Principles of Business

Grade: 11
Topic: Production

Cottage Industries is one of the smallest forms of business; it involves small-scale

production of hand-crafted items in the home or within a local community

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Characteristics

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 Work mainly carried out manually
 Home based
 Business carried out on a small scale.

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 Use of local raw materials.
 Family members provide labour and in some cases help is hired.

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Importance of Cottage Industries:

 Provide employment s
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 Satisfy psychological need of the producer
 Adds to family budget
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 Provides an opportunity to use one’s skills

 Uses local materials
 Improves skill base
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 Help to boost foreign exchange

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Factors required for cottage industries to survive:

 Materials must be readily available.

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 Training programmes must be readily available to pass on skills

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 Financial support through loans with low interest rates.

 Supported by trade shows.
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Small Business

Small business a business that has a limited number of employees, typically

fewer than larger companies and operates independently of larger
corporations

Functions of small businesses

 Supplying goods and services that satisfy some demand. Small businesses identify a
particular need in a market and develop a product or service that will meet that need.

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 Fulfilling a niche in the market that does not interest larger businesses, for example

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event planning (weddings, parties) and beauty services (hairdressing, nail care and so on).
 Creating employment – although small businesses individually employ relatively few

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employees, collectively they account for a large percentage of the total employment in
the Caribbean.
 Making profit - of course, the main reason that entrepreneurs take the risks of creating

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and operating a business. This not only benefits the entrepreneur but also supports the
economy.
 Providing rural areas with nearby shopping facilities, especially in underdeveloped and
rural areas.

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 Ensuring competition exists, which keeps larger businesses aware that there are others
out there ready to provide a personal service to consumers.
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Advantages of small business
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 Generate employment and incomes especially in rural areas and economically depressed
areas
 Increase competition for larger firms
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 Introduce new products and ideas (for example, event planning).

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Disadvantages of small business

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 The business lacks expertise in certain areas

 Owners find it difficult sourcing finance from financial institutions
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 Limited ability to service customers due to unavailable resources.

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Value of small businesses to a country

 Collectively, small businesses provide employment and thus utilise the local labour
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available and reduce unemployment

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 Small businesses can sometimes respond to customers’ needs faster than larger
businesses
 Small businesses contribute to the competitive spirit of the economic life of a country

A business grows internally and externally

Internal growth occurs when a firm expands through the use of its own resources, such as
retaining some of its profits and using them to invest in further expansion
Examples of internal growth:
 Opening other outlets
 Employing more workers
 Increasing capital.

Business Grow External Growth

External growth generally occurs when one firm takes over or merges with another. These are
popular methods of growth because the firm increases its size quickly. But there is another
method of growth that we must also consider.

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Examples of internal growth

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Joint ventures
A joint venture is a different kind of a partnership – a temporary partnership of

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some aspect of a business venture. A joint venture involves two or more
businesses pooling their resources and expertise to achieve a particular goal. The
risks and rewards of the venture are also shared in some way, although not

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necessarily equally.

Mergers
Mergers are another form of external growth. A merger (sometimes referred to as

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an amalgamation) is the voluntary combining together of two or more businesses
into a single business that is mutually agreed by the firms’ management and
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agreed by their shareholders. Mergers are used by businesses to expand their
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operations, usually to increase their profitability. A merger may be put into effect
because two or more businesses want to diversify.
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Takeovers and Acquisitions

An acquisition, also known as a takeover, refers to a business strategy whereby
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the control of a business is taken over by another business by purchasing at least

51 per cent of its voting shares. Unlike a takeover, a merger involves the
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voluntary amalgamation combining of all of the interests of two companies into a

newly named, stronger, single company.
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Linkage Industries
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Industries which are dependent on another’s output to produce goods and services. i.e. the
output of one industry (finished product) is the input (raw material) of the other industry.
E.g. the rum distillery is dependant on the sugar industry.
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Linkage may be:

 Backward
 Forward
Forward Linkage
If the final product or finished products of one industry is used in another industry as its
raw material then a forward linkage occurs. For example, sugar produced from a sugar
factory is used by a bakery to make pastries. Sugar is therefore the end product of one
industry and used as raw material in another. Other examples include agriculture and
canning, lumber and construction and cattle farming and meat processing.
Backward linkage
Occurs when the demands of an industry leads to the establishment of other industries to
produce for the needs of this industry. For example, the establishment of several
multinational fast food restaurants in the Caribbean has led to new businesses being
established to supply these restaurants with raw materials (vegetables, ground provisions,
meats and paper based products).

Benefits of Linkages

 Economic ties creates more job opportunities

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 Promotes innovation and use of new technology

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 Encourages large scale production for local and export demand.
 Promotes cooperation

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 Leads to increased household incomes and foreign exchange.

