Business activity

1.1.1 
 Needs – Goods or services that are essential for living. These can things such
as water, basic food and clothing.
 Wants – Goods and services that people would like to have but are not
essential for living. For example, brand name clothing, expensive food and
luxury cars.
 Scarcity (The economic problem) – Unlimited wants but not enough products.
The cause of scarcity is because of not enough factors of production, the 4
factors of production are…

1.  Land – Natural resources from nature such as trees, forests and oil
2. Labour – Number of workers available to make products
3. Capital – Money required for a business to produce items this includes
machinery, robots etc…
4. Enterprise – Entrepreneurs with skills required to create a business.

 Opportunity Cost – A benefit/value that must be given up in order to achieve

something else. For example, if a bakery spends money on a new oven, the
opportunity cost of the oven could be a new refrigerator to store cakes.

 Specialisation – Workers/machines specialises in some part of the production

process. For example, At a car factory, some workers cuts metal parts,
another worker assembles the product and another paints the car.
Specialisation can help cut costs and create higher quality products.

 Division of labour – Production process has been divided into different tasks
for a specialised worker to work on. e.g. painting cars at a car factory.
Advantages of division of labour are

 Increased efficiency because the worker does the same task over and over
again.
 Workers don’t waste time moving from one task to another.

Disadvantages

 Workers may become bored doing the same task which results in decreased
efficiency
 Production may stop if one worker doesn’t do job

 Added Value = Selling price of the product – Cost price (materials etc…)
Value added is the difference between the selling price of a product and the
cost to produce it.

Added value can be increased by either charging higher prices for the same
product or by reducing the cost of a product by lowering quality e.g. using
cheaper materials.

1.2 – Classification of businesses

1.2.1 
Economic Sectors

 Primary Sector – Extracts and uses the natural resources from the earth. e.g.
Fishing, farming

 
 Secondary Sector – Manufacture goods using raw materials from primary
sector. e.g. Car manufacturers and other factories

 Tertiary Sector – Provides service to consumers and other sectors of the

industry e.g. Restaurants, car showroom, travel agent

Importance of economic sector

 The sector with the most workers is the most important in a country.

or

 The sector with most valuable goods/service is the most important in a

country.

Changes in sector importance

 De-industrialisation – when manufacturing sector becomes less important in

a country.

Why the importance of sectors changes?

 Primary sector resources get used up e.g. overfishing, deforestation.

 Factory costs (usually wages) are too high e.g. wages in China/India are
cheaper
 People spend more on the tertiary sector as they become wealthier. e.g. more
restaurants, travel agents

1.2.2
Mixed Economy

 Private Sector – Businesses not owned by the government but by private

individuals. (Goal = Profit)

Advantages 

High efficiency and lower costs

Competition is encouraged (prices will be lower)

Disadvantages

Some services may be closed (run out of money)

Workers may lose jobs to improve efficiency/cut cost (private sector business
does not care about employment rates in countries)

 Public Sector – Government/State owned businesses. (Goal = non-profit,

service for all citizens) e.g. Electricity, police, public transit

Advantages

Business is funded by government

Encourage more jobs

Disadvantages

Low efficiency

No competition between businesses

 Enterprise, business growth

and size
1.3.1 – Enterprise and entrepreneurship
Entrepreneur – A person who organises, and operates a business.

Characteristics of successful entrepreneurs

 Hard working – Long hours of work are needed to become successful

 Risk taker – Entrepreneurs never know if business idea will succeed
 Creative – Business ideas different from competitors
 Self-confident – Necessary to convince banks and investors.
 Effective communicator – Talk clearly to banks, customers, employees about
business.

Business Plan – Document with important information about your business e.g.
Business objective, operations, finance, owners

Business plan is needed to

 Apply for bank loans

 Plan business to reduce risk of failure

Business plan includes 

 Products and services that you will sell

 Costs of your business
 Location of the business
 What do I need to operate my business e.g. Machines, employees

Governments supports new businesses because

 New businesses creates jobs (reduce unemployment)

 Increased competition (Businesses competing with each other means prices
may be lowered)
 Business may grow larger and contribute to the country

Government supports new businesses by

 Loans at low interest rates

 Land to set up businesses at low costs
 Grants (money) to train employees
 Use research facilities at public universities
 Business advice from experts

1.3.2 – Methods and problems of

measuring business size
Methods of measuring size of a business
 Number of employees – Easy to calculate and compare with competitors.
However, some businesses can produce higher output with fewer employees.
e.g. Some factories uses machines.

 Value of output  – Easy to calculate and compare with competitors. However,

some businesses may be very small but producing very expensive products
such as brand name clothing while a very large factory may be producing
cheap clothing.

 Value of sales – Easy to calculate and compare with other businesses.

However, value may be different for businesses for example, a sports car
dealer may sell 2 cars a day while a normal car dealer e.g. Toyota may sell 20
cars a day.

 Value of capital employed – Simple to compare with other businesses.

However, this method is inaccurate because different factories will use
different types of capital e.g. A factory may use expensive machinery and
another may depend on employees.

There is no perfect way to compare businesses. Every business is different.

1.3.3 – Why some businesses grow and

other remain small
Why do businesses grow?

 Increased chances of higher profit

 Better status and prestige of the owners and employees
 Lower average cost (more negotiating power)
 Increased control of the market

Ways businesses can grow

 Internal Growth – Business grows by itself (Business gets larger as profit
increases e.g. more customers)
 External Growth – Take-over or merger with another business.

1. Horizontal integration – Firms in the same industry at the same stage of

production merges. e.g. 2 Bakeries merging to form a larger business
2. Vertical integration – Business expands by merging with another business in
another stage of production. There are 2 types of vertical integration.
Backwards and fowards. Backward vertial integration is when a business
merges with another business in the previous stage of production for example,
Bakery merges with wheat farm. Foward is when a business merges with a
business in the next stage of production e.g. Sugar farm merges with candy
factory.

Advantage of vertical integration is to have more control over distribution of

goods and services.

Conglomerate merger – Two businesses in a completely different industry

combine to form a new business. e.g. Insurance company buys an advertising
agency.

Joint Ventures – Two or more business agree to start a new project together.

Problems of business growth

 Large businesses are difficult to control. Solution – Operate in business in

small parts.
 Costs of expansion are high. Solution – Expand slowly
 There can be poor communication in large businesses. Solution – use
technology to communicate e.g. email. Operate the business in small parts.

Why do some businesses remain small?

 Type of industry e.g. hair salons stay small because of the connection with
their customers, if they grow too large they won’t be able to offer personal
service to their regular customers.
 Market size Some businesses such as stores in small towns are likely to
remain small due to the limited amount of customers. Businesses that produce
specialised goods such as brand name clothing or luxury cars are also likely to
remain small.
 Owner’s objective Some owners want to keep their businesses small to keep
full control and know all their employees and customers. Running a large
business can become stressful.

1.3.4 – Why some businesses fail

 Poor management – Many businesses fail due to poor management from
lack of experience by the managers.
 Failure to plan for change – The business environment is constantly
changing, Businesses need to change to keep up with technology.
 Poor financial management – Shortage of money means that the businesses
cannot be operated. Businesses needs to always make sure they have
enough money
 Over expansion – Some businesses expand too quickly and not have enough
money to operate.
 Startup risk – Starting up a new business is always risky, entrepreneurs may
lack experience and not be able to compete with larger businesses.

1.4 Types of business

organisation
1.4 – Types of business
organisation

1.4.1 – Main features of different forms of

business organisation
 
Unincorporated Business – A business that does not have a separate legal
identity from its owner(s) e.g. If the business is sued, the owner is responsible
and may need to cover the cost with their own personal money.

Incorporated Business – Business that has a separate legal identity from its
owner(s) e.g. If the business goes bankrupt, the owners won’t be held
responsible and only lose the money they invested.

Unlimited Liability – (Owners are held liable for the business. If the business
goes in debt, the owner needs to pay back with their own money.

Limited Liability – (Opposite of Unlimited liability, If a business fails, the owners

only lose what they invested)

Main forms of business organisations

Unincorporated Businesses

 Sole Trader – Owned and operated by one person.

Advantages

 Cheap and easy to startup

 Full control of your own business

Disadvantages

 Unlimited Liability
 If the owner dies, the business no longer exists
 Less money / difficult to expand business

 Partnership – Similar to a sole trader but there are 2 owners.

