What a business does

A business combines human, physical and financial resources to supply goods and services that satisfy customers needs and wants. It transforms inputs into outputs, adding value along the way (output value greater than the cost of inputs).

• Human resources — recruiting, training and motivating people.
• Finance and accounts — raising and controlling money.
• Marketing — identifying and meeting customer needs profitably.
• Operations — turning inputs into finished goods and services.

The factors of production are land, labour, capital and enterprise. The entrepreneur supplies enterprise, combining the other three and bearing the risk.

Primary, secondary, tertiary (and quaternary)

Business activity is grouped by how far it is from the raw material:

• Primary — extracting raw materials (farming, fishing, mining).
• Secondary — manufacturing and construction (turning materials into goods).
• Tertiary — services (retail, banking, transport, tourism).
• Quaternary — knowledge and information services (R&D, ICT, consultancy).

Sectoral change: as economies develop, activity shifts from primary to secondary and then to tertiary/quaternary — a structural change that reshapes jobs and skills.

Which sector?

Tap an activity, then tap the sector it belongs to.

Entrepreneurs and why firms start

An entrepreneur spots an opportunity, organises the factors of production and takes the risk of running a business. Common motives include profit, independence, a market gap, a personal interest and social aims. Typical qualities: creativity, risk tolerance, resilience and drive.

• Intrapreneurship — employees acting entrepreneurially within an existing firm.
• Why start-ups fail: poor cash flow, weak market research, lack of finance, over-expansion.

Concept — creativity: new business ideas often come from creative solutions to unmet needs.

The entrepreneur's role

Who owns the business?

Key legal structures (for-profit) and their liability:

• Sole trader — one owner, easy to set up, unlimited liability.
• Partnership — 2+ owners share capital and profit, usually unlimited liability.
• Privately held company (Ltd) — shares sold privately; limited liability; separate legal identity.
• Publicly held company (plc) — shares traded on a stock exchange; can raise large capital; limited liability.

For-profit social enterprises, cooperatives, and non-profit NGOs/charities pursue social or member benefit alongside (or instead of) profit.

Limited liability means owners can only lose what they invested — personal assets are protected. Unlimited liability puts personal assets at risk.

Limited liability

Vision, mission, aims and SMART objectives

A firm sets direction through a hierarchy of intent:

• Vision — the long-term aspiration (where we want to be).
• Mission — the purpose and how the vision will be pursued now.
• Aims — broad goals; objectives — specific targets.
• Strategies and tactics — long-term and short-term plans to hit them.

Good objectives are SMART — Specific, Measurable, Achievable, Relevant, Time-bound. Many firms also set ethical objectives and pursue corporate social responsibility (CSR).

Concept — ethics: ethical objectives may raise costs short-term but can build trust, brand value and long-run profit.

Vision vs mission

Internal and external stakeholders

A stakeholder is any individual or group affected by, or able to affect, the business.

• Internal: employees, managers, owners/shareholders.
• External: customers, suppliers, government, local community, pressure groups, competitors, banks.

Stakeholder conflict arises when interests clash — e.g. shareholders wanting higher dividends versus employees wanting higher pay, or a community wanting less pollution. Managers must balance these, not just serve shareholders.

Match the stakeholder to their main interest

Tap a stakeholder on the left, then its main interest on the right.

Economies of scale, and how firms grow

As output rises, average (unit) costs often fall — economies of scale (bulk buying, specialisation, financial and technical). Grow too far and diseconomies of scale appear (poor communication, coordination and motivation), raising unit costs.

• Internal (organic) growth — expanding using the firms own resources.
• External growth — mergers (firms combine), acquisitions/takeovers (one buys another), joint ventures, strategic alliances and franchising.

Multinationals (MNCs) operate in several countries — bringing jobs and investment, but also concerns over tax, low wages and local competition.

Calculating revenue

Calculating market share

Internal vs external growth

Change, creativity, ethics, sustainability

IB wants you to integrate four concepts into your analysis:

• Change — markets, technology and society shift; firms must adapt.
• Creativity — new ideas drive products, processes and problem-solving.
• Ethics — doing the right thing for stakeholders and society.
• Sustainability — meeting todays needs without harming future generations.

Strong exam answers weave these concepts into evaluation, not just describe theory.

The big ideas to know

You have covered the key ideas in Unit 1. Press Finish to see your score.