A business is an organization that combines resources to produce goods or services that people want, usually in exchange for payment. A bakery turns flour, ovens and a baker's skill into bread. A software studio turns programmers' time and computers into an app. Either way, they make something worth more than what went in.

Inputs, processes and outputs

Economists group the resources a business uses into four factors of production:

Land: natural resources
Labour: people's time and effort
Capital: tools, machines and buildings
Enterprise: the risk taking and organizing done by the owner

You don't need to memorize all of these. "State" and "describe" questions are usually worth 1 to 2 marks, so know at least 2 well. This is for the knowledge questions (AO1 and AO2). Longer questions want you to explain and apply, not list.

Inside a business, four functional areas make this happen. Human resources recruit and develop people, finance raises and controls money, marketing finds and keeps customers, and operations produce the product. They all need each other. If marketing doubles demand but operations cannot make enough, or finance cannot pay for the extra materials, the campaign is wasted.

The four sectors of economic activity

Primary sector: Extracting natural resources: farming, fishing, forestry, mining, oil drilling.
Secondary sector: Manufacturing and construction: turning raw materials into finished or semi finished goods.
Tertiary sector: Providing services: retail, banking, tourism, transport, healthcare, education.
Quaternary sector: Knowledge based services: research and development, IT, data analysis, consulting.

Most products pass through several sectors. A cotton T-shirt starts with a farmer (primary), is spun and sewn in a factory (secondary), is sold in a shop (tertiary), and the shop's online store may be designed by a digital agency (quaternary).

As countries develop, the share of output and jobs moves away from the primary sector towards the tertiary and quaternary sectors. This is called sectoral change. When manufacturing declines in a country it is often called deindustrialization. Causes include rising incomes (people spend more on services), automation in farming and factories, and cheaper manufacturing abroad.

Entrepreneurship

An entrepreneur is someone who spots an opportunity, organizes resources and takes the financial risk of starting a business. An intrapreneur shows the same creativity and initiative, but inside an existing organization, as an employee. They create new products, services or ways of working for the firm they already work for. The big difference is who takes the risk. The entrepreneur risks their own money, while the intrapreneur uses the company's money, staff and brand, so the company takes the risk and keeps most of the reward.

Real example · Gmail

Paul Buchheit, an engineer at Google, started working on an email service as a side project in 2001. Google let staff spend part of their week on their own ideas, often called "20% time". His project became Gmail, launched in 2004, which now has well over a billion users. Buchheit didn't start a new company or risk his own money. He used Google's servers, staff and brand, and the new service belonged to Google. That is intrapreneurship.

Advantages of intrapreneurship (for the firm)

New products and services come from people who already know the business
Motivated staff who feel trusted, so they are less likely to leave
Cheaper and less risky than buying a startup with the same idea
Keeps the firm innovative as it grows

Disadvantages of intrapreneurship (for the firm)

Time spent on new ideas is time taken from normal work
Many projects fail, so money and effort can be wasted
Good intrapreneurs may leave to start their own business with the idea
Can clash with managers who prefer control and routine

People start businesses for many reasons:

To be their own boss
To earn more
To turn a hobby or skill into income
To solve a problem they care about
Because they can't find a suitable job

Challenges and opportunities for startups

Common challenges

Raising enough finance to start
Cash flow problems in the first months
Lack of business experience or skills
Building a customer base and brand awareness
Strong, established competitors
Legal requirements: licences, tax, registration

Opportunities

Low startup costs for online businesses
Gaps in the market (niches) that big firms ignore
Government grants and startup support
New technology and changing tastes
Flexibility and close customer relationships

Exam tip

"State" questions want a short answer with no explanation. "Explain" questions (usually 2 marks) want a point plus why or how it applies to the business in the case.

Common mistakes

Assuming tertiary jobs always pay more. Services add more value overall, but many retail and fast food jobs pay the minimum wage.
Treating customers and consumers as the same people. The customer pays. The consumer uses the product (a parent buys the toy, the child plays with it).
Calling an intrapreneur a small entrepreneur. An intrapreneur is an employee innovating inside someone else's business and does not carry the personal financial risk.

1.1 What is a business?