1.

1 Four Factors of Production:

 Land (physical resources)

o Natural resources
 Extracting raw materials
 Mining (copper, coal)
 Petrol
 Agriculture
 Wood
 Fishing
 Labor (Human resources) the physical or mental effort that is used to produce goods
and services
o Manual (unskilled)
 Blue collar
o Skilled
 White collar
 Capital (Financial resources) manmade resources.
o Money invested in the business
o Capital goods
 Goods that produce other goods
 Enterprise (entrepreneur)
o Organize factors of production: land, labor and capital
 Risk taker
 Decision maker

Input: Land Labor Capital production finished goods and services

The Role of Business:

1. Providing goods and services to customers

2. Creating product (factories)
3. Extracting raw materials or even produce crops

What is the difference between goods and services?

Goods Services
Tangible Intangible
Can be owned Cannot be owned
Can be stored Cannot be stored
Can be measured Cannot be measured

Examples of services: Example of goods:

 Banks  Clothes
 Lawyers  Books
 Hospitals  Cars
Business Functions:

1. HR (Human resources)
 HR department
o -Recruitment of employees
o -Motivation (Financial/Non financial)
o -Training (personal development)
2. Marketing
 Marketing department
o -Market research
o -Market share
o -Pricing strategies
o -Promotion and advertising
o -Distribution Channels
o -Branding
o -Product development
o -Public relation
3. Finance
 Finance and accounting department
o -Cash flow statements
o -Profit and loss account
o -Balance sheets
o -Budgets
o -Sources of finance
4. Operation Management (production)
 Operation department
o -Methods of production
o -Stock control
o -Quality Control

All these functions are interdependent, they rely on each other, working together to achieve
cooperate goals

Labor-intensive Industries: Industries that rely heavily on labor rather than machinery.
Usually when cheap labor is evident.
Advantages: Employment
Disadvantages: Human error, slower work, Long term more costly

Capital-intensive industries: Industries that rely heavily on machinery rather than labor.
High-tech mass production economies of scale
Advantages: Fast, efficient, less costly long term,
Disadvantages: Initial price higher, environmental issues

Maximize profits and minimize losses.

Four sectors of the Economy:

o Primary Sector (Where businesses focus on extracting raw material and

natural resources)
o Mining
o Farming
o Fishing
o Hunting
Highly monitored by the government to avoid depletion of resources or any act
of environment damage

 Secondary Sector (Where businesses work in the manufacturing sector. Raw

materials or inputs are converted into finished goods or consumer products)
o Durable
o Non-durable
o Capital goods – goods that create more goods

 Tertiary Sector (Service sector, where goods(manufactured) and services are

being sold )
o Financial services
o Accounting
o Healthcare
o Leisure
o Education
o Transport
o Law
o Security
o Consultancy
o Restaurants
o supermarkets

 Quaternary Sector (provides services that are focused on knowledge) developed

countries economies rely primarily on this (online selling)
o ICT
o E services
o Media
o Web based
How does a Business Grow?

1. Horizontal growth/ integration: (when two or more businesses of the same sector
and same industry merge or integrate together)
2. Vertical integration: (when two or more businesses integrate or merge together
they are from the same industry but different stage of production)
 Vertical backward integration: When a business buys or acquires another
business that is in an earlier stage of production. Example: a lumber company
purchasing a forest to harvest the trees
 Vertical forward integration: When a business purchases another business in a
later stage of production. Example: an organic farm buys a retail store where they
can sell their produce.
3. Conglomerate Industries: (When one or more businesses from different stages of
production and different industries merge together or integrate. These industries are
highly diversified – different products within different markets and industries)

Supplier – (Farm/ Coffee beans) manufacturer – (Nescafé / ground coffee) Wholesaler

- (Distributor/ Warehouse store) Retailer (Coffee shop/ Processing) Consumer

The above types of integration would achieve the following benefits/advantages for the
business- Example: Union Leaver or Procter & Gamble:
 Lowering transaction costs (result from passing the product from one business to
another and each business would place their own profit margin onto the product)
 Insuring the reliability of supplies (if the vertical integration is backwards than the
business can insure continuous supply of raw materials plus high quality, availability
and price)
 Businesses would find outlets for their products (especially in the case of forward
vertical integration)
 Gives the business market power (because it is a larger industry, in terms of
flexibility, minimization of costs, setting prices and increase of market share)
 Weakens forces of competing companies (might eliminate the competition by
taking a larger market share)
 Avoiding government regulations (Such as price controls/ taxes)
 Businesses can achieve economies of scale

In Jordan:
3.4% primary sector
25.8% Secondary sector
70.8% Tertiary sector & Quaternary
Contribution to the economy as a total of the GDP

The process of shifting from one sector to another and having different weighing or
percentage contribution of each sector, will result in a strain on the human resources, natural
resources or physical resources. This might cause environmental damage and depletion of
resources and pressure on the human workers.

