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GCSE NOTES

1.1 The Dynamic Nature of

Business
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Why New Business Ideas come About
 New business ideas often come about due to changes in technology, changes in
consumer demand, and the obsolescence of products and services
 New business ideas emerge as entrepreneurs recognise
opportunities created by changes in the market
 Successful businesses can identify these opportunities and develop innovative
solutions that meet the changing needs of customers

Changes in technology

 Advances in technology can create new opportunities for businesses to

develop innovative products and services
o E.g. The emergence of smartphones and social media platforms created
new opportunities for businesses to reach customers through mobile
apps and digital marketing

Changes in what consumers want

 Consumer demand often changes over time, creating opportunities for

businesses to develop new products and services that meet these changing
needs
o E.g. The growing demand for plant-based food products has led to the
emergence of new businesses in the food industry

Products and services becoming obsolete

 Products and services can become outdated due to changes in technology or

changes in consumer demand
 This can create opportunities for businesses to develop new products and
services that meet the needs of consumers in new and innovative ways
 o E.g. The decline of physical media like CDs and DVDs created
opportunities for businesses to develop digital streaming services like
Netflix and Spotify

How new Business Ideas come About

 New business ideas can come about through original ideas or by adapting
existing products, services, or ideas
 The key to business success is identifying a need or opportunity in the market
and developing an innovative solution that meets the needs of customers in a
unique and valuable way

The best source of original, or adaptive ideas, is being able to identify a problem
(Image credit: Fit Small Business)

 Original ideas are new and unique concepts that are not based on existing
products/services, or ideas
o They often arise when entrepreneurs identify a gap in the market or a
new need that has not yet been met
 o Original ideas can be based on a new technology, a new market, or a
unique perspective on an existing problem
o E.g. The business Nutrigene offered a subscription service for
personalised vitamin supplements based on an individual's DNA, which
was an original idea that was not based on an existing product or service

 Adapting existing products, services, or ideas involves taking an existing

concept and making it better or more suitable for a different market or customer
base
o This approach often involves identifying a problem with an existing
product or service and developing a solution that addresses the problem
o E.g. The ride-sharing app Uber adapted the existing concept of taxi
services by offering a more convenient, efficient, and cost-effective
solution that was accessible through a mobile app

Exam Tip

Your definitions will be improved by the appropriate use of examples.

Try your best to keep up to date with the news, pay attention when your teacher talks
about businesses in class and use your own experience of businesses in which your
family or friends work.

Remember, as a customer of numerous businesses you will have some valuable

insights of your own!

.1.2 Risk & Reward

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The Impact of Risk & Reward on Business Activity
 The impact of risk and reward on business activity is significant
o They are two sides of the same coin in business

 Businesses must manage the risks associated with failure, financial loss, and
lack of security while striving to achieve the rewards of success, profit, and
independence

An Explanation of the Risks of Business Activity

Risks of Business
Explanation
Activity
 Business failure  Business failure affects businesses of all sizes and
is a risk to both new and established businesses
 It occurs when a business is unable to meet
its financial obligations or when it cannot
generate enough revenue to sustain its operations
 The impact of business failure can be devastating,
resulting in job losses, bankruptcy, and financial
ruin for the owners and investors

Financial loss  This occurs due to factors such as poor financial

management, economic downturns,
or unexpected events such as natural disasters
 The impact of financial loss can be severe,
resulting in reduced profitability, reduced
competitiveness, and reduced ability to invest in
growth

Lack of security  This is a risk that businesses face in terms of data

security, intellectual property theft, or physical
security
 A security breach can result in reputational
damage, legal liability, and the loss of customer
trust

 There are many ways in which entrepreneurs can reduce the risks associated
with starting up and running a business including
o Careful management of cash flows into and out of the business (See
section 1.3.5)
o Conducting thorough market research before and during trading (See
section 1.2.2)
o Setting clear aims and objectives (See section 1.3.1)

An Explanation of the Rewards of Business Activity

Rewards of Business
Explanation
Activity

Business success  This is the ultimate reward that business owners

strive for
 It occurs when a business meets or exceeds its
objectives, such as generating revenue, achieving
profitability, or expanding its operations
 Profit  Profit is a measure of the success of a business
 Profit enables businesses to reinvest in growth
opportunities, pay dividends to shareholders, and
provide financial stability to the business

Independence  This reward is often overlooked but is crucial to

the success of a business
 Independence allows businesses to make their
own decisions rather than being subject to the
demands of external stakeholders such as
investors or creditors

1.3 The Role of Business

Enterprise
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The Purpose of Business Activity
 The purpose of business activity can be broadly defined as the activities that
businesses engage in to produce goods or services that meet customer
needs while adding value
The purpose of business activity is to take inputs, add value to them, and create
products which meet customer needs

To produce goods or services

 The primary purpose of business activity is to produce goods or services that

satisfy a need or demand in the market
o Goods are physical products, such as bicycles and T-shirts
o Services are non-physical items such as hairdressing, tourism and
manicures

Meeting customer needs

 The ultimate goal is to create products that meet the needs and preferences of
customers and provide value to them
  By meeting customer needs, businesses can build customer loyalty, increase
brand awareness, and generate revenue

To add value

 The third purpose of business activity is to add value to products or services

 Value-added features can differentiate products from competitors, create
a unique selling point, and increase customer satisfaction
o E.g. a product that is easier to use, has a better design, or is of higher
quality than competitors can create a competitive advantage for a
business

Methods of Adding Value to Products/Services

 Adding value is the difference between the price that is charged to the
customer and the cost of inputs required to create the product or service
o E.g. customers are prepared to pay more for potatoes when they are
packaged as oven chips than they would be willing to pay for a bag of
potatoes
 Some of the methods of adding value

 The methods of adding value overlap with some of the features of product
differentiation

Real life Examples of how Businesses have Added Value

Method Example

Branding  Apple has built a brand that many customers believe

is superior to other brands
 They have achieved this through the use of quality
materials, innovative design and good marketing
 This branding allows the firm to charge a higher
price for its products thus increasing the added value

Convenience  Persil initially provided a bottle of dishwashing

liquid for dishwashing machine use
 This resulted in spillage as customers added the liquid
to their machines, so Persil then created tablets
 The tablets offered a much more convenient option
and Persil was able to charge a higher selling price for
them

Quality  Jo Malone perfume products are well known for

their beautiful packaging which creates an exciting
opening experience for the customer
 This allows the firm to charge a higher price for its
products thus increasing the added value

Unique Selling  MoonPig birthday cards can be completely

Points (USPs) customised (size, colour, design etc.) and the level of
customisation has helped them to gain a competitive
advantage
 This customisation allows the firm to charge a higher
price for its cards thus increasing the added value

Design  Samsung Galaxy Watch 5 has robust health tracking

tools built into it, along with an amazing screen, which
has helped it to gain a competitive advantage
  These features allow the firm to charge a higher
price for its products thus increasing the added value

Exam Tip

Businesses may use several methods of adding value. It's important to understand that
adding value adds raises costs, but it is worth it if the increase in selling price outweighs
the costs associated with the method e.g. if improving the packaging costs £1 per unit
and the firm is able to raise its selling price by £1,40 per unit, then the firm can improve
its profitability by changing the packaging.
The role of Entrepreneurship
 An entrepreneur is a person who is willing and able to create a new business
idea or invention and takes risks in pursuing success

o Successful entrepreneurs can identify and pursue opportunities, create

value for customers and build thriving businesses
 Entrepreneurs display three main characteristics

1. They organise resources

 An entrepreneur must be able to gather and coordinate the

resources necessary to start and operate a business
o E.g. When Michael Dell started his computer company from his garage, he
had to organise resources such as space, computers, software tools, and
employees, and manage the finances

2. They make business decisions

 Entrepreneurs must be able to make decisions that will determine the success
or failure of their business
o E.g. A restaurant owner may need to decide what type of food to serve,
where to locate the restaurant, and what prices to charge. These
decisions require a combination of market research, creativity, and
business skill
o Making the wrong decisions can lead to wasted resources, lost
opportunities, and ultimately business failure

3. They take risks

 Entrepreneurship involves taking risks - financial, personal, or professional

 oE.g. An entrepreneur may invest their life savings into a new venture
or quit a secure job to start their own business
o They may also take risks by introducing new products or entering new
markets
 These risks can pay off with great rewards, but they can also lead to failure and
financial loss

