1.1 Business activity

Needs, wants and scarcity

• Need: a good or service essential for survival, such as food, water and shelter.
• Want: a good or service people would like to have but can live without, such as a new phone.
• Scarcity: there are not enough resources to satisfy everyone’s unlimited wants, so choices must be made.
• Opportunity cost: the next best alternative given up when a choice is made. A café that spends its savings on a new coffee machine gives up the chance to use that money for a delivery scooter.

Factors of production

Specialisation and the division of labour

Specialisation is when people or businesses concentrate on what they do best. The division of labour splits production into separate tasks, each done by a different worker.

Why businesses exist and added value

Businesses combine the factors of production to make goods and services that satisfy needs and wants. Added value is the difference between the selling price and the cost of bought-in materials and components.

Ways to increase added value: raise the price through branding, better packaging, a premium location or excellent service; or cut the cost of materials by finding cheaper suppliers or reducing waste. Each has a risk: higher prices may lose customers, and cheaper materials may lower quality.

1.2 Classification of businesses

Economic sectors

As a country develops, the share of output and jobs moves from primary to secondary (industrialisation) and then towards tertiary (de-industrialisation). This happens because incomes rise and people spend more on services, and because manufacturing moves to countries with lower costs.

Private and public sector

• Private sector: businesses owned by individuals or shareholders, usually aiming for profit.
• Public sector: organisations owned and controlled by the government, such as public hospitals, state schools and some utilities. Their aim is usually to provide a service rather than make a profit.
• A mixed economy has both.

1.3 Enterprise, business growth and size

Entrepreneurs

An entrepreneur organises the factors of production and takes the risk of starting a business. Useful characteristics: hard-working, creative, a risk-taker, self-confident, good at communicating and able to bounce back from failure.

Why people start businesses: to be their own boss, to turn a hobby or idea into income, to fill a gap in the market, or after redundancy.

Business plans

A business plan is a document describing the business, its objectives, its market and its financial forecasts. It helps the owner think through the idea and set targets, and it is usually needed to persuade a bank to lend money. However, it takes time to write and its forecasts may turn out to be wrong.

Government support for start-ups

Governments support new firms because they create jobs, add competition, can grow into large firms and pay taxes. Support includes grants and cheap loans, business advice, low-rent premises (business parks and incubators) and training.

Measuring business size

How businesses grow

• Internal (organic) growth: opening new branches, launching new products, selling in new markets. It is slower but lower-risk and keeps control and culture.
• External growth: a merger (two firms agree to join) or a takeover (one firm buys a majority of the other’s shares). It is quick but can cause culture clashes and job losses.

Problems of growth and why small firms survive

Growth can bring communication problems, weaker control, cash-flow strain and diseconomies of scale. Many firms stay small because the owner wants control or a manageable workload, the market is small or local, or customers value personal service.

Why businesses fail

• Poor management and planning, especially of cash flow.
• Failure to adapt to changes in tastes, technology or competition.
• Over-expansion: growing too fast and running out of cash.
• New businesses are especially at risk: little experience, no established customers, limited finance and no brand reputation.

1.4 Types of business organisation

• Unlimited liability: the owner is personally responsible for all business debts, so personal assets such as a house or car can be taken to pay them.
• Limited liability: shareholders can only lose the amount they invested. Their personal assets are protected.
• Incorporation: a company is a separate legal entity from its owners. It can sue and be sued and continues even if shareholders change.

1.5 Business objectives and stakeholders

Why set objectives?

• They give everyone a clear target, so efforts are co-ordinated and staff can be motivated.
• They guide decision-making: managers can test each choice against the objective.
• They allow performance to be measured, showing whether a strategy is working.
• They help persuade banks and investors that the business is well planned.

Good objectives are SMART: Specific, Measurable, Achievable, Realistic and Time-bound. “Sell 150 units per month by December” is SMART; “grow the business” is not.

Common objectives

Objectives change over time: survival first, then profit, then growth. A social enterprise has social and environmental objectives alongside financial ones and reinvests most of its profit in its cause (sometimes called the triple bottom line: profit, people, planet).

Stakeholders

A stakeholder is any individual or group with an interest in, or affected by, the activities of a business.

Conflict between stakeholders is common. Moving production to cheaper machinery may raise owners’ profit but cost workers their jobs; a new factory brings jobs to the community but also pollution. Businesses usually have to compromise, and in questions you should say which stakeholder’s view should matter most in the case and why.

