CHAPTER 1 : BUSINESS AND IT’S ENVIRONMENT (AS & A LEVEL) Purpose of business activity Business is a

major economic activity. It can be defined as the production of goods and services needed by people in
this world to meet their basic needs. Its purpose is to identify and satisfy the needs and wants of the
people with the overall aim of earning profit. To produce the goods and services the business will be
using scarce resources( resources that are limited in supply) Economic resources( Factors of production)
Business enterprises are established where entrepreneurs combine productive resources (factors of
production) to produce an output. These four factors can be categorised as Land: All natural resources
provided by nature such as fields, forests, oil, gas, metals and other mineral resources. It includes
renewable and non-renewable resources. The reward for land is rent Labour: The people who are used
produce goods and services. Labour is rewarded with a wage/salary Capital: Finance, machinery and
equipment needed to produce goods and services. NB there is also intellectual capital which refers to
the intelligence of the workforce. It refers to the ability of the workforce to develop new ideas, find new
solutions to problems and spot business opportunities. The reward for capital is interest Enterprise: The
skill and risk taking ability of the person who brings together all the other factors of production together
to produce goods and services. Usually the owner or founder of a business. In return the entrepreneur
will make a profit (or a loss) Division of labour / Specialisation Because there are limited resources, we
need to use them the most efficient way possible. Therefore, we now use production methods that are
as fast as possible and as efficient (costs less, earns more) as possible. The main production method that
we are using nowadays is known as specialization, or division of labour. "Division of Labour is when the
production process is split up into different tasks and each task is done by one person or by one machine
Specialisation: is when a person, firm or economy concentrate only on the tasks it is best at. Pros:
Specialized workers are good at one task and increases efficiency and output. Less time is wasted
switching jobs by the individual. Machinery also helps all jobs and can be operated 24/7. -repeating
the same job can make the worker more skilled -the business can enjoy economies of scale Cons
Boredom from doing the same job lowers efficiency. No flexibility because workers can only do one
job and cannot do others well if needed. If one worker is absent and no-one can replace him, the
production process stops. -Breakdown of a machine at one stage will affect all successive stages -Use of
machines may lead to unemployment Goods and services Goods –are divided into consumer and capital
goods i. Consumer goods: these are the tangible goods which are sold to the general public. This include
durable and non durable goods. Durable goods such as machinery, garments and mobiles can last for a
longtime while non durable goods such as edible things soon become damaged. ii. Capital goods: they
are physical products, manufactured specifically to be sold to other industries for production of other
goods and services like commercial vehicles. Services: They are non tangible products for the public to
satisfy their wants. They could be commercial or personal services. Commercial services include banking,
insurance, transportation which are done on a large scale. Personal services are one to one services such
as hair dressing, teaching, lawyer etc NEEDS AND WANTS NEEDS- are the things that we cannot survive
without -The basic human needs can be classified as: (a) Social -entertainment (b) Physical -food,
warmth, shelter (c) Status -sense of achievement, good job, large house etc (d) Security -privacy, steady
job, secure homes etc WANTS-: are the things that we can survive without e.g cell phones, radios,
jewellery etc Human wants are unlimited but the resources to satisfy them are limited in supply. This
gives rise to the basic economic problem Nature of economic activity The nature of economic activity is
that there are limited resources to satisfy unlimited wants. Due to the limited resources everyone has to
make choices (individuals, businesses, governments) Economic Problem We have unlimited Needs and
wants and there are limited resources. In economic terms we say the resources are scarce. Scarcity
refers to the fact that people do not and cannot have enough income, time or other resources to satisfy
every desire. Faced with this problem of scarcity, human beings, firms and governments must make a
choice. Problem of choice: businesses must make a choice on how to use scarce resources to fulfil their
wants. Business must choose on whether to use labour or capital to produce their products. The
business must also choose the types of goods to produce. When something else is chosen, it means
something else is given up (sacrificed). Thus choice leads to opportunity cost. Opportunity Cost-: this is
the next best choice given up in favour of the alternative chosen from two choices. E.g If a business has
a choice of purchasing new machinery and new premises. If the business chose to buy new machinery
because of its greater utility, then the premises will be the opportunity cost. Concept of creating /
adding value Creating Value: the increasing the differences between the cost of purchasing bought-in
materials and the price the finished goods are sold. To add extra features to a product and the customer
is willing to pay more after the value has been added. Added value -refers to the difference between the
selling price of a product and the cost of the raw materials used to make it. Ways of adding value There
are different ways through which businesses can add value to their products and services. Creating a
brand: Brands represent quality and sometimes status. Consumers are prepared to pay more for
products which have a strong brand attached to it. Why does a pair of Nike sell costlier than its
counterpart Puma, though the cost of production may not be much different. Advertising: Through
advertising the business can create a strong brand loyalty among its customers and in the process
charge more for its goods or services. Providing customised services: Business providing better quality
personalised services to their consumers add more value. Consumers are willing to pay a little extra for
customised services Providing additional features: A product or service with additional features or
functionality can make the consumers pay extra. This is very often seen in different version of a car
model. Toyota has 12 versions of its Innovation model. The basic engine and build is the same, but the
price increase as additional features are added. By offering convenience: Consumers love convenience.
