Page 1

Second edition

Coursebook with CD-ROM Chris J. Nuttall and Medi Houghton Written to cover the new Cambridge IGCSE syllabus, Cambridge IGCSE Business Studies offers valuable, practical support for students. Each unit contains stimulus material drawn from various business organisations as illustrations of the practical application of Business Studies theory. Endorsed by Cambridge International Examinations and presented in full colour, this new edition includes activities designed to develop key skills and subject-based knowledge, encouraging independent thought and student involvement. The CD-ROM contains answers to selected Coursebook activities, additional revision questions, a glossary of key terms and advice on how to do well in examinations. Other titles available for Cambridge IGCSE Business Studies: Teacher’s Resource CD-ROM ISBN 978-0-521-12212-2 Completely Cambridge – Cambridge resources for Cambridge qualifications Cambridge University Press works closely with Cambridge International Examinations as parts of the University of Cambridge. We enable thousands of students to pass their Cambridge exams by providing comprehensive, high-quality, endorsed resources. To find out more about Cambridge International Examinations visit Visit for information on our full range of Cambridge IGCSE titles including e-book versions and mobile apps.

Nuttall and Houghton

978 0521 12210 8 Nuttall & Houghton: IGCSE Business Studies Cover. C M Y K

Business Studies

Cambridge IGCSE Business Studies

Cambridge IGCSE

Chris J. Nuttall and Medi Houghton

Cambridge IGCSE


Business Studies Second edition

Chris J. Nuttall and Medi Houghton

Cambridge IGCSE

Business Studies Second edition


Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo, Delhi, Mexico City Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Information on this title: © Cambridge University Press 2002, 2010 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2002 Second edition 2010 6th printing 2012 Printed in Dubai by Oriental Press A catalogue record for this publication is available from the British Library ISBN 978-0-521-12210-8 Paperback with CD-ROM for Windows and Mac

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Contents Introduction


Section One: Business and the environment in which it operates 1.1 Business activity


Introduction to business activity Classification of business Unit 3: Business growth and measurement of size Unit 4: National wealth and the impact of business activity

9 15 20 27

Unit 1: Unit 2:

1.2 The organisation


The organisation


1.3 Changing business environment


Unit 5:

Government influence Unit 7: The impact of technology on business Unit 8: Business reaction to market changes

39 44 50

Unit 6:

1.4 Economic environment Unit 9: Unit 10:


Types of economy, competition and business International trade

55 60

Section Two: Business structure, organisation and control 2.1 Ownership and internal organisation Unit 11: Unit 12: Unit 13: Unit 14: Unit 15: Unit 16: Unit 17: Unit 18:

Types of business organisation 1: Sole traders and partnerships Types of business organisation 2: Limited companies Types of business organisation 3: Other types of business Objectives, growth and business organisation The growth of multinational companies Internal organisation Internal and external communication Effective communication

2.2 Financing business activity Unit 19: Unit 20:

67 67 74 80 84 89 94 100 105


The need for finance Financing business activity

111 115



Section Three: Business activity to achieve objectives 3.1 Marketing Unit 21: Unit 22: Unit 23: Unit 24: Unit 25: Unit 26: Unit 27: Unit 28: Unit 29:

Customers, markets and marketing Market research Presentation and use of results The marketing mix Product Price Place Promotion Marketing strategy and budget

3.2 Production (operations management) How are goods produced? Costs Unit 32: Location Unit 33: Improving efficiency Unit 30: Unit 31:

3.3 Financial information and decision-making Cash and cash-flow forecasts Financial accounts Unit 36: Interpreting financial accounts Unit 34: Unit 35:

123 123 128 134 139 142 147 152 157 163

168 168 173 178 182

186 186 193 199

Section Four: People in business 4.1 Human needs and rewards Why people work Unit 38: Management styles and motivation Unit 37:

4.2 Manpower Unit 39:

Recruiting employees, training and terminating employment

207 207 213

218 218

Section Five: Regulating and controlling business activity 5.1 Reasons for regulations Unit 40:

The impact of business decisions

5.2 Influences on business activity Government regulation Unit 42: Other influences on business activity Unit 41:

227 227

231 231 237





iv Contents

Introduction Welcome to the International GCSE in Business Studies This book is designed to help as you progress through your course. It has been specially written to cover the Cambridge International Examinations IGCSE Business Studies syllabus that you will be following. The syllabus is divided into five sections and the structure of the book reflects these, closely following the order of the syllabus.

How will this book help you? Cambridge IGCSE Business Studies is an up-to-date and lively text, which uses an enquiry-based and active approach to the subject. It does not assume any prior knowledge of business, although as you progress you will probably find that many of the businesses that you come across in these pages are familiar. Cambridge IGCSE Business Studies is divided into 42 short units to provide convenient and manageable bite-sized areas of learning. Each unit begins with learning objectives, followed by a brief introduction. Each unit has a ‘Business in context’ case study, which presents a real world or realistic setting for the topic of the unit. Questions based on the case study will give you the opportunity to apply your knowledge to a given situation. Each unit also contains a series of Activities, which will encourage you to think about, discuss or carry out activities to explore a topic for yourself, and tips to help you do well in your exam. Key business terms are highlighted in bold and are listed with definitions at the end of each unit. Exemplar exam questions are provided at the end of each unit, similar to those found on papers one and two. These are designed to give you the chance to practise the type of question you are likely to encounter in the examinations. At the end of each unit you will also find a summary of the main points covered and a revision mind map.

The CD-ROM includes revision practice questions and answers for each unit, along with model answers for the exemplar exam questions. Do not worry if your answers are different from the ones provided on the CD-ROM. Many questions are ‘open-ended’ which means that there are usually a number of possible answers. There are also multiple-choice and short-answer questions (with answers) for each section of the syllabus. Although you won’t come across multiple-choice questions in the exam, it is a good way for you to have fun and test your growing knowledge as you work your way through each section of the Coursebook.

