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TOPIC 1: INTRODUCTION AND BUSINESS ACTIVITY

INTRODUCTION

Nature of subject, expectations and papers

 Business Studies is the study of how businesses operate and how they are managed.
 A business is any organization or commercial activity that is aimed at satisfying human needs
and wants at a profit.
 A need is anything a human being can not live without, for example, shelter, water or food.

NB: The classification of things into needs and wants is general. It varies from one person to the other.

BUSINESS ACTIVITY

SCARCITY

 It means having limited resources as compared to the needs and wants of consumers.
 Due to scarcity businesses and individuals are forced to make choices to make use of
alternatives or substitutes so that the needs and wants are satisfied.
 In the process they will incur opportunity cost.

OPPORTUNITY COST

 It refers to the value of the alternative given up. For example, if one person travel, he or she
may use a road, rail or air transport.
 If the person decides to use air transport, it means road and rail transport have been given up.

REASONS WHY PEOPLE START THEIR OWN BUSINESSES (J14 P21 – Q1a)

 to earn high income

 to make and keep profit
 to be in control or be own boss
 to create employment or to help the society
 to have freedom to choose own working hours and holidays

DISADVANTAGES

 no regular wage
 worrying about business failure
 more admin work
 risk of losing personal property
1 ENTERPRENEURSHIP

 It is the ability to organize, manage resources and assume risks so as to make a profit.
 In business land, labour and capital are resources that must be managed so as to make a profit.

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 this is done by entrepreneurs

ENTERPRENEUR

 It is a person who organizes, manages resources and assumes risks to make a profit.
 The person can be the owner of the business or an employee

QUALITIES OF ENTERPRENUERS

 risk taking – that is going beyond the ordinary even if there are some danger indications
 innovator
 creative
 effective communicator
 good at networking
 multi-skilled
 strategic thinking – that is the ability to identify opportunities and design strategies to exploit
those opportunities
 Adaptability – that is being able to change the way of doing things when the need arises

BUSINESS PLAN

 It is a document which describes a business that is to be set up.

 It outlines name, ownership, objectives, products to be sold, the strengths, opportunities,
threats, weaknesses, marketing strategies, number of people to be employed, likely expenditure
and revenue of the business.

IMPORTANCE/BENEFITS OF PREPARING A BUSINESS PLAN

 It gives the business direction, so the owner will know what is to be achieved.
 It helps the business to estimate the likely course which enables the owner to source finance in
advance.
 It helps to assess the risks associated with the business idea, which means the owner can put
strategies in place to reduce failure.
 It helps to attract loan providers because the plan can be presented to bank managers who are
can grant loans. The bank manager will assess if the business idea is viable.
 It helps to control the business operations. This is because the owner of the business can
compare the actual performance of the business against what is contained in the business plan.

GOVERNMENT SUPPORT TO BUSINESSES (N14P13 Q(a); J15P23 Q1(a)

The government of a country can encourage entrepreneurship by:

2  providing loans at lower interest rates so that business people will have capital to start business
ventures

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 providing training and advice to business owners so that they have the skills to run businesses
efficiently, for example owners can be trained on how to keep records.
 providing cheap land so as to reduce set up costs
 providing tax holidays, that is new businesses can be exempted from paying tax. This will help
businesses to retain more profit and to expand.

REASONS WHY GOVERNMENT SUPPORT SMALL BUSINESSES

 To widen the tax base, because if more businesses are set up, the government will have more
businesses to charge taxes
 small businesses may grow into large businesses of tomorrow
 to increase competition for large firms
 to help them survive
 it promote economic growth, that is new businesses can design better ways of doing things
which can help to increase national output

REASONS WHY BUSINESSES FAIL

 Lack of working capital – the business may over invest in fixed assets such that it will not have
money to purchase goods for resale or to pay expenses
 Poor record keeping – if the owner fails to keep business records, he or she will not be able to
recover trade receivable hence the business will fail
 Too many drawings by the owner – If the owner withdraws a lot of goods or money for private
use, it means the capital of the business will reduce.
 Competition and failure to monitor market changes – if the business fails to provide unique
products it may fail to get customers hence it may be forced to close

SPECIALISATION

 It is when a business or people concentrate on what they know best or way in which the
business is divided as each worker concentrate on a specific task
 OR It is when a business focuses on selling a limited range of products. By specializing, the
business will be able to come up with unique products because it will be concentrating on what
it knows best.

