Objectives

After reading this chapter, you should be able to

1. Identify factors in the production of goods and services

2. Identify industries developed from the natural resources of Caribbean territories
3. Differentiate between production and productivity
4. Explain the importance of productivity
5. Explain the role of capital in production
6. Differentiate among types of capital
7. Classify the different types and levels of production
8. Describe the characteristics of cottage industries
9. Outline the functions of small businesses
10. Discuss the advantages and disadvantages of small business
11. Explain how a business grows internally and externally
12. Outline the opportunities for and benefits of developing linkage industries
13. Explain the effects of growth on a business
(5.1)
Describe the functions of management.
 Identify factors in the production of goods and services The factors of production are what make
the business work. For Morning Glory, these factors are land, labour, capital and enterprise.
 In the plant, the land includes the site on which the factory is built, as well as the surrounding
fields. The employees who work for the Business makes up the labour. The capital is the
buildings and machinery that are used to make cereal. The final factor is enterprise, which is also
known as entrepreneurial skill. This is a skill that successful entrepreneurs have: to take a risk in
bringing the other factors of production together to produce goods to make profits.

Over the years, the four factors of production have come to mean more than just the examples used
above.

 Land or natural resources refers to all gifts of nature.

 Labour is used to refer to all the physical and mental contributions of an employee, so it is more
than just the physical effort of digging for coal or making car parts. For example, it also includes
the mental effort of an accountant, or the services provided by a bank clerk. Labour can be
classified in many ways, such as skilled, semi-skilled/ unskilled, managerial/professional, etc.
Many factors affect the supply of labour, such as education, transport, economy, migration, etc.
 Capital includes all the man-made items that go into producing other things, such as
manufacturing machines, tools and buildings.
 Enterprise brings all the other factors together to produce goods to make profits while taking
risks.

KEY TERM

Factors of production: The resources needed by businesses to produce goods and service

NOW TRY

1. Ramesh owns a small sawmill producing wood from forest timber. He supplies the wood to furniture
makers, and he employs two workers to transport and load the timber, three carpenters, and two workers
to package the wood. Ramesh's sawmill is based near a river, which he uses to move some of the wood to
the sawmill. He uses advanced cutting equipment, and he owns two lorries as well asthe sawmill
buildings. Identify the land, labour, capital and enterprise in Ramesh's enterprise.
2. Which of the factors of production do you believe to be the most important to Ramesh's enterprise and
why?
3. If the receipts to owners of land are called "rent", and the receipts to suppliers of capital are called
"interest", then what would we call the receipts to owners of labour and enterprise?

4. Business in action: Talk to the owner of a small local business. Find out how the business uses its land
and capital, the type of labour employed, and the enterprise skills needed to ensure that the enterprise is
successful.
(5.2)
Identify industries developed from the natural resources of Caribbean territories

 Many industries (for example, manufacturing and service industries) rely on raw materials, so it
is helpful when a country has an abundance of natural resources. Although the Caribbean is
blessed with many different types of natural resources, the land area of most Caribbean nations
is relatively small when compared with, for example, South American and North American
countries, therefore There is only a limited supply of these natural resources. The table below
outlines some key examples of natural resources found in the Caribbean.

KEY TERM

Manufacturing: Making or finishing a raw material (or semi-manufactured parts) into a finished good.

Natural resources: Materials that occur naturally in the earth or its atmosphere, such as water, air,
mineral deposits, fish stocks, timber, etc.
  A good example of a Caribbean natural resource is Pitch Lake at La Brea in Trinidad. This is the
largest natural deposit of asphalt in the world, being over 100 acres (about half the total floor
space of the Pentagon) wide. The lake provides a rich resource for the construction of roads in the
Caribbean. There is enough asphalt in the lake to last for several hundred years, and Trinidad
exports about $3 million worth to other countries each year.

PRO TIP

While you are studying this unit, identify the natural resources that are particularly plentiful in your own
country and, if possible, view sites where exploitation of these resources is taking place. This will help
you to memorise examples for use in your exams.

Beaches, national parks and tourism services

 Beaches are one of the greatest natural resources in the Caribbean, and bring millions of dollars in
revenue to the Caribbean economies.
 Another natural resource found in the Caribbean is national parks, such as the Kaieteur National
Park in Guyana, which is nearly 60 000 hectares in size and contains the world's largest single-
drop waterfall. The park is a key tourist attraction with its trails, numerous waterfalls, and
plentiful species of birds and animals. In Anguilla, the Fountain National Park celebrates the lives
of the Amerindian tribal people who originally lived there.
 Eco-tourism is an important industry in the Caribbean, and it involves limited and controlled
access to ecological and cultural heritage sites, as well as the prevention of mass tourism. Jamaica
has a National Heroes Park, which is a botanical garden of 50 acres and the largest open space in
Kingston. Other Jamaican national parks include the Blue Mountains National Park, which is a
nature reserve and area of natural beauty. National parks enable countries to benefit from
unspoiled nature and cultural history, and to contribute to the conservation of a high-quality way
of life for the present and future generations.

Caribbean industries that have developed from agricultural produce, mining, fishing and other areas

 Natural-resource extraction (such as mining, farming and fishing) provides the basis for many
other industries. There are many sectors that benefit from these resources, as outlined in the
diagram below.
Examples of some of the natural resources extracted in the Caribbean include:

 Sugar cane: refined through manufacturing processes into grain sugar, demerara sugar, white
sugar, molasses, syrups, and sweeteners in food and drinks.
 Fish: made into ready-to-serve cooked dishes and restaurant food, as well as tinned and smoked
food sold through retail outlets.
 Alumina, cement, gypsum, lime, gravel, shale, silica and stone: these are all quarried in Jamaica,
and provide a healthy base for building and construction industries in Jamaica, other parts of the
Caribbean and beyond.

 Coconuts: grown throughout the Caribbean, they provide the basis for many products including:
 Coconut oil (used in cooking and in cosmetics)
 Coconut water (promoted as a healthy drink and a sports drink)
 Dried coconut (used in baking, e.g. as desiccated coconut)
 Coconut leaves (used as a roofing material)
 Coconut tree trunk (used as timber to make houses and bridges)
 Coconut "coir" - the fibre on the outside of the
 coconut (used to make ropes and doormats, as well as mulch and soil).
NOW TRY THESE

1. Can you identify any other natural resources that are plentiful in your home nation but missed from the
table on page 149?
2. Carry out some online research to find out about the mining of limestone and its use in the manufacture
of cement by the TCL Group of companies. These companies include Arawak Cement Company in
Barbados, TCL Guyana Inc. and the TCL Trading Company in Anguilla.
3. Identify the main national parks in your country or a neighbouring country. How big are these areas
and what is the major focus of each park? Explain how these national parks should be seen as part of the
production process in the way that they improves people's quality of life, as well as bringing in tourism
revenues.
4. Identify a natural resource in your country that is extracted through agriculture or mining. Then
identify all the different uses of this natural resource, and the manufacturing involved.

(5.3)
Differentiate between production and productivity

This unit will outline the difference between production and productivity.
 Production involves making resources more valuable. The diagram here shows the production
process, and how various business inputs are made into more valuable outputs.
 A number of operations (organised work tasks) are usually carried out to add value when
processing resources. "Operations management" is therefore the term that describes the process of
managing these activities.
 For example, a restaurant in Trinidad that serves chicken curry, rice and peas, will bring fresh
chicken, rice, peas, spices and other ingredients into the restaurant as the main raw materials.
Chefs then work with these materials to produce the final dishes. The chefs carry out operations
such as taking the ingredients out of the stores, cutting up and cooking the chicken and
vegetables, and putting the prepared food onto plates with roti and other accompaniments. The
customers make an order for food, which is then delivered to their tables or prepared as take-
away. The production process therefore involves converting the food materials into the finished
chicken-curry dishes.
KEY TERM

Production: The process of using materials (inputs) and transforming them in some way to produce goods
and services (outputs).

Productivity: A measure of how much output can be produced from a given level of input. A unit of input
is described as being productive if it can produce a relatively large output.

Production and productivity

 Production means making goods or services out of resources.

