1.
1 The purpose and nature of business activity
Satisfying Wants and Needs
Everyone has their wants and needs, and businesses need to satisfy
them. Businesses can satisfy the customer by providing physical goods
and services. A restaurant brings you the physical goods (food) and the
services (the nice waiter who is always helping you).
Scarcity and Choices
We cannot have everything we want, meaning we have to make choices.
This is because we have scarce resources. Businesses make choices all
the time, and it can usually affect its outcome.
Adding Value
Everything a business does to make a good more desirable is called
adding value.
You can add value by changing the packaging, increasing the price, and
decreasing the manufacturing costs.
Opportunity Cost
The term used to describe the value of the next best alternative that is
given up. It shows the benefit that could’ve been gained from the
alternative use of the same resources.
Specialisation
The way in which work is divided so that each worker works on a specific
task, so that they become experts in the future.
Key points:
● Businesses help to satisfy the consumers wants and needs
● Businesses add value to make products more desirable and
suitable for customers
1.2 Classification of businesses
Primary Sector: they extract natural resources of the Earth to produce
raw materials or for the use of other businesses. Primary businesses are
decreasing in number.
Secondary Sector: they turn natural resources and raw materials into
products with the use of manufacturing.
Tertiary Sector: a business that provides services to consumers.
E.g. Doctors, accountants, hairdressers etc. Tertiary businesses are
increasing in number.
Industrialisation: shifting resources from primary to secondary.
Deindustrialisation: shifting resources into tertiary.
Private sector: business activities that are owned and controlled by
individuals or groups of people and aim to make a profit.
Public corporation: a business that is owned and controlled by the
government.
1.3.1 Enterprise and Entrepreneurship
Characteristics of entrepreneurs:
● Confident
● Risk taker
● Creative
● Independant
● Hard working
Entrepreneurs should be willing to work long hard hours, to take risks, to
take tough decisions, to spot new opportunities and to have an open
minded attitude.
1.3.2 Business Plan
A business plan is a:
● Document containing the business aims
● Essential details about the operations
● Finance and owners of a business
● States the objectives and shows how they will achieve them
How does a business plan help?
● Securing a bank loan
● Sense of purpose and direction
● Informed decision making (ensures the right market and products
are targeted)
1.3.3 Government start-ups
Why governments support start-ups:
● Reduce unemployment
● Increase competition (higher quality and lower prices)
● Their products benefit society
How governments support start-ups:
● Financial support (loans)
● Lower tax rates + tax relief
● Guidance (advice and training)
● Promotion (the government organises business fairs)
● Lower rent
1.3.4 Business growth and measurement of size
How to measure the size of businesses:
● Employee number
● Value of output
● Market share
● Capital employed
How Businesses Grow:
1. (Organic Growth):
Internal Growth
○ Increasing sales through improved marketing or expanding
product range.
○ Opening new branches or locations.
2. External Growth:
○ Mergers: Two businesses agree to join and form one
company.
○ Takeovers: One business buys another to increase market
share or eliminate competition.
Methods of Measuring Business Size:
1. Number of Employees.
2. Value of Output.
3. Market Share.
4. Capital Employed (total value of resources used).
Why Businesses Remain Small:
1. Market Niche: Small customer base or specialized product.
2. Personal Preference: Owner prefers simplicity or direct control.
3. Lack of Capital: Limited financial resources for expansion.
4. Flexibility: Easier to adapt to market changes.
1.3.5 Why Do Businesses Fail?
Key Reasons:
1. Poor cash flow management.
2. Lack of planning or weak business strategy.
3. Over-expansion leading to operational inefficiencies.
4. External factors: Economic downturn, increased competition, or
regulatory changes.
1.5.1 Business objectives
A business’s major objectives are:
● Growth
● Profitability
● Market share
● (Customer loyalty)
Why do businesses have objectives?
● Having a clear target makes managers and employees more
focused and motivated.
● When making decisions, it is important to think whether this will
help achieve the objectives.
● Easy to determine how well the business is doing.
Why would a business change its objectives?
● Achieving current objectives
● Changing economic conditions
● Changes in legal rules
● Changes in the market
● New owners
● Growth of the business
● Change in capital available to the business
Key points:
● All organisations decide on broad aims (goals) to then later break
these down into more precise objectives.
