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…

Definition 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

Definition 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

Definition Scarcity

The shortage of resources compared with unlimited wants.

Definition 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

Definition Labour

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

Example of Labour

Chef, Teacher, Builder, Doctor

Definition Capital

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

Example of Capital

Tools, Vehicles, Computers

Definition 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

Calculate + How can a business increase added value?

Selling price minus the cost of bought-in materials.

Increase it by branding, convenience, a USP, higher quality, packaging or better service.

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.

Example of opportunity cost

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

What makes an entrepreneur successful?

Creativity

Hard working

Resilience

Initiative

Self-confident

Risk taker

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

Definition Business idea

Clear explanation of the goods and services provided by the business, helping to attract investors

May alos include the history if the business idea

Definition Business aims and objectives

What the business wants to achieve in the medium and long term

Aims can be both financial and non-financial depeding on the business

Definition Target market

Explain who the business aims to serve, including age, gender and income

Forms part of the firm’s marketing strategy

Definition Forecast revenue

Project the business’s anticipated income from sales

Calculated as: Sales revenue= Price x Quantity sold

Definition Forecast cost

Predicts fixed, variable and total costs to manage spending effectively

New businesses often have high startup costs, such as initial stock

Definition Profit forecast

Investors review profit forecasts to asess the business’s ability to repay borrowed funds, such as bank loans

Definition Cash-flow forecast

Explains management of cash inflows and outflows monthly to prevent liquidity issues

Definition Source of finance

Details of funding sources for the new business, such as loans, owner’s funds, or venture capital

Definition Business location

Describes the proposed business location, including a map and advantages like good transport links or customer proximity

Why do government support businesses

-Increase the country’s level of output to achieve economic growth

-Reduce level of unemployment (as a new growing business can create jobs)

-Improve choice for consumers by providing competition for existing businesses

-Encourage entrepreneurs to set up social enterprises which may support disadvantaged groups or improve community

How does government support business start-ups

-Training and support session:
Advice regarding finance, operation and marketing

(often be accessed through local authorities)

Support session:

Offered by business mentors allow entrepreneurs to ask specific questions related to their business

-Enterprise zones:

Geographic areas which provide tax breaks and gov. support to help business grow

can provide access to low-cost premises and incentives such as reduce business rate

often link with unis that share expertise and facilities (especially in less economically-developed regions)

-Finance:

Can provide low-interest start up loans and grants for new or growing businesses (that create jobs or invest in training workers)

Definition Low-interest start-up loan

Definition Grant

A loan for a new business with a low interest rate, making it cheaper to repay

Money given to a business that usually does not need to be repaid, often to support a specific purpose.

Definition Low interest rate

A small percentage charged on a loan, meaning the business pays less extra money when repaying it

Definition Business rates

A tax paid by businesses to the local government for occupying non-domestic property

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.

Internal growth

When a business grows using its own resources, such as increasing sales, opening new branches, or producing more products.

External growth

When a business grows by joining with or taking over another business, such as through a merger or takeover.

Internal growth advantages and limitations

Advantages:

Lower risk – the business grows gradually.

More control – owners keep control of the business.

Less expensive than buying another business.

Limitations:

Slow – growth can take a long time.

Limited resources – growth depends on the business's own money and capacity

May face strong competition while growing.

External growth advantages and limitations

Advantages:

Fast growth – the business can grow quickly by buying or merging with another business.

Increased market share – gains the other business's customers.

Access to resources – such as employees, technology and equipment.

Limitations:

Expensive – takeovers and mergers can cost a lot.

Risk of conflict – employees and managers from the two businesses may disagree.

Difficult to integrate – different cultures and systems can cause problems.