CLASSIFICATION OF BUSINESS ACTIVITY/LEVELS OF PRODUCTION/SECTORS OF THE ECONOMY - N14P21,

Q2 (a)

ACTIVITY/SECTOR

3
PRIMARY SECTOR SECONDARY SECTOR TERTIARY
SECTOR

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Primary sector

 It consist of businesses that are involved in the extraction of raw materials

 It is the first stage of production
 The business activities include mining, fishing, hunting, forestry, farming
 The output from this sector is called primary produce or raw materials and it is usually sold at
low prices
 The output should be passed on to the secondary sector for value addition.

Secondary Sector

 It deals with the conversion/processing of raw materials into semi-finished or finished products.
 It involves activities like canning, smelting, baking, milling, brewing etc.
 It is the second stage of production where value addition is done to primary products.

Tertiary Sector

 It deals with provision of services to other sectors

 It involves businesses like insurance, banking, internet providers, transporting, warehousing and
retailing
 It also includes provision of direct services like education, hairdressing entertainment and
medical care
 It is the third and last stage of production

STRUCTURAL CHANGES IN THE ECONOMY

The contribution of businesses from various sectors will change from time to time. Economies can
industrialise or de-industrialise.

 Industrialisation means the growing importance of the secondary sector in the economy. During
industrialization more people can be employed in the secondary sector and more output (GDP)
will come from the secondary sector.
 De-industrialisation means decrease in the importance of the secondary sector in the economy.

The contribution of each sector may change because of the following:

 Depletion of raw materials: If raw materials are exhausted, for example minerals, it means less
people will be employed in the primary sector and less output will be realized
 Introduction of machines : If businesses intoduce machines, more output is produced and less
people will be employed in the sector
 Raising incomes: If citizens are having more disposable income, they tend to buy more services
4 like tourism. This means the tertiary sector will increase in terms of output and employment
 Raising imports: when a country imports raw materials and goods, the primary and secondary
sector may decrease in their importance. There will be an increase in retailing and tertiary
sector activities

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 Recycling: Recycling will reduce the contribution of the primary sector because the secondary
sector will use raw materials or finished products over and over again
 Change in the climatic conditions: A change in the whether patterns can lead to poor harvests in
the primary sector. This means contribution of the primary sector can decrease if there is a
drought

VALUE ADDITION/BENEFICIATION

 It is a process of enhancing a product so that customers will be more willing to buy it at a higher
price.
 Both goods and services can be value added such that businesses can gain more profit if they
sell many products.
 In the secondary sector value can be added by milling, polishing, smelting etc.
 In the tertiary sector value can be added by using colorful packaging, branding, employing well
dressed shopping assistants, offering delivery, using attractive fittings and other after sales
services
 A business can calculate added value by using the formula:

Value Added = Selling Price – Buying Price of raw materials or components

BUSINESS STAKEHOLDERS

 A stakeholder is anyone interested in the running of a business.

 The stakeholders can be affected by the way a business would be operating or they can
influence the operations of a business
 Stakeholders include shareholders, employees, government, customers

Stakeholder groups and their aims for the business

Stakeholder Main features Most likely aims for the stakeholder group
group
Owners or  They put capital in to set up and expand  A share of the profits so that they
Shareholders the business gain a rate of return on the money
 They will take a share of the profits if the put into the business
business succeeds  Growth of the business so that the
 Success can not be guaranteed and if the value of their investment increases
business does not attract enough
customers, then owners may lose the
money they invested
 They are risk takers.
Workers  They are employed by the business; they  Regular payment for their work
are also called employees  A contract of employment
 They have to follow instructions of  Job security – workers do not want
5 managers and they may need training to to look for new jobs frequently
do their work effectively  A job that gives satisfaction and
 They may be employed on full or part provides motivation.
time contracts and on a temporary or
permanent basis

