Book Sample

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Original material © Cambridge University Press 2022. This material is not final and is subject to further changes prior to publication.
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Business
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Management
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for the IB Diploma
COURSEBOOK
Peter Stimpson, Adamantia Malli-Charchalaki & Alexander Smith

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First published 2011
Second edition 2015
Third edition 2022
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International, Bachillerato Internacional and IB are registered trademarks owned by
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Contents
Contents
How to use this series v Unit 3: Finance and accounts
How to use this book vi 14 Introduction to finance
and sources of finance226
Introductionviii
15 Costs and revenues243
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Unit 1: Introduction to business
management 16 Final accounts253
1 What is a business?2 17 Profitability and liquidity
ratio analysis273
2 Types of business entities19
3 Business objectives36
4 Stakeholders59
5 Growth and evolution72
6 Multinational companies (MNCs)92
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(HL only)287
19 Cash flow300
20 Investment appraisal315
21 Budgets (HL only)328
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Unit 2: Human resource management
Unit 4: Marketing
7 Introduction to human resource
22 Introduction to marketing342
management101
23 Marketing planning353
8 Organisational structure118
24 Sales forecasting (HL only)372
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9 Leadership and management137

25 Market research384
10 Motivation and demotivation152
26 The seven Ps of the
11 Organisational (corporate)
marketing mix404
culture (HL only)186
27 International marketing
12 Communication198
(HL only)446
13 Industrial/employee relations
(HL only)212
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BUSINESS MANAGEMENT FOR THE IB DIPLOMA: COURSEBOOK
Unit 5: Operations management Glossary622

28 Introduction to operations Key formulae633
management459
Acknowledgements 635
29 Operations methods473 Index637
30 Lean production and quality
management (HL only)484
31 Location 505
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32 Break-even analysis524
33 Production planning (HL only)539
34 Crisis management and
(HL only)577
36 Management information
systems (HL only)588
Unit 6: Examination skills
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contingency planning (HL only)568
35 Research and development
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37 Examination skills607
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How to use this series
How to use this series

This suite of resources supports students and teachers following the Business
Management for the IB Diploma syllabus (M2024). The components in the series
are designed to work together and help students develop the necessary knowledge
and skills for Business Management. With clear language and style, they are designed
for international students.
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in class with guidance from the teacher. It offers
complete coverage of the Business Management
for the IB Diploma syllabus (M2024). Each chapter
contains clear explanations of business theory with
a variety of activities, case studies and questions
to engage students, help them to make real-world
connections and to develop their critical
thinking and evaluation skills.
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The Teacher’s Resource is the foundation of this
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series because it offers inspiring ideas about how

to teach this course. Teachers will find everything
they need to deliver the course in here, including
teaching guidance, lesson plans, suggestions
for differentiation, assessment and language
support, answers and extra materials including
downloadable worksheets, tests and PowerPoint
slides for each chapter.
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How to use this book

Here is a brief overview of the features in this Coursebook.
LEARNING OBJECTIVES
Learning objectives help you navigate the Coursebook and indicate the important concepts in each topic.
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Higher Level Learning Objectives are marked with an arrow to allow you to easily identify
Higher Level only material.
The content in this book is divided into Standard and

Higher Level material. A vertical line runs down the ACTIVITY
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margin of all Higher Level material, allowing you to
easily identify Higher Level only material.
BUSINESS IN CONTEXT
Key ideas contained in the chapter in a real-world
business context. They raise issues for discussion,
with questions that allow you to look in more
detail at the topic.
Activities include short case studies with evaluative
or analytic questions, and opportunities to produce
your own work individually, in pairs or in groups.
CASE STUDY
International business examples provide
opportunities for you to engage with the subject,
and develop your skills of application, analysis and
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evaluation in a real-world context.
KEY CONCEPT LINK
These explain how the Coursebook’s topics are
integrated with the key concepts in the syllabus. LEARNER PROFILE
Learner profiles illustrate how the IB learner
profile can be applied in different contexts.
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KEY TERMS AND FORMULAE

Key vocabulary and formulae are highlighted
and explained. You will also find definitions in TIPS
the Glossary. Tips to help with your learning cover how to
avoid common errors or misconceptions, advice
on essay writing, evaluation and analysis, and
THEORY OF KNOWLEDGE guidance on how answers are arrived at.
Designed to stimulate critical thinking, allowing

you to consider how you can say you know what
you claim you know.
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How to use this book
SELF-EVALUATION CHECKLIST
Statements outlining the content that you should understand by the end of the chapter. You can rate how
confident you are for each of these statements when revising and re-visit topics you rated ‘Needs more work’ or
‘Almost there’.
Higher Level only statements are marked with an arrow to allow you to easily identify Higher Level only material.
EXAM-STYLE QUESTIONS
Exam-style questions focus on knowledge and understanding, application, analysis and evaluation and may
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require you to use your knowledge from previous chapters.
Higher Level exam-style questions questions are marked with an arrow to allow you to easily identify Higher Level
only questions.
REFLECTION
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An opportunity to reflect on what you have
learned and consider your own perspective on
some of the issues explored.
PROJECT
Opportunities for pair or group project work to
give you practice in producing different outputs,
such as posters, presentations and debates,
allowing you to build a range of skills.
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Introduction
• encourage the appreciation of ethical issues and
Nature of the subject the concept of social responsibility in the global
business environment
The International Baccalaureate Diploma Programme
course for Business Management is designed to develop • enable the development of decision-making skills
an understanding of essential business theory and the through the use of case studies that enhance
ability to apply business principles, practices and skills. students’ ability to make informed business decisions
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It encourages students to understand and analyse the • make a clear distinction between higher-level and
diverse range of business organisations and activities, and standard-level content, and support the higher-
the cultural and economic context in which businesses level material with more evaluative questions and
operate. A clear emphasis is placed on strategic decision- strategic decision-based tasks
making both for the whole business organisation as well • help students improve their performance on the
as within the business functions of marketing, production, internal and external assessments used in the
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human resource management and finance. Business
Management is the study of both the way in which
individuals and groups interact in an organisation and of
the transformation of resources. It is, therefore, perfectly
placed within the Group 3 subject area (Individuals and
societies) of the IB Diploma Programme hexagon.
The aims of this book

As well as providing the appropriate subject content for
•
•
Business Management syllabus
show how the Business Management syllabus relates to
the Theory of Knowledge part of the IB Programme
illustrate the four key concepts that underpin the
Business Management syllabus (change, creativity,
ethics and sustainability).
Skills
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The skills acquired and developed by successful students of
the IB Business Management course, this book aims to:
Business Management interlink with the IB learner profile.
• introduce business management as a study of ways In particular, decision-making, risk-taking and thinking
in which individuals and groups interact in an skills are needed to weigh up and make judgements on a
organisation and of how resources are transformed wide range of business strategies and options. These will
by businesses be transferable both to other disciplines and to higher-level
• explain that business management is a rigorous and undergraduate study at university.
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rewarding subject that examines dynamic decision-

The assessments used in the IB Business Management
making processes and assesses how decisions
course will test the following skills:
impact on and are affected by internal and
external environments • knowledge and understanding of business
• help students develop an understanding of business terminology, concepts, principles and theories
theory and the ability to apply business principles, • application of skills and knowledge learnt to
practices and skills hypothetical and real-business situations
• encourage students to develop international- • analysis and evaluation of business decisions, strategies
mindedness by evaluating the activities of business and practices using critical thinking
in global markets and appreciating cultural diversity • decision-making by identifying the issue(s), selecting
• evaluate the diverse range of business organisations and interpreting data, applying appropriate tools and
and activities techniques, and recommending suitable solutions
• develop in students an awareness of the cultural and • synthesise of knowledge in order to develop a
economic context in which businesses operate framework for business decision-making.
Peter Stimpson, Adamantia Malli-Charchalaki, &
Alexander Smith
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Unit 1
Introduction
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to business PL
management
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Chapter 1
What is a
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business?
Higher-level
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LEARNING OBJECTIVES
On completing this chapter you should be able to:
Know and understand:
• The nature of business (AO1)
Apply and analyse:

• Primary, secondary, tertiary and quaternary sectors (AO2)
• Entrepreneurship – challenges and opportunities for starting a business (AO2)
Select and apply the business management tool:

• The business plan (AO4)
1 What is a business?
BUSINESS IN CONTEXT
Enterprise in Chile
Chile is a good place for entrepreneurs. It was
classed as the most innovative country in South
America in the 2020 Global Innovation Index.
According to the Global Entrepreneur Monitor
(GEM), Chile is the most entrepreneurial country in
the world, ahead of the US and India. Many factors
explain this, such as a stable economy, several
sources of start-up funding, a skilled workforce,
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government initiatives to support entrepreneurs and
a good education system. It is possible to set up a
new company in just one day. This is one reason why
Chile is number one in Latin America on the 2020
World Bank’s Ease of Doing Business Index.
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Wheel the World is a travel company that was set up
in Chile in 2017 for people with disabilities. It creates
tailored travel experiences at tourist destinations
around the world. The entrepreneurs who created
this start-up, Alvaro Silberstein and Camilo Navarro
Bustos, identified a gap in the global tourism
market. The start-up raised a total of $2 million from
Booking Booster, Google Launchpad Accelerator,
Facebook, and Startup Chile. The company attracts
disabled tourists and their families from many
countries. It provides employment for an increasing
There are very few global travel companies that specialise
in holidays for those with disabilities
Discuss in pairs or in a group:

•
•
What benefits does the economy of Chile
obtain from new business start-ups such as
Wheel the World?
Why is it important for entrepreneurs to identify
a ‘gap in the market’?
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number of employees who agree with Wheel the
World’s mission of: • What challenges must an entrepreneur
overcome to make their business succeed?
• encouraging tourism for people with disabilities
• raising awareness of people with disabilities as KEY TERM
active people who strive to live their life fully
entrepreneur: someone who takes the financial
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• inspiring others with stories of overcoming, risk of starting and managing a new venture
fellowship and love.
KEY CONCEPT LINK

Creativity
New enterprises need to differentiate themselves become a very useful source of ideas for new
from rivals, many of whom will be well established. goods and services, which could help the business
One way of achieving this is by innovation – add value for consumers. Creativity is the ability
providing either a different type of product or a of the mind to think freely and to generate new
service that is different from those of competitors, and original ideas. Some of the ideas of creative
or which is delivered in a distinct way. Encouraging employees are eventually implemented on
employees to be creative could mean they innovative products.
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depending on the product being produced and the size

1.1 Introduction – what of the business. There are four main inputs:
is a business? • Land – this general term includes not only land

itself but all of the renewable and non-renewable
A business is any organisation that uses resources to resources of nature such as coal, crude oil
meet the needs of customers by providing a product and timber.
or service that they demand. There are several stages • Labour – manual and skilled labour make up the
in the production of finished goods. Business activity workforce of the business. Some businesses are
at all stages involves adding value to resources such labour intensive, that is they have a high proportion
as raw materials and semi-finished goods and making of labour input compared to other factors of
them more desirable to – and thus valued by – the production. An example is house-cleaning services.
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customer. Without business activity we would still • Capital – this consists of the finance needed to set
be entirely dependent on the goods that we could up a business and pay for its continuing operations.
make or grow ourselves; in fact, people in some The term also includes the human-made resources
communities still are. Business activity uses the scarce used in production. These resources include capital
resources of our planet to produce goods and services goods such as computers, machines, factories,
that allow us to enjoy a much higher standard of offices and vehicles. Some businesses are capital
self-sufficient.
1.2 The nature of

business
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living than would be possible if we remained entirely
Businesses identify the needs of consumers or other

firms. Then they purchase resources, which are the
•
intensive, that is they have a high proportion of
capital compared to other factors of production.
An example is power stations.
Enterprise – this is the driving force of business,
provided by risk-taking individuals, who combine
the other factors of production into a unit that is
capable of producing goods and services. Enterprise
provides a managing, decision-making and
coordinating role. Without this essential input, even
very high-quality land, labour and capital inputs
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‘inputs’ of the business, or factors of production, in will fail to provide the goods and services that
order to produce output. The ‘outputs’ of a business customers need.
are the goods and services that satisfy consumers’
needs, usually with the aim of making a profit. Business There are many other things that businesses need before
activity exists to produce goods or services, which can they can successfully produce the goods and services
be classified in several ways: consumer goods, consumer demanded by customers. Figure 1.1 shows the wide
services and capital goods. range of these needs.
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Consumer goods include cars and washing machines.

