Adding value

The process of producing a particular good or service that is worth more than the
cost of the resources used to produce it.

Business
A decision-making organization established to produce goods and/or provide
services.

Consumers
The individuals or organizations that actually use a product.

Customers
The individuals or organizations that purchase a product.

Entrepreneurs
The individuals who take risks in overseeing a business organization or business venture,
usually in pursuit of profit.

Entrepreneurship
The knowledge, skills and experiences of individuals who have the capability to
manage the overall production process.

Factors of production
The collective term for the resources used in the production process, i.e. land,
labour, capital and entrepreneurship.

Finance and accounts

Function of an organization responsible for ensuring that the business has sufficient
funds in order to conduct its daily operations.

GoodsHuman resources (HR)Marketing

Business function of identifying the needs and wants of customers so that the
organization can provide goods and services to meet these requirements and
desires, usually in a profitable way.

NeedsOperations (or operations management)

The business function referring to the process of making goods and providing
services from the available resources of a business to meet the needs and wants of
its customers.

Primary sector
Business activity involved with the extraction of natural resources, e.g. fishing,
mining and agriculture.

Production
The process of creating goods and/or services using the factors of production
available to the business.

Quaternary sector
Business activity involving the creation or sharing of knowledge and information.
Secondary sector
Business activity involved with the manufacturing or construction of finished
products.

ServicesTertiary sector
Business activity that involves providing services to customers, i.e. consumers and
business clients.

Value added
The numerical difference between the cost of factor inputs in the production process
and the price that the final output is sold for.

Wants
These are the desires of individual customers, i.e., the goods and services that they would like
to have (rather than things they need to survive), such as a new smartphone, a family holiday
in an overseas location, fresh flowers, or jewellery.

This refers to any business organisation that is

owned by its shareholders, who have limited
Companies (corporations)
liability. They comprise of privately held
companies and publicly held companies.

These are for-profit social enterprises owned and

run by their members (usually employees,
Cooperatives
managers or customers). Their primary goal is to
create value for their member-owners.

Key term Definition

This refers to any business organisation that is

owned by its shareholders, who have limited
Companies (corporations)
liability. They comprise of privately held
companies and publicly held companies.

These are for-profit social enterprises owned

Cooperatives and run by their members (usually employees,
managers or customers).

A legally binding contract that all joint owners

of a partnership sign, stating the purpose of the
Deed of Partnership
business, the rights of the partners, and how
any profits should be split.

This means that there is a legal difference

Incorporation (incorporated) between the owners of a company (the
shareholders) and the business entity itself.
 This ensures that the owners are protected by
limited liability.

An IPO occurs when an organization sells all or

part of its business to shareholders on a public
Initial public offering (IPO) stock exchange for the first time. This changes
the legal status of the business to a publicly
held company.

This legal status of a business enables its

shareholders (business owners) not to be liable
Limited liability
for more than the original amount of money
invested in the business.

This is a special type of partnership where one

or more partners contribute capital and enjoy a
Limited partnership share of the profits but do not participate in the
running of the business. However, at least one
partner must still have unlimited liability.

A type of non-profit organization (NPO)

Non-governmental operating in the private sector of the economy
organizations (NGOs) for the benefit of others in society (rather than
for shareholders).

A business alliance consisting of between 2

and 20 individual owners who are jointly
Partnership
responsible for the business (although this
number can vary between countries).

This section of the economy is made up of

businesses that are owned by individuals or
Private sector
groups of individuals, rather than by the
government.

This is a business owned by shareholders with

Privately held company limited liability, but the shares cannot be traded
on a public Stock Exchange.

A joint-stock company owned by shareholders.

The shares in a publicly held company can be
Publicly held company
bought and sold by the general public, without
prior approval of existing owners.

Public sector Businesses in this section of the economy are

run and owned by the government in order to
 provide essential services for society as a
whole, e.g., education and healthcare services.

Also known as a silent partner, this is an

investor in a partnership but who does not get
Sleeping partner
involved in the daily running and management
of the organization.

These organizations are revenue-generating

businesses with community (social) objectives
Social enterprises at the core of their operations in order to
benefit the general public, rather than private
shareholders.

