IGCSE Business Studies: Section 1 Study Notes

Section 1: Understanding Business Activity

Chapter 1: Business Activity and Economic Sectors

1. Needs vs. Wants

To understand business, we must first understand the fundamental human

desires that drive all economic activity. Humans require certain things to live,
but we also desire many things that make our lives more comfortable or
enjoyable.

 Need: A good or service essential for living.

o Textbook Examples: Water, basic food, shelter, clothing.

o Key Characteristic: Human needs are limited and finite. There

is a specific, limited list of physical requirements that humans
must have to survive.

 Want: A good or service which people would like to have, but which is
not essential for living.

o Textbook Examples: A brand-new mobile phone, a luxury car,

designer clothes, or overseas holidays.

o Key Characteristic: Human wants are unlimited and infinite.

Once one want is satisfied, humans naturally develop another
(e.g., once you have a functional phone, you eventually want a
newer model with a better camera).

2. The Economic Problem and Scarcity

Because human wants are infinite, but the resources needed to produce
them are limited, we face the fundamental economic problem.

📖 Definition to Learn: A Business A business is an organisation that

combines factors of production to make products (goods and services) which
satisfy people's wants.

 Goods are physical, tangible products that can be touched and seen
(e.g., cars, clothing, food).
  Services are intangible products that cannot be touched (e.g.,
banking, insurance, tourism, education).

📖 Definition to Learn: Scarcity Scarcity is the lack of sufficient resources

to fulfill the total wants of the population. It is the basic economic problem.

 The Cause of Scarcity: Scarcity is not caused by a simple lack of

money. It is caused by the imbalance between unlimited wants and
limited resources (factors of production). There will never be
enough resources on Earth to satisfy every single human want.

3. The Four Factors of Production

To produce any good or service, a business must gather and combine

resources. These resources are classified into four factors of production:

Factor of Detailed Explanation Practical Examples

Productio
n

Land All natural resources provided by Fields for farming, forests

nature that are used to produce for timber, oil, natural gas,
goods or services. This includes copper, iron ore, coal, and
resources on the surface, clean water.
underground, or in the atmosphere.

Labour The human effort—both physical and Factory assembly workers,

mental—available to make products, software engineers, school
including the specialized skills and teachers, office
training of the workforce. administrators, and
construction workers.

Capital The finance, machinery, and Computers, heavy factory

equipment needed for the machinery, delivery trucks,
manufacture of goods or the warehouse buildings, and
provision of services. Important: In the start-up cash used to
business, capital is also defined as purchase them.
the money invested by owners to buy
these physical assets.

Enterpris The skill, initiative, and risk-taking The entrepreneur who

e ability of the person who brings the identifies a gap in the
 other three resources (land, labour, market, risks their own
and capital) together to start a savings, and manages the
business and produce a good or daily operations of the
service. business.

4. Opportunity Cost

Because resources are scarce, individuals, businesses, and governments

cannot have everything they want. Every choice made involves a trade-off.

📖 Definition to Learn: Opportunity Cost Opportunity cost is the value of

the next best alternative given up by choosing another item. It is the cost of
the "missed opportunity."

Real-World Examples of Opportunity Cost:

 For Individuals (Consumers):

o Scenario: You have $50. You can either buy a textbook for school
or a new video game.

o Choice: You decide to buy the textbook.

o Opportunity Cost: The video game (the next best alternative you
had to give up).

 For Businesses:

o Scenario: A manufacturer has limited space in its factory. It can

either install Machine A to make plastic bottles or Machine B to
make glass jars.

o Choice: The business decides to buy Machine A.

o Opportunity Cost: The production and potential profits from

Machine B.

 For Governments:

o Scenario: A government has a budget surplus of $10 million. It

can either build a new public hospital or construct a highway
bypass.

o Choice: The government decides to build the hospital.

 o Opportunity Cost: The improved transport times and economic
activity that the highway bypass would have provided.

5. Added Value

Added value is one of the most critical concepts in business. It explains why
a business can survive and make a profit.

📖 Definition to Learn: Added Value Added value is the difference between

the selling price of a product and the cost of the bought-in materials and
components used to make it.

┌───────────────────────────────────────────────────────────────
─────────┐

│ Formula: Added Value │

│ │

│ Added Value = Selling Price - Cost of Bought-in Materials │

└───────────────────────────────────────────────────────────────
─────────┘

⚠️Critical Exam Warning: Added Value is NOT Profit!