What papers will you have to sit? The CIE IGCSE examination consists of three papers, one of which, paper 3, is optional. Paper 1 contains short-answer questions and structured data-response questions. This paper is compulsory. You should attempt to answer all the questions asked. Paper 2 is based on a single case study. You should attempt to answer all the questions arising from it. This paper is also compulsory. Paper 3 consists of coursework and will be assessed by your school or college. You will have to submit a single piece of written work. Your coursework assignment should be related to a particular business situation, or problem, and should take the form of a response to a clearly formulated question. Your assignment should be between 3 000 and 4 000 words in length. This will take about 20% of the course time for the subject as a whole. Your teacher will tell you whether or not you will be taking this paper. If papers 1 and 2 are taken without the coursework option, each paper carries 50% of the total marks. If the coursework option is taken, papers 1 and 2 carry 40% and paper 3 carries 20% of the total marks. Papers 1 and 2 are 1 hour and 45 minutes long.

Using the Student’s CD-ROM

How should you approach coursework assignments?

A Student’s CD-ROM is provided at the back of your Coursebook. This is designed to support the activities found in the Coursebook and will help you prepare for your exam. Always attempt the questions in the Coursebook before you use the answers provided on the CD-ROM. There is a section with ideas on ‘How to do well in your exam’, and a glossary of the key terms from the Coursebook, which you will need to learn.

If you are taking the coursework option, you should discuss the topic question with your teacher so that you know what is involved. Don’t start too early, or you won’t have progressed in your course far enough. But don’t leave it too late, either, or you will not have time to gather all the information you need. When starting your coursework assignment you need to think about its purpose and how you are going to obtain Introduction


the information you need. While this Coursebook, and your teacher, will help you gain the background knowledge required, you will have to do some of your own research. There are various sources of information you will find helpful in this. Your school, or local library, may be able to help, or you may be able to find some useful information on the internet. Sooner or later, however, you will have to contact a business organisation. Don’t worry, you will probably find they are quite happy to help and supply you with the information you are looking for. Write a short, polite letter, explaining who you are, what you want to know and why you want the information. Allow the business time to reply – it could be five or six weeks before they have time to think about your request.

vi Introduction

Do not start to write your assignment until you have enough information. If you start writing too soon you may find that you have to do it all over again when some new information comes to hand. But again, don’t leave it too late or you will have to rush and not produce your best work. Try to allow yourself time to complete the assignment, put it aside for a few days, and then read through it to see that you are satisfied with it. Don’t forget to check your spelling and grammar. If you have access to a computer, it is easy to use the spell and grammar checkers that come with most word-processing software. Once again, welcome to the course. We hope you enjoy your studies and wish you every success. Chris Nuttall and Medi Houghton

Section One

Business and the environment in which it operates


Business activity 1 Introduction to business activity

In this unit you will learn about:

• • • •

needs, wants and scarcity the purpose of business activity the objectives of non-profit making activity, private enterprise and public enterprise the concept of adding value.

Top tip This chapter contains some important concepts which underpin later chapters. It is important that you learn the key terms and their definitions and understand the ideas of opportunity cost, factors of production, effective demand and added value as well as the differing objectives of organisations. You could be asked to define these terms – or give examples in a chosen context.

Businesses produce goods and services. These are the products of businesses. • Goods are things you can touch and use, such as clothes and books. • Services are things that other people do for you, such as cutting your hair or selling you goods in a shop.

Needs and wants We often use the words needs and wants as though they mean the same thing. How often do you say you need a new T-shirt or you need a new CD by your favourite singer, when what you really mean is that you want those things? • Needs are items that we must have in order to live. • Wants are items that we would like to have, although we won’t die without them. For example, we need things such as: • food and drink • shelter • clothing. We may also want things such as: • a computer • a holiday • a car.

Businessinincontext context Business Kuwait Petroleum Corporation (KPC) is one of the world’s largest oil companies. The company makes products such as petrol and diesel from crude oil. Crude oil is oil in its raw or natural state. It occurs naturally in deposits within the earth. To produce the petrol that people buy from garages,

KPC must first extract the crude oil from the earth. The company does this by drilling oil wells, many of which are under the sea. KPC then transports the crude oil to oil refineries where it is turned into the petrol or other oil products that customers want.

Questions 1 What does KPC produce? 2 Does KPC produce goods or services? 3 Where can you buy KPC’s product?

4 What is KPC’s product made from? 5 Why do you think KPC produces petrol and diesel?

Introduction to business activity


1.1 Activity Think carefully about the following products and answer the questions. (a) a loaf of bread 1 2 3

(b) an oak coffee table

(c) this book

What are the raw materials that each product is made of? Where do these raw materials come from? If society keeps using these raw materials, will they eventually run out? Explain your answer.

Our wants also influence the way in which we satisfy our needs. So, if you need food, you may choose to satisfy this need by eating a burger or a pizza, because this is what you want.

Even so, your demand for trainers will not be successful unless other people want trainers and are able and willing to pay for them, too. Businesses will not make trainers if you are the only person who wants them. This is effective demand. People create effective demand when enough of them want something and are able and willing to pay for it.

Demand and effective demand When you want something, you create a demand for it. However, you cannot satisfy your want unless: • you have the money and • you are willing to pay for it. For example, while you may want a new pair of trainers, you cannot satisfy your want unless: • you have the money to pay for the trainers and • you are willing to spend your money on them (you may prefer to spend the money on books or a sweater).

The purpose of business activity Businesses are organisations that have been set up to produce goods and services. They supply these goods and services to individuals and other business organisations that want them. There are many different types of business organisation. Some are major international businesses, such as the Kuwait Petroleum Corporation or Coca-Cola. Others are smaller










Figure 1.1 Wants and needs 10

Business and the environment in which it operates





1.2 Activity 1 2 3 4


What is the main difference between needs and wants? Make two lists: the first showing the things that you need; the second listing things that you want. Identify three kinds of businesses or organisations that supply each item on your lists. Select two businesses that you have identified and explain why you think that they supply the item.

businesses that operate within their own country or even locality. Examples are: • shops • solicitors, accountants • local traders such as plumbers and small builders. All these businesses are owned and run by private individuals. They are private businesses, or private enterprises, and are in the private sector. Some organisations are run by the government to provide services to society. These include hospitals, libraries, leisure centres and other similar organisations. Businesses owned and run by the government are public enterprises. They are in the public sector. A third type of enterprise is non-profit-making. Non-profit-making organisations include charities and voluntary organisations. These are set up to fulfil a perceived social need or to provide help to a specific section of the community. All organisations in the public and private sector are involved in some form of business activity. It is only their objectives of what, for whom and why they produce goods and services that differ. We will look more closely at these different objectives in Unit 5.

