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Paper 1 Revision
Section 1: Business activity
1.1The role of business enterprise and entrepreneurship
1.2 Business planning
1.3 Business ownership
1.4 Business aims & objectives
1.5 Stakeholders in business
1.6 Business growth
Section 2: Marketing
2.1 The role of marketing
2.2 Market research
2.3 Market segmentation
2.4 The marketing mix
Section 3: People
3.1 The role of human resources
3.2 Organisational structures and different ways of working
3.3 Communication in business
3.4 Recruitment & selection
3.5 Motivation & retention
3.6 Training & development
3.7 Employment Law
Section 1: Business activity
Topic
Content
Points to include
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1.1 The role of business enterprise and entrepreneurship
The purpose of business activity and enterprise
spotting an opportunity, developing an idea for a business, satisfying the needs of customers
Characteristics of an entrepreneur
creativity, risk taking, determination, confidence
The concept of risk and reward
1.2 Business planning
The purpose of planning business activity
reducing risk, helping a business to succeed
The role, importance and usefulness of a business plan
identifying markets, help with obtaining finance, identifying resources a business needs to operate, achieving business aims and objectives
1.3 Business ownership
The features of different types of business ownership
sole traders, partnerships, private and public limited companies
The concept of limited liability
The suitability of differing types of ownership in different business
contexts
start-ups and established businesses
1.4 Business aims and objectives
The aims and objectives of business
profit, survival, growth, providing a service, market share
How and why objectives might change as businesses evolve
Why different businesses may have different objectives
1.5 Stakeholders in business
The roles and objectives of internal and external stakeholder groups
owners, employees, customers, suppliers, government, local community
The effect business activity has on stakeholders
The effect stakeholders have on business
1.6 Business growth
Organic growth
increasing output, gaining new customers, developing new products, increasing market share
External growth
mergers, takeovers - including horizontal, vertical, diversification
R isks and rewards involved in starting your own business:
Risks Rewards Might have invested your own savings Might have given up a job with a steady income Might be very stressful / affect your health Long hours = lack of holidays & strain on personal relationships with friends & family Changing consumer tastes
Possibly a higher wage / salary than previous job Might be able to sell the business for a profit if it’s successful Being your own boss The personal satisfaction of being successful Independence – being their own boss
1.2 Business planning
Reasons why it is important to create a business plan for a new business venture:
More likely to get investors (e.g. bank, partner, shareholders).
Reduces the risk of failure because decisions are based on research (e.g. choosing the correct price to charge after researching manufacturing costs, competitors’ prices, and customer preferences).
To identify what resources are needed (e.g. staff, machinery, buildings and vehicles) so that a more accurate budget / cash flow forecast can be made.
Components included in a business plan :
Component What might be included in it?
Aims & objectives
What you plan to achieve (e.g. how much revenue & profit). SMART objectives; e.g. to make £xm profit by the end of 2020
Marketing plan
What market research you will carry out. Who your target audience is likely to be (typical customer). The 4Ps - which products you will sell, what prices you will set, what advertising & special offers you’ll do, and where you’ll sell.
Human Resource plan
How many employees you’ll need. How you will recruit the employees. How much you’ll pay the employees. Any training needed.
Production plan
How you will make the product (or which supplier you will buy from). How you will ensure quality. Where you will locate your business.
Finance plan
How you will raise the money needed to set up & run the business (sources of finance). Calculate the break-even point (number of products you need to sell to cover the costs). Create a cash-flow forecast; estimating likely income and expenditure for the first year.