 As a business grows an entrepreneur may make the decision to employ staff to

help with its day to day operations
o The entrepreneur may take on the role of mentor, supporting new staff
members to carry out their tasks in a particular way

.2.1 Customer Needs

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Identifying & Understanding Customer Needs
 A market is any place where buyers and sellers can meet e.g. the Amazon
website, or a shopping mall
 Businesses thrive when they are able to meet customer needs and wants
o Needs are considered to be essential e.g. shelter or food
o Wants are desires which are non essential, even if consumers consider
them to be essential e.g Nike trainers

 The aim of marketing is to help identify, anticipate and satisfy consumer needs
and wants in a way that makes the business money (profit)
 Market research is the process of systematically gathering data from
consumers which can be used to influence the business decisions

Understanding Customer Needs about Price, Quality, Choice and Convenience

Need Explanation Benefit to the Business

Price  This is the amount of  Understanding this helps

money a customer
is willing to pay for a
product/service
 Customers often have
a budget in mind and
want to find the best
value for their money
the business price its
products competitively
and offer promotions that
appeal to their target
market
 Quality  Quality refers to
the standard of
excellence that a
customer expects from a
product/service
 Customers want products
that are reliable, durable,
and meet their
expectations
Choice  Customers often have a
wide range of preferences
and want to be able
to choose from a
variety of products or
services
Convenience  Customers value
convenience because they
want products/services
that are easy to
access and use
 This includes factors such
as location, online
ordering, and fast
delivery
The Benefits of Understanding Customers
 Identifying and understanding customers is essential for the success of any
business, especially when it comes to generating sales and ensuring business
survival
 Understanding this helps
businesses create
products that meet the
desired standards, which
can lead to customer
loyalty and positive
word-of-mouth
advertising
 Understanding this helps
businesses to offer a
range of options that
cater to different
customer preferences
 This can
increase customer
satisfaction and loyalty,
as customers are more
likely to find a product
that meets their specific
needs
 Understanding this helps
businesses to create a
customer
experience that is both
efficient and enjoyable
 By providing a
convenient shopping
experience, businesses
can build customer
loyalty and increase
repeat sales
 Understanding customers leads to greater sales

 Ensuring business survival is crucial to both new and established businesses

 Understanding customers helps businesses to survive and thrive by addressing
the following points which aid survival
 Understanding customer needs leads to business survival

2.2 Market Research

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The Purpose of Market Research
 Market research is the objective collection, compilation and analysis of
information about a market

 Effective market research will help the business

o To reduce risk when launching new products or entering new markets
o To identify and understand the future needs and wants of customers
o To identify potential gaps (market niche's) in the market which can be
exploited to increase the sales volume
o To identify competitors and gauge their potential strengths and
weaknesses

 Market research helps the business to make informed decisions about the most
effective way to use their valuable resources

 Market research enables the firm to develop the correct marketing mix

 On-going market research helps businesses to keep changing their marketing

strategy in line with customers changing needs and preferences

Methods of Market Research

 The process of market research is broadly classified into two categories - primary
and secondary research

 Primary research is the process of gathering information directly from

consumers in the target market using field research methods such as surveys,
interviews etc
o This research gathers information which is new and does not already
exist in any format
o The most commonly used methods of primary market research include the
use of surveys, interviews based on questionnaires, observation, focus
groups and test marketing

 Secondary research involves the collection, compilation and analysis of

data which already exists
o Typical methods include:
 Using the internet
 Purchasing market reports from specialist companies such as
Mintel
 Accessing government research which provides useful information
e.g The Office for National Statistics (ONS)

An Explanation of the Methods of Primary Research

 Method Explanation

Surveys  The most widely used method of gathering primary

research is to use sampling by using surveys
 This is where you would ask a series of questions to a
certain number of people (respondents)
 The results from the ‘sample’ are used to to
make inferences in which the results of the sample
are extrapolated to be true for the wider population
 A wide range of respondents can be reached using online
survey tools such as Survey Monkey

Observation  This involves hiring someone to stand in an appropriate

location and study consumer behaviour in a store or to
perhaps judge the potential consumer traffic at a particular
location

o Researchers may observe the impact of packaging

on consumer choice, or the impact that the
particular placement of a product in a store may
have on consumer choice

Interviews  The questions may be set up in a very similar way to a

survey, however an interviewer asks the questions
 This method takes longer but does allow the interviewee
to ask follow up questions and gather information which
can easily be missed when conducting surveys

Test marketing  Free samples are provided for a limited period of time to
the target market in order to gauge their response to the
product

Focus groups  Free range discussions led by a marketing specialist with

the aim of collecting detailed feedback on all aspects of
the marketing mix from the target market
 Usually limited to a small group of 12-15 people
 The group typically meets for 90 minutes to 3 hours

The use of data in Market Research

 Market research data can be quantitative or qualitative

 Quantitative data is based on numbers and could include financial reports (e.g.
sales, costs), market data (e.g. markets share) or summaries of data gained from
primary research (e.g. on a scale of 1-10 rate our customer service)

 Qualitative data gathers descriptions or explanations based on conversations,

discussions, impressions, and emotional feelings and is usually gathered through
primary research

 Both forms are useful and any data analysis should ideally include a combination
of the two

The Limitations of Qualitative & Quantitative Research Data

Limitations of Qualitative Data Limitations of Quantitative Data

 The sample size used to gather
data may be too small and
unrepresentative of all of the
customers leading to unreliable
results
 Information has been collected for
other purposes and so may lack
relevance or may not be factually
correct

 Bias may mean that researchers  Can be expensive to purchase

can guide respondents to answer
questions in a particular way
 Respondents in focus
groups may be influenced by the
responses of others, or not
provide accurate information
 A business may need to hire a
specialist market research
agency to help gather primary
data and the process can
be expensive and time-
consuming
market specific secondary data
from specialist companies such as
MINTEL
 Numerical data may be out-of-
date, especially in dynamic
markets
 Data analysis and
interpretation is a skill and
individuals within the business
may draw incorrect conclusions
which are then used to guide
business strategy

 Looking at a small amount of data

and then extrapolating the results
 can provide wrong assumptions
from which strategic decisions are
made

 Numerical data may provide

insights, but does not provide the
reasons for the insights e.g. data
may reveal sales volumes are
falling, but not the reason for the
decline

Using Social Media to Collect Market Research Data

 Traditionally, primary research has been relatively difficult and expensive for
businesses to gather

 The rise of social media platforms such as Facebook, Twitter, Instagram and
TikTok has provided businesses with incredible market research opportunities
(and some threats too!)

 The speed of communication between businesses and customers can be

almost instantaneous e.g. by using online polls thousands of responses can
potentially be received in several hours

 The cost of gathering this information can be very low e.g. Online polls take a
few minutes to set up and software automatically gathers and analyses the
results

 Social media helps businesses to generate an interactive relationship with their

customers which helps to strengthen brand loyalty

 Customers are also able to feedback quickly on products - or to express

innovative ideas about how they want the products to be changed
o This feedback may help the firm to develop extension strategies in
their product life cycle

Exam Tip

When answering questions about theory-rich topics like market research it is tempting to
write down everything you know about the subject.
Try to focus more on weighing up the benefits and drawbacks of market research
methods and justifying which method(s) might be more appropriate - and explain why in
context.

