OCR GCSE 9-1 Business: My Revision Guide

OCR GCSE (9–1)
BUSINESS
Mike Schofield
9781510423695.indb 1 7/17/18 8:35 AM

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Get the most from this book
Everyone has to decide his or her own revision Tick to track your progress
strategy, but it is essential to review your work, learn
it and test your understanding. When you revise, Use the revision planner on pages 4–5 to plan your
be active. Use a pen. Most people do not remember revision, topic by topic. Tick the boxes for each
everything simply by reading. Make notes, use key topic when you have revised it, tested it using the
words and lists, draw diagrams and pictures and use Now test yourself feature and the online answers
Post-it notes – whatever works for you. and when you have ticked off all the ‘I can’ tasks in
the topic checklist.
These Revision Notes will help you to revise in a
planned way, topic by topic. Use this book as the My revision planner
cornerstone of your revision and don’t hesitate to
write in it – personalise your notes and check your 1 Business activity
7 1.1 Role of business enterprise and entrepreneurship
progress by ticking off each section as you revise. 10 1.2 Business planning
12 1.3 Business ownership

The book has been written so that, whenever 16 1.4 Business aims and objectives
18 1.5 Stakeholders in business
possible, a single page covers one bullet point from 21 1.6 Business growth
one topic in the specification. Learning points are 2 Marketing

24 2.1 Role of marketing
summarised using diagrams or tables or short texts. 25 2.2 Market research
30 2.3 Market segmentation

You are advised to work through each page in order. 31 2.4 The marketing mix
3 People
40 3.1 Role of human resources
Concept of costs in a business and their
41 3.2 Organisational structures and different
Exam tip
I can …
5 Finance
5 Finance
importance in business decision making Be ready for questions
ways of working costs.
■ Define the terms ‘fixed costs’, ‘variable costs’ and ‘total costs’. that ask you to calculate
and Calculation of costs ■ State examples of fixed and variable the costs of a business.
■ Explain the importance of costs to a business. Learn how to calculate total
47 3.3 Communication in business
■ List and explain how a business may reduce costs. variable costs and total
Example calculations for variable costs and total costs are shown below. ■ Analyse and evaluate ways of reducing costs.
Fixed costs: Costs that costs.
Example ■ Explain why a business may not wish to minimise costs.
stay the same regardless
Total variable costs: 51 3.4 Recruitment and selection of a change in output, for
example, rent for offices,
Number of workers × Wage paid to each worker
shops, factories or land and Concept of profit and loss in business and
55 3.5 Motivation and retention
10 workers × £400 = £4,000
Cost of materials per product × Number of products sold
the uniform business tax
which is a tax based on the
its importance in business decision making
location of the business. and Calculation of profit and loss
59 3.6 Training and development
£3 per product × 6,000 products sold = £18,000
Total variable cost = £4,000 + £18,000 = £22,000
Variable costs: Costs that
change as output changes,

The concept of profit, at its simplest, is that when the total revenue of a

64 3.7 Employment law
for example, wage and business is more than its total costs of production the business has made Gross profit: Sales minus
Total cost: material costs will increase the cost of sales. In this
a profit.
Total fixed cost (£12,000) + Total variable cost (£22,000) = £34,000 if more products are made equation, ‘sales’ refers to
(total cost). or sold. Example sales income. Sales income
4 Operations
Costs are necessary for production to take place and, along with revenue,
Total costs: The addition of
total fixed and total variable
Total revenue of the business: £22m in revenue
Total costs: £12m
is the same as total revenue.
Net profit: Gross profit
costs. minus the expenses of
65 4.1 Production processes
they determine how much profit a business will make.
A business may want to minimise its costs to help it to:
Profit: £10m

operating the business.
A loss
occurs when the total revenue of a business is less than the total Expenses: The costs of
increase profits
68 4.2 Quality of goods and services
●
costs of the business. operating the business,
● reduce prices to become more competitive without cutting profits
including wages and
● save money in order to expand or to update machinery. Example salaries, rent, or mortgage
Costs may be reduced by:
●
70 4.3 Sales process and customer service
employing new technology instead of workers (although there may

Total revenue of the business: £56m
Total costs: £80m

payments, insurance,
heating and lighting and
be costs in making workers redundant) advertising.
● 74 4.4 Consumer law
finding cheaper supplies of materials or goods to sell (although the
business would need to ensure quality and reliability)
Loss: £24m
The examples below show how to calculate the

and the gross profit

Loss: When the costs of a
business are greater than
75 4.5 Business location
● asking a supplier to reduce its prices or asking workers to take a pay of a business. net profit the revenue it makes.
cut. Although suppliers and workers will not want to do this, they may Cost of sales: The cost to
have no alternative but to agree if they could lose sales or their jobs. Example
the business of producing
Sometimes a business may 77 4.6 Working with suppliers
not need to minimise its costs because, for
example, it makes a high-quality product and it knows that its customers

Gross profit is calculated by:
Sales (total revenue) – Cost of sales = Gross profit

goods to sell, for example,
buying stock to sell or
buying materials and
are prepared to pay a high price it does not have any competitors. Note: the cost of sales is the cost of buying in the goods the business
employing workers to
5 Finance sells, or the cost of producing goods.
make a product.
Features to help you succeed

Now test yourself Sales (total revenue): £35,000
Cost of sales: £15,000
79 5.1 Role of the finance function
Desmond Mills runs a business making pallets which are used by other businesses to transport loads
on and off lorries and to move the loads to where they will be stored. Desmond pays £30,000 per year
£35,000 – £15,000 = £20,000
to rent a small factory where the pallets are made and stored. The materials used in the production Gross profit = £20,000
80 5.2 Sources of finance
of pallets are wood and nails which together cost 80p per pallet. One worker can make 20 pallets in
an hour. Workers are paid £10 per hour. Pallet making is a very competitive industry. Desmond makes Example

90,000 pallets per year.
85 5.3 Revenue, costs, profit and loss
1 State one fixed cost and one variable cost that Desmond pays.
2 Calculate the:
[2] Net profit is calculated by:
Gross profit – Expenses = Net profit
(a) cost per pallet for labour (hourly wage ÷ number of pallets made each hour) [1] Note: expenses are the costs of running the business.
91 5.4 Break-even
(b) the total variable cost of each pallet (labour cost for each pallet + cost of wood and nails per
pallet). [1]
Gross profit: £20,000
Expenses: £12,000
3 Explain how Desmond would calculate the total cost of producing 90,000 pallets. [2]
94 5.5 Cash and cash flow
4 Analyse why total costs are important to Desmond. [4] £20,000 – £12,000 = £8,000
Net profit = £8,000

86 Now Test Yourself Answers at www.hoddereducation.co.uk/myrevisionnotes OCR GCSE Business 87
4 Now Test Yourself Answers at www.hoddereducation.co.uk/myrevisionnotes
Exam tips ‘I can’ checklist

Expert tips are given throughout the book to Read through the ‘I can’ statements. Only tick each
help you polish your exam technique in order to item you are confident with. Unticked items will
maximise your chances in the exam. guide your further revision.
Key terms Online

Clear, concise definitions of essential key terms are Go online to check your answers to the Now test
provided where they first appear. Learn these terms. yourself questions at www.hoddereducation.
co.uk/myrevisionnotesdownloads
Now test yourself
Remember that there is often more than one
Questions, both multiple choice and case study possible answer for a question.
questions, are given throughout the book. Practise
answering these. For case study questions, you can
write bullet points or a full answer.
OCR GCSE (9–1) Business 3
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My revision planner
1 Business activity
7 1.1 Role of business enterprise and entrepreneurship
10 1.2 Business planning
12 1.3 Business ownership
16 1.4 Business aims and objectives
18 1.5 Stakeholders in business
22 1.6 Business growth
2 Marketing
24 2.1 Role of marketing
25 2.2 Market research
30 2.3 Market segmentation
31 2.4 The marketing mix
3 People
40 3.1 Role of human resources
41 3.2 Organisational structures and different
ways of working
47 3.3 Communication in business
51 3.4 Recruitment and selection
55 3.5 Motivation and retention
59 3.6 Training and development
64 3.7 Employment law
4 Operations
66 4.1 Production processes
69 4.2 Quality of goods and services
71 4.3 Sales process and customer service
76 4.4 Consumer law
78 4.5 Business location
79 4.6 Working with suppliers
5 Finance
81 5.1 Role of the finance function
82 5.2 Sources of finance
87 5.3 Revenue, costs and profits
93 5.4 Break-even
96 5.5 Cash and cash flow
4 Now test yourself answers at www.hoddereducation.co.uk/myrevisionnotesdownloads
9781510423695.indb 4 7/17/18 8:35 AM

6 Influences on business
99 6.1 Ethical and environmental considerations
103 6.2 The economic climate
105 6.3 Globalisation
7 The interdependent nature of business
Now test yourself answers at

www.hoddereducation.co.uk/myrevisionnotesdownloads
9781510423695.indb 5 7/17/18 8:35 AM