Private sector

Public sector

Self-employed traders, professional firms, small and large businesses, international companies

Government departments and service organisations, schools, hospitals etc., public corporations, e.g. state-owned telecommunications and transport

Figure 1.2 Private and public sector businesses

Neither non-profit-making organisations nor public sector organisations have profit as a high priority. The key difference is that the public sector is run by, or on behalf of, the government whilst non-profit-making organisations could easily be set up by private individuals who feel they want to support a specific cause. The government will focus on the social needs of the wider society and try to provide financial and other forms of assistance to ensure a basic standard of living for all members of society.

Deciding what to produce Everything found on Earth is finite, or in limited supply. This includes resources such as • crude oil used to make petrol • metals such as aluminium and gold. There are enough of some resources, such as air, to satisfy everybody’s needs. But most resources are not plentiful enough for this. Where this is the case, the resource is said to be scarce. This even applies to resources like trees or wheat that are renewable and replace themselves either naturally or through careful management.

1.3 Activity 1 2 3

Investigate the different types of business in your local area. You should find examples of private enterprise, public enterprise, and non-profit-making activity. Identify the objectives of each. Draw up a table. Type



Private sector Public sector Non-profit-making

Introduction to business activity 11

Since the resources needed to produce goods and services are scarce, a choice must be made as to what to produce from them. For example, furniture and houses can be made from timber, but a table cannot be made from the same timber that is used to build a house. Therefore a decision has to be made whether to cultivate trees for furniture or for houses. Similarly if a government spends too much money building new schools, it will not be able to spend very much on training extra doctors.

Cost and opportunity cost If you want a pair of trainers and a sweater but only have enough money to buy one of them, you have to choose which to buy. Both the trainers and the sweater cost money. That is their financial cost. There is also an opportunity cost – the possibility of buying and enjoying the use of the other item. • If you buy the trainers, the opportunity cost of the trainers is the sweater. • If you buy the sweater, the opportunity cost is the trainers.



Figure 1.3 Making the decision

Business activity and the factors of production Business activity involves the use of resources known as the factors of production. These are: • land • labour • capital • enterprise. Land Land includes all resources that occur naturally, including: • the land itself • coal 12

Business and the environment in which it operates

• • •

oil gas metals and other minerals. Also included are resources that grow on the land, in seas and rivers, or in the air, such as • crops • farm and other animals • fish • birds. Labour Labour is the effort or work provided by people. Production that uses a high proportion of labour compared with machinery and equipment is called labour-intensive. Labour-intensive production is a feature of many developing countries where labour is plentiful and relatively cheap compared with available technology. In more industrialised countries, however, labour-intensive production tends to be more expensive. This is because the cost of running machinery and equipment is often less than the cost of paying employees. Capital Capital includes items used in the production of goods and services that are made by people, including: • buildings • machinery • equipment • the finance needed to purchase these. Production that uses a high proportion of capital compared with labour is called capital-intensive. Capital-intensive production tends to be cheaper than labour-intensive, where the machinery and equipment are available. Production using the latest technology is usually faster and more accurate than production by hand. Enterprise Enterprise is the ability, skill and enthusiasm to take the risks involved in developing a business idea and gathering the appropriate resources. All businesses combine the factors of production to produce the goods and services that people want to buy. A large company such as the Kuwait Petroleum Corporation will use all four elements to produce its finished petroleum products and refined oils: • land: in the form of oil wells and refineries • labour: through the efforts of all its staff • capital: drilling equipment, pipelines, office buildings • enterprise: the skill and foresight of senior management. Even a village fisherman relies on the land in the form of the sea and fish; labour is himself; his knife and nets


be sold – is more than the value of the factors of production used to make the product. Therefore the amount of value added to a finished product is the difference between the sales value of the product and the cost of all the resources used to produce the product. You should note that added value is not the same as profit (see Unit 35).


Factors of production



Selling price

Figure 1.4 Factors of production Added value

are his capital, and his experience and knowledge are his enterprise.

Cost of raw materials

Adding value As the transformation – or production – process proceeds through various stages, gain added value to the raw materials at each stage. This is because the work carried out increases the value of the parts and raw materials used. When the product is finished, its value – and the price at which it will

Figure 1.5 Added value

1.4 Activity 1

Consider one of the following businesses: • a farm • a furniture maker • a shop • a cosmetics manufacturer • a paper producer • a producer of music CDs. 2 Construct a table like the one shown below. Complete your table with examples of the types of resources or factors of production used by your selected business. The first line of the table has been completed as an illustration. Factors of production Business Farm


Land Land for grazing animals or growing crops

Labour Farm workers

Capital Tractors

Enterprise The skills and efforts of the farmer in setting up and running the farm

Design a poster or diagram showing how, by combining these resources and transforming them into a finished product, the business adds value to the resources.

Introduction to business activity


Supplying needs and wants


Effective demand


Goods and services What is business?

Opportunity cost Land


Labour Adding value

Factors of production Capital

Selling price minus cost


Figure 1.6 What is business?

EExemplar exam question

Key terms Added Add d value l – the h difference between the selling price of a product and the cost of the raw materials used to make it Effective demand – demand for a product that is backed up by an ability and willingness to pay for it Factors of production – the four categories of resources that are used to produce goods and services: land, labour, capital, enterprise Goods – tangible products that can be touched and consumed Needs – things necessary to sustain life Opportunity cost – the cost of something in terms of the next best thing Private sector – the sector of business consisting of businesses owned by private individuals or groups Profit – the profit a business makes is the amount by which its income from selling the goods and services it produces exceeds the costs of producing those goods and services Public sector – the sector of business consisting of businesses owned by the state Resources – items of limited availability that can be used in human activity Services – things other people or businesses do for you Wants – things chosen to satisfy a need or to make life more enjoyable


Business and the environment in which it operates

What is i meant by the term ‘added value’? [2]

Summary 1

We all have needs and wants.


The main purpose of business activity is to supply the goods and services people want.


The objective of most private sector businesses is making a profit.


The main objective of public enterprise is to provide services to the local and national community.


The main objective of non-profit-making organisations is to meet a perceived social need or to provide help to a specific section of the community that is not met by private or public enterprise.


Businesses produce goods and services using scarce resources known as the factors of production: land, labour, capital, enterprise.


Value is added to the resources because the work carried out to produce the finished product has a value that increases the value of the parts and raw materials used.