2.3 Market Segmentation

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Using Market Segmentation to Target Customers
 Market segmentation is the process in which a single market is divided into
sub markets or 'segments'
o Each segment represents a slightly different set of consumer
characteristics
o Firms often segment their markets according to factors such as
geographical location, demographics, behavior and lifestyle, age or
gender

Businesses can choose to segment markets in a variety of ways

 A market for a product such as crisps is not simply seen as one market e.g. the
crisp market is divided up into many market segments such as

o Dinner party snacks (Walkers Sensations, Pringles, Burts) are targeted

at middle to upper earners/professionals with a premium price
o Health conscious crisps (Walkers lite, Walkers baked, Revita lite) are
targeted at the health conscious market
o Lunch box value snacks (multipacks, hoola hoops etc) are targeted at
families and the mass market

The Advantages & Disadvantages of Market Segmentation

 Advantages Disadvantages

 Recognises  Not everyone within a segment

that consumers are not all will behave in the same way
identical - consumer groups do
not all share the same tastes and
preferences

 Products and marketing activities  May be difficult to identify a

can be altered to meet different segment and consumers can
needs of different groups of belong to multiple segments at the
consumers and targeted more same time
precisely

 Less expensive and  Segmentation requires more

wasteful than marketing products detailed market research which
at wide market segments can prove costly (but beneficial)
to the business

 May increase loyalty if the  A segment may be identified but

consumer feels that their needs it may be too small and
are being met which can lead to unprofitable to cater for
repeat purchases

Using Market Mapping to Identify gaps in the Market

 Market mapping is a tool for identifying the position of a product within a
market
o A market map refers to a two-dimensional diagram that shows
the attributes or characteristics of a product in comparison to rivals’
products
o Only two criteria can be chosen e.g. price (high/low) and quality
(high/low), age (young/old) and income(high/low) etc
 M&M has positioned itself as low price and low quality in this example of a
market map

Market Map Analysis

 If there were no spaces left on the market map, it indicates that the market is
saturated
o This means that there are no opportunities to exploit a market niche in
the market
o Competition is likely to be high and profits low

 However, the existence of a space on the market map may indicate the existence
of a market niche
o This needs to be researched carefully before the business commits e.g. it
looks like there is a gap in the market in high price / low quality area in
the map above
o This gap does not represent a worthwhile market as the business would
find it impossible to build and maintain a loyal customer base

The Usefulness & Limitations of Market Mapping

Usefulness Limitations
  Market gaps can be
identified which may enable a
business to come up with ideas
for new products
 Comparisons can be
made between a
business’s products and those of
its rivals - where are the
business’ products positioned
about its rivals?
 A gap in the market may exist
because it is not profitable to fill
 Mapping a market may
require primary research which
can be expensive
 Only two criteria can be
chosen which may prove too
simplistic

 Market maps are simple to

construct and offer a visual  Markets are often dynamic and a
illustration of a products position market map only provides insight
in the market at a specific point in time

.2.4 The Competitive

Environment
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Understanding the Competitive Environment
 Competition occurs when at least two businesses are providing goods/services
to the same target market
o The more businesses in the market, the more intense the competition

 Competition can be direct or indirect

o Direct competition occurs when the business is targeting customers
with exactly the same product as a competitor
o Indirect competition occurs when firms sell different products but
compete with each other for the customers disposable income e.g.
cinema's and theatre companies are in indirect competition

 Competition results in many benefits for the customer, such as

o Businesses offer lower prices
o Businesses produce better quality products
o Businesses provide better customer service
 However, the absence of competition reduces incentives for businesses to
innovate, be efficient or offer consumers lower prices

 When judging the strength and weaknesses of competitors, businesses often

assess their price, quality, location, product range and customer service

Assessing the Competition

Factor Strengths Weaknesses

Price  Competitors who offer  Competitors who rely

lower prices than their
rivals can gain
a competitive
advantage by attracting
price-sensitive customers
who are looking for the
best deal
 They can also
gain economies of scale by
producing and selling their
products at a lower cost,
which can lead to higher
profits
solely on lower prices
may struggle to maintain
their profitability if
customers do not perceive
the quality of their
products to be adequate
 They may also struggle to
differentiate themselves
from other low-priced
competitors in the market

Quality  Competitors who offer  Competitors who focus

high-quality products can
differentiate themselves
from rivals and establish
a strong brand
 They can also command
higher prices which can
lead to greater
profitability
solely on quality
may struggle to compete
with lower-priced
rivals if customers do not
focus on the higher
quality

Location  Competitors who have  Competitors who rely

easily accessible locations
can gain a competitive
advantage over rivals who
are located further away
from customers
solely on their location
may struggle to compete
with other businesses in
the same location

Product  Competitors who offer a  Competitors who have a

 range wide range of products can
attract a broader customer
base and increase customer
loyalty by meeting a
variety of customer needs
large product range may
struggle to manage
the complexity of their
business and maintain
consistent quality across
all their products

Customer  Competitors who provide  Competitors who rely

service excellent customer service
can differentiate
themselves from rivals and
establish a loyal customer
base
 They can also generate
positive word-of-mouth
recommendations
solely on customer
service may struggle to
compete with lower-
priced rivals if customers
do not recognise
the additional costs of
offering good customer
service

How Competition Impacts Business Decision Making

 In a competitive market, businesses must constantly evaluate their strategies and
make decisions that will enable them to stay ahead of their competitors
 Competition can impact decision making across all areas of the business

1. Pricing decisions
In a competitive market, pricing is a critical factor in determining a business's
success. Businesses must consider their competitors' prices when setting their
own prices, as they need to remain competitive while also ensuring they are
profitable

2. Product development decisions

Competitors' products and services can influence a business's product
development decisions. It may increase the speed of development of new
features - or entirely new products

3. Marketing decisions
Businesses must develop effective marketing strategies that will differentiate
them from their competitors. Making decisions about advertising, promotions,
and other marketing activities has to include an analysis of their competitors
actions

4. Operational decisions
Competitors can also impact a business's operational decisions e.g. deciding on
the best method of production (job, batch or flow production)

3.1 Business Aims & Objectives

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An Introduction to Business Aims and Objectives
 Every successful business needs to have clear aims and objectives that guide
its operations and drive its growth
 Business aims are the long-term aspirations of an organization
 Business objectives are specific, measurable, achievable, relevant, and time-
bound targets (SMART targets) that must be achieved to realise those
aspirations

 Aims and objectives align the efforts of all employees towards a common
vision and ensure that everyone is working towards the same goals
o They are critical for businesses to function effectively and achieve long-
term success
o E.g. A business aim may be to become the market leader in a particular
industry, while the corresponding objectives may include increasing
sales by 25% over the next three years, improving customer satisfaction
by 15%, and expanding into new geographic markets
 Common Business Aims & Objectives for Start-ups
 All entrepreneurs tend to have a mix of financial and non financial objectives
when starting a business
Financial & Non-financial Objectives
Financial
 Survival: Most crucially in the
first year. 60% of all start-ups in
the UK fail within their first three
years
 Sales: A business must get
customers who will buy its
product to earn an income for its
owners
 Profit: The sales
revenue received must be more
than the costs to make a profit
 Market share: The percentage of
the total market revenue that a
single firm has e.g. Costa had an
8% market share of 'out-of-home'
coffee in the UK in 2020. If
market share is increasing it
Non-financial
 Social entrepreneurship: Many
entrepreneurs aim to address
social issues. Helping others still
needs to have a financial objective
behind it for a business to succeed
and be sustainable
o E.g. After a trip to
Argentina in 2006, Blake
Mycoskie started TOMS
Shoes, using some of his
own money to launch the
company. TOMS pledged
to donate one pair of shoes
for every one sold
 Personal satisfaction: This may
be gained from doing what the
entrepreneur wants to do i.e
starting a business which aligns
with personal passions
 Challenge: This could be setting
up something that nobody else has
thought of and can link with
personal satisfaction. It may be a
chance to prove to others (or to
the entrepreneur) that something
can be done
 Independence and control: The
entrepreneur may want to control
their own time and the direction
of their business. Independence
enables people to do things their
way which can be very
 means that the firm is competing motivational
effectively

 Financial security: This is where

a business and its owners can pay
all the overheads (bills), make a
profit, and have some in reserve
to pay for unexpected
emergencies

Why Aims & Objectives Vary Between Businesses

 Business aims and objectives can vary significantly between different
businesses for numerous reasons including:

Businesses objectives are influenced by a range of factors

1. Industry
Businesses operating in different industries will have different objectives and
aims. E.g. A healthcare company's primary objective might be to improve the
 health and wellbeing of people, while a financial services firm's objective might
be to maximise profits

2. Size
The size of a business can also influence its aims and objectives. A small
business may focus on survival and achieving sustainable growth, while a larger
corporation may prioritise product diversification and market dominance

3. Culture
Each business has its unique culture, which reflects its values, beliefs, and
overall vision. This culture can impact the organization's aims and objectives, as
well as the strategies that the business uses to achieve them

4. Ownership structure
The ownership structure of a business can influence its objectives e.g. a family-
owned business may prioritise long-term stability and legacy over short-term
profitability

5. Geographic location
Businesses located in developed economies may prioritise innovation
and technology adoption, while those in developing economies may prioritise
job creation

3.2 Sales Revenue & Costs

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Sales Revenue
 Sales Revenue is the value of the units sold by a business
o E.g the revenue earned by Apple Music from sales of music downloads
o Sales revenue is a key business performance measure and must be
calculated to identify profit
o Sales revenue is calculated using the formula

 When a firm sells one product it is easy to calculate the sales revenue
o The more products a firm sells, the harder it is to calculate the sales
revenue
o Computer systems make it easier to track sales revenue when multiple
products are sold by the business
Worked example

Moped Maestro's has made the following forecasts for the costs and sales of its
mopeds for 2022

Forecast
Total number of moped sales 3000
Total revenue £2 200 000
Variable cost per moped £450
Fixed costs £180 000
Using the information in the Table, calculate the selling price per bike. You are advised
to show your workings. (2)

Step 1 - Insert the appropriate figures into the sales revenue formula

(1 mark)

Step 2 - Rearrange the formula and solve for ?