Countdown to my exams
10–3 weeks before the examination – Revision 1 The day before the examination
l Be active when revising – make notes, l Check the time and place of your examination.
summarise key words, draw diagrams. l Make sure you have everything you will need –
l Answer the ‘Now test yourself’ questions and a pen and a couple of spares, pencil, rubber,
compare with online answers. ruler, watch, tissues, a bottle of water and
l Read the ‘Exam tips’ and tick off the ‘I can maybe some sweets.
checklist’. l Have one last look over any area of the
l After each page has been revised, record specification that you are still not totally
your progress in the ‘My revision planner’ on confident about.
pages 4–5. l Allow some time to relax and have an early
l Aim to cover one section of the specification night to ensure you are fresh and alert for the
each week. You are advised to study the examinations.
sections in order. Once you have covered
Sections 1 to 3, you will have learnt all you
need to know for the first examination –
Business 1. Test yourself by looking at the
In the examination
specimen paper for Business 1. The papers
and mark schemes are available from the OCR l Read the questions and the case studies
website (www.ocr.org.uk). Business 2 covers carefully – twice is a good idea. Make sure you
Sections 4 to 7, so use a similar approach for know what the questions are asking you to do.
these topics. l Divide your time up. A useful guide is
l Remember to include any revision classes put 15 minutes for the 15 multiple choice questions
on by your teacher in your plan. Your teacher and 25 minutes for each of the case study
will be a great help in preparing you to answer questions.
questions in the examination. l Make sure you answer ALL the questions – you
will throw marks away if you do not provide
any answer, even if you are not confident about
what you have written, you have some chance
of picking up some marks.
2–1 week before the examination – Revision 2
l Don’t panic. If you have done your revision,
l Use the ‘My revision planner’ page for you should be able to answer every question.
Revision 2. Focus on those areas where you Think about the type of questions, for example,
were not confident enough to tick the ‘I can’ if it is an evaluation question, think about the
statements. evaluation strategies you have learnt.
l Revise Sections 1 to 3 in the first week and
Sections 4 to 7 in the second week. Test
yourself using a different past paper and mark
scheme. My exams
Business 1
Date: . .......................................................................
Time: ........................................................................
Final week
Location: ..................................................................
l Look at one more Business 1 paper and one
more Business 2 paper or questions from the Business 2
Hodder textbook OCR GCSE (9–1) Business.
Date: . .......................................................................
l Revise again those areas you do not feel totally
confident about. Time: ........................................................................
Location: ..................................................................
9781510423695.indb 6 7/17/18 8:35 AM

1 Business activity
1.1 Role of business enterprise

and entrepreneurship
Purpose of business enterprise
and entrepreneurship
Figure 1.1 shows the three main purposes of business enterprise and
entrepreneurship. An entrepreneur may see an existing product and spot
an opportunity to develop and improve it.
Three purposes of business enterprise and entrepreneurship
Spotting an opportunity Developing an idea Satisfying customer needs

• Spotting a gap in the market • Designing the product or • Producing the product or
• Improving a product or service providing the service
service already provided • Planning production • Marketing the product or
• Producing a product or service
service more cheaply
Figure 1.1 Main purposes of business enterprise and entrepreneurship
Now test yourself

The entrepreneurs that developed Spotify saw an opportunity: ICT could be used to sell and deliver music,
podcasts and video streaming. The consumer can buy the product online in the comfort of their own
home and receive immediate delivery. The entrepreneurs worked with record labels and independent
musicians to sell their music in return for a royalty. They then put in place the technology to enable this
to work, such as the software to be able to stream the content to buyers and to take payment from them.
Spotify sells directly to the consumer and so distribution costs as well as the cost of managing shops is
saved. Spotify customers say the service is much better than going to shops to buy music.
Analyse two ways in which Spotify satisfies consumer needs. [6]
Entrepreneur: A person who takes the risk of starting and running a

business enterprise.
Spotting an opportunity: The ability to see the need for a particular
product or service customers need.
I can …
■ State three purposes of
Exam tip business enterprise and
When answering ‘analyse’ questions, always apply your answer to the entrepreneurs.
business in the case study. For example, when answering the ‘Now ■ Analyse examples of
test yourself’ about satisfying customer needs, stress that Spotify has businesses spotting
met the need by offering a faster service at a lower cost. Explain why opportunities and
Spotify has been able to do this. developing ideas.
9781510423695.indb 7 7/17/18 8:35 AM

Characteristics of an entrepreneur
1 Business activity
‘Characteristics’ refers to the qualities, skills or abilities that a person must

have to be a successful entrepreneur. There are four main characteristics
of entrepreneurs, as shown in Figure 1.2.
Creativity
Thinking up ideas
Characteristics of an
and solving problems,
e.g. thinking of new entrepreneur: The features
products to meet consumer of an entrepreneur, which
needs or thinking of better include being determined,
or cheaper ways to
creative and having the
make goods or
provide services. ability and confidence to
take risks.
Confidence Risk-taking
I can …
Being positive, Being prepared to
believing in their
Characteristics of
put their own or ■ State and explain four
an entrepreneur characteristics that an
own ability to make other people’s
things happen money at risk entrepreneur should
have.
■ Analyse the
characteristics of an
entrepreneur in the
Determination context of a case study.
Not being put off
when difficulties or
problems arise, but
working hard to
solve them
Figure 1.2 Characteristics of an entrepreneur
Exam tip
In the examination carefully read the case study. Think about how the
information in it matches what you have learnt and revised; in this
case, how the characteristics of entrepreneurs were demonstrated by
James Dyson. Then explain how these characteristics helped him to
make a success of his business.
Now test yourself

Frustrated by a poor-quality vacuum cleaner which he used in his
home, James Dyson created the idea of the bagless vacuum cleaner.
Dyson gave up his paid job and used his savings while he worked in
his garage to produce something better. Showing great determination,
he tried out of over 500 different designs, believing that, in the end, he
would be successful. During this time, his wife worked as a teacher
to support them. Dyson then risked his money to start up a business
producing and selling the vacuum cleaners.
Analyse two characteristics of an entrepreneur that helped James
Dyson to succeed when starting up his business. [6]
9781510423695.indb 8 7/17/18 8:35 AM

Risks and rewards of being an entrepreneur
1 Business activity
Entrepreneurs hope for rewards when they go into business, but they are
taking risks by doing this. These are summarised in Table 1.1.
Table 1.1 Risks and rewards of entrepreneurship
Risks Rewards
Financial l If the business does not succeed, l The potential to make a lot of money.
the risk of losing savings (and
other assets) to pay off debts.
Non-financial l Health – the strain of running a l Independence – being in control of what you
business can cause mental and do; not being told what to do by others.
physical illness. l Self-satisfaction – feeling good because the
business is a success.
l Making a difference – improving the lives of
customers; providing socially responsible
goods and services.
Now test yourself Rewards: The benefits an

entrepreneur receives from
1 Which of the following is not a risk of being an entrepreneur? [1]
starting up and running
(a) Making a loss
a business. They may be
(b) Feeling satisfied about making a success of starting a business
financial or non-financial.
(c) Experiencing poor health
(d) Suffering from strained relationships with friends and family Risks: The possible losses
2 Amelia Prendergast bought a small newsagent shop using her own that an entrepreneur may
savings and a loan from a bank. She had been fed up in her office suffer from starting up and
work as an accounts clerk and wanted to run her own business. running a business.
She really struggled having to get up at 5 a.m. each day, sorting the
papers in to ‘rounds’ for the paper boys and girls to deliver and then
working in the shop all day until she closed at 6 p.m. After three Exam tip
months, exhausted and stressed, Amelia put the shop up for sale.
However, in the time that she ran the business, she had increased When evaluating the risks
the number of customers and the revenue the shop earned. Amelia and rewards of being an
sold the business for more than she had paid for it. entrepreneur, write about
the rewards the person has
Evaluate the risks and rewards to Amelia of being an gained as well as the risks
entrepreneur. [9] they have faced and what it
has cost them. Remember
to use the evidence in the
case study so that you are
I can … applying your learning.
Always make a judgement –
■ State two risks that entrepreneurs may take. have the risks and rewards
■ State four rewards that entrepreneurs may receive. been worthwhile or not?
■ Evaluate whether an entrepreneur is receiving sufficient reward for Sometimes you may want to
the risks he or she is taking. suggest further information
that would help you make
your conclusion.
9781510423695.indb 9 7/17/18 8:35 AM