 Added Value is the difference between the selling price and raw
material costs.

 Out of this added value, a business must still pay for all other
expenses, such as:

o Labour costs (wages and salaries)

o Factory rent or mortgage payments

o Electricity, water, and heating bills

o Advertising and marketing campaigns

o Taxes and interest on loans

 Profit is what is left over only after all of these other expenses have
been subtracted from the added value.

Real-World Case Studies of Added Value:

 House Construction Example:

 o A newly built house sells for $200,000.

o The raw materials used (bricks, cement, timber, wiring, roofing

tiles) cost $35,000.

o The Added Value is:

o This $165,000 is used to pay the construction workers' wages,

design fees, equipment rental, and provide profit to the builder.

 Rakesh’s Bakery (Textbook Case Study):

o Rakesh sells bread, cakes, and biscuits. He uses raw ingredients

(flour, sugar, butter) that cost 50 cents per cake.

o If Rakesh sells the cake for $1.50, his added value is:

o If customers want to sit down inside his bakery and have the
cake served on a plate with clean cutlery, Rakesh can charge
$2.00 for the same cake. His new added value is:

o By improving the service, presentation, and seating environment,

Rakesh has successfully increased his added value by 50
cents without increasing his raw material costs!

 Starbucks (Textbook Case Study):

o Starbucks adds value to its coffee in several ways. Rather than

just selling a cup of coffee, they:

1. Create a high-quality, recognizable brand image

associated with ethical sourcing and premium quality.

2. Design their cafés to be comfortable, social spaces with

soft seating, pleasant music, and free Wi-Fi.

3. Allow customers to customize their drinks with different

milks, syrups, and toppings.

o These factors explain why customers are willing to pay a much

higher price for a Starbucks coffee than for coffee from a basic
street cart, significantly increasing Starbucks' added value.

How a Business Can Increase Added Value:

1. Increase the selling price but keep material costs the same:
 o How? By building a strong brand image (e.g., Apple), improving
the packaging to look luxury, offering excellent customer service,
or introducing unique product features.

o Risk: If the price is raised too high without a genuine increase in

perceived quality, customers may switch to cheaper competitors.

2. Reduce the cost of bought-in materials but keep the selling

price the same:

o How? By finding cheaper suppliers, negotiating bulk-buying

discounts, or reducing material waste on the factory floor.

o Risk: Reducing material costs might result in lower-quality

products, which could damage the brand's reputation and lead to
falling sales.

6. Economic Sectors

All production in an economy can be divided into three stages of economic

activity:

[ Primary Sector (Extraction) ] ➔ [ Secondary Sector (Manufacturing) ] ➔

[ Tertiary Sector (Services) ]

📖 Definitions to Learn: Economic Sectors

 Primary Sector: Extracts and uses the natural resources of the Earth
to produce raw materials.

 Secondary Sector: Manufactures, processes, and assembles finished

goods using raw materials.

 Tertiary Sector: Provides services to consumers and other

businesses.

Examples of Sector Activities:

 Primary Sector: Mining (coal, gold, copper), farming/agriculture,

forestry (timber), fishing, oil drilling.

 Secondary Sector: Car assembly plants, clothing factories, food

processing (baking), construction of houses, steel production.

 Tertiary Sector: Retailing (shops), banking, transport (airlines, bus

services), insurance, tourism, hairdressing, education.
The Chain of Production (The Wooden Table):

The three economic sectors are deeply interdependent (they rely on each
other). Consider how a table reaches a consumer:

1. Primary Stage: A woodcutter extracts timber by cutting down trees in

a forest.

2. Secondary Stage: A manufacturing factory buys the raw timber, cuts

it, shapes it, and assembles it into a finished wooden table.

3. Tertiary Stage: A retail furniture shop buys the table from the factory,
displays it in a showroom, and sells/delivers it to the final customer.

7. Private and Public Sectors

Most economies are mixed economies, meaning they have both a private
sector and a public sector.

📖 Definitions to Learn: Private and Public Sectors

 Private Sector: Businesses owned and controlled by private

individuals, typically with the primary objective of making a profit.

 Public Sector: Organisations and industries owned and controlled by

the government or state, with the primary objective of providing
essential public services.