(2 marks for the correct answer)

Exam Tip

In Paper 1, you may be asked to conduct a simple sales revenue calculation where you
use the formula as is. Alternatively, you may be asked to calculate the percentage
change in sales revenue between two years or to rearrange the formula to calculate any
component (as in the example above).

To calculate any percentage change use the formula

Costs
 In preparing goods/services for sale, businesses incur a range of costs. These
costs can be broken into different categories

An Explanation of the Different Costs of a Business

Type
of Diagram Explanation
Cost

Fixe  Fixed
d costs
Cost (FC) are
(FC) costs that
do not
change
as the
level of
output
changes
o T
h
es
e
h
a
v
e
to
b
e
p
ai
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ld
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lo
a
n
re
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y
m
 e
nt
s
et
c.
 The fixed
costs for
this firm
are
$4,000

Vari  Variable
able costs
Cost (VC) are
(VC) costs that
change
directly
with the
output
o T
h
es
e
in
cr
e
as
e
as
o
ut
p
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cr
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ia
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ct
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Tota  The total
l cost is
Cost the sum
(TC) of the
variable
& fixed
costs
 The total
costs can
not be
0 as all
firms
have
some
level of
fixed
costs

Cost Calculations

 Based on the above definitions, we can calculate several different types of costs

1.

2.

Cost Calculations Using the Above Formulas Where VC is £60

Output (Q) FC
TVC = TC =
0 200 - 200
1 200 60 260
2 200 120 320
3 200 180 380
Worked example

Rosebud Aromas manufactures luxury scented candles. The production of each candle
incurs the following costs

Item £ per Candle

Wax 0.14

Perfume oil 0.72

Loan repayment 100

Glass jar 1.46

Outer Packaging 0.33

Calculate the variable cost in £ for each candle. (2)

Step 1 - Identify the variable costs in the list

Loan repayment is classified as a fixed cost so should not be included in the calculation

Step 2 - Total the variable costs listed

0.14 + 0.72 + 1.46 + 0.33 = 2.65 (1 mark)

Step 3 - Express the answer in £ per Candle

= £2.65 (2 marks for the correct answer)

Exam Tip

Take care when calculating variable costs per unit as it is likely that one or more fixed
costs will be included in the list as seen above.

If you are asked to calculate the total variable costs, follow the above process and
multiply the answer by the number of units produced/sold.

Reducing costs

 An important way to improve profit is to reduce costs

 o Fixed costs may be reduced by relocating to cheaper business premises,
reducing salaries for workers, spending less on promotional activities or
seeking lower-priced utilities providers
o Variable costs may be reduced by sourcing cheaper materials, buying
raw materials and components in bulk or outsourcing distribution and
packaging to a third party business
 For example, many businesses sell their products via platforms
such as Amazon which manages the packaging and shipping of
items, usually at a cost much lower than that an independent
business can achieve

 Businesses must consider carefully the impacts of reducing costs on customer

service, quality and speed of delivery
o For example, paying lower salaries to staff may mean that employees
have fewer customer service skills or experience
o Cheaper raw materials and components may lead to worsening quality

1.3.3 Profits & Profit Margins

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Types of Profit
 Profit is the money left over after all costs have been accounted for
 If the costs are greater than the sales revenue, then the firm is making a loss
 There are two different types of profit

Types of Profit

Type of Profit What does it show? How is it Calculated?

Gross Profit  The difference Gross Profit = Revenue - cost of

between sales sales
(GP) revenue and the costs
directly related to
production

Net Profit  The difference between Net Profit = gross profit - (operating
the gross profit and expenses + interest)
(NP) other operating
expenses and
 any Interest

Worked example

An e-scooter manufacturer sells its products to retailers for £180 per unit. Variable costs
are ⅖ of the selling price, with annual fixed costs being £820,000. The business also
pays interest of £2,600 per year on its bank loans. It sells 26,400 scooters a year.

Calculate the businesses

(a) Gross profit for the year. (3 marks)

(b) Net profit for the year. (2 marks)

You are advised to show your workings.

Step 1: Calculate the Gross Profit (Sales revenue - cost of sales)

1.
i. Calculate the variable cost per unit
⅖ of £180 = £72 (1 mark)

ii. Calculate the gross profit per unit (selling price - variable cost per
unit)
£180 - £72 = £108 (1 mark)

iii. Calculate the gross profit per year (gross profit per unit x units sold)
£108 x 26,400 = £2,851,200 (3 marks for the correct
answer)

Step 2: Calculate the Net Profit (Gross profit - (Operating Expenses + interest))

1.
i. Substitute the values into the formula

£2,851,200 - (£820,000 + £2,600) = £2,028,600

 (1 mark for partially correct substitution into formula; 2 marks for the
correct answer)

Exam Tip

You may not be asked to complete all of these calculations in one question. The
question may, for example, provide the Gross Profit and some other information and
then ask you to calculate the net profit. Look at the data carefully to ensure you are
doing the correct calculation.
Profit Margins
 A profit margin is the amount by which the sales revenue exceeds the costs
o Profit margins can be calculated for each type of profit (gross and net
profit)

 Profit margins can be compared to previous years to better understand

business performance
o Higher and increasing profit margins are preferable as it means
that more revenue is being converted to profit

Gross Profit Margin

 This shows the proportion of revenue that is turned into gross profit and is
expressed as a percentage
o It is calculated using the formula

Worked example

Head to Toe Wellbeing’s revenue in 2022 was £124,653. Its gross profit was £105,731.

Calculate Head to Toe Wellbeing Ltd’s Gross Profit Margin in 2022. (2)

Step 1: Substitute the values into the formula

(1 mark)
Step 2: Multiply the outcome by 100 to find the percentage

0.8482 x 100

= 84.82% (1 mark)

84.82% of Head to Toe Wellbeing’s revenue was converted into gross profit during 2022

Net Profit Margin

 The net profit margin shows the proportion of sales revenue that is turned into
net profit and is expressed as a percentage
 It is calculated using the formula

Worked example

Head to Toe Wellbeing’s revenue in 2022 was £124,653. Its net profit for the year was £57,596.

Calculate Head to Toe Wellbeing Ltd’s Net Profit Margin in 2022. (2)

Step 1: Substitute the values into the formula

(1 mark)

Step 2 - Multiply the outcome by 100 to find the percentage

0.4621 x 100

= 46.21% (1 mark)

46.21% of Head to Toe Wellbeing’s revenue was converted into profit for the year
3.4 Breakeven Point
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The Breakeven Point
 The breakeven point is a useful metric to help a business understand how
many units it needs to sell before it starts making a profit
o The breakeven point is the number of units that need to be sold for total
costs to equal the sales revenue

 The breakeven point can be calculated using one of two formulas

1.

2.

Worked example

Bravo Burgers has the following financial information for the month of May.