Private sector is more efficient than the public sector.

In the secondary sector unskilled labor (unskilled blue-collar labor) exist, whereas tertiary
and Quaternary service sectors high skilled white-collar workers are required.

o Entrepreneurs: They start up a business

o Intrapreneurs: developing a new product in an already exiting
organization
Reasons for starting up a Business:

 Rewards: Profits
 If the person works alone then they get all the rewards
 If a person works for another business then they are rewarded with a
limited amount of money – wages or salary
 But there is an element of risk
 Filling a gap in the market: First mover advantage
 Independence: You are your own boss, freedom
 Necessity: Income required
 If employee was made redundant
 Will not be able to get re- employed
 Interest
 Dream fulfillment
 Sharing an idea
 Challenge

Process of starting a business/ Business Plan:

1. Organizing the basics

 Address
 Name
 Logo
 Legal Structure
 Location
2. Researching the Market
 Primary: Surveys/Questionnaires
 Secondary: Gap in market
3. Planning the business: (Business Plan: A detailed study of all aspects of the business
by setting objectives)
 Business idea
 Cooperate objectives and aims
 Strategies to achieve objectives
 Marketing
 Finance
 HR
 Operations
 Budgets
 SWAT analysis (Strength, weaknesses, opportunities, threats)
 PESTLE analysis
 4. Establishing legal requirements
 Gov’t approval
 Sole trader – minimal finance 5000 approx. JD (Partnership more legal
payments)
 Name infringement
 IPO (initial public offering) private limited companies don’t have to do this

5. Raising finance
 Personal savings
 Friends and family
 Loans
 Shares
 Venture capitalists
6. Testing the market
 Soft opening
 Piloting

Problems a new business might face:

 Intense competition
 Not enough advertising
 Not enough capital to enter the market
 Lack of experience
 Wrong location
 No customer base
 High startup capital
 Not enough market research
 Unique selling point
 Poor cash flow – Losses > Profits
Note: A business might have all the right internal factors but if External environment is
not right (PESTLE) – Business might fail
 1.2 Types of Business Organization

 Private sector:
 Profit making
Unincorporated Businesses
o Sole traders
o Partnerships
Incorporated Businesses
o Private limited companies
o Public limited companies
o For profit social enterprise
 Non profit / non governmental organization (NGOs)

Public Sector: Owned and controlled by the Gov’t or state, the major objectives of the
government or state are to produce goods and services for the benefit of the public.
Private Sector: This sector is owned and controlled by the individuals and firms. Their
major aim is to maximize their profits and achieve expansion and growth.

Unincorporated Business:
Are businesses in the private sector that do not have a limited liability, the owners are liable
(under threat) to lose their personal belongings if the business fails or goes bankrupt.

Main Features:
 Unlimited liability: The owner is liable to lose his personal belongings or
possessions in order to settle his debts.

 No continuity: If the owner dies, the business will cease to exist (until the
successors complete all legal actions to acquire the business).
 No separate legal entity: No separation between the owner and the business
legally.

1. Sole trader: (Sole proprietor) a business in the private sector that Is owned and
controlled completely by one person.
 Advantages:
o The owner has complete power and control of the business decision.
o Few legal formalities (papers) are needed; there is mainly one paper
from the registrar of companies.
o The sole trader keeps all the profits to his or her self.
o The business establishes direct contact with customers.
o Usually a small startup capital is needed.
o Complete privacy of accounts.
o Flexibility of working hours and operations.
 Disadvantages:
o The sole trader will have an unlimited liability: The owner is liable to
lose his personal belongings or possessions in order to settle his debts.
o No separation between the owner and the business.
o He or she bears all the risks and losses.
o No partners to share the responsibilities or ideas.
 o Limited financial resources. – Banks will hesitate to give loans, in the
situation where they do give a loan it will be a secured one (a loan that
is issued against a collateral)- Against a property (land or building)
o Limited expansion prospects.
o Might be lack of continuity in the case of the death of an owner-
unless passed on. From a legal perspective business will cease to exist.

