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The economy is divided into different business sectors and the businesses within them exist to provide
goods or services. All businesses have inputs and outputs and must add value during production.

A business is any organisation that makes goods or provides services.

There are many types of business in the UK. These range from small firms owned and run by just one self-
employed person, through to large companies which employ thousands of staff all over the world.

Businesses exist to provide goods or services.

Goods are physical products such as burgers or cars.

Services are non-physical items such as hairdressing.

Customer needs are the wants and desires of buyers.

Nearly half a million businesses start up each year. A business start- up is a new firm operating in a market
for the first time.

The vast majority of businesses are very small and operate in the service sector.

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Businesses buy the products they need from suppliers – firms selling products to other businesses - and sell
to customers. The individual who uses the product is called a consumer. Sometimes the customer and
consumer are different people - for example, parents buy a pen for their child to use at school.

Businesses sell to customers in markets. A market is any place where buyers and sellers meet to trade
products - this can be a high street shop or a website.

Businesses are likely to be in competition with other firms offering similar products.

In order to create goods and services, a business buys or hires inputs such as raw materials, equipment,
buildings and staff. These inputs are transformed into outputs called products. These products are the
goods and services used by consumers. Production is the business activity of using resources to make
goods and services.
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 A business adds value when the selling price of an item produced is higher than the cost of all the
resources used to make it. Think of a pair of designer sunglasses which sell for £100. If the cost of the
materials, employees, marketing and all other inputs used in making one set of sunglasses is just £20, then
£80 worth of value has been added by the firm during production.

There are three main types of industry in which firms operate. These sectors form a chain of production
which provides customers with finished goods or services.

 Primary production: this involves acquiring raw materials. For example, metals and coal have to be
mined, oil drilled from the ground, rubber tapped from trees, foodstuffs farmed and fish trawled. This is
sometimes known as extractive production.

 Secondary production: this is the manufacturing and assembly process. It involves converting raw
materials into components, for example, making plastics from oil. It also involves assembling the
product, eg building houses, bridges and roads.

 Tertiary production: this refers to the commercial services that support the production and distribution
process, eg insurance, transport, advertising, warehousing and other services such as teaching and
health care.

The chain of production shows interdependence: firms rely on other businesses in different sectors for raw
materials, components or distribution.

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TEST 1 - What is a business?

1- What is an example of a service?

□ A bus journey
□ A bus
□ A bus stop

2- Cherry is a professional DJ. Which of the following is most likely to be a supplier to her business?
□ A hotel hiring her services
□ A record store
□ Customers at a nightclub

3- When does a business add value?

□ When revenue is greater than production costs
□ When revenue equals production costs
□ When revenue is less than production costs

4- Which industry sector is an advertising agency part of?

□ The primary sector
□ The secondary sector
□ The tertiary sector

5- What is the individual who buys a product called?

□ Customer
□ Consumer
□ Supplier

6- What is a business startup?

□ A new firm operating in a market for the first time
□ The time a shop opens
□ A firm that has been operating in a market for several years

7- Which industry sector are raw materials a part of?

□ The primary sector
□ The secondary sector
□ The tertiary sector

8- What is a car an example of?

□ A cost
□ A service
□ A product

9- Which of the following describes the money going into a business?

□ An input
□ Revenue
□ An output
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 10- What is an example of firms relying on suppliers?
□ Globalization
□ Interdependence
□ Integration

TOTAL SCORE: _____ /10

An entrepreneur knows that setting up in business is a risk. They need a robust business plan detailing
market research and competitor analysis and a good knowledge of the market.

The skill involved in wanting to start and run a business is called enterprise. The individual who sets up their
own business is called an entrepreneur.

There are several reasons why entrepreneurs are willing to take a calculated risk and set up a business.
Possible motives include:

 Making a profit. A business does this by selling items at a price that more than covers the costs of
production. Owners keep the profit as a reward for risk-taking and enterprise.

 The satisfaction that comes from setting up a successful business and being independent.

 Being able to make a difference by offering a service to the community such as a charity shop or
hospice.

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A new business needs its own name and a product. The challenge is to make goods and services that
satisfy customers, are competitive and sell at a price that more than covers costs.

