1The idea in one paragraph

A business is an organisation that takes resources, does something to them, and produces goods or services that people are willing to pay for, or that meet a need someone is willing to fund. The resources are the four factors of production: land, labour, capital and enterprise. What happens in the middle is organised by four business functions: human resources, finance and accounts, marketing, and operations, which are the other four units of this course. Businesses can be sorted by what they do into four sectors, primary to quaternary, and the balance between those sectors shifts as an economy grows. Every business starts with an entrepreneur who sees an opportunity and takes a risk to chase it, and most new businesses meet the same short list of challenges, of which running out of cash is the most dangerous.

2What a business is

A business is any organisation that uses resources to provide goods or services that meet people's needs and wants. The definition is deliberately wide: a market stall, a charity hospital, a state-owned railway and a company in forty countries are all businesses. What they share is the process, not the size or the motive.

Two pairs of words sit inside the definition.

• Needs are what people must have to survive: food, water, shelter, clothing, basic healthcare. Wants are what people would like to have beyond that: a holiday, a games console, a second coffee. Wants are unlimited; the resources to satisfy them are not, and that gap is why businesses exist and why they have to choose.
• Goods are physical products you can touch and keep: a bicycle, a loaf. Services are things done for you that you cannot store: a repair, a haircut, a lesson. Many businesses sell both.

The factors of production. Every business combines four kinds of resource.

• Land: natural resources and the site the business uses. Water, soil, timber, minerals, and the plot the building stands on.
• Labour: the physical and mental work of people, from the cleaner to the finance director.
• Capital: man-made resources used to produce other things. Machinery, tools, vehicles, buildings, computers. (Business managers also use capital to mean money invested in the business. Say which you mean.)
• Enterprise: the ideas, organisation and risk-taking that bring the other three together. Without it the other three sit idle.

Take one business and follow it all the way through the page. Second Spoke is an invented business: Dani Okafor, 26, buys unwanted bicycles, refurbishes them and sells them, and also repairs customers' own bikes. Its land is the rented workshop by the canal. Its labour is Dani and a part-time mechanic. Its capital is the workstands, the tools and a small van. Its enterprise is Dani: the idea, the savings put at risk, and the decisions.

Inputs, processes, outputs. Figure 1 shows the whole of a business in one line. Factors of production go in; the business functions turn them into goods and services; customers buy them; the revenue pays for the next round of inputs.

The point of the process is to add value. Value added is the difference between the price a customer pays and the cost of the materials and services the business bought in to make it.

The €150 is not profit. Out of it Second Spoke must pay the mechanic's wages, the workshop rent, the van's fuel and insurance, and only what is left after all that is profit. Adding value is necessary for survival, not proof of it.

A business turns inputs into outputs and adds value on the way. Value added = price paid − cost of bought-in inputs. It is not the same as profit.

3The four business functions

The middle box of Figure 1 is where managers spend their time. The guide organises the whole course around four functions, and it is worth knowing from the start what each one does.

The functions are interdependent: a decision in one lands on all four. Suppose a local university asks Second Spoke to refurbish 60 bikes for a student hire scheme, delivered in six weeks. Operations must find the workshop time. Human resources must find a second mechanic. Finance must pay for 60 sets of parts before the university pays a cent. Marketing gains a new kind of customer, and a new reputation to protect if the bikes break. A good exam answer rarely stays inside one function, because a real business never does.

4The four sectors of the economy

Businesses are grouped into sectors according to the main kind of activity they carry out. Figure 2 follows one product through all four.

• Primary sector: extracting or harvesting natural resources. Farming, fishing, forestry, mining, oil and gas extraction. The olive grove.
• Secondary sector: turning raw materials into finished or semi-finished goods. Manufacturing, processing, construction. The mill that presses and bottles the oil.
• Tertiary sector: providing services to customers and other businesses. Retail, transport, banking, insurance, tourism, healthcare, education. The shop, the website and the courier.
• Quaternary sector: knowledge-based and information-based services. Research and development, information technology, data analysis, consultancy. The laboratory that tests purity and the firm that analyses buyers' data. Some writers treat the quaternary sector as a subset of the tertiary; the guide lists it separately, so you should too.