Advantages
 2 Owners mean that more money can be invested
 Less work since tasks can be done by 2 owners.
 Losses can be distributed among the 2 owners

Disadvantages

 Unlimited Liability
 If one owner dies/quits, the business no longer legally exists.
 There can be disagreement between the 2 owners.

Incorporated Businesses

 Private limited company (LTD) – Owned by shareholders.

Advantages

 Limited Liability to all shareholders

 Capital can be invested by many shareholders
 Cheaper to set up than public limited companies
 Continuity of existence – If the business owner dies, the business still exists.

Disadvantages

 Slower to startup (many legal documents needs to be signed)

 Shares can only be sold to family and friends
 Other shareholders need to agree before shares can be sold

 Public limited company (PLC) – Similar to a private limited company but

shares can be sold to the public. Great for large companies.

Advantages

 Limited Liability
 Shares can be sold to the general public without permission (Capital (Money)
can be raised quickly)
 Continuity of existence
 Company can grow and expand quickly
Disadvantages

 Complicated legal documents (Wastes money and time)

 Expensive to start up
 Company can grow large very quickly which will be difficult to control
 Original owners of the business may lose control of the company
 Shareholders may vote who manages the business in AGM (loss of control)

Annual General Meeting (AGM) – Meeting that must be held every year for
shareholders to vote for the company’s next directors.

Shareholders – Owners of a limited company, they buy shares which represent

the percentage they own of the company.

Franchising
Franchisor – Company that owns the original business, Franchisors sell the
franchise to a franchisee

Advantages

 Make money from selling the business’ name to franchisee

 Quick growth of the brand
 Operation of the business is the franchisee’ responsibility

Disadvantages

 If one franchisee has a bad reputation, the entire franchise will be effected e.g.
If one Macdonalds store served bad food, all the other Macdonald stores will
have a bad reputation.
 Profit from franchised stores are kept by the franchisee

Franchisee – Someone who buys a franchise from the franchisor to use the
brand name

Advantages

 Less chances of failure since the business is well known.

 Most of the advertisements are paid by the franchisor
 Less decision making is required from the franchisee e.g. food recipe is
already planned from franchisor
 Staff training may be provided from franchisor

Disadvantages

 Franchisee won’t be able to make own decisions e.g. come up with own menu
 Franchisee needs to pay the franchisor to use brand name

Joint Ventures – 2 or more businesses start a new project together.

Advantages

 Costs can be shared amongst the companies

 Knowledge and skills from more than one company
 Risks are shared (If the project fails)

Disadvantages

 Profit is shared
 Businesses may disagree with each other.

1.5 Business objectives and

stakeholder objectives
1.5 – Business objectives and
stakeholder objectives
1.5.1 – Businesses can have several
objectives – and the importance of these
can change
Business objective - a target that a business works towards.

Why are objectives important for a business?

 They act as a motivator as they give managers and workers a target to move
towards
 Helps with decision making (managers will know what is better for
the business to reach its target)
 Can make the entire business work toward a goal
 Managers can see if the business has achieved its goals or not.

Objectives that businesses set

Businesses often set multiple objectives which can change over time

 Business survival – This is common for new businesses and businesses in

bad economic times
 Profit – Businesses want to maximise profit.
 Growth – Businesses may want to grow for various reasons. Common
reasons for business growth is to obtain a higher market share, increase jobs
etc…
 Return to shareholders – incorporated businesses (Private and public limited
companies) are owned by shareholders. There are 2 main ways to return to
share holders 1.Businesses profits can be paid to shareholders as dividends
and increasing share price will keep the shareholders happy so managers
won’t be voted out.
 Market share – Businesses want to obtain a higher market share. The
advantages of this is to make the business more well known. With a higher
market share, the businesses may also be able to negotiate lower costs from
suppliers (economies of scale)
 Providing a service to society – Social enterprises are privately owned
businesses that focus on  1. providing a service to society such as providing
jobs to disabled or homeless people or  2. Protecting the environment.

Business objectives are likely to change over time. For example, A new business
has survived a few years so the managers decide to change the objective to
maximising profit.

1.5.2 – The role of stakeholder groups

involved in business activity
Stakeholder – A person or group with a direct interest in the performance and
activities of a business.

List of stakeholder groups

Internal stakeholders

 Owners – These are people who invested and set up the business. Objective
= Profit so they make money from the business.

 Workers – Employees of the business.  Objective = Payment for their work,

job promotion (increased salary), job security.

 Managers – Employees that control other workers. Objective = Higher salary,

job security, Successful company means better status.

External 
 Consumers – Customers who buy goods and services from the
business. Objective = Good products from business, reliable service and
maintenance from the company.

 Government –  Responsible for the economy of the country, laws to protect

customers and employees. Objective = Successful business means more
jobs (less unemployment), Tax paid by the business and the business’
contribution to the country’s output.

 Community – Interested in how the business affects the local community, e,g,
employment, environment. Objective = Jobs for people, environmentally
friendly business, safe products for the customers.

 Bank – Lend money for the business to startup. Objective = Wants the

business to have enough money to pay them back.

These stakeholder objectives may conflict for example, 

 Managers of a business want to build a factory in an area however the local

community are against this as it may cause pollution and noise in the area.
 Owners want to use cheaper low-quality materials to lower product costs and
increase profits however consumers are against this as the quality of the
products they are buying will be lowered.

1.5.3 – Demonstrate an awareness of the

differences in the aims and objectives of
private sector and public sector enterprises
Private sector business objectives

 Business survival
 Profit
 Growth
 Returns to shareholders
 Market share
 Service to society

Public sector business objectives

 Provide service to the public

 Increase living standards of the public e.g. health care, education
 Increase jobs to lower unemployment in the country

 No opportunity for feedback – Sender uses a one-way communication channel

which does not allow receiver to contribute ideas
 Long chain of command – Message needs to be sent through a long chain of
command where the message could be changed

2.1 Motivating workers

2.1 Motivating workers

2.1.1 – The importance of a well-motivated

workforce
Motivated worker – A hard working employee who works effectively for a
business.

Why do people work?

 Money – People need money to buy food, water and other items they need to
live.
 Social needs – People just like us likes to feel part of a team, socialise and
make friends.
 Esteem needs – Feeling important, feeling that they are contributing to a
business.
 Job satisfaction – enjoyment from the work and achievements they
have accomplished.
 Security – Feeling of having a secure job with a stable income. (not likely to
lose job etc…)

Abraham Maslow’s hierarchy of needs

Abraham Maslow’s theory states that the more levels of needs achieved by
the worker = the higher motivated they will become. This also means that
each level of motivation must be achieved before an employee can move to
the next level of motivation.

Criticisms

 These needs to not apply to all employees (all humans are different)
 Difficult for managers to determine which needs their employees need

F.W. Taylor’s theory

Employees are motivated by money.

More money = employees become more motivated

Criticisms

 Employees can be motivated by other factors not just money

 There is no guarantee that all employees will work harder if they are paid more
 There are many jobs where output cannot be measured easily (difficult to
determine if employee actually works hard)

Federick Herzberg’s theory

There are 2 factors Hygiene & Motivation factors. Workers expect hygiene
factors to be available to them otherwise they will become demotivated. Hygiene
factors will not motivate the workers only motivation factors will make the
employees work harder.

2.1.2 – Methods of motivation

3 Ways to motivate employees

 Financial rewards
 Non-financial rewards
 Job satisfaction

Financial Rewards
 Wages (time rate) – Payment for a period of time such as amount per hour
e.g. $10 per hour.

Cons –  Good & bad workers get paid the same, Recording every employee’s
working hours may be complicated, costs business to hire an employee to
calculate each workers’ wage.

 Wages (piece rate) – Workers paid depending on quantity of product

produced e.g. $2 for every bicycle assembled.
Cons – Workers may rush and produced bad quality products, Workers that
make slow high-quality products will get paid less.

 Salaries – Employees paid monthly, often used to pay office workers.

Managers only need to calculate salaries once a month which uses less time.

Additional Payments (Money added to salaries)

 Commission – Sales staff are often paid a small percentage of the selling
price of the product they are selling e.g. If a car salesman sells a car, the
salesman might get 20% of the selling price of the car which is added to his
salary.
 Profit sharing – Employees receive share of the company’s profit. This
benefits the company because employees will want the company to have a
higher profit.
 Bonus – Money paid to workers when they work well usually at the end of the
year.
 Performance related pay – Employee’s pay is linked to the effectiveness of
their work. This is often used with jobs where output cannot be easily
measured.
 Share ownership – Employees are given some of the company’s shares. This
makes them work hard as prices of shares may increase if the business is
doing well. + This also makes the employee feel that they are part of the
company.

