Business: combines FOP to make products that satisfy
Specialization
consumers wants and needs
Need: essential for living
Want: non-essential for living
FOP (resources): inputs needed to make g/s that are
limited in supply
scarcity: economic problem that arises because there
are unlimited wants but limited resources that create
shortage, so choices have to be made on how to use
these scarce resource
opportunity cost: next best alternative given up by
choosing another item
division of labour: production process is split up into
different tasks and each task is done by one person or
by one machine
specialization: way in which work is divided so each
worker concentrates on a specific task so become
expert at it OR when people and businesses
concentrate on what they are best at
What Business Make:
Consumer goods: tangible goods which are sold to the
general public. Durable goods such as machinery,
garments can last for a longtime while non-durable
goods such as edible things soon become damaged.
Capital goods: physical products, manufactured
specifically to be sold to other industries for production
of other g/s.
Services: They are non-tangible products for the public
to satisfy their wants. Commercial services include
banking, insurance, transportation. Personal services
are one-to-one services such as hair dressing, teaching,
lawyer etc
C1: Understand Business Activity
1.
Benefits of Specialization
✓ Higher output (k) workers become expert so
more quantity made, increased sales (an)
✓ Improved accuracy (k) Fewer mistakes made –
less wastage, fewer customer complaints, less
costs of production (an)
✓Quicker production (k) Less time is wasted
moving between tasks in the factory
✓ Save Training Costs: The production workers
are trained in only one task (1) therefore it takes
less time to train new recruits to the factory. (1)
✓ Help improve competitiveness (k) more
output made by given input – reduces AC (an)
✓ Easier to use machinery to perform tasks –
speeds up production
✓ Performing only one task makes worker
become a skilled expert / employee specialises in
what they are good at – more efficient in that
task / more job satisfaction
Limitations of Specialization
✘ Workers are bored doing 1 task- demotivated,
productivity falls – less output made
✘ Workers become interdependent- Workers
cannot cover for absent colleagues – production
may halt
✘ Workers less motivated – more likely to leave
the business
✘ Worker may find it difficult to find alternative
employment – as only skilled in one task
✘ Lose other skills – as only use skills for one
task
1
Factors to Consider Before Starting a Business
B. Increase Price
• Cost: does the business have capital to
purchase assets needed.
• Labor issues: how many workers and what skills
will be needed? ease of recruitment?
• Demand issues: is there enough customers
interested based on market research [app]
otherwise may not generate sufficient enough
revenue to pay for costs [an]
• Actions of competitors: who are the existing
rivals? what is their market share?
• Market Conditions: what is the state of the
economy? what is the interest and tax rates?
how could external factors affect level of
demand
1.2 Added Value
Added Value: difference between the selling price of a
product and the cost of materials needed to produce it
OR improvement to the product that makes it worth
more e.g. better packaging (SP-cost of materials= AV)
Creating Value: the increasing the differences between
the cost of purchasing bought-in materials and the
price the finished goods are sold
Ways to Add Value:
A. Reduce Costs: This is safer than increasing prices
and potentially losing customers to competitors
A. Find cheaper suppliers: buy cheaper materials
to reduce AC, but if quality changes it may give
bad reputation
B. Buy in bulk to gain discounts to lower AC and
higher added value.
C. Reduce waste: The business can also reduce
the amount of inputs needed to make goods to
reduce AC and increase added value.
C1: Understand Business Activity
1. Change Packaging – luxurious packaging
makes products look more expensive so
can charge higher price. Customers can
perceive the product to be worth more
[k] so may be prepared to pay more for
the same product [an]
2. Offer convenience: Consumers love
convenience and are willing t pay more
to get product or service without much
effort
3. Excellent services (k) consumers are
willing to pay a higher price for good
service. This can also boost reputation
and brand image (an)
4. Improve design and features (k) A
product additional features (USP), better
design, more functions can make the
consumers pay higher price.
5. Branding: Brands represent quality &
status. Consumers are prepared to pay
more for products which have a strong
brand attached to it. Through advertising
the product becomes well-known and
can create a strong brand loyalty among
its customers and can charge more for
its g/s.
6. Improve quality: customers will be
willing to pay a higher price
2
 C2: Business Classification
2.1 Classification of Businesses Changes in the Importance of Economic Sectors

Businesses can be put into three sectors: Industrialization occurs when there is a decline
in the importance of the primary sector and
1. Primary: Extracts and uses the natural resources of more relevance of secondary sector
the earth and are used by the secondary sector
farming, mining, forestry, logging, oil extraction (i) Fall in PS due to depletion of primary
resources in home country
2. Secondary: process raw materials from primary (ii) poor harvest
sector and converts them into manufactured goods (iii) reduction in land for farming
car, food (iv) more recycling leads to less demand
for primary products
3. Tertiary: Providing services to consumers and other (v) reduce primary due to migration
sectors from rural to urban
(vi) Reduced employment in PS – as now
EX: Retail shops, hotels, hospitals, banking, insurance primary products produced using
mechanization
Example: Insurance: (1) provides businesses with (vii) Increase in exported products – more
protection against risks such as theft or damage to need to be manufactured in
premises. secondary sector

The relative importance of these sectors in an economy

depends on: De-industrialization occurs when there is a
• Number of workers employed decline in the importance of the secondary
• Value of output produced sector.

• In developing countries, the primary sector employs (i) fall in secondary due to cheaper
most of the work-force. This is because most people costs of manufacturing goods in
live in rural areas and there is low demand for services other countries

• In more developed countries, the secondary and (ii) changes in demand so less products
tertiary sector employ more workers sold

• In economically developed countries, the tertiary (iii) environmental protection laws that
(service) sector employs most people as they import prohibit production of certain goods
manufactured goods from other countries (tourism)
(iv) increased mechanisation / increased
technology – reduces number of
employees in the secondary

(v) rise in tertiary due to increased

income and ability to spend more on
services and leisure activity

(vi) rise in education - skills base

changed so more suited to service
provision

C2: Business Classification 1

 C2: Business Classification
2.2 Mixed Economy

Has both a private sector and a public sector.

• Private Sector: when business activities are owned

by individuals OR not controlled directly by government

Features: not government owned, profit motive,

finance arranged by owners

• Public Sector: Owned by the government with social

objectives. Government will make decisions on what
and how to produce (i.e. healthcare, education,
defense, public transport). The main aim is to provide a
service to customers.

• Privatization refers to the selling of a public

sector business to the private sector.

• Privatization may occur as private sector is

more efficient and competitive so will be able
to make good quality goods leading to higher
profits

• But private sector does not have social

objectives, making their products unaffordable.

Should Govt Subsidize Primary Sector?

Yes:
• To protect number of jobs involved
• If the PS is of strategic business
• Without PS, the country will have no resources.

No:
• PS will become inefficient
• Cheaper resources available in other countries
• Worker have lack of interest in PS
• Opportunity cost – funds can be used for other
projects

C2: Business Classification 2

 C3 BUSINESS SIZE
3.1 ENTREPRENEUR Reasons why Entrepreneurs Set up his own business

Entrepreneur: a person who organizes, operates and takes
risk for a new bz venture in anticipation of profit
Characteristics of Entrepreneurs:
(1) Hard worker – prepared to work long hours, fewer
holidays
(2) Risk-taker – willing to risk losing own capital and willing
to risk losing personal assets
(3) Self-confident – strong belief in their own ability and
ideas to convince others
(4) Creative – must have new ideas about which products to
sell and how to attract customers; can think differently. New
ideas leads to increased sales. New ideas add value (k) so can
charge higher prices [an]. Help the business stand out from
rivals.
(5) Optimistic – think positively about new ventures and
continue if there are setbacks; Must have a positive attitude
to overcome difficulties when starting a business – even if
revenue is low they will need to keep positive and keep
trading. Important for employees to see entrepreneur is
hopeful – keep a positive approach with customers to
increase sales.
✓ To be own boss [k] instead of working for others; –
independence from instructions from employer;
choose own holidays/ own work hours
✓Potential to earn higher income – more motivation
if profits is higher than wages
✓ Made redundant (k) need to provide an income to
replace income that was lost
✓ To make her own decisions (k) Able to decide how
to spend time, flexible working hours
✓ To gain recognition and status (k) to become well
known and respected
✓ To work on something they enjoys [k]
can make use of personal skills and interests
✓ Unhappy with current employment
✘ Risky: Entrepreneurs must put their own money
into the business.
✘ Lost income from not being employee for another
business – no regular wage
Reasons why Entrepreneurs are Motivated:
1. Better quality work (k)