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 If there is enough work for all workers,
some may be made redundant
(retrenchment) and told to leave the
business.
Managers  They are also employees of the business
and control the work of other workers.
 Important decisions are taken by
managers
 Successful decisions lead to the business
expanding
 If managers make poor decisions, the
business could fail.
Customers  Customers are important to every
business. They buy the goods that the
business produces or the services that the
business provides.
 Without enough customers, the business
will make loses and will eventually fail.
 The most successful businesses often find
out what consumers want before making
goods or providing services – this is called
market research
Government  Governments are responsible for the
economy of the country
 They pass laws to protect consumers and
workers.
The whole  The community is greatly affected by
community business activity. For example, dangerous
products might harm the population.
Factories can produce pollutants that
damages rivers, the sea and reduce air
quality.
 On the other hand, businesses create jobs
and allow workers to raise their living
standards. Many products are beneficial
to the community, such as medicines or
public transport.
6 CLASSIFICATION OF BUSINESSES ACCORDING TO OWNERSHIP
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 High salaries because of the
important work that they do.
 Job security – but this will depend
on how successful they are
 Growth of the business so that
managers can control a bigger and
better known business. This gives
them more status and power.
 Safe and reliable products
 value for money /buy at affordable
prices
 Well – designed products of good
quality
 Reliability of service and
maintenance
 Governments want businesses to
succeed in their country.
Successful businesses will employ
workers, pay taxes and increase
the country’s output.
 Many laws affect business activity
and governments will expect all
firms to stay within the law.
 Jobs for the working population
 Production that does not damage
the environment
 Safe products that are socially
responsible.
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PRIVATE SECTOR PARTNERSHI

P

SOLE TRADERS PARTNERSHIP COMPANIES

P PARTNERSHI
P
PRIVATE LIMITED PUBLIC LIMITED
COMPAMIES COMPANIES

PRIVATE SECTOR PUBLIC SECTOR

 businesses owned by individuals
 main objective is to make profit
 firms managed by board of directors
who usually appoint a managing
director
 businesses owned by the government/local
authorities
 main objective is to provide services at an
affordable price
 Firms are managed by the government minister
of relevant government department. CEO is
politically appointed.

Sole Traders

 It is an unincorporated business owned and controlled by one person

 Sole traders do not enjoy limited liability
 They belong to the private sector of the economy
 They are formed with a profit motive

Advantages - J15P23, Q4 (b)

 It is easy to form because they are no many legal formalities

 The owner enjoys all profits
 Decisions can be made quickly which means the business is quick to respond to changes in
customer tastes
 Accounts are not published, that is privacy of business affairs. This means competitors will not
access the accounts of the business

Disadvantages
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 The owner suffers from unlimited liability – Unlimited liability means the owner can lose private
property and capital invested if the business fails to pay liabilities or debts. This means a risk
form of business.

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 Limited capital is raised which limits the chances of expansion

 It lacks continuity that is the business usually dies with the owner.
 Wrong decisions can be made because of lack of consultation
 There may be limited range of skills
 Long working hours hence difficult to take a holiday

Partnership

 It is when 2 or more people agree to own and run a business together.

 It belongs to the private sector of the economy
 It is an unincorporated business – that is it is not formed according to the law
 On formation partners are encouraged to prepare a partnership agreement or deed which will
guide the day to day running of the business

Partnership Agreement/Deed contains: - J14P21; Q1 (b) – choosing a partner

 Capital to be contributed by each partner

 Profit/Loss sharing ratios
 Salaries to be awarded to partners
 Interest on capital or drawings

NB: Partners can agree on anything and it must be written somewhere. If they fail to prepare an
agreement, the partnership act can be applied.

Benefits of partnerships – J14 P1

 More capital is raised as compared to a sole trader, this means a larger business can be
established
 Partners can share ideas which means better decisions can be made
 Partners can share responsibilities, which reduces the need to employ other people. For
example, one partner can specialize in marketing and finance and the other can specialize in
production
 Increases illness the other partners can continue operating the business
 Losses are shared which reduces risk on partners

Disadvantages

 Profits are shared which means partners will get a low return on investment as compared to a
sole trader
 Decision making is slow because of consultation which means the business will slow to respond
to market changes
8  Partners have unlimited liability which means they may lose private property if the business fails
to pay debts
 Disagreements may occur because partners may have different objectives. This cal lead to
partnership dissolution (closing the business)

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Companies

 A company is a separate legal entity formed according to the law.

 On formation the owners are required to a memorandum of association and articles of
association
 The documents must be submitted to a government official called registrar of who will give the
business permission to start operating

The memorandum of association outlines the following:

a) The objectives of the business

b) The physical location of the business
c) Names of at least two directors

The articles of association govern the day to day running of the business. It includes:

a) voting rights of share holders

b) When annual general meetings are to be held
c) the procedures to be followed when declaring dividends

 Companies owned by share holders appoint directors to run the day to day affairs of the
business.
 A shareholder is a person who contribute capital by way of purchasing share in a company
 The shareholders get dividends in return
 A dividend is a portion of profit given to shareholders as a return on investment basing on the
number of shares held
 A shareholder who holds many shares is called the majority shareholder and a shareholder with
a few shares is called a minority shareholder.

PRIVATE LIMITED COMPANY

 It is a company that can not issue shares to the general public.