Common Public Sector Activities:

 Health services (hospitals)

 State education (schools and universities)

 National defence (army, navy, air force)

 Public transport (railways, public bus networks)

 Infrastructure and utilities (water supply, electricity grid)

 Public facilities (libraries, parks)

Comparison of Private and Public Sectors:

Secto Core Advantages Disadvantages

r Objectives

Priva * Maximize * High efficiency: * Monopolies: A single

te profit..* Grow Motivated by profit to dominant firm can exploit
Secto market share..* keep costs low and customers by charging
r Survival in eliminate waste..* very high prices..* Social
competitive Competition: Forces Costs: May ignore
markets. businesses to offer low pollution, waste, and
prices and high quality..* employee welfare to cut
Innovation: Encourages costs..* Neglect of Non-
businesses to invest in Profitable Goods: Will not
research to create new produce goods that are
products. socially necessary but do
not yield profit.

Publi * Provide * Universal access: * Inefficiency: Lack of

c essential Essential services profit motive and
Secto services..* (healthcare, education) competition can lead to
r Ensure equal are provided to everyone high waste and
access for all regardless of income..* bureaucracy..* Slow
citizens..* Social Welfare: Focuses Decision-Making: Highly
Protect jobs and on social costs and bureaucratic systems with
local benefits rather than pure many layers of approval..*
communities. financial profit..* Job Tax Burden: Inefficient
Security: Protects state-run firms must be
critical industries and funded by taxpayers,
jobs from sudden closure. raising national tax rates.

Quick Revision Tips for Chapter 1:

 Added Value vs. Profit: This is a classic exam trick! Remember:

 Interdependence: When discussing economic sectors, explain how a

strike in the primary sector (e.g., steel workers) halts production in the
secondary sector (car manufacturing) and leaves the tertiary sector
(car sales) with no products to sell.

 The Mixed Economy: Remember that most countries are mixed

economies. A government may choose to keep services like water,
police, and roads in the public sector because they are too essential to
be left to the profit-driven private sector.
Chapter 2: Enterprise, Business Growth and Size

1. Enterprise and Entrepreneurship

An entrepreneur is the vital spark that starts new business activity, driving
employment and economic development.

📖 Definition to Learn: Entrepreneur An entrepreneur is a person who has

an idea for a business, takes the financial risk of starting and managing it,
and accepts the potential risks and rewards of the new venture.

Seven Key Characteristics of Successful Entrepreneurs:

1. Hard working: Start-ups require long, exhausting hours, often without

pay initially.

2. Risk taker: Willing to risk their personal savings, security, and career
on an unproven idea.

3. Optimistic: Focuses on opportunity and success, keeping going even

when things go wrong.

4. Self-confident: Believes in their own ability and business idea,

allowing them to convince banks and suppliers to support them.

5. Innovative: Able to come up with new business ideas, find unique

solutions, or identify gaps in the market that competitors have missed.

6. Independent: Comfortable being their own boss, making decisions

without guidance, and taking complete responsibility.

7. Effective communicator: Able to negotiate deals with suppliers,

persuade bank managers to lend money, and motivate employees.

Real-World Case Study: Dr. Wedu Tose Somolekae (Botswana)

 Dr. Somolekae dreamed of becoming a paediatrician, but realized there

was an underserved market for advanced aesthetic medical services.

 In 2021, she took the entrepreneurial risk to resign from her secure job
as a medical officer in Johannesburg and founded her own beauty and
aesthetic clinic in Gaborone, Botswana.

 She combined her medical skills with business innovation, showing key
entrepreneurial characteristics: risk-taking, self-confidence, and a hard-
working nature to establish a highly successful clinic.

Advantages and Disadvantages of being an Entrepreneur:

Advantages Disadvantages

* Independence: Complete freedom * High Risk of Failure: A high

over how the business is run; you are percentage of new start-ups fail
your own boss..* Creative Control: within the first few years due to
Freedom to put your own ideas, intense competition or poor cash
vision, and values into practice..* flow..* Capital at Risk: The
High Income Potential: If the entrepreneur may lose all of their
business is highly successful, the personal savings or end up with
entrepreneur keeps all profits, earning significant debt if the business fails..*
far more than a salary..* Personal Opportunity Cost: Giving up a
Satisfaction: Pride in building a secure, regular salary and benefits
business from scratch and creating from an established job..* High
jobs. Stress & Long Hours:
Entrepreneurs often work 70+ hours a
week, leaving little time for family or
leisure.

2. The Business Plan

To minimize the risks of starting a business, an entrepreneur must compile a

business plan.

