Table of Contents
- Main Functions Of A Business
- Business Sectors
- Chain Of Production
- Sectoral Change
- Role of Entrepreneurship and Intrapreneurship
- Reasons For Starting Up A Business
- Steps In Starting Up A Business
- Factors To Consider When Starting Up A Business
- Problems Faced By New Businesses
- Contents Of A Standard Business Plan
- Simple Review Questions
- Past Paper Review Questions
- Command Terms
- References
- Click Here To Read About Our Previous Topic On Business Management HL! (Unit 1.1-1.3)
Main Functions Of A Business
| Function | Explanation |
| Human resources | Responsible for managing personnel of a business Issues dealt: workforce planning, recruitment, training etc |
| Finance & Accounts | Responsible for managing the business’ money Issues dealt: recording and reporting of financial documentation, comply with legal requirements, inform those interested in financial position of the business (e.g. shareholders and investors) |
| Marketing | Responsible for identifying and satisfying the needs and wants of customers/ensure that products sell Issues dealt: research, test marketing, advertising etc THE 4PS! -> Product: size, color, packaging and core functions -> Price: pricing strategies depend on the level of demand, production costs and amount of substitutes present -> Promotion: ensuring that customers are aware of the business’ products Example: television advertising, sales promotion, social networking etc -> Place: available in a convenient location for customers to buy products Example: online, retail outlets, vending machines |
| Operations | Responsible for the process of converting inputs (raw materials) into outputs (finished goods) for sale and delivery |
Business Sectors
| Product Type | Name of Sector | Explanation |
| Good | Primary | Involved in the extraction, harvesting and conversion of natural resources. It plays a significant role in the output and employment of Less Economically Developed Countries (LEDCs) Example: agriculture, fishing, mining, forestry, oil extraction |
| Good | Secondary | Involved in the manufacturing or construction of products. Converting raw materials into finished goods. Example: publishing firms, clothes manufacturers, energy production firms, breweries and bottles |
| Service | Tertiary | Involved in providing services to the general public. It takes a large percentage of the GDP and employment of More Economically Developed Countries (MEDCs) Example: banks, transportation and distribution, leisure and tourism |
| Service | Quaternary | Subcategory of tertiary sector; involved in intellectual and knowledge based activities that generate and share information Example: ICT, consultancy services, research and development (R&D) companies |
Chain Of Production
The 4 business sectors are linked through the chain of production which are the stages in the production of any product. Value is added for every stage so that product can be sold for more than how much it’s raw materials cost.
Sectoral Change
Sectoral change refers to the shift in the relative share of national output (GDP) and employment that is attributed to each business sector over time. Usually, as countries develop, the percentage of their output is contributed to primary sector shifts to manufacturing and then tertiary and quaternary sectors.
Reasons For Sectoral Change
| Reason | Explanation |
| Higher household incomes | As consumers have more incomes, demand for services increases. For example, dining out at restaurants, visiting hairdresser, seeking financial advice on budgeting. |
| More leisure time | As countries experience higher living standards, people will have more leisure time to go to sport activities, theatre, holiday trips etc. |
| Greater focus on customer services | Businesses understand that good customer service before, during and after sale is a good source of competitive advantage. |
| Increasing reliance on support services | Businesses are becomingly increasingly reliant on support services of other businesses: sub-contractors, advertising firms, market research analysts etc. |
Role of Entrepreneurship and Intrapreneurship
Entrepreneur
Entrepreneur is an individual who plans, organizes and manages a business, taking on financial risks of doing so, and are accountable for the success or failure of the proposed business project. They search for and exploit business opportunities, and respond to the changes in the market.
| Case Study Entrepreneurial Triumph in the 20th Century Henry Ford (1863 – 1947) is the successful founder of Ford Motor Company, who introduced the Model T in 1908, which is the first affordable and mass-produced car that transformed the automotive industry. Now, Ford is the second-leading U.S. based automaker and sixth-largest in the world. |
Intrapreneur
Intrapreneur is an employee who thinks and acts as an entrepreneur within a section of the organization. It takes direct responsibility and risks for turning a project into a profitable finished product for the business.