The role of a business plan
Identifying markets Helps a business think clearly about who it is targeting products/services at. Help determine for example the type of marketing the business will need to undertake Helping with finance A bank is more likely to lend a new business money if it is confident in being repaid. Having a business plan will show that careful thought had been given to all aspects of starting and running the business. Identifying resources that a business needs to operate
Identifies resources such as equipment, finance, additional people with particular skills or it could be where the business operates from. Vital that a business is clear on the resources it needs, otherwise it will be seen by a potential investor as a business that has not given enough thought to its operations. Potential investor might think the business is to much of a risk and not invest. Achieving business aims & objectives
Setting out aims & objectives, with an appropriate timeline, gives a business the best chance of achieving its aims. This is because objectives requires careful thought, research and consideration of all aspects of running the business.
1.3 Business ownership
Sole Trader Definition / features: A business owned and run by one person
Advantages:
Low start-up costs (less regulations & paperwork than Ltd & plc) The owner keeps 100% of the profit The owner makes all of the decisions
The owner can keep their finances private (unlike Ltd & plc)
Disadvantages:
Unlimited liability – the owner is personally responsible for the debts of the business (might have to use own personal finances such as savings, house & car)
Lack of continuity – if the owner dies, the business dies
A lot of responsibility on one person; long hours, lack of help/skills from others
Skill shortage – may have to employ specialised workers – increases costs – or may not be able to afford them.
Shortage of capital – May be difficult to start the business in the 1st^ place – may not be able to expand.
Private Limited Company (Ltd) Definition / features: A business owned by shareholders. Shares are sold privately to friends and family. Advantages:
Limited Liability – the owners (shareholders) are NOT personally responsible for paying the debts of the business; the owners and the business each have a separate legal identity
Finance can be raised by selling shares; this finance can be used to improve & expand the business without needing to get into debt
Continuity – the business continues to exist even if one of the shareholders dies
Control over share sale – No chance of the business being taken over by another business without shareholder agreement. Normally family businesses, with shares being owned only by family members, who remain in full control.
Disadvantages:
Profits have to be given to shareholders in the form of dividends The business has to publish its accounts every year – meaning that anyone (e.g. competitors) can see the financial state of the business
Higher set-up costs than Sole Trader & Partnerships – Memorandum & Articles of Association Cannot sell as many shares as a plc – so capital / finance is still limited
Public Limited Company (plc) Definition / features: A business owned by shareholders. Shares are sold to the public on the Stock Exchange. Advantages:
Limited Liability – the owners (shareholders) are NOT personally responsible for paying the debts of the business; the owners and the business each have a separate legal identity
Finance can be raised by selling shares to the public on the stock exchange; this finance can be used to improve & expand the business without needing to get into debt – because shares are sold to the public, there is the potential to raise vast sums compared to an Ltd
Continuity – the business continues to exist even if one of the shareholders dies
The business is run by a board of directors who normally have experience and areas of expertise
Disadvantages:
Profits have to be given to shareholders in the form of dividends The business has to publish its accounts every year – meaning that anyone (e.g. competitors) can see the financial state of the business Higher set-up costs than Sole Trader & Partnerships – Memorandum & Articles of Association
There is a threat of a takeover if 51% or more of the shares are bought by someone else
1.4 Business aims and objectives
Main objectives of most businesses:
To survive
To make a profit
To expand/Growth
Market share
Providing a service
Reasons why businesses should set objectives:
Reason Explanation
So that all employees are working towards a common goal (& gives them something to strive towards)
To help measure the success of a business at the end of the year (did we meet our objectives?)
So that employees can be given clear and relevant targets, and rewarded when they meet them (this helps motivate employees)
Why different businesses might have different objectives to each other (and how objectives might change over time):
Business What are their objectives likely to be?
A brand new shop in your home town
To survive: Many new business fail to survive the first year or two as they struggle to generate enough income (sales revenue) to cover their costs. They may face stiff competition from other, larger businesses.
A medium-sized business with 10 stores across the UK
To make a profit and expand: Once a business has got past the ‘survival’ stage, it might look to make a profit and expand; profit is important in order to reward those that took the risk of investing (e.g. shareholders). Expanding means the business has the potential to make even greater profits in the future.