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:

• Greater control over supplies/distribution

• Can reduce costs

• More reliable supply of materials

• Can improve quality control

Cons:

• Expensive to acquire another business

• Management becomes more complicated

• Business may have less flexibility

• If the acquired business performs badly, it can affect the whole business

Explain horizontal integration with an example, and evaluate it

Joining with a firm at the SAME stage

A supermarket buys another supermarket

Pros:

• Larger market share

• Less competition

• Economies of scale → lower average costs

• Higher sales and profit potential

Cons:

• Expensive to buy/merge with another business

• Diseconomies of scale if the business becomes too large

• Redundancies may be needed

• Can cause management and communication problems

Definition economies of scales

When a business becomes too large, causing its average cost per unit to increase.

Advantages of business growth

• Higher sales → more revenue.

• Higher profits → if costs are controlled.

• Economies of scale → lower average costs.

• Greater market share → stronger position in the market.

• More power → greater bargaining power with suppliers.

• Lower risk → sales can come from more customers/products.

• More opportunities → can expand into new markets.

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.

Business growth problems

• Higher costs → more employees, buildings and equipment are needed.

• Cash-flow problems → growth can require a lot of finance.

• Communication problems → harder to communicate in a larger business.

• Harder to control → managers have more employees and departments.

• Lower quality → rapid growth may lead to mistakes.

• Diseconomies of scale → average costs may increase as the business becomes too large.

• Less personal service → customers may receive less individual attention.

How can problems while expanding business be solved

Problem	How it can be solved
Higher costs	Make a budget and control spending.
Cash-flow problems	Get finance or improve cash-flow management.
Communication problems	Use better communication systems and regular meetings.
Harder to control	Delegate responsibility to managers.
Lower quality	Use quality checks and train employees.
Diseconomies of scale	Improve efficiency and avoid expanding too quickly.
Less personal service	Use customer-service training and feedback.

Why do some businesses deliberately stay small?

Personalised service: Niche market,

Quick response to changing tastes

Avoiding diseconomies of scale

The owner is satisficing rather than profit-maximising

Limited finance and management skills

Financing: Unable to access financing for expansion

Advantages and Disadvantages of choice of remainning small

Personal service – closer relationships with customers.

Easy to manage – fewer employees and simpler decisions.

Lower costs – less money needed for premises and staff.

Flexible – can quickly respond to changes in customer needs.

Owner keeps control – fewer shareholders/managers involved.

Limited economies of scale – higher costs per unit.

Less purchasing power – may pay more for supplies.

Limited finance – harder to raise money for expansion.

Less market share – may struggle against large competitors.

Limited ability to grow profits – fewer customers and sales.

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

Overtrading:

Expanding faster than the finance allows

What are the main causes of business sucess?

Good market research → understands customer needs and reduces the risk of selling products people do not want.

Good quality/customer service → creates customer loyalty, leading to repeat purchases and a good reputation.

Effective financial management → controls costs and cash flow, helping the business remain profitable.

Competitive advantage → offering something unique or better than competitors helps attract customers and increase market share.

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.

Definition Stakeholder

A person or group that has an interest in or is affected by a business

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.

Definition Partnership

Formal arrangements by two or more entrepreneurs to manage and operate a business and share its profits

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

Implications of unlimited liability

Owner is personally responsible for business debts.

Personal assets can be used to repay debts.

Owner may lose personal savings or possessions.

Business failure can cause personal financial loss.

Implications of limited liability

Owners are not personally responsible for all business debts.

Owners can only lose the money they invested.

Personal assets are generally protected.

The business itself is responsible for its debts and losses.

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.

Definition Ownership style

The legal structure of a business that determines who owns and controls it.

Factors affecting the choice of ownership structure

Capital needed: How much money the business needs to start and operate.

Risk: How much financial risk the owner is willing to take.

Business size: How large or small the business is.

Number of owners: How many people want to own the business.

Control: How much control the owner wants over decisions.

Liability: Whether the owner’s personal assets are at risk.

Growth: Whether the business plans to expand.

Legal requirements: Rules the business must follow.

Tax: How much tax the owner/business will have to pay.