1.5.2 Stakeholders and objectives
Stakeholders in a business: Owners, employees, customers, suppliers,
government, local community, competitors. They are people that have an
interest in the business and can be affected by their decisions.
Stakeholder objectives:
● Business survival
● Profit
● Returns to shareholders
● Growth of the business
● Market share
● Service to community
1.5.3 Objectives of private and public sector enterprises
Private sector objectives:
● Make profit/revenue (to keep shareholders happy, to survive)
● Building a strong image
● Customer loyalty
● New and exciting ideas / renovations
● Market share
Public sector objectives:
● Meet profit margin set by the government
● Provide quality services (health, transport)
● Protect or create employment
Difference in objectives:
- Private sector→maximise profit, prioritise market share and
revenue, potentially harming other businesses
- Public sector→keeping low prices to protect jobs.
A social enterprise is a business that aims to make a profit while also
having social objectives. It reinvests its profits to support its social goals.
How business act in an ethical way with different stakeholders:
● Social enterprises aim for profit and social objectives
● Fair wages and good working conditions for employees
● Prevent pollution and minimise environmental damage.
● Address concerns of pressure groups and reduce environmental
impact.
● Pay taxes on time.
● Fulfil financial obligations and repay loans on time.
● Maximise shareholder value and provide a fair return on
investment.
● Offer fair and competitive prices for products.
3.1.1 The role of marketing
The role of marketing:
● Identify and satisfy customer needs
● Maintain customer loyalty
● Gain info about customers
● Expect change in customer needs
Identifying customer needs allows for:
● Raising customer awareness
● Increasing sales revenue
● Maintaining or improving market share and image
● Targeting new market segments
● Entering new markets
● Developing or improving products
Benefits of satisfying customer needs:
● - Increased sales
● - Reduced wastage
● - Maintained competitiveness
● - Less promotion needed
● - Cost-effectiveness
● - Improved reputation/brand image
● - Potential to increase prices and keep customers
● - Sense of security
3.1.2 Market changes
Understand market changes (why consumer spending patterns change):
● Consumers tastes & fashion change
● Changes in technology
● Changes in income
● Ageing populations
Businesses MUST respond to these changes, or they FAIL.
Why have some markets become more competitive?
● Globalisation - businesses can sell their products worldwide
● Transportation - better transport allows products to be distributed
around the world
● Online shopping - customers can purchases products from around
the world
How can businesses respond to increased competition?
● Develop and maintain customer loyalty
● Keep improving their products and develop new ones that meet
consumer needs
● Keep costs low to remain competitive
● Make their products better than their competitors
3.1.3 Market segmentation
Market segment: subgroup of a market with similar characteristics
Different market segments:
● Geographic segmentation - based on location
● Demographic segmentation - based on age, gender, income
● Psychographic segmentation - based on lifestyle, personality,
interests, values
● Behavioural segmentation - based on purchasing habits, brand
loyalty, usage frequency
3.1.4 Mass and Niche Markets
Mass market: a broad group of consumers, wide audience
Niche market: a smaller group of consumers, with specific needs
MASS MARKET:
Advantages Disadvantages
●
NICHE MARKET:
Advantages Disadvantages
●
3.2.1 Market research
Market research is the process of collecting and analysing information
about customers, competitors and market trends.