2 Classification of business

In this unit you will learn about:

• • • •

the three sectors of industry how business activity is classified as primary, secondary or tertiary how businesses in each sector are interdependent why the types of business activity undertaken in a country are a key element in that country’s national economy.

Everything you buy starts out as either: a metal or mineral deposit in the earth a growing plant an animal living on the land, in the air, or in a river or the sea. Changing it into a useful product and getting it into a shop where you can buy it is a long process that involves businesses in different industrial sectors.

• • •

Industrial sectors Businesses are classified into one of three sectors, depending on the type of activity they carry out. The three sectors are: 1 Primary sector

2 Secondary sector 3 Tertiary sector. Primary sector businesses Primary sector businesses produce the raw materials out of which finished products are made. Typical primary sector businesses are: • farming • agriculture • fishing • forestry • mining • fuel extraction.

Businessinincontext context Business Do you like chocolate? Have you ever stopped to think about just what goes into making the bar of chocolate that you can buy in a shop and eat before you get home? Chinua Apache owns a small farm in Nigeria. His main crop is cocoa beans. Cocoa beans are the main ingredient in chocolate. The cocoa beans that Chinua grows are harvested and shipped in cargo vessels to chocolate manufacturers such as Whittaker’s in New Zealand.

The manufacturer processes the beans and turns them into cocoa butter. Cooked full-cream milk and sugar are added to produce chocolate ‘crumb’. This is crushed between heavy rollers, other ingredients are added and the chocolate is moulded into bars. Finally, the bars are wrapped, packed into cases and delivered to retail outlets for sale to customers. The chocolate bars are usually transported by road.

Questions Look carefully at Figure 2.1 on page 16. 1 How many different operations can you identify? 2 How many different business organisations are involved in the process?

3 Explain how businesses at different stages of the production process work with each other, basing your answer on Figure 2.1.

Classification of business 15

Farmers in America grow the cocoa beans.

The cocoa beans are shipped to the Cadbury factory at Chirk in the UK.

The raw cocoa beans are processed into cocoa butter.

The ‘crumb‘ is pulverised between rollers and other ingredients are added to produce chocolate.

The cocoa butter is turned into ‘crumb‘.

The cocoa butter is transported by road to Cadbury’s factory in Herefordshire in the UK.

The chocolate is moulded into bars.

The bars are wrapped and packed.

The wrapped bars are despatched to retailers throughout the world by road and sea.

Figure 2.1 Producing a bar of chocolate

Primary sector businesses are often the largest businesses in a country because of the large amount of expensive machinery and equipment they need. Industrial sectors




Produce the raw materials out of which finished products are made

Use the raw materials produced by primary industries and change them into finished products

Provide services

Figure 2.2 Sectors of production

2.1 Activity In the case study on page 15, you identified different types of business involved in producing a bar of chocolate. Identify the industrial sector in which each business operates.


Business and the environment in which it operates

Secondary sector businesses Secondary sector businesses use the raw materials produced by primary industries and change them into finished products. Typical secondary sector businesses include: • manufacturing, including refining and processing metals and minerals • chemicals and artificial fibres • engineering and allied trades • food and drink processing • textiles, footwear and clothing • construction, which includes domestic and industrial building, and civil engineering, such as road and bridge construction. Tertiary sector businesses Tertiary sector businesses provide services to businesses and individuals. Typical tertiary businesses include: • banking and financial services • insurance • leisure and tourism • transport • retailing and wholesaling • public services • distribution, post and telecommunications • education • health services.


Top tip You must be able to define and give examples of businesses found in each sector. Calculations are also quite common on this topic, for example calculate the number of employees in a sector.

Putting the three sectors together: chains of production Making a product and supplying it to customers usually involves businesses in all three industrial sectors. For example, producing a loaf of bread involves: • a farmer who grows the wheat (primary sector) • a miller who turns the wheat into flour (secondary sector) • a baker who makes the flour into bread (secondary sector) • a baker’s shop that sells the bread (tertiary sector) to customers • transport (tertiary sector) to get the wheat from the farmer to the miller, the flour from the miller to the baker, and the bread from the baker to the bakery. Each business forms part of a chain of production. The chain begins with the raw materials and ends with getting the finished product to the customer.

wheat farmer

You might think that your school or college, which is in the tertiary sector, has very little connection with either primary or secondary production. Its purpose is to provide education for its students (i.e. you). Your school or college does not: • grow anything – except perhaps as part of a lesson – or extract anything from the sea or land • manufacture goods. Yet it does depend on other people or firms who do. Firms in the secondary production sector have made the paper, the desks, the marker boards, the books and all the other goods that the school or college uses. Without a supply of electricity, the school or college’s computers would not work, and the lights would not work. For this, the school or college depends on mines that produce coal from which electricity is generated. The school or college is also dependent on other firms in tertiary production – from the bus company that provides transport for students to the window cleaner who cleans the windows.

flour miller


baker’s shop

Figure 2.3 Chain of production of a loaf of bread

Businessinincontext context Business In Unit 1 you read about the Kuwait Petroleum Corporation. The Kuwait Petroleum Corporation is one of the world’s largest oil companies and makes petrol and diesel from crude oil. • Extracting crude oil from the earth is a primary sector activity. • The oil is then pumped through a pipeline to an oil refinery. Refining the oil and turning it into petrol and diesel is a secondary sector activity.

Road tankers then take the petrol and diesel to garages, which sell it to the final customers. Road transport and garages are both services in the tertiary sector. Although the process of producing petrol and getting it to garages uses business activities in all three sectors, often the oil rig, refinery, road tankers and garages are all owned by one single company. Classification of business 17

What determines how countries are organised? The mix of businesses in each sector is different in different countries. • In some countries that are rich in raw materials, primary sector businesses may thrive. This is so in countries with large mineral deposits or reserves of oil, such as Zimbabwe, Qatar and the United Arab Emirates. • In other countries, perhaps with fewer natural resources but with advanced technology, or a large labour force like China, the predominant sector might be manufacturing (secondary).

Alternatively, countries such as Singapore have a large tertiary sector. Some countries focus on providing services to others. This might be due to limited natural resources in their country, meaning that goods can be produced more cheaply elsewhere. Usually it is because they have developed expertise in providing certain services that other businesses or individuals want. In reality, all countries have industries in all sectors. Because factors affecting businesses are constantly changing, the ‘mix’ of industrial sectors is also constantly changing.