Non-Financial Rewards
Non-financial rewards given to employees are also called perks or fringe
benefits.

Some examples include

 Health care paid by company

 Company cars
 Free trips / company holidays
 Employee of the month
 Free meals
 Discount on company’s products
 Free housing
 Children’s education fees paid by company

Job Satisfaction
 Pay
 Promotion
 Working conditions
 The work itself
 Status of the job

Ways to improve job satisfaction

 Job Rotation – Workers swap roles to do different tasks. This stops the
employee from getting bored.
 Job Enlargement – More extra tasks are given to the worker so they have a
variety of things to do. However, these tasks should not be more difficult. e.g.
supermarket cashier now adds price label on items.
 Job Enrichment – Adding tasks that require more skill and responsibility. e.g.
receptionist employed to greet clients now deal with telephone enquiries.
 Autonomous work groups & team working – Working in teams make
employees more interested in the tasks since they can organise themselves.

2.2 Organisation and

management
2.2 Organisation  and management
2.2.1 – Draw, interpret and understand
simple organisational charts
Definition of Organisation Structure

Organisation structure refers to how responsibility and authority is shared

in a business organisation. 

This is often displayed in the form of an organisational chart. The 2

common type of charts are

 Tall organisational charts – These have a long chain of command and a

small span of control
 Flat organisational charts – Short chain of command, wide span of control

Advantages of an organisational chart 

 Shows how everybody is linked together in a business

 Lines of communication are clear
 Motivational as employees can see where they belong and can plan their
career paths

Chain of Command – is how the power and authority is passed down from the
top of the organisation (managers) to lower employees

Span of Control – The number of employees working directly under a manager.

Levels of Hierarchy – Number of layers in an organisation structure

 
Advantages of short chain of command

 Faster communication – Communication is quicker and more accurate since

it is passed on by fewer people.
 Stronger relationship between high-level managers and employees – This
is because there are fewer levels between managers and employees.
 Each manager is responsible for more employees – This encourages them
to delegate (pass down) more work to employees.

De-layering – removing an entire row of management

2.2.2 – The role of management

Roles of managers in a business.

1. Planning

 Set goals for the future of the organisation.

 Give the business a sense of direction and purpose (e.g. we will aim to
increase sales by 10% by next year.)

2. Organising

 Organising of people and resources so that the business operates

efficiently (Managers can’t do everything, they must delegate tasks to other
employees)

3. Coordinating

 Making sure all departments are working together to achieve the overall
objectives and plans of the organisation. (e.g. Manager makes sure
marketing and operations department work together to plan for a new product
launch)

4. Commanding

 Guiding, leading and supervising of employees in the

organisation. (Managers need to make sure that employees are doing their
work!)

5. Controlling
 This involves monitoring performance to ensure that objectives will be
met.

Delegation – Passing down authority and responsibility to a subordinate

(employee)

Advantages of delegation

 More time for manager to do other tasks

 More interesting and rewarding work for employee (motivational)
 Employee feels trusted (motivational)
 Trains employee to do important tasks.

2.2.3 – Leadership styles

There are 3 main leadership styles – Autocratic, democratic and laissez-faire

Autocratic – Leader is in charge and gives orders to employees

 Makes decision alone

 Everything depends on the leader
 May de-motivate employees
 May be an advantage for some businesses where decision needs to be made
quickly

Democratic – Other employees involved in decision making

 Communication between managers and employees

 Future plans are discusssed with other employees
 Motivates employees because they are involved in making decisions.
 Sharing of ideas within the business.
 Can delay decision making

Laissez-Faire – “let it be” Leader sets objectives and employees makes decision
and organise their own work.

 Can be useful when creative ideas are needed

 Highly motivational for employees as they control their own working life
 Poor coordination and decision making
 Relies on good team work

Leadership style may be dependent on various factors. e.g.

 Type of business (creative or supply driven)

 Nature of task (requires cooperation?)

2.2.4 – Trade unions

What is a trade union?

Trade union – Group of workers who have joined together to ensure their
interest are protected.

Why join a trade union?

 Improved conditions of employment

 Improved work environment
 Improved benefits
 Improved job satisfaction
 Advice/financial support
 Strenght in number (many employees will join)

Disadvantages

 Cost money to be a member

 May be forced to take action e.g. strike even if you don’t agree

2.3 Recruitment, selection

and training of workers
2.3 Recruitment, selection and
training of workers
2.3.1 – The methods of recruiting and
selecting workers
Why do businesses recruit?

 To replace staff who have left or been promoted

 Bring in staff with new skills
 Recruit more staff as business expands

Job Analysis – A study of the tasks and activities to be carried out by the new
employee

Job Description – This describes the main duties and responsibilities of the job

Job Specifications – The qualifications and qualities necessary to perform the

job (e.g. educational requirements, experience needed)

Advertising the vacancy 

Internal Recruitment – Promoting staff or moving workers from one job to

another within the company.

Advantages

 Saves time and money – Don’t need to spend money on advertising the job
vacancy
 Applicants ‘know’ the firm
 Motivates other workers (chance for them to get promoted)

Disadvantages

 Applicants may not bring in new ideas

 Promoting an employee may make other employees jealous and demotivated

External Recruitment – Recruiting someone who is not an existing employee

and will be new to the business.

Advantages

 New ideas from new workers

 More likely to hire someone who matches job specification

Disadvantages

 Expensive – need to advertise job

 Demotivating for internal candidates

Recruiting channels 

Internal 

 Noticeboards
 Company Newsletters
 Email

External

 Local newspaper
 National newspaper
 Recruitment agencies
 Job centres

Selection of staff

Application forms and CVs – To see if applicant matches the job specification
Interviews – Find out information about candidate’s abilities and personal
qualities

Purpose of interview

1. Find out if applicant has the ability to do the job

2. Personal qualities about the applicant
3. To see if the candidate will ‘fit in’ with the culture of the business

Testing – Applicants may be required to undertake tests to check their ability to

do the job.

Type of tests

1. Skill test – to observe the candidate’s skills

2. Aptitude test – to see how quickly candidate can learn new skills
3. Personality test – to see if their personality has the characteristic that the job
may require
4. Group situation test – to see how candidate(s) works as a team

Part-time worker – employee that works fewer hours than a full-time worker.

Advantages

 Have more employees during busy periods

 Flexible working hours
 Less expensive than hiring full-time employees

Disadvantages

 Workers are less trained than full-time employees (because their job is
temporary)
 Less committed to the business (temporary job)
 More difficult to communicate with part-time workers when they are not at work

2.3.2 – The importance of training and the

methods of training
Why train employees?
 Trained workers are more productive
 decrease the amount supervision required
 may lead to job satisfaction
 reduce accidents and injuries
 improve chances for internal promotion

Induction training – Introduction given to a new employee explaining the

company’s activities and procedures and introducing them to other employees.

Advantages

 Helps new employee settle in

 Health and safety training may be required

Disadvantages

 Time consuming (delays the start of employee’s work)

 Wages are paid but no work has been done by the employee

On the job training – Experienced worker teaches new worker how to do the
job.

Advantages

 Training is cheap
 Training is specific for their job
 Work can be done while training

Disadvantages

 The trainer will not be getting work done.

 Training won’t be effective if the trainer is bad

Off the job training – Training taking place off the job (not being trained while
doing job)

Advantages

 Trainers are experts (Skills can be taught)

 Training can be done outside of working hours (in employee’s own time)
Disadvantages

 Off the job training is expensive

 Worker may receive training paid by business and leave
 Training may not be specific for the job

2.3.3 – Why reducing the size of the

workforce might be necessary
Why might a business need to reduce the number of employees?

 automation (machines replace humans)

 factory/shop closure
 business relocating
 demand for goods/services falling
 business merging

Dismissal – Employee is told to leave because of bad behavior

Redundancy – Employee told to leave because the business doesn’t need a

worker for that job anymore (not employees fault)

How to decide who is made redundant?