1.2 Business planning
1 Business activity
Purpose of planning business activity

A business must plan its activities to:
l reduce the risk of failure – for example, it must think about the prices
and goods competitors offer
l be as successful as possible – for example, decide the kind of people it needs
to run the business and how to market its product as effectively as possible.
Figure 1.3 shows the steps involved in developing a business idea.
• Identifying what the business will produce and sell and what resources Aims and objectives:
it will need. Statements of what the
• Identifying the aims and objectives of the business and how these business is trying to achieve,
The idea
will be met. such as grow larger or make
a profit.
• Identifying who will be involved. Business plan: A simple
• Identifying the human resource requirements the business will need to plan which sets out details
The people operate, including the number of people needed and the skills and
experience they should have. of the product or service
being sold and how it will
be financed, marketed and
• Identifying the markets that the business will target.
details of market research
• Identifying marketing activities - price, product, place and promotion - to
make the business successful.
findings.
Market research
• Identifying the marketing resources needed. Finance: A business word
used instead of money.
• Identifying how much finance is needed and what for. The finance needed to
• Identifying how the money will be raised. start a business is the
Finance • A good business plan is necessary to present to investors if a business money required to buy the
hopes to obtain external finance. resources needed.
Markets: Where a business
• Identify the competitors. sells its goods or services.
• Identify how the product or service will be different to those of
competitors Resources: The things a
competitors - better, cheaper?
business needs to make it
work, including staff and
materials.
Figure 1.3 Steps involved in developing a business idea
Now test yourself I can …

A case study was produced by www.englandgolf.org. The focus of the ■ Explain the main
study was Dunning Golf Club, which had produced a plan about how it purposes of a business
should increase its membership and profitability. The plan included plan.
the following:
l improving the golf course
l offering more benefits to paid-up members (such as subsidised
lessons)
l using outside caterers to ensure better and cheaper catering
l more clearly stated priorities for the future and how these would be
financed.
Explain the purpose of writing a business plan, such as that produced
by Dunning Golf Club. [4]
9781510423695.indb 10 7/17/18 8:35 AM

Role, importance and usefulness of a
1 Business activity
business plan
A business plan explains how a business intends to achieve its objectives.
It may be written before the business starts, or when planning a major Operate: A term used to
change to the way an existing business operates. explain how a business
A good business plan will cover all the objectives shown in Figure 1.4. works.
It will also make these objectives SMART: Success: For a business,
l Specific – clearly stating what is to be achieved. success can take many
l Measureable – stating how to measure the success of the plan using, forms, including making
for example, sales or profits. a profit, surviving and
l Achievable – the targets are possible for the business to achieve. providing a good service to
l Realistic – the targets are appropriate for the business. customers.
l Timely – the plan includes a deadline for achieving the targets.
Identifying the resources

Identifying the market, for needed to operate the business,
example, the age, gender and for example, workers, type of
income of target customers. equipment or machinery to
be used.
Business plan
Identify the finance needed to Achieve the business' aims

start up or grow the business and and objectives, for example,
how this will be achieved, for making a profit, expected sales,
example, selling shares, obtaining achieving social objectives.
a loan or overdraft.
Figure 1.4 A business plan details how a business intends to achieve its
objectives
Exam tip
When evaluating a business plan, write about what it contains and
what other information might be useful. Does it cover all four areas
identified in the business plan diagram? Is it SMART – does it give
measureable and timed targets?
Now test yourself

1 A business plan is useful because it will: [1]
(a) make sure a business cannot fail. I can …
(b) help competitors to improve.
(c) identify the resources that a business needs to succeed ■ Explain the main
(d) reduce the costs of running the business. purposes of a business
2 Using the information provided on page 10, evaluate the plan
Dunning Golf Club business plan. [9] ■ Evaluate a business plan.
9781510423695.indb 11 7/17/18 8:35 AM

1.3 Business ownership
1 Business activity
Features of different types of business

ownership
When a business becomes incorporated, it has a separate and distinct
legal entity that is independent of the business owners. Sole traders Partnership: A business
and partnerships are not incorporated, while private limited companies owned by between 2 and 20
partners.
and public limited companies are incorporated, which means they have
limited liability (see next section). Sole trader: A business
owned by one person.
The main features of the different types of business ownership are shown
in Table 1.2, together with their advantages (✓) and disadvantages (✗).
Table 1.2 Types of business ownership
Private limited Public limited

Feature Sole trader Partnership company company
Easy to set up ✓ Few forms to ✓ Only needs a deed of ✗ The Registrar ✗ The Registrar
complete. partnership (a written of Companies of Companies
agreement between requires legal requires legal
partners). documents, which documents, which
take time to take time to
produce. produce.
Easy for the ✓ The owner ✓ The partners (usually) ✓ Shareholders ✗ Anybody can
owner(s) to makes all the make decisions between can restrict who buy shares.
control decisions. themselves. can buy shares.
✗ It is possible that the
partners may disagree
which would lead to
problems making
decisions.
✗ The profits will have to
be shared between all
the owners.
Continuity ✗ The business ✗ A new deed of ✓ The business ✓ The business
stops when the partnership will be continues even continues even
owner dies. needed when an owner if shareholders if shareholders
leaves or joins. sell their shares sell their shares
or die. or die.
Business ✓ No information ✓ No information ✗ The public can ✗ The public can
information can about profits about profits must be see information see information
be kept private must be published. about the about the
published. business. business.
Raising finance ✗ This is limited ✗ Usually there are only ✓ New ✓ New
because there is a few partners to invest shareholders shareholders
only one person in the partnership and can invest and can invest and
to invest savings banks may think they are banks are willing banks are willing
and banks may risky to lend to. Ability to lend. Larger to lend. Large
think they are to raise finance may be amounts can amounts of
risky to lend to. limited as a result. be raised than money can often
The business sole traders and be raised.
✗ The partnership
cannot sell partnerships
cannot sell shares to
shares to raise (usually).
raise finance.
finance.
9781510423695.indb 12 7/17/18 8:35 AM

Private limited Public limited
1 Business activity
Feature Sole trader Partnership company company
Level of liability ✗ Owner has ✗ The owners (partners) ✓ The owners ✓ The owners
(risk) unlimited liability. have unlimited liability. (shareholders) (shareholders)
have and benefit have and benefit
from limited from limited
liability. liability.
Workload ✓ The owner ✗ The work is shared ✗ Managers are ✗ Managers are
makes all the between the owners, but employed to make employed to make
decisions but may the fewer the partners, decisions. decisions.
have to work long the greater the workload
hours. of each.
Now test yourself Deed of partnership: A

document stating who owns
1 Which of the following is a feature of a public limited company? [1] the partnership, how much
(a) The business does not need to publish its business information. money each partner has
(b) The owners have limited liability. invested and their role in the
(c) The owners draw up a deed of partnership when the business business.
is created.
(d) The business cannot sell shares to raise extra finance. Private limited company
2 Aaron Albright started a sole trader business manufacturing and (Ltd): Usually a smaller
fitting sun blinds. He began by selling the sun blinds to home owners. business, it can sell shares
However, the business has grown and he now sells to business to invited people only.
customers as well as fitting blinds in shops and offices. Aaron Public limited company
needs to produce more blinds to meet demand. He wants to move (plc): It can sell shares to
production to a larger factory than he currently uses but will need a anyone who wants to buy.
big investment to do this. Aaron is working long hours and is worried
about coping with a bigger business. He is considering taking on a Share: Part ownership of a
partner who will contribute some money to finance the investment. business.
Evaluate the advantages and disadvantages to Aaron of taking

on a partner. [9]
Exam tip
Questions which ask
I can … you to state and explain
the advantages and
■ State who owns the different types of businesses. disadvantages or the
■ State the advantages of different types of businesses. suitability of different types of
■ State the disadvantages of different types of businesses. businesses are very common.
■ Evaluate the benefits of changing the type of business ownership.
Concept of limited liability

When we talk about business liability, we are referring to the
responsibility of the business’ owners for debts incurred by the business.
The owners of an unincorporated business, such as sole traders and
partners, have unlimited liability – in other words, they are responsible
for all the debts of the business. Shareholders who own private limited or
public limited companies benefit from limited liability. The table below
summarises the differences between limited and unlimited liability.
Limited liability: The owners of a business can only lose the money
they have invested in a business if it fails.
Unlimited liability: The owner of a business is responsible for
repaying all the debts of a business.
9781510423695.indb 13 7/17/18 8:35 AM

Table 1.3 Comparison of limited and unlimited liability
1 Business activity
Issue Limited liability Unlimited liability