Impediments of Linkages

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 Limited raw materials
 Access to foreign market is not guaranteed
 Shortage of capital

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 Limited access to foreign markets
 Investment in equipment and machinery can be expensive.
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Effects of Growth on a business
In any organisation growth will have an effect on the following
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Organisational structure
It may become more complex, affecting the chain of command and the span of
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control of individuals. New departments may also be created. There is also

implications for the increase in the amount of communication within the firm.
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Authority may now be delegated among a greater number of personnel whereas

one or two persons may have held it.
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Capital
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More money is now required to finance operations. E.g. buying equipment,

paying workers, raw materials etc. In order to finance its operations the firm may
now have to increase its borrowing or issues shares where possible.
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Labour
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An increase in the number of workers usually occurs but the extent to which is
does may depend on if the firm is labour or capital intensive. There may also be
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division of labour/specialisation which increases output. Specialists may also be

hired.

Potential for export

As production increases and the local market is being satisfied, surplus production
may be exported as a market is established.

Scale of production
 This will increase as long as inputs have increased and are being used efficiently.
Various economies of scale can occur as production expands

Use of Technology
There will be greater used of technology as long as it will lead to reductions in
cost and increases in output. In turn it may cause a reduction in labour

As the business expands it can take advantage of economies of scale. Economies of scale refers
to the benefits that firms are able to enjoy because of expansion.

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Internal Economies of Scale
This refers to the benefits enjoyed by a firm because of its own expansion. These

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include:

Technical Economies of Scale

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Expanding businesses will need to purchase machinery and equipment to supply
the level of output required. With the use of machines productivity will rise and
the firm will experience technical savings as unit cost of production will decline.

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Marketing Economies
Expanding businesses can take advantage of bulk buying and receive discounts on
raw materials. s
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Financial Economies
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Larger firms will access loans more easily and at a cheaper interest rate than small
firms since they already have established reputations and adequate collateral.
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Managerial Economies
The employment of experts who will specialize in various management functions
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such as marketing, personnel, accounting and production will increase efficiency

and thus output.
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External Economies of Scale

External economies refers to the benefits enjoyed by a business because it is part
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of a well-organized industry and not because of its own expansion. Thus any
businesses whether large or small can reap these benefits as long as it is part of an
industry enjoying these benefits. Benefits include; government subsidies offered
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to particular industries, tax holidays and reduced duties on items imported.

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Internal Diseconomies of Scale

A diseconomy of scale refers to the disadvantages arising from the expansion, such as:

 High Advertising Cost: This becomes a diseconomy when the percentage increase in a
firm’s advertising cost is much greater than the percentage increase in its revenue.
 High maintenance cost for machinery and equipment.
 Increased difficulty in controlling the organization.
External diseconomies of scale

 Shortages of raw materials

 Decline in the industry
 Negative externalities such as pollution can affect businesses

Economical and Social Implications of Technological Development

Technological development increases the quality and quantity of output. This results in the

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lowering of unit cost of production which may be passed on to consumers in the form of lower

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prices. When goods and services become more affordable the standard of living of citizens will
rise.

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Developing countries employ both labour and capital intensive methods of production. Labour
intensive industries include banana and craft and capital intensive industries include petroleum
and bauxite.

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There are three methods of production:

Labour Intensive Production

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This method of production utilizes mainly manual labour along with a limited
amount of machinery
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Capital Intensive Production
This method of production utilizes mainly machinery along with a limited number
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of workers.

Automation
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Automation is the employment of machines in a continuous process of operation.

This is the further stage of mechanization. This production process is carried out
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automatically with little or no human involvement. For example, the automated

teller machine (ATM).
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Mechanisation
This is the substituting of human and animal labour with machines such as robotics and
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computers to produce more effectively.

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Computer Aided Design (CAD)

Computer aided design is a computer software used in the product design process to produce
designs with greater accuracy, speed and flexibility. Its powerful computer graphics allow
product designers to produce 3-dimensional objects, which can be fully examined and tested
before they are implemented.
Advantages include:

 accuracy
 speed
 it is easier to make adjustments since changes are made on the computer
 reduces cost of the design process

Computer Aided Manufacturing (CAM)

This involves the use of computers in a variety of manufacturing tasks. Computers are used to

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coordinate every aspect of production, from design through stock control to production

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scheduling and control. Benefits are increased productivity, reduction in waiting time, greater
consistency, greater flexibility, and improved coordination of operations, direct and flexible

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control of tools and materials, and continuous flow of operations.

Computer Aided Instruction (Instructional or Teaching software)

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Software application designed to instruct users on procedures and methods. It involves self-
paced and interactive instructions with on line testing and feedback. It identifies areas of

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weakness and provides remedial work until the learner understands. Teleconferencing is
possible.
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Mechanization and Automation results in increased output but reduces the amount of labour
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required in the production process. This creates unemployment in Caribbean countries. Workers
must be retrained for new developing industries such as information technology. New industries
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will absorb the fall out of workers from other industries.

Advantages and Disadvantages of Automation and Mechanisation

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Advantages Disadvantages
 Increase productive capacity in a shorter  Increased unemployment
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 Reduce labour cost  High initial investment

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 Reduction in defects  High maintenance cost

 Minimal need for supervisors  Technical disruptions
 Increased support to tertiary services  Can only be used for large or standardised
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output
 Machines become obsolete and depreciate
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Implications of change from labour intensive to capital intensive:

1. Standardised products
2. Increased outputs
3. Greater efficiency
4. Fewer people employed