 Some workers may volunteer because they might have planned to leave
anyways.
 Lenght of time worked (employees who have worked there for a long time can
stay)
 Workers with good skills remain
 Worker’s employment history (e.g. behavior / performance of employee)

2.3.4 – Legal controls over employment

issues and their impact on employers and
employees
Most countries have laws to ensure that employees are treated equally
 Business must be careful when advertising job and while selecting applicants
to make sure they are all treated fairly/equally (e.g. Gender / race)

Employees need to be protected from

 Unfair discrimination at work and when applying for job

 Wage protection (e.g. minimum wage)
 Health and safety standards
 Unfair dismissal

2.4 Internal and external

communication
2.4 Internal and external

communication
2.4.1 – Why effective communication is
important and the methods used to achieve
it
Communication – Process by which information or instruction is exchanged
between one group or person to another.

Internal communication (Communication from and to people within the

business)

e.g. Employees talking to each other. Director sending an email to employees,

Noticeboard in office,

Poor internal communication leads to –

 Workers don’t understand what they have to do
 Poor motivation
 Wastage (e.g. 2 employees do the wrong task because of wrong instructions)

External communication (Communication from people inside the business to

people outside the business)

e.g. Employees talking to customers, Ordering materials from suppliers,

Advertisements

Poor external communication leads to –

 Unhappy customers (leads to fewer sales)

 Bad business reputation (lower sales)
 Problems with suppliers/customers due to incorrect information (e.g. wrong
supplies being delivered)

Formal communication – Recognised and approved by business (e.g. formal

emails, official meetings, reports)

Informal communication – Information is sent and received casually (e.g.

employee talking during lunch break)

One way communication – Communication that does not allow for a response

Two-way communication – Communication where the receiver sends feedback

to the sender about the topic.

Advantages of two way communications

 Receiver can tell the sender that they have understood the
information/instruction
 Chance to ask for more information
 Allows the receiver to contribute ideas

Methods of communication

 Verbal
 Visual
 Written

Verbal (oral) communication

 Discussions
 Telephone calls
 Meetings

Advantages of verbal comm

 Fast
 Opportunity for receiver to reply (2 way comm)
 Body language

Disadvantages of verbal comm

 Feedback from receiver slows process down

 No permanent record of the discussion

Written communication 

 Emails
 Reports
 Newsletters
 Notices

Advantages of written comm

 permanent record of message

 May be required by law (e.g. legal information or safety notices)
 Can be easily sent to many people (e.g. emails to all employees)

Disadvantages of written comm

 Readers may find long letters boring and hard to read

 No feedback from receiver unless they reply
 No body language
Visual communication 

 Posters
 Images
 Videos
 Graphs / Charts / Diagrams

Advantages of visual communication 

 Interesting (Readers may pay more attention to posters / videos than boring
letters)
 Information can be clearer than other methods (e.g. Video instructions can be
clearer than letter instructions)

Disadvantages of visual communication

 No feedback
 Some people may find charts / graphs difficult to read

2.4.2 – Demonstrate an awareness of

communication barriers
Some examples of communication barriers are

Problems with the sender 

 Difficult/technical language is used – The sender needs to use language that

could be understandable by the sender
 The sender speaks too quickly or not clear enough – The sender should
ensure that the message is clear
 The sender sends the wrong message or sends it to the wrong receiver – The
sender must make sure that the right person is being sent the correct
message

Problems with the communication channel

 The wrong communication channel was used (e.g. important letter placed on
board that does not get seen) – The appropriate communication method must
be selected
3.1 Marketing, competition
and the customer
Marketing, competition and the
customer

3.1.1 – The role of marketing

Roles of marketing are to

 Identify and satisfy consumer needs

 Keep customers loyal 
 Gather information about customers 
 Recognise how customer’s needs are changing

Marketing goals

 Develop products that meet customer needs and wants

 Promoting product to customers
 Increase sales
 Target a new market

3.1.2 – Market changes

Why do consumer spending patterns change?
 Consumer taste and fashion change
 New technology being developed
 Changes in consumer income
 Ageing population

BUSINESSES MUST RESPOND TO THESE CHANGES OR FAIL!

Why have some markets become more competitive? 

Globalisation – Businesses can sell their products worldwide

Better transportation allows products to be distributed all over the world

Internet e-commerce (online shopping) allows customers to purchase

goods from around the world 

How can businesses respond to increased competition?

1. Develop and maintain customer loyalty

2. Keep improving their product(s) and develop new ones that meet consumer
needs and wants
3. Keep costs low to remain competitive
4. Make their products better than their

3.1.3 – concepts of niche marketing and

mass marketing
Mass marketing – Aimed at the whole market

+Advantages of mass marketing

 High sales and demands (higher number of consumers) which may lead to
high profits
 Benefit from economies of scale

-Disadvantages of mass marketing

 Higher competition
 Product is aimed at the whole market so specific customer needs are not met
Niche Marketing – Tailoring product to a particular type of customer (small
specialised market)

+Advantages of niche marketing

 Small businesses can avoid competition from larger businesses

 Product meets specific consumer needs

-Disadvantages of niche marketing

 Smaller number of consumer so growth is difficult

 Risks are not spread so if demand for the specialised product falls, the
business will likely fail unless they develop more products

3.1.4 – How and why market segmentation

is undertaken
Market segment – Sub group of a market with a group of consumers who have
similar characteristics

Ways that businesses can segment a market

 Gender
 Age
 Income
 Location
 Lifestyle
 Use of the product (e.g. for personal use, business use)

+Advantages of market segment

 Business can concentrate on specific needs of a particular type of consumer

 Marketing becomes more effective (e.g. advertising)

-Disadvantages of market segment

 Business may only focus on one segment which is very risky (incase demands
fall business wont make money)
3.2 Market research
3.2 Market research

3.2.1 The role of market research and

methods used
Market research – Research carried out to identify current and future consumer
needs and wants

Product-orientated business – Produce a product then try to convince people

to buy it.

Market orientated business – Perform market research to discover consumer

needs and wants then develop a product that meets their needs and wants.

Businesses use market research to develop and produce products that consumer

wants. Market research allows us to find out if

1. People would buy the product

2. What consumers like and hate about it
3. The price consumers would pay for it
4. Who would buy the product?
5. What their competitors are offering

Types of research 
Primary research – Collection of original information by directly contacting with
potential or existing customers

Ways of collecting primary research

 Questionnaires +Detailed information and opinions about the product –
Expensive and time consuming  
 Focus group (Group of consumers give detailed opinion about
product) +Very detailed information –Expensive and time consuming
 Interviews
 Observation -Little details

Sample – group of people selected to respond to market research questions

such as interviews

Random sample – Samples are chosen randomly without reasons

Quota sample – People are selected based on certain characteristics (e.g. age,
income)

Secondary research – Information that has already been collected and is

available for use

Examples of where secondary research information can be found from

 Departmental records
 Newspaper
 Internet
 Reports
 Statistics

Market research is not always accurate 

 Questions could be biased

 Sample may just give their own opinions
 Size of samples may be too small
 Secondary research information can be outdated or inaccurate e.g. inaccurate
info from internet

3.2.2 Presentation and use of market

research results
Market research results can be presented in ways such as
 Tables
 Tally charts
 Graphs
 Charts

3.3.1 Product
Business Studies 3.3 Marketing mix

3.3.1 Product
Types of products 

1. Consumer goods – consumed by people (final users of the product)

2. Consumer services – services for people
3. Producer goods – goods produced for other businesses to use (e.g.
machines, raw materials)
4. Producer services – Services for other businesses (e.g. Corporate lawyers,
business consultants)

What makes a product successful?

 Satisfies consumer needs and wants

 Low production cost to make profit
 Quality of the product that is kept consistent with the product image
 Introduced to the market before competitors
 Unique

Brand image
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

Roles of packaging 

Protection

 Protects the product

 Easy for transportation
 Allows the product to be used easily
 Suitable for the product

Promotes the product

 Attractive and appealing to customers

 Consistent with the brand image of the product (e.g. High end product in a
fancy packaging)

Product life cycle

1. Development – Product is being developed, The business is spending money
on research and development. There are no sales at this time.
2. Introduction – Product is introduced onto the market, sales are starting to
grow. Informative advertising is used to make consumers aware of the
product.
3. Growth – Sales are growing rapidly, Persuasive advertising is used. Prices
are reduced as competitors introduce their product to the market. Profits are
now being made as the development costs have been covered.
4. Maturity – Sales of the product increases slowly, there is intense competition.
Pricing strategies such as competitive or promotional pricing are being used to
compete with competitors.
5. Saturation – Sales have reached its highest point. Growth has stopped.
Competitive pricing is used.
6. Decline – Sales of the product has started to fall, Eventually, the product will
be taken out of the market.