| Case Study McDonald’s Happy Meal Dick Brams, St. Louis’ regional manager, began experimenting with a novel meal designed just for children in 1977. He proposed his packaged concept to management, and two years later, McDonald’s introduced the first circus-themed Happy Meal. Happy Meals have now become so important to McDonald’s business and brand identification that 3 million are sold each day. |
Entrepreneurs vs. Intrapreneurs
| Entrepreneurs | Intrapreneurs |
| Owners and/or operator of organization | Employees of organization |
| Takes substantial risks | Takes medium to high risks |
| Visionary | Innovative |
| Rewarded with profit | Rewarded with pay and remuneration |
| Responsibility | Accountability to the owner |
| Failure incurs personal costs | Failure is absorbed by the organization |
Reasons For Starting Up A Business
| Reason | Explanation |
| Growth | Entrepreneurs who own their businesses will benefit personally when there is a value of their assets, such as property and land which tend to increase in value over time (capital growth) |
| Earnings | Setting up a business can earn more potential earnings which can easily outweigh costs, even if the risks are high |
| Transference and Inheritance | Most owners may treat their businesses as transference or inheritance to give them a sense of security than self-employed people |
| Challenge | Some entrepreneurs may view setting up a business as a challenge that drives them to perform what gives them personal satisfaction, boosting their self-esteem |
| Autonomy | Starting up a new business means that owners will not be under control of another people; independence, freedom of choice and flexibility in how things are done in an organization |
| Security | Higher job security for owners of a business; potentially easier to accumulate personal wealth to provide higher funds for early retirement |
| Hobbies | Pursue their passion and turn their hobby into a business idea/organization |
Steps In Starting Up A Business
| 1 | Find a feasible business idea, look for business opportunities available and research on the potential market and customer base |
| 2 | Obtain start up capital |
| 3 | Obtain business registration |
| 4 | Open business bank account |
| 5 | Choose a convenient location |
| 6 | Market your product and service |
Factors To Consider When Starting Up A Business
| Factor | Explanation |
| Business idea | – feasible and according to passion – identify and fill a niche market – provide goods/services with a unique selling point |
| Finance | – fund marketing and manufacturing activities – record keeping needs to be done – huge barrier in starting up a new business |
| Human resources | – needed from the design and development of a product to delivering it to consumers – hiring, training, motivating staff |
| Enterprise | – effective leadership and negotiation skills – self-confidence and passion |
| Fixed assets | – premises, capital equipment – popular location but high premises costs |
| Suppliers | – provision of raw materials, finished stock of products, support services – price negotiations |
| Customers | – market research to create products that are desirable, at the right prices and sold in proper locations |
| Marketing | – convince investors, financial lenders and customers |
| Legal issues | – copyright and patent legislations – employment rights – not obeying will cause business to cease all its operations |
Problems Faced By New Businesses
| Problem | Explanation |
| Lack of Finance | – Small businesses may not have enough to borrow money (funds may be insufficient, relatively high interest rates) – Finance is needed to fund purchases of fixed assets, such as premises, buildings, machinery and equipment – Affect the cash flow position of the business |
| Cash Flow problems | – financing working capital is a major cause of business failure – inventory may not easily be turned into cash – customers may demand lengthy credit period – need to pay for on-going costs (rent, wages, utilities) |
| Marketing problems | – failure to meet customer needs – poor sales – lack the expertise to carry out proper marketing strategies – difficult to identify the gap in the market and fill it |
| Unestablished customer base | – new businesses encounter difficulties in attracting customers – establish rivals are operating in the market – customer loyalty takes a long time to build (marketing know-how and large amounts of money) |
| People management problems | – recruiting qualified employees would be difficult – not be clear what skills are needed in the business – less skilled in managing labour and processes – small teams; highly likely to fail if wrong people for the job are hired |
| Legalities | – business registration procedures, insurance cover for staff and buildings, customer protection laws, copyright rules – tedious, time consuming, highly costly – negatively impact poor cash flow position |
| Production problems | – hard to accurately forecast demand levels – overproduce/underproduce – wastage and increased costs/loss of potential sales |
| High production costs | – large amount of money needed to be spent on equipment, machinery, stock, rent, advertising – cost disadvantage; not being able to benefit from economies of scale unlike bigger businesses |
| Poor location | – busy and highly developed areas offer the highest potential number of customers; high cost of premises and rent – fixed costs (mortgage payments) take up a high percentage of total costs for most small businesses |
| External influences | – rapid changes in the natural environment/economy/politics – prone to exogenous shocks (recession/oil crises) |
Contents Of A Standard Business Plan
Business Plan
A business plan refers to the document that sets out the business’ idea, goals and objectives on how it will operate in the long run, for instance, its marketing, finance and human resources. It is crucial to raise external sources of finance.
