1. Understanding business activity

Exam analysis

Most tested topics

1.1. Business activity

Factor of production	Meaning in a business
land	natural resources and the site used in production
labour	human effort, skills and time
capital	man-made productive assets such as machinery, tools and buildings
enterprise	organising the other factors, making decisions and taking business risk

Added value is the difference between a product's selling price and the cost of bought-in materials and components. A business can increase it by raising customers' willingness to pay—through quality, design, convenience, service or branding—or by reducing bought-in input costs without damaging the product's appeal.

$added\ value=selling\ price-cost\ of\ bought\! -\! in\ materials\ and\ components$

Opportunity cost is the next best alternative forgone when a choice is made. If enterprise uses limited finance to buy machinery, the opportunity cost might be the marketing campaign that cannot now be funded.

Capital here means productive assets, not simply money. Added value is not the same as profit: wages, rent, utilities and other operating costs still have to be paid from it.

1.2. Economic sectors

A business can be classified in two different ways: by the type of activity it performs and by who owns or controls it. These classifications answer different questions.

Activity sector	Main business activity	Generic example
primary	extracts, harvests or collects natural resources to produce raw materials	a farm extracting crops
secondary	processes raw materials or components into manufactured goods	a factory turning timber into furniture
tertiary	provides services to consumers or other businesses	transport, retailing or banking

Ownership sector	Who owns or controls it?	Typical purpose and finance
private	individuals or privately owned organisations, not the government	usually seeks profit; finance is arranged privately
public	the state or government	provides state-controlled goods or services and uses public finance

The two axes can overlap. For example, a transport provider is tertiary because it supplies a service; it could be private if owned by investors or public if owned by government.

Do not treat 'public sector' as a service category or 'tertiary sector' as an ownership type. One describes ownership; the other describes activity.

1.3. Enterprise, business growth and size

An entrepreneur identifies an opportunity, organises resources and accepts the risk of starting or developing a business. Useful characteristics include initiative, creativity, confidence, resilience, calculated risk-taking, leadership and decision-making; their value depends on how they are applied.

Business-plan element	Question it answers
overview / summary	What is the business, opportunity and overall proposal?
objectives	What measurable results are intended?
resources	What premises, equipment and inputs are needed?
market research and marketing	Who are the customers, competitors and marketing-mix choices?
finance	How much money is needed, where will it come from and what are forecast results?
people	Which skills, roles and staffing are required?
operations	How will the good or service be produced and delivered?

A plan tests feasibility, coordinates decisions, anticipates risks, measures progress and helps persuade lenders or investors. Governments may support start-ups to create jobs, competition, innovation and output through grants, advice, low-cost loans or training.

The overview is a concise whole-plan summary, not a substitute for the detailed sections. A polished plan reduces uncertainty but cannot guarantee success.

Measure	Useful when	Limitation
employees	comparing labour scale	automation and part-time work distort comparison
value of output or sales	comparing money value	prices, inflation and sector differences matter
volume of output or sales	comparing physical scale	units differ and services may lack a common unit
capital employed	comparing productive investment	capital-intensive firms appear larger

Use more than one indicator and compare similar businesses over the same period. A retailer may have high sales but few employees; a manufacturer may employ much capital but sell fewer units.

Profit measures the financial outcome after costs, not business size. A large firm can make a loss and a small firm can earn a high profit.

Owners may seek growth to raise profit, market share, survival, bargaining power, status or economies of scale. Growth is a means to an objective, not automatically an objective worth pursuing at any cost.

Method	How it works	Main trade-off
internal growth	develop new products, capacity or markets using the business's own expansion	usually controlled and gradual, but slower
horizontal integration	merge with or take over a competitor at the same stage	rapid market share and scale, but integration and competition concerns
vertical integration	combine with a supplier or distributor	more control of inputs or routes to customers, but higher complexity and capital need

Rapid growth can strain cash flow, finance, quality, communication, management control and organisational culture. Some businesses remain small because the market is limited, owners value control, capital is scarce, service is personal or growth risks diseconomies of scale.

A merger combines businesses by agreement; a takeover gives one business control of another. Neither guarantees lower costs or higher profit.

Factor	Route to success	Route to failure
management skills	sound planning, control and adaptation	weak decisions or poor cash control
finance	enough working and growth capital	undercapitalisation, high debt or cash shortage
product suitability	solves customer needs at an acceptable value	poor quality, price or market fit
demand	sufficient and growing sales	falling tastes, income or market size
economy	growth and confidence support spending	recession, inflation or high borrowing costs
competition	differentiation and efficient response	stronger rivals take customers or force margins down

Factors interact. Strong demand does not prevent failure if cash arrives after bills are due; finance alone cannot rescue an unsuitable product indefinitely. Diagnosis should connect the factor to sales, costs, cash flow, decisions or customer value.

