The purpose and nature of businesses

A business is an organisation that produces goods or services to meet customer needs and generate revenue. Without customers, there is no business; without value, there are no customers. Examiners want a confident understanding of why businesses exist, who they serve, and how they are classified.

Why people start a business

People start businesses for a mix of personal and economic reasons:

• Profit — most common motive. Profit = revenue − costs.
• Independence / 'be your own boss' — control over hours, decisions, working conditions.
• Pursuing an interest — turning a hobby or passion into a career.
• Spotting a gap in the market — meeting a need no one else is meeting (e.g. zero-waste shops, plant-based food).
• Social or environmental purpose — social enterprises (TOMS shoes, The Big Issue) blend profit with mission.
• Necessity — redundancy or limited employment options.

Identifying a clear customer need is the key to success — Stripe (founded 2010) succeeded because online card payments were complicated; Stripe made them simple.

Goods vs services

• Goods are tangible, physical products you can touch (a phone, a loaf of bread, a car).
• Services are intangible — actions or expertise (haircut, banking, healthcare, software, legal advice).

The UK economy is now ~80 % services, ~20 % goods. The shift is global; high-income economies create more value through expertise, design and platforms than through making things.

Factors of production

Every business needs four factors of production:

1. Land — physical resources: premises, raw materials, natural resources.
2. Labour — workforce, skills, time.
3. Capital — money, machines, vehicles, IT, buildings used in production.
4. Enterprise — entrepreneurial skill: idea generation, risk-taking, organising the other factors.

A successful business combines all four effectively. Lack any one and the business stalls.

Sectors of the economy

Businesses operate in three main sectors:

• Primary sector — extracts raw materials from the earth: farming, fishing, mining, oil extraction, forestry. Around 1 % of UK employment.
• Secondary sector — manufactures goods using primary inputs: car factories, breweries, construction. Around 18 % of UK employment.
• Tertiary sector — provides services: retail, banking, education, healthcare, hospitality. Around 80 % of UK employment.

Some textbooks add a quaternary sector for knowledge-based services (R&D, IT, biotech).

The mix of sectors changes as economies develop: low-income economies are mostly primary; emerging economies grow secondary; high-income economies become tertiary-dominant.

Public vs private sector

• Public sector — owned and run by the government using taxpayer money. Aim is to provide services, not profit. Examples: NHS, state schools, police, armed forces, BBC.
• Private sector — owned by individuals, partnerships or shareholders. Aim is to make a profit (or in social enterprises, to fulfil a mission). Examples: Tesco, Apple, your local plumber.

Some industries blur the boundary — universities and many housing associations operate semi-commercially.

Why does the public sector exist?

• Provides services that the market underprovides (defence, public health).
• Reduces inequality (state education available to all).
• Manages externalities — costs that markets ignore (environment, public health).
• Serves areas where private profit is too low (rural buses).

Risks of starting a business

• Financial risk — losing personal savings; bankruptcy.
• Time risk — long hours, especially early on (often unpaid).
• Opportunity cost — alternative jobs/income foregone.
• Stress and mental health — uncertainty.
• Failure rate — about 60 % of UK businesses fail within five years.

How businesses succeed

• Clear value proposition — why does this exist? What problem does it solve?
• Strong financial planning — knowing costs, prices, breakeven point.
• Customer focus — designing around real needs, listening to feedback.
• Adaptability — pivoting when the market changes (Netflix moved from DVDs to streaming).
• Effective management of factors — talent, money, suppliers, technology.

Examiner tips

For 6-mark "explain" questions, give two developed reasons or factors with examples. For 9-mark and 12-mark questions, structure with agree / disagree points and a reasoned conclusion. Always use real businesses where possible — examiners reward applied knowledge.