If you get a product or service without much effort then you might happily pay a premium for it. For
example, free home delivery of your weekly grocery. Benefits to a business of adding value There are a
number of benefits a business derives through adding value to its products or services. First of all, it can
charge more to its customers. This leads to more profitability for the business in the long run. A business
can differentiate itself from its competitors. By adding more value to its goods or services a business can
stand out among its competitors as producer providing superior or premium quality. A business can save
the cost on advertising and other promotional activities once it has created a perception of high quality
and brand loyalty among its customers. Thus, adding value helps cost cutting in the long run. Business
environment is dynamic - Business environment is divided into two categories and these include the
internal and external environment. Internal environment refers to the operating environment of the
business. Elements of the internal environment are controllable and these include the firm’s
organisational structure, leadership and management style, organisational resources, vision, mission,
organisational culture. External environment is divided into market and macro environment. Challenges
from this environment are not easy to control. This environment is dynamic i.t its elements keeps on
changing. Some of the elements includes the Physical environment, Global/ International environment,
Political environment, Economic environment NB Business environment is dynamic (ever changing) and
the businesses must adapt to the challenges and formulate strategies to cope with these challenges
What a business needs to succeed Labour- the business requires different types of workers i.e skilled,
unskilled, temporary or permanent etc Land.- the business requires the site for buildings. The business
also need renewanle and non renewable resource to produce goods Capital- the business is need of
money to buy factories and machinery Customers- these are economic agents which then purchases
products made by firms Suppliers- the business will get raw materials or other services from other
businesses Government-the government will provide roads, school, law and order and the business will
benefit in one way or the other Why business fail early on (Why 9 out of 10 small businesses fail?) Lack
of experience Many a report on business failures cites poor management as the number one reason for
failure. New business owners frequently lack relevant business and management expertise in areas such
as finance, purchasing, selling, production, and hiring and managing employees. Insufficient capital
(money) A common fatal mistake for many failed businesses is having insufficient operating funds.
Business owners underestimate how much money is needed and they are forced to close before they
even have had a fair chance to succeed. They also may have an unrealistic expectation of incoming
revenues from sales Poor location Whereas a good business location may enable a struggling business to
ultimately survive and thrive, a bad location could spell disaster to even the best-managed enterprise.