 Productivity is a measure of how much output can be produced from a given level of input, e.g.
how many garments can be sewn by a garment maker in one hour. A unit of input is described as
being productive if it can produce a relatively large output. Productivity increases when resources
are used well. High levels of output can be achieved by a relatively small number of staff when
the staff are working efficiently. The productivity of a company can be measured by the
following calculation:
  Measurements are often carried out to determine the productivity of particular resource inputs.
This is often the case with labour. For example, if a Honda car plant produces 500 cars per hour
with 1 000 employees, then the labour productivity would be 0.5 cars per hour (this figure
indicates the quantity produced by one worker):

If the number of cars increased to 600 per hour, productivity could be said to have risen to 0.6 cars per
hour:

There are several ways of increasing productivity. These include:

 Organising work more efficiently (for example, the layout of machines in a factory could be
improved to reduce wasted time).
 Using more productive resources (for example using more modern machinery or training
employees to work more efficiently).
 Using automation and computerisation. Many factories today employ robots and automatic
machinery (for example electronic eyes that check the quantity of fluid in containers and stop the
filling process when the containers are full).
 Using approaches that motivate staff to work harder (for example offering bonuses, job rotation
and job enrichment).

 In some areas of work - particularly service jobs - it is not easy to increase productivity in a
measurable way. Services often involve care and attention to customers, such as the work of
dentists, doctors and accountants. In these cases, productivity should be measured not just by the
quantity of work done, but also by its quality.

KEY TERM

Automation: The technology applied to producing goods without human input (although humans might
operate the control panels that monitor automatic production).

Computerisation: To use a computer to do tasks (such as carrying out calculations and planning
operations) that were previously carried out by people.

PRO TIP
Make sure you can distinguish between the term "production", which means the output produced, and
"productivity", which measures the output per unit of input. Rising productivity means that a company
can produce more with the same number of inputs.

NOW TRY THESE

1. The output of Better Bottling Manufacturers has increased from 100 000 bottles to 110 000 bottles this
year. The marketing manager says that this shows productivity has increased, and wants to put this into
some marketing literature. However, the production manager says that productivity has actually stayed
the same. What point do you think the production manager is trying to make?
2. In 2018, a company producing solar panels made 1 200 solar panels with 100 workers. In 2019, this
increased to 1 500 solar panels with 105 workers. Explain how production and labour productivity altered
between 2018 and 2019.
3. A company producing a variety of canned fruits and vegetables has been having problems with some of
its production lines because of power outages, and because the machinery is getting older and requires
more frequent repairs. It is also having difficulty recruiting skilled labour. What solutions can you put
forward which might enable the company to increase its productivity?

4. Business in action: How might it be possible to increase productivity in the following businesses and
government departments?
(a) A private school.
(b) The government's income tax collection department.
(c) A fish-frying business.

(5.4)
Explain the importance of productivity
  In the case study at the start of this chapter (page 146), we saw how the Guyana Rice
Development Board is carrying out research to increase the yield (productivity) of rice by
experimenting with new varieties, such as those that are more resistant to pests. National
governments are keen to increase productivity because it means that their country becomes more
competitive, producing greater and better output. Rising productivity leads to rising incomes and
rising export sales as well as more profits for domestic firms. Key government policy will always
relate to increasing the productivity of labour (making a country's people more productive).
 There are a number of ways of making labour more productive, therefore, increasing the
productivity of labour as well as the overall levels of production. These are discussed below.

Improving the labour supply

 Labour supply refers to the number of hours that the labour force is prepared to work at given
wage rates. Labour supply can be increased by raising wages. As wage rates increase then people
will be inclined to work longer hours to benefit from higher incomes. However, once their
income reaches a certain level they may prefer not to work any additional hours because they are
earning sufficient (through their now higher) wages and hence may prefer not to lose valuable
leisure time, which they are able to enjoy more because they can afford to engage with new
leisure pursuits (with their higher incomes).
 In examining labour supply, we need to consider not just how long people work but also how
hard and effectively they work. Labour productivity should increase when employees work
longer and harder. However, there is another ingredient to rising labour productivity: employees
should also work "smarter", for example they need to use their time more efficiently to produce
more. If an employer can get the workforce to work "smarter", this acts as motivation because it
is no longer necessary to work so hard or so long to get the best results. The table below shows
three ways to increase production and productivity.

KEY TERM

Appraisal: A formal evaluation of an employee's performance over a particular period.

Appraisal interview: A situation where an employee usually sits down with a line manager to identify
improvement targets and to discuss whether previous targets have been met.
Development: Individual improvement in a work context, where the employees are allowed to identify
ways in which they want to be helped to learn and to develop new skills and capabilities.

Human resources development

 Human resources are the employees who make up the workforce of an organisation. Human
resources development involves improving the contribution made by employees at work by
providing opportunities for them to become more effective and motivated. The human resources
department of a company will create systems such as appraisals and appraisal interviews to
identify ways in which employees are seeking personal development. They can then provide
employees with regular opportunities to take up learning and other development opportunities.
Better-trained workers tend to work faster and more efficiently.

At a nation-building level (country-wide), human resources development involves helping people to

become more effective – to achieve improved targets and results - through:

 An improved education system, where people stay in formal education longer, and are able to
obtain more qualifications.
 Improving the health system - for example, by updating hospital facilities and recruiting more
doctors - as a healthy population is a more productive population.
 Improving working conditions, so that workplaces are safer, healthier and more motivating. Key
variables include work temperatures, the number of accidents at work, the length of work breaks,
how flexible working hours are, etc.

There are a few ways that firms can improve the quality of the human resources they employ.

Examples of these would be:

 Training and education courses specifically designed to meet job requirements, so that employees
can make a better contribution to meeting the firm's objectives. These could be coupled with
 development opportunities for employees that would enable them to meet their own personal
objectives and aspirations.
 Health initiatives such as health insurance, safety training and recreational opportunities at work
(e.g. by providing employee sports facilities and rest areas).
 Improved working conditions, for example through offering longer breaks during the working
day or better maternity breaks.

Importance of a positive work ethic

 Productivity levels also depend significantly on the attitude that employees have to their work,
and how the work ethic varies between individuals. In July 1997, the CARICOM Heads of
Government sought to define the ideal Caribbean person at their meeting in Montego Bay.
 One of the key ingredients of such a person was that they should have a "strong work ethic". A
strong work ethic is central to effective business and nation building, as well as building a strong
Caribbean region. If people work hard for themselves and for others, they will be productive.

Use of capital to increase productivity

 In Unit 5.5 below (page 157) we examine the importance of capital. Capital relates to the
resources used by a business (such as machinery, equipment, computers, tools, etc.) to produce
goods. Capital can also be used to create other capital goods, such as machines and machine
tools. Using capital well enables labour productivity to increase. For example, using a more up-
to-date production line with automatic machinery at Grace Foods would enable employees to
produce more goods, and therefore increase labour productivity.

Land use and declining productivity in the region

 In some respects, human development has led to falling levels of productivity in the Caribbean
region. For example, studies such as the Census of Marine Life show that coral populations and
coral reefs have suffered from people living in close proximity to the reefs, resulting in a loss of
coral and reduction in fish populations (a decline in coral productivity). Similarly, deforestation
 has led to serious problems. For example, Haiti has been largely deforested as a result of nearly
all of the trees being chopped down to create charcoal cooking fires or for other uses. This loss of
trees reduces the land's productivity.
 In Barbados, water scarcity is a pressing issue. Barbados is one of the highest-ranking water-
scarce countries in the world, with agriculture and private use being the largest users of water.
The growing tourist industry also impacts substantially on water availability. Water use in
Barbados is greater than what is available naturally. This therefore impacts on productivity
because most industries require water, and a lack of water leads to an inability to produce to full
capacity.
 Another key issue for countries like the Dominican Republic, Haiti and Cuba is that electricity
outages occur fairly frequently. This is because the size of domestic demand is much bigger than
the ability of these countries to afford "sources of energy" (much of which are imported). Lack of
electricity leads to falling productivity because without power, most industries grind to a halt.
Land and resources need to be used sustainably and at a workable level, otherwise productivity
falls.