Features

 Share transfer is restricted, that is the shareholders must agree before shares are sold to
new shareholders.
 Shareholders have limited liability, that is they are only liable to debts up to capital invested
and not private property
 They start trading after getting a certificate of incorporation from the Registrar of
companies
9  They are required to submit their financial statement of the Registrar of Companies but the
accounts are not published

Advantages of Private Limited companies

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 Shareholders have limited liability which means they will not lose their private property in the
event of business failure. This makes companies a less risk form of investment
 More capital is raised which increases the chances of business expansion, this is because more
people will contribute capital as compared to partnership and sole traders.
 There is continuity because companies are separate from their owners
 It easy to get loans or credit facilities from suppliers. This is because companies will have
collateral security. Collateral security refers to non – current assets that will be pledged by a
business when obtaining a loan. This means if the business fails to pay back the loan provider
can take the non – current assets.

Disadvantages

 There is a lot of legal formalities to be satisfied when forming a company. This is time consuming
and expensive as compared to forming a partnership and sole trader
 Accounts are totally private because they are submitted to the registrar of companies
 Less capital is raised as compared to a public limited company

Public Limited Company

 It is a business that can sell shares to the general public

 The shareholders will have limited liability and they elect a board of directors to run the
business on their behalf
 Public Limited Companies sell shares on the stock exchange market to the general public
 The price of shares will vary from time to time depending on the performance of the company
and the confidence of shareholders in the company
 If a shareholder is not interested in owning some shares, he/she can sell them to another person
 Usually people buy and sell shares as an investment
 Shareholders and board members are required to hold AGMs. An AGM is a formal meeting
aimed at: [ N12, 12, Q3b.] Functions of AGMs.
a) Approving or presenting financial statements and dividends
b) Approving or rejecting business proposals by the board of directors, for examples mergers and
takeovers
c) Appointing auditors
d) Vote on resolutions e.g. approve directors pay
e) gives opportunity for shareholders to question the board or inform it on its performance
f) Elect or re-elect directors
 Public limited companies are required to submit memorandum of association and articles of
association and they will start trading after receiving a certificate of trading from the registrar of
companies
10  They are also require to prepare a prospectus that will be given to shareholders to motivate
them to buy shares

Advantages of a Public Limited Company

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 Shareholders have limited liability which reduces the risk of losing private property
 Companies have a separate legal identity, which means there is continuity as compared to sole
traders
 They have a higher status which makes it easy to acquire credit facilities
 More capital is raised because shares can be sold to the public. With the capital the business can
expand and employ skilled managers.

Disadvantages

 There are many legal formalities on formation which are time consuming and expensive
 Shareholders expect dividends which may reduce profit available for expansion. In cases of no
profits, ordinary shareholders may not get dividends which can reduce investor confidence in th
business
 Accounts should be published, which means rivals can access information on how the company
is operating
 There can be conflict of interest between shareholders and managers. This can delay or affect
decision making.
 There can be dilution of control if more shareholders are brought into the business. This can
lead to disagreements.

Public Sector businesses

Parastatals/Public Corporation

 These are state owned businesses which are managed by a board of directors appointed by a
relevant minister. Examples include National Railways of Zimbabwe (NRZ), (Zimbabwe United
Passenger Company (ZUPCO), Zimbabwe Electricity Supply Authority (ZESA) and Air Zimbabwe.
 Public enterprises are normally found in the education sector, medical care, that is hospitals and
in provision of utilities (Water and Electricity).

Reasons for having Public Enterprises existence

 to provide employment even during difficult times. This will help to reduce unemployment and
anti-social activities
 To control strategic commodities or areas, for example in Zimbabwe the government owns GMB
which controls the buying and selling of maize as a staple food. This will avoid shortage of
mealie-meal
 To increase competition which will help to reduce prices of products, for example ZUPCO
charges reasonable fares and this forces other transport operators to reduce their fares.
 To get revenue. This can be used to finance government expenditure. This is because in some
11 cases parastatals report profits.
 To provide essentials services or goods at reasonable prices. For example, government schools
in Zimbabwe charge low fees so that citizens have access to education.

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Disadvantages of having parastatals

 They can drain government revenue especially if they make losses from one year to another
 Usually they provide poor services because they do not have a profit motive and they are usually
run by incompetent manager who are appointed on political grounds.
 It may increase taxes charged on citizens and private sector businesses. This can reduce the level
of demand as citizens will be having less income.