(6) Innovative – able to develop new products to retain 2. Can set a good example to employees [k]
customers
3. Lead to more innovation
(7) Good communicator – able to convince suppliers to
supply, banks to lend, customers to buy 4. More chance of being successful

(8) Independent – can work on their own

(9) Good at networking – prepared to learn from others

(10) Perseverance: need to be prepared to keep going when

faced with problems

(11) Resilience

(12) Multi-skilled

C3: Business Size 1

 C3 BUSINESS SIZE
3.2 BUSINESS PLAN
Business Plan: a document containing the business aims and
important details about the operations, finance and owners
of a business.
Main parts of BP:
1. Executive summary: description of business
2. Product: details of g/s is made
3. Market: who is the target customer, forecast sales, rival
analysis
4. Location: physical location of business and its distribution
channel
5. Organization Structure: hierarchy in the business, number
of workers needed
6. Financial Information: calculate start-up capital, predicted
costs, forecast cash flow – decide source of funds
7. Marketing strategy : elements of the MM
8. Human resources plan: number of employees and skills
needed
9. Market Research (k) Able to identify the target market and
what customers want. This shows if there is a demand.
However, if the sample was small and therefore the results
may not be accurate so owner will make bad decisions.
10. Resources (k) help plan equipment, inventory needed so
able to calculate how much start-up capital is needed and
make sure there is sufficient finance to get started
successfully or arrange to raise additional finance if
necessary.
C3: Business Size
BZ PLAN assist entrepreneurs because:
✓ Helps to get a bank loan/OD [k] as banks is able to
see that the business is profitable and able to repay
[an]
✓ Aids in Financial Planning (k) provides an estimate
of costs of resources needed so help to set budgets
and decide what type of finance to use [an]
✓ Can plan resources needed (k) identify number of
workers needed, budget for new production
machinery
✓ Help attract investors (k) financial documents will
help to show expected returns – to see if it will bring
the return expected by shareholders
✓ Act as a checklist [k] track progress as they set up
[app] so that they don’t forget any important task
✓ Reduces risk of failure (k) It forces the
entrepreneur to plan ahead, understand risks and is
able to plan out solutions to problems [an]
This will allow them to prepare for any problems and
stop these causing difficulties for the business
✓ Motivate employees (k) - business plan have clear
aims [k] so employees know what actions to take to
achieve aims [an]
✓ Identify demand (k) Help decision making [k] so
will not waste time or money on making
the wrong products [an] to ensure this business does
not fail [app]
X BP gets out of date quickly [k] so time spent
preparing it is wasted [an]
Why Banks want to see Business Plan?
• Supports request for finance [k] financial
documents show ability to repay loans
• Shows planning (k) shows that entrepreneur has
thought seriously about the business and its problems
• Provides important business information [k] such as
if demand is increasing based on market research
[app]
• Shows assets the business (k) identify which asset
can be used as collateral to support any loan [k]
2
 C3 BUSINESS SIZE
3.3 GOVERNMENT ROLE Are Grants the best Government Support?

Why Governments helps start-ups? Yes

1. To reduce unemployment, new businesses will create jobs,
fewer welfare benefits to pay
2. To increase competition (k) gives consumers more choice,
keep prices low and quality higher; avoid monopoly
3. To Increase output (k) new businesses make more g/s for
consumers to buy, help increase GDP
4. Can grow in future (k) large businesses started small at
the beginning and the new start-up may become a large
important business in the future
5. Earns taxation (k) the business will pay tax if profitable
and this will be a source of revenue for the government
which they can then use for providing public services.
6. Can provide important goods and services to larger
businesses
7. Small businesses can meet demands of smaller markets
8. To benefit society (k) entrepreneurs may create social
enterprises for example providing jobs and profit for local
disadvantaged groups
9. To benefit society (k) area will become developed if there
are more start-up businesses
10. To encourage entrepreneurs – government support may
reduce the risk of failure
• Start-up business need funds to buy assets [k]
without which it cannot operate [an]
• Start-up business likely to have access to fewer
sources of finance [k] and banks may be less willing
to take the risk of lending money
No
• Other ways to help
• Provide a mentor [k] as a new entrepreneur may
not have experience of running a business
• Lower taxes [k] so lower costs [an]
• Lower rent [k] reduce outflow [an]
Evaluation:
• Financial help is better due to the limited sources of
finance available and without this there is no business

How Governments Help New Entrepreneurs to become Should Govt help New Business?
more competitive
YES
1.Provide Grants(k) to train employees or buy new • Protect jobs [k]
machinery to increase productivity •Protect if vital industry [k]

2. Lower tax rates [k] this will reduce expenses (an) therefore
potentially improved profitability [an]
3. Finance: low-cost loans (k) to provide cheap capital to
reduce cash outflow
4. Low rent from government [k] to reduce fixed costs
5. Mentorship [k] give advice and support sessions to new
entrepreneurs [an] so that they have the skills needed to run
a business [an] Mentorship will help them make better
decisions and improve more chance of survival
NO
• government could lose tax revenue if they fail [k]
• not the role of government [k] to help private
sector business [app]
• disincentive for businesses to be successful [k] this
could lead to them being inefficient [an]
• opportunity cost (k) helping businesses would
require money from the government and will reduce
the money available for other projects

6. Tariff barriers (k) quota and tariff are protectionism

measures to help local firms from foreign rivals

7. Relaxed legislations [k] makes it simpler to set up business

[an] lower minimum wages

8. Organize business fairs (k) to meet more potential

customers (an)

9. Improve infrastructure (k) to make it easier to receive

supply and sell finished goods to customers

C3: Business Size 3

 C3 BUSINESS SIZE
3.3 Business Size 3.4 GROWTH

Who needs to know the size of a business? Reasons A Businesses Grow Quickly

(1) Investors: to decide where to invest 1. Changes in customer tastes [k] more demand
(2) Government: to decide tax rates based on bz size 2. Increase in productivity [k] more output
(3) Competitors: to compare bz sales and market share 3. Takeover of competitor [k] so fewer rivals in
(4) Workers: idea of how many people they will work with market
(5) Bank: to decide whether to give loan 4. Introduction of new technology [k]
5. Access to more capital
There are several different measurements of business size
and they all have limitations:
1.Internal Growth is when the business expands its
Measurements Limitations existing operations using its retained profits.
(1) Number of LI firms have high number of Less risky than external growth but is a slow way to
people employed workers. expand.
• Develop new products to increase sales
Easy method to CI firms employ few people. • Enter new markets
compare bz size Some have many part-time • Buy more machine, equipment
employees so appear larger than • Build more factories, open shops
firms with only part-time workers

(2) Value of High level of output does not mean 2. External Growth is when the business take- over or
output business is large. merges with another business

(manufacturing A firm employing few people may • Take-over: one business buys out the owers
bz) produce several very expensive of another business
products will appear larger than a • Merger: owners of 2 business join together
business that produce cheaper to make one business
products but employing more • Licensing
people. • Franchise
• Joint Venture
(3) Value of sales Misleading to use this measure when
comparing the size of businesses that
(compare retail sell very different products
bz) Benefits of GROWTH (C5)

(4) Value of Easy to calculate the value of the ✓ Higher profits [k] expansion will lead to increase
capital assets in the business. output which could lead to increased sales and
Employed profits. Higher return mean more dividends to
CI firms use a lot of technology and shareholders.
(money invested equipment so do not need so many ✓ More Prestige for owners [k] seen as larger
into the business) workers. But LI firms employ many business so able to gain access to more sources of
workers and produce low output finance to further help expansion plans [an]
levels and use little capital
✓ Increased market share (k) may produce a stronger
equipment.
brand image – might result in greater customer
loyalty (an)
(5) Market Share No accurate way of measuring
✓ To lower AC (k) gain EOS from bulk buying [k]
market share
discounts leads to lower AC so able to charge lower
(compare bz in
prices [app]
same industry)
✓ Spread risks of failure (k), if sales in one market
Which is the Best Method: /product falls, they have other markets/products to
rely on [app]
There is no perfect way of measuring business size as each ✓ Reduced risks of takeover [k]
method gives different answers. Therefore, businesses may ✓ Access to more finance [k] banks more likely to
use more than one method lend to larger firms - seen as less risky