PRO TIP

Make sure you can explain how increased productivity benefits a specific country's economy, as well as
businesses within that country. For example, rising productivity makes a country more competitive,
therefore boosting export sales and helping to create more output and employment in an economy. Firms
benefit because they become more competitive, and are able to reduce costs relative to revenue. This
enables them to make more profit, and to plough some of the profit back into improving productivity still
further.

NOW TRY THESE

1. Labour is most productive when it is combined with other resources that are effective. Identify three
resources that can be combined to enhance the productivity of labour. In each case, explain how this
resource could be used to enhance labour productivity.
2. Identify two methods of increasing labour supply in a country that suffers from shortages of types of
skilled labour.
3. How can human resources managers help to make labour more productive?

4. Business in action: Do you believe that people in your country have a positive work ethic? What
evidence would you put forward to support your belief?

(5.5)
Explain the role of capital in production
  The term 'capital' typically refers to the machinery, tools and buildings that a business uses to
produce other goods. A capital-intensive plant or industry is one that uses a lot of machinery and
equipment, for example an automated car factory. Increased use of capital often means that a lot
more output can be produced, because capital can be substituted for labour. For example,
substituting a crop-cutting machine for men cutting the crop with cutlasses will hugely increase
how much can be cut.

Capital can be used in most industries to increase productivity and production. For example:

 Oil production in Trinidad has benefitted from deep-sea drilling using oil platforms out at sea.
The drill bit is lowered from an oil platform down to the sea bed, where it cuts through rocks until
deposits of oil and gas are found. The release of pressure brings the oil and gas to the surface.
From here, it is transported by oil pipelines to oil refineries. Platforms, drills, pipelines and
refineries are all examples of capital.
 Retailing is a capital-intensive business throughout the Caribbean. Large supermarkets and other
large retail stores require a lot of capital in the form of large buildings, large display units,
electronic point of sale (EPOS) technology, state-of-the art loading bays, and computerised
ordering systems. Of course, there still exist many smaller "mom and pop stores" which are less
capital intensive, but every Caribbean country has shopping malls and supermarkets that require a
lot of capital.
 Air transport is another capital-intensive industry. Large airport terminals have sophisticated
radar and landing facilities, conveyor belts, flight check-in systems and loading bays, as well as
large aircraft capable of intercontinental travel.

 Capital can be used to undertake production that labour would not complete in a timely manner.
Capital reduces the need for labour and enables work to be done far more quickly. Nowhere is the
contrast clearer than when comparing a laborer digging a trench with a pick-axe and shovel to a
machine operator using a mechanized trench digger; or when comparing the harvesting of crops
by gang labour to harvesting similar crops with a combine harvester.

KEY TERM

Oil platform: An offshore oil-drilling rig made up of a large structure, enabling the drilling of oil for
exploration and extraction purposes, as well as the ability to store and process petroleum.

Electronic point of sale (EPOS): A computerised system for recording sales in a retail outlet using a laser
scanner to read the barcode on a product.
KEY TERM

Mom and pop store: A small retail business that is typically family owned and run.

NOW TRY THESE

1. In addition to the industries listed above, identify two other industries and explain how capital is used
to improve production in these industries.
2. Some industries are described as being capital intensive and others as labour intensive. Can you
identify two capital- intensive industries in your country and two labor-intensive industries?

3. Business in action: Contrast production methods used in a specific industry in your country with
production methods used in the same industry in the United States. Which country uses the most capital-
intensive production methods? What additional capital is used in that country?

(5.6)
Differentiate among types of capital

 The term "capital" is used in a number of senses. In Unit 5.5, we identified capital as the
machinery, tools and buildings that a business uses to produce other goods. We call this type of
capital "physical capital". Capital can also refer to "financial capital", for example the money
(finance) that is used to set up and run a business. All businesses need financial capital if they are
going to pay for physical capital and other resources.

Physical capital can be further divided into fixed capital and working capital.

Fixed capital

 Fixed capital refers to durable capital equipment that can be used repeatedly in the production
process. For example, on a farm the fixed capital would include tractors, combine harvesters,
 storage sheds and any form of machinery that is used for production. In a retail outlet, the fixed
capital would include the shop buildings, as well as fixtures and fittings.

Working capital

 Working capital refers to the capital needed to pay for the day-to-day operation of a business. To
calculate working capital, a business must calculate the difference between the current assets
(what the business is owed, which can be converted into cash in under one year), and the current
liabilities or debts (for example debts that need to be paid in under one year).

KEY TERM

Fixed capital: Durable capital equipment that can be used repeatedly in the production process.

Working capital: The capital of a business used to finance day-to- day transactions (often described as
current assets minus current liabilities).

Current assets: liquid assets that can be turned into cash in under one year.

Current liabilities: Debts that must be paid within a short period, for example under one year.

Inventories: Goods and materials that a business holds for the purpose of reselling them.

Trade receivables: Debts owed to a company by its customers for goods supplied or services rendered.

Trade payables: Sums payable by a company to its suppliers for goods delivered or services consumed.

The formula for working capital is:

working capital = current assets minus current liabilities

Current assets consist of:

 Inventories (the stock that a company holds in order to sell)

  Trade receivables (many businesses supply goods on credit, and will expect to receive payment
for those goods in the near future)
 Cash.

Current liabilities consist of

Trade payables (many businesses buy goods on credit, and will need to pay for these in the near future).

 For example, Joanna owns a small ice-cream manufacturing company and sells her ice cream to
small retail stores. Her current assets are the stock of ice cream that she holds in a freezer
warehouse, which is waiting to be supplied to retailers; trade receivables in the form of money
owed to her by retailers who have bought on credit; and the cash in her cash till and in her bank
account. Joanna's current liabilities consist of invoices that she has not paid yet to a packaging
manufacturer, from whom she has purchased packaging in which to wrap her ice cream.
 If a business is going to continue to have enough working capital to trade, it is essential that the
business has enough current assets to pay current liabilities. Companies need cash (working
capital) in order to buy stocks and raw materials, as well as to pay wages and company bills (such
as energy and transport bills).

In summary:

Venture capital

 A third type of capital is venture capital. Venture capital is money that is provided by investors to
"start-up" businesses. These investors are often referred to as venture capitalists. Venture capital
benefits a start-up by providing the funds - and sometimes the experience - of an investor.
(Venture capital may also be given to a small business to help it to grow, not just because it is a
new start-up.) The venture capitalists stand to gain because they will only invest if they think they
can make a good return from the investment. The start-up entrepreneur is likely to work hard, and
may have spotted a gap in the market that will yield a good return.
NOW TRY THESE

1. Why does a business need to have both fixed capital and working capital?
2. Give three examples of items that would be fixed capital for a bottling company, and three that would
be current assets.
3. Why might it be important for a business to have more current assets than current liabilities?
4. Why does a business need working capital?

5. Business in action: Calculate the working capital of Fry Fishery. Fry Fishery has bought a catch of fish
for $1 000, which it needs to pay for by the end of the week. Fry Fishery currently holds $500 in its tills
and has $800 in a cash account at the bank. Fry Fishery holds a stock of $500 worth of fish in its freezers
that is waiting to be cooked. It has also supplied $400 worth of cooked fish to the next-door restaurant,
which will be paid for tomorrow.

PRO TIP

A key feature of batch production is that every now and then, you have to stop the production process and
change over to a new batch (such as white bread instead of brown bread), using similar equipment. Many
manufacturing and service organisations operate in this way. For example, in an electronics factory, the
production line may be set to produce one type of electronic circuit board for the first two hours of the
day. Then the machine may be reprogrammed to produce another type of circuit board for the next two
hours, and so on.

(5.7)
Classify the different types and levels of production
There are four main methods of production that can be applied to organising production processes, as
outlined below.
Job production
 Job production involves a one-off job. For example, the historic Chamberlain Bridge in Barbados
was rebuilt between 2005 and 2006 using fibre reinforced plastic, which is lighter and longer-
lasting than previously used materials. Building the bridge was a one-off project because the
bridge had particular dimensions due to the size of the channel over which it crossed, and the
rebuild had to maintain the heritage of the earlier bridge built in the 19th century. It was a unique
job and was therefore not going to be reproduced anywhere else.
 One-off jobs are more expensive to plan, prepare and implement than mass production methods.
Typically, they will involve one or just a few customers, and one or just a few manufacturers.
One-off jobs take longer than most other forms of production.

