1 Understanding Business Activity
1.1 What is Business Activity?
- Process of producing goods and services to satisfy human wants.
- Driven by the fundamental economic problem of scarcity – limited resources, unlimited wants.
- Choices are made using opportunity cost: the value of the next best alternative fore‑gone.
1.2 Needs, Wants & Wants Hierarchy
- Needs – essential for survival (food, shelter, clothing).
- Wants – non‑essential desires that improve quality of life (smartphones, holidays).
- Businesses must decide which wants to satisfy, given scarce resources.
1.3 Business Objectives
| Objective | Typical Aim |
|---|
| Survival | Stay in operation (especially for start‑ups). |
| Profit maximisation | Earn the greatest possible financial return. |
| Growth | Increase size, market share or product range. |
| Market‑share | Become a leading player in a particular market. |
| Social/Environmental goals | Corporate social responsibility, sustainability. |
1.4 Stakeholders & Their Objectives
| Stakeholder | Primary Objective |
|---|
| Owners / shareholders | Profit, return on investment. |
| Managers | Achieve organisational targets, career progression. |
| Employees | Job security, fair wages, good working conditions. |
| Customers | Value for money, quality, service. |
| Suppliers | Stable orders, timely payment. |
| Community & NGOs | Environmental protection, social welfare. |
| Government | Tax revenue, compliance with law, economic stability. |
1.5 Conflicts Between Objectives
- Profit vs. environmental protection (e.g., cheaper production may increase pollution).
- Growth vs. employee well‑being (rapid expansion can lead to longer hours).
- Shareholder return vs. community interests (price‑cutting may harm local retailers).
1.6 Adding Value
Value is added when inputs (factors of production) are transformed into outputs that are worth more to the consumer than the sum of their costs.
Example: Raw cotton (land) → design & stitching (labour & capital) → branded T‑shirt (enterprise) – the final product sells for far more than the cost of raw cotton.
1.7 Specialisation & Division of Labour
- Specialisation: Workers focus on a narrow set of tasks, gaining expertise.
- Division of Labour: Production process broken into distinct stages performed by different workers or groups.
- Result: higher productivity, lower unit costs, ability to produce larger volumes.
- Real‑world example: An automobile assembly line – chassis team, engine team, interior team, paint team.
1.8 Classification of Economic Activity
| Sector | Definition | Examples |
|---|
| Primary | Extraction of natural resources | Farming, fishing, mining, forestry |
| Secondary | Manufacturing & construction – turning raw materials into finished goods | Car production, clothing factories, building houses |
| Tertiary | Provision of services | Retail, banking, education, health care, tourism |
1.9 Private vs. Public Sector in a Mixed Economy
- Private sector – owned by individuals or groups; profit‑oriented (e.g., Tesco, Toyota).
- Public sector – owned & run by government; service‑oriented (e.g., NHS, Royal Mail).
- Mixed economy – both sectors coexist; government may regulate, tax, subsidise, or directly provide services.
2 People in Business
2.1 Motivation – Why Do People Work?
| Theory | Key Idea | Implications for Managers |
|---|
| Maslow’s Hierarchy of Needs | Physiological → Safety → Social → Esteem → Self‑actualisation | Provide a mix of pay, security, team spirit, recognition, development opportunities. |
| Herzberg’s Two‑Factor Theory | Hygiene factors (salary, conditions) prevent dissatisfaction; motivators (achievement, responsibility) create satisfaction. | Ensure good working conditions and offer challenging work. |
| Taylor’s Scientific Management | Break jobs into simple tasks; use incentives to increase output. | Standardise work and use piece‑rate pay where appropriate. |
2.2 Methods of Motivation
- Financial: wages, bonuses, profit‑share, commissions.
- Non‑financial: recognition, career development, flexible working, good relationships, job enrichment.
2.3 Organisation & Management
- Organisational structure – hierarchy shown in an organisational chart (e.g., functional, divisional, matrix).
- Functions of Management – Planning, Organising, Leading, Controlling (POLC).
- Leadership styles
- Autocratic – decisions by manager alone.
- Democratic – staff consulted.
