PROFILE 2: INTERNAL ORGANISATIONAL ENVIRONMENT

SECTION 5: PRODUCTION
Objective 1: identify factors in the production of goods and services

Production

The creation of goods and services to satisfy the needs and wants of consumers. It may also be defined as

changing inputs into outputs.

FACTORS OF PRODUCTION

1. Land

2. Labour

3. Capital

4. Enterprise/Entrepreneurship

1. LAND

This consists of all the natural resources on the earth including those in the sea and the atmosphere around

us. Each country in the Caribbean has various natural resources which can be used in various industries

to produce goods.

2. LABOUR

This includes all human resources which are needed to combine other factors of production to produce

goods and services. It refers to both physical and mental ability. This factor is rewarded with wages,

salaries and or profits. This factor is very important since people are needed to operate equipment,

program machinery, make decisions, interact with clients etc. Without it, the other factors would be

useless. Labour can be divided into

 Skilled (engineers, doctors, teachers, nurses’ architects etc)

 Semi-skilled (driver, plumber, data entry operator etc)

 Unskilled (watchman, vendor, labourer etc.)

3. CAPITAL

Capital is the money and all other assets which are employed in the process of production.

4. ENTERPRISE/ENTREPRENEURSHIP

This is the ability to coordinate and combine the various factors of production in an

effort to successfully run the organization. The entrepreneur is often seen as the fourth

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factor of production. This role is also carried out by the various managers within

businesses. Without it production is not possible. An entrepreneur can be seen as

someone who has the following functions:

1. Creation of ideas

2. Takes the initiative and risks

3. Raises finances to fund production

4. Determines what , for whom and how much to produce

5. Ensures that factors are used in the correct proportions

Exercise

Objecitve 2: identify industries developed from the natural resources of Caribbean territories;

Industries Developed From Natural Resources In The Caribbean

Caribbean countries have been blessed with a surplus of natural resources. The industries developed from
these natural resources have created employment as well as foreign exchange earnings from exports.
Examples:
COUNTRY NATURAL RELATED INDUSTRY
RESOURCE
Trinidad and Tobago Asphalt Asphalt (Construction)
Oil Petroleum (Energy)
Iron ore Steel (Construction)
Natural gas Energy Industry
Limestone Construction
Clay Construction
Sun, sea and sand Tourism

Jamaica Bauxite Aluminium (Mining

industry)
Marble
Construction
Limestone Construction
Silica, sand, grave Construction
Clay Construction
Tourism
Sun, sea and sand
Arable land Agriculture
Guyana Bauxite
Forestry
Gold, silver
Clay
Arable land
Barbados Crude oil
Natural gas
Limestone
Clay
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 Arable land
Sand, sea and sun
[Link] and Nevis Arable land
Sun, sea and sand
Limestone
Silicia and sand
clay

Objective 3& 4: differentiate between production and productivity and explain the importance of

productivity.

PRODUCTIVITY

Production refers to the process of using resources to make goods or services. On the other hand,
Productivity is the rate at which goods are produced (efficiency of production). It may also be the
relationship between the amount which is produced and all the inputs (raw materials, money etc.) which
must be used to produce those goods. Productivity = quantity of output produced
Quantity of input used
Importance of Productivity
Productivity increases output. High productivity results in lower cost per unit of output resulting in higher
levels of profit for a business. For example, a factory worker can produce 10 items in an hour and he
subsequently produces 20 units in the same hour after some training. His productivity has doubled and the
business will benefit from a fall in unit cost as more units are being produces at the same costs of production.
Higher profits for the firm will mean more funds available for its expansion, new business ventures and
community support. It may also wish to pass on the benefits of lower costs to consumers in the form of lower
prices.
Factors Affecting Productivity
 Education and Training
 The amount and quality of capital
 Motivation
 Working Conditions
 Health of Workers
 Good Management

Objective 5: explain the role of capital in production;

Role of Capital in Production

Capital includes assets such buildings, money, stocks, machinery, equipment and vehicle owned

by the company. Capital plays a vital role in the overall production of good/services. Money is needed

for overall operation of the business e.g. purchase of equipment and raw materials, payment of

wages/salaries etc. The use of fixed capital (tools, equipment) increases the productivity of labour. E.g.

the use of a tractor rather than a hoe can increase the rate at which a field is ploughed.

The amount and type of capital a firm uses depends on the size and type of industry in which it

operates. E.g. the production of cars requires large factories and specialized equipment while the

production of leather goods can be done in a small shop with little equipment.
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 With the use of capital, division of labour is made possible which in turn can increase the level of

productivity/ output per person.

Capital is also used for investment into various capital ventures. This can be done by saving with

financial institutions (banks, cooperatives etc.) which then in turn loan the money to different

organisations or entrepreneurs.

Objective 6: differentiate amongst types of capital.

