Understanding Business Activity-Topic 1

Definition of Business

An organisation that combines factors of production to make products (goods and services) which satisfy people’s needs and wants

Goods

Tangible products made by businesses to be sold to customers

Example of Goods

Cars, Phones, Clothes…

Services

Intangible products that are provided by businesses to customers

Example of Services

Haircut, Taxi ride, Medical treatment…

Factors of Production

Ressources needed to produce goods or services

They are 4 and they are in limited supply

Limited Supply

When a finite amount of a resource or product is available

What does Limited supply of factors of production creates

Limited factors of production → Scarcity → Choice → Opportunity cost

Scarcity

The shortage of resources compared with unlimited wants.

Land

Natural ressources provided by nature that are used in the production of goods and services

Example of Land

Fields, Forests, Oil, Gas, Metals and other mineral sources

Labour

The human effort (physical and mental) used to produce goods and services.

Example of Labour

Chef, Teacher, Builder, Doctor

Capital

Man-made resources (finance, machinery and equipment) used to produce goods and services.

Example of Capital

Tools, Vehicles, Computers

Enterprise

The skills and risk-taking ability to organise the other factors of production to start and run a business (called entrepreneurs)

Example of Enterprise

-An entrepreneur starting a café

-A business owner launching a clothing brand

-Someone creating a new app company

Definition of Capital

The money invested into a business by the owners

How do you calculate added value, and how can a business increase it? | Selling price minus the cost of bought-in materials. Increase it by branding, convenience, a USP, higher quality, packaging or better service.

Explain horizontal integration with an example, and evaluate it | Joining with a firm at the SAME stage — one ice cream maker buys another. Pros: rapid market share gain, economies of scale, less competition, shared expertise. Cons: duplicated roles cause diseconomies of scale, culture clash.

What problems does growth cause, and how can they be solved? | Slow communication down a longer chain → use technology and decentralise. Diseconomies of scale → delegate more. Cash-flow strain → grow gradually with retained profit. Culture clash → communicate and plan carefully.

Why do some businesses deliberately stay small? | Personalised service, a niche market, quick response to changing tastes, avoiding diseconomies of scale, the owner is satisficing rather than profit-maximising, or limited finance and management skills.

What are the main causes of business failure? | Financial (low revenue, rising costs, cash shortages, no access to credit), poor management and inexperience, external shocks (new technology, new rivals, economic change), and overtrading — expanding faster than the finance allows.

Evaluate operating as a sole trader | Pros: quick and cheap to set up, total control, all profit kept, accounts stay private. Cons: unlimited liability, limited capital, long hours, no continuity if the owner is ill or dies.

Evaluate a partnership | Pros: more capital, shared skills and workload, simple to set up, flexible split of profit. Cons: unlimited liability, profits shared, slower decisions, and each partner is bound by the others' actions.

Contrast unlimited and limited liability and their consequences | Unlimited (sole traders, partners): no legal separation, personal assets at risk, so owners avoid bold decisions. Limited (Ltd, Plc): separate legal entity, shareholders lose only their investment, which encourages investment and risk-taking.

Evaluate a private limited company | Pros: limited liability, can raise finance by selling shares privately, professional image, company owns assets and signs contracts. Cons: set-up costs and paperwork, accounts must be filed, shares can't be sold publicly.

Evaluate a public limited company | Pros: can raise very large sums, shares easily traded, suits large-scale or global expansion. Cons: expensive compliance, loss of control, hostile takeover risk, shareholder pressure for short-term results.

A start-up owner has little money, significant set-up costs, and a skilled sister willing to invest. Which ownership type would you recommend? | A private limited company is strong — cheap to form, protects personal assets, attractive to lenders. A partnership is also viable since the sister brings both skills and finance. Sole trader is weakest, as high costs mean high personal risk. Always justify against the SPECIFIC facts given.

Evaluate franchising from both sides | Franchisee gains: known brand, training, supplies, exclusive area. Franchisee loses: high entry cost, royalties paid regardless of profit, little independence, rights can be withdrawn. Franchisor gains: fast growth with low risk plus fee income. Franchisor loses: control over daily operations, and one bad franchisee damages the brand.