Objectives in the public and private sector

Private sector firms usually focus on profit and growth. Public sector organisations focus on providing a service, keeping costs within budget and meeting social aims, such as keeping bus fares affordable.

2.1 Motivating employees

Motivation is the set of reasons that make someone want to work hard and do the job well. Motivated workers are more productive, make fewer mistakes, are absent less often and are less likely to leave (lower labour turnover), which cuts recruitment and training costs.

Motivation theories

• Taylor: workers are motivated mainly by money, so pay them according to output (piece rate). Works for simple, measurable tasks but ignores social and esteem needs, and can lower quality as workers rush.
• Herzberg: hygiene factors (pay, conditions, supervision, job security) do not motivate, but if they are poor they cause dissatisfaction. Motivators (achievement, recognition, responsibility, interesting work, promotion) create real motivation. Fix hygiene factors first, then add motivators.

Financial methods

Non-financial methods

• Job rotation: moving between tasks at the same level. Reduces boredom and creates flexible workers, but the tasks may be equally dull.
• Job enlargement: adding more tasks of a similar level to a job.
• Job enrichment: giving more challenging tasks and responsibility. Meets esteem and self-actualisation needs, but needs training and not everyone wants responsibility.
• Team working: groups take responsibility for a section of work. Meets social needs and can improve ideas and quality.
• Training and opportunities for promotion.
• Recognition and praise, such as employee of the month.

2.2 Organisation and management

Organisational structure

An organisational structure shows the levels of management and who reports to whom. It makes clear each person’s role, who they are accountable to and how communication flows, which supports delegation and accountability.

• Level of hierarchy: a level of management or employees with the same authority.
• Chain of command: the route through which instructions pass down the hierarchy.
• Span of control: the number of subordinates directly controlled by one manager.

Delayering removes one or more levels of management, making the structure flatter. It saves salary costs and speeds up communication and decisions, but may cause redundancies, lower morale among remaining staff, and wider spans that managers struggle to supervise.

The role of management

Delegation is giving a subordinate the authority to carry out a task. It frees the manager’s time for important decisions and motivates staff through trust and responsibility, but the manager remains accountable and loses some control, and the task may be done less well if staff lack skills.

Leadership styles

Trade unions

A trade union is a group of workers who join together to protect their interests, such as pay, working conditions and job security. Members gain collective bargaining power, legal advice and support if disciplined. Unions may take industrial action (overtime ban, go-slow, strike). For the business, a union gives one point of contact for negotiating with many workers, but strikes can stop production and raise costs.

2.3 Recruitment, selection and training

The recruitment and selection process

Interviews let the business judge communication skills and personality and ask follow-up questions, but they take managers’ time, some candidates perform well in interviews but not in the job, and the interviewer may be biased towards people similar to themselves.

Part-time and full-time workers

Part-time staff give flexibility (cover busy periods such as weekends) and cost less, but may be less committed and harder to communicate with. Full-time staff are more committed and easier to manage but less flexible and more expensive.

Training

Reducing the size of the workforce

• Dismissal (being fired): because of the worker’s fault, such as misconduct or poor performance.
• Redundancy: the job is no longer needed (falling demand, new machinery, relocation, delayering). It is not the worker’s fault, so redundancy pay is usually given.
• Alternatives: natural wastage (not replacing workers who leave), early retirement, offering part-time contracts.

Legal controls on employment

Laws protect workers from unfair dismissal and discrimination (gender, race, religion, age, disability), set a minimum wage, limit working hours and require safe working conditions. They raise costs for businesses, but they also protect the firm’s reputation and help attract good workers.

2.4 Internal and external communication

Effective communication means the message is received and understood by the receiver, who gives feedback. Every communication has a sender, a medium, a receiver and feedback.

• Internal: within the business (manager to staff). External: with people outside (customers, suppliers, banks, government).
• One-way: no feedback expected (a notice). Two-way: the receiver responds (a meeting).

Barriers to communication and how to reduce them

• Jargon or language the receiver does not understand → use simple language and check understanding.
• Long chain of command distorts messages → flatter structure, direct messages.
• Wrong medium (complex instructions by phone) → choose written or visual methods for detail.
• Noise and distractions, or a receiver who does not trust the sender → quiet settings, build good relationships, ask for feedback.

3.1 Marketing, competition and the customer

Marketing is identifying customers’ needs and wants and satisfying them profitably. Its roles: identify and anticipate customer needs, satisfy them, keep customer loyalty, build relationships, and gain information about the market.