These two examples are referred to as durable
KEY TERMS
consumer goods. Food, drink and soap are examples consumer goods: the physical and tangible
of non-durable consumer goods as they can only be goods sold to final users; these include cars, food
consumed once. and clothing
consumer services: non-tangible products
that are sold to final users; these include
1.3 What are business hotel accommodation, insurance services and
train journeys
‘inputs’? capital goods: physical goods that are used
These are the human, physical and financial resources by industry to aid in the production of other
needed by businesses to produce goods or services. goods and services such as machines and
They are also known as factors of production. commercial vehicles
Businesses use different combinations of inputs,
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Site for buildings Raw materials Finance Factories/Offices
Land Capital Machines
Roads/Rail/Airports
Customers
Resources needed
Government Law and order
by business
Suppliers
Schools/Colleges
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Labour Enterprise
Skilled Permanent Risk-takers Coordinators
Unskilled
Figure 1.1: What businesses need
1.4 Business functions

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Temporary
Most businesses have four main functional departments.

In all but very small businesses they will be staffed by
people who have specific qualifications and experience in
Decision-makers
made within the other functional areas, so finance

is a key division of any business.
Marketing
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the work of the functional area. This function is responsible for market research
and for analysing the results of such research so
that consumer wants can be correctly identified.
Human resource management This information will then be discussed with other
departments of the business so that the right product
Human resource (HR) management identifies the decisions are made. Once a product is available for sale,
workforce needs of the business. Then it recruits, the marketing function will have to make important
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selects and trains appropriate individuals and provides decisions concerning its pricing, how and where to
motivational systems to help retain workers and promote it, how to sell it and how to distribute it
encourage them to work productively. It also draws for sale.
up contracts of employment and deals with the
redundancy or redeployment of employees if this
becomes necessary. The aim of this business function is Operations management
to manage human resources to help the business achieve
its overall objectives. Operations management is responsible for ensuring
adequate resources are available for production,
maintaining production and quality levels, and
Finance and accounts achieving high levels of production as efficiently
as possible. This function is important in service
This function is responsible for monitoring the flow industries as well as in traditional manufacturing.
of finance into and out of the business, keeping and In service industries, operations management will aim
analysing accounts and providing financial information to ensure that the processes for the delivery of the
to both senior management and other departments. service are well tested, consistent and understood
Without adequate finance, no effective decisions can be by all employees.
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ACTIVITY 1.1 KEY TERMS

1 Identify which business function is most likely primary sector business activity: businesses
to undertake the following roles. engaged in farming, fishing, oil extraction and all
other industries that extract natural resources to
Role Function be used and processed by other firms
Setting prices of new products secondary sector business activity: businesses
Recruiting a new operations that manufacture and process products from
manager natural resources, including furniture, brewing,
Allocating resources to purchase baking, clothing and construction
capital equipment
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tertiary sector business activity: businesses
Deciding on the appropriate that provide services to consumers and other
inventory levels of raw materials businesses, such as retailing, transport, insurance,
Finding out if consumers prefer one banking, hotels, tourism and telecommunications
product design to another quaternary sector business activity: this focuses
on information technology (IT) businesses and
Determining the level and number
of employees that the business
needs for future operations
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The function responsible for the first role
(setting prices of new products) must
collaborate closely with another function
before the decision is taken. Which function
do you think that is?
How did you decide on your answer to
Question 2? Did you consider the roles of all
information service providers such as research
and development, business consulting and
information gathering
Country
United Kingdom
Ghana
Primary
1.2
33.8
Secondary
18.1
18.6
Tertiary
80.7
47.6
Table 1.1: Employment data 2020 – as a percentage of
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four basic business functions first to narrow total employment
your choices and to justify your answer?
CASE STUDY 1.1
1.5 Economic sectors Huan and Bonnie want to become

entrepreneurs
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All production can be classified into four broad types of

Huan and Bonnie have recently graduated from
business activity, or economic sectors. These categories
university. Huan holds a degree in chemical
relate to the three stages involved in turning natural
engineering and Bonnie has graduated from
resources, such as oil and timber, into the finished
a business school. They both want to become
goods and services demanded by consumers, plus the
entrepreneurs, so they decided to create a
‘knowledge-based’ support services that businesses
start-up business producing and selling fresh ice
require. The four sectors are primary, secondary, tertiary
cream. Huan will undertake the management
and quaternary.
of operations, while Bonnie will specialise
National economic data often makes no distinction in marketing.
between tertiary and quaternary sectors. The balance
of the primary, secondary and tertiary sectors in the They are worried about the management of the
economy varies substantially from country to country human resource and finance functions. They
as it depends on the level of industrialisation in each need to recruit four employees for their small
country. The balance between the sectors is often production unit and two employees for the retail
referred to as a country’s ‘economic structure’. Table 1.1 shop. All employees will need to be trained on
shows the different economic structures of two countries. the business’s processes.
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Benefits include:
CONTINUED
• Total national output (gross domestic product)
They also need to make sure they have increases and this improves average standards
enough financial resources to pay for the inputs of living.
of their production. • The increasing output of goods can result in lower
imports and higher exports of such products.
• The expansion of manufacturing businesses will
result in more jobs being created.
• Expanding and profitable firms will pay more tax
to the government.
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• Value is added to the country’s output of raw
materials, such as corn processed into breakfast
cereals, rather than simply exporting these as basic,
unprocessed products.
Problems include:
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2
3
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Define the term ‘entrepreneur’.
In which economic sector(s) will Huan
and Bonnie’s start-up business operate?
Justify your answer.
Suggest two types of ‘inputs’ that
Huan and Bonnie need in their
[2]
[4]
•
•
The chance to work in manufacturing can
encourage a huge movement of people from
the countryside to the towns, which leads to
housing and social problems. It may also result in
depopulation of rural areas, and farmers may not
be able to recruit enough workers.
The expansion of manufacturing industries may
make it difficult for secondary sector businesses to
recruit and retain sufficient employees.
Imports of raw materials and components are often
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ice-cream business. [4] needed, which increases the country’s import costs.
Costs of imported materials vary with changes in
4 Using examples, explain the importance the exchange rate.
of all four business functions for the • Pollution from factories will add to the country’s
start-up ice-cream business. [4] environmental problems.
• Much of the growth of manufacturing industry is
due to the expansion of multinational companies,
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Changes in economic which may remit all of their profits to their

home countries.
structure – sectoral change In more economically developed economies, the situation
It is very important to recognise two features of the is reversed. There is a general decline in the importance
four-sector classification of economic activity. of secondary sector activity and an increase in the
tertiary sector. This is known as deindustrialisation.
The first is that the importance of each sector in
a country’s economic structure changes over time. In the UK, the proportion of total output accounted
Industrialisation describes the growing importance for by secondary industry fell from 30% in 1970 to 17%
of the secondary sector manufacturing industries in 2020. This decline in the relative importance of the
in developing countries. The relative importance of manufacturing sector also occurred in other developed
each sector is measured in terms either of employment economies such as the USA, France and Germany.
levels or output levels as a proportion of the whole The reasons for and possible impact of these changes on
economy. In some countries in Africa and Asia, the business include the following:
relative importance of secondary sector activity
• Rising incomes associated with higher living
is increasing. This brings many benefits as well
standards have led consumers to spend much of
as problems.
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their extra income on services rather than more • Employment patterns change – manufacturing
goods. There has been substantial growth in workers may find it difficult to find employment in
tourism, hotels and restaurant services, financial other sectors of industry. This is called ‘structural
services and so on – yet spending on physical goods unemployment’.
is increasing more slowly.
The second thing to recognise is that the relative
• As the rest of the world industrialises, importance of each sector varies significantly between
manufacturing businesses in the developed countries different economies. Table 1.1 shows the differences that
face increased competition and these rivals tend exist between the economies of different countries and
to be more efficient and use lower-cost labour. the share of total employment accounted for by each
Therefore, the growing number of imported goods sector of industry.
are taking market away from the domestic secondary
sector firms, and many have been forced to close.
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CASE STUDY 1.2
Vietnam’s sectoral change
over time.
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Vietnam is undergoing a swift economic transition.
Historically, it has been an agricultural country,
dependent on the production of rice. The country’s
reliance on the primary sector has been reducing
The secondary sector grew fast, especially in the

late 2000s. The growth of manufacturing, mostly
in auxiliary industries such as textile, electronics,
leather and garments has been supported by various
economic policies of the Vietnamese government.
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Moreover, Japan offered aid of approximately
$180 million to finance small and medium-sized household income has increased, leading to
enterprises (SMEs) in Vietnam. As a result, areas improved living standards. Yet, Nguyen Hoang
such as Que Vo district and Bac Ninh province Dung, former R&D director of the Ho Chi Minh City
became industrial zones. The industrialisation of Institute of Economy and Management in Vietnam,
Vietnam attracted big multinational firms such as the identified some issues along with the benefits
Korean company Samsung, which now assembles of the sectoral change. Some of these issues are
most of its smartphones in the country. By 2020,
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linked to the fact that most of the economic shift

smartphones accounted for roughly one quarter of is led by foreign businesses. One main problem
the country’s exports. is the lack of adequate training of local manual
Today, Vietnam is developing its tertiary sector fast. workers by multinational companies. Also, foreign
Some of the fastest-growing industries are finance firms often do not transfer much technological
and banking, insurance, health care, education, know-how to Vietnamese engineers, and they are
transportation, trade and tourism. Modern not environmentally responsible.
technologies in the quaternary sector are growing 1 Define the term ‘secondary sector’. [2]
fast as well, with firms like Samsung investing in
artificial intelligence (AI), 5G, and research and 2 With reference to the case study, identify
development (R&D) facilities. two examples of ‘sectoral change’ in
the Vietnamese economy. [4]
Vietnam’s sectoral change has improved overall
welfare in the country by increasing the national 3 With reference to the case study, identify
output and creating new job positions in the one advantage and one disadvantage of
secondary and tertiary sectors. The average the economic transition in Vietnam. [4]
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TIP
It is a good idea to read the business section of world, and actual business examples can be used
newspapers regularly. Don’t forget that these are to help answer some examination questions. For
often available free online. This will help you to example, what was the major business story in your
apply the work you have done in class to the real country this week?
ACTIVITY 1.2
Business Primary Secondary Tertiary Quaternary Description of
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main activities
Coca-Cola
HSBC
RTZ Corporation plc
1
Booking.com
Rolls Royce Holdings plc
Tencent
a
b
c
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Copy the table above into your notebook. Use the internet or other means of research to:
identify these well-known international companies
identify the main sector of industry that they operate in
give details of their main activities.
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2 Have you had problems identifying the main sector of any of the companies
in the table? If so, why? How did you come up with an answer?
3 Research five businesses that operate in your country and identify which sector
of the industry they mostly operate in and what their main activities are.
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family may reveal various products or services that