C3: Business Size 4

 C3 BUSINESS SIZE
Problems with Growth (C5)
Diseconomies of scale are factors that lead to increase in
average costs as a business grows above a point.
X Poor communication – Larger businesses find it hard to
send and receive messages across many levels. Instructions
do not get to the right person or get distorted – errors in
work carried out or instructions are not carried out correctly.
This can be solved by using more than one methods of
communication
X Poor Morale - Large businesses employ many people, some
workers feel unimportant as they feel remote from
managers. Employees feel alienated and this could lead to
lower motivation and low productivity. This can be solved by
using democratic style in managing workers.
X Difficult to control (k) too many workers to manage and
monitor can lead to more mistakes and wastage. This can be
solved by operating the business in small units – this is a
form of decentralization
X Financial problems (k) expansion might lead to short-term
cash flow difficulties. Cash outflows rise faster than cash
inflows. Output produced but demand not sufficient – leads
to unsold inventory and increased storage costs. If loans are
taken then this may increase cost – due to interest payments
or may need to issue more share capital and dilute control.
This can be solved by expanding slowly, use retained profits
to pay for growth
X Weak coordination – it may be more difficult for decisions
to be made between departments to ensure each runs
smoothly
Should A Business Continue To Expand?
YES
• Possible economies of scale [k] allowing her to lower
average cost [an]
• Allow business increase sales [k]
NO
• Do they have access to enough finance?
• Need to hire more workers [k] so more money spent
on recruitment which increases costs [an]
• Do they have skills to manage a larger business
• Risk of increased competition [k]
C3: Business Size
3.5 Types of External Growth:
1. Horizontal Integration – firm taking over/merging
with another firm in the same industry
Ex. a paper company taking over another paper
company
✓ Economies of scale leads to lower AC
✓ Higher market share (k) reduces competition
✓ Wider product range
✓ Gain skills, resources from another firm
X Diseconomies of scale and difficult to control and
manage the business
2. Vertical Integration – firm taking over/merging
with another firm in same industry but different stage
of production (there is forwards and backwards)
A. Forward: firm takes over a business in a later stage
of production (merge with retailer)
Ex. paper manufacturing company taking over paper
selling company (forward)
✓ Merger gives assured outlet for its product
✓ Retailer will not sell rival product
✓ Profit margin made by retailer is absorbed by the
business.
B. Backward: firm takes over a business in a earlier
stage of production (merge with suppler)
Ex. Book company takes-over a paper making bz
✓ Merger gives assured supply of materials
✓ Supplier will not supply to riva firms
✓ Profit margin made by supplier is absorbed by the
business.
3. Conglomerate Merger - firm merging/taking over
another firm in a different industry. (diversification)
Ex. paper company taking over a food company
✓ Benefits include spread of risks, if bz fails in one
industry it will be offset by sales in another industry
✓ Transfer of ideas between different sections of the
business.
5
 C3 BUSINESS SIZE
Pros/Cons Take-Over of Rival Firms
✓ Economies of scale- bulk buying help to reduce AC
✓ Larger capacity –use the existing production facilities to
increase the output– faster than setting up own factories
✓Reduced competition (k) Increase in market share [an] able
to increase market prices [an]
✓ Gain brand name of rival [k] may widen range of
customers which could help gain more sales [an]
✓ Wider product range (k) satisfy more customers
✓ More sales (k) large customer base
✓ Gain skilled workers/resources (from other business) [k]
✓ Faster than internal growth
X Difficult to Control (k) increased number of employees in
the merged business means managers may not be in direct
contact with employees. The business will need to employ
more supervisors to control workers – increases costs as
more wages to pay. May also mean some workers are not
supervised and may not work efficiently – less output from
each worker. Possible DEOS. This can be solved by employing
supervisors who pass important messages to employees.
X Finance issues (k) expansion costs are high and the
business may take out loans to finance the takeovers –
increased interest payments for loans - increased costs –
lower profits
X Clash of culture [k] difficult to integrate two businesses
[an] Other businesses taken over may have different
cultures and ways of doing things – may have clashes
between staff. Employees may not work effectively together
as leadership styles are different at the two companies –
reduced efficiency as output per employee drops. There may
be resistance by workers to do things differently – workers
demotivated after the takeover. Cultures are embedded in
businesses making employees very resistant to change.
Employee participation could be used to make everyone
accept working in a new environment
X Does not Spread Risks if take-over is same industry
X Cost savings may not happen [k] no guarantee that
benefits will happen [k]
X Management issues e.g. communication problems
between businesses [k] possible DEOS – higher AC
X Cost of redundancies [k] need to make some workers
redundant - negative impact on employee motivation
Other ways to grow: expand product range, franchise, JV
C3: Business Size
Take-Over Impact on Shareholders
✓ Less competition [k] lead to more sales / profits
and higher dividend [an]
✓ Successful takeover could lead to an increase in
share price [k]
✓ lower AC (k) due to economies of scale
✓ larger market share [an] so an increased stability of
the company [an]
✓ Larger company might meanmore capital to invest
[k]
X No guarantee that increased profits will happen
Take-Over Impact on Customers
✓ Lower prices [k] due to cost savings [app]
X Less customer choice
Do you think entering a growing market where there
is a lot of competition is the best way for a business
to expand?
YES:
• Shows high potential demand means more
potential customers [k] could lead to an increase in
revenue [an]
• Forces the business to be mor efficient (k) need too
keep AC down (an)
NO:
• Difficult to charge high prices - may have to set
lower prices than rivals so lower profit margins
• Have to do something different to make your
product ‘stand out’ (k) customers may be brand loyal
to other businesses so leads to lower sales (an)
• Added costs of promotion [k] leading to higher
expenses [an]
Evaluation:
• Other ways to expand: Expand in existing market or
develop new products, take-over rival, sell in new
market with few rivals
• It will depend on how good its product is
because if customers are interested in what the
business is offering, they may be prepared to buy it
despite the competition so in this situation it is
worth the risk as they would be able to gain market
share to justify the costs of expansion.
6
 C3 BUSINESS SIZE
3.5 SMALL FIRMS Why Stay Small?

Advantages/ Limitations of Small Firms:
✓ Easier to control [k] not stressful
✓ Offer personal service to customers [k] employees are
trained [app] so able to maintain customer loyalty [an]
✓ Better communication [k] fewer workers so less likely to
have barriers
✓ Flexible [k] Small business able to react quicker to change
in customer demands for type of product
✓ Leaner management [k]. Business has few employees to
inform/ask [app] so able to make decision quicker (an)
✓ Able to specialize and can cater to niche market [k] so
might not need to compete on price [an] so will attract
particular customers (an).
X Lack of economies of scale [k] so have higher AC so prices
charged by small businesses are higher [an]
X Lack of capital [k] to be able to market/advertise effectively
[an]
X Less stock held [k] and therefore less consumer choice [an]
X Threat of competition- Vulnerable to price wars [k]
X They cannot get discounts from suppliers because they buy
in small quantities
X Lack of finance to compete with larger firms(k) smaller
shop, less variety (an)
X Lower marketing budgets [k] so struggle to have a large
market presence [an] unable to promote
X Less visibility as a brand [k] so harder to get sales [an]
X Fail to attract best employees (k) as larger firms can pay
higher
X Unlimited liability: sole trader and partnership have UL- risk
of losing personal assets
1. Small Market (k) does not have a large market so
low demand - if there few number of customers,
sales are low so produce low output
2. Owner’s preference (k) owner wants the business
to remain small – to keep a work life balance, may not
want to stress, can keep closer links with workers and
customers, easier to control
3. Type of product (k) offer personal service or
specialized products. Specialized products use job
production and not suitable to be produced on a large
scale – customer preference would be lost and not
designed to customer needs if mass produced.
4. Lack of Finance (k) small firm has fewer sources of
finance so remain small
5. Avoid DEOS (k) Easier to manage - may not want
the stressor does not have the personal skills to
manage a larger business - keeps closer links with
employees and customers
6. Lack of skills to manage large business (k) likely to
make mistakes if expand
Why small businesses are at greater risk
1. Established by young entreprenerus who
lack managed experience
2. Borrow money to begin so will have to repay
whether or not business is successful
3. Start-ups have lesser experience and
information about the market in order to
make informed decisions
4. New entrepreneurs may not have a realistic
picture of the market