2.2 Activity 1 2

Carry out a survey of businesses in your local area. Create a table of organisations and the industrial sectors in which they operate as shown below. Do not forget that organisations such as libraries and hospitals are business organisations and should be included in your table. Name of organisation


Industrial sector

2.3 Activity Using your local library, government records or the internet, try to find out how the structure of your economy has changed over the past 50 years. You should be able to find either employment or GDP figures for your country. Make sure you use the same figures for both years chosen. Fill in the details in a chart like the one below. % of jobs in each sector


50 years ago

Primary Secondary Tertiary Do you notice any change in the percentages for each sector? Think of possible reasons for your results.

EExemplar exam questions 1 2

Giv Give an example of a type of business found in the following sectors: secondary and tertiary. [2] The table below gives employment data for country A over the past ten years. % of labour force employed in:












Total working population (millions)



(a) Calculate the number of people employed in the secondary sector in 2009. [2] (b) Identify and explain two possible reasons for the change in employment over the ten years. [4]


Business and the environment in which it operates

• • • •

Farming Agriculture Mining Fuel extraction

Primary sector

• • • • • •

Manufacturing Engineering Food and drink Textiles Clothing Construction

Secondary sector

• • • • • • • •

Financial services Transport Retailing Public services Post Telecommunications Education Health services

Chain of production

How business is organised


Tertiary sector

Figure 2.4 How business is organised

Key terms Ch i off production Chain d – the stages of production a product goes through from raw materials to finally being sold to the customer Primary sector – the sector of industry that produces unrefined raw materials Secondary sector – the sector of industry that produces finished or part-finished goods Tertiary sector – the sector of industry that provides services to businesses and individuals

Summary 1

Businesses owned by private individuals or groups are in the private sector.


Businesses owned by the state are in the public sector.


All products go through many stages of production.


The different stages of production of a product are linked in a ‘chain of production’.


Businesses may be in the primary sector, secondary sector or tertiary sector, depending on where they are in the chain of production.

Classification of business 19

3 Business growth and measurement of size

In this unit you will learn about:

• • •

different ways of measuring the size of a business the problems of using the different methods

• •

why businesses seek to grow problems connected with growth.

the ways in which a business can grow

Some businesses are small, owned and run by just one person. At the other end of the scale are giant companies

which operate all over the world. Businesses grow in different ways, and for different reasons.

Business context Business B usiness inincontext Tata is a rapidly growing business group based in India. The group has significant international operations. Their revenues (the amount of money they received from selling their goods and services) in 2007–08 were around $62.5 billion. The group employs around 350 000 people worldwide. Major companies in the Tata Group include:

• • • • • • • •

Tata Steel Tata Motors Tata Consultancy Services (TCS) Tata Power Tata Chemicals Tata Tea Indian Hotels Tata Communications. Tata was recently valued at $11.4 billion. This put it 57th in the list of the world’s top 100 brands.

Questions 1 In which country is Tata based? 2 What different types of goods and services does Tata produce?


Business and the environment in which it operates

3 Most people would consider Tata a large company, although it had small beginnings. Do you agree? Why? 4 Do you think that Tata benefits from operating in many different countries? Explain your answer.

The size of firms Businesses vary considerably in size. Companies such as Tata based in India, Anglo American plc based in South Africa and Microsoft based in America are considered large, whereas a roadside food-stall proprietor or a self-employed carpenter are running small businesses. Sometimes, however, it is necessary to provide a measure that is more objective and this may be important to different stakeholders. For instance: • banks and other financial institutions want to know if the business is likely to be able to repay a loan • shareholders and investors may base their investment decisions on the size of a business; large businesses are often thought of as secure investments although some investors may prefer to invest in a small business that is likely to grow • businesses need to know the size and strength of their competitors • governments need to know the effect of different businesses on employment and the economy • employees may feel that their jobs are safer and that there are more prospects for promotion in a large company. The size of a business is measured in terms of: • output of goods and services • sales value or revenue • number of employees • capital employed (the amount of capital or money invested into the business by its owners from their own resources or loans). Size of output

Sales value

Measuring business size

Number of employees

Figure 3.1 Measuring the size of a business

Problems with measuring size Most methods of measuring and comparing the size of businesses do, however, present some problems (see also Table 3.1, page 22). • Output might be used to compare the size of firms in the same industry, but care is necessary: two fast-food restaurants each serving 1000 meals a day might be considered the same size, but two firms each producing 1000 motor cars cannot be compared on the same basis if one produces luxury limousines while the other produces family saloons. • Similarly with sales value or revenue: a business that produces and sells a small number of very high-value products may have higher revenue than a larger business that produces and sells a larger number of lower-value products. • Care must also be taken when comparing the size of businesses on the basis of numbers of employees or capital employed. Some businesses are labourintensive (i.e. they employ a large number of people relative to machinery and equipment), while others are capital-intensive (having a high level of machinery and equipment with fewer employees). • Using profit as a measure is usually inaccurate as other factors influence the amount of profit a business makes. Profit depends on the skills of management and workers, the efficiency of production and administrative systems, as well as the ability of the business to keep its costs low. Top tip Try to avoid using profit as a way to measure the size of a business. It is inaccurate as the amount of profit depends on more than just the size of the firm.

How firms grow Most businesses begin small and grow over a long period of time. A business may grow internally or externally. Capital employed

Internal growth Internal growth can also be called ‘organic’ growth. This is because it is the business expanding by itself rather than as a result of taking over another company. Some businesses

3.1 Activity Investigate businesses in your own country. 1 Construct a table listing the five largest businesses using one of the measures listed below: • output of goods or services • capital employed • sales value or revenue • profit. • number of employees 2 Would the order change if the businesses were measured against different criteria? What are the problems of comparing the size of the businesses using these criteria?

Business growth and measurement of size 21

Method Output



Measuring the total number of units of goods and services produced. A business producing a large number of units of its goods or services may be considered larger than a business that produces a smaller number of units.

Sales value or revenue Measuring the total value of sales over a period. Businesses with a high value of sales or revenue may be considered larger than businesses with a lower sales value or revenue.

• Number of employees Measuring the average number of employees over a given period. Large companies tend to employ more employees.

• • •

Capital employed


Measuring the amount of capital or money invested into the business by its owners (from either their own resources or loans); a high value of capital involved may indicate a large business.

Measuring the profit of a business.