Effect on l The shareholders who own the l The owners must pay back all the debts of the
owner company do not have to use their own business they own.
savings or other private possessions l If the business goes bankrupt, the owners must
to pay off the debts of the company if sell any assets the business has.
the business fails. l If this sale does not raise enough to pay off the
debts, the owner(s) can be ordered to use their
savings or sell private possessions to raise the
money needed to pay off the debts.
Effect on l It helps businesses to start up and l People may be discouraged from setting up a
business raise extra finance to expand because business because of the risk to their savings
people are prepared to invest, and other personal assets.
knowing that they are not risking all l This can limit the creation and expansion of
their personal possessions. sole trader and partnership businesses.
Other l Forming a business as a limited l It is easier to start up as a sole trader or
impacts company can be complicated because partnership because legal documents do not
various legal documents need to be have to be sent to the Registrar of Companies.
prepared and sent to the Registrar of
Companies.
Now test yourself Assets: Items owned by the

business, such as stock,
1 Which statement about limited liability is false? [1] buildings and vehicles, as
(a) The owner of a business who has limited liability cannot be well as less obvious things
ordered to sell private possessions to pay off debts if the such as a good reputation.
business fails.
(b) The owner of a sole trader business has limited liability.
(c) Limited liability encourages people to invest in a business
because it reduces their risk. Exam tip
(d) The shareholders in private limited companies benefit from Liability is about risk.
limited liability. Whether liability is limited
2 Dan Wynne and Barbara Tennyson run a road haulage business. or unlimited is a key point
They have a fleet of refrigerated lorries which they use for delivering to stress in answers to
frozen foods for their customers. They began the business with questions about different
one lorry which they paid for with their savings. Dan and Barbara types of businesses.
expanded the business by buying a further seven lorries, which they
paid for mainly with loans from the bank. They also have an overdraft
on their bank account. Dan and Barbara started the business as a
partnership but changed it to a private limited company when they
expanded.
Analyse the benefit to Dan and Barbara of changing their
business to a private limited company. [6]
I can …
■ Explain what limited liability ■ Analyse why limited liability is
means. important for businesses.
■ Explain what unlimited ■ Analyse why unlimited liability
liability means. is important for businesses.
9781510423695.indb 14 7/17/18 8:35 AM

Suitability of different types of ownership in
1 Business activity
different business contexts
The most appropriate type of ownership for a business will depend
on the needs of that particular business. A start-up business and an Established business: A
established business will have very different finance requirements business that has been
and their type of ownership – sole trader, partnership, private or public trading for some time.
limited company – will ref lect that. Figure 1.5 summarises the main Finance: The money used
points about the suitability of different types of businesses. to start up or to expand
a business, usually from
savings and loans. It is used
Partnership
for capital items such as
Suitable for start-ups or established
investment in buildings and
businesses wanting to grow that:
Sole trader
• need larger amounts of finance machinery.
Suitable for start-ups that: (than sole traders)
Start-ups: New businesses
• only need a small amount of • have a fairly low financial risk
finance • need a wider range of skills
that are just beginning.
• usually have a low financial risk (than sole traders)
• require limited or non-specialist • have owners who want to keep
skills. control of the business.
Suitability of different
types of
businesses
Private limited company Public limited company

Suitable for start-ups and Suitable for an established
established businesses wanting business that:
to grow that: • wishes to grow
• need larger amounts of finance • needs very large amounts of
• have an increased or high finance
financial risk • has a very high financial risk.
• have owners who wish to keep
control of the business.
Figure 1.5 Types of businesses
Now test yourself Exam tip

Think about the needs of
In 1884, Michael Marks borrowed a small sum of money from a friend
the business owners with
to start up a market stall business selling a range of cheap goods for a
regard to finance, risk, skills
penny per item. By 1894, he wanted to open a permanent market stall
and level of control of the
selling a wider range of goods. Thomas Spencer, an experienced book-
business – and then decide
keeper with many business contacts and his own savings, became a
which type of business
partner in 1894. Marks & Spencer opened more and more shops and
ownership would most
the business became a public limited company in 1926. Today Marks &
appropriately meet these
Spencer has over 850 shops in more than 10 countries.
needs.
Evaluate how the different types of business ownership helped
Marks & Spencer to develop. [9]
I can …
■ State and explain the different needs of start-up and established
businesses.
■ Evaluate the type of business ownership required to meet the needs
of a business.
9781510423695.indb 15 7/17/18 8:35 AM

1.4 Business aims and objectives
1 Business activity
Aims and objectives of business

Figure 1.6 summarises the different business objectives.
Business objectives: These
are the aims of a business,
Survival Profit
and can include survival,
• Concerned with a business’ • The reward to owners for taking
profit, growth and providing
ability to continue to trade in the a risk by investing their money in
long term. the business.
a service.
• Businesses may survive for a • Many businesses seek to
short period without making a maximise profits for the benefit of
profit. the owners.
Business
objectives
Growth Providing a service

• Increasing sales or market share. • Some owners want the satisfaction
• A way of increasing profits. of giving customers a good service
(provided they can make an
amount of profit that satisfies
them).
• Can be seen as a way of
making a profit as customers
will return and new customers
will use the business.
Figure 1.6 Business objectives

Remember to apply your
1 Which of these statements is not a business objective? [1]
understanding of business
(a) A business seeks to maximise the profit it makes.
objectives when you are
(b) A business wishes to increase its sales.
asked to write about the
(c) A business cuts the wages of its workers.
objectives of a particular
(d) A business wants to gain a good reputation by providing a good
business in a case study.
service.
2 In the table below, match the business objective with the description
of the case study business.
I can …
Business
objective Description ■ State and explain and
apply the main objectives
1 Survival a) E.ON, the energy company, has raised its prices even of businesses.
though costs have not risen.
2 Profit b) Abdul has just opened a coffee shop in a small town
where there are already four other coffee shops. He
needs to establish the business in this competitive
market by gaining sufficient customers to help it to stay
in business in the longer term.
3 Growth c) The Co-Operative supermarket chain aims to act
responsibly and respectfully to its customers.
4 Providing d) American business, Post Holdings, has bought the
a service Weetabix brand from owners, China Bright Food.
9781510423695.indb 16 7/17/18 8:35 AM

How and why objectives might change as
1 Business activity
businesses evolve
As businesses evolve they will have different objectives because:
l they are at different stages of their development Evolving: Refers to the
l their owners have different motivations
way a business develops
and changes over time, by
l they are inf luenced by different market conditions
becoming bigger or smaller
l they are experiencing different economic conditions.
and by selling different
Figure 1.7 examines some of the reasons why businesses have different goods and services or a
business objectives. wider range, as well as
selling in different places
Survival Profit and in different ways.
• This may be an objective for a new • New businesses may seek a
business so that it can become minimum level of profits to help
established and secure by gaining them survive.
customers and then aim to make
Exam tip
• Established businesses may want
profit in the longer term. to earn profits to reinvest and to Be ready to write about how
• It may be an objective for a business expand a business.
during a downturn in economic
the objectives of a business
• Good profits encourage new
activity or when a market is very investors to put money in the can alter as it changes or as
competitive. business, helping it grow. economic conditions change.
When writing your answer,
remember to consider what
Reasons behind
motivates the owners of the
business business, too.
objectives
Growth Providing a service

I can …
• New businesses may set • This will help the business to get a ■ Explain different ways in
objectives for the growth of good reputation enabling it to which businesses evolve
sales or market share to help attract new customers as well as
them survive. retain its existing customers.
and how their objectives
• Established businesses may • Sometimes providing a good may change.
want to grow to gain more service can help a business ■ Analyse why different
power in the market, reduce survive or increase its profits. business objectives are
competition and increase profits. • Some owners get satisfaction from suitable for different
running a business that is useful to
its customers (as well as profitable businesses.
for themselves).
Figure 1.7 Reasons for different business objectives
Now test yourself

Ron Crosbie is a sole trader who sells and fits car tyres from a tyre
centre in Ormskirk. Ron does make a profit but has never wanted
to expand by opening other tyre centres. His business has a good
reputation for competitive prices and a quality service and he believes
this is what has kept him in business so long. The biggest threat came
when Kwik Fit opened a tyre outlet in the town. Kwik Fit now owns
over 570 outlets across the UK as well as mainland Europe after the
company bought Speedy Tyres in France and Pit Stop in Germany.
Kwik Fit expanded further by starting to sell insurance services.
Analyse the different objectives of Ron Crosbie Tyres
and Kwik Fit. [9]
9781510423695.indb 17 7/17/18 8:35 AM

1.5 Stakeholders in business
1 Business activity
Roles and objectives of internal and

external stakeholder groups
Table 1.4 lists the internal and external stakeholders of a business and
states the role and objectives of each type of stakeholder. ‘Role’ refers
to what a stakeholder may do in connection with the business, while
‘objectives’ refers to what the stakeholder wishes to achieve.
External stakeholders: The local community, suppliers, customers

and government.
Internal stakeholders: The business owners and the people who work
in the business.
Stakeholders: Groups or individuals who have an interest in a
business.
Table 1.4 Roles and objectives of internal and external stakeholders
Role Objectives
Internal stakeholders
Owners l Provide finance to start up and l Make profits.
expand the business.
l They may manage or run the
business or they may employ
managers to run it on their behalf.
Employees l Produce goods and services. l Satisfaction of having a job and earning
an income.
l Be treated fairly by employers.
l Enjoyment of social aspects of working
with colleagues.
External stakeholders
Customers l Buy goods and services. l Enjoy the benefits provided by goods and
services.
l Pay affordable prices.
Suppliers l Sell goods for resale or components l Make sales.