An organization which is owned by a single

Sole trader (sole
entrepreneur who has exclusive responsibility
proprietor)
for the running of the business.

This is any marketplace where the general

Stock exchange public and other companies can buy and/or sell
shares.

This means the owner(s) of a business (such

as a sole trader or partner) is personally liable
Unlimited liability for any business debts, even if this requires the
debts to be settled by selling off personal
assets.

Key term Definition

A method of external growth that involves one

company buying a majority stake in another
Acquisition
company with the agreement and approval of
the target company’s Board of Directors.

A method of external growth that involves a

Backwards vertical company buying another company that is
integration further away from the consumer in the chain of
production.

This form of external growth occurs when two

or more businesses in unrelated industries
Conglomerate
integrate through a merger, acquisition, or
takeover.
 This occurs when a company sells off a part of
its business, thereby separating into two or
more separate entities. This often happens due
Demerger
to conflicts and inefficiencies of two or more
firms previously in a merger agreement, such
as culture clashes.

Growth that is more results in inefficiencies

and higher average costs of production,
Diseconomies of scale perhaps due to problems such as
miscommunication, misunderstandings, and
poor management of resources.

These are cost-saving benefits enjoyed by a

business as it increases the size of its
Economies of scale
operations, i.e. lower average costs (the cost
per unit).

Category of economies of scale that occurs

External economies of when a firm’s average cost of production falls
scale as the industry grows, i.e., all firms in the
industry benefit.

This occurs when an individual firm has higher

External diseconomies of
cost per unit of output due to factors beyond its
scale
control as the industry as a whole grows.

Also known as inorganic growth, this takes

place when an organization requires the
External growth
support of a partner organizations for its
growth.

Banks and other lenders charge lower interest

Financial economies of
to larger businesses for overdrafts, loans and
scale
mortgages as they represent lower risk.

This external growth method occurs when one

Forward vertical
company buys another business that is closer
integration
to the consumer in the chain of production.

This growth strategy that gives the right to do

Franchise business using another company’s products,
brand name and corporate logo.

Franchising A growth method that involves two parties, with

the franchisor giving the licensing rights to a
 franchisee to sell goods and services using the
franchisor’s brands and products.

This external growth strategy occurs when a

merger, acquisition, or takeover takes place
Horizontal integration between two or more companies operating
within the same industry (thereby reducing
competition).

Higher unit costs of production that occur due

Internal diseconomies of
to internal problems of mismanagement as a
scale
business organization grows.

Category of economies of scale that occurs for

Internal economies of and within a particular organization (rather than
scale the industry in which it operates) as it grows in
size.

Also known as organic growth, this takes place

Internal growth when an organization expands without the help
of an external partner firm.

An external growth method that involves two or

more organizations agreeing to create a new
Joint venture
business entity, usually for a finite period of
time.

Lateral integration

Larger businesses can afford to hire specialist

Managerial economies of
functional managers, thus improving the
scale
organization’s efficiency and productivity.

Larger businesses can spread their fixed costs

Marketing economies of
of marketing by advertising a greater range of
scale
brands and products.

This form of external growth involves two or

Merger more companies agreeing to form a single,
larger company

The level of output where the average cost of

Optimal output level
production is at its lowest value,

Purchasing economies of Larger firms can gain huge cost savings by

scale buying vast quantities of stocks (raw materials,
Risk bearing economies of Large businesses can bear greater risks than
scale smaller ones due to a greater product portfolio.

Specialization economies Larger firms can afford to hire and train

of scale specialist workers,

These are formed when two or more

organizations join together to benefit from
Strategic alliances
external growth without having to set up a new
separate legal entity.

Also referred to as hostile takeover) occurs

when a company buys a controlling interest in
Takeover another firm without the prior agreement or
approval of the target company’s Board of
Directors.

The business that is the focus of being bought

Target company out by the purchasing company in an
acquisition or takeover.

Cost savings by greater use of large-scale

Technical economies of
mechanical processes and specialist
scale
machinery,

When an acquisition or takeover occurs

Vertical integration between two companies operating in different
industries.