📖 Definition to Learn: Business Plan A business plan is a written

document that describes a business, its objectives, its strategies, the market
it is in, and its financial forecasts.

Eight Key Elements of a Business Plan:

1. Summary: A brief, engaging overview of the business concept, the

product, and the background of the entrepreneur.

2. Objectives: Clear, measurable targets the business hopes to achieve

over a set period (e.g., survive the first year, achieve $50,000 in sales,
or capture 5% of the local market).

3. Resources: Details of the physical resources needed (e.g., location,

premises, specialized machinery, equipment).

4. Market Research: Data demonstrating that a market exists for the

product, including information about customer demographics, pricing,
and main competitors.
 5. Marketing Plan: How the product will be promoted, priced, packaged,
and distributed to customers.

6. Human Resources (People): The management structure, roles, and

number of employees needed, along with their required skills.

7. Operations: Detailed explanation of how the product will be

manufactured or how the service will be provided.

8. Finance: Crucial financial projections, including:

o Forecast Profit and Loss Account

o Cash Flow Forecast (detailing cash inflows and outflows month-

by-month)

o Sources of Capital (how much the owner is investing and how

much is needed from loans)

Why a Business Plan is Critical:

 Securing Bank Loans: Bank managers will refuse to lend money to a

start-up without a business plan. They use it to assess whether the
business can afford to pay back the loan with interest.

 Reducing Risk: Writing the plan forces the entrepreneur to research

the market and find potential problems (e.g., high rent or intense
competition) before spending money.

 Setting Goals: It provides clear targets for the business to monitor its
progress during its critical early months.

3. Government Support for Start-ups

Governments want to encourage new businesses to set up.

Why Governments Help:

 Reduce Unemployment: New businesses create jobs, which reduces

government spending on unemployment benefits.

 Increase Competition: New firms challenge established ones,

encouraging innovation, forcing down prices, and giving consumers
more choice.
  Economic Growth: New businesses increase the total output of the
economy (GDP).

 Social Benefits: Some start-ups focus on disadvantaged areas or

green technologies, helping the environment or local communities.

How Governments Provide Support:

 Grants: Providing cash sums to cover start-up costs. Unlike loans,

grants do not have to be repaid.

 Low-interest loans: Reducing the interest rates on loans to make

borrowing capital more affordable.

 Advice & Training: Setting up business centers that offer free

mentorship, legal advice, and accounting courses to new
entrepreneurs.

 Cheap premises: Renting out government-owned factories or office

spaces at highly subsidised, low rents.

 Tax breaks: Allowing new businesses to pay lower tax rates on their
profits for the first few years.

4. Measuring Business Size

Businesses range from small corner shops to massive multinational

corporations. We need standard ways to measure and compare business
size.

Four Main Methods of Measuring Business Size:

Measuremen How it works Detailed Limitations

t Method

Number of Counting the total Capital-intensive firms use

Employees number of full-time advanced automation and computer
and part-time technology to produce massive
workers employed by volumes of output with very few
the business. employees (e.g., an automated oil
refinery vs. a labour-intensive clothing
factory).

Value of Calculating the total High-priced luxury businesses (e.g., a

Output / monetary value of hand-crafted diamond jeweler) might
Sales sales made by the have high revenue while selling very
Revenue business over a year. few items, making them appear larger
than a mass-market business with thin
profit margins.

Volume of Counting the actual You cannot easily compare different

Output physical quantity of industries. For example, you cannot
goods produced or compare a coal mine producing 10,000
services sold in a tons of coal with a luxury watch
year. manufacturer producing 500 gold
watches, even though the watchmaker
might be far more valuable.

Capital The total value of Different industries require vastly

Employed capital invested into different capital. A retail clothing store
the business (e.g., or hair salon needs very little capital
machinery, buildings, compared to a car manufacturer or
technology) to nuclear power plant, even if they have
generate profits. similar sales levels.

Crucial Exam Rule: Profit is NOT a good measure of business size. A

massive multinational airline can operate at a multi-million-dollar loss, while
a small, local online software company can be highly profitable with only
three employees.

5. Business Growth: Internal vs. External

Many businesses aim to grow over time to increase profits, achieve market
dominance, or benefit from economies of scale (lower average costs of
production as size increases).