Extending the product life cycle

 Introduce new variations of the original product

 Sell the product into new markets (e.g. distribute to other countries)
 Increase and create new advertising campaigns
 Lower the price
 Make changes to the product (e.g. new packaging)

3.3.2 Price
Business Studies 3.3 Marketing mix

3.3.2 Price
Pricing Methods

 Cost plus pricing – Cost of producing the product plus a profit

+Method is easy 

-Lose sales if the selling price is a lot higher than your competitor’s price 

 Competitive pricing – Product priced similarly to or just below the

competitor’s price

+Sales are likely to be high as the price is competitive

-Researching your competitor’s prices can take time

 Psychological pricing 

1. Charging high prices for a high-quality product so consumers purchase it as a

status symbol
2. Prices just below a whole number ($1.99)
3. Charge low prices for some items to attract customers into the store

 Penetration pricing – Low price for a new product in order to attract

customers from existing competitor’s products.
+Useful if launching product to a new market

+ Ensures product will be sold so the product enters the market

 Price Skimming – High price is set for a new product on the market

+Can make people think product is good quality because it’s expensive

– Consumers may not buy the product because they think its overpriced

 Promotional pricing – Product sold at a low price for a short period of time.

+Useful when clearing old stock that doesn’t get sold

+ Promotes the business

– Low sales revenue as prices are low

3.3.3 Place
3.3 Marketing mix

3.3.3 Place
1. Producer to consumer (Products sold directly to customers) – This is when
the manufacturer sells the products to the customers who are the final users of
the product

Advantages

 Very simple
 suitable for some types of products (e.g. products from farms)
 Lower price for consumers

Disadvantages
 Not many customers live near farms/factories so it is difficult for them to buy
the products
 Transporting products to consumers can be expensive and not worth it.
 May not be suitable for some types of products

2. Producer to retailer to consumer – Producer sells products to retailers who

then sell the products to the consumers

Advantages

  Lower distribution costs (Only need to transport to the retailers not individual
customers)

Disadvantages

 No direct contact with customers

3. Producer to wholesaler to retailer to consumer – Wholesaler divides large

bulks of products into smaller ones for small retailers to buy.

Advantages

 Reduce storage cost for manufacturer and retailers

 Reduce transportation costs
 Small retailers can buy small bulks from wholesalers so products don’t expire
 Wholesalers can give advice to small retailers on what is selling well

Disadvantages

 Price is higher for retailers and consumers

 Wholesaler may not sell every product
 Longer time until products reach consumers which may be bad for fresh
products

4. Producer to agent to wholesaler to retailer to consumer – Agent sells the

products on behalf of the manufacturer in another country so the manufacturer
doesn’t have to contact foreign wholesalers directly.

Advantages 

  Agents have more knowledge about businesses in that country

 Save time for the producer as they don’t have to take care overseas
distribution

Disadvantages

 Producer has to pay the agent commision / fee

 May lose control of how the product is sold to customers

Which distribution channel to use?

 The type of product
 Does the product need explanation (e.g. technical products)
 The price of the product
 The shelf life of the product
 Location of the customers

Methods of distribution

 Department stores
 Chain stores
 Discount stores
 Supermarkets
 Internet (E-Commerce)

E-Commerce
Advantages for the business

 Lower employment costs – Online shops don’t require salespersons

 Website can encourage customers to buy more

Disadvantages for the business

 Increased competition as customers can compare products with the

competitors
 Delivery costs
 No contact with customers
 Technical stock control systems are required to manage online orders
(expensive)
Advantages for consumers

 Online shopping is convenient

 Prices between brands can be easily compared
 Can buy from shops all over the world

Disadvantages for customers

 Require internet connection

 Products such as clothing cannot be tried on before buying
 No staff to explain how the product works
 Risk of credit card info being stolen when buying from unsecured websites

3.3.4 Promotion
3.3 Marketing mix

3.3.4 Promotion
Aims of promotion 

 Increase sales and market share

 Create a brand image
 Introduce new products to the market
 To compete with competitors

1. Advertising

Informative advertising – Give audience detailed information about the product

Persuasive advertising – Tries to persuade audience that they need the

product

Advertising methods
 Local newspaper (for local businesses) Cheap, Lots of information, Permanent
copy. / Not eye-catching, boring 
 National newspaper (nation wide businesses)
 local or national television Seen by many people, video can be interesting,
choose which time to advertise (ad will be seen by target audience) / Very
Expensive
 Internet Lots of information, 
 Specialist magazines Read by audience with certain characteristics e.g car
magazines, sport magazine 
 Social media
 Billboards
 Leaflets Cheap, Permanent copy, Range of audiences (given to anyone) / May
not be read

2. Sales promotion – Special deals to attract customers short term.

 Price reductions – Reducing the price to attract customers

 Gifts – Products for e.g. toys that comes in cereal boxes makes customers
want to buy it.
 Competitions – Products that comes with entry to competitions such as
winning a prize. (e.g. Win a car or airplane tickets)
 Point of sales display and demonstrations – Demonstrations to show how
product works (e.g. Food displays or cooking demonstrations at supermarkets)
 After sales service – Customers like buying from shops that offer repairs and
maintenance
 Free samples – Free samples can encourage customers to buy the product if
they like it (e.g. Food samples at supermarkets)

Advantages of sales promotion

 Maintain high sales throughout the year

 Encourages consumers to buy the products
 More competitive

Marketing budget – Financial plan for marketing of a product for a specific

amount of time.

Which type of promotion to use?

 Stage of product life cycle

 Advertising budget
 Nature of the product itself

Public relations 

 Strategies used to promote a good image for the business. (e.g. Sponsoring
activities such as sports or charity events.

3.3.5 Technology and the

marketing mix
3.3 Marketing mix

3.3.5 Technology and the marketing mix

Advantages of businesses advertising on social networking sites

 Can target specific types of consumers

 Advertisements and information can be edited/updated quickly
 Quite cheap

Disadvantages

 Customers may find online ads annoying

 Pop up advertisements cost money
 Advertisement can be edited by audience in a bad way (e.g. internet memes
xD)

Advantages of business advertising on their own website

 Don’t need to pay for ads if website already hosted

 Ads can be changed/updated anytime
 Can provide more information on their own website

Disadvantages 
 Fewer viewers
 May not be seen by most people

3.4 Marketing strategy

3.4.1 Justify marketing strategies

appropriate to a given situation
Marketing strategy – Plan to combine the 4 P’s of marketing (Product, Price,
Place, Promotion) in the right combination to achieve a marketing objective.

Examples of Marketing objectives

 Increase sales
 Increase market share
 Entering a new market

3.4.2 The nature and impact of legal

controls related to marketing
Legal controls on marketing

Here are a few examples

 Misleading promotion – Falsely advertise a product.

 Weights & measures – Businesses can’t sell underweight goods (e.g.
chocolate bar containing less chocolate than advertised)
 Sale of goods – Businesses can’t sell products that are faulty or doesn’t work
like it is advertised.
3.4.3 The opportunities and problems of
entering new markets abroad
Why businesses enter new markets abroad?

 Low trade barriers – low trade barrier allows businesses to easily and
profitably trade between countries.
 Home markets are saturated – demand for the product are no longer
growing the country.
 Other countries developing – New markets opens up abroad as other
countries become more developed.

Problems businesses face when entering a new market

 High transport costs – increased costs as businesses have to pay to ship

products abroad.
 Lack of knowledge – Company X may not know consumer habits in the
country they are expanding to. (e.g. where consumers like to shop)
 Trade barriers – Countries may have trade barriers to protect local
businesses, this may make importing products less profitable for the business.
 Exchange rate changes – Exchange rates can change which may mean cost
of importing products may become more expensive.

Ways for businesses to overcome these problems

 Joint ventures – A joint venture can be created between a business in

country X and another business in country Y, this means that business X can
gain information from business Y.
 International franchising – An example of this is McDonald’s a US company
can sell its franchise to a franchisor in China with local knowledge.
 Licensing – Business in country X can sell the license of their product to a
business in country Y, This can avoid transport costs and trade barriers
4.1 Production of goods and
services
4.1 – Production of goods and
services

4.1.1 – The meaning of production

Production – Process of adding value to a product (using four factors of
production – land, labour, capital and enterprise) to satisfy customer needs and
wants.