Batch production
  Bakeries are a common sight in urban areas in the Caribbean. Bread, bagels, cakes, patties and
other products will be produced either in a retail bakery, or in a large bakery and then transported
to retailers for sale. In batch production, a number of identical (or similar) items will be produced
in a set or batch. The items do not need to be for any specific customer, but are made at regular
intervals in specific quantities. Batch production involves work being passed from one stage to
another, and each stage of production is highly planned. For example, in a bakery, the equipment
might first be prepared to bake white bread, then brown bread, then rye bread. Alternatively, it
might be prepared to produce different types of cookies in separate batches.
Flow production
 Flow production involves products or services that are passed down a line of production. The
production process is a repeating one, with identical products going through the same sequence of
operations. Bottling operations and soap manufacture in the Caribbean fit into this type of
production.
 Airports also operate a form of flow production. Passengers arrive, check in, have their bags
processed, go through immigration, wait in the departure lounge, and so on. The sequence is
always the same. Air travel is therefore a form of mass production.
 In continuous flow production, products are created 24 hours a day, using automatic equipment in
a standardised way. An oil refinery, for example, works on a continuous flow basis, with petrol
being refined around the clock. While this production method may be ideal for some types of
product, a disadvantage is that there are many products that consumers prefer to be more
individualised rather than mass produced.

KEY TERM

Lean production: A systematic set of processes for eliminating waste from manufacturing and other
forms of production. Waste is defined as any activity that does not add value in terms of what the
customer wants from the product. The challenge is to identify any processes that currently take place in
production that waste time and resources, and then to cut these processes out.

Lean production

 Lean production has also become popular in the Caribbean. The idea of "lean" stems from
Japanese manufacturing, and is particularly associated with Toyota. At Toyota, the emphasis is
on teams of employees working together in small groups to identify ways of improving
production. These groups are called quality circles. Quality circles seek to determine ways of
identifying waste in production, for example processes and activities that do not add value to a
product. Lean production aims to cut out these wasteful activities. The emphasis in lean
manufacturing is in getting workers to work "smarter".

Types of production
  Primary production consists of extracting natural resources. These natural resources can then be
used in secondary production, which consists of manufacturing (making) goods, as well as
construction (for example, building bridges, offices and other buildings). Primary-production
resources can also be used in tertiary production, which consists of services in the form of direct
services to people, and commercial services to businesses.

There are four main types of production activity, outlined below.

Extractive (agriculture, mining and quarrying, fishing)

 An extractive industry is any form of industry that removes (takes out) resources supplied
naturally, for example extracting minerals or shale gas from a bed of rock, or catching fish from
the sea.
 Vegetables grown in the Caribbean include tomatoes, carrots, lettuce, beets, pumpkin, cucumber,
cabbage, okras, peppers, yams, sweet potatoes, eddoes, cassava and beans. Caribbean countries
also produce a variety of fruits including bananas, carambola, grapefruit, guava and mangoes. In
addition, most Caribbean countries have a dairy industry, which includes the rearing of pigs (for
pork), cows (for beef), chicken, turkey, lamb and goats.
 There are many other resources found in the Caribbean such as sugar cane, bauxite, spices, oil,
coffee, lumber, etc. All of these are extractive, and are grown or extracted in order to be used as a
primary resource.
 The term "mining" generally refers to sinking a shaft into the ground in order to extract coal,
gypsum and other minerals, as well as to extract metals such as tin. A mine is thus usually
referred to as a structure with a roof. However, the term "open-cast mining" refers to situations
where there is no roof and minerals are extracted with mechanical digging equipment.

 A quarry is a site for extracting minerals and rock that lie on the surface, and typically refers to
the extraction of sand and gravel. These are known as aggregates and are used widely in the
construction industry. In Barbados, the focus is on quarrying rather than mining. A number of
raw materials are quarried for the construction industry, including limestone, sand, clay, gravel
and coral.
 Off the coast of many Caribbean countries, fishermen catch barracuda, kingfish, snapper, bill
fish, tuna and other varieties of fish. The fish are then cooked by people in their homes, or in
restaurants and other kitchens. These fish are an important natural resource in Caribbean
countries. The Caribbean therefore has a strong extractive sector, consisting of agriculture
(mainly fruits and vegetables, with some animal production), fishing, and mining and quarrying
industries.

Construction (building)
  Construction refers to the erection of all types of building and other infrastructure, and usually
relates to large structures such as houses, office blocks, factories, roads, railways, transport
terminals, bridges and ports. Construction activity is usually an indicator of how well an economy
is doing. When an economy is growing, the amount of people employed in the construction
industry increases, to create the buildings and infrastructure needed for growth. When an
economy runs into decline, the number of people employed in construction is cut back, and some
construction companies run into financial difficulties.
 In Trinidad and Tobago, the construction industry accounts for about 16 per cent of the entire
labour force and is responsible for about 7 per cent of all output (2015 figures).

Manufacturing (assembling, refining)

 Manufacturing is concerned with making finished products from raw materials and semi-
manufactured goods. For example, the Agapey chocolate factory in Bridgetown, Barbados
produces high-quality dark chocolate from cocoa beans grown in the Caribbean. Other examples
include the following.

 On an international level, we tend to associate large-scale assembly production lines with

automobile manufacture in the United States, Europe and South East Asia, as well as countries
like Brazil.
 Automated production lines can work for up to 24 hours a day, and levels of production are
related to the demand for the product. When demand increases, the production line needs to run
quicker and for longer.

 There is relatively little land for the huge sites required for such Factories
 There is relatively little domestic demand compared with huge markets such as China and the
United States
 There is relatively little skilled labour because urban populations are much smaller than those in
large countries such as China, India and the United States.

 However, where there is a Caribbean product with a mass market, there is scope for large-scale
automated production. Perhaps the best example of this is the Red Stripe production plant in
Jamaica, which is capable of producing 5 million cases of beer annually.
 Another good example of Caribbean manufacturing is oil refining. Guyana has large reserves of
oil and natural gas. As a result of the increased extraction of these resources, the country has been
building large oil-refining plants. At the same time, Trinidad, which until recently was the
Caribbean's major oil-refining nation, has started to close down refineries as they have not been
making enough money.
Service (transport, communication, tourism)

 A service (tertiary) industry provides a direct service to people (for example a taxi service, a
hairdresser's, a healthcare facility, insurance and personal banking, etc.). A commercial service
provides a service to a business organisation rather than an individual, such as business insurance,
the commercial transport of goods (by sea, land and air), and banking (e.g. the handling of
business accounts).
 Transport links are fundamental to any economy. For example, the bus service in the Caribbean
enables many employees to get to work, while commercial fleets of lorries move raw materials,
semi-manufactured goods and finished goods to and from centres of manufacturing. Air transport
enables rapid delivery, particularly of lighter and more valuable products. Bulkier and less-
valuable products can be transported by sea, and there are a number of high-quality ports in the
Caribbean that facilitate the smooth movement of such goods, for example the ports in Nassau
(the Bahamas), Port of Spain (Trinidad), Suriname and St Lucia.
 Communications refers to telephone, Internet, post, radio and television services. It is the process
of connecting people (e.g. by telephone) and places (e.g. by air travel). Communication is a two-
way process where the participants share information, news, ideas and thoughts. While telephone,
post, radio and television are long-established industries, there have been rapid advances in
telecommunications since the late 1990s.
 Communication services are a key aspect of the Caribbean economy, and telecommunication
links are particularly well developed. A communications service provider (CSP) is a service
provider that transports communications electronically. The Caribbean Telecommunications
Union (TCU) is an intergovernmental organisation driving cooperative improvements in the ICT
(information and communications technology) sector.
 The development of cellphone communication has helped to open up the Caribbean economy to
rapid contact systems, as has the development of broadband. The key providers in the mobile
market include Flow and Digicel. Communication is both a business in itself - providing
employment and incomes - as well as a key service for other businesses, enabling them to reduce
costs and to reach wider markets.
 Tourism is another important service industry in the Caribbean, providing employment for many
people. Figures for 2017 show that this industry was responsible for 750 000 jobs in the
Caribbean area and created $60 billion worth of revenues, and these figures continue to grow.
The tourism industry involves four main areas:

 Accommodation (e.g. hotels)

 Transport (e.g. taxi and bus rides)
 Entertainment (e.g. festivals, sporting events and dining)
 Attractions (e.g. visits to sites of historic interest).