£ May
Raw materials for each burger £2.10
Packaging for each burger £0.20
Fixed costs £1 730
Selling price for each burger £4.95
(a) Using the information in the table, calculate the level of output required to break
even in May. You are advised to show your workings. (2)

Step 1 - Calculate the variable costs per burger

Variable cost per burger = raw materials + the packaging

Variable cost per burger = £2.10 + £0.20 = £2.30. (1 mark)

Step 2 - Substitute the values into the breakeven formula

 (1 mark)

Step 3 - Round to the nearest unit

653 burgers need to be sold to break even in May (2 marks for a correct answer)
Exam Tip

Always round up the break even point to the nearest whole unit.
Interpreting Break Even Diagrams
 A break even chart is a visual representation of the break even point and is
used to identify the following

The break even chart for A2B Limited shows that at 324 units the total revenue =
the total costs

Diagram analysis

 Fixed costs do not change as output increases

 o A2B's fixed costs are £8,000 and these do not change whether the
business produces 0 units or 500 units

 Total costs are made up of fixed and variable costs

o At 0 units of output, they are made up exclusively of fixed costs
o At 500 units the total variable costs equate to £11,800
o This line slopes upwards because total variable costs increase as output
increases

 The revenue line also slopes upwards

o At 0 units of output, the revenue is £0
o At 500 units the total revenue equates to £11,800
o Revenue will increase with the output
o The line will slope more steeply than the total costs and will cross the
total costs line at some point

 The point at which the total costs and the revenue lines cross is the break even
point
o The break even level of output for A2B is 324 units

 The margin of safety can be identified as the difference on the x-axis between
the actual level of output (in this case 450 units) and the break even point

 The profit made at a specific level of output can be identified as the space
between the revenue and total costs lines
o In this instance, the profit made at 450 units of output is £14,400 - £11,250
= £3,150

Exam Tip

When calculating the break even point write down the break even formula first and then
find the figures you need to fill in the data required.

This allows you to check that you have everything you need for the calculation - and you
will be able to identify very quickly whether you need to carry out further calculations
such as total fixed costs.
The Margin of Safety
 The margin of safety provides useful information to a firm on how many sales
they could lose before they start making a loss
o The margin of safety is the amount by which the number of units sold is
greater than the break even point
o The margin of safety can be calculated using the following formula
  Businesses prefer their margin of safety to be as large as possible
o This means that if demand for their products drops unexpectedly, the
business will continue to make a profit

Worked example

Figure 1 shows the weekly break-even diagram for the Yorkshire Rare Breed Sausage
Company.

Figure 1: Output, Costs & Revenues of the Yorkshire Rare Breed Sausage
Company

Using Figure 1 above, calculate the weekly margin of safety. Show your workings and
the formula used. (3)
Step 1 - Write the formula down

(1 mark)

Step 2 - Read from the chart and substitute values into the formula

(1 mark for any correct working; 3 marks for the correct answer)
Exam Tip

Use a ruler to help you to read break even charts accurately

.3.5 Cash & Cash-flow Forecasts

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The Importance of cash to a Business
 Profit and cash are different financial terminologies
o Profit is simply the difference between sales revenue generated and
business costs
o Cash is measured by taking into account the full range of money flowing
in and out of a business

 A new business may have to pay cash on purchase for all of its supplies until
its suppliers trust them enough to provide credit terms (buy now, pay later)
o A supplier may then give the business trade credit of 30 or 60 days
o This means that the business can receive their stock now and only pay for
it in 30 or 60 days - the cash outflow is delayed
o As the business sells its products, they receive money generated from
the business revenue and this represents a cash inflow
o At the end of 60 days they will pay their supplier (cash outflow), but the
firm may still have half of its stock available for sale

 A profitable business is likely to fail if it does not have sufficient cash

o Cash-poor businesses will struggle to pay suppliers, employees and
operating expenses
 o This is called insolvency
 E.g. Lifestyle retailer Joules announced plans to liquidate in
December 2022 as a result of cash flow difficulties despite making
a profit of £2.6 million during the previous year

Calculating & Interpreting Cash-flow Forecasts

 A cash flow forecast is a prediction of the anticipated cash inflows and cash
outflows, typically for a three, six or twelve month period

o Typical outflows include payments on raw materials, paying staff wages

and salaries, paying bills such as electricity
o Typical inflows include receipts from sales, money received from a new
bank loan, money from the sale of an asset

Key terminology and an example

 The net cash flow is calculated by subtracting total outflows from total inflows
 The opening balance is the previous month’s closing balance carried forward
 The closing balance is calculated by adding the net cash flow to the opening
balance

An Example of a Start-up 3 Month Cash Flow Forecast (£s)

Jan Feb Mar

Inflows
Cash received from
4,600 5,100 3,100
sales
Total inflows 4,600 5,100 3,100

Outflows

Inventory/stock 1,500 850 900

Wages 2,200 2,200 2,200

Utilities 840 840 840

Total outflows 4,540 3,890 3940

Net cash flow 60 1,210 (840)

Opening balance 500 560 1770

Closing balance 560 1,770 930

Analysis of the cash flow forecast example

Executive Summary

 Overall, this cash flow forecast supports a decision for the business to arrange
an overdraft facility with their bank
 As sales increase in January and February, inflows are greater than
outflows and the business has a positive cash flow
 This changes in March as the level of sales falls and the net cash flow turns
negative
 An overdraft facility will help them survive if their closing balance drops below
zero in the next month or two

January

 The opening balance of £500 has been introduced by the owner

 The business is expected to achieve sales of £4,600
 Total outflows are expected to be £4,540
 The Net Cash Flow is expected to be £60 (£4,600 - £4,540)
 January’s closing balance is expected to be £560(£60 + £500)

February

 The closing balance from January becomes the opening balance for February
 Sales of £5,100 are expected to be the business total inflows
 Total outflows are expected to be £3,890
 The net cash flow is expected to be £1,210 (£5,100 - £3,890)
 The closing balance is expected to be £1,770 (£1,210 + £560)

March

 The closing balance from February becomes the opening balance for March
 The business expects to achieve sales of £3,100 as its total inflows
 Total outflows are expected to be £3,940
 The net cash flow is expected to be -£840 (£3,100 - £3,940)
 The closing balance is expected to be £930 (-£840 + £1,770)

Worked example
The following is an extract from a cash flow forecast

April May June

000s 000s 000s
Cash inflow 23 24 30
Cash outflow 28 81
Net cash flow 10 (51)
Opening bank balance 30 40 36
Closing bank balance 40 36
Fill in the three blanks to complete the cash flow forecast. (3)

Step 1 - Calculate the cash outflow for April

Net cash flow = inflow - outflow

10,000 = 23,000 - ?

Cash outflow = £13,000 (1 mark)

Step 2 - Calculate the net cash flow for May

Net cash flow = inflow - outflow

Net cash flow = £24,000 - £28,000

Net cash flow = - £4,000 (1 mark)

Step 3 - Calculate the closing balance for June

Closing balance = opening balance + net cash flow

Closing balance = £36,000 + - £51,000

Closing balance = - £15,000 (1 mark)

Exam Tip

When calculating opening and closing balances, work through each month in turn.
Always double-check your calculations in cash flow forecasts as one mistake will have a
knock-on effect elsewhere and, in some cases, lead you to make inaccurate
judgements.

.3.6 Sources of Business

Finance
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An Introduction to Sources of Finance
 All businesses need finance to get started, allow them to grow and fund their
continuing activity
 Finance may be needed for capital expenditure which is spending on fixed
assets such as equipment, buildings, IT equipment and vehicles
 Similarly, finance is required for operating expenditures which is spending
on raw materials or day to day expenses such as wages or utilities
 Businesses have different sources of finance available to them in the short-
term and the long-term

Long-term and short-term sources of finance

 Short-term Sources of Finance
An Explanation of the Short-term Sources of Finance Available to Businesses

Source Explanation Pros Cons

Overdrafts  An  A limit is agreed  An overdraft

arrangement and interest is may
with the Bank charged only when be ‘called
for business a business ‘goes in’ if the
current account overdrawn’ bank is
holders to  Offers significant concerned
spend more flexibility and about a
money than it aids cash flow business's
has in their ability to
account repay what
it owes
 Interest on
overdrafts
tends to be
higher than
on other
loans

Trade  An agreement  Trade credit is  Suppliers

credit is made with usually interest- may
the business free prioritise
suppliers to  A business can delivery to
buy raw increase its stock customers
materials, without having to who have
components immediately pay the shortest
and stock for it which can repayment
which are paid significantly enabl dates
for at a later e a positive cash  Cash needs
date (typically flow if the stock is to be
30 to 90 days) sold before carefully
payment becomes managed to
due ensure the
business has
the money
available to
pay its
suppliers on
the agreed
 date