Why markets change

• Customers’ spending patterns change with income, fashion, technology and lifestyle (for example, growing demand for plant-based food).
• Competition grows, including from overseas firms and online sellers.

Businesses respond by keeping close to customers (research), improving products and efficiency, and developing new products. Firms that do not adapt lose sales and market share.

Niche and mass markets

Market segmentation

A market segment is an identifiable sub-group of a market whose members share similar characteristics. Markets can be segmented by age, gender, income, location, lifestyle, use of the product or ethnicity/religion. Segmenting lets a firm target the right customers with the right product and promotion, so marketing spending is not wasted, and it can reveal gaps in the market.

3.2 Market research

Market research is gathering information about customers, competitors and market trends. It reduces the risk of launching a product nobody wants.

• Market-orientated businesses research customers first, then make what they want.
• Product-orientated businesses make a product they believe is good, then try to sell it (common for innovative or basic products).

Sampling: it is too costly to ask everyone, so a sample is chosen. A random sample gives everyone an equal chance of selection; a quota sample picks set numbers from each group (e.g. 30 women aged 18–25). A sample that is too small or unrepresentative gives misleading results.

Accuracy of research depends on sample size and selection, question design (leading questions cause bias), honesty of respondents and how old the data is.

Presenting data: tables, bar charts, pie charts and line graphs. Line graphs show trends over time; pie charts show shares of a total such as market share.

3.3 The marketing mix

The four Ps must work together and fit the target market: a luxury product needs a high price, exclusive outlets and stylish promotion.

Product

A product can be a good or a service. Developing a new product: generate ideas → screen them → research and develop a prototype → test market → launch. New products can increase sales and market share and spread risk, but development is expensive and many new products fail.

Brand image is the image or identity customers associate with a brand. A strong brand builds loyalty, makes the product recognisable and lets the firm charge a higher price. Packaging protects the product, gives information, makes it easy to use and attracts attention on the shelf.

Product life cycle

Extension strategies lengthen the life cycle: add new features or flavours, sell in new markets (export or new segments), change the packaging, or find new uses for the product.

Price

Price elasticity of demand (PED) measures how much quantity demanded responds to a change in price. If demand is price elastic (many substitutes, luxuries), a price rise causes a large fall in sales and revenue falls, so the firm should keep prices low. If demand is price inelastic (necessities, strong brands, few substitutes), a price rise causes only a small fall in sales and revenue rises.

Place (distribution)

E-commerce (buying and selling online): the business reaches customers anywhere, 24 hours a day, with lower shop costs, but faces intense price competition, delivery costs, website costs and security risks. Customers gain convenience and easy price comparison but cannot see or try products and must wait for delivery.

Promotion

Aims: inform customers about a new product, persuade them to buy, remind them about an existing product, and build brand image.

• Advertising (paid communication through media): TV, radio, print, billboards, cinema and online. Informative advertising gives facts; persuasive advertising creates desire.
• Sales promotion: short-term incentives such as discounts, free samples, competitions, loyalty points and buy-one-get-one-free.
• Digital and social media marketing: targeted ads, influencers, email and search adverts. Cheaper and highly targeted; results can be measured; but negative comments spread fast.
• Sponsorship and public relations, personal selling and direct mail.

The choice depends on the marketing budget, the target market, the stage in the product life cycle and what competitors are doing.

3.4 Marketing strategy

A marketing strategy is a plan combining the four Ps to achieve a marketing objective. A good strategy is based on research into the target market and fits the budget. A luxury watch brand would use high prices, exclusive retailers and glossy magazine adverts; a new budget snack would use penetration pricing, supermarkets and sales promotions.

Legal controls on marketing

Laws protect consumers against misleading descriptions and advertising, unsafe or faulty products, and unfair contracts. Businesses must make sure products match their description and are safe, which can raise costs but builds trust.

Entering new foreign markets

Opportunities: a much larger market, extra growth when the home market is saturated, spreading risk across countries.
Problems: different languages, cultures and tastes; lack of local knowledge; different laws; import tariffs and transport costs; exchange-rate changes; strong local competitors.

Methods of reducing the risks: a joint venture with a local firm (local knowledge), licensing a local firm to make the product, franchising, or selling through local agents and distributors.

4.1 Production of goods and services

Production is turning inputs (factors of production) into outputs (goods and services). Productivity measures how efficiently inputs are used:

Ways to increase productivity: better training, more motivated staff, improved technology and automation, better organisation of the workplace. Higher productivity lowers the cost per unit, which can mean higher profit or lower prices.