Poor inventory management Poor inventory management might lead to too much of cash being blocked
as stock. Excess stock also brings in additional cost burden of maintaining it and the risk of getting
obsolete or damaged. Over-investment in fixed assets Blocking too much of cash in fixed assets can
again pose danger for the business and can contribute to business failure. Poor credit arrangement
management Business might take too much of debt and might find it difficult to service them. Poor
credit management, forward planning and cash flow problems might contribute to it. Personal use of
business funds Owners of small business usually don’t differentiate between business funds and their
own funds. The risk of utilizing business funds for personal use by the owner might lead to cash shortage
for the business. 1.1.2 THE ROLE OF THE ENTREPRENEUR Who is an entrepreneur?: An entrepreneur is
an individual who organizes and operates a business or businesses, taking on financial risk to do so. A
more technical definition of entrepreneur is ‘a person who brings together the factors of productions to
produces goods and services.’ It is one of the factors of production. Characteristics of successful
entrepreneurs Self motivation They are also often very passionate about their ideas that drive toward
these ultimate goals and are notoriously difficult.to.steer.off.the.course. Positive attitude There might
be initial hurdles and failures in ventures. A successful entrepreneur learns from his mistakes and does
not get dismayed by initial failures. He always sees the light at the end of the tunnel and continues with
his journey. Positive attitude also helps in making a strong team which might be very instrumental in the
ultimate success of the venture. Risk taker "nothing ventured, nothing gained". Successful
entrepreneurs are risk takers who have all gotten over one very significant hurdle: they are not afraid of
failure. Excellent leadership qualities A successful entrepreneur must have excellent leadership qualities.
It earns the trust and respect of his team by demonstrating positive work qualities and confidence. They
foster a positive environment and then proliferates these values through the team. Innovator Successful
entrepreneur are innovators and usually have an ‘out of the box’ approach to solving problems. They
usually identify gaps in consumer demands or needs which have been ignored for long. They welcome
change and are consistently innovating with the changing demand patterns. Dependable Successful,
sustainable business people maintain the highest standards of integrity because, at the end of the day, if
you cannot prove yourself a credible business person and nobody will do business with you, you are out
of business. Therefore, a successful entrepreneur should have Strong sense of basic ethics and integrity.
In short, he should be dependable. Resourceful Most new businesses have limited resources such as
money, information and time. Successful entrepreneurs figure out how to get the most out of these
resources. They are masters at stretching a dollar and making a few resources go a long way.
Communicators A successful entrepreneur must be a good communicator. Excellent inter-personal and
networking skills go a long way in business success. Achievement oriented Successful entrepreneurs are
achievement oriented. They value accomplishment and the intrinsic rewards that go along with
achieving difficult goals. Role of business enterprises in the development of a country Business
enterprises provide employment They pay taxes They increase the GDP of the country They satisfy the
needs and wants of the people They bring foreign currency if the products are sold outside the country
Reducing poverty levels Major challenges faced by entrepreneurs  Identifying successful business
opportunities  Sourcing capital  Determining suitable location  Competition from established firms 
Building customer base 1.1.3 SOCIAL ENTERPRISE SOCIAL ENTERPRISE Refers to a business with mainly
social objectives that reinvests most of its profits into benefiting society rather than maximising returns
to owners. Social enterprises are businesses whose primary purpose is the common good. They use the
methods and disciplines of business and the power of the marketplace to advance their social,
environmental and human justice agendas. THE RANGES AND AIMS OF SOCIAL ENTERPRISES Basically
these are the characteristics of social enterprises They operate for the well being of the society Making
profit is not the main aim Main aim is to solve social problems faced by people Profit is kept to provide
more services They normally provide education and health Generate the majority of their income
through trade Triple bottom line Social enterprises have three main objectives. These aims are often
referred to as the triple bottom line. Triple bottom line is used to measure the performance of a
business: a. Economic (Profit) b. Social (People) c. Environment (Planet) Benefits of Social Enterprises