Long-term Sources of Finance

An Explanation of the Long-term Sources of Finance Available to Businesses

Source Explanation Pros Cons

Share  Share  Large amounts  Shareholders are

capital capital is of money can the owners of
finance ra be quickly shares and they
ised from raised from are entitled to a
the sale of wealthy share of the
shares in investors company’s
a limited  Shareholders profit when divide
company who buy a large nds are declared
number of shares  Shareholders
may also bring usually have a vote
and share at a
expertise which company’s Annual
can be beneficial General
to the business Meeting (AGM)
where they can
have a say in the
composition of the
Board of Directors

Bank loans  A sum of  Bank loans are  Interest is payable

money is usually unsecur and the
borrowed ed and are business assets are
from the typically repaid at risk if the
bank and over two to ten business does not
repaid years make repayments
(with  Interest rates are as planned
interest) fixed for the
over a term of the loan
specific so repayments
period of are made in
time equal instalments
- which helps
with business
 planning

Crowdfund  Crowdfun  The Business has  Businesses need to

ing ding to attain the provide
allows target a persuasive
businesses amount before business plan to
to access any funds are convince
finance released i.e they individuals to
provided will not receive invest in their
by a large any funds even if product as they will
number of they are just a be competing with
small few hundred £s many other
investors short by the projects online
on online selected funding
platforms date
such  Investors are
as Kickst often attracted by
arter incentives such
as a sample or
early access to a
product
 E.g. Flow Hive
is a beekeeping
system that was
successfully
funded on
Indiegogo in
2015. The
campaign raised
$12.2 million
from 38,470
backers

Retained  The profit  This is a cheap  The opportunity

profit that has source of cost of investing
been finance, as the money back
generated it does not into the business is
in involve that shareholders d
previous borrowing and o not receive extra
years and associated intere profit for their
not st and investment
distributed arrangement fees
to
owners is
reinveste
d
 back into
the
business

 Some  A  Most venture

Venture specialist business rejecte capitalists demand
capital venture d as high-risk a stake in the
capital by banks may business and
businesses be able to access expect to have a say
or large amounts in how the business
successful finance is run
entreprene  Venture
urs can be capitalists often
approache provide business
d to invest advice
in higher-
risk
businesses

 If businesses choose to borrow money in the form of a loan or overdraft, it will

need to consider the full cost of repaying the borrowing
 Interest must be paid on loans which means that the amount that is required to
be repaid is higher than the original amount borrowed

Worked example

When starting her business in 2019, Paulina took out a loan. The financial details of this
loan are in the table below.

Loan required from the bank £20,000

Total repayments for the loan £22,200
Length of loan 3 years
Using the information in the table, calculate the interest on the loan as a percentage of
the total amount borrowed. You are advised to show your workings.

(2 marks)

Step 1: Deduct the original loan amount from the total repayments to calculate
the total interest paid

£22,200 - £20,000 = £2,200

 (1 mark)

Step 2: Divide the total interest paid by the original loan amount

£2,200 ÷ £20,000 = 0.11

Step 3: Multiply the outcome by 100 to calculate the percentage rate of interest

0.11 x 100 = 11%

(1 mark)
Exam Tip

Recently, some sources of finance like bank loans have been trickier to access. When
considering the best source of finance in your answers, acknowledge that businesses
may find accessing these sources more challenging and expensive than in previous
years. Crowd funding has been able to fill some of the gaps left by changes in the
banking industry.

.4.1 The Options for Start-up &

Small Businesses
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Limited & Unlimited Liability
 When an entrepreneur starts a business, they need to consider what kind of
legal structure they want for their business
 Sole traders and partnerships offer no legal protection to the owners in that the
business assets and the owner's personal assets are viewed as being the
same (unlimited liability)
 The other forms of business ownership offer limited liability in which the assets
of the owners are considered to be separate from those of the business

A Comparison of Unlimited & Limited Liability

Liability Description Implications

Unlimited  The owners  There is no legal

liability are fully responsible for distinction between
all debts owed by the owners with unlimited
business liability and the business
  Owners are also
legally responsible for
any unlawful
acts committed by those
connected to the business
 As a result, these
business owners may
have to use their
own personal assets to
pay debts or legal fees

 E.g. a sole proprietor

may need to sell their
home to pay creditors if
their business fails

Limited
liability  Owners (shareholders) of
private limited companies
and public limited
companies can only lose
the original amount they
invested in the business if
it fails
 Shareholders are not
responsible for business
debts
 In most cases, the
shareholders cannot be
held responsible for
unlawful acts committed
by those connected with
the business
 Companies
are incorporated and
owners are considered
a separate legal entity to
the business
 This means that if a
company fails,
the owners would lose
their
investment (shares) but
would not have to use
their assets to meet
additional debts or legal
fees
 E.g. In 2018 construction
company Carillion
entered liquidation and
the shareholders lost
their investments

Types of Business Ownership for Start-ups

 When an entrepreneur starts a business, they will often start operating as a sole
trader
 Over time, they may change the form of business to gain more
funding or provide more security for the owners by providing limited liability
 The different types of business structures available to the owners

 Three of the most common forms of business at start up are sole traders,
partnerships and private limited (Ltd) companies
 Each one of these forms has various advantages and disadvantages associated
with the structure

An Explanation of Sole Traders, Partnerships and Private Ltd Companies

Form Explanation Advantage Disadvantage

Sole Trader  A business  Easy and  Unlimited liability,
that has a inexpensive to meaning the owner
single owner set up is personally
(although  The owner responsible for any
they may still has complete debts the business
hire control over incurs
employees) the business  Limited access to
 All profits finance and capital
belong to the  Limited skill set of
owner the
 Simple tax owner/entrepreneur
arrangements

Partnership  Two or more  Easy to set up  Unlimited liability

people join and  Potential for
together to inexpensive disputes between
form a  Shared partners
business responsibilities  Profits are often
 Good and decision- shared equally,
examples of making regardless of the
this type of  More skills contribution
business and  Difficult to transfer
include knowledge ownership
lawyers and are available
accountants  Increased
access to
finance and
capital

Private  The  Limited  More expensive

Limited ownership of liability, and time-
Company the business meaning the consuming to set
(Ltd) is broken owners are not up
down into personally  More complex legal
a specified responsible for requirements and
number of the company's regulations than sole
shares debts traders
 These shares  Access to  Annual financial
can be sold greater reporting and
by the owner, finance and auditing are
usually to capital required
friends and  Easier to  Shareholders have
family or transfer little control over
to venture ownership the company as
capitalists  Can have a the founder usually
professional imposes their
  Decision- image and agenda
making often reputation
rests with the
person
appointed to
run the
company,
often called
the Managin
g Director or
CEO

Franchising
 Franchising is a business model where an individual (franchisee) buys the
rights to operate a business model, use its branding and software tools and
receive support from a larger company (franchisor) in exchange for an initial
lump sum plus ongoing fees

 The franchisee operates the business under the franchisor's established

system and receives training, marketing support, and ongoing assistance
o E.g's include Domino's Pizza, KFC, Burger King

Some of the many food franchises available

The Advantages & Disadvantages of Owning a Franchise

 Advantages Disadvantages

 Centralised advertising: A ready  Overhead/Startup Cost: This is

made, well recognised brand
name, which will be promoted
centrally by the Franchisor
o E.g. Dominoes sponsored
'The Simpsons for many
years
 Training: The Franchisor
provides training such as how to
make pizzas properly to ensure
the quality and consistency of the
brand
a fixed sum paid at the start of the
franchise for the right to use the
business name and resources
 Royalty costs: Usually paid
quarterly and varies according to
the level of sales. Often equal to 5
- 10 % of sales turnover
 Cost of supplies: The Franchisor
may sell material or equipment to
the Franchisee at inflated prices

 Supplies are provided: The  Quality control management: If

Franchisor provides equipment the Franchisee does not produce
and supplies so that the product the good/service to the required
will be the same, regardless of standard set by the Franchisor, the
where it was purchased Franchise rights can be removed
from them
 Exclusive location: The
Franchisor provides an exclusive
area or market to sell to
o They will not create any
more franchises in that
area

 Support services: Advice,

training, use of software systems
and problem solving are ongoing
and the Franchisor may also
provide the Franchisee with loans,
insurance etc.