A multinational business with stores around the world
To maximise profits and achieve global domination: Businesses like Apple, Amazon and Ford seek to use their size and power to maximise profits (see economies of scale below) and become a household name in as many countries as possible.
1.6 Business growth
Organic growth – Is concerned with increasing sales of products and services. It is internal, as in it
grows by increasing its own size rather than taking over another business.
Methods of growing a business internally (organically)
Method Explanation & example Increasing market share (in a current market)
A business might attract new customers by using advertising and special offers. For example, Tesco might use BOGOFs, price reductions and a loyalty card to attract new customers.
Developing new products
A business might expand its range of products to a) sell new products to existing customers and b) attract new customers. For example, Dyson started by selling vacuum cleaners. Now, they sell washing machines, hair dryers, and fans. Gaining new customers (in a new market)
A business might try to attract a completely new target audience. For example, Tesco & Dyson both started in the UK to begin with & both have expanded into new markets (foreign countries).
External growth can be achieved by mergers and takeovers. Using an example of each, explain what each of the following is and why it might be a good idea:
Method Explanation, example & benefits
Horizontal takeover
To takeover / merge with a company in the same line of business; e.g. one supermarket joins with another. One less competitor in the market = less need to advertise / lower prices / compete. Economies of scale (see below) e.g. may be able to get discounts from suppliers for buying in bulk = lower cost per unit
Backward vertical takeover
To takeover / merge with a company which can supply you with goods; e.g. a crisp manufacturer takes over a potato farm. Take control over own supply chain to ensure good quality, prices, and lead times (prompt deliveries)
Forward vertical takeover
To takeover / merge with a company which you can sell your goods to; e.g. a brewery takes over a pub. A guaranteed market for sales.
Diversification
To takeover / merge with a company in a completely unrelated industry; e.g. a car manufacturer takes over a fashion brand. If one market fails (e.g. a decline in car sales) then the business has another area to fall back on (don’t keep all of your eggs in one basket!).
One of the benefits of business growth is ‘ economies of scale’. Explain what the term ‘economies
of scale’ means. Economies of scale refers to the reduction of unit costs that occurs as a business grows in size (put
simply, the benefits a business gets by growing larger). There are a few types of economy of scale:
Purchasing economies: Large businesses need to buy stock from suppliers in bulk. Suppliers may be willing to give a discount to businesses that buy in bulk. Therefore, even though it is more expensive to buy in bulk, it works out to be cheaper per item. Example: o A small business buys 10 cans for £10 = £1 per can. o A large business buys 1,000 cans and is given a 10% discount so pays £900 = 90p per can. Marketing economies: Large businesses can spread the cost of advertising over a larger number
of shops / products, thus making it cheaper per unit. Example: o A small business with one shop pays £1,000 for a TV advert = £1,000 per shop. o A large business with 50 shops pays £1,000 for a TV advert = £20 per shop. Financial economies: Large businesses are likely to find it easier to borrow money at lower
interest rates, because they have a proven track record of being able to pay creditors back. Technical economies: Large businesses can afford new technology (e.g. robots in factories &
automated IT systems) that allow them to reduce unit costs in the long term (they can reduce costs associated with employees; recruitment, training, and wages / salaries).
Lower unit costs are good because:
a) A business makes a larger profit margin on each unit sold. OR b) A business is able to reduce its prices to customers and be more competitive.
2.1 The role of marketing
The objectives of the marketing department are to…
The primary objective of the marketing department is to increase sales. Broadly speaking, they do this by:
Carrying out market research to identify customer needs. Making decisions on the Marketing Mix (the 4 Ps) which are appropriate to the target audience.
Informing customers about their products and services (e.g. by advertising) and persuading them to buy them (e.g. using special offers).
2.2 Market research
What is market research?
Market research is how businesses collect information on whether or not their products or services will be bought. Why is market research important?
Will help a business be clear on whether there is demand for their product/service Market research avoids unnecessary investment.