 Internal (Organic) Growth: Expansion of the business using its own

resources and activities.

o How? Developing new products, opening new branch locations,

or targeting new export markets.

o Advantage: Gradual, easier to manage, and funded by the

business's own profits.

o Disadvantage: Can be very slow compared to buying other

businesses.
  External (Inorganic) Growth: Expansion by joining forces with, or
buying, another business.

o Merger: Two or more businesses agree to join together to form

one single, new company.

o Takeover (Acquisition): One business buys out the owners of

another business (usually by buying a majority of its shares),
which then becomes part of the buying company.

The Four Types of Integration (External Growth):

[ Backward Vertical Integration ] ➔ Sells to you (e.g., supplier)

▲
│

[ Horizontal Integration ] ➔ [ YOUR BUSINESS ] ➔ [ Horizontal Integration ]

(e.g., competitor)

▼
[ Forward Vertical Integration ] ➔ You sell to them (e.g., retailer)

(Plus Conglomerate Integration ➔ Merging with a business in an entirely

unrelated industry).

Analysis of Integration Types:

Integration Detailed Real-World / Key Key

Type Explanation Textbook Advantages Disadvantages
Example

Horizontal Merging with PVR merger * Eliminates a * Regulators

Integration or taking with INOX direct may block the
over a Leisure: Two competitor..* merger to
business at major Indian Achieves rapid prevent a
the same cinema chains economies of monopoly..*
stage of merged to scale..* Clash of
production eliminate Increases corporate
in the same competition, market share cultures can
industry. increase market and power. cause staff
share, and friction.
negotiate
 better deals
with film
distributors.

Backward Merging with A bakery taking * Secures * The supplier

Vertical or taking over a flour supply of raw business may
Integration over a mill, or a materials..* lack external
business at chocolate Prevents customers..*
an earlier manufacturer competitors Management
stage of buying a cocoa from accessing may lack
production plantation. materials..* experience in
(closer to Absorbs the running a raw-
raw supplier's profit material
materials) in margin, lowering business.
the same costs.
industry.

Forward Merging with A clothing * Secures * Lack of retail

Vertical or taking manufacturer retail outlets management
Integration over a buying a chain for products..* experience..*
business at a of retail Allows direct Consumers
later stage clothing shops, promotion and might prefer a
of or an oil branding to wider variety of
production extraction consumers..* brands in a shop
(closer to the company Absorbs the rather than just
consumer) in buying petrol retail shop's one
the same stations. profit margin. manufacturer's
industry. brand.
Conglomer Merging with A clothing * * Lack of direct
ate or taking manufacturer Diversification industry
Integration over a taking over a : Spreads risk knowledge can
business in a software across different lead to poor
completely development markets (if one decision-
unrelated company, or a market crashes, making..*
industry. food brand others Difficult to
buying an survive)..* manage a
electronics Transfer of highly diverse
manufacturer. general business
management portfolio.
skills.

6. Why Some Businesses Remain Small

While many businesses grow, the majority of businesses in the world remain
small.

 Type of Industry: Some industries offer personal services (e.g.,

hairdressing, plumbing, massage therapy, car repairs). These depend
on personal contact and trust, which cannot easily be mass-produced.

 Market Size: If the total number of customers is small or highly

localized (e.g., a small village grocery shop, or high-end luxury items
like custom sports cars), the business cannot grow large because there
is not enough demand.

 Owner’s Objectives: Some owners prefer to keep the business small.

This allows them to:

o Maintain complete control over all decisions.

o Keep personal contact with customers and staff.

o Avoid the stress and long hours associated with managing a

large company.

 Limited Access to Capital: Small businesses find it much harder to

obtain bank loans for expansion because they represent a higher risk
to lenders.

7. Why Businesses Fail

Even well-established businesses can fail. The main reasons include:

 Poor Management Skills: Lack of experience, bad decision-making,

poor leadership, or failure to manage staff.

 Poor Financial Management (Cash Flow Crisis): Running out of

cash to pay daily bills (lack of liquidity). A business can be highly
profitable on paper, but if its customers delay payment, it will go bust
because it cannot pay its rent, wages, or suppliers.

 Failure to Plan for Change: Failing to adapt to changes in

technology (e.g., Kodak failing to adapt to digital cameras), consumer
tastes, or new competitors.

 Over-expansion: Growing too quickly before the business has the

cash or management structure to handle the larger operations, leading
to a collapse of control.

Quick Revision Tips for Chapter 2:

 Integration Memory Trick:

o Horizontal = same level (side-by-side).

o Vertical = different level (up or down). Backward goes back to

the farm/factory; Forward goes forward to the shop/customer.

o Conglomerate = totally different industry.

