Cambridge IGCSE Business Studies (0450) – Complete Revision Notes
1. Understanding Business Activity
1.1 What is a Business?
- Purpose: Satisfy human needs and wants while making a profit.
- Needs vs. Wants: Needs are essential for survival (food, shelter); wants are desires that improve quality of life (designer shoes).
1.2 Classification of Business Activity
| Basis | Categories |
|---|
| Sector |
Primary (extraction), Secondary (manufacturing), Tertiary (services) |
| Size (based on turnover, employees, assets) |
Micro, Small, Medium, Large |
| Ownership |
Sole trader, Partnership, Private limited company (Ltd), Public limited company (PLC) |
1.3 Entrepreneurship
- Identifying opportunities, taking risks, organising resources.
- Key traits: initiative, creativity, resilience.
1.4 Business Objectives
- Profit‑oriented: profit, growth, market share.
- Survival‑oriented: continue trading, maintain cash flow.
- Social & Environmental: ethical practice, sustainability, community involvement.
1.5 Stakeholders and Their Objectives
| Stakeholder | Primary Objective(s) |
|---|
| Owners / Shareholders | Profit, return on investment |
| Managers | Achieve targets, career progression |
| Employees | Job security, wages, good working conditions |
| Customers | Value for money, quality, service |
| Suppliers | Steady orders, timely payment |
| Community | Employment, environmental protection |
| Government | Tax revenue, regulation compliance |
2. People in Business
2.1 Motivation Theories (AO1)
- Maslow’s hierarchy of needs – physiological → safety → social → esteem → self‑actualisation.
- Herzberg’s two‑factor theory – hygiene factors (salary, conditions) and motivators (recognition, achievement).
- McGregor’s Theory X & Theory Y – assumptions about employee attitudes.
2.2 Management Functions (POAC) (AO1)
- Planning: set objectives, decide actions.
- Organising: allocate resources, define structure.
- Acting (Leading): motivate, communicate, direct.
- Controlling: monitor performance, take corrective action.
2.3 Organisational Structures (AO1)
- Functional: departments by function (e.g., marketing, finance).
- Divisional: separate divisions for product lines or geographic areas.
- Matrix: dual reporting – functional and product.
- Flat / Hierarchical: number of management levels.
2.4 Leadership Styles (AO1)
- Autocratic – decisions made by leader alone.
- Democratic – leader involves team in decision‑making.
- Laissez‑faire – little direction, employees operate independently.
2.5 Recruitment & Training (AO1‑AO2)
- Job analysis: identify duties, skills, qualifications.
- Advertising: internal (postings) or external (newspapers, online).
- Selection methods: interviews, tests, assessment centres.
- Induction: introduction to policies, culture.
- On‑the‑job training: coaching, job rotation.
2.6 Trade Unions & Employee Relations (AO2‑AO3)
- Collective bargaining – negotiate pay, conditions.
- Industrial action – strikes, work‑to‑rule.
- Grievance procedures – formal handling of complaints.
2.7 Communication (AO2)
- Internal: meetings, memos, intranet, notice boards.
- External: advertising, public relations, social media, direct mail.
3. Marketing
3.1 The Role of Marketing & Market Segmentation (AO1)
- Creates exchange between business and customers; identifies and satisfies target markets.
- Segmentation bases:
- Geographic – region, climate.
- Demographic – age, gender, income.
- Psychographic – lifestyle, personality.
- Behavioural – usage rate, loyalty.
- Mass marketing vs. niche (specialist) marketing – advantages and disadvantages.
3.2 Market Research (AO2)
| Type | Methods |
|---|
| Primary |
Surveys, interviews, observations, experiments |
| Secondary |
Published reports, government statistics, internet sources |
- Sampling techniques – random, stratified, convenience.
- Presenting data – tables, bar charts, pie charts, line graphs.
3.3 The 4 Ps of Marketing (AO1)
3.3.1 Product
- Core, actual, augmented product.
- Product life‑cycle (PLC) – introduction, growth, maturity, decline; strategies for each stage.
- Branding, labelling, packaging, warranties.
3.3.2 Price
- Pricing objectives – profit‑oriented, sales‑oriented, status‑oriented.
- Methods – cost‑plus, markup, target return, competition‑based.
- Discounts, terms of payment, psychological pricing.
3.3.3 Place – Distribution Channels (AO1‑AO4)
What is “Place”?
Place covers all activities that make a product or service available to the customer when and where they want it. It includes decisions about distribution channels, logistics, market coverage and after‑sales service.
