Understanding business

• Sectors of industry


  • Primary Sector
  • Secondary Sector
  • Tertiary Sector
  • Quaternary Sector
• Primary Sector


  Businesses involved in extracting or exploiting natural resources
• Primary Sector


  • Farming
  • Mining
  • Oil drilling
• Secondary Sector


  Businesses involved in manufacturing and construction - they take natural resources and turn them into goods that can be sold later
• Tertiary Sector


  Businesses and organisations involved in providing services rather than goods
• Tertiary Sector


  • Shops
  • Banks
  • Hotels
  • Hospitals
• Quaternary Sector


  Businesses involved in providing information and knowledge-based services
• Quaternary Sector


  • ICT (information and communication technology)
  • Consultancy (offering advice to businesses)
  • Research and development
• For Higher, we will learn about the smaller private sector companies, public limited companies, and the ownership, control, sources of finance, and advantages of each type
• Merger


  When two or more businesses combine to form a new, larger business
• Merger


  • Often results in a new, larger business
  • Leads to increased market share
• Demerger


  When a single business splits into two or more separate businesses, still owned by the same organisation but managed independently
• Types of integration


  • Lateral integration
  • Horizontal integration
  • Forward vertical integration
  • Backward vertical integration
  • Conglomerate integration (diversification)
• Lateral integration


  Two businesses in related industries but not in direct competition join together
• Horizontal integration


  Two businesses at the same stage in the production process making similar products join together
• Forward vertical integration


  One business takes over/merges with one of its customers
• Backward vertical integration


  One business takes over/merges with one of its suppliers/sources of goods and materials
• Conglomerate integration (diversification)


  Businesses that operate in completely different markets combine
• Advantages of integration


  • Increased market share
  • Reduced risk of failure
  • Economies of scale
  • Reduced competition
• Disadvantages of integration


  • May breach competition rules
  • Quality may suffer
  • Customers may pay higher prices
  • Business may not be able to manage new activities efficiently
• Outsourcing


  When an organisation arranges for another organisation to carry out certain activities for them, instead of doing it themselves
• Advantages of outsourcing


  • Allows business to focus on core activities
  • Reduces labour and equipment costs
  • Outsourced business has greater expertise
  • Costs only incurred when service is needed
• Disadvantages of outsourcing


  • Less control over outsourced work
  • Communication issues
  • Risk of sharing sensitive information
  • Outsourced services may cost more than in-house
• Advantages of demerger


  • Each new business can focus on its own core activities
  • Each new business can become more efficient
  • Businesses can be more easily sold off (divestment)
• Disadvantages of demerger


  • Significant costs involved
  • Customers may not support the change
• Divestment


  Selling off part of an organisation, such as a subsidiary company or one of the company's brands
• Advantages of divestment


  • Allows remaining business to focus on more profitable parts
  • Raises money from sale proceeds
  • Meets competition regulations
• Disadvantages of divestment


  • None provided
• Marginal utility is the additional utility (satisfaction) gained from the consumption of an additional product
• If you add up marginal utility for each unit you get total utility
• Types of private sector businesses

  • Sole trader
  • Private limited company
  • Public limited company
• Sole trader


  • Owned and run by one person
  • Easy to set up
  • Owner makes all decisions
• Partnership


  • Formed by 2-20 people
  • Partners specialise in different areas
  • Unlimited liability
  • Profits shared between partners
  • Partners may have disagreements that affect the running of the business
• Partnership agreement


  Deed of partnership
• Private limited company


  • Owned by shareholders
  • Shares not traded on stock exchange
  • Often sold to family/friends
  • Controlled by board of directors and managing director
  • Sources of finance include bank loans, government grants, retained profits
• Public limited company


  • Owned by shareholders
  • Shares traded on stock exchange
  • Controlled by board of directors and managing director
  • Sources of finance include issuing shares, bank loans, government grants, retained profits
  • Advantages: large amounts of capital, good reputation, easier to get loans
  • Disadvantages: complicated legal process, must publish annual reports
• Multinational companies


  • Have branches/subsidiaries in multiple countries
  • Head office usually in home country
  • Advantages: economies of scale, ability to spread risk, access to global markets
  • Disadvantages: language barriers, cultural differences, profits may go back to home country
• Businesses can be classified into two types: those that have trading but not book value, and those that have both trading and book value
• Mission Statement


  Sets out the vision and aims of an organisation
• Many organisations have a mission statement