2. Partnerships: A business where 2-20 people or partners share the responsibilities

and the running of the business. Example: Law firms, Doctors.
1. Normal Partnership
2. Sleeping or silent partner: Invests but is not involved with running
the business – Limited liability
3. LLP: limited liability partnership: In this case all partners will
have limited liability which would protect their personal belongings
from being conflicted in the case of bankruptcy
 Legal papers Required:
o Deed of partnership: A written legal document or agreement that
states the duties and responsibilities of each partner, their investment,
their percentage of profits, in case of disagreements how to resolve
the dispute.

o the deed of Partnership is likely to include the following:

The amount of finance contributed by each partner
The roles, obligations and responsibilities of each partner
·Condition for introducing new partners.
How profits or losses will be shared among the partners.
Causes of the withdrawal of a partner from the business.
Procedures for ending the partnership
 Advantages:
o Partners get to share, idea, responsibilities, losses and risks
o More sources or finance
 Disadvantages:
o Unlimited liability: In the case of bankruptcy or accumulation of
debts, each and every partner will be liable to lose his or her
personal belongings to settle those debts
o No continuity In the Case of the death of any partner or dissolving
the partnerships it ceases to exist legally
o No distinction between the business and the owners
o Profits are not shared equally
o Less sources of finance and less opportunities for growth in
comparison to private and public limited companies
o Some partners might contribute more than others- creating
resentment
Incorporated Business (companies):

Companies or corporations that have limited liability (In the case of bankruptcy the
shareholders or owners are not liable to lose their personal belongings; they will only lose
their original investment). It also refers to businesses that are owned by shareholders. A
certificate of incorporation has been issued at this point which gives the company a separate
legal entity from its owners.

Setting up companies can be very complicated and expensive. This is since it requires
legislation to protect the investors who buy shares in a business that they do not run or
control. A board of directors is elected by shareholders to run the company on their behalf.

 Features of companies (Incorporated businesses)

o Limited liability
o Shareholders are the ones that hold shares in an LTD or PLC and thus are
entitled to dividends (profits).
Dividends: Profits given to shareholders at the end of the fiscal year provided
that the business makes a profit or the board of directors agrees to distribute
the profits, it’s the return on the investment.
o Shareholders will also get “Capital Gains” if the share price went up
(appreciate in value)
 Separate Legal Entity: there is a divorce or separation between
ownership/shareholders and control (management)
o Board of directors is elected or voted for by the board or directors in the
AGM –Annual General Meeting
o Shareholders Board of directors Management team Control over
meetings
 Separate legal identity means that the company is liable by law to settle the debts in
the case of bankruptcy and not the shareholders
 Usually individual shareholders will own a small percentage of the company and will
not have the power unless they own a majority of the shares.
 1 share = 1 Vote the higher the number of shares the more power a shareholder will
have over decision making especially during the AGM.
 In the case where a shareholder has over 51% of the shares gives the shareholder the
power to control the company.
 Continuity.
- Complete control on decision making
- No Privacy of accounts

1. LTD Private limited company: these are incorporated businesses with a minimum
of two shareholders who are usually family and friends and they have a limited
liability. “Private: means that the shares remain privately owned and are not offered
in the stock exchange for the public, to sell or buy a share, the consent or approval of
the majority of the board of directors must be granted.
  Advantages:
o More status than sole traders and partnerships
o More sources of finance available for them (share capital and loan
capital)
o More opportunities available for expansion
o They can have economies of scale thus minimizing their costs and
maximizing their profits
o Limited liability for shareholders
o Continuity: if one of the shareholders died or sold his shares the
company will continue to exist
o The business was a separate legal identity
o Share holders still retain control over business decisions
o Degree of secrecy is retained in comparison to PLCs (public limited
company)
 Disadvantages:
o Expensive and time consuming to set up
o A lot of legal papers are needed to set up the business
 Memorandum of association
This document records they key characteristics of the
company and basic information about the objectives of
the business, share capital, external activities, etc.
 Article of association
Includes all the articles or internal laws that govern the
business such as the executives of the companies, their
titles, areas of responsibility, and the rights and
responsibilities of each shareholder, the AGM (annual
general meeting), emergency meetings, etc.
 Certificate of incorporation
Gives the business the authorization to work as a
private limited company with limited liability
o Limited financial resources as private limited companies cannot sell
their shares to the public, thus the share capital remains limited