Methods of market research
Primary research (field) Secondary research (desk) Definition: Brand new information that is collected by the business.
Definition: When a business uses information that already exists.
Examples: Questionnaire Survey Interview Focus group Trials - sold for a short time as a test in a much smaller area.
Examples: The internet Magazine / newspaper articles Government reports & census Competitors’ websites
Advantages: It is up-to-date. It is collected for your specific purpose (e.g. your market / target audience). It can be trusted because YOU gathered it.
Advantages: It is quick to collect. It can be cheaper than primary research. There is a wide range of information available on the internet.
Disadvantages: It can be very expensive to collect. It can be time consuming to collect. Poorly designed questionnaires give poor quality results.
Disadvantages: It could be out-of-date. The source might be biased / untrustworthy. The data might not be wholly relevant / specific to you because it was gathered for a different purpose.
Q ualitative and quantitative data:
Definition & examples
Qualitative data
This is data related to attitudes, opinions and feelings. For example, the reasons why you do / do not buy a particular product, and your feelings about a particular brand. It is difficult to statistically analyse this data, but it can give you more detailed information.
Quantitative data
This is data related to numbers (quantity). For example, the number of times you go shopping per week, or the number of hats you own. This data can be added up and statistically analysed.
2.3 Market segmentation
Segmentation is the splitting of the market for a product or service into different parts, or
segments.
Five ways that the population can be segmented into groups: Age
Gender Income
Location Lifestyle
2.4 The marketing mix
PRODUCT
Four features of a good product : It is innovative (e.g. unique, creative, original).
It is made to a good standard (high quality). It is functional (it does what it is supposed to do).
It meets the needs of the customer.
The benefits of ‘ branding ’: Brand loyalty – well-known brands (e.g. Coca Cola, Tesco, & Apple) tend to have loyal customers
who return to them again and again. Higher price – well-known brands are able to charge a much higher price for their goods and
services than non-branded goods.
PRICE
P ricing methods :
Method Definition, example, pros & cons
Skimming
Price skimming is where the price of a product starts high because the product is new / unique and demand is likely to be high. Then the price comes down in stages as demand falls over time. Examples: A new games console or mobile phone – starts at £299, then comes down to £249 six months later, then £199, etc. Allows a business to maximise sales revenue whilst the product is in high demand, to pay off the research and development costs. Allows a business to target consumers on lower incomes as demand falls, so that all target groups pay the maximum they are willing to pay. Businesses need to be careful not to set the price too high initially as it might put customers off. Technology and fashions can change quickly, so there may only be a very short period during which the business can charge the maximum price. Some customers will simply wait for the price reduction.
Cost-plus
Cost-plus is when a business looks at how much it cost them to make / buy the product from a supplier, and then adds on a percentage in order to ensure they make a profit (after all other costs have been paid for). For example, if it cost £5 to make a pair of shoes, then a business might choose to charge cost-plus 200% = £15. The business will make a ‘gross profit’ of £10 on each pair of shoes sold. However, once all the other running costs of the business have been deducted (e.g. rent, bills, advertising), then whatever left is referred to as ‘net profit’. It’s a good way to ensure that products sold actually make a profit (by covering the cost of making / buying it, plus other running costs). Cost-plus alone might be difficult to use, especially in a competitive market (price might be too high compared to competition). As costs change, time & money needs to be spent to keep changing the prices. Whilst it is fairly easy to calculate the cost of making / buying each product, it can be difficult to know how much to charge to cover all the running costs of the business (fixed costs).
Penetration
Penetration pricing is when a business tries to enter a competitive market by starting off with a low price (for a limited time). Once a customer base / market share has been established, they will put prices up. New customers might be attracted to try the new product, and then continue buying it if they like it. During the initial low price period, the business might not make enough revenue to cover costs. If brand loyalty amongst competitors is very high, the business might not attract many customers despite the low price. A low price might present an image of low quality.