Why is Market research needed:
● Understanding Customer Needs
● Assessing Market Demand
● Identifying Competitors:
● Evaluating Market Trends:
● Optimising Pricing
● Product Development
Methods of Primary research:
● Surveys: questionnaires, interviews, email, online forms
● Interviews: researcher, respondent, structured, unstructured
● Focus Groups: moderated discussions, small group, participants,
opinions, attitudes, perceptions
Advantages Disadvantages
Tailored data Takes time
Current / Relevant Costly
Unique insights/perspectives Potential for errors
Methods of Secondary research:
● Websites
● Social media
● Magazines/Newspapers
● Television / Radio
Advantages Disadvantages
Time saving Outdated info (potentially)
Cost-effective Not tailored or customised
Historical data Unreliable sources (potential bias)
3.3.1 The four Ps
Product, price, place and promotion
3.3.2 The product
Types of “product”:
● Consumer goods - These are goods which are bought by
consumers for their own use
● Consumer services - These are services that are bought by
consumers for their own use ( hairdressing, education )
● Producer goods - These are goods that are produced for other
businesses to use ( includes trucks, machinery )
● Producer services - These are services that are produced to help
other businesses ( accounting, insurance and advertising agents )
What makes a product successful:
● The product needs to satisfy consumer wants and needs
● Good quality for the price
● Good product design
● Cost of production needs to be lower than selling price
Product Design:
● Quality for product needs to match the brand image
● Higher brand image justifies higher price
● Products must be durable and meet performance standards
● Non-compliance with rules hards the brand reputation
Brand name: unique name of a product that makes it different from other
brands
Benefits of branding – Advertising makes consumer aware of the quality
of the product and persuades them into buying the product
Brand loyalty – When customers continue buying from the same brand
instead of the competitors
Role of packaging:
● Packaging protects and enables product use
● Should be suitable for product and transportation
● Colour and shape are important for catching customers’ attention
● Reinforces brand image
Extension strategies (making the product last longer):
● Adding new features or versions
● Changing the colour/design to suit popular tastes
● Updating the image with new packaging
● Targeting new markets or market segments
3.3.3 The price
Pricing strategies:
● Cost plus pricing - production cost with a profit
+ Easy method
- Lower sales if selling price is higher than competitors
● Price skimming - high prices to start,
+ Customers may think its good quality
- Customers may think it's overpriced
● Penetration pricing - starting low price, to attract customers from
other competitors
+ Ensures sales to the business so that it is in the market
- Business will not maximise profits
● Competitive pricing - the price is just lower than rivals
+ Safe way to enter the market, if it is a competitive market
- Will lose revenue in the short term
● Promotional pricing - low price for a short period of time
+ Can clear old stock and also promotes the business
- Low sales revenue
Factors to determine the right pricing strategy:
● ✓ Differentiation and USP (unique selling point)
● ✓ Price elasticity of demand
● ✓ Amount of competition
● ✓ Strength of the brand
● ✓ Stage in the product life cycle
● ✓ Costs and the need to make a profit
What does it mean when “demand is price elastic”?
When the price of a product changes, the percentage change in demand
will be higher for that product.
The demand for a product depends on its price and the availability of
substitutes.
If there are many substitutes, a small price increase of 5% leads to
decreased demand and lower revenue of 15%.
If there are no substitutes, a significant price increase leads to slightly
decreased demand and higher revenue.
Apple’s prices are inelastic, because a significant increase in price leads
to a slight decrease in demand. That’s because of customer loyalty.
Place
Promotion
3.4 Marketing Strategies
Justify Marketing Strategies:
1. Suitability: Tailored to market segment and business size.
2. Profitability: Must lead to increased sales or reduced costs.
Legal Controls in Marketing:
1. Prevent misleading claims (false advertising).
2. Ensure safety of advertised products.
1.4 Forms of Business Organisation
Main Features:
1. Sole Trader:
○ Owned by one person.
○ Advantages: Full control, keeps all profits.
○ Disadvantages: Unlimited liability, harder to raise capital.
2. Partnership:
○ Owned by 2+ people.
○ Advantages: Shared expertise, more capital.
○ Disadvantages: Profit sharing, disagreements.
3. Private Limited Company (Ltd):
○ Shares sold privately.
○ Advantages: Limited liability, easier to raise funds.
○ Disadvantages: Higher administrative costs, profits shared
as dividends.
4. Public Limited Company (Plc):
○ Shares sold publicly on stock exchange.
○ Advantages: Huge capital potential, shareholder
investments.
○ Disadvantages: Risk of takeover, strict regulations.
5. Franchises:
○ Buying rights to operate under another business’s name.
○ Advantages: Established brand, ongoing support.
○ Disadvantages: High initial fees, limited autonomy.
2.1 Motivation in the Workplace
Importance of Motivation:
1. Increases productivity.
2. Reduces staff turnover and absenteeism.
3. Improves employee satisfaction and loyalty.
Methods of Motivation:
1. Financial Incentives:
○ Wages and salaries.