2. PLCs Public Limited Company: Incorporated businesses that have limited liability
and the shares are offered or traded to the public in the stock exchange. Public does
not mean the business is owned by the government

 Advantages:
o Limited liability
o Separate legal entity for the company
o Continuity
o Large sources of finance are available as the share is not limited to
private shareholders
o Banks will give PLCs more loans as they have security and their
worth is huge
o Unlimited expansion prospects
o Achieve economies of scale
  Disadvantages
 Large amount of legal documents are needed for a PLC to
setup which is time consuming and expensive
 Article of association
 Memorandum of association
 Certificate of incorporation
o Complete lack of secrecy and privacy, PLCs are required by law to
publish this financial accounts to the public in the newspapers
o Original owners risk losing control unless they maintain more than
51% of the shares
o Higher accountability (especially that it is the money of the public
and the public interest should be guarded
o A company has no control over the stock exchange – share prices
might fall, leading to the image of the business being damaged
o Influenced by negative publicity, targeted more than any other type of
business by pressure groups, public scrutiny
o Limited control over who buys the shares

Note that one disadvantage of PLC’s is that there is dilution (strength) of control. With more
shareholders the original owners will lose control of the business, since owners with more
shares control the business.

NOTE: Private limited companies means that shares are traded privately between a certain
group of shareholders, and this business is in the private sector.
NOTE: Public limited companies are companies were shares are offered to the public (Does
NOT mean the government) Public means people. Shares are offered to the public in the
stock exchange and this company is in the private sector.

IPO: Initial public offering – face value of 1 JD

Prospectus: brochure that contains all information about company that’s going to become a
PLC. An invitation for investors to buy shares in the business (PLC)

Floatation: process of becoming private to public limited, the first day that shares are put in
the stock exchange, according to the forces of demand and supply

If shares go up exponentially shareholders will get dividends and capital gain

 Profit social organizations:

*Cooperatives: (Form of partnership: members share the running and responsibilities of

the business, profits are equally divided, 1 person = 1 vote,this can exceed 20 partners.)
 Forms of cooperatives
 Sole traders
 Partnerships
 Companies

 Types of cooperatives:

* Financial cooperatives: Such as credit unions where social aims might mean that those
unions will lend money at lower interest rates for members or provide loans for members
who are not eligible to borrow money from banks.
* Housing cooperatives: these cooperatives are run to provide housing for its members,
as opposed to providing runt to private land owners. Opened by the cooperatives not by
members, but members will have units, shared facilities, lower operation costs. Rules and
conditions will apply.
* Workers cooperatives: A business that is owned and operated by the workers
themselves, save money that is usually paid to directors and managers. This provides
employment as a priority, usually this emerges when a business is failing or about to go
bankrupt, so the workers take overthe business, sack the managers and run the business
themselves.
* Producer cooperatives: This is where groups of producers collaborate in certain stages
of production, particularly common in agriculture. Buy in bulkand save costs, share risks,
and divide responsibility, maximize utilization of expensive equipment, pooling of
resources leading to cost effectiveness.
* Consumer cooperatives: provides services to customers who are also owners of the
business. Advantages: lower profit markets because they charge lower prices than other
grocery stores.

o Public Private Partnership: take place when governments create partnerships

with the private sector in the provision of certain services. P.P.P
 o It is a company created between private sector business and the publicsector, with
social aim or a specific project such as the development of a site for sustainable
energy or environmental site. The business is expected to make profit but this is
not the major aim, public sector will provide finance, expertise, government will
provide incentive such as tax deductions or incentives for the private sector.
The tunnel between France and UK was a PPP between EU gov’t and Swedish
company called Skanska.
o Advantages PPP:
o Gov’t might give private businesses incentives such as less tax rates or even tax
exemptions, gov’t will give businesses planning permissions in a short period of
time
o Less bureaucratic gov’t when it comes to dealing with thesebusinesses,
facilitating all papers needed to achieve product
o Both sectors will have mutual benefits because they pool their resources
together, gov’t provided land, funds, labor
o Running the project will be much more efficient than if I the publicsector
performed the project independently, private: more profit oriented, and
efficient because of motivation

 THE DIFFERENCE BETWEEN PUBLIC SECTOR AND THE PRIVATE

SECTOR
Public Sector
 Its objective is to provide goods or
services without making aprofit.
Private Sector
 Its objective is to provide goods or
services but with the main aim of
making profit.
 It has a lower quality, less  It has higher quality, more

choice, and less innovation and choice and more innovation and

inventions. invention.