 Measuring size limitations: When answering questions about

business size, always evaluate at least two methods and explain why
one of them might give a misleading picture (e.g., why number of
employees doesn't work for highly automated factories).

Chapter 3: Types of Business Organisations

Before a business starts, the owners must decide on its legal structure. This
decision determines who owns the business, who controls it, and who is
responsible for its debts.

Key Legal Concepts:

  Unlimited Liability: The owners of a business are personally
responsible for all of the debts of the business. If the business fails and
cannot pay its debts, the owners' personal assets (e.g., house, car,
personal savings) can be taken by force and sold to pay back creditors.

 Limited Liability: The liability of shareholders in a company is limited

only to the amount they invested. If the company goes bankrupt, the
shareholders can only lose the money they spent buying shares. Their
personal assets are completely protected by law.

 Unincorporated Business: A business that does not have a separate

legal identity from its owners. The owner and the business are legally
one and the same (e.g., Sole Traders, Partnerships).

 Incorporated Business: A business that has a separate legal identity

from its owners. The company can own property, sue, and be sued in
its own name. The owners are shareholders (e.g., Ltd, Plc).

1. Sole Trader

A sole trader is a business owned and controlled by one individual. It is the

most common form of business structure in the world.

Sole Trader Pros and Cons:

Advantages Disadvantages

* Few legal formalities: Very * Unlimited liability: High personal

cheap, quick, and easy to set up. risk if the business goes bankrupt..*
Minimal registration required..* Difficult to raise capital: Banks are
Keep all profits: The owner does reluctant to lend to sole traders, and
not have to share the business's capital is limited to the owner’s
profits with anyone else..* personal savings..* High stress &
Complete control: You are your workload: The owner has to manage
own boss and can make instant everything (sales, accounts, marketing)
decisions without consulting and has no one to share decisions
others..* Close customer contact: with..* No continuity: If the owner
Personal service builds strong falls ill, the business must close. If the
customer loyalty..* Privacy: owner dies, the business legally ceases
Business accounts do not have to be to exist.
published or shared with the public.
2. Partnership

A partnership is a business agreement between 2 and 20 people to jointly

own and run a business.

📖 Definition to Learn: Partnership Agreement A Partnership Agreement

is a written, legal document that outlines how the partnership will be run,
including profit-sharing ratios, roles, voting rights, and what happens if a
partner leaves or dies.

Partnership Pros and Cons:

Advantages Disadvantages

* More capital can be raised: * Unlimited liability: All partners

Multiple partners can contribute their are personally liable for the
own savings to the business..* business's debts, and they are legally
Shared workload: Responsibilities, responsible for any mistakes made by
decisions, and daily management other partners..* Potential for
tasks are shared among partners..* conflict: Disagreements over
Specialized skills: Partners can bring business decisions, hours worked, or
different expertise (e.g., in a law firm, strategy can destroy the
one partner might specialize in tax partnership..* No separate legal
law, another in criminal law)..* Cover identity: The partnership is legally
for illness: If one partner is ill or on bound to the owners..* Limited
holiday, the others can keep the growth: Capital is still limited
business running. compared to companies, and the
number of partners is restricted
(usually to 20)..* No continuity: The
partnership automatically dissolves if
a partner leaves or dies, requiring a
new agreement to be drawn up.

3. Private Limited Company (Ltd)

A Private Limited Company is an incorporated business owned by

shareholders.

Key Characteristics of an Ltd:

 Shares can only be sold privately to friends, family, or business

associates.
  Shares cannot be sold to the general public on the Stock Exchange.

 Two key legal documents are required to set up:

o Memorandum of Association: Outlines the company name,

registered office, and purpose.

o Articles of Association: Rules for the internal running of the

company (e.g., how directors are elected, how meetings are
held).

Ltd Company Pros and Cons:

Advantages Disadvantages

* Limited liability: Shareholders are * Legal setup costs: Complex and

protected; they can only lose their expensive legal setup process with
investment in the shares..* Separate registration fees..* Cannot sell
legal identity: The company shares to the public: This limits the
survives even if shareholders sell total amount of capital the business
their shares or die (continuity)..* can raise..* Loss of privacy:
More capital: Can raise significant Company accounts must be registered
finance by selling shares to new with the government, making them
investors..* Control is protected: semi-public..* Transfer of shares is
Because shares are sold privately, difficult: Shareholders need the
the founders can refuse to sell shares permission of other shareholders to
to outsiders, protecting themselves sell their shares.
from a takeover.