Exam Tip

A franchise is not a form of business ownership - it is an alternative to starting up a

brand new business from scratch.

In most cases Franchisors require businesses to operate as private limited companies

as this ownership type is considered to have more stability than sole traders or
partnerships.
.4.2 Business Location
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Factors Influencing Business Location
 Choosing a good location can have significant impacts on a business, such as
attracting customers, reducing costs, accessing skilled labor, remaining
competitive, and enhancing its reputation

Business locations are affected by multiple factors and if a business chooses the
wrong location, it can fail

 Proximity to market, labour, materials, and competitors influence the location

decisions of a business
o Proximity to the market refers to the distance between the business
location and the target market. Locating near the market reduces
transportation costs and increases its accessibility to potential customers
o Proximity to labour refers to the availability of qualified and skilled
workers in the area. Businesses often locate in areas with a high
 concentration of skilled labour to ensure that they have access to the
necessary workforce to run their operations efficiently
o Proximity to materials refers to the availability of raw materials and
supplies needed for the business which will help to minimise
transportation costs
o Proximity to competitors may be desired (or not) to take advantage of
a shared customer base or to differentiate themselves by offering unique
products or services

 The nature of the business activity is also an important factor in location

decisions
o
 Different types of businesses have different requirements in terms
of space, infrastructure, and accessibility
 E.g. A manufacturing plant may require a large space for
equipment and a loading dock for shipping and receiving goods,
while a service business such as a law firm may require less space
and more accessible office locations

 The impact of the internet means businesses can reach customers from
anywhere and physical location may not be as important as it once was
o E-commerce businesses may choose to operate from a fixed location, but
their location may not be as critical as it is for traditional brick-and-
mortar businesses that rely on foot traffic
o Providing customers with the opportunity to book services or purchase
products online offers convenience and is likely to reduce business
costs as premises in non-high profile areas are usually cheaper to rent or
buy than high street or other busy areas
o For businesses that offer a combination of online and in-person services
(restaurants or retail stores), location remains an important factor in their
success

.4.3 The Marketing Mix

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An Introduction to the Marketing Mix
 The marketing mix (4Ps of marketing) provides a framework for businesses to
create and implement successful marketing strategies
 The 4Ps represent the key elements of a marketing strategy: product, price,
place, and promotion
  These four components work together to satisfy the needs and want of a target
market while achieving the company's objectives
 By understanding and manipulating the marketing mix, businesses
can differentiate themselves from competitors
 The marketing mix is an essential tool for any company looking to maximise its
marketing impact and achieve long-term success

Each business combines the different elements of the marketing mix in unique
ways to maximise their profitability

Promotion

 Promotion is an important element of the marketing mix as it plays a crucial role

in generating customer awareness, interest and desire for a product/service
o A business can communicate its value proposition to potential customers
and differentiate itself from competitors
o Promotion helps to build brand awareness and loyalty which can lead to
repeat purchases and referrals

 The promotion element of the marketing mix includes a variety of promotional

methods such as advertising, direct selling to potential customers, and public
relations
Product

 The product design mix refers to the combination of elements that make up a
product's design
o These elements include function, aesthetics, and cost

 Balancing the elements of function, aesthetics, and cost, helps the product
design to be both functional and attractive, while also being cost-effective for
both the manufacturer and the consumer
o Some manufacturers aim to balance all three elements e.g. Fentimans
ginger beer is relatively affordable and is packaged in eye catching bottles
and the product itself is very good quality
o Other manufacturers may focus on one aspect, more than the others
e.g. Asda's own brand of ginger beer is produced at the lowest possible
cost and sold to consumers at a very low price
o Businesses must take care to balance customers' quality
expectations with these elements
 The target market may value quality less than price and will not be
prepared to pay a high price for goods even if they are of the
highest quality

 Developing a strong brand can help to differentiate a product or service from

those offered by competitors and can help a business to add value as customers
are often willing to pay higher prices for brand they recognize and trust

Price

 By understanding their customers, competitors, and costs, businesses can set

prices that maximise revenue and profitability
 Pricing can play a significant role in positioning the brand in the market and
help a firm to compete effectively

Place

 This refers to the physical location of the business and/or the journey
(distribution) through which the product goes from the business to the end
customer
 Choosing the most efficient location or distribution network will result in lowered
costs and greater profits

The Marketing Mix in a Competitive Environment

 The marketing mix may change in a competitive environment, with businesses
adapting their product, price, promotion, or place to differentiate
themselves from competitors and attract customers
o The specific elements that businesses change may depend on the
industry, the competition, and the needs of their target market

Examples of how the Marketing Mix may Change in Different Competitive

Environments

Factor Explanation

Price  Where there are many substitutes (similar

products/services ) available, businesses may need to lower
their prices to remain competitive
o They may also offer temporary discounts or
promotions to attract customers

Product  Where there are many substitutes, businesses may need

to differentiate their product/service to stand out
o They may focus on improving the quality,
functionality, or unique features to appeal to
customers

Promotion  In a competitive environment, businesses may need

to increase their marketing expenditure to reach potential
customers
o They may need to invest in targeted advertising,
social media campaigns, or other promotional
activities to create brand awareness and stand out
from competitors

Place  In a competitive environment, location and distribution

channels can give a competitive advantage
o Businesses may need to locate themselves in areas
with high foot traffic or use innovative online
channels to reach customers who prefer to shop
online
  The competitive grocery market in the UK has seen the rise of smaller
convenience stores in local neighbourhoods e.g Sainsbury Local and Tesco
Express
o The location of these stores is often the main factor in the marketing mix
that attracts local customers
o Convenience adds value and customers are often willing to pay more
for much needed items (e.g. milk) which do not require a main
supermarket shopping trip

 Many service based businesses such as Save My Exams or recruitment

companies like The International Educator have set up as remote based
company with their employees working from home
o This reduces business costs and gives a competitive advantage over
competitors who continue to incur office expenses
o Facilities can be hired for company get togethers or essential business
meetings

Changing the Marketing Mix in Response to Changing

Consumer Needs
 The marketing mix should constantly be evolving as businesses respond to
changing market conditions and feedback from their customers
o E.g. A small bakery might introduce a home delivery service in response
to customer requests

 Here are some examples of how changing consumer needs can impact each
element of the marketing mix:

1. Price

 Changing consumer needs can also impact the pricing strategy of a business
o E.g.During a recession, consumers may become more price-sensitive
and shop around for more affordable options
o Businesses may reduce prices or offer discounts to remain competitive

2. Product

 Businesses must adapt their products to changing needs

o E.g.In recent years there has been a growing demand for plant-based
foods as more consumers adopt vegan or vegetarian lifestyles
o This has led to the introduction of new products in the market, such as
plant-based meat substitutes, which have been successfully marketed to
this growing market segment
3. Promotion

 The way businesses promote their products can also change based on changing
consumer needs
o E.g. in recent years, there has been a significant shift towards digital
marketing, as consumers increasingly rely on social media to inform their
purchasing decisions
o This has led to businesses investing more in digital marketing
channels such as influencer marketing, to reach their target audience

4. Place

 Changing consumer needs can impact the way businesses distribute their
products
o E.g. The rise of e-commerce has made it easier for consumers to shop
online and have products delivered to their doorstep
o In response, many businesses have invested in their online presence
offering convenience and fast delivery to cater to the needs of their
customers

New Technology & the Marketing Mix

 New technology has revolutionised each element of the marketing mix
o Changes in e-commerce & digital communication have changed the way
businesses create and distribute products
o Changes in e-commerce & digital communication have changed the way
businesses communicate with customers and set prices
 To remain competitive, businesses must continuously embrace the latest
technology and adapt their marketing strategies accordingly

How New Technology Impacts Each Element of the Marketing Mix

Price Product

 Businesses can use data  Businesses can now easily gather

analytics to analyse their feedback from their customers
competitors' pricing strategies and  This information can help
set their prices accordingly businesses create and refine
 Technology can also help products that meet customers'
 companies reduce costs in needs
several ways which gives them
the option of lowering their
prices
 Technology can enable dynamic
pricing strategies, where prices
can be adjusted in real-time based
on supply and demand

