Ordinary Levels Business Studies Definitive Encyclopedia Notes - Understanding Business Activity, Management, and Economics

Understanding Business Activity and the Purpose of Business

• Foundational Concept: Needs and Wants

  • Needs: Essential items required for survival, such as food, drink, and basic shelter.

  • Wants: Non-essential items that people desire once basic needs are met. Examples include DVD players, cars, holidays, and meals out.

• Definition of a Business: An organization that exists to provide goods and services to meet the needs and wants of a population.

  • Goods: Physical objects that can be purchased, such as flour, CD players, oil, or laptop computers.

  • Services: Non-physical items that can be purchased, such as baking, rock concerts, tourism, education, and healthcare.

• Case Study: Unilever

  • Started in 1872, initially producing margarine.

  • It is currently the third-largest consumer goods company.

  • Revenue in 2012 reached $€51.3$ billion.

  • Unilever products are consumed by nearly $2$ billion people every day.

• Key Features of Business Activity

  • Production of goods and services.

  • Consumption by customers.

  • Use of resources (capital, labor, etc.).

  • Susceptibility to external factors.

  • Aim to generate a profit.

• Classification of Organizations

  • Private Enterprise: Owned privately by individuals or groups. Their primary goal is to generate profit for owners.

  • Social Enterprises: Non-profit organizations in the private sector, such as charities and pressure groups, existing for social causes rather than profit.

  • Public Enterprise: Organizations owned by the government (public sector). Examples include schools, policing, and healthcare. They provide goods/services that the private sector might fail to provide adequately.

The Economic Problem and Factors of Production

• The Problem of Scarcity: Human wants are unlimited, but resources are limited. This creates scarcity.

• Opportunity Cost: The next best alternative given up when choosing one item over another.

• The Factors of Production (Economic Resources):

  • Land: All natural resources provided by nature.

  • Labour: The number of people available to make products.

  • Capital: Finance, machinery, and equipment needed for manufacturing goods.

  • Enterprise: The skill and risk-taking ability of an individual who combines the other factors of production.

• Specialization: Occurs when people or businesses concentrate on tasks they are best at.

• Division of Labour: Splitting the production process into different tasks where each worker performs one specific task.

• Added Value: The difference between the cost of purchasing raw materials and the price the finished good is sold for.

  • Formula: $\text{Added Value} = \text{Selling Price} - \text{Cost of Raw Materials}$

  • Methods to Add Value: Brand names, packaging, advertising (often using celebrities), specialized machinery, increasing the selling price, and reducing costs.

Business Stakeholders

• Definition: Any individual or group that has an interest in the operation of a business.

• Key Stakeholder Groups and Their Interests:

  • Owners/Entrepreneurs: Risk their own money to set up and organize the business; they seek profit and growth. Limited companies are owned by shareholders.

  • Customers: Purchase goods and services; they demand high quality at fair prices.

  • Employees: Work for the business; they desire satisfactory salaries, training, good working conditions, job security, and promotion opportunities.

  • Managers: Run the business; they lead teams and solve problems. They help plan the direction of the business with owners.

  • Financiers: Lend money (banks, family, venture capitalists). They have a financial interest and want the business to succeed to ensure repayment.

  • Suppliers: Provide raw materials and utilities; they require prompt payment and regular orders.

  • Local Community: Provide the workforce; they benefit from jobs but may criticize noise or pollution.

  • Government: Interested in employment, wealth generation, and tax collection to finance public spending.

Levels of Economic Activity and Changes in Sectors

• Economic Sectors:

  1. Primary Sector: Extraction of raw materials (agriculture, fishing, forestry, mining, quarrying).

  2. Secondary Sector: Conversion of raw materials into finished or semi-finished (producer) goods (manufacturing, construction, processing).

  3. Tertiary Sector: Production of services (commercial, financial, leisure, transport, healthcare).

• Interdependence: Businesses in different sectors rely on each other to survive and function.

• Deindustrialization: The decline in the manufacturing sector (secondary) within an economy.

  • Example: The UK moved from a primary-sector-dominant economy before the late 18th-century Industrial Revolution to a tertiary-sector-dominant economy in the last $60$ years.