Social enterprises produce higher social returns on investment than other On one hand, they produce
direct, measurable public benefits. A classic employment-focused social enterprise, for example, might
serve at least four public aims:  Fiscal responsibility: It reduces the myriad costs of public supports for
people facing barriers, by providing a pathway to economic self-sufficiency for those it employs.  Public
safety: It makes the community in which it operates safer, by disrupting cycles of poverty, crime,
incarceration, chemical dependency and homelessness.  Economic opportunity: It improves our pool of
human capital and creates jobs in communities in need of economic renewal.  Social justice: It gives a
chance to those most in need. 1.2 BUSINESS STRUCTURE 1.2.1 ECONOMIC SECTORS/ THE LEVELS OF
BUSINESS ACTIVITY -There are millions of businesses around us. Business can be categorised in three
broad categories or stages. Primary Sector It is the first stage of production. All those businesses which
are related with extraction of raw material from Mother Nature such as mining, fishing, farming, and
quarrying are known as Primary Sector businesses. Raw materials that are extracted are send to the
secondary sector. Secondary Sector They convert raw materials into finished or semi-finished goods. All
businesses which manufacture and process the raw materials which can be used by the end consumers
are known as Secondary Sector businesses. These include building, construction, compute assembly,
shoes factories, textile factories etc. Tertiary Sector Whereas all the businesses which provide services
and assist both the primary and secondary sector businesses can be classified as Tertiary sector
businesses. These include transportation, insurance, hospitals, educational institutes, showrooms etc. A
business may exist in all the three sectors also. For example. British Petroleum has its own Oil wells and
it extracts raw oil, this is primary sector activity, this oil is converted into petroleum and other by
products. This is secondary business activity. After processing the oil into useable product BP sells it to
end consumers through its network of Petrol pumps. This comes under the tertiary sector. 1.2.2
BUSINESS STRUCTURE Differences between Private and Public Sector Private Sector This sector
comprises businesses owned and controlled by individuals or groups of individuals. Such businesses are
commonly found in the free market economy. Their main aim is to make profit through the sale of
private goods. Examples of business found in the private sector include: i) Sole trader ii) iii) iv) v) SOLE
TRADER Partnership Private Limited Companies Public Limited Companies Co-operatives Refers to a
business in which one person provides permanent finance and, in return, has full control of the business
and is able to keep all of the profits. It is owned by one person. However the owner may employ other
people. Examples are hair salons, bus operators, grocery stores etc. Formation: No legal formalities are
required Ownership: owned by one person Legal status : The business is not a recognised as a legal
person. It is referred to as an unincorporated business Liability : The owner of the business suffer from
unlimited liability. If the business fails the owner may loose personal possessions (personal property)
Continuity : The business come to an end when the owner dies Tax Issues: it does not pay corporate
taxes, but rather the person who organized the business pays personal income taxes on the profits
made, making accounting much simpler Advantages 1 –easy to form (less capital and legal
requirements) 2 –owner has direct control of the business (makes decisions that best suit his/her
conditions 3 –all profits go to the owner 4 –enjoys major exemptions from Government legislation 5 –no
double taxation 6 –has personal contact with both customers and employees 7 –easy to terminate
Disadvantages 1 –unlimited liability 2 –can raise little capital 3 –limited management expertise 4 –poor
quality decision making 5 –difficulty in attracting qualified employees 6 –lack of continuity when the
owner dies 2 Partnerships -a business owned by at least two but not more than twenty people. The
partners agree to carry on business together, with shared capital investment and , usually, shared
responsibilities. To enter into a partnership, partners can have a verbal agreement or otherwise write a
Partnership Deed/Agreement which is a document setting out the following details: a) amount of capital
contributed by each member b) salaries/wages to be paid to each member c) rights and obligations of
the partners d) procedure for partnership dissolution) profit/loss sharing ratio e) Name of firm - includes
the name of the business entity. f) Date of writing - includes simply the date that the contract was
written. g)Duration of partnership - includes how long the partnership should last. It is automatically
assumed that the death of one of the contracting parties breaks the contract, unless otherwise stated.