Reasons why obtaining finance is not easy for a new How SF compete with LF?
business:
1. Open longer hours
1. Seen as too high a risk 2. Offer extra services like free delivery
2. Do not have an accurate business plan 3. Sell specialist stock
3. Do not have collateral; 4. Offer friendly service
4. Lack experience 5. Sales promotion: BOGOF
5. Relatively new to the market 6. Spend on Advertising
6. Unproven product 7. Give Longer Credit Time
7. Lack of credit history

C3: Business Size 7

 C3 BUSINESS SIZE
3.6 BUSINESS FAILURE Ways to Reduce Risks of Failure for New Bz

1. Poor management - lack of experience, poor choice of 1. Prepare a business plan [k] to help identify
managers (family business), bad decisions made potential problems and solve in advance (an)

• D not know how to manage workforce - staff may not be
aware of their job role and may not be efficient
• Do not know how to manage inventory – ordering too
much or too little - leading to wastage
• Do not know how to manage financial records – difficult to
make decisions based on revenue and cost
2. Insufficient Working Capital –The lack of money to pay
workers, suppliers, rent can lead to bz failure. The bz must
arrange a short-term bank loan to improve liquidity.
2. Use Government support [k] that may be offered to
sole traders [app]
3. Carry out primary market research [k] to better
understand potential demand [an]
4. Talk to other business people for advice
5. Start a franchise [k] as would have advice of
franchisor to support him

• Problems paying suppliers – negatively impacts 6. Train (k) enroll in courses to gain skills needed to
relationships with the suppliers start a business
• Problems maintaining equipment – reduces productivity

3. Poor Planning: poor or lack of business plan

• Insufficient staff - if owner does not plan for the correct

number of staff – order not delivered on time - poor
customer service
• Insufficient inventory so cannot meet orders on time - so
sales lost
• Inappropriate market research - leading to wrong decisions
made

4. Failure to plan for change – businesses need to respond to

a dynamic business environment. New technology, powerful
new competitors and major economic changes can lead to
business failures

5. Over-expansion – when a new bz tries to grow too quickly

at the start or objectives too ambitious but manager lacks
experience in running the business, management problems
and finance issues can set in (diseconomies of scale)

6.Competition – Difficulty competing with larger established

firms in the market. Difficulties of breaking into a new
market - high brand loyalty to existing firms

7. Change in government laws and legal controls

8. Poor product range/outdated products

9. Lack of demand/recession

10. Poor Market Research (k) bz did not identify customer

needs, may produce something that lacks demand resulting
in lower revenue and possible business failure if costs cannot
be covered.

11. Poor marketing (k) no brand awareness

C3: Business Size 8

4.1 PUBLIC Sector Private sector: businesses owned and controlled by
individuals. Not Government owned. Their main aim
Public sector: are business owned by the is to make profit through the sale of private goods.
government with social objectives. Capital comes
from government (taxes paid by taxpayers) Features: not government owned, profit motive,
Finance arranged by owners, run by individuals
ex. education, transport, hospitals, police, utilities
TYPES OF PRIVATE SECTOR BUSINESS
Public Corporation: A business that is owned and
controlled by the government 1. Unincorporated: Business has NO separate legal
identity. Business and owner are treated as one.
Benefits Limitations Eg; Sole Trader, Partnership
Allows access of Low efficiency due to
essentials to lack of competition Unlimited liability: owners of a business can be held
everyone- Continued responsible for the business debts. Their liability is
even if in losses not limited to the investment they made in the
business.
Provide important Suffer from excessive
goods and services at political interference ✓Owners/ Partners are in complete control of the
reasonable prices business
Provide employment Tend to provide poor ✓ Sole trader keeps all profits; partnership has fewer
to the majority quality goods and owners than limited company so higher profits for
services due to the each partner.
absence of stiff ✓Easy to set up and will have few legal requirements
competition to operate the business – reducing effort and cost to
Keeps in mind social Will have to be set up
costs of decisions subsidized if in
(non-profitable losses. ✘ Unlimited liability – could lose all personal
possessions
✘ Limited sources of capital – compared to
Objectives of Public Sector: incorporated business – fewer investors

1. Access for all or provided irrespective of 2. Incorporated: Business has separate legal identity.
ability to pay so will make services Business and owner are treated as two entities. Eg:
affordable for all Limited Company
2. Provide (essential) services
3. Meet profit target set by government- ✓ Limited liability – owners personal possessions will
source of revenue for govt not be used to pay business debts; any liability will
4. Protect or create employment in certain only be for an amount invested in the business
areas
✓ Owners and business are separate legal identities –
provides continuity on the death of owners
4.2 PRIVATE Sector ✓ Can sell shares to raise capital– to family and
friends – large amounts of capital may be raised
Unincorporated Incorporated
Sole-trader/Partnership PLC /Private Ltd ✘ Accounts are not private – competing business
Unlimited liability Limited liability may access the accounts
No Continuity Continuity ✘ Legal formalities to set up – may take more time
no legal identity has legal identity and cost than a partnership
Cannot sell shares Can sell shares
Limited capital Access to more
capital