 This then generates a range of additional service expenditure, such as on food and beverages
(served in cafes and restaurants), and on products sold in shops.
 Key to the development of the tourism industry is a sustainable approach, so that the number of
visitors does not impact negatively on the Caribbean's natural resources, for example by
contributing to the destruction of coral reefs and the pollution of the seas.
PRO TIP

Try to identify local examples (from your own country) of different types of production, for example in
manufacturing, construction and service. These examples can be used in your exams.

Levels of production

As societies develop, they go through four recognized levels of production, as outlined below.

Subsistence

 In Unit 5.1, we saw how people living in simple societies are often self-sufficient and usually
agrarian (they rely on agriculture). In subsistence production, the level of production is only just
sufficient to meet the basic needs of the local population. The early Carib people in areas like
Dominica would have lived in this way, gleaning enough resources from the natural environment
to get by, as well as making tools for hunting and basic farming. There would have been some
examples of bartering by neighbouring groups of people.

Domestic consumption
  In the next stage of production, the emphasis is primarily focused on domestic consumption, i.e.
providing sufficient goods to meet the needs of people within a given territory or country. A
society focused on domestic consumption might rely on pottery, basket-weaving, food production
and some mining of minerals. In this stage of production, a country would look to its own internal
resources to provide most of the products used. Benefits of this stage of production include self-
sufficiency, the creation of employment and the saving of foreign exchange.

Surplus

 As industry becomes more efficient, then surpluses of products start to develop, and some
members of society are able to organize production into small factories and plantation agriculture.
 Entrepreneurs start to look for ways of benefiting from these surpluses, by extending the scope of
the markets in which they operate. This inevitably leads to the next level: export production.
 There are many benefits to a surplus industry, such as the earning of foreign exchange, the
development of large-scale production, employment and trade relationships.

Export

 With the better organisation of production and a more intensive use of capital, it becomes
possible to export goods and services. In the Caribbean, this might have originally involved the
export of goods between Caribbean countries, but this would have rapidly developed to cover a
much wider area, for example the export of sugar, bananas and other cash crops to Europe, South
America, North America and beyond.
 Today, all Caribbean countries export some of their output. Tourism is a major export, as well as
natural resources such as oil (from Guyana), bauxite (from Jamaica) and rice (from Guyana).
Modern service industries also provide major exports, such as the export of information
technology and telephony services (from Barbados), offshore banking (from the Bahamas and
Cayman Islands etc.) and healthcare (from Cuba).

KEY TERM

Unit cost: the cost of producing a single (one) unit of output. It can be calculated by dividing the total cost
of producing a given level of output by the number of units produced. So for example if a business
produces 1,000 units for a total cost of $110 000, the cost of producing each unit (unit cost) would be $10
each.

PRO TIP

The key to understanding economies of scale are that although large firms have higher costs than smaller
ones, these costs are spread over a much larger output. The result is that the large firm has lower unit
costs, for example the cost of one unit of production, or the cost of marketing or selling one unit.
Economies of scale

 As businesses get bigger, they are said to operate on a larger scale, and therefore, benefit from
economies of scale. Economies of scale are the advantages that a larger business has over a
smaller one in terms of being able to produce a larger output at a lower unit cost. In other words,
the big business produces more and the cost of producing each unit is lower. For example, the
Red Stripe plant in Jamaica produces beer on a very large scale to reduce the cost of producing
each unit (i.e. each bottle of beer).
 The key aspect of economies of scale is that it enables a business to produce a larger output at a
lower unit cost. The unit cost is the cost of producing each single unit of production (for example
every single bottle of beer). There are many advantages that a large firm has over a smaller one,
as outlined below.

Technical economies of scale

 This is where more effective techniques are used to produce goods, such as the use of automated
machinery for mass-production purposes. In a Red Stripe plant, electronic eyes are used to scan
bottles to check they have been filled to the correct level. Automated machinery then lifts, moves
and packages bottles automatically. Technical economies come about because a firm is able to
afford to employ better and more effective machinery, equipment and buildings that are
customised to the needs of production.

Commercial economies of scale

 Commercial economies refer to advantages in the buying and selling of goods, raw materials,
parts and other purchases. A large firm will often buy in bulk from suppliers; therefore, it will be
able to get a discount on its purchases. It can also transport goods in bulk, hence reducing unit
transport costs. A large firm can reduce selling costs, as selling in large quantities requires fewer
sales staff. Large businesses today can also use websites to sell their goods directly to customers,
which reduces the need for sales staff even more.

Financial economies of scale

 Large firms can raise finance cheaper than smaller firms. For example, a large firm's reputation
may enable that firm to get a bank loan for a lower rate of interest than a smaller firm, as it
presents less of a risk to the lender.

Marketing economies of scale

 Marketing costs are lower when you produce on a large scale. For example, the unit cost of a
marketing campaign that reaches millions of customers is likely to be lower (per unit of sale
made) than the unit cost of a much smaller marketing campaign runs by a small firm.
Information technology economies of scale

 Large firms can use information technology at a far lower unit cost of sale than a small firm. A
large firm can create extensive websites and customer databases that cater for a large number of
customers. Although these websites and applications are expensive to set up and buy, they can
reach very large numbers of browsers and users, and thus potential customers.

Management economies of scale

 A larger firm can employ a greater number of specialist managers. This enables greater efficiency
because of the extra expertise that these additional managers bring to the firm.

Risk-spreading economies of scale

 Whereas a small firm will produce or sell a narrow range of products, a large firm is likely to
produce and sell a far wider range. Although some products will fail, others will succeed. Instead
of putting all of its eggs in one basket (all of its risk on one product), the bigger firm places its
eggs in lots of baskets (spreading the risk over multiple products). As a result, it is spreading its
risk more widely.

Diseconomies of scale

 If a firm becomes too large, it can suffer from diseconomies of scale. Diseconomies of scale
results in increasing output or sales, but only at the expense of higher unit costs. Reasons for
diseconomies of scale might be that a firm has become too large to manage effectively, or the
scale of production is greater than the demand for goods. Problems that arise from diseconomies
of scale include ineffective communication, staff inertia, losing touch with customers, etc.

NOW TRY THESE

1. Classify the following according to whether they are extractive, construction, manufacturing or service
industries and occupations: quarrying, food canning, insurance, railway building, dog walking, fishing, oil
refining, house building and air transport.
2. Identify economies of scale that might be gained by a huge mass-production bottling plant compared
with a much smaller bottling plant.
3. How might diseconomies of scale occur when a small family hotel expands by buying several larger
tourists hotels?

4. Business in action: What is the largest company close to where you go to school or college, or where
you live? Outline some of the economies of scale that this enterprise is likely to benefit from because of
its size.
(5.8)
Describe the characteristics of cottage industries
A cottage industry is one that takes place in people's homes. The key distinguishing features of this type
of industry include the following:

 Home-based: people can work from home rather than in a factory.

 Mainly manual: typically, people will work with their hands, for example by sewing, weaving,
making carpets, etc.
 Small-scale: the scale of production will be small in contrast to factory production (where large-
scale mass production machinery is likely to be employed). Therefore, the machinery and
equipment used will also be relatively small-scale, for example a sewing machine or a hand loom.
 Uses local raw materials: materials will often be sourced locally so that they can be transported
easily to family homes.
 Uses family members as labour: the family will often work together to produce goods, and skills
will be taught by older members of the family to younger ones.

Examples of products that are commonly produced by cottage industries in the Caribbean include the
following.

 There are many benefits of cottage industries to the economy. These include the use of local raw
materials, the creation of local incomes, and boosting tourism (for example by providing
souvenirs).
 Some cottage industries go on to develop into much bigger enterprises, producing on a larger
scale. A good example of this is the business set up by Levi Roots. Levi learned how to mix
Caribbean flavours, herbs and spices from his grandmother in Clarendon, Jamaica. Later, the
family moved to Brixton in London, and Levi and his children would mix spices in their kitchen
to sell at carnivals and fairs. Levi Roots went on to secure finance for his business, which is now
a household name in the United Kingdom and beyond, selling his well-known Reggae Reggae
Sauce alongside other varieties of food and spice.