Productivity – How a business measures it’s efficiency

Productivity could mean using fewer inputs to produce the same amount of
output. Or using the same amount of input to produce a greater amount
of output

Ways to improve productivity

 Improving layout of factory so production becomes faster and more efficient

 Training workers so they can be more productive
 Using automation

Benefits of increasing efficiency/productivity

 Lower cost per unit

 Less employees needed (reduce labour cost)
 Reduces overall costs.

Why do businesses hold stock?

Businesses keep stocks for a variety of reasons, for example, factories keep raw
material inventory to make sure there are enough materials for production while a
shop might hold stock to ensure that products are available to customers.

Too much stock 

 Money wasted on storage cost

 Depreciation cost
 Shelf life (items may reach best before date before being sold)
 Money could’ve been used on something else

Not enough stock

 Opportunity lost (profit could be made if product sold)

 
Buffer stock (aka safety stock) – inventory to deal with sudden customer
demands for a product or in case supplies doesn’t get delivered on time.

What is Lean production?

Lean Production – Term for techniques used by businesses to cut down waste
and increase efficiency.

Common wastes in businesses

 Overproduction – Producing too many products which then costs the business
money to keep the product in storage. (and may get damaged/expires etc..)
 Waiting – Goods not being processed
 Transporting – Materials being moved around the factory inefficiently
 Over-processing – e.g. using advanced machine to do simple tasks
 Defects- production of faulty products which can’t be sold.

Costs can be reduced by lean production

Benefits of lean production

 Less storage of raw materials (e..g no need for refrigeration costs, warehouse
etc…)
 Less defects in production (broken products don’t get produced)
 Better use of equipment
 Speeding up production by cutting out unnecessary tasks
 Less money tied up in stock

3 Common lean production techniques

Kaizen – Kaizen means continuous improvement by eliminating waste.

 Workers meet regularly to discuss problems and possible solutions

 In this way, wastage is reduced and efficiency is improved
 Factory floors are usually rearranged so that the flow of production from one
activity to the next is improved.

Just-in-time production

 Focus on reducing the need to hold stocks of raw material or parts that are
needed (This reduces storage costs)
 Raw materials are delivered just in time by suppliers for production
 Reliable suppliers are needed for this to work

e.g. Milk gets delivered to milkshake factory 30 minutes before production starts,
this means that the milkshake factory won’t have to spend money on expensive
refrigerators to store milk before it gets produced.

Cell production

 The production line is divided into separate teams of workers, each makes a
part of the finished production
 Motivation is improved due to the variety of tasks and the worker belonging to
a team

4.1.2 – The main methods of production

 

Job Production – Each product is different and made to specific instructions by

the consumer. e.g. tailor made suits, customizable birthday/wedding cakes

Advantages of Job production

 Workers have more varied job (They won’t become bored)

 Higher price can be charged for product
 Product meets requirements of the customer

Disadvantages of Job production

 Costs of production are high because skilled labour is used

 Product takes a long time to produce
 Products are made to order so any errors may be expensive for the company
to fix

Batch production – Similar products are made in batches (e.g. batch of white
shirts then another batch of green shirts are made)

Advantages of Batch production

 Gives more variety of jobs to workers

 Production can be easily changed from one product to another
 Gives consumers a variety of products (e.g. many colour shirts)

Disadvantages of Batch production

 Expensive to produce goods

 Machines have to be reset when changing from one batch to another which
slows down production (e.g. change colour of shirts from white to green dye)
 Warehouse space is needed to store products

Flow production (Mass production) – Large quantities of identical products are

produced on a continuous basis

Advantages of Flow production

 Goods are produced quickly and cheaply (economies of scale)

 Increased efficiency through use of machinery
 Less labour is needed (machines do the work)
 Automated production line means production can operate overnight

Disadvantages of Flow production

 Very boring for workers (same product over and over)

 Starting costs are high (expensive machines, big factory etc…)
 If a machine breaks down the whole production line may stop
 Expensive storage costs as they are lots of products
Factors affecting which method of production to use

1. The nature of the product – Unique products will require job production.
2. Size of the market – Products with small number of customers mean job or
batch production is used. Products with large amount of consumers = flow
production should be used.
3. The nature of demand – Small and infrequent demand by customers means
job or batch production will be used.
4. The size of the business – Small businesses tend to operate using job and
batch production while large business may use flow production.

4.1.3 – How technology has changed

production methods
Improvements in technology can help reduce costs and improve product quality

 Automation – Production by equipment which are controlled by computers.

 Mechanisation – Production by machine operated by workers (human)
 Computer aided design (CAD) – 3D drawing software to design new
products
 Electronic point of sale – Used at checkouts where stock records are
automatically adjusted as an item barcode is scanned when it is sold. e.g.
supermarket stock
 Electronic funds transfer at point of sale (EFTPOS) – Cash registers
connected to bank (Customer’s card is swiped and money is transferred right
away from customer’s bank account

Advantages of technology

 Higher productivity
 Improved motivation as boring jobs are now done by machines
 Better quality products are produced
 Faster communication
 Improved flow of information for managers

Disadvantages of technology

 Higher unemployment as machines replace human labour

 Technology is expensive
 Technology becomes outdated very quickly and may needs to be upgraded
often

4.2 – Costs, scale of production and

break-even analysis

4.2.1 – Identify and classify costs

Fixed cost  – A cost that does not change as the amount of products produced
or sold changes.

 Examples of fixed cost – rents such as office space or land, insurance and
employee salaries
 Fixed cost per product can be lowered by making more products.

Variable cost – A cost which changes as the amount of goods produced or sold
changes.

 Examples of variable cost – Materials used to produce product, wages of

production workers

Total cost – Fixed cost and variable costs are combined

Average cost per product = Total cost / Number of products produced

4.2.3 – Explain, interpret and use a simple
break-even chart
Break Even – method for finding out the minimum level of sales needed for a
firm to pay for its total cost.

Break even: Level of output where total costs equal total revenue

When Total cost = Revenue, the business will break even.

Advantages of break even charts

 Enables managers to see the level of production/sales needed to break

even
 Allows managers to read off expected profit/loss for different levels of
sales
 Impacts of business decisions can be seen (e.g. See effects of  lowering
variable costs)
 Break even chart shows safety margin

Disadvantages 
 The chart is merely a forecast for the future. There is no guarantee that
the figures will prove to be correct.
  Assumes all goods manufactured will be sold. This may not always
happen!
 Assumes costs and revenue are always drawn as straight lines. This is
unlikely to be the case.

4.2.2 – Economies and diseconomies of

scale
Economies of scale – Factors that lead to a reduction in average cost as a
business increase in size.

 Purchasing economies – Large firms able to negotiate cheaper prices for

raw materials (e.g. Coca-Cola buying large bulks of sugar from supplier )
 Financial economies – Large firms able to negotiate cheaper finance deals
(e.g. lower bank loans because banks view large businesses as less risky)
 Managerial economies – Large businesses can afford to hire specialists to
work for them. This increases efficiency.
 Technical economies – Use of specialist machinery to produce large
quantities of products. (Small businesses cannot afford this)
 Marketing economies –  1. Buying own vehicle to distribute product 2.
Advertising costs can be spread over a large number of products.

Diseconomies of scale – As a business becomes too large, it becomes less

efficient leading to higher cost of production.

 Poor communication – 

1. Difficult to send and receive accurate messages in large organisations.

2. Takes longer for decisions to be made

3. Top managers lose contact with customers.

 Low motivation – Workers begin to feel unimportant and not valued by

management. This leads to lower efficiency.
4.3 Achieving quality
production
4.3 – Achieving quality production

4.3.1 – Why quality is important and how

quality production might be achieved
Quality – to produce a good or service which meets customers expectations.

Why Is Quality important for a business?

 Gives competitive advantage

 Encourages return purchases
 Provides customers with information and builds consumer confidence in the
brand
 Reduces costs incurred in solving past sales problem (Customer refunds etc..)
 Helps improve efficiency

Quality control – Checking product quality at the end of the production process.
If defected products are found, the entire batch will be thrown away/repaired

Advantages of QC 

 Faults are found before product is sold to customers

 Less training for the worker is required (compared to quality assurance)
Disadvantages of QC

 Hiring employee to check product costs money

 QC does not explain how fault occurred and can happen again.
 Fixing defected products cost money

Quality Assurance – Checking quality standards of a product throughout the

production process.