Privatisation

 It is when the government transfers the membership of parastatals to private sector business.
For example, in Zimbabwe the Dairy Marketing Board was privatized which led to the formation
of Dairibord Zimbabwe Limited (D.Z.L.)

Benefits of Privatisation

 It leads to better service provision because private sector businesses are run with a profit
motive and aim at being efficient.
 It generates revenue for the government because government will receive a lot of cash when it
sales a parastatal. More taxes will also be received from private sector businesses.
 It reduces dependency on government funds. This is because if a parastatal is sold the
government will no longer be responsible for its losses or financial problems.
 It increases competition because more businesses can be allowed to offer services after selling a
parastatal. For example, in Zimbabwe Postal and Telecommunication Company (PTC) used to
have a monopoly power over communication systems but after privatization Econet and Telecel
were also allowed to offer telecommunication services.

Disadvantages of Privatisation

 Prices of products can increase because private sector businesses charge high prices so as to
make a profit. This will make consumers worse off.
 It can lead to creation of private sector monopolies. A monopoly is a business that dominates
the whole market, that is, it will be the only seller. This can also make consumers worse off.
 Government revenue can decrease if a profit making parastatal is sold
 It can lead to shortages of goods because in the event of the product being less profitable,
private sector businesses will stop producing it.

Nationalisation

 It is when the government converts private sector businesses in to parastatals

12 Multinational Companies

 It is a business with factories, production or service operations in more than one country---------

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 They are private sector businesses and will usually have a headquarters in the country of origin.
Examples include Uniliver and Coca – Cola.
 They are also known as global businesses or transnational businesses.

Reasons why MNCs locate in other countries

 To benefit from cheap labour

 To get raw materials
 To get foreign currency
 To increase sales volume
 To benefit from low taxes
 To sell own product in other countries

Benefits to host countries

 A host country is the one receiving the multinational company. The country can benefit in a
number of ways which include:
a) Employment of citizens which will help reduce unemployment and to increase disposable
income of citizens. This means the standards of living of citizens will improve.
b) It increases government revenue. This is because the companies will pay tax to the government.
This means the government will have money to spend on medical care and education
c) They improve technology and the quality of products. Multinational companies may bring new
technology which can help increase national output and the quality of produce
d) Infrastructure development. Multinational companies can help to develop the roads, schools
and hospitals in the areas they operate
e) They increase competition. This means citizens will have access to cheap and quality products

Disadvantages to host countries

 Exploitation of labour by overworking and underpaying citizens. This means standards of living
of citizens may not improve
 They can pollute the environment which can expose citizens to respiratory problems.
 They can (repatriate profits) that is they can take profits to the mother country. This means the
host country may remain underdeveloped
 They can interfere in national politics by sponsoring political parties. This can cause political
instability

NB: For the host country to benefit fully, the government should regulate the operations of
multinational companies. The government should also consider the problems the nation is facing before
allowing multinational companies to operate. For example, if there is higher unemployment, the
13 multinational companies may be allowed to operate

indigenization

Benefits

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Drawbacks

Franchise

Joint venture

BUSINESS OBJECTIVES

 An objective is what a business seeks to achieve

 The objectives change from time to time depending on marketing conditions and the size of the
organization. Examples of objectives include:
a) maximize profits
b) increase market share
c) survival
d) fight competition
e) growth

BENEFITS/IMPORTANCE OF SETTING OBJECTIVES: [N12, P12, Q5c.]

 They help to motivate employees (k)as they will know what is expected out of them(an)
 give a business an aim or target [k] so employees/managers will know what they must
do to be seen as successful [an]
 they provide a sense of direction [k] so able to take decisions/allocate resources
effectively [an]
 measure of success against which performance can be judged [k] so objectives act as a
benchmark to alert if the business is performing below or above standard/target (an)
 they facilitate budgeting OR planning [k] as staff is able to effectively identify milestones
which would help them achieve goals [an]

NB: The most important objective to businesses is maximizing profits. This is because profits are used to
pay bonuses to employees, to expand operations and to reward investors.

GROWTH

 It refers to the increase in size of a business

 The size of a business can be measured using:
a) Number of employees
Generally large businesses employ more people than small businesses. BUT, it also depends on
whether a business is labour or capital intensive
b) Sale Revenue
Usually large businesses sell more products as compared to small businesses. This means if
there is an increase in sales, the business would have expanded
14 c) Market Share
This refers to the portion of the total market held by thr business. It is calculated as :

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For example, out of the nine million subscribers in Zimbabwe 5,5 million have econet lines. Therefore,
Econet market share = = 61%

Usually small businesses have a small market share as compared to large firms.

d) Capital Employed/Invested
Usually large businesses will have more capital employed than small businesses. However, it
also depends on whether a business is capital intensive or not. Capital intensive businesses will
also require more capital than labour intensive businesses.