Difficulties arise when comparing businesses producing different types of goods or services. Also a small but efficient business may produce more units than a larger, less efficient one.

Difficulties arise when comparing businesses producing different types of goods or services. A business that produces and sells a small number of a very high-value product may have a higher revenue than a larger business that produces and sells a larger number of lowerpriced items. Also a small but efficient business may generate a higher sales value than a larger, less efficient one. Labour-intensive businesses employ more people. A business that is considered small when measured by the number of employees may be considered larger when using a different measure. Fewer employees may be an indication of efficiency rather than size. Capital-intensive businesses have a high level of machinery and equipment with fewer employees. Some small businesses are highly capital-intensive and have a high value of capital employed. Using profit to measure size is usually inaccurate as other factors (e.g. the skills of management and workers, the efficiency of production and other systems, and the ability of the business to keep its costs low) influence the amount of profit a business makes.

Table 3.1 Methods of measuring the size of a business

grow because their market grows or they develop new products and maintain their share of the market. Other businesses try to find new markets for their products, perhaps internationally. New products, especially in the field of information technology, can generate increased sales for a business. But internal growth can be a slow process. The market might grow only slowly, if at all. New products may involve many years of research, development and testing before they can be marketed. External growth External growth involves a merger with another business or a takeover of that business. 22

Business and the environment in which it operates

• • •

A takeover is where one company buys another and so gains control of it. Another name for a takeover is acquisition. A merger is where two companies join together by mutual agreement – either establishing a completely new business or keeping their separate identities. Horizontal mergers occur where the two companies are engaged in the same stage of production of the same good. For example, two clothing businesses join together. Vertical mergers occur between two companies engaged in different stages of the production of the same good. For example, a sugar-milling factory buys a sugar plantation.

Parts manufacturer

Accessories producer

Lateral merger

Backward vertical merger

(prior stage of production)

(related products) Diversifying merger (no links) Cosmetics producer

Car manufacturer A

Forward vertical merger

Horizontal merger (same stage of production)

Car manufacturer B

(later stage of production)

Car showroom

Figure 3.2 Types of merger

Lateral mergers involve two companies producing related goods that do not directly compete with each other. The common link may be at one end of the process only, for example distilling and brewing are two distinct and separate techniques, but a lateral merger of brewers would lead to cost cutting. Conglomerate, or diversifying, mergers occur where the products of the companies involved are unrelated. This could be a business making farm equipment merging with a soft drinks firm. Diversifying mergers are often defensive, anticipating a decline in the purchasing company’s main market.

Why do businesses grow? Businesses grow for a variety of reasons. Growth may: • be part of a strategy to increase sales or market share • be a result of growth in the market for their product leading to increased sales and production • reflect the personal aims of the owners or directors of the business, such as increased status or power.

3.2 Activity Consider the following mergers and identify what type of merger was involved: • a national newspaper buying a paper mill in Canada • a small printing firm in your town going into partnership with a similar business in a nearby town • a furniture manufacturer buying a chain of high street furniture stores • S T X Group buying shipbuilding and energy companies • a computer software developer taking over an internet service provider.

Technical economies

Managerial economies

Economies of scale

Financial economies

Trading economies

Figure 3.3 Economies of scale

Many businesses expand in order to obtain economies of scale. Economies of scale are advantages that businesses obtain by expanding and increasing production. The main types of economies of scale are shown in Table 3.2.

Business growth and measurement of size 23

Type of economy Technical economies


• • •

Managerial economies

Trading economies

• •

Financial economies

Large businesses can afford expensive machinery and technology to develop automated production lines. Such equipment can be operated for longer periods. This increases productivity (the number of items produced) per machine. Equipment designed for higher levels of production does not necessarily cost proportionately more to purchase. Increased production is unlikely to have a major effect on the effectiveness of managers or require an increase in their number. Larger firms, however, can employ specialist managers and other staff who can improve the efficiency of the business. Larger firms enjoy greater discounts for buying in bulk. Costs of items such as research and development, advertising and distribution do not increase in proportion to increases in production and sales. Large firms have access to more sources of finance than small firms, often at lower rates of interest.

Table 3.2 Economies of scale

The disadvantages of growth A business that grows quickly and unexpectedly may have problems with overtrading. This is where the business increases production to meet higher than anticipated sales. However, increasing production also increases costs as more raw materials have to be bought, and possibly also new machinery and additional employees. These additional costs may have to be borne by the business until revenue from the increased sales is received. Sometimes this can result in a shortage of cash to pay bills that are due, which could lead to the business failing even though it is making a profit. 24

Business and the environment in which it operates

Poor communications


Diseconomies of scale


Effect on employees

Figure 3.4 Diseconomies of scale

Diseconomies of scale are disadvantages businesses can get from expanding or growing too large. The main diseconomies are outlined below: • Size: a business that grows too large becomes difficult to control and manage, leading to an increase in the number and cost of managers. • Bureaucracy: large organisations tend to develop large and rigid administrations, or bureaucracies, leading to wasteful ‘red tape’ and inflexibility. • The effect on employees: employees often have difficulty identifying with and feeling a part of a large organisation, leading to a drop in motivation and productivity. • Communications: large organisations develop large structures (see Unit 16), giving rise to long communications channels; decision-making is slow. Top tip Economies of scale – learn the main ones. Remember the aim of each is to lead to a reduction in average cost per unit. Diseconomies of scale – most of these are management issues when firms become too big to control their staff.

Problems of growth The main problems associated with growth are diseconomies of scale. As stated above this is mainly to do with a firm becoming too big so it cannot effectively control its staff. However there are other problems that a company must overcome as it grows in size. • Competition rules: governments will often put legal restrictions in place to protect consumers from exploitation to stop businesses having too much influence in a particular market. • There can be problems if a business wants to expand into new overseas markets (see Unit 10). • Financial and cash flow problems: can the business access the necessary finance to fund a takeover? If they choose organic growth, they might try to grow too quickly and run into cash flow problems. This is often

called overtrading as the business does not have enough working capital to fund the level of planned production (see Unit 36 ). Growth might mean a change in the form of business ownership. The current owners might have to share or give power to other individuals or groups which might result in conflict. (Forms of ownership are dealt with in Units 11–13.)

