Cambridge IGCSE Business Studies (0450) – Complete Revision Notes
Learning Objectives
- Understand the core concepts of business activity, people, marketing, operations, finance and external influences.
- Analyse business situations, apply relevant theory and justify decisions using appropriate terminology (AO2).
- Develop exam techniques that meet the four Assessment Objectives (AO1–AO4).
1 Understanding Business Activity
1.1 What is a Business?
- Definition: An organisation that combines resources to produce goods or services that satisfy human needs and wants, with the aim of achieving its objectives (profit, growth, social benefit, etc.).
- Key Economic Concepts
- Needs vs. Wants: Needs are essential for survival (food, shelter); wants are desires beyond basic needs.
- Scarcity: Resources are limited, so choices must be made.
- Opportunity Cost: The value of the next best alternative fore‑gone when a decision is made. Example: Using a factory floor for furniture instead of toys means the opportunity cost is the profit that could have been earned from toys.
- Value‑Adding: Transforming inputs (raw materials, labour, capital) into outputs that are worth more to customers.
1.2 Economic Sectors & Ownership
| Sector | Primary Activity | Examples |
|---|
| Primary | Extraction of raw materials | Agriculture, mining, fishing |
| Secondary | Manufacturing and processing | Car production, clothing factories |
| Tertiary | Service provision | Retail, banking, education |
- Private sector: Owned by individuals or companies; profit‑oriented.
- Public sector: Owned and operated by government; aims include service provision and welfare.
1.3 Forms of Business Organisation
| Form | Ownership & Control | Liability | Key Features | Typical Use |
|---|
| Sole trader |
One owner, full control |
Unlimited – personal assets at risk |
Simple to set up, all profit retained |
Small retail, tradespeople |
| Partnership |
Two or more owners share control |
Unlimited (unless limited partnership) |
Shared profit/loss, joint decision‑making |
Law firms, accountancy practices |
| Limited company (private) |
Shareholders own, directors manage |
Limited to amount unpaid on shares |
Separate legal entity, can raise capital by issuing shares |
Manufacturing, tech start‑ups |
| Public corporation |
State‑owned, managed by appointed board |
Limited – government bears loss |
Provides public services, not profit‑driven |
Railways, utilities |
| Franchise |
Franchisor grants brand & system; franchisee runs outlet |
Limited to franchisee’s investment |
Brand consistency, support, royalty payments |
Fast‑food chains, retail stores |
| Joint‑venture |
Two or more parties pool resources for a specific project |
Limited to each party’s contribution |
Shared risk & profit, often for market entry |
Automotive collaborations, overseas expansion |
| Co‑operative |
Members own & democratically control |
Limited – members’ liability limited to share capital |
Profits shared among members, focus on member benefit |
Retail co‑ops, agricultural co‑ops |
Activity – Matching Objectives to Stakeholders (AO3)
Match each stakeholder with the most relevant business objective(s). Write a short justification.
| Stakeholder | Possible Objective(s) |
|---|
| Owners / Shareholders | Profit maximisation, Return on investment |
| Managers | Growth, Market share, Efficiency |
| Employees | Job security, Fair wages, Training |
| Customers | Quality, Value for money, Service |
| Suppliers | Long‑term contracts, Timely payment |
| Government | Tax revenue, Employment, Compliance |
| Community / NGOs | Social responsibility, Environmental protection |
1.4 Business Size – Measurement & Limitations
- Turnover (sales revenue): Indicates market activity but ignores profit margins.
- Number of employees: Reflects operational scale; can be misleading for highly automated firms.
- Market share: Shows competitive position; hard to calculate in fragmented markets.
Worksheet: Given the data for three firms, calculate each size indicator and discuss which gives the most reliable picture of “size”.
1.5 Business Objectives
- Survival: Stay in operation (common for start‑ups).
- Profit maximisation: Generate the highest possible profit.
- Growth: Increase sales, market share, or geographic reach.