4. Public Limited Company (Plc)

A Public Limited Company is a large incorporated business owned by

shareholders, with the legal right to sell shares to the general public.

Key Characteristics of a Plc:

 Shares are listed on the national Stock Exchange (e.g., London Stock
Exchange, New York Stock Exchange).

 Anyone in the general public can buy shares in the company.

 Subject to strict legal regulations to protect the public's money.

Plc Company Pros and Cons:

Advantages Disadvantages

* Limited liability for all * Extremely complex setup: Very

shareholders..* Massive capital expensive legal processes, requiring
potential: Can raise millions of lawyers and financial advisers..*
dollars by selling shares to the global Divorce of Ownership and Control:
public on the Stock Exchange..* High Shareholders (owners) elect a Board
status: High reputation makes it of Directors to run the company. The
easier to secure bank loans at lower directors may make decisions that
interest rates..* Continuity: Easy benefit themselves rather than the
transfer of shares ensures the shareholders..* Risk of hostile
business survives forever. takeover: Anyone can buy shares. If
a competitor buys more than 50% of
the shares, they take control of the
company..* Total loss of privacy:
Financial accounts must be fully
published, allowing competitors to see
cost and profit details.

5. Alternative Business Structures

 Franchise: A business system where an entrepreneur (the

franchisee) buys the right to use the brand name, logo, products, and
business model of an established business (the franchisor).

Franchise Pros and Cons:

Perspecti Advantages Disadvantages

ve

Franchise * Lower risk: Using an * Cost: Must pay a large initial

e (The established, successful brand franchise fee to buy the
Buyer) name reduces the risk of rights..* Royalties: Must pay a
failure..* Support: The franchisor percentage of monthly sales
provides free training, marketing (royalties) to the franchisor..*
materials, and supplier No freedom: Cannot change
contacts..* Bank loans: Banks prices, products, or shop
are far more willing to lend design to suit local tastes.
money to set up a known
franchise.
Franchiso * Rapid expansion: The * Reputation risk: A poor
r (The business grows quickly using the franchisee who offers bad
Seller) franchisee's capital rather than service can ruin the reputation
its own money..* Highly of the entire global brand..*
motivated managers: Loss of direct control:
Franchisees work harder than Cannot manage daily
regular employees because their operations in individual shops.
own money is at risk..*
Guaranteed income: Receives
regular royalty payments.

 Joint Venture: Two or more businesses agree to start a new project

together, sharing capital, risks, and profits.

o Real-World Case Study: BMW Brilliance Automotive:

 BMW partnered with Brilliance China Automotive to design,

produce, and sell BMW cars in China. This joint venture
allowed BMW to gain vital local market knowledge and
navigate Chinese regulations, while Brilliance benefited
from BMW’s world-class engineering and technology.

o Advantages: Shared development costs, combined expertise,

easier access to foreign markets.

o Disadvantages: High potential for disagreements over

management styles, profits must be shared, different corporate
cultures.

 Social Enterprise: A business with social or environmental objectives

as well as profit objectives.

o Key Concept: Operates on the Triple Bottom Line:

1. Financial: Make a profit to reinvest back into the social

cause (rather than paying dividends to private owners).

2. Social: Provide jobs or support to disadvantaged

communities.

3. Environmental: Protect the planet by using sustainable

practices and reducing pollution.

Quick Revision Tips for Chapter 3:

  Limited Liability Distinction: Make sure you write that limited
liability protects shareholders' personal possessions. It does not mean
the company is immune to debt—the company itself can go bankrupt.

 The Stock Exchange Difference: An Ltd cannot sell shares on the

Stock Exchange. A Plc must have its shares listed and available to the
general public.

 Franchise Royalty Rule: Remember that royalties are paid on sales

revenue, not profit. Even if a franchisee makes a loss in a month, they
must still pay royalties to the franchisor.

Chapter 4: Business Objectives and Stakeholder Objectives

1. Common Business Objectives

An objective is an aim or target that a business works towards. Objectives

give a business direction and motivate managers and employees.

 Survival: The primary objective of any new business during its first
year of operation, or of an established business during an economic
recession. The focus is simply on covering basic costs to avoid closure.