What is a joint venture? Give a real example and evaluate it | Two separate firms form a combined structure for a defined outcome, sharing risk and return — BMW and Brilliance Auto in China. Pros: shared costs and expertise, local knowledge, less risky than going alone. Cons: profits split, managers disagree, objectives drift apart.

What is a social enterprise, and what is a cooperative? | A business whose primary purpose is social or environmental impact alongside profit, with surpluses reinvested. Its objectives are social, environmental, ethical and financial. A cooperative is one type, owned by its worker or customer members who share profits and elect directors.

What is the difference between aims and objectives, and what makes an objective SMART? | Aims are long-term aspirations; objectives are the specific steps to reach them. SMART = Specific, Measurable, Achievable, Relevant, Time-bound.

List the common business objectives and explain why they change | Survival, profit, growth, market share, customer satisfaction. A start-up prioritises survival; once established the focus moves to profit, then growth and market share. Recessions push firms back to survival.

What do internal stakeholders want? | Owners/shareholders: profit, dividends, return on investment. Employees: fair pay, job security, good conditions. Managers: hit company targets, maximise profit, control costs.

What do external stakeholders want? | Customers: quality at a fair price with good service. Suppliers: regular orders and prompt payment. Lenders: repayment with interest from a low-risk borrower. Government: legal compliance, tax, jobs. Local community: employment and responsible environmental behaviour.

Give an example of stakeholder conflict | A firm cuts costs to raise owners' profit, but workers face lower pay and customers face lower quality. Or a firm expands to create jobs, while the local community objects to the pollution and disruption. Managing it needs communication, transparency and compromise.

Give an example of adding value

Coffee beans costing a few cents become a $4 latte through branding, store ambience and convenience.

The beans are the bought-in cost; everything else is added value.

Why is adding value NOT the same as profit?

Added value only deducts the cost of materials.

Profit deducts ALL costs — wages, rent, energy, marketing.

A business can add lots of value and still make a loss.

Explain opportunity cost using a business example

The next best alternative given up.

A firm spends $50,000 on machinery instead of a marketing campaign — the campaign is the opportunity cost.

Name the three sectors with an example of each

Primary: farming, mining, fishing.

Secondary: car manufacturing, construction.

Tertiary: banking, hairdressing, tourism.

Definition Sectors of the economy

• Primary sector → Extracts raw materials from nature.

• Secondary sector → Manufactures raw materials into finished goods.

• Tertiary sector → Provides services to customers or businesses.

What is the difference between the private and public sector?

Private: owned by individuals and firms, aim is usually profit maximisation.

Public: government-owned, aim is providing services, protecting strategic industries, creating jobs.

Give examples of public sector organisations

Transport for London (local), Caribbean Airlines (national), state water and energy suppliers

What is privatisation, and can a government keep a stake?

Transferring a state-owned business into private hands.

Governments often retain a share to keep influence and receive profits

Singapore Airlines is majority government-owned.

What makes an entrepreneur successful, and how should you write about it in an exam?

Hard-working, shows initiative, takes calculated risks, creative, determined.

Never just list them — link each one to how it helps THAT business succeed.

What goes in a business plan and why does it matter?

Aims and objectives, target market, forecast revenue and costs, profit forecast, marketing mix, cash-flow forecast, sources of finance, location.

It reduces risk and persuades banks and investors to lend.

Name four ways to measure business size and one weakness of each

Workforce (misleads for capital-intensive firms), capital employed (misleads for service firms), value of sales (firms sell different products), value of output (hard to compare across industries)

Why do businesses want to grow?

Higher market share and profit, lower unit costs through economies of scale, more power over suppliers and customers, product diversification, easier access to finance.

What is the difference between a merger and a takeover?

Merger: two firms agree to combine into one new company and the originals cease to exist. Takeover: one firm buys over 50% of another's shares and gains control, often unwillingly.

Explain vertical integration with an example, and evaluate it

Joining with a firm at a different stage of the supply chain.

Forward: a dairy farm buys an ice cream maker.

Backward: a retailer buys its manufacturer.

Pros: cuts out middlemen, controls supply and quality.

Cons: culture clash, no experience in the new stage, high cost.