Advantages of QA

 Fewer customer complaints

 Tries to eliminate faults or errors before the customer receives the product
 Fewer defected(low quality) products produced (Reduce cost because there
will be less broken/low quality products to fix)

Disadvantages of QA

 Expensive to train employees

 Relies on employees following instructions

Total Quality Management – Continuous improvement of products and

processes by focusing on quality at each stage of production

Advantages of TQM

 All employees are aware of the need for quality

 Less likely to receive customer complaints
 Waste (defected products) is removed and efficiency increases

Disadvantages of TQM

 Expensive to train employees for TQM

 Relies heavily on employees following this idea
4.4 Location decisions
4.4 – Location decisions

4.4.1 – The main factors influencing the

location and relocation decisions of a
business
Location factors for a Manufacturing business
 Production methods – Large scale production requires the business to be
near component or raw material suppliers.
 Market – Being near to the customer is important if the product is bulky/heavy
or is perishable (likely to go bad e.g. Fresh food.)
 Availability of labour – is there a sufficient supply of suitably skilled labour in
the area
 Government influence – may offer grants and subsidies to encourage firms
to locate to a specific area (e.g. Government may want factories to be built in
area with high unemployment rates to create jobs) The government may also
restrict certain locations for factories a specific reason e.g. to protect the
natural environment
 Transport – Suitable transport is required for supplies/products to be
delivered (e.g. near airport to deliver product to customer)
 Power – Reliable source of electricity is needed

Location factors for a Retail business

 Shoppers – Need a lot of consumers in the area
 Nearby shops – Locate near businesses that are visited regularly (e.g.
Schools)
 Parking facilities must be close by
 Security/crime in the area

Clustering – Competitors in the same area attract consumers (e.g. Clothing

stores all next to each other)

Location factors for a Service business

*Retail factors apply to service business  

 Customers – Be near customers for a quick response time (e.g. Electrician

located in residential area can provide service to homes quickly)
 Labour – Availability of suitably skilled labour in the area
 Rents and taxes in the area – Businesses that don’t need to be near
customers can be located further away where rents are low
 Technology – Some services can be provided online which means that the
business won’t need to be located near customers.
 Personal preference of the owner

Reasons to relocate abroad

 New markets overseas – Locate near customers in another country (Reduce
transport costs)
 Cheaper materials – Raw materials may be cheaper in another country
 Unstable/expensive labour – A business (especially factories) may want to
relocate to another country with cheaper labour
 Rents and tax may be cheaper in another country
 Government grants for foreign businesses – The government may give
businesses grants(money) and reduce tax because they want the business to
relocate to their country
 Overcome trade and tariff barriers – Some countries may charge tax on
imported goods and businesses can overcome them by relocating their factory
to that country instead.
5.1 Business finance: needs
and sources
5.1 Business finance: needs and
sources

5.1.1 – The need for business finance

Why do businesses need finance? 

 To startup the business – Businesses need money to buy land and

equipment
 Expanding the business – Businesses need money to expand (e.g. buying
more land to expand factory, upgrading machines)
 Money required to pay for day to day expenses (working capital) –
Businesses need money to pay for day to day expenses such as employee
wages and salaries, purchasing raw material etc..

Capital expenditure – Money spent on purchasing fixed assets that lasts for
over a year, (e.g. office buildings, transport vehicles)

Revenue expenditure – Money spent on day to day expenses (e.g. salaries,

maintenance of office building)

Short term finance – working capital for day to day operations.

Long term finance – Finance that is available for over a year.

5.1.2 The main sources of capital
Examples of internal sources of finance 
 Retained profit – Profit that is reinvested into the business and not distributed
to shareholders.
 Adv + Does not need to be repaid (they are not borrowing money)
 Dis –  Profits may be too little for what they are planning to do. (e.g. Need       
10Million for expansion but only have profit of 1million)

 Selling existing assets – Businesses can sell unused assets such as old
machinery and unused buildings.

Adv + Debt does not increase from this

Dis – Takes time until asset gets sold

 Selling inventory – Businesses can sell their inventory for a lower price.         
Adv + This also lowers storage costs (e.g. smaller warehouse)                         
Dis – Opportunity cost of actually selling it to a customer for high                   
price

Examples of external sources of finance

 Selling shares to shareholders                                                                         
Adv + Capital raised does not need to be repaid to shareholders                     
Dis – Shareholders will be expecting profits to be shared with them                 
as dividends
 Bank loans – Borrowing money from the bank                                                   
Adv + Fast source of finance                                                                               
Dis – Have to be repaid with interest
 Government grants – Governments may give businesses a sum of money in
exchange for benefiting the country. (e.g. Locating factory in an area of high
unemployment)

 
 Debt factoring – Definition                                                                                 
Adv + Receive money quickly                                                                             
Dis – The business won’t receive 100% of the debts they are owed.

 Short term sources of finance

 Overdraft – bank arrangement to withdraw more money than the businesses
actually has. This is later paid back by the business with interest.
 Buying on credit – Businesses can pay suppliers on a later date by buying
supplies on credit.
 Debt factoring 

Long term finance

 (long term) Bank loans
 Leasing – This is similar to renting (e.g. business can pay monthly fee to use
assets e.g. leasing a car for transport)
 Hire purchase (installment plan) – Businesses can buy an asset and pay the
manufacturer over time (e.g. buy a car, pay 1000 each month for 24 months)
 Selling shares

Businesses put into consideration factors such as purpose, time, amount and
legal form before choosing the source of finance.

Example – A business that needs cash immediedly will need to use short term
sources of finance.

Microfinance – Financial services to low-income individuals in developing

countries that are not served by banks.

5.2 Cash-flow forecasting and

working capital
5.2 Cash-flow forecasting and
working capital
5.2.1 The importance of cash and of cash-
flow forecasting
Cash – is a liquid asset immediately available for the business to use and spend.

Problems for the business if it has too little cash

 Can’t pay employees and suppliers

 Production of goods stops 
 Liquidation (business stops and sells assets to pay debts)

Cash flow – money going into and out of a business over a period of time

Examples of cash inflow include

 Sales of products and services

 Money received from bank loans and sale of assets
 Capital raised from selling shares

Examples of cash outflow 

 Purchasing of stock/inventory
 Buying assets such as buildings, machinery etc..
 Employee wages and salaries

Cash flow cycle 

Cash is needed by the business for operation -> Products are produced ->
Products sold -> Customers pay cash to the business -> REPEAT

Cash flow forecast – Estimate of future cash inflows & outflows of the business
and shows expected balance at the end of each month.
Why do businesses need cash flow forecasts?

 To startup the business

 To show bank manager to get bank loan approved
 Manage cash flow

Businesses shouldn’t have too much cash in bank account as it could’ve

been used in better ways e.g. expanding the business, investing, etc…

Simple Cash flow forecast

*You may be asked to fill in missing parts of a cash flow forecast in your exam.

Net cash flow = Cash inflow – Cash outflow

Examples of how businesses can solve short term cash flow problems

 Apply for a bank loan – Businesses can quickly borrow money from the
bank, however, interest will have to be paid.
 Delay or cancel plans to purchase new equipment – Delaying or canceling
plans to purchase new equipment such as new machines may significantly
reduce cash outflow. However, this is bad for the business in the long term as
new machines can increase the efficiency of the business.
 Purchasing supplies on credit – This means paying their suppliers at a later
date (delays cash outflow). However, some suppliers may not allow this or
may only give discounts to customers who don’t buy on credit.
 Only sell in cash, not credit – Businesses can choose to only sell to
customers in cash, this means that the business will get their money
immediately. However, customers may buy from competitors that sell on
credit.

5.2.2 Working capital

Working capital – Capital (money) available for a business to pay for day to day
operations

Working capital = current assets – current liabilities

Businesses need sufficient working capital to 

 Pay employee wages and salaries

 Figure out if they are in a good financial position to purchase supplies that are
currently on sale (e.g. Suppliers may give discounts to customers that pay by
cash not credit)
 Ensure they have enough cash for day to day operations
 Pay debts

5.3 Income statements

5.3 Income statements

5.3.1 What profit is and why it is important

Profit = Sales Revenue – Costs
Profit can be increased by

  Reducing costs
 Increasing sales revenue (selling more products or increasing the price)

Profit is important to a private sector business because

 it is a Source of finance – Businesses need profit to grow the business

 Reward – Entrepreneurs want their business to profit so they can make
money!