Figure 2 is a chain of production: each stage takes the output of the one before and adds value to it. Every link is a business with its own customers, which is why "which sector?" questions are about what this business does, not about the product.

Three points win or lose the classification marks.

Classify by main activity. Second Spoke refurbishes bikes (secondary: it is making a product fit for sale) and repairs customers' bikes (tertiary: a service). If most of its revenue comes from selling refurbished bikes, call it mainly secondary with a tertiary side, and say why.

Many businesses sit in more than one sector. A grove that presses its own olives and sells the oil from a farm shop works in three. Say so, and give the evidence from the case.

Justify, do not just label. "Tertiary" earns one mark at most. "Tertiary, because it sells a service, delivering parcels, rather than extracting or making anything" earns the explanation.

5Sectoral change

The share of an economy's output and jobs in each sector is its sectoral structure. It does not stand still. Figure 3 shows the usual pattern for an imagined country as it develops.

Early on most people work on the land. Industrialisation moves workers into factories. Later, deindustrialisation shrinks the secondary sector's share of jobs, and the tertiary and quaternary sectors take the largest share. Four forces drive it.

• Rising incomes. As people grow richer they spend a smaller share of each extra euro on food and a larger share on services: travel, restaurants, health, entertainment. Demand moves, and jobs follow.
• Rising productivity. Machinery lets one farmer feed many more people, and automation lets one factory worker make many more goods. Output in those sectors can hold steady or rise while the number of jobs falls.
• Global competition. Manufacturing often moves to countries where labour costs are lower, so richer countries import goods they used to make.
• Technology. New knowledge creates whole industries of quaternary work, from software to genetic testing, that did not exist a generation earlier.

What it means for a business. This is where the AO2 marks are, because the guide asks you to apply sectoral change, not only describe it. A business in a growing sector finds its market expanding, but it also competes for the skilled workers everyone else in that sector wants. A business in a shrinking sector faces falling demand or cheaper imports, and must cut costs, automate, move up-market or move into a growing sector. A textile mill in a country whose wages are rising might close its sewing lines and keep only design and marketing at home, which is a firm moving from the secondary to the quaternary and tertiary sectors in one decision.

Sectoral change also brings structural unemployment: workers whose skills belonged to a shrinking sector cannot walk into jobs in a growing one without retraining. For a business that is a threat (local customers with less to spend) and an opportunity (a pool of workers ready to retrain). Name which one the case supports, and why.

6Entrepreneurship

An entrepreneur is a person who identifies a business opportunity, organises the factors of production to exploit it, and bears the risk of doing so. Entrepreneurship is that activity: turning an idea into a working business. It is the fourth factor of production, enterprise, in the form of a person.

Three words in the definition carry the marks. Opportunity: the entrepreneur sees a gap, an unmet need or a better way. Organises: the idea alone is worth nothing until land, labour and capital are brought together. Risk: the entrepreneur's own money, time and reputation are at stake, and if the business fails, they carry the loss. The reward for bearing that risk is profit.

Entrepreneurs tend to show initiative, creativity, resilience and a tolerance for risk, though none of these guarantees success. Two related roles are worth knowing.

• An intrapreneur is an employee who acts like an entrepreneur inside an existing organisation: they spot an opportunity and develop it, but with the organisation's money, so the organisation carries most of the risk. A designer at a large furniture firm who builds a new rental service for office chairs is an intrapreneur.
• A social entrepreneur starts a business whose main purpose is to meet a human need or solve a social or environmental problem, with profit as a means rather than the goal. HL Paper 3 is built around one: you are asked to describe the need the social entrepreneur is meeting and explain the challenges they face, which is the next two sections applied to a social enterprise. Section 1.2 covers the legal forms they use.