Competitor
This is where a business keeps a close eye on competitors’ prices and tries to match or beat them. Example: Often used by the supermarkets. Customers like to shop around for the best price, so this can help to attract customers away from competitors. Lowering prices to match / beat competitors can damage profit margins. Small businesses will find it hard to match / beat the prices of competitors because they do not benefit from economies of scale – for example, a large supermarket like Tesco can buy in bulk from suppliers, get a discount, thus the cost per unit is lower than a corner shop would be able to get.
Promotional
Promotional pricing is the short term use of price reductions and special offers to increase sales. Examples: It can be used in the clothing industry at the end of the ‘season’ in order to clear out old stock that is no longer in fashion / for the wrong season, to make way for new stock. A good way to increase sales in the short term. Whilst buying products on promotion, customers may buy other more profitable items in the shop. Clear out old stock to generate cash to be used to buy new stock (improves cash flow). Each item is sold for less revenue / a lower profit margin than its original price. Some customers may just wait for the sales. It costs money to advertise promotional offers.
The producer will have to sell the item to the wholesaler at a much lower price to allow them to add on their ‘mark-up’ to the retailer, who in turn will need to add on their mark-up to the customer. By the time the product reaches the customer, it may not be in perfect condition – possible damage to brand image.
Producer Agent Customer
An agent is someone / a business that gives a business specialist advice on how to enter a new market (e.g. a new country, or an unknown product area). Example: This might be used by a UK business wishing to expand into a foreign country. The agent is likely to have specialist knowledge of the new market which increase the chance of success. For example, when expanding abroad, the agent might know the local language, culture, trends, laws, suppliers, competitors, etc. The agent is likely to charge a fee for their services and / or take a commission on sales.
What is meant by the term ‘digital distribution channel’:
Digital distribution channels are used to deliver goods and services via the internet, where no physical product exists. For example, e-books from Amazon, digital music from Apple, films and TV programmes from Google Play. Digital distribution can be good as customers can receive their purchase immediately, 24/7, and the business has no transport costs. However, there can be technical issues, not all consumers have the internet, and illegal copying means that many customers find a way to avoid paying for digital goods and services. Also, it may cost a lot initially to set up the digital distribution system (e.g. iTunes).
PROMOTION
Aims of promotion
To inform customers about a product or service To keep a business ahead of its competitors To create or change the image of a business, its products and services To maintain or increase sales.
A dvertising methods:
Method Definition, example, pros & cons
Social media
Social media involves businesses using platforms such as Facebook, Twitter and Instagram to communicate with their customers. Examples: Most businesses use social media these days e.g. Nike, Tesco and McDonald’s. Can be cheap to use (compared to TV). Can target large, specific audiences. Quick to communicate (TV can take months to make an advert). There are many forms of social media – it may be expensive to target all of them (Facebook, Twitter, Snapchat, Instagram & YouTube). Message may be distorted through social media users – e.g. ‘re- tweeting’ in a silly / negative way. May require an employee to manage / monitor the social media accounts. Not used by every market segment – the elderly?
Websites
This is where a business has a presence on the internet; either to just advertise / promote their brand, or possibly to enable actual online sales. Example: Most businesses have a website these days – e.g. Tesco.com was the first UK supermarket to enable online sales. Growing use of the internet = more potential customers. Can use moving images (video) as well as detailed written information. Can include detailed information (e.g. phone number, specifications). Can link the customer to purchase immediately / directly. Can update seasonal promotions quickly & cheaply (e.g. Valentine’s day). Not used by all groups of people (e.g. less so by the elderly). Can be expensive to set up the website in the first place, and to manage the deliveries (delivery vans, petrol, drivers needed). Most businesses have a website these days, so hard to differentiate (make yours stand out from the crowd). Potential of cyber hacking – e.g. customer details being stolen, creating a bad brand image.
