses a lot of machinery?

What if it has lots of parttime employees? Amount of Any business can have a lot money invested of expensive machinery, so by owners/ capital employed is high. borrowed from lenders Amount of How can this be compared output over a if different types of given period products are made?

– Number and type of employees

Possible problems with using this measure

3 Enterprise, business growth and size

Measure

– Finance required, cash flow forecasts

Value of output

What if not all of the products are sold? A fi rm might sell a few high value items while another fi rm may sell many cheap items.

Figure 3.02 Main sections of a business plan.

New businesses can offer many benefi ts to the economy and consumers.

Value of sales over a given period

Table 3.01 Measuring the size of a business organisation.

TIP

3.03 How and why governments support business start-ups

Value of sales

• Jobs create lower unemployment.

• Increased competition could lead to more choice or lower prices.

Profi t is NOT classed as a measure of size. This is because too many factors influence the amount of profi t made.

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• They can provide specialist or new services.

• Start-up businesses, if successful, could grow into large businesses. Governments provide a range of support including: • fi nancial – grants and subsidies, lower tax rates • information, advice and support

• location – enterprise zones, rent-free spaces

3.05 Why owners may want to expand the business Growth is an objective for some businesses. Advantages include: • Economies of scale – leading to lower average/unit costs.

• training courses for entrepreneurs and/or workers.

• Diversification/spread risk – so the business is less reliant on one market or product.

3.04 Methods and problems of measuring business size

• Financial reasons – higher profi ts, or able to borrow money more easily.

Small, medium or large business? Size can matter. Being large could indicate business growth or a lower risk for lenders. There is no perfect way to measure size.

• Personal objectives – power and status. • Market domination – increased power or market share in existing markets, so the business can gain more influence with suppliers and customers. • Access to new markets.

Sample question

Method

Advantages

Internal

External

By expanding its own activities

By taking over or joining with another business

✔ Able to keep control

✔ Much quicker so gain benefi ts of growth faster

✔ Relatively inexpensive as business can use own resources

Rafa owns a successful jam-making business. He started ten years ago and has made a profi t every year. All the jam is sold at local markets. Rafa wants to grow his business. He cannot decide whether to start making sweets or try to fi nd a new market for his jam. Recommend to Rafa which way he should choose to grow his business. Justify your answer. [6]

There are two ways a business can grow: internally and externally.

Sample answer: Rafa has no experience of sweet-making [1] so it will take time to learn these skills [1], and even if he does there is no guarantee of success [1]. He is known for his jam so this reputation can help attract new customers. [1] While sweets might help to spread risk, as he is already successful [1] it would be safer to try to broaden his target market [1].

Section 1: Understanding business activity

3.06 Different ways a business can grow

Disadvantages ✗ Very slow process ✗ Harder to control ✗ Change of ownership?

Table 3.02 Advantages and disadvantages of internal and external growth.

TinPot makes metal cans for drinks. Let’s look at the different ways it might grow in Figure 3.03.

SA M

External ways to grow Merge with supplier: metal mine

TinPot’s factory

Internal ways to grow

• make more of current products • find new markets for current products • develop new products.

Merge with customer: soft drinks business

Figure 3.03 Ways TinPot could grow

Merge with competitor: tin-making business

Unrelated merger: clothing business

Sample answer: Advantage: Spread risk. As it is in a competitive market, ARG’s food sales might decline as customers choose rival products. This way, ARG has another market to rely on for revenue. [4]

Growth (internal or external) does not guarantee success. Problems of growth

Different options to overcome problems

Harder to manage and control

Hire specialist managers

Financial problems

Delegate and involve employees in decision-making Use long-term sources of finance (see 19.02) Grow at steady rate Set clear objectives

Table 3.03 How to overcome problems of growth.

Sample question

3.08 Reasons why some businesses remain small

Lack of focus

Communication problems

Disadvantage: Harder for ARG’s management to control.The new business will have 2000 shops and 207 000 employees, so it could take much longer for decisions to reach all employees, if at all. As customer demands are constantly changing, ARG might be too slow to react and lose sales to rivals. [4]

Review organisational structure Use two-way communication methods (see 9.03)

3 Enterprise, business growth and size

3.07 The problems of growth

3.09 Why some businesses fail

SA M

ARG is a large food retailer. It has 1200 shops and has 160 000 employees across country A. The Managing Director of ARG plans to take over HBC, which sells electrical goods such as televisions. She said, ‘The food market is very competitive. Customer demands and technology are constantly changing. I know many of our stakeholder groups will be affected.’ HBC has 800 shops and 47 000 employees.

• Demand in market may not be large enough so it is not possible to grow. • The business offers specialist goods or services (niche markets). • Owners want to be their own boss. • A small business can be more flexible, and able to react to market changes quickly.

Identify and explain one advantage and one disadvantage for ARG’s business of taking over HBC. [8]

Not all businesses will be successful. Both established and new businesses can and do fail. New businesses are at higher risk, as they are not established in the market. It can be difficult to persuade customers to try a new product. Owners may lack experience to make the right decisions. Raising finance and cash flow are common problems.

Lack of finance or poor financial management

Lack of effective marketing

Changes in technology

Why businesses fail

Competition

Poor planning

Economic factors

Changing market conditions

Overexpansion

Figure 3.04 Reasons why some businesses fail.

Sample questions

What does the word ‘entrepreneur’ mean?

Outline one problem of using employees as a measure of business size.

Example 2: Identify and explain two characteristics Grace needs to be a successful entrepreneur. [6]

State two ways a business can grow internally.

Identify two reasons why a business might remain small.

Characteristic 2: Effective communicator [1]: as beauty salon is a service; [1] she needs to encourage people to return [1].

Summary

Example 3: Identify and explain two ways in which a government might help Grace’s business. [6]

Entrepreneurs are people who start up new businesses. Governments try to support such businesses. The size of business can be measured in many ways. Many businesses will want to grow while others remain small.

Sample question

Sample answer: Characteristic 1: Risk-taker [1]: 80% of new businesses fail; [1] so she must be prepared to lose all her savings [1].

Sample answer: Way 1: Financial support [1]: Grace only has $400 [1] and is likely to have high start-up costs [1]. Way 2: Advice [1] to help make better decisions [1] as only has some experience[1].

SA M

Grace is an entrepreneur. She wants to open a beauty salon in town. She has $400 in savings and some experience from a part-time job. She has read that 80% of new businesses fail. She believes the government will help new business start-ups.

TIP

Section 1: Understanding business activity

Progress check

If a question asks for a decision, make one. Either viewpoint is acceptable as long as it is then supported by your answer.

Example 1: Identify two reasons why new businesses might fail. [2] Sample answer: Reason 1: Lack of cash flow. [1]

TIP

Reason 2: Wrong location. [1]

This is a generic question so a simple list of possible reasons is acceptable for this type of question.

d Do you think joining with the other business is the best way for GB to grow? Justify your answer. [12]

a Identify two ways to measure the size of a business. Way 1: Way 2:

c Identify and explain two possible problems for GB’s business if it grows too large. Problem 1: [8] Problem 2:

Glass Brothers (GB) is a successful small glass-making business. It is a business partnership owned by two brothers, Kai and Kit. GB makes a range of products from windows to bottles, in an old factory near the city centre. Kai has been looking at GB’s business plan. He wants to grow the business but cannot decide the best method to use. Kit, the Production manager, wants to develop new products. A local windowfitting business has offered to join the two businesses together.

b Identify and explain two possible benefits to GB of having a business plan. Benefit 1: Benefit 2: [4]

3 Enterprise, business growth and size

Examination-style questions

SA M

[2]