○ Bonuses and commissions.
2. Non-Financial Incentives:
○ Job rotation and enrichment.
○ Recognition and promotion.
2.2 Organisation and Management
Organisational Charts:
1. Show roles, responsibilities, and hierarchy.
2. Key terms:
○ Span of control: Number of subordinates under a manager.
○ Chain of command: Line of authority in an organisation.
Role of Management:
1. Plan, organise, lead, and control operations.
2. Ensure goals are achieved efficiently.
Leadership Styles:
1. Autocratic: Leader makes all decisions.
2. Democratic: Employees involved in decision-making.
3. Laissez-faire: Minimal managerial interference.
2.3 Recruitment, Selection, and Training of Employees
Recruitment and Selection
1. Recruitment Process:
○ Identify Vacancy: Determine the role needed.
○ Job Description: Outline duties, responsibilities, and tasks.
○ Person Specification: Identify the qualifications, skills, and
qualities required.
○ Advertising: Use newspapers, websites, or internal notices.
2. Methods of Recruitment:
○ Internal Recruitment: Filling roles with existing employees.
■ Advantages: Cheaper, motivates employees, faster.
■ Disadvantages: Limits new ideas, creates another
vacancy.
○ External Recruitment: Hiring from outside the organization.
■ Advantages: Brings fresh skills and ideas, wider pool
of candidates.
■ Disadvantages: Expensive, longer process.
3. Selection Methods:
○ Application Forms/Resumes: Initial shortlisting of
candidates.
○ Interviews: Assess personality and suitability.
○ Tests: Evaluate skills (aptitude tests) or personality
(psychometric tests).
Training
1. Importance of Training:
○ Improves efficiency and productivity.
○ Reduces errors and waste.
○ Increases employee motivation and job satisfaction.
2. Types of Training:
○ Induction Training: Introduction for new employees,
covering company policies, safety, and role expectations.
○ On-the-Job Training: Training provided at the workplace by
experienced staff.
■ Advantages: Low cost, specific to the job.
■ Disadvantages: May reduce productivity during
training.
○ Off-the-Job Training: External training courses or
workshops.
■ Advantages: High-quality training, broader skillset.
■ Disadvantages: Expensive, no immediate application.
2.4 Communication in Business
Importance of Communication
1. Ensures instructions are understood.
2. Facilitates decision-making.
3. Builds teamwork and improves motivation.
4. Helps resolve conflicts effectively.
Methods of Communication
1. Meetings, phone calls, or video calls.
Verbal Communication:
○ Advantages: Immediate feedback, personal interaction.
○ Disadvantages: Miscommunication due to unclear speech,
no permanent record.
2. Written Communication: Emails, letters, reports, memos.
○ Advantages: Permanent record, clear for future reference.
○ Disadvantages: Time-consuming, lacks personal touch.
3. Visual Communication: Charts, graphs, diagrams.
○ Advantages: Simplifies complex data, easy to understand
trends.
○ Disadvantages: May require explanation.
4. Electronic Communication: Emails, instant messaging, intranets.
○ Advantages: Fast, wide reach, cost-effective.
○ Disadvantages: Risk of misinterpretation, over-reliance on
technology.
2.5 Motivation at Work
Why Motivation is Important
1. Increases productivity and efficiency.
2. Enhances employee loyalty and reduces absenteeism.
3. Creates a positive working environment.
Theories of Motivation
1. Maslow’s Hierarchy of Needs:
○ Physiological Needs: Basic needs like wages for food and
shelter.
○ Safety Needs: Job security, safe working conditions.
○ Social Needs: Teamwork, sense of belonging.
○ Esteem Needs: Recognition, promotion opportunities.
○ Self-Actualization: Achieving potential, personal growth.
2. Taylor’s Scientific Management:
○ Workers motivated by money; pay linked to output through
piece-rate systems.
3. Herzberg’s Two-Factor Theory:
○ Hygiene Factors: Prevent dissatisfaction (e.g., salary,
working conditions).
○ Motivators: Encourage satisfaction (e.g., recognition,
responsibility).