| Element | Explanation |
| Business | – name and address of business – cost of premises and other start-up costs – details of owner and past business experience – type of business organization – quantifiable objectives |
| Product | – details of good(s) and service(s) – costs of production – pricing strategies used – details of suppliers of resources – where and how production takes place |
| Market | – forecast level of sales – nature of market – competitor analysis |
| Finance | – proposed sources of finance – cash flow forecast and steps to deal with cash flow problesm – forecast balance sheet |
| Personnel | – number and hob roles of workers – details of remuneration system (wages) – organizational structure |
| Marketing | – market research – details of promotional mix used to attract customers – unique selling point |
Simple Review Questions
- What are the 4 functional areas of a business?
- Differentiate between an entrepreneur and an intrapreneur.
- Distinguish between primary and secondary sector.
- State any 2 reasons for starting a new business!
- Differentiate between tertiary and quaternary sector.
- What is chain of production?
- What is sectoral change?
- What are the main steps in starting a new organization?
- What are the problems faced by new businesses?
- What is a business plan? State its main elements!
- State any 3 factors to consider when starting up a new business!
Past Paper Review Questions
(Note: The answers here are just a reference/sample of what you can write for each question!)
Number 1
Answer
(a) Revenue is the money that a business receives from the sale of its goods and/or services, e.g. private schools can earn revenue from tuition fees and fund-raising events. By contrast, costs are paid by a business for the production costs of goods and/or services, e.g. staff salaries and the costs of running the school.
(b) This question requires application of the four main functions of a business organization. For example:
- Human resources: Te recruitment and ongoing training of teachers and support staf (non-teaching
staff). - Finance: Allocating budgets for the year’s spending on items such as textbooks, equipment, and
maintenance (repairs and improvements). Schools might also seek additional sources of funding
(revenue) such as grants from the government. There is also a need to account for all costs (expenditure) and revenues of the school. - Marketing: schools need to attract customers (students and their parents). This might be done through means such as offering a broad and enriching curriculum and providing a wide range of opportunities (such as extra-curricular activities). Public relations and promotion (such as informing parents and the community about exam results) will also be important.
- Operations management: the main output in schools is the provision of lessons (learning). Other
operations might include sporting events, music concerts, school fund-raising events and the hiring
out of school facilities to outside agencies.
Number 2
Answer
- Generally, a business entrepreneur is someone who has the idea of starting and managing a new business while bearing the financial risk. For example, Sonali. He has an innovative idea of starting a rose-growing business and decides to manage it by himself, as in taking the responsibility for all the decision making required. Then, he also bears the financial risk of going out of business, because he uses his own savings to start the business.
- The first reason is because Sonali wants to be wholly independent. This means that he wants more flexibility and full control on the business, from its decision making to the return of profits. The second reason is because of his will and ambition of earning more income. This could mean that he was working on a job that pays a salary, lower than his living expenses.