- Laissez‑faire – little direction.
- Transformational – inspires and motivates change.
- Trade unions – represent workers, negotiate wages & conditions; can lead to collective bargaining, strikes or industrial action.
2.4 Recruitment, Selection & Training
- Recruitment – attracting candidates (advertising, online job portals, campus recruitment).
- Selection – short‑listing, interviews, tests, reference checks.
- Training & Development – induction, on‑the‑job training, apprenticeships, further education.
2.5 Redundancy & Legal Controls
- Redundancy – job no longer required; must follow statutory procedures (consultation, notice, redundancy pay).
- Key legislation (UK examples)
- National Minimum Wage Act – sets minimum hourly rates.
- Health & Safety at Work Act – duty to protect employee health.
- Equality Act – prohibits discrimination.
- Employment Rights Act – unfair dismissal, redundancy, maternity rights.
2.6 Communication in Business
| Type | Methods | Barriers |
|---|
| Internal | Emails, intranet, meetings, notice boards, team apps | Information overload, hierarchy, language, cultural differences |
| External | Websites, press releases, social media, advertising, newsletters | Misinterpretation, media distortion, legal restrictions |
3 Marketing
3.1 Role of Marketing
- Identify and satisfy customer wants and needs.
- Create demand, build brand loyalty, generate revenue.
- Acts as a bridge between the business and its external environment.
3.2 Market Research
- Primary research – surveys, interviews, focus groups, observations.
- Secondary research – published data, industry reports, government statistics.
- Helps to assess market size, trends, competition and consumer behaviour.
3.3 The Marketing Mix (4 Ps)
| Product | Price | Place | Promotion |
|---|
- Features, quality, branding, packaging, warranty.
|
- Pricing strategies – cost‑plus, penetration, skimming, psychological.
|
- Distribution channels – direct, retailers, wholesalers, e‑commerce.
|
- Advertising, sales promotion, public relations, personal selling, digital marketing.
|
3.4 Market Segmentation, Targeting & Positioning (STP)
- Segmentation – divide market by demographics, psychographics, geography, behaviour.
- Targeting – select one or more segments to serve (mass, niche, differentiated, concentrated).
- Positioning – create a distinct image in the mind of the target consumer (e.g., “affordable luxury”).
3.5 Marketing Planning
- Set marketing objectives (SMART – Specific, Measurable, Achievable, Relevant, Time‑bound).
- Develop strategies using the 4 Ps.
- Prepare an action plan, budget and control mechanisms.
4 Operations (Production & Quality)
4.1 Factors of Production – Recap
| Factor | Definition | Examples | Typical Cost to Business |
|---|
| Land | Natural resources used in production | Plot of land, mineral deposits, water rights, forests | Rent, lease, royalties, purchase price |
| Labour | Human effort – physical and mental | Factory operatives, sales staff, managers, engineers | Wages, salaries, training, benefits, overtime |
| Capital | Man‑made resources that aid production | Machinery, computers, factory buildings, delivery vans | Purchase price, depreciation, interest on loans, maintenance |
| Enterprise | Ability to combine the other factors and assume risk | Business owners, start‑up founders, innovators | Profit share, dividends, risk capital, opportunity cost of time |
4.2 Production Methods
- Job/Project production – one‑off items (custom houses, ships).
- Batch production – groups of identical items (baked goods, clothing lines).
- Flow/Continuous production – high‑volume, low‑cost items (automobiles, soft drinks).
- Mass customisation – standard base with individual options (customised computers).
4.3 Quality Management
- Quality control (QC) – checking output against standards (inspection, testing).
- Quality assurance (QA) – processes to prevent defects (ISO 9001, Six Sigma).
- Total Quality Management (TQM) – organisation‑wide commitment to continuous improvement.
4.4 Location Decisions
- Factors: proximity to market, raw materials, labour availability, transport links, government incentives, environmental impact.
- Methods: cost‑benefit analysis, break‑even analysis, location‑specific ROI.
4.5 Stock (Inventory) Management
- Types of stock – raw materials, work‑in‑progress, finished goods.
- Techniques: Just‑In‑Time (JIT), Economic Order Quantity (EOQ), safety stock.