PRO TIP

Make sure you can give an example of a cottage industry, such as weaving baskets or pickling vegetables
in a home setting. Be able to identify the characteristics of these cottage industries.
NOW TRY THESE

1. Identify five features that are typical of the cottage industry.

2. Where would you typically find a cottage industry located, and what types of people are most likely to
be employed in cottage industries?

3. Business in action: Identify a cottage industry that operates in your neighborhood. Who set up the
cottage industry? What does it produce/sell? How Is it organised?

(5.9)
Outline the functions of small businesses

Small businesses play an important part in nation building and serving the needs of people in Caribbean
countries, as well as the needs of people across the globe.
 The problem with analyzing the role of small businesses in the Caribbean is that there is a lack of
research into small business, and no clear example of a typical small enterprise. A report
produced by the Caribbean Development Bank into micro/small/medium-sized business in the
Caribbean, called Towards a New Frontier (2016), noted that across the Caribbean there are at
least 35 definitions of what constitutes such enterprises in 23 different Caribbean territories.
These definitions focus on the assets to which these enterprises have access, the employment they
create, or their turnover (sales). The report noted that the most common feature used to define
MSMEs (micro/ small/medium-sized enterprises) is size.

The report recommended the creation of a Caribbean-wide definition, based on the following:

 A micro enterprise has between 1 and 5 employees

 A small enterprise has between 6 and 15 employees
 A medium enterprise has between 16 and 50 employees.

The report identified some of the problems facing such enterprises, including:

 A lack of clear government plans for the development of small businesses (with some exceptions,
for example Trinidad and Barbados)
 A difficulty in accessing finance, because banks see small enterprises as constituting high-risk
loans.

KEY TERM

MSMEs: micro/small/ medium-sized enterprises. The following terms relate to the different ways that an
MSME can be defined.
The assets method: A calculation totaling the value of the things that a business owns or is owed at a
given moment in time.

The employment method: A calculation using the number of employees of a company. This is a simple
method and the most widely used.

The turnover method: A calculation of the sales value of a business in a given period of time, for
example one year.

There is typically a pyramid of enterprise sizes in most countries, with micro enterprises being the most
numerous, and large enterprises being the least numerous.

 A few agencies have been developed to foster the growth of small businesses in the Caribbean.
These include the Jamaica Business Development Corporation (JBDC), the Small Business
Association of Jamaica (SBAJ), the National Entrepreneurship Development Company (NEDCO)
in Trinidad, and the Institute of Private Enterprise Development (IPED) in Guyana.

Small businesses perform many functions, as outlined below.

Creating employment

 MSMEs provide employment for a large number of people in urban and rural areas. International
comparisons show that the Caribbean region has a relatively low level of MSME density
compared with other areas, but the numbers are rising with increased prosperity and development.
Small firms provide work in many industries, for example:

 The hotel and catering industry

  Small-scale food and drinks manufacture
 Farming and fishing
 Retailing (small shops and street vending)
 Printing and graphic design
 Education
 Textiles
 Building and construction
 Electrical work and plumbing
 IT and website design.

Small enterprises provide an environment for entrepreneurs to learn new skills, and some eventually go
on to set up or run much larger businesses.

Providing services

 MSMEs provide services for larger firms as well as providing services that large firms do not
want to provide themselves. For example, cleaning service companies will provide cleaning for
factories and offices. Catering companies will provide onsite catering facilities for large
companies, taking orders in the morning and then delivering the food at midday or whenever
required. A large company might contract out many non-core functions to smaller companies, for
example taking corporate photographs, repairing company machinery and equipment, or
providing medical services for workers employed by a large company.

Catering for niche markets

 A niche market is a small segment (component) of a larger market. Demand may be relatively
small and specialised in a niche market, therefore a large firm may find that demand and potential
sales are too low for it to target the market.
 A good example of an entrepreneur who spotted a niche market is the Jamaican entrepreneur
Cheryl Holdsworth. Cheryl was seeking natural products for her own diet. She developed the idea
of nut and seed butters that could be sold in health-food stores. She set up her company Cher
Butters in 2013. This is the only Jamaican company that manufactures seed butters such as
almond butter, cashew butter and sunflower seed butter, without the use of hydrogenated oil or
palm oil.
 These products are cheaper than imported products and are more natural as well. Cheryl is now
looking to export her product range so that she serves not only the domestic market. She has
effectively secured a niche outside of those areas covered by large companies.

NOW TRY THESE

1. What is a small business? Why do you think there are different ways of defining what a small business
is?
2. Why are there so many opportunities to set up a small business? Why might there be more
opportunities to set up a small business than a large business?
3. Why might a business want to stay small rather than expand?

4. Business in action: Identify a business in your area that has found a niche market to exploit. What is
that niche markets? What benefits are there to the firm operating in a niche market rather than a larger
market?

(5.10)
Discuss the advantages and disadvantages of small business

Examples of the advantages of small business

Small businesses benefit the economy and help nation building in a few ways, as outlined below.

Small businesses generate employment and incomes

 Most people in the Caribbean (around 70 per cent) live in urban areas, i.e. areas with a higher
population density. However, the percentage of those living in rural areas vary from country to
country. For example, most people in Montserrat and St Lucia live in rural areas. In contrast, 61.7
per cent of the population of Guyana lives in Georgetown, and there are similar figures for
Kingston (Jamaica) and Port of Spain (Trinidad).
 In rural areas, most people are employed in jobs in agriculture or tourism. There are more men
than women living in rural areas (many of whom are working in agricultural occupations), and
there are high levels of youth unemployment. Small businesses provide an opportunity for people
to earn incomes to support themselves and their families. Setting up an enterprise can be a way of
escaping poverty. In the Caribbean, average incomes are lower in rural areas than in urban areas,
therefore setting up an enterprise in a rural area can be a way of earning extra income.

KEY TERM

Necessity entrepreneurs: People who become entrepreneurs because they need additional income to get
by. Often, they will run a small business enterprise from home as well as having other jobs working for
someone else.
  In the Caribbean there are high numbers of female entrepreneurs in rural areas, although some of
these are described as necessity entrepreneurs, for example they set up an enterprise toearn
sufficient money to feed the family. Typical lines of business for female entrepreneurs are food
processing, selling fruit and vegetables, selling haberdashery, garment construction, hairdressing
and catering.
 Cottage industries are particularly important because they require little capital and can rely on
manual labour working from home, typically making up personal orders for other people.

Small businesses increase competition for larger firms

 Small enterprises compete with larger firms, and a few small firms eventually grow to become
large enterprises. Small firms are particularly competitive in areas like website design, IT
products and services, electrical and plumbing work, and also in retailing. The existence of the
MSME sector means that customers have alternatives to large enterprises where prices may be
higher.
 In the early days, it pays to be small. This is because small-business owners learn how to run and
manage a business, make decisions, access capital, and work out what products to supply. They
therefore build up a lot of general experience, which someone inside a bigger business may lack
because they specialise too much in one area.
 Small businesses can supply a local market, for example a local corner shop, restaurant or
hairdresser. A small business finds out what local customers want and the level of service they
require. This may give small businesses an advantage over bigger businesses that are supplying
the same area.
 Small business provides essential components and supplies for larger businesses. This enables the
larger businesses to focus on what they do best. For example, small businesses might provide
advertising, marketing and packaging support for larger businesses, or make sub-assemblies for
larger companies.

Small businesses introduce new products and ideas

 Being Entrepreneurial often involves coming up with new ideas. For example, in Unit 5.9 above,
we saw how Cheryl Holdsworth developed new butters. Her story has been repeated throughout
the Caribbean where entrepreneurs have created products and ideas such as new Caribbean food
and drink flavors, green technologies, IT applications, engineering products, recording studios,
surfboards suitable for Caribbean waters, and many other products.
 Event planning and management is a good example of Caribbean innovation. Many small
enterprises in countries like Barbados, Trinidad and Jamaica have been established to organise
events, or handle aspects of event management such as transport to locations, management of
lighting effects, provision of music and photography, etc. These entrepreneurs are particularly
creative in providing new ideas and solutions to the many demands for event management,
including weddings, parties, conferences, exhibitions and sporting tours.
 There may only be limited demand for a small firm's product. An example might be a supplier of
specialist medicines for patients with rare diseases. As there is only limited demand, a large
business would have to diversify and offer different products in order to be viable. Small firms
 are also particularly good when personal service and attention to detail are required, for example
in hairdressing or wedding planning.