Inventory (stock) management

Businesses hold inventory of raw materials, work-in-progress and finished goods. Holding buffer inventory means production and sales can continue if deliveries are late or demand suddenly rises. But inventory costs money: storage space, insurance, risk of theft, damage or going out of date, and cash tied up that could be used elsewhere.

A business reorders when inventory falls to the reorder level, allowing for the lead time (days for delivery).

Lean production

Lean production aims to cut waste of all kinds (time, materials, inventory, movement, defects) to raise efficiency.

• Kaizen: continuous small improvements suggested by workers, often in team meetings. Cheap to introduce and motivating, but improvements are gradual.
• Just-in-time (JIT): materials arrive exactly when needed and finished goods are sent out immediately, so almost no inventory is held. This saves storage costs and frees cash, but needs very reliable suppliers: a late delivery stops production completely.

Methods of production

Technology in production

Automation, robots, computer-aided design (CAD) and computer-aided manufacturing (CAM), electronic point-of-sale (EPOS) systems and contactless payments raise productivity and accuracy and lower unit costs. However, technology is expensive to buy, needs training, quickly goes out of date and may cause redundancies and lower morale.

4.2 Costs, scale of production and break-even

Types of cost

• Fixed costs do not change with output in the short run: rent, salaries, insurance, loan interest.
• Variable costs change directly with output: raw materials, packaging, piece-rate wages.
• Total cost = fixed costs + total variable costs.
• Average cost (unit cost) = total cost ÷ output.

Economies and diseconomies of scale

Economies of scale are the factors that lower average cost as a business grows.

• Purchasing: bulk-buying discounts.
• Marketing: advertising costs spread over more units; can afford its own vehicles.
• Financial: banks lend more easily and at lower interest to large firms.
• Managerial: can employ specialist managers.
• Technical: can afford advanced, efficient machinery.

Diseconomies of scale raise average cost when a business becomes too large: poor communication through many levels, low morale as workers feel unimportant, and weak co-ordination and slow decisions.

Break-even

The break-even point is the level of output at which total revenue equals total cost, so there is neither profit nor loss.

Uses of break-even: shows how many units must be sold to avoid a loss; shows the effect of changing price or costs; supports applications for loans. Limitations: assumes every unit made is sold, that price and variable cost stay the same at every output, and that fixed costs never change. It is only as accurate as the forecasts behind it.

Changes to the break-even point: a higher price or lower variable cost raises contribution and lowers break-even; higher fixed costs (a new loan, bigger premises) raise break-even.

4.3 Achieving quality production

Quality means producing a good or service that meets customers’ expectations and is fit for purpose. Good quality builds reputation and loyalty, allows higher prices and cuts the cost of waste, repairs and returns. Poor quality leads to complaints, returns, lost sales and a damaged brand.

Customers also judge quality through customer service and after-sales service (repairs, warranties). Excellent service is a way to stand out from competitors, especially for small businesses that cannot compete on price.

4.4 Location decisions

Choosing a country

Firms may move production abroad (relocation) for lower wages and land costs, to be nearer new markets, to avoid import tariffs, or for government incentives. Risks include political instability, different laws, communication problems and damage to reputation if working conditions are poor.

Legal controls on location

Governments use planning permission to stop businesses locating in residential or protected areas, and may offer grants to attract firms to areas of high unemployment.

5.1 Business finance: needs and sources

Why businesses need finance

• Start-up capital: premises, equipment and first stock before any revenue arrives.
• Working capital: day-to-day costs such as wages, materials and bills.
• Expansion: new branches, machinery, research and development, buying other firms.

Capital expenditure is spending on fixed assets that last more than a year (machinery, vehicles, buildings). Revenue expenditure is spending on day-to-day running costs (wages, rent, fuel).

Sources of finance

Choosing a source depends on: what the money is for (short-term needs → overdraft; long-term assets → loan or shares), the amount, the legal form of the business (only companies can sell shares), the owner’s wish to keep control, and existing debt (a firm that already owes a lot will struggle to borrow more and faces high interest).

5.2 Cash flow forecasting and working capital

Cash flow is the movement of money into (inflows) and out of (outflows) a business. A business can be profitable yet still fail if it runs out of cash to pay wages and suppliers. Cash is needed to pay debts on time, keep suppliers’ trust and take opportunities.

Cash flow forecast

Each month’s closing balance becomes next month’s opening balance. The forecast shows a cash shortage in February, so the owner can arrange an overdraft in advance.