A new business starts out with few, if any, customers and is likely to face competition from existing firms. To
succeed it needs to plan its launch carefully and work out how to create a competitive advantage over
its rivals. To gain this advantage, it needs to offer a product which customers prefer to a rival's product.
Setting up a business involves risks and reward. Profit is the reward for risk-taking. Losses are the penalty of
business failure.

An owner may decide to close a business if losses are being made, or if the level of profit is not enough to
make trading risks or hours worked worthwhile.

Most small businesses have very limited resources. Research is costly and can seem like a poor use of
time. Some entrepreneurs ignore planning and analysis and instead rely on their gut instinct. They launch
products they believe customers want and competitors cannot match. Poor planning is a major cause of
business failure.

There is an alternative. A business plan is a report by a new or existing business that contains all of its
research findings and explains why the firm hopes to succeed. A business plan includes the results of
market research and competitor analysis. Analysis is when a business interprets information.

Drawing up a business plan forces owners to think about their aims, the competition they will face, their
financial needs and their likely profits. Business plans help to reduce risk and reassure stakeholders, such
as banks.

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 In order to attract and satisfy customers, businesses need to be competitive and make products that are
superior to their rivals.

This is not easy because businesses operate in a dynamic and challenging market place. Business rivals
are likely to be at work creating new products or improving operations to reduce costs and drive down
prices. Businesses may need to adapt their products because ever-changing fashion trends mean that
customer requirements evolve over time. Success today is no guarantee of future profits.

A competitive market will have many businesses trying to win the same customers. A monopoly is either
the only supplier in a market, or a large business with more than 25% of the market.

Competition can make markets work better by improving these factors:

 Price: if there is only one retailer, products may not be competitively priced. If there are several
retailers, each retailer will lower their prices in an attempt to win customers. It is illegal for retailers to
agree between themselves to fix a price - they must compete for business.

 Product range: in order to attract customers away from rivals, businesses launch new varieties of
products they believe to be superior to their competitors.

 Customer service: retailers that provide a helpful and friendly service will win customer loyalty.

Businesses operate in competition with each other. If the market is large enough to support many firms, a
new business can open which imitates an existing idea. ‘Me too’ products can sometimes be successful.
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 However, businesses become more competitive by making products that stand out from the competition
in terms of price, quality or service. This is called product differentiation.

Methods of creating product differentiation include:

 a strong brand image

 a unique selling point
 competitive factors

TEST 2 - Why set up a new business?

1- Which of the following does every business do?

□ Make a profit
□ Produce goods and services
□ Provide jobs for everyone

2- How do you reduce the risk of starting a new business?

□ Advertising
□ Planning
□ Investment

3- What do you call an individual who sets up their own business?

□ An enterprise
□ An entrepreneur
□ A stakeholder

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4- What is profit reward for?
□ Risk-taking
□ Business failure
□ Gut instinct

5- What helps owners identify their aims and competition?

□ A spreadsheet
□ A monopoly
□ A business plan

6- What is it called when multiple business are trying to win the same customers?
□ A competitive market
□ A monopoly
□ A diverging market

7- What is product differentiation?

□ When a business makes a product which imitates an existing idea
□ When a business makes a product which stands out from the competition
□ When a business makes a product which is the same as the market leader

8- What percentage of the market does a large company need to be over to have a monopoly?
□ 10%
□ 25%
□ 50%

9- Which of these is a method of product differentiation?

□ Having a unique selling point
□ Selling a product in multiple territories
□ Introducing a product at a low price

10- What helps to create brand identity?

□ Having multiple products
□ An increase in profits
□ Creating a logo for the company/product

TOTAL SCORE: ____ / 10

►
Owners can opt to run their businesses as sole traders, partnerships or private limited companies. As the
business expands it may decide to become a public limited company or to offer franchises.

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 A sole trader describes any business that is owned and controlled by one person - although they may
employ workers. Individuals who provide a specialist service like plumbers, hairdressers or photographers
are often sole traders.

Sole traders do not have a separate legal existence from the business. In the eyes of the law, the business
and the owner are the same. As a result, the owner is personally liable for the firm's debts and may have
to pay for losses made by the business out of their own pocket. This is called unlimited liability.

Advantages

 Easy to set up
 Small capital investment means reduced start-up costs
 Freedom to make decisions
Disadvantages

 Responsibility
 Long hours
 Unlimited liability

Partnerships are businesses owned by two or more people.

