CH.

2 BUSINESS STRUCTURE
Classification of business activity

1. Primary sector – extracting natural resources. E.g. fishing, mining

2. Secondary sector – manufacturing sector. E.g. car manufacturing,
clothes-making
3. Tertiary sector – service sector. E.g. banking, transportation

Changes in business activity

The importance of each sector changes as the economy develops. The

importance of each sector is measured by employment levels or output
levels.

1. Industrialisation is when the importance of secondary sector rises.

This occurs in developing countries like India and China

It increases the
It increases the GDP if
employment
the country, helping
opportunities
raise living standards.
available. Firms will be more
profitable, increasing
ADVANTAGES tax revenue
Manufacturing sector
Increases exports andgoods have more value
reduces imports. than primary sector
goods.

DISADVANTAGES
Manufacturing Imports of raw
industries growth is materials will increase,
usually occured due to increasing import
growth of MNCs costs.
Causes a huge
movement from rural
to urban areas, causing
social and housing
problems.
 2. De-industrialisation occurs when the importance of secondary
sector declines. It occurs in developed countries like USA, UK.

As the world industrialises,

more and more
manufacturing businesses
enter the market,
increasing the competition
and causing prices to fall.
This makes it easier for
As a country develops, the developed countries to buy
average income per person these goods rather than
increases. Rising incomes producing it themselves.
lead to increasing living
standards as consumers
will be able to spend more
on services than goods,
showing demand for
services rises more quickly
than physical goods

PUBLIC AND PRIVATE SECTOR

1. Public sector – firms controlled and managed by the

government/local authority.
2. Private sector – firms controlled and managed by individuals.

TYPES OF ECONOMIES

1. Free market economy – only private sector and no government

intervention.
2. Mixed economy – both private and public sectors. Governments
and individuals make decisions together. Governments usually offer
essentials like health care and education.

3. Command economy – economies that have only the public sector.

 PRIVATISATIO
N
It occurs when the
state sells of
companies to the
private sector.

The legal structure of business organisations – the private

sector

1. Sole trader
 These are businesses owned by one person
 The one person owns and controls the business.
 It has no formal legal structure as business and owner are
considered one and the same.
 Easy to set up and manage
 Owner has complete control
 Ability to choose working times
 Easy to establish relations with employees and customers
 Freedom of making own decisions
 Limited finance (capital)
 Unlimited liability
 May face intense competition
 Unable to specialise
 Lack of continuity
 Insufficient skills
2. Partnership
 It is a business owned by a group of individuals
 Each partner may specialise in different areas
 Shared decision-making
  Additional finance (capital) injected by each owner
 Losses are shared
 Greater privacy
 Fewer legal formalities
 Unlimited liability
 Profits are shared
 No continuity
 Risk of conflicts

Limited companies

Features:

 Limited liability – each shareholder will only lose the amount

invested if the business/idea fails
 Legal personality – the company has a separate legal identity from
its owners/shareholders
 Continuity – even after the death of a shareholder, there is no
need for dissolution.

Private limited companies

 It is a business owned by shareholders who are friends and family

 Limited liability
 Separate legal identity
 Continuity
 Original owner will be able to regain control
 Ability to raise capital from sale of shares
 Higher status
 High legal formalities
 Can’t sell shares to public
 Difficult to sell shares
 Have to send accounts to companies’ house – less secrecy
Public limited company

 These are businesses which have legal rights to sell shares to the public.

ADANTAGE
S
Limited liability
Seperate legal identity
Continuity
Easy to buy and sell shares
Access to substantial capital sources due to the right to issue
prespectus (flatation)

DISADVNATGES

High legal formalities

Cost of hiring specialists
High flucuation in share prices
Less secrecy
High risks of takeover
Directors influenced by short term
objectives of major investors

Legal formalities in setting up a company

1. Memorandum of association – name, address, contact number,

maximum share capital, declared aims
2. Articles of association – name of director, procedures to be
followed
 These documents must be submitted to the ‘registrar of companies’

Other forms of business organisation

Cooperatives

 These are organisations owned by their members

 Features:
o All members contribute to running and managing
o All members have a say in important matters
o Equally shared profits
 Advantages –
o Buying in bulk
o Working together to solve problems
o Good motivation
 Disadvantages –
o Poor management skills
o Capital and finance shortage
o Slow decision making

Holding companies

 A business which owns and controls many different companies, but is

not unified as one

Joint ventures

 When 2 or more businesses agree to join for one project

 Reasons:
o Shared costs and risks
o Different companies’ different strengths
o Together more powerful
 Risks:
o Conflicts
 o Errors or mistakes
o Business failure of one partner, risk the whole project.

Franchise

 A business which uses the name, logo, trading methods of an

existing successful business
 They have a legal agreement to do so

ADVANTGAES TO DISADVANTAGES TO
FRANCHISOR FRANCHISOR
Gaurenteed income Poor managemnt of
from franchisee one business, affectign
Easy, risk-free way of reputation of all
expansion Potential management
Easy to manage issues
Still have some control Difficult to monitor

Lower risks as business is established

Advice, traning, supplies and advertising obtained by
ADVANTAGES TO franchsier
Franchiser won't open another out;et in the same area
FRANCHISEE Access to experts
Economies of scale

Proportion of revenue sent to franchisor

DISADVANTAGES Rigid business model already made
Potential loss of large investment
TO FRANCHISEE Expensive initial fee
Public-sector enterprises – public corporations

 Known as public corporation

 In the public sector
 Profit is not their main aim

ADVANTAGES

Managed with social objectives rather than profit

Still operate, even if making a loss
Fainance raised from government

DISADVANTAGES

High chances of ineffeciencies

Subsidies may encourage inefficiency
Government may interferw in business decisions