- Market share: Capture a larger proportion of the market.
- Quality / Customer satisfaction: Build reputation and repeat business.
- Social / Ethical objectives: Community involvement, environmental stewardship.
1.6 Entrepreneurship & Business Growth
- Entrepreneurial traits: Risk‑taking, innovation, vision, perseverance, ability to spot opportunities.
- Growth Strategies (Ansoff Matrix):
- Market Penetration – sell more of existing products to current markets.
- Market Development – enter new geographic or demographic markets.
- Product Development – create new products for existing markets.
- Diversification – new products in new markets (related or unrelated).
2 People in Business
2.1 Motivation Theories
| Theory | Key Points | Relevance to Management |
|---|
| Maslow’s Hierarchy of Needs |
Physiological → Safety → Social → Esteem → Self‑actualisation |
Design reward packages that satisfy lower‑level needs first. |
| Herzberg’s Two‑Factor Theory |
Hygiene factors (salary, conditions) prevent dissatisfaction; Motivators (recognition, achievement) create satisfaction. |
Separate “must‑have” conditions from “growth” incentives. |
| Taylor’s Scientific Management |
Standardise work, select and train workers, use incentives. |
Useful for repetitive, high‑volume production. |
| McGregor’s Theory X & Theory Y |
X – people dislike work, need control; Y – people are self‑motivated. |
Influences leadership style and delegation. |
2.2 Financial & Non‑Financial Rewards
- Financial: Salary, bonuses, profit‑share, commissions, piece‑rate.
- Non‑financial: Job enrichment, career development, recognition, flexible working, good workplace relations.
2.3 Organisational Structure & Charts
| Structure | Features | When Used |
|---|
| Simple | Owner makes all decisions; no formal hierarchy | Very small firms |
| Functional | Departments by function (marketing, finance, production) | Medium‑size firms |
| Divisional | Separate divisions for products, regions or customers | Large, diversified firms |
| Matrix | Dual reporting – functional manager + project manager | Complex, project‑focused organisations |
Sample Organisational Chart (Functional)
CEO
│
├─ Marketing Manager
├─ Finance Manager
├─ Production Manager
└─ HR Manager
2.4 Functions of Management (POCCC)
- Planning: Set objectives, decide actions.
- Organising: Allocate resources, define structure.
- Controlling: Monitor performance, take corrective action.
- Co‑ordinating: Ensure activities work together.
- Communicating: Share information effectively.
2.5 Leadership Styles
| Style | Key Characteristics | Impact on Motivation |
|---|
| Autocratic | Decisions made by manager only | Quick decisions but may lower morale. |
| Democratic | Manager seeks input from staff | Higher engagement, better ideas. |
| Laissez‑faire | Minimal direction; staff autonomy | Good for skilled teams; risk of drift. |
2.6 Trade Unions & Employee Relations
- Functions of trade unions: Collective bargaining, representation, legal advice, industrial action.
- Legal controls (UK example): Trade Union and Labour Relations (Consolidation) Act 1992 – sets rules for registration, industrial action, and dispute resolution. Similar legislation exists worldwide.
- Good industrial relations: Reduce strikes, improve productivity, enhance reputation.
2.7 Recruitment, Selection & Training
- Job analysis & specification
- Advertise vacancy (internal/external)
- Short‑list applications
- Interview & assessment centre
- Selection (tests, references)
- Offer & contract
Training types
- Induction – introduction to the organisation.
- On‑the‑job – learning while working.
- Off‑the‑job – classroom, e‑learning, workshops.
- Continuous professional development (CPD).
2.8 Redundancy
- Occurs when a role is no longer needed (e.g., automation, restructuring).
- Legal steps (UK): consultation, selection criteria, notice period, statutory redundancy pay, right to appeal.
- Alternative options: redeployment, reduced hours, voluntary severance.