Methods of Motivation
1. Financial Rewards:
○ Wages, salaries, bonuses, and profit-sharing.
○ Commissions for sales staff.
2. Non-Financial Rewards:
○ Job enrichment and rotation.
○ Employee recognition programs.
○ Flexible working hours or opportunities for promotion.
2.6 Organisation and Management
Structure of an Organisation
1. Hierarchical Structure:
○ Clearly defined roles and responsibilities.
○ May result in slow decision-making.
2. Flat Structure:
○ Fewer levels of hierarchy.
○ Faster communication but less clear authority.
3. Key Terms:
○ Span of Control: Number of subordinates reporting to a
manager.
○ Chain of Command: Line of authority from top to bottom.
Leadership Styles
1. Autocratic Leadership:
○ Manager makes all decisions.
○ Advantages: Quick decisions, clear instructions.
○ Disadvantages: Low employee morale, lack of creativity.
2. Democratic Leadership:
○ Employees participate in decision-making.
○ Advantages: Motivates employees, encourages creativity.
○ Disadvantages: Time-consuming.
3. Laissez-faire Leadership:
○ Employees have freedom to make decisions.
○ Advantages: Encourages independence.
○ Disadvantages: Lack of direction, poor coordination.
Role of Management
1. Functions of Management:
○ Planning: Setting objectives and strategies.
○ Organizing: Allocating resources effectively.
○ Leading: Motivating and guiding employees.
○ Controlling: Monitoring performance and making
adjustments.
2. Skills of a Good Manager:
○ Communication, decision-making, leadership, and time
management.
2.7 Industrial Relations
Importance of Good Relations
1. Reduces strikes and disputes.
2. Increases productivity and cooperation.
3. Improves employee morale.
Methods of Resolving Disputes
1. Negotiation: Direct discussions between employers and employees.
2. Mediation: Involvement of a neutral third party.
3. Arbitration: Binding decision made by a neutral third party.
Trade Unions
1. Purpose:
○ Represent employee interests.
○ Negotiate wages and working conditions.
2. Advantages of Joining a Union:
○ Collective bargaining for better pay.
○ Support during disputes or unfair treatment.
○ Access to training and legal advice.
3. Disadvantages of Joining a Union:
○ Membership fees.
○ Potential conflict with management.
4. Operations Management (Production)
4.1.1 The Meaning of Production
● Definition:
The process of creating goods or services to satisfy
consumer needs.
● Types of Production:
○ Primary: Extraction of raw materials (e.g., farming, mining).
○ Secondary: Manufacturing and construction (e.g., making
cars).
○ Tertiary: Services (e.g., retail, healthcare).
4.1.2 Main Methods of Production
1. Job Production:
○ Producing one item at a time, tailored to customer needs.
○ Advantages: High quality, customized products.
○ Disadvantages: Expensive and time-consuming.
2. Batch Production:
○ Producing goods in groups or batches.
○ Advantages: Economies of scale, less downtime.
○ Disadvantages: Less flexibility compared to job production.
3. Flow Production:
○ Continuous production line (e.g., assembly line).
○ Advantages:
■ High output suitable for mass production.
■ Consistent quality.
■ Economies of scale.
○ Disadvantages:
■ High setup costs for machinery.
■ Less flexible to changes in demand or product design.
4. Cell Production:
○ Work is divided into teams or "cells," each responsible for a
section of production.
○ Advantages:
■ Increases teamwork and motivation.
■ Reduces movement between tasks, saving time.
○ Disadvantages:
■ Requires skilled workers.
■ High training costs.
4.1.3 Lean Production
Definition: Aims to reduce waste and improve efficiency while maintaining
quality.
Techniques of Lean Production:
1. Just-in-Time (JIT):
○ Produces goods only when needed.
○ Advantages: Lower storage costs, reduces waste.
○ Disadvantages: High reliance on suppliers; no buffer stock.
2. Kaizen:
○ Continuous improvement involving all employees.
○ Advantages: Encourages innovation and efficiency.
○ Disadvantages: Time-consuming; requires strong employee
participation.
3. Time-Based Management:
○ Focuses on reducing production time.
○ Advantages: Faster response to customer demands.
○ Disadvantages: May increase pressure on workers.