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Doctors, dentists and solicitors are typical examples of professionals who may go into partnership
together and can benefit from shared expertise. One advantage of partnership is that there is someone
to consult on business decisions.

The main disadvantage of a partnership comes from shared responsibility. Disputes can arise over
decisions that have to be made, or about the effort one partner is putting into the firm compared with
another. Like a sole trader, partners (who have not registered as an LLP) have unlimited liability.

A limited company has special status in the eyes of the law. These types of company are incorporated,
which means they have their own legal identity and can sue or own assets in their own right. The
ownership of a limited company is divided up into equal parts called shares. Whoever owns one or more
of these is called a shareholder.

Because limited companies have their own legal identity, their owners are not personally liable for the
firm's debts. The shareholders have limited liability, which is the major advantage of this type of business
legal structure.

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 Unlike a sole trader or a partnership, the owners of a limited company are not necessarily involved in
running the business, unless they have been elected to the Board of Directors.

There are two main types of limited company:

 a private limited company (ltd)

 a public limited company (plc)

An entrepreneur can opt to set up a new independent business and try to win customers. An alternative
is to buy into an existing business and acquire the right to use an existing business idea. This is called
franchising.

A franchise is a joint venture between:

 franchisee
 franchisor

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Many well-known high street opticians and burger bars are franchises.

Opening a franchise is usually less risky than setting up as an independent retailer. The franchisee is
adopting a proven business model and selling a well-known product in a new local branch.

TEST 3 – Forms of business ownership

1- What is the main advantage of being a sole trader?

□ Unlimited liability
□ Limited liability
□ Be able to make quick decisions

2- Who is limited liability an advantage to?

□ Shareholders
□ Stakeholders
□ Sole traders

3- What is a partnership?
□ A business owned by shareholders
□ One person trading alone
□ Two or more individuals trading together

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4- Who is a company controlled by?
□ Shareholders
□ Stakeholders
□ Managers

5- What legal identity does a company have in the eyes of the law?
□ No legal identity
□ Its own legal identity
□ As shared legal identity with shareholders

6- What is a business that sells the right to use a business idea?

□ A franchisor
□ A wholesaler
□ A franchisee

7- Which of the following is NOT an advantage offered by a franchise?

□ A prime location
□ A tested product
□ A well known brand

8- Who is a franchise bought by?

□ A franchisor
□ A franchisee
□ A wholesaler

9- Which type of business does NOT usually have limited liability?

□ A public limited company
□ A multinational
□ A partnership

10- Who has legal responsibility to settle debts in a company with unlimited liability?
□ Owners
□ Shareholders
□ Stakeholders

TOTAL SCORE: ____ /10.

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Businesses have different aims and objectives that can change over time. Some businesses chose to use
SMART objectives.

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 An aim or objective is a statement of what a business is trying to achieve over the next 12 months. For
example, a business can set itself any of these targets:

 survival
 increased profit
 growth
 increasing market share

The computer business constantly changes and reinvents products over time
Having an objective is useful because it helps staff to focus on shared aims. A business could instruct its
staff to work towards increasing sales by 10% by the end of the year.

Different organisations have different objectives. Some businesses are run to make as much profit as
possible for owners. However, not all businesses aim to make profit. Voluntary organisations such as
charities are more concerned with providing a service to others.

In most businesses, the owners decide on the objectives for the business.

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 When a business first starts trading it has few loyal customers and no reputation. The most likely objective
for a start-up business is simply survival. As the business grows and begins to win market share, the aim
may shift towards expansion and/or increasing profits.

Some owners have a vague idea about their objectives. The best types of objective are SMART, which
stands for:

 Specific: clearly state what is to be achieved, eg increased profits.

 Measurable: the desired outcome is a number value that can be measured, eg increase profits by
10%.
 Agreed: all staff are involved in discussing and agreeing an aim.
 Realistic: the target is possible given the market conditions and the staff and financial resources
available.
 Timed: the target will be met within a given period of time, eg 12 months.

An example of a SMART objective is 'to increase profits by 10% within the next 12 months'. SMART
objectives allow the performance of a business to be assessed.