How do small firms survive? There are several reasons why small firms continue to thrive. • Many people value independence. A large number of small businesses could expand but do not as their owners want to retain control and do not want the anxiety that being part of a larger organisation would bring. • Small businesses can concentrate on the needs of smaller markets. These smaller markets may not have enough customers to sustain a large business. • Most large companies are not interested in producing custom-made goods. A large construction firm that

specialises in building motorways or power stations will not waste resources on building an extension to your kitchen, which is the type of job ideally suited to a small builder. • Small firms also frequently provide an important service to large firms by producing components. This enables the larger firm to concentrate on its main tasks. • Small firms can be more creative. Managers and owners of small businesses are closer to their customers than top management of large firms. They may be able to identify the significance of and need for new developments more quickly. • In a small business, decisions are taken more quickly than in a larger business. Small businesses are often more responsive to the changing needs of their customers. Each year a large proportion of small businesses fail. Others succeed and grow, while more are established for the first time. In many countries, assistance is available to people considering starting their own business.

3.3 Activity Select one small and one multinational business to investigate. These businesses should operate in your country, and if possible in your area (although the Head Office of your chosen multinational business may be anywhere in the world). 1 For each business explain why you think it is its present size. 2 What are the advantages of each business being the size it is? 3 What are the disadvantages?


Horizontal Output

Vertical Growth

Sales revenue No. of employees


Mergers Lateral

Measurement Conglomerate

Capital employed

Economies of scale

Size Reasons

Diseconomies of scale Multinational businesses Survival of small firms

Figure 3.5 Business growth and the measurement of size Business growth and measurement of size 25

EExemplar exam question Ronald runs a successful small glass-making business with his brother. They make a range of products from windows to Ronaldo bottles. They have been looking to expand their business. A local window-fitting company has approached them about a merger. Ronaldo is keen on the idea but his brother is not so sure. Identify and explain two reasons why the merger is a good idea for Ronaldo’s business. [8]

Key terms C Conglomerate l (d (diversifying) merger – merger which occurs where the products of the companies involved are unrelated Diseconomies of scale – disadvantages that may come from growth Economies of scale – advantages that larger businesses gain by virtue of their size External growth – the means by which a business can grow by merger, takeover or joint venture Horizontal merger – occurs where two companies are engaged in the same stage of production of the same good Internal (organic) growth – the means by which a business can grow using its own resources Lateral merger – two companies joining together who produce related goods but do not directly compete with each other Merger – two companies joining together by mutual agreement Takeover – one company gaining control of another Vertical merger – occurs between two companies engaged in different stages of production of the same good




The size of a business can be measured in terms of output of goods and services, turnover, number of employees, capital employed, or number of outlets.


Profit is unreliable as a measure of size as it is affected by other factors.


Businesses may grow internally or externally.


External growth involves mergers or takeovers.


Growth allows businesses to benefit from economies of scale.


Disadvantages of growth are called diseconomies of scale.


Despite the trend towards larger businesses and multinationals, many businesses remain small.

Business and the environment in which it operates

4 National wealth and the impact of business activity

In this unit you will learn about:

• •

the impact that business activity may have on the environment, including pollution and global warming the impact that business development may have on national wealth and the depletion of natural resources and sustainable development.

We all care about the environment. Most businesses also want to conserve – in other words preserve and protect – our environment and ensure that their activities do not damage it in any way. However, making production environmentally friendly could: • add to the costs of a business, which might reduce the amount of profit it makes • be good for public relations by giving a business a positive image that could boost its reputation and lead to further sales • result in new business opportunities for businesses as, increasingly, consumers look for more environmentally friendly products

lead to the development of new environmentally friendly production techniques which can help reduce wastage, so cutting costs for businesses. Environmental issues have become an important global issue for individuals, businesses and governments. For businesses this represents both a threat and an opportunity. There is a danger that their current products, or methods of production, and distribution will have a negative impact on people outside the business. Businesses must therefore change how they operate to minimise their costs and avoid legal action. Alternatively they might look to adopt more ethical policies to prevent them gaining a poor reputation with their customers.

Businessinincontext context Business As consumers we all contribute to environmental pollution, for example through waste. Consider the waste that you produce in a week from the products you buy. • Paper waste: for example from school, college, work and magazines. How much paper do you throw away? Do you use both sides of a page?

• • •

Food waste: Do you ever leave part of a meal either at home or at a fast-food or other restaurant? Metal or plastic: for example empty drinks cans, bottles or containers. Other materials such as ball-point pen refills, printer cartridges and batteries that you throw away.

Questions 1 Try to find out what happens to the waste. Is it recycled? Does it end up being taken by the council to a landfill site? 2 Where did the waste come from? Was it produced by a business in order to aid the sale of its product? Was it the product itself?

3 Draw a diagram linking the waste products to you, the consumer. Include the method of disposal and the businesses who made it. What do you think the effect of all this waste is on the environment?

National wealth and the impact of business activity


Some businesses will have ethical considerations as one of their main objectives. These businesses will actively consider the wider social implications of their actions and use them to guide how they operate. However, there are also opportunities for other forwardthinking businesses. If businesses need to modify their equipment, they may need to obtain ‘greener’ components than suppliers currently provide. Customers will want new ‘eco-friendly’, ‘environmentally friendly’ or ‘green’ product alternatives. If a business cannot adapt, or respond, to these changing demands, it risks losing both current and potential new customers. So it is important for all businesses to be aware that issues in their external environment will affect them.

Externalities: the social costs and benefits of business activity Business activity incurs social costs and benefits that have an impact outside businesses themselves. These are called external costs, or externalities. Typical external costs of business activities include:

environmental factors such as pollution from smoke, noise and chemicals • spoiling the environment with buildings such as factories or the construction of roads • damage from traffic through higher risk of accidents and congestion • the destruction of natural habitats of wildlife and flowers • endangering species of wildlife • an increase in global warming by cutting down forests and burning coal • social factors such as unemployment and loss of amenities when a factory or business closes. External benefits include: • increased employment from the expansion of businesses, for example opening new factories • the economic regeneration of an area if new businesses move in • increased training of a local workforce, making the workforce more adaptable • improved amenities and living standards, for example new roads and schools.