4.1.4 Factors Affecting Production
1. Labour-Intensive Production:
○ Relies more on human effort than machinery.
○ Advantages: Flexible, customized output.
○ Disadvantages: Higher labour costs; risk of human error.
2. Capital-Intensive Production:
○ Uses more machinery than human labour.
○ Advantages: High efficiency; consistent quality.
○ Disadvantages: High setup costs; less flexibility.
4.1.5 Quality Control and Assurance
Quality Control:
● Inspects finished products to ensure they meet standards.
● Advantages: Prevents defective products from reaching
customers.
● Disadvantages: Can be expensive; detects issues late in the
process.
Quality Assurance:
● Ensures quality at every stage of production.
● Advantages: Reduces defects early; boosts customer trust.
● Disadvantages: Requires training and changes in processes.
5. Financial Information and Decisions
5.1 The Importance of Finance
Uses of Finance:
1. Start-up capital for new businesses.
2. Working capital to cover daily expenses.
3. Expansion and growth investments.
4. Covering unforeseen costs or emergencies.
5.2 Sources of Finance
1. Internal Sources:
○ Retained profit: Profits reinvested into the business.
○ Sale of assets: Selling unused or non-essential assets.
2. External Sources:
○ Short-term:
■ Bank overdrafts.
■ Trade credit.
○ Long-term:
■ Loans.
■ Selling shares.
■ Venture capital.
5.3 Cash Flow Forecasting
Predicts cash inflows and outflows to ensure a business has
Definition:
enough liquidity.
Components:
1. Cash inflows: Money entering the business (e.g., sales revenue).
2. Cash outflows: Money leaving the business (e.g., rent, wages).
3. Net cash flow: Inflows minus outflows.
Importance:
1. Identifies potential cash shortages.
2. Helps secure loans or investment.
3. Assists in budgeting and planning.
5.4 Profit and Loss Account
Purpose: Measures a business's financial performance over a period.
Key Components:
1. Revenue: Income from sales.
2. Cost of sales: Direct costs of production.
3. Gross profit: Revenue - Cost of sales.
4. Expenses: Overheads such as rent and utilities.
5. Net profit: Gross profit - Expenses.
Importance:
● Helps assess profitability.
● Identifies areas of cost inefficiency.
● Used by stakeholders for decision-making.
5.5 Balance Sheet
Purpose: A snapshot of a business's financial position at a specific point.
Components:
1. Assets:
○ Fixed assets: Long-term (e.g., buildings, machinery).
○ Current assets: Short-term (e.g., stock, cash).
2. Liabilities:
○ Current liabilities: Short-term debts (e.g., overdrafts).
○ Long-term liabilities: Debts repayable over years (e.g.,
loans).
3. Equity: The owner's investment in the business.
5.6 Financial Ratios
1. Gross Profit Margin:
Gross Profit Margin=Gross ProfitRevenue×100\text{Gross Profit
Margin} = \frac{\text{Gross Profit}}{\text{Revenue}} \times
100Gross Profit Margin=RevenueGross Profit×100
Indicates profitability before deducting expenses.
2. Net Profit Margin:
Net Profit Margin=Net ProfitRevenue×100\text{Net Profit Margin} =
\frac{\text{Net Profit}}{\text{Revenue}} \times 100Net Profit
Margin=RevenueNet Profit×100
Reflects overall profitability after expenses.
3. Current Ratio:
Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio}
= \frac{\text{Current Assets}}{\text{Current Liabilities}}Current
Ratio=Current LiabilitiesCurrent Assets
Shows liquidity and ability to pay short-term debts.
4. Acid-Test Ratio:
Acid-Test Ratio=(Current Assets - Inventory)Current
Liabilities\text{Acid-Test Ratio} = \frac{\text{(Current Assets -
Inventory)}}{\text{Current Liabilities}}Acid-Test Ratio=Current
Liabilities(Current Assets - Inventory)
Excludes inventory for a stricter measure of liquidity.
5.7 Importance of Financial Statements
1. To Owners: Assess profitability and business growth.
2. To Managers: Help make informed decisions.
3. To Investors: Determine potential returns and risks.
4. To Lenders: Evaluate creditworthiness.