Ways of Achieving Growth

1. Internal Growth/organic growth

This occurs when a business ploughs back profit in expanding the business. The profits will be
used to open new outlets and to increase sales.
2. External Growth/Integration
This is when a business grows by taking over or merging with other businesses. The takeovers or
the mergers can take different directions which include:
a) horizontal integration
This is when a business combines with its competitor. The objectives may be to reduce
competition and to share skills. The businesses will be in the same sector, for example, OK can
combine with TM.
Horizontal integration

TM supermarket OK supermarket

b) downward integration
It is when a business combines with its supplier at a lower level of activity. This can be aimed at
an uninterrupted supply of raw materials or at a lower price.

Dairiboard Colcom

Dairy farm Piggery Farm

c) Upward integration
It is when a business combines with its customer or a business at a higher level of activity. The
objective is to have an assured market and to control the price of the final product.

15 Lobels Bakery

Victoria Foods

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d) Lateral Integration/Conglomeration/Diversification
This is when a business combines with another in a totally different industry, for example:

Standard Chartered Bank

Netone

The business will be able to spread risks and to get certain services that may be technical.

Merging

 It is when two businesses combine their resources to work together.

 The businesses may retain their names, for example Kingdom Bank and Meikles once merged
into Kingdom Meikles Africa Limited.
 The businesses can also demerge as time progresses.
 Demerging means the splitting up of two or more businesses that were previously merged.

Takeovers [J14 P12 Q1e; J14 P21 Q5a]

 It is when one business buys another.

 The business may not retain its name or identity.

Benefits of Integration to:

a) Employees/Workers [N14 P23 Q3a]

 The employees may receive better salaries because after merging or takeover more profits may
be generated
 Employees may also get challenging work which motivate them to work hard
 BUT, some employees may be retrenched which can be costly to the business because they give
the employees retrenchment packages. The employees will also lose their source of income.

b) Managers
 The salaries of managers may also increase which will enable them to satisfy their physical
needs. The manager will therefore be more prepared to work if their needs are satisfied.
 The status of managers will also improve which is motivating.
 BUT, some managers may also be retrenched. This can cause insecurity in the remaining
managers.
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c) Customers
 The quality of products can improve or increase. This is because this is because the business will
share skills and will be able to invest in product research and development.

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 The prices of products will also decrease. This is because large businesses will incur low average
per unit cost.
 BUT, it can lead to creation of monopolies which means customers may be charged high prices
than before.

Benefits of Growth

 The market share will increase such that the business will have control over the market. This
means the business will be able to charge high prices and get more profits.
 Risk will be spread over many products or regions. This is because if one product fails the
business will get profits from their products. This will increase the chances of business survival.
 It allows the business to enjoy economies of scale. That is per unit cost of production will
decrease. This means the business will get more profits.
 It improves the image of the business such that it will get loans or credit lines easily.

Disadvantages

 It increases capital expenditure, which means the business may have cash flow problems
 It leads to control problems, because there will be more employees to be monitored. This
means the business may fail to achieve its objectives.
 Communication problems may arise as information may be distorted. This means wrong
decisions may be made.

Economies of Scale

These are cost advantages of operating at a large scale. They include:

a) Purchasing economies of scale

 Large businesses are able to buy in bulk and get trade and quantity discounts. This means they
will get the goods at a lower price and they can also resale them at a lower price. This will
enable the business to increase its market share.
b) Managerial Economies
 Large businesses can employ skilled managers who will help to run the business efficiently. This
means more profits will be realized.
c) Risk bearing Economies
 Large businesses can invest in different regions and products. This will reduce chances of
business failure.
d) Financial Economies
 Large businesses can get loans at low interest rate which enables them to expand.
e) Marketing Economies
17  Large businesses are able to promote their products at lower costs. This means they will be able
to attract more customers and to increase sales.

Diseconomies of Scale

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 These are cost advantages of operating at a large scale. As a business continue to expand, it will
start to face problems like capital shortages, poor communication, facing a limited market size,
coordination and control problems.

NB: Growth is good for a business, but it must be managed well. This is because after reaching the
optimum point, the cost per unit will increase.

Cost per unit

Economies of Scale Diseconomies of Scale

optimum point

Output

Why businesses remain small

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