C4: Business Organization 1

 UI and Incorporated Business
• Limited company has separate legal identity [k]
so assets at the factory are owned by the business
rather thanthe individual, whereas the owners and
the business are the same for a UI business
• UI has UL [k] whereas the risk for shareholders is
Limite. limited to the amount invested and are less
concerned about business liabilities[app]
• UI can be difficult to raise large amount of
finance, Incorporated can sell shares (an)
• UI has no continuity; incorporated continues
even after death of shareholder
4.3 UNINCORPORATED BUSINESS
1. SOLE TRADER: business owned by one person
who provides permanent finance and, in return,
has full control of the business and is able to keep
all of the profits.
Features: UL., unincorporated, keep all profits,
full control on decision, few legal requirements
✓ Owner has complete control (k) make all
decisions does not need to consult with anyone
[an] less disagreement (an)
✓ Few legal formalities (k) easy to set up reduced
save costs (an)
✓ Own boss (k) freedom to choose own working
hours or holidays so better work-life balance (an)
✓ Keep all the profit [k] – keeps all the returns
from his own hard work (an)
✓ Secrecy in financial matters [k] does not have to
share financial details about his business to
anyone else except tax office (an) rivals have no
access to information to take away clients (an)
✓ Has close contact with customers [k] so able to
respond quickly to changes in demand [an] can
encourage customer loyalty that will increase sales
(an)
✓ Does not have to share profits (k) incentive to
work hard (an)
✓ Less risky (k) require limited start-up capital [an
✓ Can make quick decision-making [k] so may be
more responsive to changes in demand (an)
C4: Business Organization
✘ Unlimited liability [k] personal possessions are at
risk – not just the capital he invested in the business
✘ No continuity [k] bz dissolves when owner retires
or dies (an)
✘ Limited capital –only one investor - more difficult
to expand in the future – remain small
✘ No separate legal identity [k] so owner would be
personally liable for the bz debts (an)
✘ Limited range of skills [k] Owner may not have
knowledge/expertise in all areas of running the
business (an)
✘ Limited ideas (k) No one else to discuss business
decisions with lead to poor decisions (an)
✘ Work long hours (k) difficult to take holidays [k]
owner is overworked (an)
✘ No one to share workload with [k] everything is
the sole responsibility of the owner – this can be
stressful, and he may be more likely have poor
quality decisions and make mistakes (an)
✘ No one to share the risks [k]owner suffers all
losses (an)
✘ Has all the responsibility (k) make decisions on
own [k] No one else to discuss business decisions
with - limited ideas – so poor quality decisions (an)
✘ No economies of scale [k] so average costs are
higher than other bz forms (an)
✘ No one to help if sole-trader is ill
WHY ST better WHY Partnership better
✓ keep all profits ✓ More skills
✓ quick DM ✓ More funds
✓ complete control ✓ More ideas
✓ Share work
✘ less finance ✘ Share profits
✘ fewer ideas ✘ Share control
✘ no one to share risks ✘ More Conflicts
✘ no one to share
workload
2
2. PARTNERSHIP: two or more people jointly Partnership agreement is the written and legal
agree to own and run a business together agreement between business partners. It is not
essential for partners to have such an agreement but
Features: UL, no separate legal identity , finance by it is always recommended.
partners, profits /risks shared
Contents of Partnership Agreement:
✓ More capital (than sole trader) [k] improve
chance of expansion (an) so less need to borrow 1 Amount of capital invested by all partners
(an) 2 Tasks to be done by each partner
✓ Shared work load [k] responsibility shared and 3 The way profits are shared out
division of labor possible so partners not 4 How long partnership will last
overworked like a sole-trader (an) less stressed
(an) allow more free time (an)
✓ More skills (k) so partners can specialise Factors in Choosing a Partner
in one aspect of the business where they have
expertise allowing time them to focus on their job • amount of capital: prospective partner has a lot of
(an) capital it will mean they will have to borrow less
✓ More ideas [k] about what type of product to money to expand. (1) no interest expense paid
sell [app] can help increase revenue [an] • experience: knows what to do – help in decision-
making
✓ Share risk [k] so do not have to carry alone all
• skills - each can specialize in different parts of the
the financial burden [an] if there are debts or
business so help reduce workload
losses these are shared between the partners
• reliability
✓ Shares ideas (k) can help increase sales, make • trustworthiness
business decisions that are more competitive (an) • compatibility
✓ Few legal requirements (k) compared to limited • profit sharing arrangements
company
✓ Other partner can cover if absent or ill
Will partnership achieve its objectives if converted to
✘ Unlimited liability [k] so if business is not able to Private Limited??
pay the suppliers [app] partners could lose his
personal possessions [an] to repay bz debts YES
✘ Share Profits [k] will get less than what a sole- The common objectives are growth and profitability.
trader gets (an) After incorporation, there is more capital so can
✘ Slow decision-making (k) control is shared so compete effectively. It will also benefit from LL
need to consult with other partners (an) reducing personal risks of investors.
✘ Fewer sources of finance (than limited company)
[k] restricting plans to expand the business [app] NO
The larger the bz does not always translate to more
✘ Loss of control (k) share decision-making take
profits. There could be DEOS.
longer to make decisions[k] but may lead to better
decisions (an)
Conclusion
✘ Disagreements (k) difference in opinions can
Potentially, it should help in achieving the objectives
lead to slower decision making [an] potential
(ev)
conflicts (an)
✘ No separate legal identity [k] so partners Thewould
obj
be personally liable for the bz debts (an)
✘ No continuity (k) bz dissolves when partner
retires or dies (an)
✘ Partnership agreements cost time and money [k]
more complex to form than sole-trader
✘ Scope of dishonesty (k) If one of the partners is
inefficient/dishonest, they all lose money (an)
✘ Limited capital (k) maximum of 20 investors

C4: Business Organization 3

4.3 INCORPORATED BUSINESS
Limited Company: a business that has been
incorporated and whose owners have limited
liability
Limited Liability: liability of shareholders is limited
to the amount they invested- shareholders not
liable for bz debts
Shareholders: part owners of a limited company.
They buy shares which represent part ownership
Share: certificate confirming part ownership of a
company. This certificate also entitles the
shareholder the right to dividends.
Dividends : profits after tax that is distributed to
shareholders, reward for risks taken
Benefits of LL
✓ Shareholders risk is limited to the amount
invested [k]
✓ Protecting their personal assets [k]
✓Encourages (potential/existing) shareholders to
invest [k]
WHY Private Ltd better than Partnership?
n
✓ Access to more capital
✓ Higher status
✓ Limited liability*
✓ Continuity*
✘ Legal Formalities
✘ Less secrecy of financial info
✘ Potential decrease in control
C4: Business Organization
3. PRIVATE LIMITED CO: a company whose shares
cannot be sold to the general public, they can only
sell shares to friends or family. Often a small to
medium-sized business owned by shareholders who
have LL.
Features: LL, separate legal identity, can sell shares,
incorporated, right to transfer shares is limited
✓ Raise more capital (than unlimited company) (k)
sell shares to family and friends to raise capital- so
can expand business (an)
✓ Limited liability [k] shareholders personal assets
are safe [an] if business unable to pay bz debts [app]
✓ Separate legal identity [k] continuity after death
of owners.
✓ Separate legal identity [k] so the owners are not
held responsible for the actions of the business [an
✓ Seen as more creditworthy to suppliers [k] so could
be more willing to supply materials [app] Can
negotiate longer credit period when buying (an)
✓ Greater status than an unincorporated businesses
(k) Lenders more likely to agree loans for private
limited companies [k] as seen as lower risk [an]
✓ Less risk of takeover (than PLC) [k] original owners
are able to keep control who buys shares (an)
Cannot be taken over without the consent of the
shareholders
✓ No need to publish accounts like PLC
✘ Legal formalities to set up and run [k] more
complex legal process so have extra costs and time-
consuming [an]
✘ Shareholders may expect dividends (k) reduced
retained profits (an)
✘ Less capital than PLC. Only sell shares to friends
and family [k] so may not raise sufficient funds to
expand [app]
✘ Difficult to transfer shares (K) requires other
shareholders to agree (ap)
✘ Less secrecy (k) Financial results are disclosed and
can be seen by competitors [an]
✘ Potential decrease in control of partners [k] as
ownership may be shared between more people [an]
✘ Financial statements need to be audited each year
– increase in annual expenses
4
4. PUBLIC LIMITED CO: - a large business, with the
right to sell shares to the general public and their
shares are tradeable on the Stock Exchange.
Features: LL, separate legal identity, can sell shares
in stock market, shares are transferrable, publish
accounts, must hold AGM
✓ More finance [k] No restriction of buying, selling
or transferring shares (k) so easier to raise funds to
expand. Do not have to pay interest (an)
✓ More finance (k) Sell shares on stock market, so
no limit to potential number of investors [an] so
help fund expansion (an)
✓ Limited liability [k] so investor only liable for
amount invested [an] encourage more people to
invest in the plc
✓ Separate legal identity [k] continuity after death
of shareholders (an)
✓ Greater status (k) so easier to attract suppliers
who will sell to them on credit (an)
✓ Greater status (k) Banks more likely to lend to
them as seen as lower risk [an] charged lower
interest rates (an)
✓Greater status [k] so might be able to attract
better managers/employees [an]
✘ Legal formalities to set up and run [k] more
complex legal process so have extra costs [an]
✘ Lack secrecy (k) Financial results (IS, SFP, CF) are
published each year. so less able to keep financial
details secret from rivals [an]
✘ Selling shares expensive [k] must pay
commission to banks (an)
✘ Risk of takeover (k) cannot control who buys the
so original owners might lose control (an) No
restriction on who buys shares.
✘ Shareholder may expect dividends to be paid [k]
✘ Divorce in ownership and control [k] lead to
conflicts between BOD and shareholders
WHY PLC better than Private Ltd?
✓ More capital – sell in stock market
✓ Shares are transferrable
✘High risk of take-over
✘ Less secrecy- publish accounts
✘ More legal requirements
C4: Business Organization
Board of Directors: senior management of the
business responsible for strategic decisions; elected
by shareholders
• Provide strategic direction/guidance
• Set target
• Legal responsibility (to represent business)
• Direct and control resource
• Prepare Business plan
• Take decisions that can affect the whole
department/company
• Protect the interests of shareholders
Annual General Meeting is a legal requirement for all
companies. Shareholders may attend and vote on
who they want to be on the Board of Directors for
the coming year.
Purpose of AGM
• elect OR re-elect directors
• BOD present financial accounts
• SH vote on resolutions
• agree dividends
• SH question the board on performance
• Approve BOD pay
Article of Association –contain the RULES in which
the company will be managed. Contains:
• Rules for shareholder meetings
• List of directors and their jobs
• Voting rights of shareholders
• Details of how accounts are recorded
Memorandum of Association – contain important
information about the company and directors
• Company name, address
• What the business does
• Number of shares to be sold
Why People Invest in PLC?
1. Share of profits/dividends: return on their
investment as they are risking their own money by
investing it in the business
2. Capital gain from increased share price: possible
profits from selling their shares for a higher price
than that paid originally
5
5. FRANCHISE: A business agreement based upon
the use of the brand names, promotional logos and
trading of an existing successful business.
Franchisee buys the license to operate this
business from the franchisor.
Should a bz expand by selling franchises?
YES
Franchisees will pay towards the start-up costs [k]
which will help reduce the amount the franchisor
has to raise to expand (an).