Definition Franchises

A business that operates using the brand, products and business model of another established business, with permission.

How does a franchise operates

1. Franchisor → Owns the brand and business model.

2. Franchisee → Pays to use the brand and business model.

3. Franchisor provides → Training, support, products and marketing.

4. Franchisee operates → Runs the individual business and employs staff.

5. Payments → Franchisee usually pays an initial fee and ongoing royalties to the franchisor.

6. Rules → Franchisee must follow the franchisor’s standards and procedures.

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.

How does a joint venture operates

• Businesses agree to work together.

• They contribute money, resources or expertise.

• They share costs and risks.

• They share the profits.

• The businesses usually remain separate after the project.

Give a real example of joint ventures and evaluate it

Example: 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,

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

Objective: 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.

Benefits of setting business obj

• Provides direction → Gives the business clear goals to work towards.

• Motivates employees → Employees know what they are trying to achieve.

• Helps measure performance → The business can see whether it is meeting its targets.

• Improves decision-making → Managers can make decisions based on the business's goals.

• Helps with planning → Resources such as money and employees can be allocated effectively.

• Encourages growth → Objectives can encourage the business to increase sales, profits or market share.

Type of business obj

• Survival → Staying in business, especially when starting or during difficult times.

• Profit maximisation → Making the highest possible profit.

• Sales growth → Increasing the amount of products/services sold.

• Market share → Increasing the business's percentage of total market sales.

• Customer satisfaction → Keeping customers happy and loyal.

• Growth → Expanding the size of the business, such as opening more branches.

• Social/environmental objectives → Reducing environmental impact or supporting the community.

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.

Stakeholder conflict

When two or more stakeholders have different interests or objectives, causing disagreement about a business decision.

Example of Stakeholder conflict

• Employees vs owners → Employees want higher wages, while owners want to keep costs low.

• Customers vs business → Customers want lower prices, while the business wants higher prices to increase profit.

• Local community vs business → The community wants less pollution/noise, while the business wants to increase production.

Definition USP (Unique Selling Point)

The feature that makes a product different from and better than competitors', giving customers a reason to buy it.

Definition Added value

The difference between the selling price and the cost of bought-in materials.

Skill set for successful entrepreneurs

Communication

Team working

Problem solving

Organisation

Numercay

Information technology

Definition Business plan

A document setting out a business's aims, finances, marketing and operations.

Aims between

Shareholders, Employees, Customers, Suppliers, Governemnt and Local Community

• Owners/shareholders → want profits

• Employees → want good wages and job security

• Customers → want good-quality products

• Suppliers → want to be paid

• Government → wants taxes to be paid

• Local community → wants the business to have a positive impact

Definition Liability

Liability: The legal responsibility for a business’s debts.

Limited liability: owners only risk the money they invested.

Unlimited liability: owners can have to use their personal money/assets to pay business debts.

Definition Assets

Things a business owns that have value, such as buildings, equipment, vehicles and cash.

Definition of Franchisor, Franchisee and Joint venture

Franchisor: The business that owns the franchise and allows another business to use its brand and business model for a fee.

Franchisee: The person/business that pays to use the franchisor’s brand and business model.

Joint venture: When two or more businesses work together to create a new business or project, sharing the costs, risks and profits.

Definition Stakeholder and Shareholder

• Stakeholder: Anyone affected by or interested in a business.

• Shareholder: Someone who owns shares in a company.

Internal vs External Stakeholders

Internal stakeholders: People inside the business who are affected by its decisions.
Examples: employees, managers, owners.

External stakeholders: People outside the business who are affected by its decisions.
Examples: customers, suppliers, government, local community.

Definition Recession

A period when the economy is shrinking, causing lower spending and demand for goods and services.

Definition Capital

Money or other resources a business uses to start, run, and grow.

Definition of business sales

Total sales revenue achieved during a trading period

Formula sales revenue

Price x Quantity