1.6 Entrepreneurship – an entrepreneur could offer.
• Being independent. Some people dislike the
starting a business idea of being told what to do! By creating their
own business they have flexibility around their
Opportunities work and control over their working lives. If the
business is a success, the entrepreneur will no
The process of setting up a new business is known as longer have to accept other managers’ decisions,
entrepreneurship. Entrepreneurs have many different nor face the threat of being made redundant
reasons for starting their own business but the main by an employer.
opportunities created by setting up a business are:
• Improving standard of living. The desire to earn
• Overcoming unemployment. Losing a job more money is the main thing that drives most
encourages many people to set up a business of entrepreneurs to establish their own business. Many
their own. They could provide a product or service people setting up a business believe that they will
similar to that of their former employer, or another earn a higher income working for themselves as
product, or they could provide a service based on they will be motivated to work hard and take the
an interest or skill they have. Talking to friends and necessary business risks.
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THEORY OF KNOWLEDGE Challenges

Knowledge question: To what extent does The potential for success when starting a new business
intuition affect entrepreneurship? can be considerable. However, if it was easy to set up a
successful business we would all be multimillionaires!
Entrepreneurs are people who are willing to There are many challenges that new entrepreneurs have
take risks to turn innovative ideas into goods to confront and overcome when setting up a business.
and services.
Start-up businesses face a high risk of failure. Challenge 1: Do I have the appropriate
In order to avoid this, entrepreneurs must personal qualities?
organise their resources and pursue their goals
There are some important personal qualities that most
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in the most effective way possible.
successful entrepreneurs tend to have.
In many cases, entrepreneurs decide on
appropriate business opportunities after Innovation
researching the market. They examine the The entrepreneur may not be a ‘product inventor’, but
overall external environment to identify the they must be able to create a new niche in the market.
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potential risks. They study basic statistics
such as market shares and market growth data,
and in some cases they perform primary research
to understand the exact wants of consumers
before making any investments.
However, some famous entrepreneurs base
their business plan on intuition rather than
facts. Intuition – sometimes referred to as a ‘gut
feeling’ – is not a magic ability. It is the result of
accumulated knowledge, perspective, cultural
They need to attract consumers in innovative ways and
present their business as being ‘different’. This requires
original ideas and an ability to do things innovatively.
Commitment and self-motivation

It is never easy to set up and run your own business.
It is hard work and it may take up several hours every
day. A willingness to work hard, a keen ambition to
succeed, energy and focus are all essential qualities
of a successful entrepreneur.
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background, personal ethics and experience. Multiple skills
According to scientific evidence, the intuitive
An entrepreneur will have to make the product or
sense is the result of signals sent via neural
provide the service, promote it, sell it and count the
communication channels between the gut and
money. These different business tasks require a person
the brain. Richard Branson, the founder of the
with many different qualities such as being keen to
Virgin Group, once said: ‘I rely far more on
learn technical skills, an ability to get on with people,
gut instinct than researching huge amounts
and being good at handling money and keeping
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of statistics.’
accounting records.
Should logic, statistics and facts overrule intuition
when entrepreneurs decide on new business Leadership skills
activities? Discuss in class. An entrepreneur has to lead by example. They must have
a personality that encourages people in the business to
follow them and be motivated by them.
KEY TERM Self-belief
business plan: a written document that describes Many business start-ups fail, but this will not
a business, its objectives and its strategies, the discourage a true entrepreneur. They believe in their
market it is in and its financial forecasts abilities and business ideas and they will bounce back
from any setbacks.
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Risk-taking • small-budget market research. The internet allows

Entrepreneurs must be willing to take risks in order to any user to browse directories to see how many
see results. Often the risk they take involves investing businesses of specific types there are in the local
their own savings in a new business. area. This low-cost research might indicate gaps in
local markets that the entrepreneur could fill and
make a profit.
LEARNER PROFILE
Risk-takers Challenge 3: Do I have sufficient capital?
Once an entrepreneur has decided on the business idea
Entrepreneurs take calculated risks hoping for
or opportunity, the next task is to raise the necessary
great rewards.
capital. This will come from various sources, but the
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A good example is the founder of Dropbox, business owner/entrepreneur will almost certainly
Drew Houston. Houston was a student at MIT have to use some of their own savings to set up the
and was fed up with carrying lots of USB sticks business. Friends and family might also provide
and having to email documents to himself to use financial support. Banks may provide finance by way
of different computers. He came up with an idea of a loan or an overdraft facility, but they will want to
for a solution and after some setbacks managed check the business plan carefully. Venture capitalists
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to apply to the startup hub YCominator and
started Dropbox in 2007. A few years later he
was contacted directly by Steve Jobs at Apply to
say the market for Dropbox would be taken over
by the iCloud service, but Houston refused to
sell to Apple. The company he built is now worth
over $1 billion.
Find examples of famous businesses which
became a success a few years after their set-up.
Did the entrepreneurs behind these businesses
may be prepared to invest if the business idea is novel,
offers significant profit potential and can be legally
protected by a patent so that the idea cannot be copied.
Government grants might be available, perhaps as part
of a policy to reduce unemployment by encouraging
people to set up new businesses.
In an International Labour Organization (ILO) survey
of new business start-ups, entrepreneurs said that
the main difficulty they faced was getting finance.
Why is obtaining finance such a major problem
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take any risks? How did the risk-taking attitude for entrepreneurs?
of the entrepreneurs contribute to the success of • Lack of sufficient own finance – many
the businesses? Discuss in class. entrepreneurs have limited personal savings,
especially if they are setting up their own business
because they have been made redundant.
Challenge 2: Is there a market for • Lack of awareness of the financial support and
my product? grants available.
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• Lack of any trading record to present to banks as

Many people say that they want to work for themselves.
evidence of past business success − a trading record
However, many fail to become entrepreneurs because
can give a bank more confidence when deciding
they are unable to identify a market opportunity
whether to lend money for a new venture.
(i.e., a product or service) that is sufficiently in demand
for the business to make a profit. • A poorly produced business plan that fails to
convince potential investors of the chances that the
The original idea for most new businesses usually comes business will succeed. A lack of capital to run day-
from one of the following sources: to-day business affairs is the single most common
• own skills or hobbies, e.g., dressmaking or car reason that businesses fail to survive in the first
bodywork repairs year. Capital is needed for day-to-day cash, in order
to hold stock, and to allow the business to give
• previous employment experience, e.g., hairdressing
trade credit to customers who then become debtors.
• conferences and exhibitions which offer a wide Without sufficient working capital, the business
range of new business start-up ideas using may be unable to buy more stock or pay suppliers
franchising, e.g., fast-food restaurants or offer credit to important customers.
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Challenge 4: Where should I locate • personal customer service

my business? • knowledgeable pre- and after-sales service
• fulfilling one-off customer requests that larger firms
A suitable location is vital if the start-up business
may be reluctant to provide for.
intends to sell directly to consumers. This raises the
problem of costs.
Challenge 6: How do I
Perhaps the most important consideration when
choosing the location for a new business is the need to
compete effectively?
minimise fixed costs. When finance is limited, it is very This is nearly always a problem for new enterprises
important to try to keep the break-even level of output unless the business idea is unique. Often a newly
as low as possible. Break-even is the output level where created business will experience competition from more
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enough revenue is earned to cover all costs. This will established businesses that have more resources and
greatly increase the chances of survival. market knowledge. The entrepreneur may have to offer
better customer service to overcome the cost and pricing
Most entrepreneurs start their business by operating
advantages of bigger businesses.
from their home. This has the advantage of keeping
costs low, but there are drawbacks:
Challenge 7: Must I keep accurate
•
•
•
It may cause family tensions.
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The entrepreneur’s home may not be close to the
area with the biggest market potential.
It lacks status – a business with its own prestigious
premises tends to generate confidence.
It may be difficult to separate private life from

working life.
If operating the business from home is not possible
then the location and cost of new premises will have a
big impact on the likely success of the business. New
business records?
Accurate records are vital in order to pay taxes and
bills and chase up debtors. Many entrepreneurs fail
to pay sufficient attention to this. They either believe
it is less important than actually meeting customers’
needs, or they think they can remember everything,
which is impossible. For example, the owner of a new,
busy florist’s shop will not be able to remember all of
the following:
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• when the next delivery of fresh flowers is due to arrive
businesses that offer a consumer service need to consider
location carefully. For example, a website designer could • whether the flowers for last week’s big wedding have
operate from home quite effectively, as communication been paid for
with customers will be by electronic means. However, a • if the money received from an important customer
hairdresser may need to consider obtaining premises in has been paid into the bank
an area with the biggest number of potential customers. • how many hours the shop assistant worked last week.
An alternative would be to visit customers in their own
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homes – this way, the entrepreneur may avoid the costs Challenge 8: Do I have the necessary
of buying or renting their own premises.
management skills?
Challenge 5: How do I build a Most entrepreneurs have had some form of work
experience, but not necessarily at a management level.
customer base? They may not have gained experience of:
In order to survive, a new enterprise must establish itself • leadership skills
in the market and build up customer numbers as quickly
as possible. The long-term strength of the business will • cash handling and cash management skills
depend on encouraging customers to return to purchase • planning and coordinating skills
products again and again. Many small businesses try • decision-making skills
to encourage this by offering a better service than • communication skills
their larger and better-funded competitors. This
• marketing, promotion and selling skills.
might include:
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Entrepreneurs may be very keen and willing to work