CAPITAL

Capital is the money and all other assets which are employed in the process of production.
Types of Capital
1. Physical Capital
This consists of fixed and working capital.
2. Working Capital
Items required for the day to day operation of the business and which are continually being used up e.g.
raw materials, cash etc.

3. Fixed Capital
This usually refers to items which are long lasting and are used in the production of goods and services
e.g. buildings, machinery, tools etc.

4. Financial Capital
Money which is used to run the operations of the organisation. It consists of loan capital and share capital

5. Social Capital
This takes the form of government expenditure on factories, machinery, roads, utilities etc. The
infrastructure is then used by organisations to assist in effective operations.

Objective 7: classify the different types and levels of production.

PRODUCTION LEVELS
1. Subsistence Production
This is the production of goods to satisfy one’s own personal needs. E.g. kitchen garden, sewing one’s
own clothing etc.
Benefits
 It saves money
 One-of-a-kind items are created
 Creativity can be explored

2. Domestic Production
The production of good/services for the local market
Benefits
 Use of local inputs e.g. labour, capital, raw materials etc.
 Provision of jobs
 Reduces imports
 Reduces the use of foreign exchange
 Economy may become self-sufficient

3. Surplus and export

The production of goods above what is needed to supply domestic needs. The surplus is sold on the
international market.

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 Benefits
 Foreign exchange earned
 The development of an external market
 Jobs
 Can improve Balance of Trade and current account of Balance of Payment

TYPES OF PRODUCTION

1. Extractive/Primary Sector

This type of production involves the extraction of basic raw materials from the land e.g. mining,

agriculture, fishing, forestry. Some of these resources can be used directly or are used as the raw materials

of other industries to be converted to other goods.

2a. Manufacturing/ Secondary Sector

This sector generally uses the raw materials of primary sector to create other goods. E.g. sugar, oil

refining, canning, furniture and garment making etc.

2b Construction

This is also part of secondary sector and uses products from the manufacturing area e.g. building

3. Service/Tertiary Sector

This is known as the service sector where no “tangible” goods are produced. It is divided into direst

services which are needed for their own sake (education, health etc.) and indirect services which are

needed in order to exchange goods (transportation, communications, banking etc.)

4. Quaternary Sector

Objective 8: describe the characteristics of cottage industries.

COTTAGE INDUSTRIES

These are industries which are usually carried out in the home. They usually require some form of skill in

order to manufacture goods. These industries are very important to rural areas as they provide income,

employment and provide goods and services which may only have been available in the town which may

be far away.

Characteristics

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1. Work mainly carried out manually

2. Home based

3. Business carried out on a small scale.

4. Use of local raw materials.

5. Family members provide labour and in some cases help is hired.

Exercise: 1. Give 4 benefits and 4 problems of cottage industries

2. Identify the role of small firms in the economy

Benefits

Problems

Objective 9: outline the functions of small businesses,

Small business is defined as a privately owned corporation, partnership, or sole proprietorship that has

fewer employees and less annual revenue than a corporation or regular-sized business.

micro enterprises (fewer than 10 employees), small enterprises (10 to 49 employees), medium-

sized enterprises (50 to 249 employees). Large enterprises employ 250 or more people.

Functions Of A Small Business

1. Supplying goods and services that satisfy demand

Small business identifies a particular need in a market and develop a product or service that will meet that

need.

2. Creating employment

Small businesses account for a large percentage of total employment in Caribbean economies.

3. Making profits

The main purpose of starting and operating a business is to make profits. Profit makes it worthwhile for

the entrepreneur to continue business. Profit earned may be reinvested to expand the business.

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 4. Fulfilling a niche in the market that does not interest larger businesses, for example event planning

and beauty service.

5. Provide services that large firms are not willing to produce.

Objective 10: discuss the advantages and disadvantages of small business.

(a) Examples of advantages:
(i) generate employment and incomes especially in rural areas and economically depressed areas

(ii) increase competition for larger firms.

(iii) introduce new products and ideas (for example, event planning).

(b) Examples of disadvantages:

(i) the business lacks expertise in certain areas;

(ii) owners find it difficult sourcing finance from financial institutions

(iii) limited ability to service customers due to unavailable resources.

Objective 11: explain how a business grows internally and externally.

As a business grows it gains two major advantages over its smaller rivals. Large firms have

more influence over market price. They're big enough to be price setters.

Large firms also often enjoy economies of scale. This means that a business has lower unit costs because

of its large size. They can buy raw materials cheaply in bulk and also spread the high cost of marketing

campaigns and overheads across larger sales.

For example, if a large firm can produce a given type of sunglasses for $20 while it costs its smaller rival

an average of $30, then the larger firm has a $10 per unit cost advantage. Larger firms can charge lower

prices or enjoy a higher profit margin. Economies of scale are a major source of competitive advantage

for large firms.