h)Business to be done - includes exactly what will be done in this partnership. This section should be
very particular to avoid confusion and loopholes. Formation: fewer legal formalities are involved
Ownership: owned by at least two to a maximum of twenty partners Legal status : The business is not a
recognised as a legal person. It is referred to as an unincorporated business Liability : The partners suffer
from unlimited liability. If the business fails the owner may lose personal possessions (personal
property) Continuity : The business come to an end when the key partner dies Tax Issues: it does not pay
corporate taxes, but rather the partners who organized the business pays personal income taxes on the
profits made, making accounting much simpler Advantages 1 –easy to form (same as sole proprietor) 2 –
more capital available 3 –diversity of skills and expertise 4 –quality decisions are made 5 –personal
contact with employees and clients 6 –risk is spread over a number of people 7 –relative freedom from
government control Disadvantages 1 –unlimited liability i.e all of the owner’s assets are potentially at
risk 2 –disagreements may easily lead to winding of the business 3 –all partners responsible for the acts
of each other 4 –lack of continuity when the key partner dies or become insane 5 –profit/loss sharing
ratio not necessarily equal 6-the partnership often face intense competition from large firms 7-the
owner , by taking on a partner, will lose control of the business Limited companies Also known as Joint
stock companies. These are businesses where a number of owner(shareholder) pool in their resources
to do a common business and to share the profits and losses proportionally. In a limited company, the
debts of the company are separate from those of the shareholders. As a result, should the company
experience financial distress because of normal business activity, the personal assets of shareholders
will not be at risk of being seized by creditors. Ownership in the limited company can be easily
transferred, and many of these companies have been passed down through generations. General
features of Joint Stock Companies / limited Companies 1 –separate legal entity 2 –shareholders have
limited liability 3 –owners are called shareholders (buy shares) 4 –shareholders receive dividends as
payments 5 –the Board of Directors manages the affairs of the company 6 –the company is governed by
Memorandum and Articles of Association 7 –shareholders hold Annual General Meetings (AGMs) NB: A
share is defined as a certificate confirming part ownership of a company. This certificate also entitles the
shareholder the right to dividends. Shareholder- a person or institution owning shares in a limited
company a)Private Limited Companies Refers to a small to medium-sized business that is owned by
shareholders who are often member of the same family. This company cannot sell shares to the general
public. They have two but not more than fifty shareholders. The right to transfer shares is limited. The
business should submit financial statements and auditors reports to the Registrar of Companies
Formation: There are complex legal formalities. Two documents should be drafted by the founders of
the company and these documents include the memorandum and articles of association Ownership:
owned by at least two to a maximum of fifty shareholder Management and Control: it managed and
control by the board of directors Legal status : The business is recognised at law as a legal person. It is
referred to as an incorporated business Liability : The shareholders enjoy limited liability. If the business
fails the shareholders’ personal assets cannot be taken. They only lose the capital they have invested in
the business. Continuity : There is continuity Tax Issues: there is double taxation. The shareholders pay
tax on their incomes and the business also pay corporate tax Advantages 1 –shareholders have limited
liabilities 2 –more capital can be raised 3 –greater status than an unincorporated businesses 4 –easy to
transform into public limited companies 5 –do not have to publish annual accounts in the press
Disadvantages 1–not easy to form (up to six months) 2–has to fill complex tax forms 3–cannot raise
capital through the stock exchange 4- quite difficult for the shareholders to sell shares b) Public limited
companies -a large business, with the right to sell shares to the general public. The share prices are
quoted on the national stock exchange. They have at least two shareholders to no maximum limit.
Shares are freely transferable. The public can be invited to subscribe to shares and debentures through
a prospectus. Can only start business after complying with all the requirements of the Companies Act.
Annual accounting reports (financial statements) are supposed to be published in the press. Must keep a
register of investors and directors’ shareholding Formation: There are more complex legal formalities.