and materials needed to manufacture l Earn profits.
goods or provide a service.
Government l Help businesses, workers and l Encourage businesses as this leads
communities. to high employment and prosperous
communities.
l Government wants to encourage
businesses because this increases the
taxes paid to government.
Local community l Provide workers. l Have a local area which is prosperous,
l Monitor and influence business healthy and safe.
activities.
9781510423695.indb 18 7/17/18 8:35 AM

Now test yourself
1 Business activity
1 Which of these stakeholders of Debenhams plc will want to earn a wage from the business? [1]
(a) Customers of Debenhams plc.
(b) The government.
(c) Workers at Debenhams plc.
(d) The shareholders of Debenhams plc.
2 Cuadrilla is a fracking company which extracts gas from below ground. It has permission to drill at
Roseacre Wood, a rural area in Lancashire north of the city of Preston and surrounded by several
small villages. It has drill wells at the site. Cuadrilla needs to pump a lot of water in to the site, build
roads and dig trenches for pipes. Some of the local community were involved in a campaign to stop
planning permission being given for the wells, but others in the wider community area hope there will
be increased employment opportunities as a result of Cuadrilla’s plans.
State two internal and two external stakeholders in Cuadrilla plc. For each stakeholder, state their
role and their likely objective. [8]
I can …
■ Define the term ‘stakeholder.’
■ State the main internal and external stakeholders of a business.
■ State the role of each of the internal and external stakeholders.
■ State the objectives of each of the internal and external
stakeholders.
Exam tip
Always read questions carefully and obey the command in the
question. The command word here is state. State simply means
name – the stakeholders in this case. Stating the stakeholder’s role
means saying what they do, while stating their objective means saying
what they want to achieve. In this type of question there is no need to
add any discussion, for example, of whether the fracking will be good
or bad for stakeholders.
Effect of business activity on stakeholders

A business can affect stakeholders both positively and negatively. Table 1.5
gives examples of the benefits of business activity and problems caused by
business activity for stakeholders that arise from the activities of a business.
Benefits of business activity: For stakeholders, these include profits,

jobs and incomes, goods and services, sales, taxes and prosperity.
Problems caused by business activity: For stakeholders, these include
financial losses, redundancy, poor goods and services, late or missed
payments, bad publicity and negative impacts on the local environment
and community.
9781510423695.indb 19 7/17/18 8:35 AM

Table 1.5 Benefits and problems for stakeholders arising from business activities
1 Business activity
Stakeholder Benefits of business activities Problems from business activities

Owners l Earn profits if the business is l May lose money invested in the business if it
successful. fails.
Employees l Employed in a job role within the l May be made redundant if the business
business and able to earn an income does not do well or if their job is replaced by
from the business. automation such as a robot.
l Employment conditions may be unfair, leading
to stress.
Customers l Obtain products and services at l May be sold poor quality goods and services.
good prices that satisfy their wants. l May be over-charged for goods or services.
l May experience poor customer service.
Suppliers l Sell their goods to another business l May lose money if the business does not pay
and earn profits from doing this. for goods supplied.
l Cash flow problems in the business may mean
that they delay payment to their suppliers.
Government l Receive tax revenue from the l Very large companies can become ‘too big to
owners, workers, suppliers and fail’ – the government may be criticised if the
customers of the business. business fails and the government does not
step in to help it to survive.
Local l People in the community can earn l The community can be affected by negative
community money from jobs with the business externalities such as pollution and road
or because workers in the area have congestion caused by the business.
money to spend in their businesses.

Learn at least one
Read again the Cuadrilla case study on page 19, then answer the
benefit and one problem
following question.
experienced by each type
Identify one internal and one external stakeholder in Cuadrilla (you of business stakeholder so
may wish to choose the same stakeholders you wrote about in your that you are able to answer
answer to the data response question in the previous section). For a question which focuses on
each stakeholder, analyse one benefit and one problem which they any one of the stakeholders.
may experience from the business activities of Cuadrilla plc. [8]
I can …
■ Analyse how each stakeholder in a business may be affected by it.
Effect of stakeholders on business

Stakeholders can inf luence business success. Table 1.6 summarises
ways in which each stakeholder can help a business to succeed or cause
business failure.
Business failure: This can be indicated by losses, low sales, poor quality
goods and services and a negative impact on the local community.
Business success: This may be measured in terms of profits, growth,
sales, returning customers and a positive contribution to the local
community.
9781510423695.indb 20 7/17/18 8:35 AM

Table 1.6 Stakeholder influences on business
1 Business activity
How the stakeholder may influence the How the stakeholder may contribute to the
Stakeholder success of a business failure of a business
Owners l Investing enough money. l Not investing enough to make the business
l Using the investment in ways that efficient.
will help the business to grow and l Failing to change the business when the
succeed. market for its goods and services changes.
Employees l Working hard to produce good quality l Producing poor quality goods or services.
goods or services at competitive l Demanding high wages as this will lead to
costs. higher costs.
l Disrupting production by industrial action.
Customers l Purchasing goods and services. l Deciding to buy from competitors.

l Creating a good reputation for the l Publicising instances of poor quality
business by recommending it to goods or bad service, leading to a poor
others. reputation for the business.
Suppliers l Providing supplies promptly and l Supplying poor goods or services which
at competitive prices to help the lead to quality problems.
business produce its goods and l Not supplying components or materials on
services cheaply and reliably. time which can cause production delays.
Government l Giving the business a grant to enable l Reducing the business’ profits by
it to pay for investment or by giving increasing taxes or by raising the National
it planning permission to develop or Minimum Wage so that wage costs
expand its facilities. increase.
l Government may also be a customer l Preventing the expansion of the business
of the business, buying goods and by refusing planning permission.
services from it.
Local l Providing the business with l Opposing the business’ plans for expansion
community customers and supporting its plans or preventing production by not supporting
for development. its application for planning permission.
l This may lead to increased legal costs
for the business as it fights for planning
permission.

Evaluation is the most
Re-read the Cuadrilla case study (page 19), as well as the information
difficult skill to develop. You
below.
need to consider arguments
Cuadrilla will submit a planning application to allow it to develop the that are both ‘for’ and
drilling site at Roseacre Woods. It intends to use very experienced ‘against’ and decide what
employees to prepare its planning application. It knows that the local will affect the importance of
community are very much against planning permission for the site each. In the Cuadrilla case
to be developed and that there are well-off, qualified and articulate study, think about how well
people living in the area. each of the two stakeholders
involved will present their
Evaluate the possible effects on one of the following stakeholders on
arguments and what skills
the success of Cuadrilla’s planning application:
and qualities they will need
l Employees of Cuadrilla [7] to present their case well.
or
l Local community. [7] I can …
■ Analyse and evaluate
the effect that each
stakeholder in a business
can have on the business.
9781510423695.indb 21 7/17/18 8:35 AM

1.6 Business growth
1 Business activity
Organic growth
Figure 1.8 shows four ways in which organic growth can take place. Although
the diagram shows four separate boxes, the examples of growth described in Capacity: For a factory or
the boxes are interconnected. For example, a business may increase its capacity shop, capacity refers to how
because it has increased its sales or a firm may increase its sales because its much output it can produce
or sell.
market share has increased as a result of a new advertising campaign.
Organic growth: Concerned
with the internal growth of
Increasing output
a business, for example, by
A business can increase the amount it
produces by: increasing its sales.
• using resources more efficiently,
for example, using new technology
Gaining new customers
or training workers
A business can gain new customers by:
• using up spare capacity, for example,
• reducing its prices
unused factory space
• opening new shops in different locations
• increasing the capacity of the business,
for example, building a new • better marketing, for example, a bigger,
factory, opening new shops. more effective advertising campaign.
Organic growth
Developing new products Increasing market share

A business can develop new A business can increase market share
products by: by:
• researching and developing • increasing its own sales
• copying the ideas of other businesses • taking business from other firms.
• buying ideas from other businesses. (Note: a firm could keep sales constant
but its market share would rise if other
businesses sell less.)
Figure 1.8 Ways in which organic growth can occur in a business

Case studies are designed to
Apple was started in 1976 and is now the largest company in the world. It
provide clues and evidence
began by making and selling desktop computers and its first order was for
to help you to answer the
50 computers sold at $666 each, bringing in revenue of $33,300. In 2016,
questions. Read them
its revenue had grown to $49.6bn – a huge increase, even allowing for
carefully so that you use the
price rises since 1976. During its history, Apple has taken over only a very
information in them to gain
small number of other businesses. Apple has researched and developed
as many marks as possible.
a range of successful products, including laptop computers such as
the Macbook Pro, mobile phones (iPhone), tablet computers (iPad) and
services such as Apple Pay. Apple has run some very effective marketing
campaigns. It often introduces new products around September and I can …
advertises them heavily in the lead up to Christmas. Its advertising is often
very innovative, using catchy music, a confident narrator and minimalist ■ Explain the meaning of
backgrounds in order to focus attention on its products. organic growth.
1 What evidence is given in this case study for the growth ■ Analyse how the organic
of Apple? [1] growth of a business can
2 Analyse the reasons for the growth of Apple. [3] take place.
9781510423695.indb 22 7/17/18 8:35 AM