Key Concepts
- Distribution channel: the route a product takes from producer to final consumer.
- Direct channel: producer sells straight to the customer (e.g., own shop, website).
- Indirect channel: one or more intermediaries (wholesalers, retailers, agents).
Channel Coverage Types
| Coverage | Definition | Typical Use | Advantages | Disadvantages |
| Intensive | Stocked by as many outlets as possible | Convenience goods (soft drinks, snacks) | High market reach; large sales volume | Low control of retail environment; price competition |
| Selective | Sold through a limited number of chosen retailers | Shopping goods, many electronics | Better brand control; lower distribution costs | Reduced market coverage; reliance on selected partners |
| Exclusive | Only one or very few retailers in a given area | Luxury goods, high‑end fashion | Strong brand positioning; high profit margins | Very limited reach; risk if partner fails |
Factors to Consider When Choosing a Channel (AO2)
- Nature of the product – perishability, complexity, price.
- Target‑market characteristics – geographic spread, buying habits, service expectations.
- Company resources – financial, managerial, logistical.
- Level of control required over price, promotion and after‑sales service.
- Competitive environment and industry norms.
- Legal & ethical constraints – exclusive agreements, franchising regulations.
Step‑by‑Step Process for Recommending a Distribution Channel (AO3‑AO4)
- Analyse the product: Classify as convenience, shopping or specialty.
- Identify the target customers: Where do they shop? What service level do they expect?
- Assess company capabilities: Can the firm handle logistics itself or does it need intermediaries?
- List possible channel options: Direct (online, own shop); Indirect (wholesaler → retailer, franchise, agent).
- Choose appropriate coverage: Intensive, selective or exclusive.
- Estimate costs & benefits: Use a simple cost‑benefit table (see example).
- Compare alternatives – pros & cons: Evaluate control, reach, cost and risk.
- Select the most suitable channel and justify: Link back to the factors in step 4.
- Plan implementation: Contracts, logistics set‑up, performance monitoring.
Example Cost‑Benefit Comparison
| Channel Option | Initial Investment | Ongoing Costs (per year) | Control (price/promotion) | Market Reach | Overall Suitability |
| Direct online sales | £20,000 (website, warehousing) | £5,000 (maintenance, delivery) | High | National (depends on delivery network) | Good for high‑margin, tech‑savvy customers. |
| Selective retail (5 specialist stores) | £10,000 (training, display kits) | £12,000 (wholesale margin) | Medium | Regional | Suitable for premium product needing personal service. |
| Intensive supermarket distribution | £5,000 (listing fees) | £30,000 (lower margins) | Low | National | Best for low‑price, high‑volume items. |
Pros‑Cons Table (same three options)
| Channel | Pros | Cons |
|---|
| Direct online | Full brand control; direct customer data; higher margins. | Requires strong IT & logistics; no hands‑on trial for customers. |
| Selective retail | Customer can try product; local after‑sales support; shared marketing costs. | Medium control of price; retailer margins reduce profit. |
| Intensive supermarket | Maximum exposure; fast turnover. | Low price control; intense competition; thin margins. |
Sample Situation & Recommendation
Situation: A new mid‑range smartwatch aimed at 18‑30‑year‑old urban consumers, priced at £150, with features that require after‑sales support.
Recommended Channel: A hybrid approach – direct sales through an official website **plus** selective placement in 8 high‑traffic electronics retailers in major cities.
Justification (AO4):
- Online sales give full control of pricing, branding and valuable customer data.
- Selective retail presence provides hands‑on trials and local after‑sales service – essential for a tech product.
- The target market researches online but often wants to try the device before purchase.
- Costs are manageable: website set‑up (£15,000) plus modest retailer margins, avoiding the low margins of intensive distribution.
- Channel power is balanced – the firm leads on price (online) while retailers influence in‑store promotion.
Checklist for Exam Questions (AO1‑AO4)
- Identify product type and target market (AO1).
- List all viable direct and indirect channel options (AO1).
- Choose appropriate coverage (intensive, selective, exclusive) (AO1).
- Analyse costs, control, reach and risk for each option (AO2 & AO3).
- Compare alternatives using a pros‑cons or cost‑benefit table (AO3).
- Select the best channel and provide a clear, evidence‑based justification (AO4).
- Outline how the chosen channel would be implemented and monitored (AO4).
3.3.4 Promotion (brief – AO1)
- Advertising, sales promotion, public relations, direct marketing, personal selling.
- Integrated Marketing Communications – delivering a consistent message across all media.