Three documents should be drafted by the founders of the company and these documents include the
memorandum of association, articles of association and the prospectus Ownership: owned by at least
two to no maximum limit of shareholder Management and Control: it managed and control by the board
of directors Legal status : The business is recognised at law as a legal person. It is referred to as an
incorporated business Liability : The shareholders enjoy limited liability. If the business fails the
shareholders’ personal assets cannot be taken. They only lose the capital they have invested in the
business. Continuity : There is continuity Tax Issues: there is double taxation. The shareholders pay tax
on their incomes and the business also pay corporate tax Advantages 1 –easy to raise capital through
floating shares on ZSE 2 –can operate on a large scale 3 –unlimited life 4 –employees can become
shareholders-increases loyalty 5 –managers and directors have room to work independently therefore
prove their expertise in their areas of specialization 6-shareholders enjoy limited liability Disadvantages
1 –difficult to form 2 –files always open for inspection by members of the pubic 3 –decisions take time
to make due to large size of the company 4 –no personal touch between employees and customers 5 –
conflict of interest-shareholders are usually interested in expanding the business 5 Co-operatives -Is an
association of persons united voluntarily to meet common economic, social and cultural needs. Usually
members join together to purchase or sell goods that they cannot afford individually. Main features 1 –
formed by people who want to work together 2 –is voluntary 2 –members make equitable contributions
4 –risks and benefits are shared equally 5 –are democratically controlled 6-the name ends with Co-op
Formation Members should have a common goal. These members will then draft the constitution and
the management committee is elected usually at an annual general Meeting There are different types of
co-operatives: Housing cooperative Retailers' cooperative Worker cooperative Consumers' cooperative
Agricultural cooperative Advantages  It is easy to form e.g any ten adults form a co-operative  No legal
formalities are involved  Membership is open to everyone  Members enjoy limited liability  Members
get goods and services at reasonable prices  There is continuity  Surplus is shared amoung members 
State patronage ( government provides special assistance to the co-operatives to enable them to
achieve their objectives successfully  They are usually tax exempted Disadvantages  unable to raise
large amount of financial resources  It is managed by members who may be lacking the required
management skills  Can be affected by conflict since it is an association of people from different social,
economic and academic background  Absence of rewards discourage the members to put maximum
effort in the society Franchising Refers to an agreement where one party (the franchisor) grants another
party (the franchisee) the right to use its trade mark or trade name as well as certain business systems.
The franchisee sells the franchisor's product or services, trades under the franchisor's trade mark or
trade name and benefits from the franchisor's help and support. and In return, the franchisee usually
pays an initial fee to the franchisor and then a percentage of the sales revenue. The franchisee owns the
outlet they run. But the franchisor keeps control over how products are marketed sold and how their
business idea is used. Well-known businesses that offer franchises of this kind include: Pizza, Bata,
McDonalds, Nandos etc Contractual Obligation  A franchise agreement should be drafted and signed by
both parties. This is a legal contract in which the franchisor gives the franchisee the right to use the
business’s trade mark.  The franchisor is not allowed to open a similar business nearby  It must specify
the franchise fee as well as monthly royalty payment  The agreement lays out details of what duties
each party needs to perform  It also state the duration of the franchise contract Advantages to the
franchisee  Franchisee benefit from pre-opening support e.g site selection, design, financing 
Franchisor assist in training staff  Franchisor advertise goods on behalf of the franchisee ( saves money)
 Franchisee enters into an existing market which increases the chances of business success.  Risk is
reduced and is shared by the franchisor.  Relationships with suppliers have already been established.
Disadvantages to the franchisee  The franchisor might go out of business, or change the way they do
things.  The franchise agreement usually includes restrictions on how you run the business. You might
not be able to make changes to suit your local market.  The franchisee must pay initial fee and
continuing fees to continue to use the trade mark  The franchisee cannot sell goods from other
suppliers  Breach of contract can result in a penalty charge Advantages to the franchisor  It’s a source
of income to the franchisor (royalties received)  Risk of the business is spread amoung different
franchisees  A network of outlets gives the business a far better chance of success Disadvantages to the
franchisor  Other franchisees could give the brand a bad reputation.  Franchisor must provide the
franchisee with on-going support which then requires constant research  Setting up a franchise requires
a lot of money Joint Ventures It occurs when two or more businesses agree to work closely together on
a particular project and create a separate business division to do so. Joint Venture is not a long term
business relationship but a short term relationship based on a single business project. The business is
not a separate legal entity. Once the joint venture has met it’s goals, the entity ceases to exist. An
example include Sonny and Ericson formed Sonny Ericson to produce handsets. Joint Venture
Agreement Should cover:  The parties involved  The objectives of the joint venture  Contributions
made by each party  Dispute resolution procedure  How the joint venture is terminated  Non-
disclosure agreements  Day to day management Advantages  Provide companies with the