hard, and they may have abilities in their chosen field. CASE STUDY 1.3
For example, a new restaurant owner may be an excellent
chef, but they could lack management skills. Some Why do start-ups fail?
entrepreneurs learn these skills quickly once the business Based on research performed on small
is up and running, but this is a risky strategy. Other businesses across various industries in the US,
entrepreneurs buy in the skills by employing staff with around 90% of start-up ventures eventually fail.
management experience, but this is an expensive option. In 2019, the industries in which start-up failure
Just because a business is new and small it does not was especially high were grocery retailing,
mean that enthusiasm, a strong personality and hard trucking, plumbing, air conditioning and
work will be sufficient to ensure success. This may prove heating, as well as security brokerage. The risk
of failure was much lower in health care, social
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to be the case, but often it is not. Potential entrepreneurs
are encouraged to either seek management experience services, construction, transportation, and
through employment or attend training courses to warehousing. The same research identified the
gain some of the required skills before putting their main reasons why start-ups often fail. Some of
capital at risk. the most significant factors are the inexperience
of entrepreneurs and managers, the failure
Challenge 9: How do I deal
with change?
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Setting up a new business is risky. Not only are there the
problems and challenges referred to above but there is
also the risk of change, which can lead to the original
business idea being less successful. New businesses may
fail if any of the following changes occur, turning the
venture from a successful one to a loss-making enterprise:
• new competitors appear
to understand the exact consumer needs
and wants and the lack of adequate financial
resources. On the other hand, one of the most
important factors increasing the chances of
success is the use of third-party experts as
advisers who help the entrepreneurs to put their
plans into action. Start-up businesses using
professional advisers grow 3.5 times faster
than start-up businesses that rely only on the
know-how of their founders.
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• legal changes, e.g., the product is banned
• economic changes that leave customers with less
money to spend
• technological changes that make the methods used
by the new business old-fashioned and expensive.
The list of changes could be longer, but even these four
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factors show that the business environment is a dynamic

one, and this makes owning and running a business
enterprise very risky.
Challenges and opportunities

for starting a business – 1 Define the term ‘start-up business’. [2]
conclusion 2 Suggest two possible reasons why

the probability of success varies across
This section has identified and explained the different industries in the USA. [4]
opportunities and challenges for new entrepreneurs.
3 Suggest two reasons why small
People who want to start a new business should always
start-ups that use third-party
be encouraged to create a detailed business plan (see
professional advisers grow faster than
1.7 Business management tool: Business plans). This will
the ones which do not. [4]
help to analyse how the opportunities can be exploited
and the challenges overcome.
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• marketing and sales strategy − details of why the

1.7 Business entrepreneur thinks customers will buy what the
business intends to sell, and how the business aims
management tool: to sell to them
• management team and personnel − the skills and
Business plans experience of the entrepreneur and the employees
they intend to recruit
Looking ahead is a key part of the effective
management of any business. Making plans for the • operations − premises to be used, production
future helps to prepare finance and other resources for facilities, IT systems
a new venture. Business plans are an important business • financial forecasts − the future projections of sales,
management tool. profit and cash flow, for at least one year ahead.
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The contents of a typical business plan are: Table 1.2 shows a typical business plan summary
for a new business venture.
• the executive summary − an overview of the new
business and its strategies
• description of the business opportunity − details of
the entrepreneur; what is going to be sold, why and
to whom
Name of business
Type of organisation
Details of business owners
Business aim
Product
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Pizza Piazza Ltd
Privately held company
Peter Chun – chef with 15 years’ experience
Sabrina Singh – deputy manager of restaurant for three years
To provide a high-class takeaway pizza service including home delivery
High-quality home-cooked pizzas
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Price Average price of $10 with $2 delivery charge
Market aimed for Young people and families
Market research Research in the area conducted using questionnaires
undertaken and the results
Also, research into national trends in takeaway sales and local competitors
Results of all research in the appendix to this plan
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Human resources plan Two workers (the business owners) to be the only staff to be employed initially
Production details and Main suppliers – R and R Wholesalers
business costs
Fixed costs of business – $70 000 per year
Variable costs – approximately $2 per unit sold
Location of business Site in shopping street (Brindisi Avenue) just beyond the town centre.
Leasehold site (ten years)
Main equipment required Second-hand kitchen equipment – $6000
Second-hand motorbike – $2000
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Forecast profit See financial appendix to this plan

Summary: In the first year of operations the total costs are forecast to be
$55 000 with revenue of $85 000. Predicted profit = $30 000
Level of output to break even – 8750 units per year
Cash flow forecast See financial appendix to this plan
Due to the high set-up and promotion costs there will be negative cash flow in
the first year
Finance $10 000 invested by each of the owners
Request to bank for a further $10 000 plus an overdraft arrangement of $5000
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per month
Table 1.2: Business plan for Pizza Piazza Ltd
• The financial forecasts in a business plan can act as

Importance of business plans
•
•
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Business plans are very important when setting
up a new business, but they should also be
referred to and updated when further important
strategic choices are made. The main purpose of
a business plan for a new business is to obtain
finance for the start-up. Potential investors or
creditors will not provide finance unless clear
details about the business proposal have been
written down.
The planning process is very important too. If an
•
•
budgets and control benchmarks for the internal
stakeholders such as business managers.
Updated versions of the plan can be used to apply
for additional funding, to attract more partners
or to supply data for the experts if a stock market
flotation becomes an option.
Employees will find that planning helps to identify
specific objectives and targets and gives focus to
their work, which aids motivation.
Suppliers may be able to tell from the parts of the
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business plan that are communicated externally
entrepreneur went into a new business – even if whether it is worthwhile establishing a long-term
no external finance was required – without a clear trading relationship with the business.
sense of purpose, direction, marketing strategies
and what employees to recruit, the chances of
success would be greatly reduced. Business plans as a business
• The financial and other forecasts contained in the management tool
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plan can be used as the targets that the business

should aim for. This business management tool can be integrated into
all functional units of the IB syllabus as follows:
Users of business plans • A business plan for a start-up business needs

to include evidence about and forecasts
Business plans may be of real benefit to the stakeholders for human resources, finance, operations
of new businesses: and marketing.
• The plan allows potential investors in the • A completely new venture for an established
new business – and the bank – to make a business, such as setting up operations in another
judgement about the viability of the idea and the country, also requires careful planning. A business
chances of the owners making a success of it. plan for this type of new venture would be essential
Potential shareholders will not invest without seeing and this must draw evidence from all four main
a plan. functional areas.
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CASE STUDY 1.4
Does Chu Hua need a business plan?

Chu Hua is a young entrepreneur in Vietnam. Her
start-up business operates in the quaternary sector,
offering artificial intelligence (AI) applications such
as fraud detection, security, chatbox and more to
various organisations. She currently employs eight
people. The Covid-19 pandemic created many
opportunities in the AI industry, as businesses
across all fields rushed to improve their online sales
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and services. Health care is just one example of an
industry that needs AI applications to manage an
increasing volume of data due to the pandemic.
Even though the external opportunities are
excellent, Chu Hua faces many challenges when
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managing her start-up business. Firstly, competition
in the industry is fierce. Bigger, more established
competitors have already signed contracts with
large customers and it is easier for them to
promote their innovations through direct selling.
Moreover, Chu Hua finds it difficult to attract
sources of finance, as investors and traditional
banks are afraid of the risk of failure, which is
high for start-ups. Without enough resources, the
business cannot proceed to invest in technology
for innovation.
director of her business to prepare a detailed
business plan. However, business planning is a
difficult process, especially given that the market
is very dynamic and fast changing.
1
2
Define the term ‘quaternary sector’.
Explain two reasons why the risk
of failure is big for Chu Hua’s
start-up business.
[2]
[4]
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3 Identify two roles of Chu Hua as
According to global research published in 2021, an entrepreneur. [4]
most start-ups eventually fail, 10% of them within
the first year. In her effort to attract finance, Chu 4 Discuss the usefulness of a business
Hua is currently working closely with the finance plan for Chu Hua. [10]
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ACTIVITY 1.3
Quibi was a video streaming service which shut 2 Bring your findings to class to prepare a
down just a few months after its launch, even presentation covering the reasons why the
though it was designed to revolutionise in the way Quibi start-up failed.
people enjoy videos on their smartphones.
3 Split into two groups. Debate the following
1 Find information on Quibi and do statement: ‘Quibi could have survived if it
some personal research on the failed had offered its services for free like TikTok
start-up business. and YouTube.’
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After studying this chapter, complete this table.
Needs Almost Ready to

I know and understand:
more work there move on
the nature of business (AO1)
I am able to apply and analyse:
primary, secondary, tertiary and quaternary sectors (AO2)
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entrepreneurship – opportunities for starting a business (AO2)
entrepreneurship – challenges of starting a business (AO2)
I am able to select and apply the business management tool:
business plans (AO4)
REFLECTION
1
2
products or services to sell?
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Assume you plan to start a new business
enterprise. How would you decide which
If you were planning to set up the business

with another person, why would collaboration
be important?
3 Entrepreneurs need to balance the risk
involved with a new business against the
potential profit. After reading this chapter,
how would you attempt to do this for your
new business enterprise?
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PROJECT
Split into groups of four students. 3 Each team will prepare a class presentation on
their business idea and key elements of their
1 Each group will form the management team of business plan.
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a start-up business. Each group member must