External growth
1 Business activity
Figure 1.9 illustrates the different kinds of external growth that can occur
within a business. This example focuses on a furniture manufacturer. Backward vertical growth:
The boxes around the outside of the diagram show how the furniture When a business merges
manufacturer business is involved in a merger or takeover with other with, or takes over, a
businesses, with the type of growth that occurs labelled next to the arrow. business that supplies it
The benefits of each type of growth are shown inside each box. vv with goods or services.
Diversification: When a
Another furniture manufacturer business merges with or
Benefits: takes over another business
• Each factory can specialise in a particular with which it has no
type of furniture. connection.
• One factory could be closed if not A perfume manufacturer
needed, reducing costs. External growth: The
Benefit:
• It can gain economies of scale, reducing
• Risk is spread, success does not rely
growth of a business by
costs. takeover or merger.
only on furniture sales.
Horizontal growth – the Diversification – the Forward vertical growth:

producer is at the same producer is in an When a business merges
stage. unconnected line of with, or takes over, a
Furniture business. business that it supplies
manufacturer
goods or services to.
Backward vertical growth – Forward vertical growth –
the producer is at an earlier the producer is at a later Horizontal growth: A
stage in production. stage in production.
merger or takeover where
Timber merchant Furniture retailer the two businesses are
Benefit: Benefit: involved in a similar
• It guarantees a supply of wood to make • The manufacturer is guaranteed operation.
the furniture. somewhere that will sell what it
• The manufacturer can benefit from the produces to consumers. Merger: Where two or more
timber merchant. businesses agree to join to
become one business.
Figure 1.9 Types of external growth
Takeover: Where a business
takes a controlling interest
Now test yourself in another business, for
example, by buying more
1 Which of the following statements describes a takeover? [1] than 50% of the shares in it.
(a) Orange and T-Mobile joined together to become EE.
(b) Disney the film-maker bought the cartoon animation company,
Pixar. Exam tip
(c) Honda Motor Company builds a factory to manufacture gear
boxes for its cars. Be ready to answer
(d) Netflix increases its share of the market. questions which ask you to
2 Identify the type of growth which takes place in each of the identify the type of external
following and give a reason for your choice. [6] growth described. Make
(a) A brewery takes over chain of public houses. sure you can explain the
(b) A bus company takes over a chain of fitness centres. different reasons why
(c) A food retailer merges with another food retailer. businesses merge or
takeover other businesses.
I can …
■ Explain the difference between a merger and a takeover.
■ Identify the different types of external growth.
■ Analyse the reasons for or benefits of different types of external
growth.
9781510423695.indb 23 7/17/18 8:35 AM

2 Marketing
2.1 Role of marketing

Purpose of marketing within business
Figure 2.1 shows the three main purposes of marketing.
When a business decides to market a product, it will need to consider Marketing: Finding out
these factors: the needs of consumers
l Finance – how much finance is available to spend on research and
and demonstrating how a
business fulfils those needs
development of the new product or an advertising campaign?
so that its sales increase.
l Who the marketing is aimed at – young people may be more likely to
respond to advertisements on social media. Different groups of people
may require different products, for example, some older people may
like a mobile phone that has large buttons and is easy to use; only rich
people may be willing to pay high prices for top quality goods.
l Location of potential customers – which country or region of a
country do they live and what language do they speak.
Identifying and understanding customers Informing customers

• Who are they (male or female, • Advertise on TV, in papers, billboards,
young or old, rich or poor), what do they social media (Twitter, Facebook).
want, where do they live? • How much advertising a business does
• Answers to these questions can be will be influenced by what it can
found through market research. afford and who it needs to inform.
Main purposes
of marketing
Exam tip
When answering a question
Increasing sales on evaluation, make sure
• Sales can be increased by reducing price, you use any evidence given
introducing new products, selling in in the case study to make
different places or by different methods
(e.g. online or shops) and promotion, a judgement. You might
including advertising. include further evidence
• Think of the 4Ps: price, product, place and in your answer if you have
promotion. some or explain what
further evidence would be
Figure 2.1 Main purposes of marketing useful.

Samsung wants to increase the sales of its mobile phones. ■ Explain what marketing is.
1 Explain three ways in which Samsung could increase its sales ■ Explain the purposes of
of mobile phones. [6] marketing.
2 Analyse one factor which will influence how Samsung markets ■ Analyse the factors which
its mobile phones. [3] influence how a business
chooses to market its
product.
9781510423695.indb 24 7/17/18 8:35 AM

2.2 Market research
2 Marketing
Purpose of market research
Market research is about identifying and understanding customer needs
in order to produce goods and services to meet those needs. Figure 2.2 Market research: The
summarises what market research is about. collection of data on
Market research is used to inform key business decisions, and so can customer habits to help
inf luence whether a business succeeds or fails. decision-making in
marketing.
If a business does no market research, or conducts its research poorly,
Target market: A group
the chance of the business succeeding will be reduced. Any information
of customers to whom a
gathered through market research must be interpreted correctly to: business aims to sell its
l understand its significance to the business
products. The target market
l help marketing decision makers in the business choose the marketing may be other businesses as
strategy which best meets the needs of their target market. well as consumers.
Though market research costs money, this will, if the research is used
effectively, be repaid to the business as sales revenue.
Marketing involves the 4Ps:

Price, product, place and promotion (sometimes a fifth P, packaging, is added to the list)
because the information it produces will help business to decide its marketing strategy.
(See Section 2.4 for more detail on the 4Ps.)
Market research aims to find out information about the target market: Exam tips
• Their age – children or adults, young or old.
• Their economic status – rich or poor, do they want high or low quality goods or services. Evaluation questions ask
• Their culture – what motivates them, what do they enjoy. you to make a judgement –
• Where they are –urban or rural areas, in the north, the Midlands or the south, in the whether something is good
UK or abroad. or bad, useful or not. You
• What they want in a product or service – style or function, large or small size, hot or cold. will need to weigh up these
points and then come to a
judgement. Remember to
give a reason or reasons for
Good market research helps a business to be successful and avoid expensive
mistakes by finding out: your decision. Evaluation
• The product or service customers want. also requires analysis. For
• The price its customers are willing to pay. example, you may need to
• The design of the product that will be attractive to customers. explain why information is
• How many products customers will buy and so how many it should buy-in or make. useful to a business.
• How to target customers – which media to use, what message to put out, what language
to use.
• Where and how to sell its goods and services – through retailers, either online or on the
high street, through personal sales representatives. I can …
Figure 2.2 Market research ■ Explain the term ‘market
research’.
■ Explain the term ‘target
Now test yourself market’.
■ Analyse the information
Next plc is considering introducing a new clothing range. The clothes
that market research can
will be targeted at women in the age group 16–25. Next plc has asked a
produce for a business.
market research company to research this market.
■ Evaluate the usefulness
Evaluate the importance to Next plc of conducting market research of market research for a
before introducing a new range of clothing. [9] business.
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Primary research methods
2 Marketing
Primary research is about collecting new data directly from people

Primary research: Data that
within the target market. Figure 2.3 summarises the main methods used is collected first hand, often
to collect primary data and their advantages and disadvantages. Each in the form of questionnaires,
method is a kind of survey. It will not be possible to reach everyone in interviews and focus groups.
the target market so usually a sample of representative people is chosen to Sometimes referred to as
get information from. ‘field’ research.
Questionnaire Interview
A set of questions sent out to selected A person asks an individual or a group of
people in the post or asked online. people questions (in person or on the
Advantages: phone) and records their answers.
• Cheap to carry out. Advantages:
• Easy to target customers, for example, • The questions can be explained.
people who buy cameras online. • It is easy to target certain types of
Disadvantages: consumers.
• People may not understand the questions. Disadvantages:
• People may not be interested in the • It is an expensive method.
product, so may answer dishonestly or • Not everybody likes being interviewed.
not at all.
Primary research
methods
Trialling Focus group