opportunity to gain new capacity and expertise  Allow companies to have access to new technology 
Access to greater resources, including specialised staff and technology  Sharing of risk with a venture
partner Disadvantages  The business failure of the partner would put the whole project at risk  Styles
of management and culture might be so different that the two teams do not blend well together  The
parties don’t provide enough leadership and support in the early stages  Errors and mistakes might
lead to one blaming the other for mistakes Strategic Alliances A strategic alliance is an agreement
between two companies that have decided to share resources to undertake a specific, mutually
beneficial project. A strategic alliance is less involved and less permanent than a joint venture. The main
purpose is to allow two organisations, individuals or other entities to work toward common or
correlating goals. Unlike a joint venture, firms in a strategic alliance do not form a new entity to further
their aims but collaborate while remaining apart and distinct. Examples of Strategic Alliances An
agreement with a Local University- finance is provided by the business to allow new specialist training
courses that will increase the supply of suitable staff for the firm An agreement with a supplier- to join
forces in order to design and produce components and materials that will be used in a new range of
products. An agreement with the competitor- to reduce the risk of entering a market that neither firm
currently operates in. Holding Companies Refers to a business organisation that owns and controls a
number of separate businesses, but does not unite them into one unified company. They are not a
different legal form of business organisation, but they are an increasingly common way for business to
be owned. Family Owned Businesses Refers to businesses that are actively owned and managed by at-
least two members of the same family. Decision making is influenced by multiple generations of a family
related by blood. Strengths of family business  Stability- family positions typically determines who leads
the business and as a result, there is longevity in leadership. Family leaders stay usually stay in the
positions for many years until a life event such as illness, retirement or death results in change 
Commitment- since the needs of the family are at stake, there is a greater sense of commitment and
accountability. The family owners often show dedication in seeing the business grow, prosper and get
passed on to future generations. This level of dedication is almost impossible to generate in non-family
firms  Flexibility- you won’t hear “Sorry but that’s not my job description”. In a family business, family
members are willing to wear several different hats and to take on tasks outside of their formal job on
order to ensure the success of their company.  Long term outlook- non family firms think about hitting
goals this quarter, while family firms think years, and sometimes decades, ahead. This ‘patience’ and
long term perspective allows for good strategy and decision making  Decreased costs- family members
working at family businesses are willing to contribute their own finance to ensure the long term success
of the organisation. This could mean contributing capital or taking a pay cut. This advantage comes in
handy during economic down turns, where it is necessary to personally suffer in order for the firm to
survive. Weakness of family businesses  Family conflicts- deep seated, long lasting bitter fights and
quarrels can affect every single person within the firm and can draw divisive lines. These conflicts are
usually difficult to solve and result in a premature ending of the business.  Unstructured governance-
governance issues such as internal hierarchies and rules, as well as the ability to follow and adhere to
corporate laws, tend to be taken less seriously at family businesses. There is little interest in setting clear
and formal business practices and procedures and this situation can lead to inefficiencies  Tunnel
vision- there lack of outside opinions and diversity on how to operate the business. Family members are
given jobs for which they lack the required skills, education and experience. This has got far- reaching
effects on the success of the business.  Issues of fair remunerations can be ‘a can of worms’- the issue
of wages and salaries can be a highly sensitive subject. The question is how the pie is going to be
divided. Paying family members and dividing the profits amoung them can be a difficult affair. Many
people usually feel that they are underpaid and family members too. We have family members who
comments like this, ‘uncle Jack sits around and gets more than I do’ Public Sector Refers to all the
businesses that are owned by the government on behalf of the public. They can be district councils or
public corporations. They are established by an Act of Parliament. They are corporate bodies with a
separate legal entity -they are managed by a Board appointed by the Minister -the Minister can be
questioned by parliament over activities of the corporation Advantages  They provide important goods
and services at reasonable prices  Provide employment to the majority  Implement government
policies e.g charge low prices to reduce inflation  They are a source of income to the government
Disadvantages  They are inefficient and very wasteful due to the lack of profit motive  They tend to
provide poor quality goods and services due to the absence of stiff competition  Lack of motivation
amoung workers leads to inefficiency  They suffer from excessing political interference Public Sector
and Private Sector contrasted Usually the aim of public sector business is to provide services to the
community. For example if the transport system is owned by the government and it is running a bus
service to an interior village and it is not getting enough customers, the government might still continue
it as its main objective is to provide service and not to maximise profits. Whereas private sectors
business give priority to profits and may end the service if it does not find it profitable to run the service.