• Reasons for Manufacturing Decline in Developed Countries:

  • Shift in consumer spending patterns toward services.

  • Competition from developing nations like India, China, and Brazil.

  • Growth of the service-heavy public sector.

  • Technological advances replacing manual labor with machines.

Business Size, Growth, and Integration

• Measuring Business Size:

  • Number of Employees: Can be misleading (e.g., a fully automated firm with $20$ people producing more than a manual firm with $200$).

  • Sales Turnover: Total value of sales.

  • Capital Employed: Total finance invested. Capital requirements vary by industry (e.g., an oil company needs millions, while a restaurant may need less than $\$10,000$).

• Benefits of Growth: Higher sales/profits, Economies of Scale (falling average costs), prestige for owners, and bargaining power with suppliers (e.g., Walmart).

• Methods of Growth:

  • Internal (Organic) Growth: Expansion by opening new branches, financed by loans, shares, or retained profits (e.g., Cargill’s Food City).

  • External Growth: Integration through mergers or takeovers.

    • Merger: Two companies combine to form one.

    • Takeover: One company buys a controlling interest (more than $50\%$ of shares) in another (e.g., Adidas buying Reebok).

    • Synergy: Two integrated firms becoming more efficient and profitable than they were separately.

• Types of Integration:

  • Horizontal Integration: Firms in the same industry at the same stage of production (e.g., two bakeries). Eliminates competitors but may lead to monopoly investigations.

  • Forward Vertical Integration: Integrating with a customer (e.g., a farm buying a retail shop). Secures an outlet for products.

  • Backward Vertical Integration: Integrating with a supplier (e.g., a bakery buying a wheat farm). Controls quality and price of raw materials.

  • Conglomerate: Integrating with a business in an entirely different industry. Reduces risk by diversifying revenue streams.

• Reasons Businesses Remain Small:

  • Industry type (personal services like hairdressing or plumbing).

  • Limited market size (luxury goods like jewelry or expensive fashion).

  • Owner's preference/objectives.

Public Sector Organizations and Privatization

• Public Corporations: Owned and controlled by the government. Managed by a board of directors appointed by government ministers.

  • Pros: Prevents wasteful competition; ensures provision of essential services (electricity, broadcasting).

  • Cons: No profit incentive leads to inefficiency; prone to political interference; subsidized by taxpayers.

• Privatization: Transferring public sector resources to the private sector.

  • Methods: Sale of public corporations (selling shares), Deregulation (lifting legal restrictions), Contracting out (private firms bid for government services), and sale of land/property.

  • Motivations: Generate income for the state, reduce inefficiency, increase competition, and reduce political interference.

Entrepreneurs and Business Start-ups

• Entrepreneur Qualities: Innovation, market understanding, resilience, passion, and risk-taking.

• Reasons for Government Support: Reduces unemployment, increases competition and choice, boosts GDP output, and provides future tax revenue from growing firms.

• Business Plan: A dynamic document detailing objectives, operations, finance, and owners. Essential for securing bank loans.

  • Typical Contents: Executive summary, market profile, product (USP), competition analysis, idea protection (patents), management team, marketing mix, production/operations, and financial projections.

• Reasons for Failure: Lack of management skills, environmental changes, over-expansion, and poor financial management.

Types of Business Organization

• Sole Trader: One person provides capital and has full control.

  • Pros: Easy to set up, minimal paperwork, full control.

  • Cons: Unlimited Liability (personal assets at risk), hard to raise finance, lack of continuity.

• Partnership: $2$ to $20$ people share capital and management via a Partnership Deed.

  • Deed Contents: Profit/loss sharing ratios, withdrawal rules, illness/holiday arrangements.

  • Pros: Specialization, more capital, shared responsibility.

  • Cons: Unlimited liability, shared profit, potential for disputes.

  • Limited Partnership: Includes sleeping partners who provide capital but have limited liability and no management role.

• Franchise: A business using the name and system of a successful existing firm (Franchisor).

  • Franchisee Fees: Initial start-up fee and ongoing royalty payments (percentage of sales).

  • Pros: Low risk, support/training provided, national marketing.

  • Cons: Shared profit, strict contracts, lack of independence.