A product is sold for a short period, usually A small group of people are asked to use a
in one region of a country. If it sells well the product or think about an advertisement
business will go into full production. and to give their opinion. The feedback
Advantages: helps the business to re-design the product
• A good way to see if the product is what or advert.
people want. Advantage:
• Reduces the risk involved in producing • The people chosen will be representative
large quantities. of potential customers.
Disadvantage: Disadvantages:
• The people or area tested must be
representative of the total market,
• It will only be a small group. Exam tip
• It is usually costly to carry out.
otherwise the findings will not help the When you revise, try to learn
business.
‘trigger’ words which will
Figure 2.3 Primary research methods remind you of key terms
and their advantages and
Now test yourself disadvantages. For example:
interviews = individual
The Royal Society for the Protection of Birds (RSPB) runs several bird questions, explained, targeted,
reserves around the country, where birds can nest and feed safely. BUT expensive, disliked.
Members of the RSPB provide money to pay for the reserves through
annual subscriptions. In return they receive services such as free
access to the reserves, shops, conferences and education services I can …
for schools. The RSPB plans to use an online questionnaire to get the
views of members about the quality of its services. The questionnaire ■ Explain what primary
will pop up when members enter the RSPB website. research is.
1 This online research is an example of: [1] ■ State and explain the
(a) primary research main methods of primary
(b) secondary research research.
(c) a trial ■ Analyse the usefulness
(d) interview data to a business of different
2 Analyse one advantage to the RSPB of its plan to ask members to types of primary
complete an online questionnaire. [3] research.
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Secondary research methods
2 Marketing
Secondary research involves using information that has already been Secondary research: The
created. collection of data using
Table 2.1 summarises the main sources of secondary data and their research and information
advantages and disadvantages. provided by others, such as
magazines, journals and the
internet. Often called desk
research.
Table 2.1 Secondary research methods
Method of secondary
research Description Advantages Disadvantages
UK Census data l The national census l Information comes from l Information has not
finds out information a lot of people – almost been collected to
about all UK households the whole population of meet the specific
every 10 years. the country. needs of the
l It includes information l It is already collected business.
about the numbers and analysed, reducing l The information
of people living in the the cost to business. will need careful
household, their income interpretation.
and where they live.
Data from l Articles in publications l Such information is up l Information will
newspapers and often describe people’s to date, cheap (involves be general and
magazines interests and current only the cost of the not specific to the
fashions. newspaper or journal or business.
may even be available
free on the internet) and
is a good source of ideas.
Data from websites l Information about other l Cheap to collect and l The information
companies can be readily available. Such data will need careful
found, including what can help a business decide interpretation by the
they sell and the prices what to produce (and what business.
they charge. not to produce) as well as
the price to charge.
Internal data l This is data collected by Cheap to collect, readily l Data is historical – it
the business about, for available and is specific to looks at what has
example, its past sales the business. happened, not what
and profits as well as will happen.
customer feedback.
Now test yourself

Age UK is a charity which provides advice for older people. It needs Exam tip
to decide whether to open an Age UK office in Leamington Spa.
1 Explain the term ‘secondary market research’. [1] Exam questions may ask
2 Analyse how information from the UK Census may help Age you to define terms or
UK decide whether to open an office in Leamington Spa. [3] analyse advantages or
disadvantages of different
kinds of secondary
I can … research. You will usually
need to apply your learning
■ Explain secondary market research. to a case study.
■ State and explain the different types of secondary research.
■ State and explain the advantages and disadvantages of the different
types of secondary research.
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Appropriateness of different methods and
2 Marketing
sources of market research for different

business purposes
When choosing to conduct market research, a business must decide
whether to use primary or secondary research or both. The decision will
be inf luenced by the following factors:
l How much the business can afford to spend – some organisations will
only be able to afford secondary research, while others may be willing
to spend large amounts of money on primary research.
l What information is required – first-hand information from potential
customers gained from, for example, an interview or a trial may be a
good way to get opinions about a new product. Secondary information
about people in the local community may be gained from the Census
or from local newspapers. Information about competitors may be
obtained from their websites.
l Location of customers – a questionnaire or telephone interview may be
a good way of getting information from customers in another country.
A local newspaper may provide information about the market in a
particular town.
l How quickly the information is needed – it will be quicker to use
secondary information than to have to prepare and carry out primary
research.
Now test yourself

Bolton Wanderers Football Club plan to introduce a new football Exam tip
strip which the team will wear and replicas will be sold through the
club shop. The club is planning to get some ideas from fans before You must answer the
designing a strip and then showing it to fans to see if they like it or not. question set. You should
1 Evaluate two methods of primary research which Bolton Wanderers refer to the advantages and
Football Club should use to research the design for its new replica disadvantages specific to
football strip. [9] the question, for example,
about primary information
Jenny Jones has just finished a university degree in fashion design. or information from
She lives in Norwich and is considering starting up a small trader websites. You can also
business making and selling dresses in shop premises in the city. She bring in ideas about other
is planning to do some market research using information from the kinds of information, both
Census or from the websites of other businesses. secondary and primary,
2 Evaluate the usefulness to Jenny of researching information from that the business would find
the websites of other dress-making businesses in Norwich. [9] useful, but which would not
be provided by a research
method mentioned in the
I can … question. You may also need
to stress the importance of
■ Evaluate the usefulness of different methods of market research. research for the business.
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Use and interpretation of qualitative
2 Marketing
and quantitative data in market research
Qualitative data is usually collected using primary research as it involves
finding out the opinions of customers who use the product or service. For
example, a business may want to find out why people like or dislike the
taste of the sweets its sells.
l An advantage of qualitative data is that it helps a business to understand
what customers are thinking and what they want.
l A disadvantage of qualitative data is that information may only be
provided by a limited number of people.
Quantitative data provides facts, for example, about what people do, what
they spend or where they shop. A business may want to know how often
a person goes to the cinema, for instance.
l An advantage of quantitative data is that it is easy to analyse. It can be
gathered from a lot of people.
l A disadvantage of quantitative data is that it limits how much people
can say about what they like or dislike.
Qualitative data: Data based on the opinions of those being asked.

Quantitative data: Data collected that is based on facts or numbers; it
is usually easier to analyse than qualitative data.

In an exam question you
A software company is planning to develop a new computer game
may be asked to focus on
aimed at teenagers. It is considering using research which will
qualitative or quantitative
produce qualitative data.
data or both. Make sure
Analyse one benefit to the software company of using research your answer focuses on the
that will produce qualitative data. [3] data obtained and not on the
different research methods.
I can …
■ Explain the difference between qualitative and quantitative data.
■ Analyse the benefits of qualitative and quantitative data.
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2.3 Market segmentation
2 Marketing
Use of segmentation to target customers

The market for a product or service can be divided into segments, known
as market segmentation, as shown in Figure 2.4. People in different Market segmentation:
Splitting the market for
segments often want different kinds of products or services. Businesses
a product or service into
need to know this so that they can target their products at the different
different parts or segments.
needs of customers in each segment. When a business targets the different
segments in its market, it will need to consider:
l whether to produce different products for different markets – the
Exam tip
business may consider offering male/female versions or basic and more Learn as many examples
sophisticated models of how businesses target
l what price to charge – high or low customers in different market
l how to promote the products – the type of media to use and what segments. This will help you
message this method may give to analyse and evaluate any
l where to locate shops – town centre, shopping mall, holiday resort –
case studies presented to you
in the examination.
and whether to sell online or not.
Age Gender
Example: Magazines aimed at Example: Different coloured

teenage girls and magazines aimed running shoes for men and women.
at women in the 20 to 40 age range.
Income
Example: Patek Philippe watches for Location

the very wealthy customers, Tissot Ways of segmenting a market
Example: Business suits for people
watches for middle income customers
living and working in a city,
and Casio watches for low income
tweeds for those living in the
customers.
countryside.
Lifestyle
Example: Lycra for the cycle

enthusiast and large flat screen TVs
for viewing enthusiasts.
Figure 2.4 Segmenting a market
Now test yourself

I can …
The Tesco loyalty card is called the Tesco Clubcard. When customers
sign up for a Clubcard, they are asked to give Tesco information ■ Explain, with examples,
about, for example, their income, gender and age. Tesco use this the meaning of the term
information to target the different segments of their market. Wealthy ‘market segmentation’.
customers may be sent offers about smoked salmon, while less ■ Explain how a business
well-off customers may be sent offers for more basic food stuffs can target customers
such as baked beans. in different market
1 Explain what is meant by the term ‘market segmentation’. [2] segments.
2 Analyse the benefit to Tesco of targeting customers, as ■ Analyse and evaluate the
described in the case study. [3] suitability of products
3 Analyse one other way in which Tesco may target its for different market
customers. [3] segments.
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2.4 The marketing mix
2 Marketing
The marketing mix refers to the 4 Ps of marketing – product, price,
promotion and place – which are used together to market a product or
service. Each ‘P’ is looked at in turn in this section, followed by a look at
how they mix together.
Importance of the ‘4 Ps’ of marketing –