IMPACT on FRANCHISOR SELLING FRANCHISES NO

✓ Receives a franchise fee to use brand name (k) However, the franchisor may lose control [k] which
franchisee has to buy a license – income for may damage their reputation [an].
franchisor
✓ Saves time on expanding into the foreign RECOMMENDATION
market – as franchisee will open the outlets. It might be better to sell franchises than open own
Franchisor maintains its fast rate of growth [app] outlets , as it will reduce the costs especially if it
increase market share. wants to open a large number of shops [eval]. This
✓ Cheaper way to expand [k] as the franchisees can improve its chances of being able to expand
pay building costs [app) franchisee does not have faster (eval)
to raise as much capital [an]
✓ Receive a share of franchisee’s profits k] helping
increase franchisors profits [app]
Should FRANCHISOR opens OWN SHOPS? NOT SELL
✓ Franchisee manages outlet [k] franchisor has
FRANCHISE
time for other strategic tasks
✓ Franchisees will have local knowledge [k]
increasing chance of higher sales [an]
✓ total control over the operations [k]
✓All products sold must be obtained from
✓ keep all the profits [k]
franchisor [k] to ensure consistency – franchisor
earns profits from supplies
✘ need to raise all the capital to build outlet (K)
✓ Brand awareness increases [k] as logo is seen in
more places

✘ Poor management of one franchise could

damage whole business reputation (an) if franchise
does not maintain standard it can decrease sales of
all outlets (an)
✘ Franchisee keeps most of the profits from the
outlet
✘ Franchisor has to offer franchisees help and
advice [k] which may take time as they have no
experience [app]
✘ Low level of control by Franchisors – over how
the franchise operates
✘ The franchisee has information about the
ingredients and recipes of and may use these when
the franchise agreement has expired – could
develop a better version and become a competitor

C4: Business Organization 6

IMPACT ON FRANCHISEE of buying FRANCHISE
✓ Higher chance of success (k) using a know brand
so less chance of failing (an)
✓ Banks are likely to lend to franchisee [k] the
amount needed [app] as seen as lower risk [an]
✓ Supplies from central source [k] do not need to
find suppliers [an] so has more time to do business
[app] ensures quality (an)
✓Lower advertising costs [k] advertisement are
paid by franchisor (app) saves costs for franchisee
(an)
✓ Save training costs (k) franchisor [k]franchisor
trains workers to maintain consistency [app] which
saves costs for franchisee [an]
✓ There are fewer decisions to make than with
an independent business – prices, store
layout and range of products will have been
decided by the franchisor
✘ High cost [k] of franchise fee (k) could be too
expensive - unable to afford [an]
✘ Less profits (k) a percentage of profits is paid to
franchisor [k] so if successful, it will not maximise
profits [an]
✘ Problem at one franchise affects all others [k]
might lower revenue [an]
✘ Less independence in decision making.
Franchisee has less control and has no say in many
decisions [app]. May be unable to make decisions
that would suit the local area, for example, new
products that are not part of the range offered by
the franchisor. Franchisee may want the freedom
to make own decisions [an]
✘ Cannot sell other products – restricts supplies in
the shop
✘ Business is not guaranteed to succeed [k] if he
chooses the wrong location [app]; might not make
enough customers (an)
C4: Business Organization
OPEN OWN OUTLETS- not BUY FRANCHISE
✓ Keep all the profits made [k] No need to pay
royalty or share profits
✓ Save franchise fee
✓ Has full control of business – independent in
making decisions
✓ If entrepreneur has experience [k] better to open
OWN as support of franchisor is less important[an]
✘ No support of franchisor – owner may have no
experience in running a business. Need help as it’s a
new business [app] cannot get help with marketing
to increase sales [an]
✘ Large amount of capital required – must pay for
training and advertising costs
✘ Higher risks of failure of opening own business (k)
in a competitive market may be difficult to attract
customers (an)
Which is better Buy Franchise or OWN outlet?
As a new business, buying a franchise will make it
much easier to obtain finance from the bank to use
for the expansion.
However, the owner cannot take their own decisions.
If the owner has done well so far with their business,
they must open own business and can sell whatever
they wants and keep all the gross profit.
7
6. Joint venture is where 2 or more businesses Is JV better than Franchise to enter new market?
start a new project together, sharing capital, risks
and profits. JV Better

✓ Costs are shared (k) good for expensive projects • Forming a JV is the best way to overcome the
(ap) so less need to borrow funds to expand in problems of entering a new market in another
another country (an) country which the business is unfamiliar with as this
✓ Access to local information [k] e.g. easier to will enable business to understand this new market
focus on local preference (app) so better able to by gaining knowledge from this other business. The
meet customer requirements / ensure demand local business will be able to advise and guide the
and sales [an] other business on the best locations to choose,
✓ Spread risks (k) Access new markets as no longer suppliers, and customers preferences so can
just selling one product or in 1 location [app] successfully enter this market. Franchising should not
leading to higher revenue [an] be chosen as the franchisee may provide poor service
and lead to a poor brand image of the business.
✓ EOS [k] joint purchase can lead to lower AC (an)
✓ Wider range of contact of suppliers, (k) so might
OPEN ON OWN Better
be able to obtain cheaper materials / lower costs
(an)
• Expanding on their own would require more capital
✓ Increased capacity [k] ] so able to meet potential [k]but can retain all profits and control (an).
demand [an]
✓ Reduce competition [k] as working with local Franchise Better
business [app] so one less rival [an]
✓ May be a legal requirement (in some countries) • Selling a franchise to another businesses in the new
[k] MNCs must work with local firms to expand in in another country will reduce the investment
new counties (an) required for franchisor to expand. This will make it
✓ Less market research required (k) reducing the cheaper and quicker to expand into this new market
costs of entering the new market abroad while still receiving revenue from the fees charged
for the franchise. But mismanagement of an outlet
can negatively affect reputation [an]
✘ Shared Profits (k) if project is successful (app)
receive less than doing alone
✘ Conflicts (k) different styles of culture and Recommendation
management cause disagreements and If bz is willing to share control, a joint venture is the
inefficiency – higher costs (an) best way as it helps reduce the risks of setting up in a
✘ Any mistake of one of the parties might damage new country [eval]. Since expanding on their own
reputation of both firms [k] lowering revenue [an] maybe too expensive (ev)
Business failure of the partner would put the
whole project at risk
✘ Take time and effort to find the right partner to
join with in the venture – which may delay the
expansion plans
✘ The level of expertise may not be the same in
the partner business – may make the return on
investment unfair
✘ The work and resources may not be equally
shared between the two partners in the joint
venture – one business may have to put more work
and resources as it is the main partner in the
venture