Success and failure rarely have one cause. Separate profit from cash flow and distinguish an external change from management's response to it.

1.4. Types of business organisation

A suitable business organisation matches the owners' need for finance, control, expertise, continuity and protection from risk. No form is always best: each changes who owns the business, who decides, how capital is raised and who bears losses.

Form	Main features	Advantages	Disadvantages
sole trader	one owner; unincorporated; owner usually has unlimited liability	quick decisions, direct control, keeps profit, simple to establish	limited finance and expertise, heavy workload, no separate continuity, personal assets at risk
partnership	two or more owners share decisions, capital and profit; generally unincorporated	more capital, skills and workload sharing than one owner	profit and control shared, disputes, partners may create liabilities, continuity can be uncertain
private limited company	incorporated; separate legal identity; privately held shares; shareholders have limited liability	protects personal assets, continuity, can raise share capital while retaining closer control	legal formalities, financial disclosure, profit shared; shares cannot be offered to the general public
public limited company	incorporated; limited liability; shares may be offered to the public	access to much larger share capital, continuity and growth finance	expensive regulation and disclosure, ownership/control may separate, takeover pressure and dispersed profit

Form	Relationship	Main gain	Main risk or cost
franchise	franchisor licenses its brand and business system; franchisee pays fees and operates under agreed rules	a tested format, brand and support for the franchisee; faster expansion using franchisees' capital for the franchisor	fees and less freedom for the franchisee; quality-control, support cost and reputation risk for the franchisor
joint venture	two or more businesses cooperate in a separate project or operation	shares cost and risk and combines technology, skills, distribution or local knowledge	profit and control are shared; conflict, cultural differences or leaked knowledge may damage the venture
social enterprise	trades as a business to pursue social or environmental objectives as well as financial sustainability	commercial income can fund the mission and benefit stakeholders	balancing mission with costs and revenue can restrict choices or financial returns

Decision-maker	Advantages	Disadvantages
franchisor selling franchises	rapid expansion, initial fees and royalties, franchisees fund local outlets	less direct control, support/training costs, one weak outlet can damage the brand
franchisee buying a franchise	recognised brand, established methods, training, marketing and supplier support	initial fee and royalties, restricted decisions, dependence on franchisor and other outlets' reputation

For a recommendation, identify the decisive circumstances: capital required, owners' willingness to share control and profit, liability risk, need for specialist or local knowledge, desired speed of expansion, continuity, administrative cost and any social purpose. Then explain why the chosen form fits those circumstances better than the strongest alternative.

Limited liability protects shareholders' personal assets beyond their investment; it does not guarantee that the company will succeed or that lenders will provide finance. A franchise is not the same as a branch: the franchisee owns the outlet but must follow the franchisor's system.

1.5. Business objectives and stakeholder objectives

A business objective is a target the business aims to achieve. It gives direction, helps managers choose between alternatives, coordinates employees and provides a standard for measuring performance.

Objective	What it prioritises	Example indicator
survival	continuing to trade, especially during start-up or difficulty	positive cash flow and bills paid
profit	increasing the financial return from operations	profit value or margin
growth	expanding sales, capacity, employees or locations	sales or output growth
market share	increasing the business's sales relative to the total market	percentage market share

Objectives can change with ownership, business age, competition and economic conditions. A start-up may prioritise survival, then later pursue profit or growth.

An objective is not merely a slogan. It must influence decisions and be measurable enough to review; objectives may also conflict, such as rapid growth versus short-run profit.

Stakeholder	Typical objective
owners / shareholders	profit, dividends, growth and business value
managers	pay, status, job security, resources and meeting performance targets
employees	pay, security, conditions and development
customers	quality, value, choice and reliable service
suppliers	regular orders and prompt payment
lenders / banks	interest paid on time, loan repayment and acceptable risk
government	tax revenue, jobs and legal compliance
local community	jobs with limited noise, congestion or pollution

Objectives conflict when satisfying one group imposes a cost on another. Higher wages may reduce short-run owner profit; lower prices help customers but squeeze margins; expansion may create jobs while increasing local congestion. Managers must judge stakeholder power, urgency, long-run relationships and the business objective.

Managers are internal stakeholders even when they do not own the business. Lenders are external stakeholders: they supply finance but normally seek repayment and interest rather than ownership returns.

1. Understanding business activity

Exam analysis

Most tested topics

1.1. Business activity

Combine resources to add value

1.2. Economic sectors

Classify businesses by activity and ownership

1.3. Enterprise, business growth and size

Turn an enterprise idea into a business plan

Measure business size with the right indicator

Choose how—and whether—a business should grow

Diagnose why businesses succeed or fail

1.4. Types of business organisation

Choose a suitable business organisation

1.5. Business objectives and stakeholder objectives

Use business objectives to guide decisions

Balance stakeholder objectives