2.9 Communication in Business
| Channel | Formal / Informal | Examples | Advantages |
|---|
| Written reports | Formal | Annual report, policy documents | Record‑keeping, clarity |
| Meetings | Formal / Informal | Board meeting, team huddle | Immediate feedback |
| Emails / Intranet | Formal / Semi‑formal | Internal memos, newsletters | Speed, traceability |
| Grapevine | Informal | Water‑cooler chat, social media | Rapid spread of information (or rumours) |
3 Marketing
3.1 Role of Marketing & Market Types
- Identify and satisfy customer needs, create value, build relationships, generate revenue.
- Market types
- Mass market – broad appeal, low‑price focus.
- Niche market – specialised segment, higher price/quality focus.
- Competitive strategies (Porter)
- Cost leadership – become the low‑cost producer.
- Differentiation – offer unique features.
- Focus – target a narrow market segment.
3.2 Market Research
| Research Type | Purpose | Methods |
|---|
| Primary | Collect new, specific data | Surveys, interviews, focus groups, observation |
| Secondary | Use existing data | Industry reports, government statistics, company records |
Sampling techniques affect reliability:
- Random: Every member has equal chance – most representative.
- Stratified: Sub‑groups sampled proportionally – good for diverse populations.
- Convenience: Easy to access – risk of bias.
3.3 The Marketing Mix (4 Ps)
3.3.1 Product
- Product definition: Anything that satisfies a need or want.
- Product mix (assortment): Total range of products a firm offers.
- Product line: Group of related products sharing a brand, function or price range.
- Product life‑cycle (PLC): Introduction → Growth → Maturity → Decline.
3.3.2 Price
- Pricing objectives – profit, market share, status, survival.
- Strategies – penetration, skimming, psychological, prestige.
- Factors – cost, demand, competition, perceived value.
3.3.3 Place (Distribution)
- Channel choices – direct (online), indirect (wholesalers, retailers).
- Logistics – transport, warehousing, inventory control.
- Location decisions – footfall, proximity to suppliers/customers.
3.3.4 Promotion
- Advertising – paid, mass‑media.
- Sales promotion – coupons, discounts.
- Public relations – press releases, events.
- Personal selling – face‑to‑face interaction.
- Digital marketing – social media, SEO, email.
3.4 Product Extension Strategies
| Strategy | Definition | When It Works Best |
|---|
| Line Extension |
Adding new items to an existing product line (new flavours, sizes, models). |
Strong existing line, demand for variety. |
| Brand Extension |
Using an established brand name to launch a product in a different category. |
High brand equity and a logical link to the new category. |
| Multi‑Brand Strategy |
Introducing a new brand alongside an existing one to target a different segment. |
Need to avoid cannibalisation or reach a distinct demographic. |
| Co‑Branding / Partnership |
Two brands collaborate to create a joint product. |
Complementary strengths, shared risk, market‑entry advantage. |
| Private‑Label Extension |
Retailer develops its own brand for a product previously supplied by a national brand. |
Retailer seeks higher margins and control over quality. |
Factors to Consider When Choosing a Strategy
- Strength of existing brand (recognition, reputation, loyalty).
- Similarity between current and proposed product categories.
- Market demand, size of opportunity and competitive intensity.
- Risk of cannibalisation or brand dilution.
- Resource availability – financial, technical, marketing expertise.
- Legal / regulatory constraints (e.g., food safety, labelling).
Decision‑Making Framework for Product Extension (AO2)
- Analyse the current product mix and performance. Identify strengths, weaknesses and gaps.
- Identify the market opportunity. Use primary/secondary research to spot unmet needs, trends or new segments.
- Assess brand equity and relevance. Is the brand trusted for the proposed category?
- Match opportunity to the most suitable extension strategy. Refer to the table above.
- Evaluate risks and financial implications. Cannibalisation, development cost, price positioning.
- Justify the choice. Link to business objectives (e.g., increase market share, diversify revenue, meet CSR goals).
Sample Situation & Recommendation (AO3)
Company: FreshFizz Ltd – UK producer of carbonated soft drinks.