External costs

External benefits

• Destruction of the countryside

• Less congestion

• Disturbance of people living close to the new motorway

• Reduced damage to buildings as traffic avoids town

• Destruction of wildlife and its habitat

• Improved traffic flow through towns and villages

• Pollution from increased traffic levels

• Reduced pollution in towns and villages

Figure 4.1 Externalities of constructing a road bypassing a small town

Businessinincontext context Business Women on the remote island of Char Montaz in the south of Bangladesh are learning how to make battery-powered lamps. This project, funded by the World Bank Energy Sector Management Program, aims at improving the lighting and indoor air quality of rural households by replacing the traditional kerosene lamps with modern fluorescent batterypowered lamps, which have a reduced risk of fire and do


Business and the environment in which it operates

not give off smoke and other emissions harmful to human health. The fluorescent lamps are produced and marketed by a women’s micro-enterprise in an area where electricity is not likely to be available in the next 20 years. If a woman constructs and sells two lamps a day, she earns wages equivalent to those of a skilled labourer, a significant

Business in context

Businesses need to consider environmental issues

opportunity which benefits both her family and improves her social status. The remote community also benefits from the lamps, which are highly efficient and have low energy consumption. So far 1000 households are using these lamps. From the start, the project recognised the importance of rural women’s knowledge of local conditions and used their knowledge to design the lamps. Recognising that the women had limited technical skills, the project gave appropriate training to ensure that reliable lamps were produced. Training was also given in accounting and book-keeping. (Adapted from United Nations Division for Sustainable Development website.)

Questions 1 Explain the purpose of the project. 2 What are the problems with the kerosene lamps?

3 How do the new battery-powered lamps help with environmental issues in Bangladesh?

4.1 Activity Make a list of the external benefits and costs of producing and using coal. Do you think that the benefits outweigh the costs, or not? Justify your answer.

Dealing with external costs External costs can be dealt with in several ways. Internalisation, where the supplier accepts responsibility for the external cost and absorbs the cost of putting it right. For example, a construction company building a new road may pay the costs of excavating, removing and restoring an archaeological site in a new location. • Pressure groups, such as Greenpeace International which operates across Asia, Africa, Europe, the Americas and the Pacific to protect and conserve the environment, can demand that governments and private firms take externalities into account when contemplating a major project such as building a nuclear generating station. Of course, the pressure group may not get its way. • Private action by firms or individuals is often intended to improve their own public image, but may go a long way towards paying for social costs. Such action may be,

for example, a manufacturer reducing emissions of gases harmful to the atmosphere, or a football club paying for the policing of the neighbourhood around its ground at match time. Government action to cover externalities includes: ! taxation and subsidies ! introducing a pricing system, such as parking meters and tolls ! direct controls, such as planning controls and licensing ! providing goods and services through the public sector, either free or at subsidised rates.

Government action


External costs

Pressure groups

Private action

Figure 4.2 Ways of dealing with external costs National wealth and the impact of business activity


Cost–benefit analysis: measuring social costs and benefits Many businesses use a procedure known as cost–benefit analysis to weigh up the social costs and benefits of their activities. The basic procedure involves: • identifying all costs and benefits connected with an activity or project, including future costs and benefits • putting a financial value on the costs and benefits • comparing the total cost with the total benefit value. If the total value of benefits exceeds the costs of the activity or project, the business should continue. If the costs exceed the value of the benefits, however, the activity or project should be cancelled, at least for the present: circumstances change and a future cost–benefit analysis may yield a different result. While cost–benefit analysis is helpful in making decisions about the overall costs and benefits of business activity, it does have problems, such as: • some business activities provide benefits for some consumers but costs for others • it is often difficult to put a value on some social costs or benefits, such as protecting a species of wildlife.

National wealth, living standards and economic growth The wealth of a country lies in its natural resources and other productive assets. How efficiently the country uses its natural resources and other productive assets will determine the general standard of living of those living in the country. The efficiency of a country in using its natural resources can be measured by the amount of goods and services that are produced using them. An increase in goods and services produced will lead to an increase in general living standards in the country.

Economic growth and sustainability The nations of the world are increasingly considering economic growth in terms of its sustainability. In other words, can growth be maintained not just for the present, but for future generations as well? To be of lasting benefit, growth must be sustainable. But despite major advances in technology and communications that have increased the productivity and availability of factors of production, the basic economic problems remain: • people have potentially unlimited wants • the resources available to satisfy them are limited. As the world population increases, pressure on these scarce resources increases with it.

Top tip Questions on social or environmental issues will usually require you to give an opinion on a given statement. Try to look for both positive and negative points and make a decision. Make sure points are relevant to the type of business identified (this is what is meant by the word ‘context’).

EExemplar exam question Do you think the government of country Z should allow a chemical factory to set up in the country? Justify your answer. [6]

4.2 Activity Economic growth is achieved largely through increasing production of goods and services. Usually, within a country some industries are growing (increasing production) whilst others may be in decline (decreasing production). 1 Identify and research an industry that is increasing its level of production. 2 Find out why this is happening. For example: • demand for the product may be growing either in the home market or abroad • new technology may be improving production techniques or productivity, allowing the product to be sold at a lower price • the raw materials from which the product is made may have become more easily or cheaply available. 3 Do you think the increase in production is sustainable? Explain your answer.


Business and the environment in which it operates

External costs National wealth External benefits Externalities Dealing with external costs

Impact of business activity Economic growth


Cost–benefit analysis

Figure 4.3 National wealth and the impact of business activity

Key terms Cost–benefi C b fit analysis – a method of comparing the overall costs and benefits, including the social costs and benefits, of a business activity or project

Economic growth – a measure of how well a country is doing: it is shown through the GNP of the country Environmentally friendly – activities that conserve the environment or do not deplete scarce resources External costs (externalities) – the social costs and benefits of business activity borne by the wider community National wealth – the natural resources and other productive assets of a country Social costs and benefits – costs and benefits to society as a whole rather than to the business Sustainability – the likelihood of being able to maintain levels of production

Summary 1

Some activities of business are harmful to society or the environment.


These are social costs external to business.


External costs may be dealt with by internalisation, pressure groups, private action by firms or individuals, or government action.


Cost–benefit analysis is a method of comparing the total costs and benefits of a business activity or project, including social costs and benefits.


The wealth of a country lies in its natural resources and other productive assets.


How efficiently a country uses its natural resources and other productive assets will determine the general standard of living of those living in the country.


Economic growth through increasing GNP will increase the wealth and living standards of a country.


To be of lasting value, growth must be sustainable.

National wealth and the impact of business activity


Cambridge IGCSE Business Studies: Coursebook with CD-ROM  

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