C4: Business Organization 8

 C5: Bz Objectives
5.1 OBJECTIVES of PRIVATE SECTOR
Objectives: specific targets a business works towards
Benefits of having Business Objectives:
1. Gives a sense of direction [k] so managers able to
make right decisions based on the objectives and
allocate resources effectively to ensure business meets
its target [app]
2. Help unite the business (k) clear and measurable
objectives help unite the whole business towards the
same goal - –guides the business in the right direction -
avoids loss of focus
3. Motivate employees (k) They give workers and
managers a clear target to work towards and this helps
motivate employees/managers as they know what they
must do to be seen as successful [an]
4. Allows measurement of success [k] Business
managers can compare how the business has
performed to their set objectives – to see if they have
been successful or not. Can help judge performance
Private sector Objectives:
1. Survival : to not go bankrupt in the first year of
operation – to cover costs
(i) aim of new business which aim to break-even and
survive in the first few years. To not go bankrupt in the
first year of operation – to cover costs. Once
established they will move to other long-term goals.
(ii) bz aim survival when the economy is in recession
(iii) bz aims survival when there is entry of new rivals
2. Provide Service to community – provide jobs,
support disadvantaged groups in society, protect
environment
Social Enterprise: business with social objectives that
reinvest back most of its profits to benefit society
rather than maximizing returns to owners.
TRIPLE Bottom Line (TBL) 3 objectives:
(1) social: provide jobs in disadvantaged areas
(2) protect environment using sustainable methods
(3) financial : to make profit and reinvest it to benefit
society
C5: Business Objectives
3. High Returns to shareholders - aim of a PLC
to have a high ROCE to prevent shareholders
from selling their shares.
Shareholder: are the owners of a limited
company
Why People Invest in PLC?
(i) gain high dividends
(ii) Increase in share price
4. Profit: to provide a return on investment – for
the owners who risked their own money
Profit (difference between TR and TC
IMPORTANCE of PROFITS
(i) reward for risk-taking [k] as owners invested
their money in hope of making a ROI [an] must
have a significant ROI to justify initial investment
[k] otherwise would invest elsewhere [an]
(ii) internal source of funds [k] business has full
control over it is spent, no interest to be pay [an]
permanent capital [an] supports the objective to
grow [app]
(iii)measure of success [k] to see if the current
profit is higher than last year [app] higher profits
is seen as good trading year/ Profits make the bz
appear as a successful company
(iv) main reason why business exits– provides
motivation to work hard
(v) Ensure long term survival of business [k] as
have funds to help if business makes a loss [an]
can avoid closure (an) protect jobs of its existing
employees (ap)
(vi) Needed to pay out bonus (k) to attract good
employees [an]
(vii) High profits allows business to pay out
larger dividends to encourage shareholders to
invest in company
1
 C5: Bz Objectives
Ways to Increase Profits?
(i) Target new market (k) diversify and sell in new
locations to have more customers and increase sales
(ii) Develop new products [k] to attract new customers
that increase sales, profits
(iii) Advertise (k) to attract more customers and
increase sales
(iv) Change price [k] if D inelastic, raise P to have higher
profit margins
(v) Lean production(k) to cut waste and improve
efficiency reduce costs increase profits (an) C!8
(vi) Automation [k] replacing some employees [app] so
lower wage cost [an]
(vii) Find cheaper supplier [k] which lowers cost of sales
[an] increase profits
(viii) Merger/ takeover [k] can buy supplies in bulk to
get cheaper materials [app] possible EOS – lower AC
[an].
Why is a Business Profitable?
(i) Higher demand for their product (k) so can sell at
higher price
(ii) Efficient (k) able to control costs
(iii) Enjoy EOS (k) able to lower AC so more profit can
be made (an)
(iv) Less Competition in niche market (k) so can sell at
higher price
(v) Well-priced – affordable
(vi) Good reputation- brand loyalty
(vii) Productive workforce – make better quality
product/better service
(viii) Target Customers Well – effective advertising and
promotion
C5: Business Objectives
5. Growth – – to possibly increase sales –
leading to increased revenue in the future
✓ Higher profits- increase output so more sales
✓ Higher return to shareholders – more
dividends paid
✓ Higher market share – more number of
customers – more influence over market so able
to set higher prices
✓ Spread risk [k] so can expand into new
markets, so if sales in one market falls, they have
other markets to rely on
✓ Increase prestige (k) as seen as larger
business, easier to gain access to sources of
finance to further help in expansion plans [an]
(financial eos)
✓ Benefit from Economies of Scale (k) lower AC
so bz more competitive
✓ Ensures survival (k) Protection from risk of
takeover
✓ Makes job more secure, increase salaries of
managers
Problems of Growth
X Possible DEOS, difficult to monitor so many
workers
X Communication problems due to long COC
X Workers may feel less important in a large
organization
X Extra costs (k) more rent, more wages, more
expense (an)
Does Growth Guarantee More Profits?
Yes: Sales revenue of the business should
increase [k] and this will increase profits
No: Expansion creates extra costs [k] Is there
sufficient demand [k] to expand? Everything
depends upon the success of the venture.
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 C5: Bz Objectives
6. Market Share: – attract a higher number of
customers – possibly leading to higher revenue
MS: percentage of total market sales held by one brand
or business. (C10)
formula: business sales/industry sales x 100%.
Brand Leader: the brand with the highest market share.
Benefits of HIGH Market Share
✓ Become market leader - Retailers will be keen to
stock best-selling brand. Products can be supplied to
retailers at a low discount rate, since the shops are
more keen to stock them. This will give the producer a
higher profit margin.
✓ Good publicity (k) Effective promotional campaigns
often say that the product is a brand leader.
✓ Increased influence over suppliers, as they will be
very keen to sell to a business that is becoming
relatively larger than others in the industry
✓Increased influence over customers – can set higher
prices
• offer 10. Spot market gaps quicker than rival
Reasons Why Market Share Falls (C10)
1. Rivals sell better products. New rivals entered
market so customers have more choice.
2. Increase in competition in the market (k) customers
have wider choice
3. Higher Price than competitors (k) so customer buy
from cheaper rivals
4. Poor promotion (k) unappealing so customers are
not persuaded to buy product (an)
5. Poor Product Quality damages reputation and
reduces sales (an)
6. Outdated products (k) product lost its appeal, do not
meet customer needs
C5: Business Objectives
Ways to Increase Market Share
1. Lower prices [k] should encourage people to
buy [an] as products are more affordable
2. Increase range of products [k] to appeal to
more customers [an]
3. Increase advertising, promotion [k] which will
raise awareness of its products [an]
4. Increase number of places sell it products [k]
so can reach more customers [an]
5. Target new markets [k] could sell overseas or
to different segments[app] to widen market
6. Improve product quality [k] use better
materials [app] can make them more
competitive
7. Introduce new designs/ [k] renew interest
8. Improved customer service (k) to maintain
customer loyalty
9. Take-over rival business [k] so able to gain
customer of other business
Does high MS lead to higher profits? (j14v12)
Yes: Larger MS share due to increased sales
quantity may lead to purchasing EOS and
reduces AC and increases profit margins (an).
High MS leads to strong brand recognition and
customers more likely to buy the product so
increase sales and profits. They may also charge
high market price which will lead to higher
profits.
No: Higher MS due to lower prices could
increase sales but might lead to lower PM
Conclusion: Generally, a higher MS means more
sales & profits but this depends on the reason
why MS went up. If prices are lowered, then
sales may rise but profit margins may fall. It is
better to improve design, features so business
can charge higher prices and gain additional
revenue.
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 C5: Bz Objectives
FACTORS THAT DETERMINE OBJECTIVES
1. Size and legal form of the business
• Small businesses – profit satisficing
• PLC – growth, increase, stock value
2. Ownership of Business
• Public sector – CSR, social objectives
• Private sector – profits
3. Age of Business: the number of years the business
has been operating
• New firms- survival, increase MS
• Established firms – growth
4. Economic conditions
• Boom-growth;
• Recession-survival
CHANGE IN OBJECTIVES
It is most unusual for a business to have the same
objective forever.
(i) previous objectives are met and the business has
become established so will set new objectiives (an)
from survival to growth
(ii) change in economic conditions e.g. grow during
boom; survival during recession
(iii) change in competition e.g. e.g. competitors join
market – stop growth and aim is survival; competition
leaves -aim is higher market share
(iv) change in demand: higher demand so aim for
growth; low demand aim for survival
(v) change in BOD/Owners (k) is the BOD profit or
social oriented? new MD might have different goals
[app]