Profit is not the same thing as cash! Businesses can have profit but no
cash to spend! Refer to 5.2 (Cash flow) 

5.3.2 Income statements

Income statement (AKA Profit & loss account) – Financial document that
shows the company’s revenue and expenses over a period of time. (e.g. 1 year)

Income statement tells the company’s managers whether the company is making
a profit or a loss, managers can also compare this year’s income statement with
last year to see if the differences in profits or losses. In addition, this can also be
compared with other businesses in the same industry.

Income statements containS

  Revenue (Sellng price x Quantity sold)

 Gross profit (Sales revenue – cost of sales)
 Cost of sales (aka Costs of goods sold) is the cost involved in selling a
product – More details here https://www.thebalancesmb.com/how-to-calculate-
cost-of-goods-sold-397501
 Net profit (Gross profit – expenses)  | This is the actual profit after subtracting
the business’ operating expenses such as employee salaries & wages, taxes
etc…
 Retained profit (Profit kept by the business for its own use)

Income statement example 

https://commons.wikimedia.org/wiki/File:Cascadia_Wikimedians_User_Group_-
_Income_statement_as_of_Dec_13,_2015.jpg

5.4 Balance sheets

 5.4 Balance sheets
5.4.1 The main elements of a balance sheet
Balance sheet – Financial statement which shows the value of a business’
assets, liabilities, and equity at a point in time.

3 Main Sections of a Balance Sheet

1. Assets
2. Liabilities
3. Equity

Assets – Items which are owned by the business

– Current Assets – Items owned and used by the business within a year. e.g.
Stock (inventory), cash, debtors

– Non-current (fixed) Assets – Items owned by the business for more than one
year. e.g. Buildings, vehicles, machinery, ovens,

Tip: Make sure you can come up with examples! + Read the case study before
answering balance sheet question.

Liabilities – Debts owed by the business

– Current Liabilities – Money owed by the business which must be repaid within
a year. e.g. Bank overdraft, creditors

– Non-current Liabilities – long-term borrowings which do not have to be repaid

within a year. e.g. Long term bank loans,

Equity (aka Shareholder’s equity, shareholder’s fund) – Total amount of money

invested into the business by the owners of the company.

– Share capital (Money raised from selling shares)

– Retained profits

– Reserves
5.4.2 Interpret a simple balance sheet and
make deductions from it
Interpreting balance sheet
 How a business is financing its activities.
Business expansion can be funded by increasing non-current liabilities e.g.
long-term loans, or through increasing shareholder’s equity e.g. selling more
shares (share capital), retained profits.

 What asset a business owns

Can be seen from the assets section of the balance sheet

 Sale of inventory to raise finance

If this occurs then inventory (stock) would decrease on the balance sheet

Balance sheet equations

 Equity = Total Assets – Total Liabilities

 Working Capital = Current Assets – Current Liabilities
^ Money required to pay for day to day expenses)
 Capital Employed = Equity + Non-Current Liabilities

Note: There are many accounting terms used by different

textbooks/websites/exams. e.g. Equity could be called Shareholder’s fund.
Complete lots of past papers to make sure you are aware of the terms used in
your exam.

5.4 – Balance sheets is a quantitative part of the syllabus. Practicing lots of

questions on your textbook + past papers will help with this topic.

6. External influences on business activity

Government economic
objectives and policies
Government economic objectives and
policies

6.1.1 How government control over the

economy affects business activity
Main government economic objectives
 Low inflation
 Low unemployment
 Economic growth (increasing GDP)
 Balance of payments

Objective: Low Inflation

Inflation – An increase in the general price level of goods and services in an
economy.

Problems with high inflation

1. Reduce value of wages – People are not able to buy as many goods and
services as before.
2. Reduced international competitiveness – Prices of goods will become
higher than that of other countries resulting in higher imports of foreign
products. This reduces jobs in the country as less locally produced products
are produced and sold.
3. Reduced living standards – Businesses are unlikely to expand resulting in
fewer jobs, lowering living standards.

Objective: Low Unemployment

Unemployment – Occurs when people who are willing and able to work can’t
find a job.

Problems with high unemployment

 Loss of output – Unemployed people do not produce goods and services.

 Increased costs for the government – The government will have to spend
more on unemployment benefits (money given to unemployed people).

Objective: Economic Growth

Gross Domestic Product (GDP) – The total value of all goods and services
produced in a country in one year.

Economic Growth = Increase in GDP

Problems with no economic growth

 Unemployment – If total value of goods and services produced falls, there
may be less workers which mean fewer jobs.
 Lower living standards – Fewer jobs means less income so people can
afford fewer goods and services.
 Low business expansion – Businesses are less likely to expand since
people in the country have less money to spend on goods and services.

Business Cycle
Growth: Rising GDP since more goods and services are being produced,
unemployment falls, high living standards.

Boom: Too much spending in the economy, prices rise too quickly resulting in
high costs for businesses.

Recession: Low levels of spending in the economy, less goods and services
demanded and produced (GDP falls), unemployment rises.

Slump: A major recession. High levels of unemployment, and many businesses

fail.

Objective: Balance of payments

Balance of payments – Difference between a country’s exports and imports

Imports – goods and services bought from another country

Export – goods and services sold to another country

Balance of payment surplus: value of a country’s exports is higher than the
value of the country’s imports.

Balance of payment deficit: value of a country’s exports is lower than the value

of the country’s imports.

Main Government Economic Policies

 Fiscal Policy (changing tax rates and government spending)
 Monetary Policy (changing interest rates)
 Supply-side policies (improving the production capacity of the economy)

Fiscal Policy
Fiscal policy – When the government changes the tax rate or level of
government spending.

Governments spend money on various projects in the country. Examples include

building schools, hospitals, public transportation etc.. Money to fund these
projects are collected through tax.

Direct Tax – Taxes on income and wealth, paid directly to the government

 Income tax – Tax on people’s incomes.

Higher income tax lowers people’s disposable income which leads to less
spending on goods and services.
 Corporate/Profit/Business tax – Tax on business’ profits.
Lower retained profits for businesses leading to fewer businesses expanding.

How businesses can react to high income tax

Businesses can lower price of products or produce cheaper products
that people can afford. However, this may result in lower profits for the
business and potentially damage the brand image.
Indirect Tax – Tax on spending to buy goods and services paid indirectly to the
government.
 Value Added Tax (VAT) – Tax on goods and services.
Results in fewer sales of the good / service with VAT

 Import Tariff – Tax on imported goods.

Benefits local businesses if tariff placed on foreign competitor’s products.
Increases costs for local businesses that imports foreign products/supplies.

 Import Quota – Physical limit to the quantity of a product that can be

imported.

How businesses react to import tariff

Businesses can purchase supplies from local suppliers instead of
importing them. However, local supplies may be lower quality ->
Impacts brand image.
Government Spending – The government can increase economic growth by
spending on public sector projects e.g. education, healthcare, transportation.

Example) If the government invests in a new hospital, construction firms,

medical equipment manufacturers will sell more goods and services.

Monetary policy
Monetary policy – When the government / central bank changes the interest
rate.

How changing interest rates impacts businesses

 Fewer business expansions – As firms are less likely to borrow money from
the bank to expand due to high interest rates.
 Lower retained profits for firms – As firms have to repay high interests from
loans they borrowed.
 Lower demand for goods and services – As consumers have less money to
spend after paying back high interest rates or Consumers want to save more
as they get high interest.
 Exchange rate appreciation – High interest rates will attract foreign savers to
save money in the country’s banks. This requires them to exchange their
foreign currency to the country’s currency, resulting in an exchange rate
 appreciation for the country’s currency. = Imported goods become cheaper but
exports more expensive.

Exchange rate appreciation – Rise in value of a currency compared to other

currencies.

How businesses can react to high interest rates

Delay or reduce future expansion. Focus on using internal source of
finance e.g. Retained profits, selling existing assets. However, this
could limit future growth.

Supply Side Policies

Supply side policies – Policies that focus on increasing the productive capacity
of an economy. (Make an economy more efficient and able to produce more
goods and services)

1. Privatisation – Government sells a public sector business to the private

sector to increase efficiency
2. Improve training and education – Government provides education/training
for the country’s workers to improve skills and make the workforce more
productive.
3. Increase competition – Encourage fair competition between businesses to
increase efficiency.