Examples of the disadvantages of small business

The business lacks expertise in certain areas

Running a business requires expertise in a wide range of areas, some of which are shown in the diagram
below.

PRO TIP

If you were in charge of the loans department of a bank, would you want to lend to a small business,
knowing that it could fail at any moment?

 Of course, the business owner may be able to hire a limited number of employees who have some
of this knowledge, or access advice and help from outside consultants, but very often this will
need to be paid for.
Owners find it difficult to source finance

 Financial institutions such as commercial banks are very cautious about how much they lend, and
to whom they lend. Because small firms only have limited assets to put forwards as collateral
against a loan, it is more difficult for them to raise finance. Small businesses may also have to
pay higher interest rates to secure finance (compared to a large organisation with an established
financial reputation).

Limited ability to service customers

 You can only service the needs of multiple customers if you have the resources to do so, such as
the necessary machinery, vehicles, labour, management, etc. For example, a small legal firm will
only be able to take on a relatively small number of clients. A dentist with only two dentist's
chairs can only service two customers at the same time. A taxi firm with only three cars can only
take on three jobs at a time, etc. A small firm has a limited production capacity and will be
unlikely to compete with larger firms around the world.

No benefit from cost advantages

 Small enterprises are not able to benefit from the cost advantages (known as economies of scale,
as described on page 166) from which large-scale producers benefit. While a small, local
company might be able to supply local customers with lemonade, it would not be able to compete
nationally or internationally with a huge manufacturer.

No access to research and development facilities

 Research and development are crucial to modern industries such as pharmaceuticals and IT
applications. This research and development enable breakthroughs in technology and product
innovation. Very few small firms have access to the research and development facilities that large
firms have, which impacts on the development of new products and ideas.

Less well known

  Small firms are less well known than larger firms because they have smaller advertising and
marketing budgets. This means they have a smaller potential customer base.

NOW TRY THESE

1. Identify some small businesses in your area. If possible, interview the owner of at least one of these
enterprises to find out the following.
(a) When the business was set up.
(b) What the motivation was for setting up the business.
(c) How many people it employs.
(d) What the aspirations of the entrepreneur are. For example, does he or she want to increase the scale of
the business?
2. Give examples of situations where small businesses supply local needs in ways that a large business
might not.
3. Give examples of how small businesses might be able to develop, and have developed, new ideas.
4. Who or what is a "necessity entrepreneur", and what contribution do they make in supplying goods that
people need?

5. Business in action: What contribution do small businesses make to the economy of your country? Give
some examples of specific businesses and how they contribute.

PRO TIP

Make sure you can explain how small firms help a country/ nation, for example by providing work for
others (Particularly in rural areas), and how small firms are also beneficial to their owners, for example by
providing a source of income to the entrepreneur and the opportunity to work for themselves.
(5.11)
Explain how a business grows internally and externally

 Businesses may be able to gain advantages over competitors by growing, as they may be able to
cut costs and win a greater share of the market. By growing they may also be able to develop new
products or sell to new markets. Growth may be internal (inside the business) or external (joining
together with other businesses).

Examples of internal growth

 "Organic growth" takes place within a business. Money to finance the expansion comes from
either reinvesting the company's profits back into the business or asking the business owners to
put in more capital (i.e. the money comes from within the business).
 Many small businesses grow organically in their early years. This is because the owners do not
want to risk borrowing money from outside the business. However, growing organically can be a
slow process. Once organic growth has reached a certain point (for example the owners have put
in as much capital as they are willing to, or the maximum number of profits have been
reinvested), then internal growth often takes place by investing in new products or selling more of
the company's existing products. The following are some examples of internal growth.

Opening other outlets

 Most well-known restaurant and hotel chains, as well as retail outlets, start out from a single
premises. The idea is then "rolled out" (introduced) to multiple outlets under a single ownership.
 For example, Sandals Resorts, which are spread across the Caribbean today, were created by
entrepreneur Gordon "Butch" Stewart. He originally set up a single hotel in Montego Bay,
Jamaica, before going on to spread the beach-resort concept across the Caribbean. This started up
as a small business (one hotel) and now consists of many leisure and hotel complexes in prime
locations across the Caribbean.

Employing more workers

  If a company wants to grow, it will often take on more staff to deal with the increased level of
business. A retail store may take on more shop staff to serve customers, and a restaurant chain
may employ more kitchen or service staff. As companies grow, they will also be able to take on
more specialist managers who can perform specialist functions such as managing sales and
finances and organising different areas of production.

Increasing capital

 A key aspect of growth will be the acquisition of more financial capital in order to invest in better
resources and equipment. Money for expansion can come from ploughing back (reinvesting)
profits, or from borrowing from financial markets such as banks and investors, often using some
of the business's assets as collateral.

Establishing e-commerce

 Creating an online trading platform such as a website enables small businesses to expand
organically to a potential worldwide market, without having to open outlets around the globe.

Franchising and outsourcing

 Franchising is when well-established business allows others to use its business idea, format, logo
and products (for a share of the profits). For example, KFC is a fast-food franchise that offers a
number of franchise opportunities in countries like Barbados and Trinidad and Tobago.
 Outsourcing is when a business contracts out some of its work to an outside supplier, who will
then make goods or provide a service on behalf of the business. Outsourcing makes it possible for
a business to grow quickly at low cost, partly because managing tasks is done by people external
to the business.

Examples of external growth

 External growth involves the takeover of another business, a merger with another business, or the
creation of a joint venture.
 Businesses can take over other companies by purchasing most shares in them. They can merge
with another company by joining together the two concerns as a single entity, usually with new
shares being issued for the new company. Businesses can also grow by creating a joint venture - a
new enterprise set up by the two companies concerned.

Joint ventures

 A good way to enter an overseas market is to form a joint venture with a local partner. A joint
business is set up between the two companies. Many American and European companies have
 formed joint ventures with a Caribbean partner. The local partner will have a lot of contacts with
government officials and business people in the home market. The local partner will also have a
good knowledge of local tastes and preferences.

The table below outlines some joint ventures in the Caribbean.

Mergers

 A merger occurs when two businesses combine to form a single company. The existing
shareholders of both businesses retain a shared interest in the new business.
 For example, in 1998, Exxon and Mobil signed a merger agreement to form a new company
called ExxonMobil, creating one of the largest oil companies in the world. The benefits of this
merger stemmed from the ability to cut out the wasteful duplication of activities, for example in
oil exploration and the laying of undersea pipelines. Through the merger the new company was
able to lay off some workers who were doing similar jobs, leading to cost savings.

Takeovers/acquisitions

 An acquisition occurs when one business gains control of part of another business. A business
may be prepared to sell off one of its divisions that it no longer wishes to keep.
 To take over another company, one business will buy up a majority or all the shares in the
business it wants to take over. It may offer the shareholders in the company being acquired shares
in the new business.
 A good example of the acquisition of other companies through a takeover process involves the
Republic Bank of Trinidad and Tobago. Until 1981 this was part of Barclays Bank (a UK-based
bank), but in 1981 it became independent and started to expand in the Caribbean. As well as
having branches in Trinidad and Tobago, Republic Bank has branches in Grenada, Guyana and
Barbados. More recently, Republic Bank has grown by taking over Barbados National Bank
(through the acquisition of the shares of this bank), as well as the Bank of Commerce Trinidad
and Tobago.
Advantages of acquisition include the following:

 A reduction in competition. In Republic Bank's case, this means less competition in the provision
of financial services.
 Being able to operate on a larger scale, benefitting from economies of scale such as being able to
mass advertise to a broader market, and being able to afford better technology for online banking.
 Being able to reduce the duplication of services and hence cut costs, such as through a reduction
in the labour force.