(vi) financial issues e.g. decrease in profit [k] aim for
survival or break-even
(vii) changing demands of stakeholders [k] pressure
groups may force bz to be more ethical and CSR
(viii) change in capital available to the business (k)
more capital will aim for expansion (an)
C5: Business Objectives
5.2 OBJECTIVES OF PUBLIC SECTOR
Public sector: business owned by the private
sector with social aims
1. Financial Objectives: Meet profit targets set
by government
2. Service: Provide a service to the public
3. Social: Protect or create employment in
certain areas – especially poor regions
How are Objectives of Private Sector Different
from Public Sector?
• Private sector aims to maximise profit [k]
whereas in public sector the objective may be
social and may products for free or at a low price
[an]
• Private aims to increase MS [k] making it
difficult for other businesses to survive [an]
• Private sector aims to increase revenue [k]
whereas the public sector may offer subsidised
prices [an]
• Protecting jobs may be more important in the
public sector [k] whereas private sector firms
may look to reduce costs (an)
5.3 STAKEHOLDERS
Stakeholder: any person or group with a direct
interest in the business performance. Each
stakeholder group has different objectives for
the performance of the business.
Shareholder: are the part owners of a limited
company
There are two types of stakeholder groups:
1. Internal Stakeholders work/own the
company (owners, managers, workers)
2. External Stakeholders are outside of the
business(consumers, government,
banks, lenders, pressure group, rivals)
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 C5: Bz Objectives
Groups Why are they important?
Owners Risk-takers (K) Provide capital which can
help bz expand.
Have power to vote out the directors [k]
Government Provide the legal framework in which
the business operates [an]
Passes laws to protect workers and
consumers
Community They are affected by business activities
that cause pollution or produce
dangerous products.
Provide planning permits: might object
to building [app] delaying the start/stop
the work
Provide workers and land for production
Suppliers They provide inputs of materials,
components to use in production
Lender/Banks They provide external finance for
expansion
Customers They buy g/s so business can make profits
Pressure Group They can cause consumer boycotts and
actions that can affect business image if
business harms environment
Workers They are employed either as part-time or
full-time
They provide labor and follow
instructions
Managers They control the day-to-day operations
and make important decisions
C5: Business Objectives
Objectives/ Why Interested?
Invested their own money into the business
and want a return on their investment –
higher profit – higher dividends paid
They want the business to grow so value of
investment increases
They want business to pay taxes correctly
and promptly
They want business to succeed and create
more jobs to reduce UE, help increase
output (GDP)
They expect business to follow the law
They want business to use sustainable
production methods
They want business create jobs
They want business buy from local suppliers
They want business to orders more
materials and give regular orders
They want business pays promptly
They want business pays fair price for its
supplies
Business to pay loan and interest on time
They want to ensure reasonable prices.
They want high quality products [k]
They want value for money from product
They want high quality service and well-
designed product
They want business to use sustainable
production methods to protect the
environment [an]
They want the business to reduce amount
of pollution/environmental damage [k]
They want job security and have contract of
employment [k]
They want reasonable pay, offered good
work conditions.
They want access to training and be given
opportunities for promotion [k]
They want job security, high pay, high
status
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 C5: Bz Objectives
Are Shareholders the Most Important?
YES
Shareholders are important as they invest money in
the business [k] which can help the business expand
[an]. They have the power to vote out the directors
[k]
NO
Other groups are also important.
(i) Customers [k] buy the products [an] and if bz
ignores their needs, the bz will lose sales [an]
(ii) Employees [k] make the products [an] so if they
become demotivated quality may fall [an]
(iii) Suppliers [k] provide materials/inventory [an]
(iv) Banks [k] provide finance/loans [an]
(v) Community (k) provide workers (an)
(vi) Government (k) provide the legal framework in
which the business operates [an]
SAMPLE:
Shareholders are important as they invest money in
the business [k]. However, once the business is
established, they have little influence over day-to-
day decisions. Customers (k) matter as they buy the
products [an]. While shareholders provide
important finance, without customers a company
cannot generate income [eval] and without this
cannot cover its costs or make a profit, so the
customer is probably the most important
stakeholder. [eval]
Impact of Bz Decisions on Stakeholders
1. Buy New Machine
• Workers: boring jobs done by machines; loss of
jobs – redundant – low standard of living
• Customers: better quality products
• Government: more unemployment, less tax
revenue
• Banks: greater demand for loan to pay for new
machines
• Owners: more risks invest to buy more machines;
• Community: new machine create noise pollution
C5: Business Objectives
2. Business Closure
• Workers: loss of jobs, income, unemployment
• Supplier: loss of orders, fall in revenue
• Community: environmental benefits such as
less pollution, less traffic; but more UE due to
job loss cause lower SOL
• Government: more unemployment, less tax
revenue
3. A business makes a Takes-over offer
• Banks (k) may have increased demand for
loans [an] to pay for taking over its main
competitor [app]
• Government [k] may receive more tax
revenue from larger business [an] if sales
increase [app]
• Suppliers: increased orders [an] more sales
• Consumers (k) as may lead to less choice [an]
• Competitors (k) concerned about possible
price drops due to the economies of scale
gained form merger [an]
4. A business receives a take-over offer
• Employees: more prestige working for larger
business; so more job security for workers,
better promotion prospects, possible loss of
jobs for some duplicate jobs, fear of change to
new systems
• Manager: higher status, more pay, more
complexity of managing larger bz
• Shareholders: money made from sale of
shares if the terms were attractive;
• Consumers: have less choice- Price may rise
or larger firms benefit from EOS – lower AC-
charger lower price
• Government: more tax revenue from larger
business
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 C5: Bz Objectives
5. Business Expansion
• Workers: more job security, opportunity for
promotion and higher pay, more variety of tasks
that makes job interesting, work extra hours
• Shareholders: reduce dividends in the short-run;
long-term higher profits if successful
• Manager: higher status, more pay, more
complexity of managing larger bz
• Supplier: more security of orders, additional sales,
may struggle to meet extra demand
• Community: create pollution
• Government: more employment, more tax
revenue • May
Does PROFIT conflict with other stakeholder’s
objectives?
Different stakeholders have different objectives, it
may cause conflict to try to please all the
stakeholders. Managers must compromise when
they decide the best objectives for the business.
Owners of the company
They are likely to want the business to work towards
as much profit as possible and may:
• Bz could use cheap method of production
increases profits but causes more pollution
• Bz could introduce new machines could reduce the
jobs but lead to higher profits
• Bz could expand operations but lead to a dirtier,
noisier local environment
• Bz want to charge higher prices to earn more
profits
Customers
• They want low prices and value for money [k]
when buying products [app] which could reduce
revenue and bz profits[an]
• Customers want high-quality customer service [k]
which requires more staff [app] increasing
costs/expenses [an]
• Customers want convenience and want business
to open in many locations (k) which increases rent
costs (an)
C5: Business Objectives
Employees
• Workers want higher pay (k) which could lead
to higher costs [an]
• Workers want security employment (k)
business may make some redundant to reduce
workers
• Workers want training to allow promotion (k)
training increases bz costs (an)
• Workers want safer work conditions (k) but
can lead to higher costs (an)
Suppliers
• Suppliers may want to charge higher prices
[k] for materials [app] whereas business might
want to use its power to reduce prices (to
increase profit margin [an]
• Suppliers want increase number of regular
orders (k) but business may reduce orders
when it looks for cheaper suppliers (an)
• Suppliers want prompt payment for goods
supplied (k) but could increase cash outflow
and cause liquidity problems (an)
Community
• Concerned about jobs too, but it will also be
worried about pollution from business activity
How a Business Can Be Ethical with its
Stakeholders
(i) Employees [k] bz should pay fair wages [an]
and offer good work conditions
(ii) Customers [k] bz does not exploit by
charging high prices [an]
(iii) Suppliers [k] pay fair prices
(iv) Pressure groups [k] by trying to prevent
pollution/environmental damage [an] caused
by business activity [app]
(v) Government [k] paying its taxes on time/not
do tax avoidance [an]
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