While owners have a major say in deciding the aims of a business, other interest groups called
stakeholders are usually considered. Stakeholders are any group of people interested in the activities of
the business - they could be managers, staff or customers. When owners sacrifice some profit to pay staff
an annual bonus, this is an example of stakeholder consideration.

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The aim of a business can change over time. This can happen in response to internal factors, such as
business growth, or in response to external factors, such as an economic recession.

A small start-up business may aim to survive in the first year. Once successful, the business then sets itself
the objective of increasing profits or growing in size.

Alternatively, a profitable business that is hard hit by an economic recession may struggle to maintain the
same level of output. Faced with declining sales, a business may change its objective from growth or
making a profit, to simply surviving.

TEST 4 - Aims and objectives

1- What is a business objective?
□ A statement of what the company has achieved
□ A statement of what the company is trying to achieve
□ A statement of what the company is currently achieving

2- What is the first aim of a business?

□ To survive
□ To make a profit
□ To grow

3- Who normally decides on business objectives?

□ Employees
□ Customers
□ Owners

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4- What does an objective mainly help staff to focus on?
□ Shared aims
□ Suppliers
□ Customers

5- Who are stakeholders?

□ Any group interested in the activities of the business
□ Any group interested in the activities of government
□ Any group interested in the activities of shareholders

6- Which of the following best describes a financial objective?

□ It is not easily measured
□ It is easily measured
□ It is personal to the owner

7- What is an example of stakeholder consideration?

□ When owners keep all the profits for themselves.
□ When some profit is sacrificed to pay staff an annual bonus.
□ When owners decide to increase profits.

8- In the long run, what is it that all private sector firms must aim to do?
□ Make a difference
□ Make products
□ Make a profit

9- Which is the best example of a SMART objective?

□ To make a 5% profit
□ To make a 5% profit soon
□ To make a 5% profit in the next year

10- Increasing market share is an example of:

□ An objective
□ Revenue
□ A business plan

TOTAL SCORE: ____ /10.

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Business expansion has potential benefits and drawbacks. Some owners are reluctant to take the risk of
growing the business and opt to stay small.

As a business grows it gains two major advantages over its smaller rivals. Large firms have more influence
over market price. They're big enough to be price setters.

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 Large firms also often enjoy economies of scale. This means that a business has lower unit costs because
of its large size. They can buy raw materials cheaply in bulk and also spread the high cost of marketing
campaigns and overheads across larger sales.

For example, if a large firm can produce a given type of sunglasses for £20 while it costs its smaller rival an
average of £30, then the larger firm has a £10 per unit cost advantage. Larger firms can charge lower
prices or enjoy a higher profit margin.

Economies of scale are a major source of competitive advantage for large firms.

A business can grow in size through:

 Internal (organic) growth - the business grows by hiring more staff and equipment to increase its output.

 External growth - where a business merges with or takes over another organisation. Combining two
firms increases the scale of operation.

 Franchising - where a business leases its idea to franchisees. This allows new branches to open across
the country and internationally.

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Owners can face a dilemma in deciding whether to expand. Expansion is risky. There's always the
chance that any expansion plans can fail and result in losses rather than profit. Owners are then worse
off than before the growth of the business.

The risk of expansion means that some owners are reluctant to chance funds. They opt instead to stay
small and earn a relatively risk-free profit.

There is potentially a major drawback to avoiding growth. Small businesses can be at a cost
disadvantage compared to their larger rivals enjoying economies of scale. As small firms cannot
compete with the low prices set by their larger rivals, they have to compete on service or quality.

TEST 5 – Business Growth

Business growth

1- What is a monopoly?
□ A government body
□ Two businesses joining together
□ When one retailer dominates a market

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2- Why does a business benefit from growth?
□ It will have more competition
□ It will have more market power
□ It will have more overheads

3- What do economies of scale result in?

□ Lower unit costs
□ Unchanged unit costs
□ Higher unit costs

4- What is hiring more staff an example of?

□ External growth
□ Internal growth
□ A takeover

5- What is spreading overheads over a large level of output an example of?

□ Economies of scale
□ Diseconomies of scale
□ Internal growth

6- How can small firms best compete against large rivals?

□ By cutting prices
□ By offering better customer service
□ By using advertising

7- How can a business grow in size?

□ Giving staff bonuses
□ Delayering
□ Offering franchises

8- When does organic growth occur?