- Firstly, the lack of financial resources. Before starting a business, it is important to have sufficient funds/capital so you can purchase non-current/fixed assets such as premises, machinery or equipment and support the business’ additional expenses in the future. Without enough finance, the business has the risk of going into debt. Especially for Sonali, as a small business, securing external funding such as a bank loan, is difficult and cumbersome. If the funds are proven to be insufficient, Sonali has to lose his personal assets for the business as his savings is its only source of finance. Secondly, the unestablished customer base. Despite having no leading firms selling roses in India, there is still an uncertainty to what extent customers are attracted to Katuri Networks and this requires a lot of time and money. His costs may increase even further as he needs to establish brand and product awareness in the market. He may even go out of business without sufficient capital and customers in the long run. So to conclude, these are the challenges that Sonali’s business might face during its start-up stage.
Number 3
Answer
(a) A = China
B = Germany
C = Pakistan
(b) This question requires candidates to examine and explain the data in their answers. For example:
- In LEDCs like Pakistan, agriculture accounts for a larger proportion of GDP. Therefore, Germany and
China do not fit this criterion. - Pakistan’s large pool of low-paid workers (being the sixth most populated nation in the world) means that its primary sector is relatively significant.
- China is a fast-growing and industrializing nation, and it is therefore safe to assume that manufacturing accounts for a significant share of its GDP; this is more apparent in China than in Germany or Pakistan.
- Many multinationals from the USA and Europe have also invested directly in China to exploit the
relatively cheap but skilled labour. - The services sector is the most predominant sector in MEDCs such as Germany. As an economically developed nation, Germany does not need to rely heavily on its manufacturing base, unlike China.
Number 4
Answer
- (a) Entrepreneur
Ans: A person who bears the financial risk of starting and managing a new business. For example, Jessica Lyons and her new CV business.
(b) Tertiary Sector
Ans: This sector focuses on providing services to everyone. For example, Jessica Lyons who wants to start a new business providing CVs to school leavers.
(c) Quaternary
Ans: This is actually a break-away category from the tertiary sector that mainly focuses on the using and sharing of information as well as technology. Industries included in this sector are, research and development firms, IT development firms etc.
(d) Intrapreneurship
Ans: This is an act of being an entrepreneur but as an employee within a large organization. For example, inside Riot games (the main entrepreneur), there are other intrapreneurs such as League of Legends and Valorant (small game developers). - Jessica’s home/building available for rent, Jessica, staff to help in the business’ future management and production, a computer, a printer, Jessica’s entrepreneurial ideas, knowledge and skills
- Human resource (HR) department, Finance and accounts department, Marketing department, Operations management department, Research and development department
- Most would-be entrepreneurs believed that holding a business in the tertiary sector could bring them more opportunities and profit. The reason is because there is a competitive advantage firms can gain in the market as consumer demand for services increases. This is supported by the fact of the tertiary sector being a large contributor for GDP and employment (both skilled and unskilled workers) in most developed countries recently – allowing more potential for growth and stability than other sectors. In addition, it is more easy and flexible to start if compared to doing a business in the primary or secondary sector, since they can decide what to provide according to their skills and interest or what they are able and willing to provide. Moreover, entrepreneurs are highly benefited from the lower financial risk because they do not need a large amount of startup capital for resources and equipment, at start-up stage, to provide a service – in contrast to the primary sector, which requires mining and heavy equipment to start a mining business, or the secondary sector, which requires factory and a high amount for labor to produce and provide cars. The risk of business failure is also lower and the returns for profit are much higher. Thus, most would-be entrepreneurs would rather choose to set up businesses in the tertiary sector.
Command Terms
References
- https://ebooks.papacambridge.com/viewer/ib/group-3-individuals-and-societiesbusiness-management-ibid-business-management-paul-hoang-third-edition-ibid-2014-pdf
- https://app.kognity.com/study/app/grade-12-business-management-hl-2023-2024/sid-351-cid-162407/book/starting-a-business-id-36502/
- https://lmarks.com/blog/intrapreneurship-examples-to-learn-from/
- https://guide.fariaedu.com/business-management-hl/unit-1-business-organisation-and-environment/1.1-introduction-to-business-management/reasons-for-starting-up-a-business-or-an-enterprise-ao2
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