take one of the following roles: HR director, 4 Your teacher will act as the bank manager
marketing director, operations director and responsible for assessing your request for
finance director. Each team will need to vote a loan to help you with your start-up plans.
(or randomly select) one of its members to be They will try to challenge your idea, and they
the managing director. can only give a loan of $50 000 to one of
the teams! Prepare to receive questions on
2 Each team should decide on the type of the problems you are expecting to face as a
business activity to set up and will need start-up business. Also, be prepared to answer
to prepare a brief business plan, similar to any questions from the managers of the other
Table 1.2. In the finance section, you need to businesses competing for the loan.
include a breakdown of your capital investment
and justify why you need a loan for $50 000
from the bank.
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CONTINUED
Thinking about your project: • How significant is a collaboration among the
team members to create the business plan?
• Have you considered the risks of your Do you have any disagreements or problems
business activity before you set it up as that you have to overcome when preparing
entrepreneurs? How could your business the business plan and the presentation? How
overcome such risks? can the managing director help your team deal
with such issues?
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Recession sparks new business ideas
Disney, McDonald’s, Burger King, Procter & Gamble, Johnson & Johnson, Microsoft – what do they all have in
common? They all started during a recession or depression.
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The message, delivered to around 40 would-be entrepreneurs at a workshop in Stratford, East London, is clear:
do not let bad economic headlines put you off. Most of the people at this session are not aiming to create new
multinational corporations. But during the coffee break, they seem pretty confident that their ideas can prosper even
in the current climate. ‘I’m here to find out about starting up a business providing CVs to school leavers,’ says Jessica
Lyons, wearing a lapel badge with My First CV, the name of the future business, written on it. ‘For my particular
business idea, I think this is the ideal time because there are more people than ever out there looking for work.’
The recession is causing a spike in interest in setting up small businesses. Another interesting example was from
a gym instructor who wants to take his equipment to companies around London, giving people a lunchtime
workout without them having to leave their offices. Most of the would-be entrepreneurs in Stratford are looking at
potential opportunities in the tertiary sector which do not require large amounts of start-up finance to purchase
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capital equipment, and which rely more on their own skills and interests. Yet, some opportunities also arise in
the secondary sector. Small producers of low-priced unbranded food products experience increasing demand for
their goods, as retailers try to satisfy consumers with value-for-money offers. Overall, the demand for basic food
products does not fall as much as the demand for luxury goods and services during a recession.
Even though the steps to follow to set up a business are similar under conditions of economic recession and in
conditions of growth, the problems that start-ups face may be more severe when the economy is undergoing a
downturn. To balance the risks of failure, some entrepreneurs employ managers who are experienced in the market
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and can help the business to survive and grow in the long run and can assist with the preparation of the start-up’s
business plan.
1 Define the term ‘tertiary sector’. [2]
2 State two elements of a business plan. [2]
3 Outline the factors of production needed to set up the business providing CVs to school leavers. [4]
4 Explain two reasons why new businesses might start up in the tertiary sector. [4]
5 Suggest two reasons why the CV writing start-up might need a business plan. [4]
6 Explain two common steps of opening a business in the tertiary sector. [4]
7 Explain two common problems of start-ups that are particularly difficult to handle under
conditions of economic recession. [4]
8 Identify two types of resources needed for a person to open a business activity as a gym instructor. [4]
9 Suggest two ways in which entrepreneurs may try to reduce the risk of failure for a start-up business. [4]
10 Discuss the opportunities and challenges of setting up a business in a recession. [10]
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Chapter 2
Types of
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business
Higher-level
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entities
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LEARNING OBJECTIVES
LEARNING OBJECTIVES
In this chapter you will learn how to:
On
• completing this chapter
appreciate possible you should
definitions be able to: of the central characteristics of the arts
and descriptions
Apply and analyse:
• consider the creation and interpretation of the arts
• The distinction between the private and public sectors (AO2)
• be able to defend what you think are the standards of artistic judgment
Evaluate:
•• understand how the
The main features of arts
the fit into thetypes
following humanof experience andsole
organisations: the traders,
idea of consensus
partnerships, privately held
companies and publicly held companies (AO3)
• be able to discuss the possible status of artistic knowledge compared with other Areas of Knowledge
• The main features of the following types of for-profit social enterprises: private sector companies,
• consider the unique
public sector properties
companies of the arts and
and cooperatives how knowledge is constructed in the arts
(AO3)
• The main features
appreciate the roleofofthe following
ethics in the types of non-profit
arts and be able to social
discussenterprises: non-governmental
ethical considerations that may shape the
organisations
production of (NGOs)
artworks(AO3)
BUSINESS IN CONTEXT
Pague Menos converts to public limited company
In 2020, Brazil recorded a high number of
companies selling shares to the public for the first
time. Converting a privately held company (private
limited company) to a publicly held company
(public limited company) is usually undertaken by
arranging an initial public offering (IPO). Many
of these companies were originally owned and
operated by families that now want to sell shares to
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the public to raise substantial capital sums.
One such company is Pague Menos, which operates
a large chain of drug stores (pharmacies) in Brazil.
The controlling shareholders are the Queiros family.
The decision was taken in 2020 to try to raise around
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1.2 billion reais (about $224 million) by selling Pague
Menos shares to the public. IPOs convert privately
held (owned) companies into publicly held (owned)
companies. The plan was to use the capital raised to
fund further growth of the business. Opportunities
for increased sales of pharmaceutical products grew
following public concern about health due to the
Covid-19 pandemic.
KEY TERMS
Discuss in pairs or a group:
•
•
Why do you think the owners of Pague Menos
arranged an IPO?
What are the likely advantages and
disadvantages to the existing owners of
a company of converting a privately held
company to a publicly held company?
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share: a certificate confirming part ownership of a institutions and the general public; its share price
company. Most types of share entitle shareholders is quoted on the national stock exchange
to dividends paid from profits
initial public offering (IPO): the process of
privately held company: a business that is owned offering for sale the shares of a privately held
by shareholders who are often members of the company to financial institutions and the
same family; this company cannot sell shares to general public
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the general public

shareholders: individuals or institutions that buy/
publicly held company: a limited company own shares in a limited company
with the legal right to sell shares to financial
KEY CONCEPT LINK

Ethics the National Council of Nonprofits supports
charities by sharing practices that demonstrate
All businesses have ethical responsibilities, but accountability, ethics and transparency to the public.
the existence and long-term survival of charitable This is very important from the perspective of the
non-profit organisations relies on their ethics and Council, because if one of their members behaves
transparency. If the public loses trust in charities, unethically, ‘that’s one too many’: people could lose
those charities stop receiving donations. In the US, trust in non-profit charities overall.
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2 Types of business entities
2.1 Distinction between KEY TERMS
the private and public private sector: comprises businesses owned

and controlled by individuals or groups
of individuals
sectors public sector: comprises organisations
Chapter 1 looked at the classification of business into accountable to and controlled by central or local
different economic sectors. This chapter further classifies government (the state)
business activity into:
mixed economy: economic resources are owned
• the private sector and public sector and controlled by both private and public sectors
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• for-profit and non-profit organisations.
free-market economy: economic resources are
The relative importance of the private sector owned largely by the private sector, with very
compared to the public sector is not the same in all little state intervention
mixed economies. Those that are similar to free-market
economies have very small public sectors. Those command economy: economic resources are
countries with central planning command economies owned, planned and controlled by the state
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will have very few businesses in the private sector.
In most mixed economies, certain important goods and
services are provided by state-run organisations – they
are in the public sector. It is argued that they are too
significant to be left to private sector businesses. They
include health and education services, defence, and
law and order (the police force). In some countries,
important ‘strategic’ industries are also state owned and
state controlled, such as energy, telecommunications
and public transport. These public sector organisations
privatisation: the sale of public sector
organisations to the private sector
2.2 The main features

of private sector
businesses
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therefore provide essential goods and services for
individual citizens and organisations in the private sector. Figure 2.1 shows the main types of private sector
They often have objectives other than profit, for example: businesses that are operated for profit.
• ensuring supplies of essential goods and services – Profit-based private sector businesses
perhaps free of charge to the user, e.g., health and
education services in some countries
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• preventing private sector monopolies (single firms

that dominate an industry) from controlling supply Sole Partnerships Limited Cooperatives
• maintaining employment traders companies
• maintaining environmental standards.
There has been a trend in many countries towards
selling some public sector organisations to the private Private Public
(Ltd) (plc)
sector – called privatisation – and this means that profit-
making becomes one of their main objectives. Figure 2.1: Private sector businesses that are operated
Private sector organisations are owned and operated for profit
by individuals or groups of people. Most of these
organisations are operated for a profit, but not all. For
example, charities are non-profit making organisations
in the private sector; they are not owned and controlled
by the government or state.
21
Sole trader Partnerships are formed in order to overcome some of

the drawbacks of being a sole trader. When planning to
This is the most common form of business organisation. go into partnership, it is important to choose business
Although there is a single owner in this business partners carefully – the errors and poor decisions of
organisation, there may be employees. But the firm any one partner are considered to be the responsibility
is likely to remain very small. While they are great in of them all. This also applies to business debts incurred
number, sole traders account for only a small proportion by one partner. In most countries there is unlimited
of total business turnover. All sole traders have liability for all partners should the business venture
unlimited liability. This means that the owner’s personal fail. It is usual, although not a legal requirement, to
possessions and property can be taken to pay off the draw up a formal Deed of Partnership between all
debts of the business should it fail. This can discourage of the partners. This provides agreement on issues
some potential entrepreneurs from starting their such as voting rights, the distribution of profits,
E
own business. the management role of each partner and who has
authority to sign contracts.
Another problem faced by sole traders involves finance
for expansion. Many sole traders remain small because Partnerships are the most common form of business
the owner wants to keep control of their own business. organisation in some professions, such as law and
Another reason is the limitations that they have in accountancy. Small building firms are often partnerships
for injections of capital. PL

raising additional capital. As soon as partners or
shareholders are sought in order to raise finance, then
the sole trader becomes another form of organisation
altogether. In order to remain a sole trader, the owner is
dependent on their own savings, profits made and loans
This type of business organisation is most commonly

established in construction, retailing, hairdressing,
car servicing and catering. The advantages and
disadvantages of sole traders are summarised
too. The advantages and disadvantages of partnerships
are summarised in Table 2.2.
KEY TERMS
sole trader: a business that is exclusively owned
by one person who has full control of it and is
entitled to all of the profit (after tax)
partnership: a business formed by two or
more people to carry on a business together,
M
in Table 2.1. with shared capital investment and, usually,
shared responsibilities
Partnership
A partnership agreement does not create a separate legal
unit; a partnership is just a grouping of individuals.
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Advantages Disadvantages
Easy to set up – no legal formalities Unlimited liability – all of owner’s assets are potentially at risk
Owner has complete control – not Often faces intense competition from bigger firms,
answerable to anyone else e.g. food retailing
Owner keeps all profits Owner of a small business may have responsibility for all
aspects of management and may therefore be unable
Able to choose times and patterns of working to specialise
Able to establish close personal relationships Difficult to raise additional capital
with staff (if any are employed) and customers
Long hours are often necessary to make the business pay
Rather than working as an employee for a
larger firm, the sole trader can use their skills Lack of continuity – as the business does not have separate
in their own business legal status, when the owner dies the business ends too
Table 2.1 Sole traders – advantages and disadvantages
22
Partners may specialise in different areas of Unlimited liability for all partners (with some exceptions)
business management
Profits are shared
Shared decision-making
As with sole traders, there is no continuity and the partnership
Additional capital can be injected by will have to be reformed in the event of the death of one of
each partner the partners
Business losses are shared between partners All partners are bound by the decisions of any one of them
Greater privacy and fewer legal formalities Not possible to raise capital by selling shares
than corporate organisations (companies)
E
Partners need to discuss and agree major decisions which
might take a long time
Table 2.2: Partnerships – advantages and disadvantages
CASE STUDY 2.1
Martha’s digital marketing agency
PL
After being crowned entrepreneur of the year at the
2020 ‘Women in Business’ Awards, Martha’s digital
marketing agency has gone on to beat her revenue
target and win new clients. She has been nominated
for the awards again this year, in the small business of
the year and inspirational woman categories. Martha
set up ‘Catchy Internet’ as a sole trader in 2009 to
M
help businesses be more successful on the internet.
She decided to grow the business in 2015, and by
2020 the business has expanded from 3 employees
to 18.
She said: ‘I am very pleased to be nominated
again this year. The awards ceremony itself is a
great chance to network with other successful
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businesspeople. Winning the award raised the

visibility of Catchy Internet, which is growing fast.
We are working with a lot of exciting clients. Our
goal was a revenue of $1 million in 2021 but we are
already ahead of that target. The next goal is to grow
outside our local geographical area. We have already 1 Define the term ‘privately held company’. [2]
signed contracts with two multinational customers.’ 2 Outline two advantages for Martha of
Martha is now considering the possibility of changing running her business as a sole trader. [4]
the type of organisation from a sole trader business 3 Outline two problems that Martha may
to a partnership with her friend Alan, who specialises face due to being a sole trader. [4]
in financial management and business planning.
But Martha has been advised by one of her most 4 Discuss the possible advantages and
loyal employees to avoid the disadvantages of a disadvantages for Martha if she decides to
partnership by turning the business into a privately change her business organisation from
held company. a sole trader business to a partnership. [10]
23
Limited companies products sold by a company are found to be