Why people start businesses. The left column of Figure 4 gives the common reasons.

Independence, the chance to keep the profit, a gap in the market, a cause, and necessity after redundancy are the usual five; turning a skill or hobby into a living is a sixth, and it is how Dani began, having repaired friends' bikes for years before charging for it.

In the exam, reasons must be the case's reasons. "Entrepreneurs want independence" is theory. "Dani started Second Spoke because she had repaired bikes for years and saw that the city's hire schemes were throwing away bikes that could be fixed" is application.

7The challenges of starting up

Most new businesses meet the same challenges. The right-hand column of Figure 4 lists them. Learn them as a list, then learn to explain each one as a chain of cause and effect for a named business.

Finance. A new business has no trading history and few assets to offer as security, so banks see it as risky. Loans may be refused or offered only at high interest. Most founders start with their own savings, family money or a small loan, which limits how big they can start.

Cash flow. This is the most dangerous challenge, and it is different from making a loss. Costs arrive before revenue does: equipment, a deposit on premises, stock, the first month's wages, all paid before the first customer walks in. Figure 5 shows it happening to Second Spoke.

Dani started with €14,000: €8,000 of savings and a €6,000 bank loan. Setting up (tools and stands, a second-hand van, the deposit on the workshop) cost €10,000, leaving €4,000 in the bank on opening day. For five months more cash went out than came in, because customers were slow to find the shop and parts had to be bought in advance.

Second Spoke survived, but a single late payment or a broken van in month 5 would have left it unable to pay the rent, however good the business idea. Unit 3 teaches cash-flow forecasting properly; for now, remember that a start-up needs enough cash to get through the months before sales build up.

Establishing a customer base. Nobody knows the name, marketing costs money the business does not yet have, and customers prefer brands they already trust.

Competition. Established rivals have loyal customers, credit from suppliers and often lower costs per unit, and may cut prices to see off a newcomer.

Lack of skills and experience. In a small start-up one person may have to be the buyer, the salesperson, the accountant and the manager at once. Being good at repairing bikes does not make Dani good at bookkeeping.

Rules and premises. Registration, licences, tax, insurance and employment law take time and money. A site with passing trade is expensive; a cheap one may have no customers.

The opportunities are real too. A start-up is small and flexible, so it can change direction quickly. Its owner is close to every customer and hears problems first. It can serve a niche, a small specialised part of a market that large firms ignore. A website and social media can replace a shop window, and many governments and cities offer new firms advice, small grants or cheap workspace. A "discuss" answer weighs these against the challenges for the business in the case.

8The business plan: the toolkit tool for a start-up

The guide suggests the business plan as a tool for Unit 1, and a start-up is where it earns its keep. A business plan is a written document that sets out what a new or existing business intends to do, how it will do it, and how it will pay for it. A typical plan contains:

• a summary of the idea and the objectives (1.3)
• the legal form of the business and who owns it (1.2)
• market research: the customers, the competitors, the size of the market (Unit 4)
• the marketing plan: product, price, place, promotion (Unit 4)
• the operations plan: premises, equipment, suppliers (Unit 5)
• the people: the founder's skills and any staff needed (Unit 2)
• the financial forecasts: start-up costs, a cash-flow forecast, expected revenue and costs, and the finance needed (Unit 3)

Why it helps. It forces the entrepreneur to answer the right-hand column of Figure 4 before the money is spent, a lender will usually ask for one, and it gives targets to measure performance against once trading starts.

Its limits. It rests on forecasts with no past data behind them, it dates as soon as conditions change, and a polished plan can give false confidence in a weak idea. A plan reduces the risk of starting; it does not remove it.

Two other Unit 1 tools fit here: a SWOT analysis of the start-up, and a STEEPLE analysis, which is the natural way to organise the outside forces behind sectoral change.