• Social Enterprises: Focus on social/environmental missions (e.g., Charities, Cooperatives).

  • Cooperatives: Owned by members; profits returned to members.

• Limited Liability Companies: Must be incorporated to create a separate legal entity.

  • Documents: Memorandum of Association (External: name, office, objectives) and Articles of Association (Internal: shareholder rights, director procedures).

  • Private Limited Company (Ltd): Shares transferred privately; often family-owned. Cannot trade on the stock market.

  • Public Limited Company (PLC): Shares sold to the general public on the stock exchange. Must have at least $\pounds 50,000$ share capital. Subject to more regulatory control and media profile.

Business Objectives

• Motivation: Objectives provide clear targets and motivation for employees.

• Financial Objectives:

  • Survival: Critical for new or struggling firms.

  • Profit Maximization: Making as much profit as possible.

  • Sales Growth: Increasing volume to achieve market share and economies of scale.

  • Market Share: The percentage of total market sales held by one brand.

  • Financial Security (Profit Satisficing): Making enough profit to satisfy owners' needs without the burden of massive expansion.

• Non-Financial Objectives: Social objectives (improving well-being), personal satisfaction, challenge, and independence (being one's own boss).

• Reasons for Objective Changes: Market conditions, technological shifts, performance levels, new legislation, or internal ownership changes.

Motivation in the Workplace

• Definition: The reason employees want to work hard and effectively. Behavior is a product of ability and motivation.

• Theories of Motivation:

  • F.W. Taylor (Scientific Management): Employees are "economic men" motivated solely by money. Advocates for Piece Rate systems, division of labor, and tight supervision.

  • Maslow (Hierarchy of Needs): People move up a hierarchy: Physiological (rest, shelter) $\rightarrow$ Safety (job security) $\rightarrow$ Social (friendship) $\rightarrow$ Esteem (prestige) $\rightarrow$ Self-actualization (maximizing potential).

  • Herzberg (Two-Factor Theory):

    • Hygiene Factors: Do not motivate if present but cause dissatisfaction if absent (e.g., pay, working conditions, status, security).

    • Motivators: Lead to real satisfaction and better performance (e.g., achievement, recognition, responsibility, the work itself).

• Financial Rewards:

  • Salary: Monthly pay (typically white-collar).

  • Wages: Weekly pay (typically manual labor).

  • Time Rate: Pay based on hours worked.

  • Piece Rate: Pay based on output quantity.

  • Commission: Pay based on sales volume.

  • Bonus: Extra pay for good work.

  • Fringe Benefits: Non-cash benefits (company cars, insurance, pensions).

  • Sundar Pichai Example: Awarded $\$199$ million in shares as an incentive to stay at Google/Alphabet.

• Non-Financial Rewards: Job rotation, job enlargement (extra tasks at same level), job enrichment (tasks requiring higher skill/responsibility), autonomous work groups (team empowerment).

Internal Organization and Management

• Organization Charts: Shows functions, roles, responsibility, accountability, and communication channels.

• Hierarchy Levels:

  • Directors: Appointed by owners; make major decisions.

  • Managers: Plan, organize, coordinate, and control resources.

  • Supervisors: Monitor operations.

  • Operatives: Skilled workers in production.

• Span of Control: The number of subordinates reporting directly to a manager.

• Chain of Command: The route orders take from the top to the bottom of the hierarchy.

  • Tall Structure: Long chain of command, narrow span of control. Costs more; communication can be slow.

  • Flat Structure: Short chain of command, wide span of control. Communication is faster; management costs are lower.

• Delegation: Passing authority and work to a subordinate. Helps train staff but requires trust from the manager.

• Management Functions (Henri Fayol): Planning, Organizing, Co-ordinating, Commanding, and Controlling.

• Leadership Styles:

  • Autocratic: Manager expects orders to be followed without question.

  • Democratic: Employees involved in decision-making.

  • Laissez-faire: Employees left to make their own decisions within broad objectives.

Human Resources: Recruitment, Training, and Legislation

• Recruitment Process: Job Analysis $\rightarrow$ Job Description (tasks/duties) $\rightarrow$ Person Specification (skills/qualifications) $\rightarrow$ Advertising $\rightarrow$ Shortlisting $\rightarrow$ Interviews/Testing $\rightarrow$ Selection $\rightarrow$ Contract of Employment.