dangerous or faulty, the company itself can be
There are three important differences between prosecuted but not the owners, as would be the
companies (privately held companies and publicly held case with either a sole trader or a partnership.
companies) and sole traders and partnerships: A company can be sued and it can sue others
through the courts.
• company shareholders have limited liability, but
• Continuity: In a company, the death of an owner
sole traders and partners do not (apart from the
or director does not lead to its break-up or
case of limited liability partnerships)
dissolution. All that happens is that ownership
• companies have legal personality but sole traders continues through the inheritance of the shares,
and partnerships do not and there is no break in ownership.
• companies can continue after the death of one of
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the owners, unlike sole traders and partnerships. Privately held companies
The protection that comes from forming a company
KEY TERM is therefore substantial. Small firms can gain this
protection when the owner(s) create(s) a privately held
limited liability: the only liability – or potential
company. In many countries these are referred to as
•
total wealth of the shareholder
PL
loss – a shareholder (or partner in a limited
liability partnership) has if the company fails is
the amount invested in the company, not the
Limited liability: The ownership of companies is

divided into small units called shares. People can
buy these and become ‘shareholders’ – they are
part-owners of the business. It is possible to buy just
one share, but some shareholders will own many
private limited companies.
Usually the shares will be owned by the original sole
trader (who may hold the majority of the shares to
keep control of the company), relatives, friends and
employees. New issues of shares cannot be sold on
the open market to the public. Existing shareholders
may only sell their shares with the agreement of the
other shareholders.
Legal formalities must be followed when setting up a
privately held company and these can be expensive and
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shares. It is possible for one person or organisation
to have complete control if they own more than time-consuming in some countries. The advantages
50% of the shares in a company. Individuals with and disadvantages of privately held companies are
a large number of shares often become directors summarised in Table 2.3.
of the business. All shareholders benefit from the
advantage of limited liability. Nobody can make Publicly held companies
any further claim against shareholders should the
Publicly held companies (known as ‘plcs’) are the
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company fail. This has two important effects:

most common form of legal organisation for large
• People are prepared to provide finance to enable businesses because they have access to substantial funds
companies to expand as the risk of losing for expansion. Converting a privately held company to
capital is limited to the investment in shares. publicly held company status is referred to as a stock
market flotation.
• The greater risk of the company failing to pay
its debts is now transferred from investors to A publicly held company has all the advantages of
creditors (those suppliers/lenders who have not privately held company status plus the right to advertise
been paid). So creditors may be keen to check its shares for sale and have them quoted on the stock
if the word ‘limited’ appears in the company exchange. Publicly held companies have the potential to
name and to scrutinise the company’s accounts raise large sums of money from public issues of shares.
for signs of potential future weakness. Existing shareholders can sell their shares quickly if
they want to. This flexibility of share buying and selling
• Legal personality: A company is legally recognised
encourages the public to purchase the shares in the first
as having an identity separate from that of its
instance and thus invest in the business.
owners. This means, for example, that if the
24
Shareholders have limited liability There are legal formalities involved in establishing
the business
Separate legal personality
Capital cannot be raised by the sale of shares to the
Continuity in the event of the death of a shareholder general public
The original owner is often still able to retain control It is quite difficult for shareholders to sell shares
Ability to raise capital from the sale of shares to family, In the UK, end-of-year accounts must be sent to
friends and employees Companies House – they are available for public
Greater status than a non-company or inspection there (there is less secrecy over financial
E
unincorporated business affairs than for sole traders or partnerships)
Table 2.3: Privately held companies – advantages and disadvantages
Limited liability
Separate legal identity
Continuity
Ease of buying and selling of shares
for shareholders – this encourages
investment in plcs
Access to substantial capital sources
PL
due to the ability to issue a prospectus
to the public, giving full details of a
There are legal formalities in formation
Cost of business consultants and financial advisers when creating a plc
Share prices are subject to fluctuation, sometimes for reasons
beyond the business’s control, e.g. the state of the economy
Legal requirements concerning disclosure of information to
shareholders and the public, e.g. annual publication of detailed
report and accounts
Risk of takeover due to the availability of the shares on the
stock exchange
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potential investment in the company,
and to offer shares for sale Directors are influenced by short-term objectives of major investors
Table 2.4: Publicly held companies – advantages and disadvantages
The other main difference between these two types of their own power and status. Many privately held
company organisations concerns the ‘divorce between companies convert to publicly held status to gain the
SA
ownership and control’. The original owners of a benefits referred to in Table 2.4. It is also possible for the
business are usually still able to retain a majority of directors or the original owners of a business to convert
shares and continue to exercise management control it back from public ownership to privately held company
when the business converts to privately held company status. Richard Branson and the Virgin group is one
status. This is most unlikely with publicly held companies of the best-known examples of this. The reasons for
due to the volume of shares issued and the number of doing this are largely to overcome the divorce between
people and institutions investing. These shareholders ownership and control – in a privately held company it
own the company, but at the annual general meeting is normal for the senior executives to be the majority
they appoint a board of directors who control the shareholders. In addition, the owner of a privately held
management and decision-making of the business. company can take a long-term planning view of the
business. It is often said that the major investors in a
This clear distinction between ownership and control
publicly held company are only interested in short-term
can lead to conflicts over the objectives to be set and
gains. ‘Short-termism’ can be damaging to the long-term
direction to be taken by some publicly held companies.
investment plans of any business.
The shareholders might prefer short-term maximum-
profit strategies, but the directors may aim for long-term A summary of the advantages and disadvantages of
growth of the business, perhaps in order to increase publicly held companies is given in Table 2.4.
25
CASE STUDY 2.2
Airbnb ‘Goes Public’

Airbnb went public in December 2020, amid
conditions of reduced demand for travelling due
to the public health crisis. The initial public offering
(IPO) was very successful and Airbnb shares traded
at $146, more than doubling the price of $68 per
share set for the IPO one day earlier. The decision of
Airbnb to become a public limited company offered
a great financial return to its investors. The financial
E
resources raised from the stock market will help
Airbnb’s management to invest in more innovation
around its cloud-based application, offering 1 Define the term ‘publicly held company’. [2]
advanced services for vacation rentals and tourism
activities to its users in a market which is becoming 2 Analyse two potential advantages to Airbnb
increasingly competitive.
THEORY OF KNOWLEDGE
PL
Knowledge question: How can we decide
whether a type of business activity is ethical or
3
of becoming a publicly held company.
Analyse two potential disadvantages
to Airbnb of becoming a publicly
held company.
A typical reason that consumers use payday loans

is to pay utility bills and rent.
[4]
[4]
M
not? For example, can the price of the product
be a criterion? ‘Payday’ loans are legal in 32 states in the US.
Payday lenders claim that the very high rates
The personal loan market in many economies has are justified by the very high risk of borrowers
seen the emergence of a huge number of so-called eventually not being able to repay the loans.
‘payday’ lenders. These organisations provide very Moreover, lenders say that payday loans are a
short-term loans (up to 30–40 days) to borrowers valuable service for US society. Numerous low-
who urgently need cash to cover their living costs or income consumers have avoided eviction and
SA
a particular expense until, in theory, they get paid. homelessness because they have received payday
loans while they were being denied access to the
Research conducted in the US suggests that traditional banking system.
12 million Americans take out payday loans each
year, with interest rates ranging from 300% to Discuss in class:
500%, which are commonly disguised as ‘fees’.
1 Is it unethical to charge high interest to
Compare this with 15–30% interest rates on credit
consumers if they are willing to accept it?
cards and it is easy to see how customers are
financially drained by payday lenders. 2 Is it ethical for ‘payday’ businesses to trap
consumers in loans that are very expensive
The main targeted consumers are low- to medium-
and hard to repay, to save them from huge
income workers who do not qualify for credit
problems such as homelessness?
cards or personal loans due to financial problems.
26
ACTIVITY 2.1
The graph shows the return to shareholders on a 2 Which other two car manufacturers appear
monthly basis between 29 June 2010 (the day Tesla on the share price performance graph?
Motors floated in the NASDAQ stock exchange) and How do they perform in terms of returns to
29 June 2020. the shareholders compared to Tesla?
1 If an investor had spent $100 on Tesla shares on 3 Which factors do you think explain the difference
the day of the IPO, how much would their return between the returns on Tesla shares and the
be if they sold their shares on 29 June 2020? returns of the other two car manufacturers?
a More than $400 4 What does Tesla’s soaring share price mean
E
for the business as a plc and its ability to raise
b More than $1000 money through the stock exchange?
c More than $4000 5 Would you have bought Tesla shares on 29 June
2020 if you were an investor? Justify your answer.
4000%
3000%
2000%
PL
Tesla’s soaring share price
Share price performance since Tesla’s IPO date of 29 June 2010
Tesla
Netflix
Amazon
M
1000%
Apple
GM
0%
Ford
2010 2012 2014 2016 2018 2020

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abandon the financial disciplines of business in their

2.3 Types of for-profit desire to improve society as they need to earn profits
to allow them to survive and grow.
social enterprises
KEY TERMS
Private sector companies as
social enterprise: a business with social and/or
Social enterprises environmental objectives that reinvests most
Social enterprises are not charities, but they have of its profits into benefiting society rather than
objectives that are often different from those of an maximising returns to owners
entrepreneur who is only motivated by profit. Making a social entrepreneur: a person who establishes
profit may be one of the objectives of a social enterprise, an enterprise with the aim of solving social
but it is usually less important than the organisation’s problems or achieving social change
social objectives. However, social entrepreneurs cannot
27
A social enterprise is therefore a business that makes its Here are two examples of social enterprises.
money in socially responsible ways and uses most of any
• SELCO in India provides sustainable energy solutions
surplus made to benefit society. Social entrepreneurs are
to low-income households and small businesses. In
not running a charity – they can and often do keep some
one scheme, solar-powered lighting was provided
of the profit made for themselves.
by SELCO to a silkworm farmer who depended on
Social enterprises compete with other businesses in the dangerous and polluting kerosene lamps. The farmer
same market or industry. They use business principles could not afford the initial capital cost of solar power,
to achieve social objectives. Most social enterprises have so SELCO helped with the finance too.
these common features: • The KASHF Foundation in Pakistan provides very
• They directly produce goods or provide services. small loans and social support services to women
entrepreneurs who traditionally find it difficult to
• They have social aims and use ethical ways of
E
obtain help. This enables the women to set up their
achieving them.
own businesses in food production, cloth-making
• They need to make a surplus or profit in order and other industries. The loans have to be repaid
to survive as they cannot rely on donations as with interest, but the interest rates are much lower
charities do. than an international bank would charge.
Objectives of social enterprises
•
the owners. PL
Social enterprises often have three main aims:
Economic – to make a profit or surplus to reinvest
back into the business and provide some return to
Social – to provide jobs or support for local, often

disadvantaged, communities.
Environmental – to protect the environment and
to manage the business in an environmentally
The advantages and disadvantages of the social enterprise
form of business organisation are summarised in Table 2.5.
As with all business owners in the private sector, social
entrepreneurs must establish their businesses with a
legally recognised structure. Most social enterprises
operate in the private sector. They can be organised as
sole traders, partnerships, limited companies or mutual
organisations such as cooperatives.
KEY TERMS
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sustainable way.
charity: an organisation set up to raise money
These aims are often referred to as the triple bottom line. to help people in need or to support causes that
This means that profit is not the sole objective of require funding
these enterprises.
triple bottom line: the three objectives of social
enterprises: economic, social and environmental
SA
Most governments want to encourage this form of Social enterprises have to compete with other
business structure so they provide a range of financial businesses and organisations whose costs may be lower
incentives to social entrepreneurs due to their reduced social/environmental objectives
The objectives of social enterprises attract like- Social enterprises often offer unusual products
minded and committed people who want to be that are targeted towards particular communities.
employed by them, and this helps to create a Since communities and consumer tastes are always
cohesive workforce changing, social enterprises have to constantly
There are increasing trends towards ‘responsible research and monitor their target market
consumerism’ so marketing social enterprises and Investors, employees and customers need to trust
their products may become easier because there is a that the social mission is being pursued effectively,
growing potential market so complete transparency of the operations of the
enterprise is essential
Table 2.5: Social enterprises – advantages and disadvantages
28
of social enterprises
47% of social enterprises
44%
Economy
grew their turnover
are under five years old
over the last year
74% made a profit or broke
even last year 66% introduced a new product
or service in the last year
NEW
of social enterprises said