Current Product Line: Lemon, Orange and Cola (330 ml cans).
Market Insight: Growing demand for low‑sugar, health‑focused drinks among 18‑30‑year‑olds.
Chosen Strategy: Line Extension – launch a low‑sugar, flavoured sparkling‑water range.
Justification (AO2)
- Brand Leverage: FreshFizz is already associated with refreshing beverages; staying within the “refreshment” category preserves brand relevance.
- Market Fit: Health‑conscious trend aligns with low‑sugar sparkling water, meeting a clear unmet need.
- Low Cannibalisation: Sparkling water targets a different consumption occasion (hydration) and price point, limiting overlap with regular sodas.
- Cost Efficiency: Existing bottling lines need only minor adjustments; capital expenditure is modest.
- Revenue Potential: Using the formula
$$\text{Projected Revenue Increase}= \text{Current Sales}\times\text{Market Growth Rate}\times\text{Capture Rate}$$
With a 5 % market growth and a 10 % capture rate, sales could rise by ≈0.5 % of total revenue in year 1, with higher upside as the product gains acceptance.
Implementation Checklist (AO4 – planning)
- Develop three new flavours (Lime, Berry, Cucumber).
- Design packaging that differentiates from regular soda but retains the FreshFizz visual identity.
- Launch a digital marketing campaign highlighting health benefits and low sugar content.
- Secure distribution in gyms, university canteens and health‑food retailers.
- Monitor sales, consumer feedback and competitor response; consider further extensions (e.g., vitamin‑fortified variants).
Suggested Diagram
Insert a flowchart that visualises the Decision‑Making Framework: Analyse → Identify Opportunity → Assess Brand → Choose Strategy → Evaluate Risks → Justify.
3.5 Marketing Planning & Legal Controls
- Components of a marketing plan: Executive summary, market research, objectives (SMART), target market, marketing mix, budget, monitoring & control.
- Legal controls (UK examples): Consumer Protection Act, Advertising Standards Authority (ASA) rules, Product Safety Regulations, Intellectual Property (trademarks, patents).
- International market entry modes:
- Export – low risk, low control.
- Licensing – use of brand/IP by a foreign partner.
- Franchising – replicates a proven business model.
- Joint venture – shared ownership, moderate risk.
- Wholly owned subsidiary – full control, highest investment.
4 Operations Management
4.1 Production Methods
| Method | Flexibility | Volume | Typical Use |
|---|
| Job (custom) production | High | Low | Bespoke furniture, specialist engineering |
| Batch production | Medium | Medium | Bakery items, clothing collections |
| Mass (flow) production | Low | High | Automobiles, consumer electronics |
| Continuous production | Very low | Very high | Oil refineries, electricity generation |
4.2 Costs, Break‑Even & Decision‑Making
- Fixed costs: Do not vary with output (rent, salaries).
- Variable costs: Change directly with output (raw materials, labour per unit).
- Break‑Even Point (units):
$$\text{BE}= \frac{\text{Fixed Costs}}{\text{Selling Price per unit} - \text{Variable Cost per unit}}$$
- Margin of safety: Difference between actual sales and break‑even sales – indicates risk level.
4.3 Location Decisions
- Factors – market access, labour availability, transport costs, government incentives, proximity to suppliers, environmental impact.
- Techniques – Cost‑benefit analysis, break‑even analysis for different sites, location‑factor weighting.
4.4 Quality Management
- Quality concepts: Conformance, fitness for purpose, customer satisfaction.
- Tools: Check sheets, flow charts, Pareto analysis, statistical process control (SPC).
- Approaches: Total Quality Management (TQM), Six Sigma, ISO 9000 certification.
4.5 Inventory & Stock Control
- Reasons for holding stock – meet demand, avoid stock‑outs, take advantage of bulk discounts.
- Methods – Just‑in‑Time (JIT), Economic Order Quantity (EOQ), ABC analysis.