Secondly Public sector strives to create employment whereas Private sectors main aim is to become
efficient and cut cost and in this process they might cut jobs. Public sector business usually locates in
regions where there is underdevelopment so as to create jobs and income for local population. Private
sectors might not keep these things in consideration and will look for external economies of scale.
Privatisation involves selling state-owned assets to the private sector Advantages of Privatisation 1.
Financial Resources The main advantage of privatization is to generate financial resources for the
government in order to generate resources disinvestment of public sector enterprises. 2. Optimum
Utilisation of Resources It has been observed that the public sector has failed in the optimal use of
national resources. The private sector may success in the optimum use of resources by maintaining
efficiency. 3. Fostering Competition Most of the public Enterprises enjoy the status of monopoly. It
results in inefficiency and losses. Privatization creates a situation of competition for public Enterprises
and they are forced to improve their efficiency. 4. Reduce Fiscal Burden Privatization reduces the fiscal
burden of the state by relieving it of the losses of the public enterprise and reducing the size of the
bureaucracy. 5. Economic Democracy Privatization helps to control government Monopoly. It helps to
attract more resources from the private sector. It emerges economic democracy by private participation
in Economics sphere. 6. Better Industrial Relations Privatization may increase the number of workers
and the common man who are shareholders. This could make the Enterprises subject to more public
vigilance. 7. Reduction in Political Interferences The process of privatization reduces political
interferences in the public sector enterprises by giving more representation to the private sector in the
management of Public Enterprises. 8. Reduction in Bureaucracy Public Enterprises become synonyms
bureaucracy. They can be made from bureaucracy by the process of privatization. 9. More Productivity
The private sector can improve productivity by maintaining efficiency in its operations. Advantages and
Disadvantages of Privatization Disadvantages of Privatisation 1. Problem of Price The government
usually want to sell the least profitable Enterprises, those that the private sector is not willing to buy at a
price acceptable to the government. 2. Opposition from Employees Disinvestment tends to arise
political opposition from employees who may lose their jobs, from politicians who fear short-term
unemployment consequence of liquidation of cost reduction by private owners, from bureaucrats who
stand to lose patronage and from those sections of the public who fear that national assets are being
concerned by foreigners, the rich or a particular ethnic group. 3. Problem of Finance In the developing
countries under the developed capital market sometimes makes it difficult for the government to float
shares and for individual buyers to finance the large purchase. 4. Improper Working The main
disadvantage of the private sector is that it has fallen much short of what this sector is capable of or
what it has achieved in some other countries. The private sector is not interested in cost reduction and
quality production. 5. Independence on Government There has been an excessive Regulation and
control of the private sector by the government. This has prevented and competition from becoming a
generalized phenomenon of the economy. 6. High-Cost Economy Another problem with the private
sector is that its cost, in general, are large and the price of products are unduly high. 7. Concentration of
Economic Power The private sector emerges Monopoly and the concentration of economic power in the
hands of few.The private sector operates on the principle of maximization of the Monopoly profits. It is
harmful to consumers and society as a whole. 8. Bad Industrial Relations An unfortunate aspect of the
private sector is the recurrence of industrial disputes which 9. Widespread Sickness The private sector
Industries such as Textiles, engineering, Chemicals, iron, and steel and people are suffering from the
problems of industrial sickness. 1.3 Size of business The businesses are classified as small, medium and
large businesses. Thus the businesses are compared using their sizes.. Importance of Business Size
Stakeholder Importance Government -the government may want to give assistance to small firms -The
government may want to charge different tax rates to different firms Investors -they may want to
compare with its close competitors -they want to know how safe it is to invest in a given business
Customers -customers may prefer to deal with large forms since they are the most reputable and are
less likely to cease production in the near future Workers -workers also want to be employed in large
firms since they are concerned about job security Banks They use business size to determine the
maximum loan they can give to the business 1.3.1 Measurements of business size In the world around
us there are some businesses which are small and some are big. But how do we categorize these
businesses as big or small. We can consider the following factors:  The number of employees: Small
business employ fewer workers than large businesses since they operate on a small scale. European
Classifications of business