• Internal vs. External Recruitment:

  • Internal: Cheaper, motivates staff, familiarity. Disadvantages include no new ideas and potential jealousy.

  • External: New talents/ideas, more choice. Disadvantages include high cost (agencies/advertising) and high risk.

• Training Types:

  • Induction: Familiarizing new recruits with the system and culture.

  • On-the-job: Learning while performing the task with a supervisor.

  • Off-the-job: Training away from the workplace (institutes, evening courses).

• Workforce Planning: Managing numbers and skills to meet future needs. Downsizing may occur due to automation, falling demand, or mergers.

  • Redundancy: Employee lost through no fault of their own.

  • Dismissal: Employee fired for unsatisfactory work or behavior.

• Employment Legislation (UK Examples):

  • Equal Pay Act 1970: Equal pay for work of equal value regardless of gender.

  • Sex Discrimination Act 1975: Protection based on gender/marital status.

  • Race Relations Act 1976: Protection against discrimination based on ethnic origin.

  • Disability Discrimination Act 1995: Duty to make "reasonable adjustments."

  • Health and Safety at Work Act 1974: Written policy and training for safety.

Communication in Business

• Direction of Flow: Downward (instructions), Upward (feedback/ideas), Horizontal (peer-to-peer).

• Barriers: Complicated language (jargon), wrong medium (e.g., letter for bad news), non-listening receivers, lack of feedback.

• Methods:

  • Oral: Face-to-face, telephone, video/teleconferencing. Allows immediate feedback.

  • Written: Letters, reports, memorandums (internal only), notices. Provides a permanent record.

  • Electronic: Email, Intranets, Social Media (target reach), Viral Marketing.

  • Visual: PPT, films, charts, photographs. Appealing but can be misinterpreted.

Marketing and the Marketing Mix (4 Ps)

• Market Research: Gathering/analyzing info about markets.

  • Qualitative: Subjective opinions ("Why?"); focus groups, interviews.

  • Quantitative: Statistical data ("How many?"); surveys, questionnaires.

  • Primary (Field): New, original data. Expensive and time-consuming.

  • Secondary (Desk): Data that already exists (government reports, websites, internal records). Cheap but may be out of date.

• Market Segment: Sub-groups with similar characteristics (age, socio-economic group, location, gender, lifestyle, religion).

• Mass Market: Selling the same product toทุกคน (e.g., Coca-Cola).

• Niche Market: Specialized segments (e.g., Bentley).

• The 4 Ps:

  1. Product: Design, brand, and packaging. Product Life Cycle: Development, Introduction, Growth, Maturity, Decline. Extension strategies: new uses, new markets, product modification.

  2. Price:

     • Cost-plus: Cost + markup.

     • Penetration: Low starting price to enter a market.

     • Skimming: High starting price for high-quality/unique items.

     • Competitive: In line with rivals.

     • Psychological: e.g., $\$99.99$.

     • Loss Leader: Sold below cost to attract customers.

     • Dynamic: Prices change with demand (airlines).

  3. Place: Channels of distribution.

     • 1-Level: Manufacturer $\rightarrow$ Customer.

     • 2-Level: Manufacturer $\rightarrow$ Retailer $\rightarrow$ Customer.

     • 3-Level: Manufacturer $\rightarrow$ Wholesaler $\rightarrow$ Retailer $\rightarrow$ Customer.

  4. Promotion: Informative vs. Persuasive advertising. Above-the-line (media) vs. Below-the-line (sales promotions, BOGOF).

• Legal Controls on Marketing: Weights and Measures, Trade Descriptions (honest ads), Sale of Goods (fit for purpose), Distance Selling (7-day cooling-off period).

Operations and Production Management

• Productivity: Output compared to input.

  • Labour Productivity Formula: $\text{Productivity} = \frac{\text{Output}}{\text{Number of Employees}}$

• Inventory Control:

  • Buffer Stock: Minimum stock level held for emergencies.

  • Lead Time: Time between ordering and delivery.

  • Reorder Level: Inventory level at which a new order is triggered.

• Lean Production: Minimizing waste while maintaining quality.