5 Finance
5.1 Sources of Finance
| Source | Ownership | Control | Risk | Typical Use |
|---|
| Owner’s capital | Owner | Full | Personal risk | Start‑ups, small firms |
| Bank loan | Lender | None | Repayment obligation | Equipment purchase, expansion |
| Hire purchase | Lender | None | Interest + depreciation | Machinery, vehicles |
| Trade credit | Supplier | None | Short‑term, interest if late | Working capital |
| Debentures | Investors (bond‑holders) | None | Fixed interest, priority over shareholders | Large capital projects |
| Shares (equity) | Shareholders | Shared | Dividend expectations, dilution | Growth, acquisitions |
| Retained profit | Business | Full | Opportunity cost of not distributing | Re‑investment, R&D |
5.2 Cash Flow & Budgets
- Cash flow forecast: Projects inflows and outflows over a period; highlights potential shortfalls.
- Types of budgets: Sales, production, cash, master (combined) budget.
- Key ratios for monitoring – current ratio, quick ratio, net profit margin, return on capital employed (ROCE).
5.3 Financial Decision‑Making (AO2)
- Identify the need for finance (e.g., new product launch).
- Calculate the amount required (cost estimates, contingency).
- Compare sources using criteria: cost of capital, control, risk, repayment terms.
- Select the most appropriate source(s) and justify with reference to business objectives.
5.4 Example – Choosing Finance for a New Line Extension
A company needs £200,000 to launch a low‑sugar sparkling‑water line.
- Option A – Bank loan (5 % interest, 5‑year term).
Cost: £10,000 interest per year; retains full control.
- Option B – Issue new shares (10 % dividend).
Cost: £20,000 dividend per year; dilutes ownership.
- Option C – Hire purchase for new bottling equipment (6 % interest).
Cost: Higher overall interest; asset ownership at end.
Justification (example): The bank loan is cheapest and preserves ownership, matching the firm’s objective of maintaining control while expanding its product range.
6 External Influences
6.1 PESTLE Analysis
| Factor | Key Questions |
|---|
| Political | Tax policies, trade restrictions, stability? |
| Economic | Inflation, exchange rates, consumer confidence? |
| Social | Demographic trends, lifestyle changes, cultural attitudes? |
| Technological | Innovation, automation, e‑commerce? |
| Legal | Health & safety, employment law, IP protection? |
| Environmental | Sustainability, waste regulations, carbon footprint? |
6.2 Ethics & Social Responsibility
- Ethical issues – child labour, fair trade, advertising to children.
- CSR approaches – philanthropy, ethical sourcing, environmental initiatives.
- Impact on reputation, customer loyalty and long‑term profitability.
6.3 Globalisation & International Trade
- Benefits – larger markets, economies of scale, access to resources.
- Risks – exchange‑rate volatility, cultural misunderstandings, political instability.
- Tools – SWOT analysis for overseas markets, Porter’s Five Forces for industry assessment.
7 Exam Technique & Assessment Objectives
7.1 AO1 – Knowledge & Understanding
- Memorise key definitions, formulas and diagrams.
- Use flash‑cards for terminology (e.g., “brand extension”).
7.2 AO2 – Application
- Read the question carefully; underline command words (e.g., “recommend”, “justify”).
- Apply the relevant framework (e.g., Decision‑Making Framework for product extension).
7.3 AO3 – Analysis
- Break the situation into parts: internal factors, external influences, stakeholder interests.
- Use tables or bullet points to compare alternatives.
AO4 – Evaluation
- Weigh pros and cons; consider short‑term vs long‑term effects.
- Link back to business objectives and the wider environment.
- Conclude with a clear, justified recommendation.
Quick Checklist for a 12‑Mark Question
- State the relevant theory or model (2 marks).
- Apply it to the given data/situation (4 marks).
- Analyse the implications (3 marks).
- Evaluate alternatives and give a justified recommendation (3 marks).
8 Suggested Revision Activities
- Mind‑map Exercise: Create