Promotion Place

 Businesses can now easily reach  E-commerce has made it possible

their target audiences with highly
targeted marketing messages
 Businesses can use digital
channels to create two-way
communication with customers,
allowing them to provide
feedback and ask questions
for businesses to reach
customers in any location, at any
time, and through any device
 Businesses can expand their
reach beyond their physical
location and offer a wider
selection of products

.4.4 Business Plans

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Using a Business Plan to Obtain Finance
 A business plan is a document produced by the owner at start-up, which
provides forecasts of items such as:

o The business idea (sub-topic 1.1.1)

o The business aims and objectives (sub-topic 1.3.1)
o The target market (sub-topic 1.2.2)
o The forecast revenues, costs and profits (sub-topic 1.3.2)
o The cash-flow forecast (sub-topic 1.3.5)
o The sources of finance (sub-topic 1.3.6)
o The business location (sub-topic 1.4.2)
o The planned marketing mix (sub-topic 1.4.3)

 The main aim of producing a business plan is to reduce the risk associated with
starting a new business and help the owners to raise finance
o Producing a business plan forces the owner to think about every aspect of
the business before they start which should reduce the risk of failure
 Elements of a business plan

 Having carried out research to support the plan, the business will be well-
informed about the potential problems and chance of success and can
select the most appropriate source of finance based on this information

 A well-written business plan can help a business to obtain finance

o Lenders (e.g. banks) and other investors will be able to explore the plan
and make an informed decision about whether the business is credible
and worth the financial risk
 o Investors (e.g. venture capitalists) will use the business plan to explore
whether there is an opportunity to increase the value of their
investment and make a worthwhile profit
o The business, having carried out research to support the plan, will
be well-informed about the potential problems and chance of
success and can select the most appropriate source of finance based on
this information

 A clear action plan provides direction for the business and helps lenders and
investors to have confidence in the future success of the business
 Most high street banks can provide a detailed template for business owners to
complete when applying for finance.

Exam Tip

A business plan cannot guarantee success - though it is very unlikely that investors or
financial institutions such as banks would consider risking their money on a business
without one!

Managers and business owners should keep the business plans up to date, treating it
like a Curriculum Vitae (CV) for the business. It can help focus business activities and
identify resources the business needs as well as providing justification to potential
investors.

1.5.1 Business Stakeholders

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An Introduction to Business Stakeholders
 Business stakeholders are individuals or groups that affect or are affected by
the actions of a business
 Groups with an interest in the activities of a business

 Stakeholders can have different objectives based on their different roles and
perspectives
 A business needs to take into account the needs and interests of its
stakeholders to operate successfully and ensure long term success

The Different Objectives of Stakeholders

Stakeholder Objective Example

Owners  Shareholders are  For example, a

(shareholders) individuals or entities
who own a portion of a
company's stock
 They invest in the
company to make a profit
 Shareholders' primary
objective is to maximise
their returns on
investment
shareholder of Apple
may want the company
to release new products
and increase sales to
increase the value of
their shares
  They want the company
to be profitable
and generate a high
return on their
investment

Employees  Employees are  For example, Google

individuals who work for
a company
 Their primary objective is
to earn a living, have job
security and be
compensated fairly for
their work and have a
safe working
environment
employees in California
have some of the best
working conditions in
the world, with the
Company offering
sleeping pods, games
rooms and free
speciality coffee all-day

Management  Managers are individuals  For example, a manager

who are responsible for of McDonald's may
the day-to-day operations want the restaurant
of a company to increase sales and
 Their primary objective is reduce costs by
to meet the company's improving efficiency
goals and objectives
 They want to maximise
profits and minimise
costs while ensuring that
the company operates
efficiently

Suppliers  Suppliers are individuals  For example, Busco

or businesses
who provide goods or
services to a business
 Their primary objective is
to sell their products or
services and make a
profit
 Suppliers want to be paid
on time and have a long-
term relationship with
the company
Sugar Milling Co.,
Inc supplies Coca-
Cola with 84% of its
sugar requirements.
They want the company
to continue buying their
sugar and to pay their
bills on time

Customers  Customers are  For example, a customer

individuals or businesses of Nike may want the
 who purchase company to provide
goods/services from a high-quality shoes at a
business reasonable price - and
 Their primary objective is to deal promptly with
to receive high-quality any customer concerns
products or services at a issues
fair price
 Customers also want
good customer service
and a positive experience
with the company

Pressure groups  Pressure groups are  For example, an animal

organisations that seek rights group may want a
to influence the policies clothing company
and actions of to stop using animal
businesses or products in their
governments clothing
 Their primary objective is
to promote a specific
cause or agenda
 Pressure groups want the
company to support their
cause or take action on an
issue

The local  The local community  For example, Burnley

community includes individuals and Savings & Loans Ltd
organisations that live or (Bank of Dave) donates
operate in the area where all of their profits to
a business operates local charities and good
 Their primary objective causes
is for the business to
have a positive
impact on the
community
o This may include
the business being
environmentally
responsible,
providing jobs,
and contributing
to local causes

The government  The government is  For example, the

 responsible for creating government may want
and enforcing laws and a company to pay
regulations that affect taxes, comply with
businesses environmental
 Their primary objective is regulations, and create
to promote the public jobs
good and protect the
interests of citizens
 The government wants
companies to operate
within the law and
contribute to the
economy

Stakeholders Interactions with Businesses

How stakeholders are affected by business activity

 Business activity can have various impacts on stakeholders

o If a business experiences financial difficulties, shareholders may lose
value in their investments and employees may face job losses or pay cuts
o If a business is profitable, shareholders may benefit from increased
dividends and employees may receive bonuses or promotions
o Customers can be affected by business activity in terms of product
availability, quality, and pricing
o The local community can be impacted by the environmental and social
impact of business operations, such as pollution or job creation
o The government can be affected by business activity in terms of tax
revenue and regulatory compliance (following the laws)

How stakeholders impact business activity

 Stakeholders can impact business activity in various ways

o Customers can influence product development and pricing through
their purchasing decisions and feedback
o Employees can impact business activity through their productivity, skills,
and job satisfaction
o Shareholders can impact business activity through their investment
decisions and demands for returns
o The local community can impact business activity through regulations
and permits (from the local council), and social pressure
o Pressure groups can impact business activity by lobbying for changes in
policy or boycotting products
 o The government can impact business activity through taxes, regulations
(laws), and subsidies

Possible Conflicts Between Stakeholder Groups

 Stakeholder groups can have conflicting interests and objectives, which can
lead to tensions and conflicts
o Shareholders may prioritise profit maximisation, while employees may
prioritise fair treatment and high wages
o Customers may prioritise low prices, while the local community may
prioritise environmental sustainability which raises costs and prices

 These conflicts can create challenges for businesses to balance the competing
demands of different stakeholder groups
o E.g. A company may need to invest in costly environmental technology to
meet the demands of the local community, but this may reduce profitability
and upset shareholders

 Conflicts can also arise when stakeholders have different levels of power and
influence
o E.g. Pressure groups with strong public support may be able to influence
business activity more than individual shareholders

 Managing stakeholder conflicts requires careful communication, transparency,

and compromise

Real life Examples of Stakeholder Conflicts

Stakeholders Conflict

Employees vs.  In 2020, British Airways faced criticism from its

Employers employees and unions after announcing plans
to cut 12,000 jobs and reduce pay and
benefits for remaining staff due to the impact of
the COVID-19 pandemic on the airline industry
 The cuts were met with protests and legal
challenges from unions and employees, who
argued that the airline was unfairly targeting its
workers

Pressure Groups vs.  In 2019, Extinction Rebellion, a climate change

 Government activist group, organised protests across the UK
to demand government action on climate
change
 While the group had the support of many members
of the public, some politicians criticised the
protests for disrupting public order and causing
economic damage

Local Communities vs.  In 2019, plans to build a new high-speed rail

Developers line, HS2, faced opposition from residents of
areas affected by the proposed route, who argued
that the project would damage the environment,
disrupt communities, and be too expensive
 The project also faced opposition from
environmental groups who argued that the
resources could be better spent on other
infrastructure projects

Exam Tip

The interests of stakeholders should be considered whenever a question asks you to

weigh up business choices, typically in the longer-answer questions. You might
consider the following:

 Which stakeholders might be supportive of each option?

 And which stakeholders might oppose each option?
 Is there a conflict between different stakeholders?
 How might conflict be overcome?