47% of social enterprises
72%
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that they were a Living
Society
are led by women

Wage employer
31% 22%
have directors from
operate in the most
ethnically diverse
PL
backgrounds
deprived areas of the UK
Environment
84% 20% 67%

believe that buying of social enterprises are of social enterprises have
products that are addressing the climate or plan to embed tackling
socially responsible and emergency as part of climate change/climate
M
environmentally friendly their core social/ emergency into their
is as important – or more environmental mission constitution/articles
important – than cost of association
Figure 2.2: Results of a 2021 report on private sector social enterprises
Public sector companies as to profit-driven goals. A summary of the potential

SA
advantages and disadvantages of public corporations

social enterprises as social enterprises is given in Table 2.6.
Every country will have some enterprises that are owned

by the state – usually central or local government. These KEY TERM
organisations are therefore in the public sector and they public corporation: a business enterprise owned
are referred to as public corporations. and controlled by the state – also known as
Public sector organisations can be operated as social nationalised industry or public sector enterprise
enterprises. Often they do not have profit as a major
objective. For example, in many countries the main
focus of the publicly owned TV channels is the quality TIP
of public service programmes and state-owned airlines
have safety as a priority. When public corporations are Avoid a common error by remembering that
sold to the private sector, known as privatisation, the publicly held companies are in the private sector
objectives often change from socially orientated ones of industry – but public corporations are not.
29
They are managed with social objectives rather than There is a tendency towards inefficiency due to lack
solely with profit objectives of competition and lack of strict profit targets
Loss-making services might continue to operate if the Subsidies from government can encourage
social benefit is great enough inefficiencies
Finance is raised mainly from the government, Government may interfere in business decisions for
so they are not subject to limitations from banks political reasons, e.g., by opening a new branch in a
or shareholders certain area to gain popularity
Table 2.6: Public sector social enterprises – advantages and disadvantages
E
Cooperatives as social ACTIVITY 2.2
enterprises The privatisation of British Rail started back
Cooperatives are not about making big profits for in the 1990s and it has been the subject of
•
PL
shareholders. They aim to create value for customers
and secure employment for workers. This is what gives
cooperatives a social enterprise character, and influences
their values and principles.
Cooperatives tend to fall into one of these three groups:
Retail cooperatives – also called consumers’
cooperatives. This is a cooperative business owned
by customers for their mutual benefit. It is a
private sector enterprise that is oriented towards
service rather than financial profit. It often takes
much debate. Supporters of the decision
identified benefits for the public such as
improved customer services and increased
capital investment in infrastructure. But some
stakeholders disagree and say the ‘private
sector efficiency vision’ did not work well for
this example of privatisation.
2
Find more information about the
privatisation of British Rail.
Search for evidence of the impact of this
M
the form of retail outlets operated and owned by privatisation on stakeholders.
the consumers. The consumers or customers are the
people who have provided the capital required to 3 Discuss your findings in class.
launch or purchase the enterprise. Profits are shared
Reflection
either by way of discounts on products or by a
payout to customer-owners each year. • When looking for information, did you make
• Agricultural cooperatives – these exist when sure that you used a variety of sources and
SA
farmers pool resources for mutual benefit, for not just one article?
example in the buying of fertiliser or the marketing
• Is the evidence you collected trustworthy?
of key food products.
Does it include any statistical data or
• Worker cooperatives – often these are research evidence, for example on the
manufacturing businesses. Workers collectively own evolution of ticket prices after privatisation?
the business and make the important decisions.
• Have you tried to identify both positive
and negative aspects of the privatisation
KEY TERM
example being discussed?
cooperative: a group of people acting together
to meet the common needs and aspirations of
the members, sharing ownership and making
decisions democratically
30
CASE STUDY 2.3
The Aegina Agricultural Cooperative of

Pistachio Growers
Pistachio trees arrived in Greece in around 1850.
Aegina is a small Greek island where local farmers
have a special variety of tree and produce superb
pistachio nuts. Today, the Aegina Agricultural
Cooperative of Pistachio Growers handles
harvesting, packaging and distribution of Aegina
pistachios all over Greece and the rest of the world.
E
The cooperative was first set up in 1947 and initially
there were many problems, such as the lack of
marketing skills. Through the effective collaboration
of its members, the cooperative grew, and by 2020
there were 347 members producing roughly 30% of cooperative. Producers outside the cooperative
the island’s pistachio production.
PL
Many of the members of the cooperative are not
full-time professional farmers; they are just small-
scale producers who want to sell their products to
increase their household income. The members
pool resources for mutual benefit for the production,
distribution and promotion of their products.
However, the democratic management of the
cooperative is not without problems. There are
often disagreements among the members on issues
prefer to remain free to decide on how to package,
promote and price their products.
1
2
3
Define the term ‘agricultural cooperative’. [2]
Suggest the advantages for
pistachio producers of joining
the Aegina Agricultural
Cooperative of Pistachio Growers.
With reference to the case study,
identify two problems associated
[6]
M
such as the growth and marketing strategy of the with agricultural cooperatives. [4]
humanitarian functions. They bring public concerns to

2.4 Non-profit social the attention of governments and encourage community
participation by stakeholders. The objectives of NGOs
enterprises are not profit based; they are specifically focused on
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social, environmental or humanitarian objectives.

Not all organisations in the world aim to make profits.
There are thousands of non-profit organisations that
have objectives other than profit – for example, charities KEY TERMS
and pressure groups. Many of these are also called
non-profit organisation: any organisation that has
non-governmental organisations (NGOs).
aims other than making and distributing profit and
which is usually governed by a voluntary board
Non-governmental non-governmental organisation (NGO):
organisations (NGOs) a legally constituted body that functions
independently of any government and that has
A non-governmental organisation (NGO) is a not-for- a specific humanitarian or social aim/purpose,
profit group, independent from government, which is e.g., supporting disadvantaged groups in
organised on a local, national or international level to developing countries or advocating the
tackle issues that support the public good. They are protection of human rights
task focused and made up of people sharing a common
interest. NGOs perform a variety of services and
31
Examples of NGOs include the following: • The MacArthur Foundation supports creative
people and effective institutions committed to
• Amnesty International is a worldwide campaigning
building a more just, verdant and peaceful world.
movement that works to promote internationally
Among other things, it seeks to further the
recognised human rights for all. It undertakes
development of an international system of justice
research and action focused on preventing
and advance human rights around the globe.
and ending serious abuses of human rights to
physical and mental integrity, ensuring freedom • The International Committee of the Red Cross
of conscience and expression, and freedom (ICRC) is an ‘impartial, neutral and independent
from discrimination. organisation whose exclusively humanitarian
mission is to protect the lives and dignity of victims
• Article 19 is a human rights organisation with a
of armed conflict and other situations of violence
specific mandate and focus on the defence and
and to provide them with assistance.’
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promotion of freedom of expression and freedom
of information worldwide.
• Avocats Sans Frontières (ASF – ‘Lawyers Without LEARNER PROFILE
Borders’) is mostly made up of lawyers, solicitors
Principled
and magistrates who aim to contribute, completely
independently, to the establishment of a fair,
•
equitable and united society.
PL
Médecins Sans Frontières (MSF – ‘Doctors
Without Borders’) is an international humanitarian
aid organisation that provides emergency medical
assistance to populations in danger in more than
70 countries.
Médecins Sans Frontières (MSF) is a not-for-profit
NGO that provides medical aid and support
to developing countries in conflict situations
and humanitarian crises. Between March and
August 2021, it provided medical care to 6000
malnourished children across Madagascar, a
country that was hit by the worst food and
nutrition crisis in its recent history. To deal with
the humanitarian crisis, MSF set up mobile
clinics in 20 locations. It had to overcome
many problems, including the country’s
M
geography, which makes it difficult to access
remote villages.
MSF’s actions are based on the principles of
medical ethics, independence and impartiality.
Its primary aim is to go to the most difficult
places and situations around the world and
provide support to sick and injured people.
SA
Why can the people of Médecins Sans Frontières

be described as ‘principled’? Discuss in class.
Médecins Sans Frontières (MSF) is an international Find another example of an organisation that you
humanitarian aid organisation would describe as principled and explain to your
class why you think it is.
• The Ford Foundation is a resource for innovative
people and institutions worldwide that aim to
strengthen democratic values, reduce poverty and
injustice, promote international cooperation and
advance human achievement.
32
Charities
Most countries have laws about what constitutes • advancement of environmental protection
charitable work as charities are usually allowed tax or improvement
benefits. The following list is typical of activities • relief of those in need, by reason of youth,
accepted as being for ‘charitable purposes’: age, ill health, disability, financial hardship or
• prevention or relief of poverty other disadvantage
• advancement of education • advancement of animal welfare.
• advancement of religion Charities often perform useful social and environmental
• advancement of health or the saving of lives functions that would not be undertaken by private
businesses or government-funded organisations.
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• advancement of citizenship or
They are dependent on private contributions and
community development
these can vary in amount, making it difficult for
• advancement of the arts, culture, heritage or science charity managers to plan. Some charitable work is
• advancement of human rights conflict resolution duplicated – for example, in social care or medical
or reconciliation, or the promotion of religious or research – and it is argued that such situations can lead
ACTIVITY 2.3
1
Women’s Legal and Human

Rights Bureau
Production of straws made
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racial harmony or equality and diversity
sector
to wasteful duplication.
Identify the type of business activity that is most likely to match the description provided.
For-profit private For-profit social

enterprise
Non-profit Public sector
business
M
from sugarcane
Ophthalmic hospital
National Statistical Institute
Financial consulting
SA
2 One of the business activities above can be either a for-profit private sector or a public sector business.
Which one do you think it is, and why?
33
After studying this chapter, complete this table.
Needs Almost Ready to

I am able to apply and analyse:
more work there move on
the distinction between the private sector and public sector (AO2)
I am able to evaluate:
the main features of the following types of organisations: sole
traders, partnerships, and privately held companies and publicly
E
held companies (AO3)
the main features of the following types of for-profit social
enterprises: private sector companies, public sector companies,
cooperatives (AO3)
REFLECTION
1
PL
the main features of the following type of non-profit social
enterprises: non-governmental organisations (AO3)
If you were planning to set up a business, would

you create a social enterprise? Justify your
decision to another learner.
2 What factors did you consider when making this
decision? Which was the most important factor,
and why?
M
PROJECT
1 As a class, find an NGO specialising in any social d how it finds resources to cover its needs
cause that you think is important in your country.
e what kind of problems it has when trying
2 Find as much information as you can about this to reach its goals
NGO and its goals from the internet.
SA
The interview findings should be presented to the