Methods of expansion

A business can grow in size through:

Internal (organic) growth - the business grows by hiring more staff, equipment to increase its output
opening other outlets and increasing capital.

 External growth - where a business merges with or takes over another organization. Combining two

firms increases the scale of operation.

How Firms Grow

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1. Expanding their markets

2. Creating new products

3. Merging with another firm

4. Takeover

Why Firms Grow

1. To reduce cost & achieve economies of scale

2. To increase profits

3. To achieve greater security

Objective 12: outline the opportunities for and benefits of developing linkage industries.

LINKAGE INDUSTRIES

Industries which are dependent on another’s output to produce goods and services. E.g. the rum distillery

is dependent on the sugar industry. Linkage may be:

Forward Linkage
If the final product or finished products of one industry is used in another industry as its raw material then a
forward linkage occurs. For example, sugar produced from a sugar factory is used by a bakery to make
pastries. Sugar is therefore the end product of one industry and used as raw material in another. Other
examples include agriculture and canning, lumber and construction and cattle farming and meat processing.
A backward linkage occurs when the demands of an industry lead to the establishment of other industries
to produce for the needs of this industry. For example, the establishment of several multinational fast-food
restaurants in the Caribbean has led to new businesses being established to supply these restaurants with raw
materials (vegetables, ground provisions, meats and paper-based products).

Importance of Linkage Industries

1. Employment

2. Foreign Exchange earner

3. Self-sufficiency

4. Use of local resources

5. Close proximity between industries can reduce costs e.g. transportation

6. Reduction of imports

7. Increase in investment

8. Knowledge can be shared

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Problems

1. Limited raw materials

2. Access to foreign market is not guaranteed

3. Shortage of capital

FACTORS INFLUENCING LOCATION OF INDUSTRIES

The location identified for the operation of a business will impact on its success or failure. An unsuitable
location can result in high operational costs or low sales volume. Business owners must therefore consider the
following factors when choosing a location.

1. Geographical

2. Availability of raw materials and supplies

3. Infrastructure

4. Power

5. Water

6. Transport

7. Health Facilities

8. Labour supply

9. Governmental Regulations

Objective 13: explain the effects of growth on a business.

GROWTH OF BUSINESS AND ITS EFFECTS

Effects of Growth
In any organization growth will have an effect on the following:

1. Organizational structure
It may become more complex, affecting the chain of command and the span of control of individuals.
New departments may also be created. There is also implications for the increase in the amount of
communication within the firm. Authority may now be delegated among a greater number of personnel
whereas one or two persons may have held it.

2. Capital
More money is now required to finance operations. E.g. buying equipment, paying workers, raw materials
etc. In order to finance its operations, the firm may now have to increase its borrowing or issues shares
where possible.
3. Labour
An increase in the number of workers usually occurs but the extent to which is does may depend on if the
firm is labour or capital intensive. There may also be division of labour/specialisation which increases
output. Specialists may also be hired.

4. Potential for export

As production increases and the local market is being satisfied, surplus production may be exported as a
market is established.
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5. Scale of production
This will increase as long as inputs have increased and are being used efficiently. Various economies of
scale can occur as production expands

6. Use of Technology
There will be greater used of technology as long as it will lead to reductions in cost and increases in
output. In turn it may cause a reduction in labour

CAPITAL INTENSIVE vs LABOUR INTENSIVE PRODUCTION

Capital intensive industries are those which use more machines than humans in the production process

e.g. automobile manufacturing. This method mainly operates in developed countries which have access

to the money to purchase equipment. The quality of products can be standardised, output in usually

greater and fewer people are employed.

Labour intensive industries use large pools of human and animal labour e.g. garment making.

Employment is generated and the wage bill tend to be high. This method of production is found mainly in

developing countries.

N.B. In the Caribbean many jobs which were done manually are now seeing the

introduction of the use of machines e.g. in the past, sugar cane was cut by hand it is now cut in many

countries by the use of the combine harvesters which complete the job at a quicker rate. In other areas

such as pattern making and drafting, architecture, engineering etc., CAD (Computer Aided Design) is

becoming more common. It speeds up the process and improves on quality and standardization. CAI

(Computer Aided Instruction) is also a tool where the computer is used for the giving of instructions. It

allows a person to move at their own pace, offering methods of testing, feedbacks and remedial work until

the learner understands.

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Machinery used in a factory – Fixed Capital

Money used to buy raw materials – Working Capital

Investment from a private investor – Venture Capital

Office buildings – Fixed Capital

Cash needed for day-to-day expenses – Working Capital

New computer software development – Venture Capital

Furniture for the office – Fixed Capital

Wages paid to employees – Working Capital

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Seed funding for a start-up – Venture Capital

Company vehicles – Fixed Capital

Marketing costs for a product launch – Working Capital

Purchase of inventory – Working Capital

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