□ When a company hires more staff
□ When a company merges with a rival
□ When a company takes over a rival

9- How often will a growing business make a profit?

□ It will always make more profit
□ It will sometimes make more profit
□ It will never make more profit

10- Which of the following is not guaranteed with business expansion?

□ Economies of scale
□ Market power
□ Risk free profit

TOTAL SCORE: ____ /10.

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 ►
An entrepreneur needs to be able to turn an idea into a successful business.

Enterprise is a skill. Put simply, enterprise is the willingness of an individual or organisation to:

 Take risks. Setting up a new business is risky. Even if the entrepreneur has carefully researched the
market, there's always a chance that customers may reject the product and that a loss will be made.

 Show initiative and 'make things happen'. Successful entrepreneurs have the drive, determination and
energy to overcome hurdles and launch new businesses.

 Undertake new ventures. An entrepreneur has to have the imagination to spot business opportunities
that will fill gaps in the market.

Enterprise is carried out through the work of an entrepreneur. To see enterprise skills in action, watch
presentations given during an episode of the BBC’s Dragon's Den.

Creative thinking is the process by which individuals come up with new ideas or new approaches to
business. New ideas could result in a new product - for example, a games console. They could also result
in a new process that cuts costs or improves quality - for example, a bagless vacuum cleaner.

Fresh ideas give businesses a competitive advantage and help make their goods or services stand out in
the market place.
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 Entrepreneurs can make use of several different thinking techniques to improve their creativity:

 Lateral thinking or thinking outside the box. An example of this would be breaking down the steps
taken to serve coffee in a café and asking 'why' at each step to see if a better process can be
created.

 Deliberate creativity uses thinking techniques to spark off new ideas. For example, putting on different
thinking hats to tackle problems from different angles. 'White-hat' thinking looks at facts and 'black-hat'
thinking looks at drawbacks.

 Blue-sky thinking involves a group of people looking at an opportunity with fresh eyes. As many ideas
as possible are generated in an ideas generation session, where no ideas are rejected as silly.

Part of the process of thinking creatively and coming up with a new business idea is to ask the right
questions. For example, looking at a successful product and asking - why, why not, how, where, when,
what, what if?

Invention is about making new items, or finding new ways of making items. Innovation involves bringing
this new idea to the market, that is, turning an invention into a product.

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 A business can use the law to protect its business idea. For example, an entrepreneur can:

 Register ownership of an invention or new process and be given a patent. This can stop rivals from
copying the idea for a set number of years.

 Sue for damages if others copy their work - copyright automatically arises for authors creating books,
films, music or games.

 Register a trademark. A trademark is a symbol or phrase that a company can register with the
government to make their company distinctive.

A patent, copyright or trademark grants legal ownership and is only given for original work.

So what does it take to be a successful business person? Typically entrepreneurs are:

 imaginative and quick to see business opportunities and gaps in the market

 planners who take time to research customer requirements, competitors and trends to better
understand their market and minimise the risk of failure

 determined to succeed no matter how many hours of unpaid preparation are involved

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TEST 6 - Enterprise

1- Which of the following is an example of enterprise?

□ Accepting a job promotion
□ Starting a new job
□ Starting a new business

2- What is it important for an entrepreneur to do?

□ Never take risks
□ Use their initiative
□ Be aggressive

3- What is innovation?
□ Discovering new products
□ Discovering new processes
□ Bringing a new idea to the market

4- How can the law protect a new business idea?

□ Using patents
□ Using lawyers
□ Using government

5- Which of the following best describes deliberate creativity?

□ A thinking skill
□ Launching a new product
□ Launching a new business

6- How can an entrepreneur create a competitive advantage?

□ By selling the same products as rivals
□ By improving customer service
□ By launching a new business

7- What is enterprise?
□ A skill
□ An owner
□ An investor
8- Who is profit paid to?
□ Stakeholders
□ Creditors
□ Owners

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9- How would a drug company stop rivals from copying a new drug?
□ Register a patent
□ Use brandin
□ Use advertising

10- What would a manufacturer use to stop rivals from using their name on copied products?
□ A patent
□ A trademark
□ A business plan

TOTAL SCORE: ____ /10.

https://www.bbc.co.uk/bitesize/guides

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