- Goal: minimise holding costs while avoiding stock‑outs.
4.6 Technology & Innovation in Operations
- Automation, robotics, computer‑aided design (CAD), 3‑D printing.
- Impact: increased productivity, lower unit costs, new product possibilities.
5 Finance
5.1 Sources of Finance
| Source | Type | Advantages | Disadvantages |
|---|
| Owner’s capital | Equity | No interest, retains control | Limited amount, risk to personal assets |
| Bank loan | Debt | Fixed repayment schedule, retains ownership | Interest cost, collateral required |
| Share issue (private) | Equity | Large amounts possible, spreads risk | Dilutes ownership, dividend expectations |
| Hire‑purchase/Leasing | Debt‑like | Spreads cost of capital goods | Higher total cost, asset ownership delayed |
| Venture capital | Equity | Expert support, large funding | Loss of control, high return expectations |
5.2 Cash Flow Management
- Cash inflows – sales receipts, loans, investment income.
- Cash outflows – purchases, wages, rent, interest, tax.
- Techniques: cash flow forecast, speeding up receivables, extending payables, maintaining a cash reserve.
5.3 Break‑Even Analysis
Break‑Even Point (BEP) = Fixed Costs ÷ (Selling Price per unit – Variable Cost per unit).
- Shows the sales volume needed to cover all costs.
- Useful for pricing decisions and assessing viability of new products.
5.4 Financial Ratios (AO2 – analysis)
| Ratio | Formula | Interpretation |
|---|
| Gross Profit Margin | (Gross Profit ÷ Sales) × 100 | Efficiency of production & pricing. |
| Net Profit Margin | (Net Profit ÷ Sales) × 100 | Overall profitability after all expenses. |
| Current Ratio | Current Assets ÷ Current Liabilities | Short‑term liquidity. |
| Return on Capital Employed (ROCE) | Operating Profit ÷ Capital Employed × 100 | How well capital is used to generate profit. |
5.5 Budgeting & Forecasting (AO3 – evaluation)
- Prepare sales, production, cash‑flow and profit budgets.
- Use historical data and market research to forecast future performance.
- Monitor actual results against budgets to identify variances and take corrective action.
6 External Influences on Business
6.1 Economic Environment
- Growth, inflation, unemployment, interest rates, exchange rates.
- Impact on consumer spending, cost of borrowing, export competitiveness.
6.2 Political & Legal Environment
- Government policies, taxation, trade restrictions, health & safety legislation, consumer protection laws.
- Businesses must comply or face fines, reputational damage.
6.3 Social & Cultural Environment
- Demographic changes, lifestyle trends, attitudes towards the environment, ethical consumerism.
- Influences product design, marketing messages and CSR strategies.
6.4 Technological Environment
- Innovation cycles, automation, e‑commerce, data analytics.
- Creates opportunities (new markets) and threats (obsolescence).
6.5 Environmental (Ecological) Factors
- Climate change, resource scarcity, waste management, sustainability legislation.
- Leads to green production methods, eco‑labeling, carbon accounting.
6.6 Globalisation
- International trade, outsourcing, multinational operations.
- Benefits: larger markets, cheaper inputs. Risks: exchange‑rate volatility, cultural differences.
7 Summary Diagram (Suggested)
A flowchart that shows:
- Inputs – Land, Labour, Capital, Enterprise (Factors of Production).
- Transformation process – Operations (production, quality, technology).
- Outputs – Goods / Services that create Value.
- Revenue – Sales → Profit.
- Re‑investment – part of profit returns to Capital and Enterprise, completing the loop.
8 Assessment Objectives (Cambridge)
- AO1 – Knowledge & Understanding: Define key terms, describe processes (e.g., factors of production, marketing mix).
- AO2 – Application: Use concepts in realistic contexts (e.g., calculate break‑even, apply motivation theory to a case study).
- AO3 – Analysis: Break down information (e.g., analyse stakeholder conflicts, evaluate financing options).
- AO4 – Evaluation: Make justified judgments (e.g., recommend a marketing strategy, assess the impact of a new technology).