  • Kaizen: Continuous improvement from worker ideas.

  • Just In Time (JIT): Reducing inventory to zero; materials arrive exactly when needed (Example: Toyota).

• Production Methods:

  • Job: Single, specialized items (tailor-made jets).

  • Batch: Set quantities of identical items (printing batches).

  • Flow: Continuous mass production (soft drinks).

• Quality Management:

  • Quality Control (QC): Checking at the end (detecting faults).

  • Quality Assurance (QA): Building quality into the process (prevention).

  • TQM: Total Quality Management; improvement at every stage.

  • ISO 9000: International quality standard; enhances brand image and sales.

Financial Information and Decisions

• Why Finance is Needed: Start-up, working capital (day-to-day), expansion, and emergencies.

  • Capital Expenditure: Spending on fixed assets (long-term).

  • Revenue Expenditure: Spending on day-to-day costs (wages, rent).

• Sources of Finance:

  • Internal: Retained profit, sale of assets, sale of inventory, owner's savings.

  • External: Bank loans, issuing shares, debentures (long-term loans), debt factoring, grants, microfinance, crowdfunding, and venture capital.

  • Short-term: Overdrafts, trade payables (30-90 days), credit cards (typically 56 days interest-free).

  • Long-term: Leasing, hire purchase, mortgage.

• Breakeven Analysis:

  • Formula: $\text{Breakeven Point (units)} = \frac{\text{Fixed Costs}}{\text{Selling Price per unit} - \text{Variable Cost per unit}}$

  • Margin of Safety: The amount by which sales exceed the breakeven point.

• Financial Statements:

  • Statement of Comprehensive Income:

    • $\text{Gross Profit} = \text{Revenue} - \text{Cost of Sales}$

    • $\text{Operating Profit} = \text{Gross Profit} - \text{Overheads}$

  • Statement of Financial Position:

    • $\text{Net Assets} = \text{Total Assets} - \text{Total Liabilities}$

    • $\text{Working Capital (Net Current Assets)} = \text{Current Assets} - \text{Current Liabilities}$

• Ratio Analysis:

  • $\text{Gross Profit Margin} = \left( \frac{\text{Gross Profit}}{\text{Revenue}} \right) \times 100$

  • $\text{Net Profit Margin} = \left( \frac{\text{Operating Profit}}{\text{Revenue}} \right) \times 100$

  • $\text{Return on Capital Employed (ROCE)} = \left( \frac{\text{Operating Profit}}{\text{Capital Employed}} \right) \times 100$

  • $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$ (Ideal: $1.5$ to $2.0$)

  • $\text{Acid Test Ratio} = \frac{\text{Current Assets} - \text{Inventories}}{\text{Current Liabilities}}$ (Critical if < 1.0)

External Influences on Business

• Government Economic Objectives: Low inflation (preventing price rises), low unemployment, high GDP growth, and a positive balance of payments.

• Balance of Payments: Records the difference between Exports and Imports.

  • \text{Exports} > \text{Imports} \rightarrow \text{Surplus}

  • \text{Exports} < \text{Imports} \rightarrow \text{Deficit}

• Economic Policies:

  • Fiscal Policy: Changes in taxes (Direct: Income/Corporation; Indirect: VAT) and government spending.

  • Monetary Policy: Changes in interest rates. High rates increase business costs and reduce consumer demand.

  • Supply-side Policies: Privatization, training/education improvement, and increasing competition.

• Business Cycle: Stages of Growth, Boom, Recession (falling GDP), and Slump (prolonged recession).

• Environmental and Ethical Issues:

  • Social Responsibility: Decisions benefitting stakeholders (e.g., reducing pollution).

  • Externalities: External costs (pollution) vs. External benefits (jobs for the community).

  • Pressure Groups: Can organize consumer boycotts.

• Globalisation: Increased worldwide trade, movement of people, and capital. Encouraged by free trade agreements and improved transport.

• Exchange Rates:

  • Appreciation: Rise in currency value; makes Exports more expensive (bad for exporters) and Imports cheaper (good for importers).

  • Depreciation: Fall in currency value; makes Exports cheaper (good for exporters) and Imports more expensive (bad for importers).