 Profit: The long-term objective of private sector businesses. Profit is

needed to pay returns to the owners (dividends) and provide finance to
reinvest in the business.

 Growth: Expanding the business to increase its output, open new

branches, or gain economies of scale.

 Market Share: The percentage of total market sales held by one

business.

┌───────────────────────────────────────────────────────────────
─────────┐

│ Formula: Market Share (%) │

│ │

│ Market Share (%) = (Sales of Business / Total Market Sales) * 100 │

└───────────────────────────────────────────────────────────────
─────────┘
Worked Example of Market Share:

 The total annual sales revenue of all businesses in the sports shoe
market is $100 million.

 Business A has sales revenue of $20 million in that year.

 The market share of Business A is:

 Providing a Service / Social Benefit: The primary objective of public

sector businesses (e.g., public transport, healthcare) and social
enterprises.

2. Stakeholders and Their Aims

A stakeholder is any person or group that has a direct interest in the

performance and activities of a business. Stakeholders are divided into
internal and external groups.

Internal Stakeholders:

Stakeholder Role in the Business Detailed Objectives

Group

Owners / Provide the capital to * High profits (to receive high

Shareholder start up and expand the dividends)..* An increase in the value
s business. of their shares..* A strong return on
their invested capital.

Managers Control and direct the * High salaries and performance

daily operations of the bonuses..* Job security and career
business. progression..* Status, power, and
prestige (linked to business growth).

Employees Provide the physical * Fair, high wages and salaries..*

and mental labour to Safe, healthy working conditions..*
produce goods/services. Job security (knowing they won’t be
fired suddenly).

External Stakeholders:

Stakeholde Role in the Detailed Objectives

r Group Business

Customers Buy the goods and * High-quality, reliable products..* Fair,

 services produced by value-for-money prices..* Good after-sales
the business. customer service and safety.

Suppliers Sell raw materials, * Regular, high-volume orders..* Fair

parts, and equipment prices for their goods..* Prompt, on-time
to the business. payment for invoices.

Banks / Provide financial * Regular repayment of the loan on

Lenders loans to help the time..* Payment of interest on the
business start up or borrowed amount.
grow.

Governme Provides legal * High tax revenue from business

nt systems, profits..* Job creation to keep national
infrastructure unemployment low..* Compliance with all
(roads), and safety. national laws and regulations.

Local Lives in the * Job opportunities for local citizens..* A

Communit geographical area clean, safe environment (low pollution,
y where the business noise, and traffic)..* Support for local
operates. community groups and facilities.

3. Stakeholder Conflicts

Because different stakeholder groups have different goals, their objectives

frequently clash. A business cannot satisfy all of its stakeholders at the same
time.

Real-World / Textbook Examples of Stakeholder Conflicts:

1. Wages vs. Profits (Employees vs. Shareholders):

o The Conflict: Employees demand higher wages and better

working conditions. Shareholders want to maximize profits.

o The Trade-off: If the business raises employee wages, its

operational costs will increase. This directly reduces the profit
margin, leaving less money to pay dividends to shareholders.

2. Factory Expansion vs. Local Environment (Managers vs. Local

Community):
 o The Conflict: Managers want to build a large factory expansion to
increase production and sales. The local community wants a
clean, quiet neighborhood.

o The Trade-off: The factory expansion will create local jobs, but it
will cause noise pollution, air pollution, and heavy delivery truck
traffic, ruining the local environment.

3. Prices vs. Profit Margins (Customers vs. Shareholders):

o The Conflict: Customers want low prices and high-quality

products. Shareholders want high sales revenue and profits.

o The Trade-off: Lowering prices makes customers happy, but it

reduces the profit margin on each item sold, resulting in lower
profits for owners.

Quick Revision Tips for Chapter 4:

 Stakeholder Definition: Ensure you write that a stakeholder is

anyone interested in or affected by the business. Do not confuse
Stakeholders with Shareholders (shareholders are owners who hold
shares; stakeholders is the broad umbrella term).

 Exam Structure for Conflict Questions: When asked about

stakeholder conflicts in an exam, use this three-step formula to secure
full marks:

1. Identify two specific stakeholders (e.g., Customers vs. Owners).

2. Explain what each stakeholder group wants (e.g., Customers

want low prices; Owners want high profits).

3. Explain why these goals cannot both be met at the same time
(e.g., if prices are lowered, the business's profit margins fall,
reducing the dividends paid to owners).