Uses of a cash flow forecast

• Shows when the business will be short of cash so finance can be arranged early.
• Supports a loan application.
• Helps manage the timing of large payments.

Solving a cash flow problem

Working capital

Working capital is the money available for day-to-day spending. Too little and the business cannot pay its bills; too much (for example, lots of unsold stock or cash sitting idle) means money is not being used productively.

5.3 Income statements

Profit is total revenue minus total costs. It rewards the owners for risk, provides finance for reinvestment, and signals success to investors and lenders. Cash is not profit: a sale on credit counts as revenue now, but the cash arrives later.

• Revenue = price × quantity sold.
• Cost of sales = opening inventory + purchases − closing inventory.
• Gross profit = revenue − cost of sales. Profit = gross profit − expenses.

Users: managers (judge performance, set targets), shareholders (dividends, share value), banks (ability to repay), and potential investors.

5.4 Statement of financial position (balance sheet)

Shows what a business owns (assets) and owes (liabilities) on a particular date.

• Non-current assets: kept for more than a year: buildings, machinery, vehicles.
• Current assets: held for less than a year: inventory, trade receivables (money owed by customers), cash.
• Current liabilities: debts due within a year: trade payables (money owed to suppliers), overdraft.
• Non-current liabilities: debts due after more than a year: long-term bank loans.
• Shareholders’ equity: share capital + retained earnings.

5.5 Analysis of accounts

How to improve: raise prices (if demand is inelastic), find cheaper suppliers, cut overheads, or sell more higher-margin products. To improve liquidity: sell off excess inventory, chase customers who owe money, or convert short-term debt into a long-term loan.

Limitations of ratios: they are based on past data; one year alone means little, so compare with previous years and competitors; they ignore non-financial factors such as staff morale and reputation; and different firms may calculate figures differently.

6.1 Economic issues

The business cycle

Government economic objectives

• Economic growth: rising GDP means more jobs and higher incomes, so more demand for products.
• Low unemployment: more people with income to spend.
• Low and stable inflation: high inflation raises firms’ costs, makes planning hard, and makes exports less competitive.
• Balance of payments stability: exports and imports roughly in balance.

Gross Domestic Product (GDP) is the total value of goods and services produced in a country in a year. Inflation is a sustained rise in the general price level. Unemployment is when people who are willing and able to work cannot find a job.

Government policies and their effects

6.2 Environmental and ethical issues

Externalities

• External costs: costs of business activity paid by third parties, not the business: air and water pollution, traffic congestion, noise, loss of habitats.
• External benefits: gains to third parties: new jobs, better roads built for a factory, training that workers take to other jobs.

Sustainable development means meeting today’s needs without reducing the ability of future generations to meet theirs: using renewable energy, recycling, cutting waste and packaging.

Pressure groups and government

Pressure groups try to change business behaviour through boycotts, protests and social media campaigns. Bad publicity can cut sales quickly, so firms often respond. Governments can control harmful activity with laws (limits on emissions), taxes and fines on pollution, and permits to pollute that can be traded.

Ethical decisions

An ethical decision is based on moral principles, doing what is right rather than only what is profitable: not using child labour, paying suppliers fairly (fair trade), being honest in advertising, protecting the environment.

6.3 Business and the international economy

Globalisation

Globalisation is the increasing freedom of movement of goods, capital and people around the world. It is driven by free-trade agreements, cheaper transport and the internet.

• Opportunities: new markets abroad; cheaper materials and production; access to foreign skills and technology.
• Threats: more competition from foreign firms with lower costs; staff may be attracted to foreign firms.

Governments may use protectionism (tariffs and import quotas) to shield domestic firms. This helps local producers but raises prices for consumers and for firms that use imported materials, and other countries may retaliate.

Multinational companies (MNCs)

A multinational has factories or service operations in more than one country.

Exchange rates

An exchange rate is the price of one currency in terms of another. When a currency appreciates it buys more foreign currency; when it depreciates it buys less.

Costs, revenue and profit

Break-even

Production

Cash flow and accounts

Ratios

Exchange rates

Short answers [2–4]

Case: Siti’s Batik Studio

Case: Arjun’s FixIt repair service

Case: KL Scoot (12-mark recommendation)

Short answers [4]

KL Scoot: quality and suppliers [6]

Siti’s Batik Studio: job or batch? [12]

Paper 2 style: consider three options [12]

Calculations

Explain [2–4]

Analyse [6]

Fix the answer: common slips

These are typical first-draft answers (shortened). Each one has the right idea but loses marks. See what changes.