3.3.5 Technology & E‑commerce (AO1‑AO2)
- Impact of the internet on buying behaviour – research, comparison, purchase.
- Benefits: wider reach, lower costs, 24/7 availability.
- Challenges: security, delivery logistics, intense online competition.
4. Operations Management
4.1 Production Methods (AO1)
- Job – one‑off, highly customised.
- Batch – limited quantity, set‑up changes between batches.
- Flow (mass) – continuous, high volume, low variety.
4.2 Productivity (AO2)
Productivity = Output ÷ Input. Ways to improve: training, better technology, efficient layout, motivation.
4.3 Economies & Diseconomies of Scale (AO2)
- Economies – lower average cost as output rises (spreading fixed costs, bulk buying).
- Diseconomies – higher average cost when a firm becomes too large (coordination problems, bureaucracy).
4.4 Break‑Even Analysis (AO2‑AO3)
Key formulae:
- Contribution per unit = Selling price – Variable cost per unit.
- Break‑Even Point (units) = Fixed Costs ÷ Contribution per unit.
- Break‑Even Point (£) = Fixed Costs ÷ Contribution margin ratio.
4.5 Quality Control & Assurance (AO1‑AO2)
- Standards – specifications, grades.
- Inspection – sampling, testing.
- ISO certification – internationally recognised quality management.
4.6 Location Decisions (AO1‑AO3)
- Market access – proximity to customers.
- Transport links – road, rail, ports.
- Labour – availability, skill level, wage rates.
- Utilities – electricity, water, broadband.
- Government incentives – tax relief, grants.
- Other factors – environmental impact, competition clustering.
4.7 Lean Production & Just‑in‑Time (JIT) (AO2)
- Lean – eliminate waste, improve flow.
- JIT – receive materials only when needed, reducing inventory costs.
5. Financial Information and Decisions
5.1 Sources of Finance (AO1)
| Internal | External |
|---|
| Retained earnings, sale of assets, owner’s capital |
Bank loan, overdraft, lease finance, issue of shares, venture capital |
5.2 Cash‑Flow Forecasting (AO2)
- Project cash inflows (sales, receipts) and outflows (payments, expenses) over a period.
- Helps ensure sufficient working capital and avoid liquidity problems.
5.3 Income Statement (Profit & Loss Account) (AO1‑AO2)
| Item | Explanation |
|---|
| Revenue (Sales) | Total income from goods/services sold. |
| Cost of Sales | Direct costs of producing the goods sold. |
| Gross Profit | Revenue – Cost of Sales. |
| Operating Expenses | Rent, salaries, advertising, depreciation. |
| Operating Profit | Gross Profit – Operating Expenses. |
| Interest & Taxes | Finance costs and tax payable. |
| Net Profit | Final profit after all deductions. |
5.4 Statement of Financial Position (Balance Sheet) (AO1‑AO2)
| Assets | Liabilities & Equity |
|---|
Current assets – cash, stock, receivables
Non‑current assets – plant, equipment, patents |
Current liabilities – payables, short‑term loans
Non‑current liabilities – long‑term loans
Equity – share capital, retained earnings |
5.5 Key Ratios (AO3)
| Ratio | Formula | Interpretation |
|---|
| Gross Profit Margin | Gross Profit ÷ Revenue × 100% | How much profit is made after direct costs. |
| Net Profit Margin | Net Profit ÷ Revenue × 100% | Overall profitability. |
| Return on Capital Employed (ROCE) | Operating Profit ÷ Capital Employed × 100% | Efficiency of capital use. |
| Current Ratio | Current Assets ÷ Current Liabilities | Short‑term liquidity – ability to pay debts. |
| Quick Ratio | (Current Assets – Stock) ÷ Current Liabilities | Liquidity excluding inventory. |
| Inventory Turnover | Cost of Sales ÷ Average Stock | How quickly stock is sold. |
| Receivables Turnover | Credit Sales ÷ Average Debtors | Effectiveness of credit control. |
5.6 Interpretation of Accounts (AO4)
- Use ratios to assess profitability, liquidity, efficiency and financial stability.
- Compare with previous periods, industry averages or target figures.
- Identify strengths (e.g., high profit margin) and weaknesses (e.g., low current ratio) to inform decision‑making.
6. Summary Checklist for Exams (All Units)
- Identify the relevant concepts and terminology (AO1).
- Explain how and why they work – cause and effect (AO2).
- Analyse information, calculate figures and interpret results (AO3).
- Make justified recommendations, evaluate alternatives and suggest implementation (AO4).