Businesses carry out external growth to:

 Buy new and exciting brands where sales are likely to be high
 Acquire new inventions and technologies
 Break into new markets, perhaps in other countries.

 The key benefit of internal growth is that it enables owners to keep control of their own business.
However, internal growth can be slow and can put a lot of pressure on the existing owners.
 In contrast, the key benefit of external growth is that it enables more rapid expansion and allows a
business to gain skills and knowledge that it may not possess internally. However, it is risky in
that the existing business may be joining with others about which it has little knowledge.

NOW TRY THESE

1. Describe three differences between internal growth and external growth in relation to business.
2. How might external growth help a business to grow quicker than internal growth?
3. What are the dangers of external growth when compared with internal growth?

4. Business in action: In a national newspaper, identify discussions revolving around a merger, takeover,
or the creation of a joint venture. Who are the two parties involved? How does the newspaper portraysthe
benefits of the method of external growth that has been used?
(5.12)
Outline the opportunities for and benefits of developing linkage industries

 Linkages between industries in an economy are very important in determining how effective that
economy is. Some sectors of the economy provide more opportunities to create linkage industry
than others. A linkage industry is one that is connected to another industry because it provides
supplies for it or is a market for its finished product. An industry will have backward links to
other industries, as well as forward links.
 This is best illustrated by means of an example. The tourism industry is a key part of most
Caribbean economies, and expenditure by tourists benefits many industries in the economy. For
example, when tourists spend money in a restaurant, this creates income for the restaurant.
However, the restaurant will also need to buy supplies to cater for the tourists, such as tables,
chairs and tablecloths from local retailers. The local retailer will purchase tables and chairs from
local furniture makers. The furniture makers will buy glue, nails and tools from hardware stores.
And so on. The flowchart below shows the backward links in this supply chain.

KEY TERM

Linkage industry: One that is connected to another industry because it provides supplies for it or is a
market for its finished product.
Backward linkage: When an industry depends on the output from an industry which is at an earlier stage
of production.
Forward linkage: When one industry or firm supplies another industry or firm further up the supply chain.
  Another example is that tourists will stay in hotels which have been built by local construction
companies. The construction companies will buy their materials from local suppliers to the
construction industry. These suppliers will buy sand, gravel, etc. from quarries.
 Backward links are when an industry or firm is supplied by an industry or firm further back down
the supply chain. The demand of one industry leads to the development of another industry. For
example, a firm that extracts oil (primary sector) has a backward linkage with the producer of oil
rigs (secondary sector). Another example would be a bakery that depends on the services of an
accountant.
 In contrast, forward links are when one industry or firm supplies another industry or firm further
up the supply chain, i.e. when the products of an industry become the raw materials of another
industry. The flowchart below gives an example of forward links in a supply chain.

KEY TERM

Key sectors of the economy: Industries that have both strong forward and backward linkages.

 The term "key sectors of the economy" refers to industries that have both strong forward and
backward linkages. It is important to understand how industries link together, and to appreciate
how many Other industries are dependent on one particular industry. For example, tourism
creates lots of business for other industries and businesses, including hotels, automobile rental,
golf courses, supermarkets and restaurants, museums and historical sites, and so on.
 Studying linkages helps to understand how important industries are to a national economy. For
example, if an industry buys most of its supplies from local producers, then it creates significant
demand in the domestic economy and creates further local employment and incomes. Take the
example of the building industry. If the building industry in Jamaica gets most of its materials
from Jamaica, then these backward links create incomes within the country. However, if instead it
imported most of its materials, then this would not create these effective links. Fortunately,
Jamaica can supply much of its own building materials.
 Similarly, it is helpful to a national economy if an industry has forward links within its own
country. For example, if food grown in Jamaica is processed in Jamaica, then this creates incomes
and jobs in Jamaica.
NOW TRY THESE

1.What's the difference between a backward linkage and a forward linkage? Illustrate your answer by
using an example (one that is different to those given in the text above).
2. Why are "key sectors of the economy" so important to an economy? Give an example of a key sector in
your country and show why it is so important.

3. Business in action: Which industries are the most important in your country in terms of the sales
revenue and employment created by these industries? Create a poster that illustrates the forward and
backward links between these industries and other industries in your country.

(5.13)
Explain the effects of growth on a business

When a business grows, this will inevitably impact on many different parts of the business. The main
effects are outlined below.

Organisational structure

 The way that a business is structured may have to change if it expands. For example, two
companies that merge together will often have the same set of functions, such as marketing,
finance and IT. It may therefore be necessary to bring together these two sets of functions to
avoid duplication. Rather than having two marketing directors, it may be necessary to have one
marketing director with overall responsibility for marketing in the new company. Or the span of
control may become wider, while the structure will become taller since more levels will be added.

Capital

 As a business grows, it will build up more capital. Finance can be acquired from several sources,
including from investors such as venture capitalists, from selling more shares (if the company is a
registered company), and by ploughing back profits into the business.
 The business can then use this capital to acquire more fixed capital in the form of better premises,
more effective machinery and equipment (for manufacturing businesses and businesses that
extract raw materials), more fixtures and fittings, more advanced IT and data processing, and
telecommunications systems in a variety of service industries. Businesses are also better placed to
lease equipment and vehicles.
Labour

 A growing business can take on more labour. For micro and small businesses, including those in
cottage industries, it will be possible to switch from the employment of part-time or casual labour
to employing people full-time. There will be issues here associated with creating a more formal
employment structure, such as paying income taxes and other contributions to the government for
each worker employed. Increasingly, skilled labour rather than unskilled labour can be employed,
and this will lead to rising wages.

Use of technology

 As firms grow, they will be able to employ more advanced technologies. For example, in
garment manufacture this could involve the purchase or leasing of better sewing and weaving
machines. Growing businesses will also want to use advanced information.

KEY TERM

Casual labour: People who are employed on a temporary basis rather than on a regular or full-time basis.

Technologies: Technology is the use of science for practical purposes. When small businesses use
technology, this means they are using more advanced techniques of production, usually because of using
more advanced equipment such as computer systems and computer-aided machines.

Leasing: A lease is a contractual arrangement whereby the lessor (user) agrees to pay the lessee (provider
of equipment) sums of money for the use of leased items. Typical items that are leased by businesses
include photocopiers and cars.

KEY TERM

Computer-aided design: Computer-aided design systems involve using a computer for design purposes,
for example to aid textile design. A designer might create a design using a computer programme, which
can then be used by a special computer-aided manufacturing machine to cut out the parts that have been
designed.

Exporting: Selling goods into a foreign/overseas market.

 technology, for example computer-aided design equipment, database systems, websites and a
range of relevant IT applications. The term "computer-aided design" (CAD) refers to producing
designs on computers. These designs can then be fed into a computer-aided manufacturing
machine (CAM), which will automatically carry out operations that have been programmed into
it.
Potential for export

 In Unit 5.9 above (page 169), we saw that Cheryl Holdsworth was contemplating exporting her
Cher Butter. Once a small business has started to build up customers, there is no reason why these
customers should not be overseas. Exporting will involve extra cost in terms of promoting the
product in foreign markets, transporting the goods (or services) abroad, paying import taxes in
some foreign countries, and other complications. However, many of these obstacles can easily be
overcome, for example by marketing through an easily accessible website, exporting alongside
other exporters in a shared container, and of course by charging higher prices in overseas
markets. Small firms will contemplate exporting if the product is not too heavy or bulky, meaning
it is less expensive to transport, and where it particularly appeals to overseas customers. Also,
small businesses tend to meet local demand. As businesses expand, they will adopt new standards
to enter global markets. This will increase profits and provide an impetus for firms to become
more competitive.

NOW TRY THESE

1. The tourism industry has become increasingly important in the Caribbean. Using the example of the
hotel industry, explain how a hotel chain will have to alter the following as it grows:
(a) its organisational structures
(b) the types and quantities of capital employed
(c) the types of labour employed
(d) the types of technology used.
2. Identify a growing business in the Caribbean that has been able to benefit from increasing opportunities
to export. What have become the key export markets that it is targeting?

3. Business in action: Interview the owner of a local small business that is experiencing growth. Identify
the issues the business has faced in terms of changing the organisational structure, employing more and
different people, accessing more capital, employing new technologies, and any export considerations.