3 Split into two groups. One group should other group, which will need to organise a practical
organise a meeting with the NGO for an way to support the NGO. Some ideas are to offer
interview with a manager. The interview should voluntary work or to organise lotteries, etc.
include structured open and closed questions,
aiming to understand: 4 The two groups meet to create a visual
presentation of the project, e.g. a video, to be
a the scope of the business activity shared with their peers at school to increase
awareness of the social goals of the non-profit
b how it is organised organisation.
c how it differs from for-profit businesses
34
Alejandro and Santiago become partners
Alejandro and Santiago are graduates from the same university. They have decided to set up a partnership to start
a business organising experiential events. They came up with the idea when they saw a video on YouTube, in which
IKEA offered a sleepover event to 100 people in one of its stores. They were also inspired by the fact that some
famous partnerships were so successful that they ended up becoming huge public limited companies, such as the
partnership between Larry Page and Sergey Brin, who founded Google. However, they also read statistics which
suggest that partnerships have many disadvantages and that only 30% survive in the long term.
In 2018, they started the partnership, under the name XEvent. As a start-up, XEvent faced many problems.
Competition in the market was more intense than the partners expected. The business had cash flow problems, and
E
banks were not prepared to offer a loan. The business plan initially set up by the partners proved inaccurate. In
2020, Alejandro convinced a friend, Maria, to invest in the business. However, Maria demanded that the business
be incorporated by becoming a private limited company. Initially the partners were sceptical about this because
the incorporation process is quite costly. But they knew that the decision would solve many of their problems.
Eventually the partners became shareholders with limited liability in XEvent.
2
3
4
PL
The business started to grow and soon became very profitable. Maria was interested in transforming XEvent from
a traditional for-profit business to a for-profit social enterprise by investing some of their profit in organising
events for children with special needs as part of their social integration programme. Santiago and Alejandro also
suggested that XEvent could help non-profit businesses by supporting them with their goals. Alejandro contacted
an NGO working on animal rights and volunteered to organise an event to help them spread awareness.
1 Define the term ‘partnership’.
Identify the economic sector in which XEvent operates.
Suggest two reasons why Santiago and Alejandro decided to set up their business as a partnership.
Suggest two problems the two owners faced from setting up XEvent as a partnership.
[2]
[2]
[4]
[4]
M
5 Describe two common steps of setting up a new business that the partners must have followed
when starting XEvent. [4]
6 Suggest two reasons why Maria did not want to invest in a partnership but wanted XEvent to
become a private limited company. [4]
7 Explain two possible disadvantages for Alexander and Santiago from changing their partnership
into a private limited company. [4]
8 Explain one difference and one similarity between a typical for-profit business and a for-profit
SA
social enterprise. [4]

9 With reference to the case study, explain one difference and one similarity between an NGO and
a for-profit business. [4]
10 Should XEvent become a social enterprise? Justify your answer. [10]
35
Chapter 3
Business
E
objectives
Higher-level
PL
M
SA
LEARNING OBJECTIVES
On completing this chapter you should be able to:
LEARNING OBJECTIVES
Apply and analyse:
In this chapter you will learn how to:
• Vision statement and mission statement (AO2)
• appreciate possibleobjectives
Common business definitionsincluding,
and descriptions
growth, of the central
profit, characteristics
protecting shareholderofvalue
the arts
and ethical
objectives (AO2)
• consider the creation and interpretation of the arts
•Synthesise
be ableand evaluate:
to defend what you think are the standards of artistic judgment
• Strategic and tactical objectives (AO3)
• understand how the arts fit into the human experience and the idea of consensus
• Corporate social responsibility (CSR) (AO3)
• be able to discuss the possible status of artistic knowledge compared with other Areas of Knowledge
Select and apply the following business management tools:
consider
• SWOT the unique
analysis (AO4)properties of the arts and how knowledge is constructed in the arts
•
• STEEPLE
appreciateanalysis
the role(AO4)
of ethics in the arts and be able to discuss ethical considerations that may shape the
• Ansoff matrix
production of (AO4)
artworks
3 Business objectives
BUSINESS IN CONTEXT
Daimler AG – objectives and strategy
Daimler AG is one of the world’s most successful
automotive companies. With its Mercedes-Benz Cars
& Vans, Daimler Trucks & Buses and Daimler Mobility
divisions, the Group is one of the leading global
suppliers of premium cars and one of the world’s
largest manufacturer of commercial vehicles.
The Group’s strategic approach can be summarised
E
in three core statements:
Move: Reinvent the invention
As the inventor of the automobile, it is in our nature
to repeatedly reinvent mobility. Our aspiration is Our corporate culture creates the foundation for the
to offer environmentally sustainable solutions for outstanding innovative capability displayed by our
PL
mobility and the transport of goods in the future. . . .
We are working systematically to achieve our
“Ambition 2039” goal of CO2-neutral mobility.
To do so, we are also utilising the potential offered
by automated driving and digital services.
Perform: We create sustainable value
We aim to create value that is sustainable.
Our business is grounded in what we do best –
delighting our customers with fascinating vehicles.
employees. We put diversity into practice, . . . and
the principle of integrity guides our actions and our
relationships with our business partners.
Daimler-Benz’s chairman has stated that the overall
business has an objective of reaching an average
8–9% profit return on sales. This objective is broken
down into specific profit targets for each division of
the business such as cars, trucks and buses.
Discuss in pairs or a group:

M
Here, the attainment of our profitability targets and
the maintenance of a solid cash flow remain top • What are the likely benefits to a business of
priorities for the short and medium term. ... having a ‘strategic vision’?
Transform: Reinvent ourselves • Why is it important for a business to
have environmental objectives as well as
Our transformation is a long-term process of
financial ones?
adapting the implementation of our structures and
SA
processes in cooperation with our employees. We • What is the purpose of setting profit objectives
have a workforce that is agile and willing to learn . . . for each division of a business?
KEY CONCEPT LINK

Change
Strategic objectives are long term in nature, Some of these factors are the size of the business,
but nothing is forever. As external and internal the culture and attitudes of employees, the way the
conditions change, business objectives need to business is organised and the availability of financial
change as well. resources to invest in change.
But not all businesses are able to cope with change.
Many factors affect a business’s adaptability.
37
• Samsung: ‘to devote its talent and technology

3.1 Vision statement to creating superior products and services that
contribute to a better global society.’
and mission statement • Huawei: ‘To invest resources in the making of a
Mission statements outline the overall purpose of the digitally connected world.’
organisation. A vision statement, on the other hand, • Microsoft: ‘To empower every person and every
describes a picture of the ‘preferred future’ and outlines organization on the planet to achieve more.’
how the future will look if the organisation achieves • Google: ‘To organize the world’s information and
its mission. It is a statement of the future position that make it universally accessible and useful.’
describes what owners and directors ideally want their • Merck: ‘To discover, develop and provide innovative
business organisation to become. products and services that save and improve lives
E
around the world.’
KEY TERMS An effective mission statement should answer three
key questions:
mission statement: a statement of the business’s
core aims, phrased in a way to motivate • What do we do?
employees and to stimulate interest from • For whom do we do it?
outside groups
PL
vision statement: a statement of what the
organisation would like to achieve or accomplish
in the long term
A mission statement is an attempt to condense the

central purpose of a business’s existence into one short
paragraph. It is not concerned with specific, quantifiable
goals, but it tries to sum up the aims of the business in a
• What is the benefit?
Table 3.1 compares the vision and mission statements of
three organisations.
So what is the link between vision statements, mission
statements and strategies? It is simple. Without the
direction and focus brought to an organisation by vision
and mission statements, planning new strategies will be
like trying to steer a ship with no idea of either where
it is or the direction in which it is meant to be heading.
M
Vision and mission statements give the organisation
motivating and appealing way. It can be summed up as a
a sense of purpose and can prevent it from drifting
statement about ‘who we are and what we do’.
between the tides and currents of powerful events.
Here are some examples of mission statements.
• An A Level/IB college: ‘To provide an academic
curriculum in a caring and supportive environment.’
SA
Organisation Vision statement Mission statement

Alibaba We envision that our customers will meet, To make it easy to do business
work and live at Alibaba, and that we will be anywhere.
a company that lasts at least 100 years.
Minnesota Department Health equity in Minnesota where all Protecting, maintaining and improving
of Health (USA) communities thrive and everyone has what the health of all Minnesotans.
they need to be healthy.
McDonald’s restaurants To move with velocity to drive profitable Our mission is to make delicious feel-
growth and become an even better good moments easy for everyone.
McDonald’s serving more customers
delicious food each day around the world.
Table 3.1: Comparing vision and mission statements
38

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E

Peter Stimpson, Adamantia Malli-Charchalaki & Alexander Smith

Cambridge University Press is part of the University of Cambridge.

permission of Cambridge University Press.

notice to teachers in the uk

9 Leadership and management137

Unit 5: Operations management Glossary622

How to use this series

series because it offers inspiring ideas about how

How to use this book

The content in this book is divided into Standard and

KEY TERMS AND FORMULAE

Designed to stimulate critical thinking, allowing

The aims of this book

rewarding subject that examines dynamic decision-

Apply and analyse:

Select and apply the business management tool:

Discuss in pairs or in a group:

KEY CONCEPT LINK

depending on the product being produced and the size

is a business? • Land – this general term includes not only land

1.2 The nature of

Businesses identify the needs of consumers or other

Consumer goods include cars and washing machines.

Site for buildings Raw materials Finance Factories/Offices

Land Capital Machines

Skilled Permanent Risk-takers Coordinators

Figure 1.1: What businesses need

1.4 Business functions

Most businesses have four main functional departments.

made within the other functional areas, so finance

ACTIVITY 1.1 KEY TERMS

CASE STUDY 1.1

1.5 Economic sectors Huan and Bonnie want to become

All production can be classified into four broad types of

Changes in economic which may remit all of their profits to their

Vietnam’s sectoral change

The secondary sector grew fast, especially in the

linked to the fact that most of the economic shift

Business Primary Secondary Tertiary Quaternary Description of

family may reveal various products or services that

THEORY OF KNOWLEDGE Challenges

Commitment and self-motivation

Risk-taking • small-budget market research. The internet allows

• Lack of any trading record to present to banks as

Challenge 4: Where should I locate • personal customer service

It may be difficult to separate private life from

Entrepreneurs may be very keen and willing to work

factors show that the business environment is a dynamic

Challenges and opportunities

conclusion 2 Suggest two possible reasons why

• marketing and sales strategy − details of why the

Forecast profit See financial appendix to this plan

• The financial forecasts in a business plan can act as

plan can be used as the targets that the business

Users of business plans • A business plan for a start-up business needs

CASE STUDY 1.4

Does Chu Hua need a business plan?

Needs Almost Ready to

If you were planning to set up the business

9 Leadership and management137

Unit 5: Operations management Glossary622

social enterprise. [4]