product and stages of the product life cycle
Market research will inform businesses what customers want. The
business must design, invent or innovate so that it is producing the Decline: When sales are
falling as the product or
product(s) or services that customers want to buy. These three processes
service is seen by customers
are explained below: to be old and they switch to
Table 2.2 Processes involved in the development of a product or service new products or services.
Design: An important
Activity Meaning Example
element in a number
Design When a business The Ford Focus is designed to meet of different products,
plans what a the needs of C-segment consumers especially where style and
product will do (its (lower middle class workers such as technology work together.
function) and what junior managers and skilled working
it will look like (its class workers such as plumbers and Growth: When sales are
style). electricians). These consumers have growing strongly as the new
a median age of 42 and a household product or service becomes
income of around £50,000. They want known.
features such as automatic parallel Innovation: The
parking, rain-sensing windshield improvement of an original
wipers, parking cameras and keyless idea, which will often involve
entry, among others. using new processes.
Invention When a business Firms are working on mobile phones Introduction: When a
comes up with a that can be charged without having to product or service is first on
new product or be plugged in. sale.
service.
Invention: The introduction
Innovation When a business The Samsung 8 mobile phone is an of a totally new product or
improves a improvement on the Samsung 7. service.
product which
already exists. Maturity: When sales are at
their highest level.
The product life cycle refers to the four stages of life that a product Product life cycle: The life
usually goes through. of a product, usually shown
as a graph divided up into
Figure 2.5 shows the product life cycle and explains each of the stages.
four stages: introduction,
Advertising will be high during the introduction stage to ensure growth, maturity and
customers know about the product. During the growth phase, advertising decline.
is used to reinforce awareness of the product. In maturity, additional
advertising may be used to keep sales high. In decline, buyers may be
encouraged with special offers to buy stocks of goods the business has left
over. The firm could also try to find new uses for the product to extend
its sales and life cycle.
9781510423695.indb 31 7/17/18 8:35 AM

Sales
2 Marketing
1 2 3 4
1 Introduction: 2 Growth: 3 Maturity: 4 Decline:

The product is Sales grow Sales reach their Sales begin to
new, sales are quickly. peak. fall.
just beginning.
Figure 2.5 The product life cycle

If you prefer to remember
Lego was first made and sold in 1949. The building blocks were based things in a visual form,
on Kiddicraft Self-Locking Building Bricks which had been created by learn diagrams such as
Hilary Page. Duplo, which are larger building bricks, were introduced the product life cycle
to suit younger children. During the 1990s, sales of Lego began to fall diagram and use it in an
and some thought that decade would possibly see the end of Lego’s examination to remind you
product life cycle. However, Lego introduced new models based on of the different stages of the
characters from popular films and books such as Harry Potter and product life cycle.
Winnie the Pooh. There is now a Lego board game and a film involving
Lego characters. Lego’s sales and profits are now very high.
1 Using the case study, identify one example of:
(a) invention
(b) innovation
(c) design. [3]
2 Analyse how Lego has managed to extend the life cycle of
its bricks beyond the period of decline in the 1990s. [3]
I can …
■ Explain the main processes involved in developing products –
design, invention and innovation.
■ Explain the main stages of the product life cycle.
■ Explain how a business may extend a product’s life cycle.

pricing methods
Figure 2.6 summarises the five pricing methods that you need to know.
All pricing decisions are about making a profit. Businesses must consider
the following when deciding what price to charge for a product:
l how new the product is
l the quality of the product
l the number and nature of the competitors
l how well customers know the product already
l what stage of the product life cycle the product is at
l the costs of producing the product.
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Skimming Cost-plus pricing
2 Marketing
A high price is charged for a new, better The cost of the product is calculated and
product to make a large profit, then the then an amount of profit is added to
price is reduced when competitor decide the price. Often used by
products start to be sold. businesses to make sure they make a
profit (assuming the goods sell at the
price decided).
Penetration pricing Pricing methods Promotional pricing
A low price is charged for a new The price is lowered to persuade

product to persuade customers to try it. customers to buy stock that remains
The price will be increased when sales or to buy a product whose sales
have grown. are slowing down.
Competitor pricing
A business looks at the prices charged

Competitor pricing: A
by competitors before deciding its price.
It may want to be slightly cheaper or price is set based on prices
slightly more expensive, or charge the charged by competitors for a
same, depending on how good the similar product.
product is and how it wants customers to
think about it – higher or lower quality or Cost-plus pricing: A
about the same as competitors. pricing method that adds
a percentage for profit to
Figure 2.6 Pricing methods
the total costs of making
a product. This gives the
Now test yourself selling price.
Penetration pricing: A price
Recommend one method of pricing which would be appropriate in each is set that is lower than
of the following situations. Give a reason for your recommendation. those of competitors. Often
1 Julie Roberts is opening a hairdressing salon in York. There used by new businesses to
are several other hairdressers in the part of the city where break into the market. It is a
her shop is located. [3] short-term strategy only.
2 Vauxhall Motors has decided to introduce a new model of its
popular car, the Astra. It wishes to sell off the old models of the Promotional pricing: Prices
Astra that it has already produced. [3] are reduced to give products
3 Apple is introducing a new version of its iPad, which it claims a boost or to sell off old
has more features than previous versions and other tablet stock.
computers. [3] Skimming: Where a new
product is more advanced
than that of its competitors,
Exam tip a price is set high as
When you are asked to make a recommendation, state your consumers are willing to
recommendation first and then give a reason or reasons for your pay higher prices to own
decision. Usually more marks are given for the reason than the the newest technology. Also
recommendation. referred to as ‘creaming’.
You would not normally be asked to make recommendations about

more than one pricing decision in the exam. Here you have been
asked for three in order to provide you with practice at recommending
I can …
different methods of pricing. ■ List the main pricing
methods.
■ Evaluate when each of the
main pricing methods is
useful.
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2 Marketing
promotion: point of sale and advertising

Promotion is about informing customers about what is for sale and
persuading them to buy. The two main areas you need to know are: Point of sale promotions:
● Point of sale promotion – a benefit the customer will receive when Sales offers available when
they buy the product. purchasing a product.
Promotions include price
● Advertising – giving the customer information about the product and
reductions, competitions,
persuading them to buy it.
free samples and loss
Figure 2.7 summarises the main kinds of point of sale promotion and leaders. Loss leaders are
promotional advertising media: goods offered at a low price.
Although the business
POINT OF SALE makes a loss on these
ADVERTISING
PROMOTIONS products, it is hoped that
while customers are buying
Price reductions (or ‘sales’) Social media these products, they will be
To sell off old stock, for example, old models A cheap way of communicating with large tempted to buy other more
of cars, winter clothes as spring approaches. numbers of people as well targeting profitable goods so that
The disadvantage is that the business will customers. Facebook and Twitter are good
make less profit (or even a loss) than if the
overall the shop makes the
examples of this. However, not everyone
product had been sold at a higher price. uses social media. profit it needs.
Promotional advertising
Competitions Websites media: The ways in which a
A person who buys a product is also entered A lot of information can be provided for company can advertise its
in to a competition, for example, a voucher potential customers, including written goods, such as social media,
for a free holiday could be included in a information, diagrams and videos. Content
websites, print media,
number of bags of crisps. Customers ‘win’ type depends on how much the business
by finding a voucher. can afford to spend. It costs a business television and radio.
money to keep its website up to date.
Loss leaders
Some goods are sold at a loss to encourage Television
customers to come to the shop in the hope This is often expensive, but TV advertising
that they will do all their shopping there. For is good for reaching a wide audience.
example, Tesco may sell petrol cheaply to Advertisers will know what channels and
attract customers and it will make its profits programmes potential customers watch.
on the groceries those customers buy.
Print media
Free samples This includes newspapers (local and national),
These are given to tempt people to buy the magazines and leaflets. Businesses can target
product, for example, customers may be their market, for example, a local plumber
.
offered small pieces of cheese in a would use a local newspaper, a supermarket
supermarket so they can try it. chain a national paper, a fast food outlet could
post leaflets through doors in the local area.
However, many people do not read newspapers
and leaflets are often ignored.
Radio
This is cheaper than TV and usually suitable for
local advertising but products cannot be seen.
Figure 2.7 Point of sale promotion and promotional advertising
When a business wishes to promote a product, it will be inf luenced by

the following:
● What the business can afford.
● The target audience – who and how many customers.
● The aim of the promotion – to sell off old stock, tempt new customers, etc.
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2 Marketing
Pick out key words to help
Recommend one type of media that could be used in each of these
you to remember different
situations:
advertising mediums in the
1 Regent Seven Seas Cruises offers luxury accommodation,
exam. For example, when
top quality food and comprehensive services on its cruises.
considering television as
The cruises, which are very expensive, are aimed at wealthy
an advertising medium,
people. Many buyers will be retired. [3]
‘expensive’ is a key
2 Coca-Cola is running a campaign aimed at 16–25 year olds based
disadvantage, while ‘wide
on the theme of sharing and enjoying a good time together. [3]
audience’ and ‘familiar
3 Jacobs Biscuits has developed a new kind of cracker to eat with
with channels potential
cheese. Recommend the point of sale method of promotion that
customers will watch’ are
it should use. [3]
good reminders of the
advantages. Select your
own key words for other
I can … point of sale promotions and
advertising methods.
■ Explain the main methods of point of sales promotion.
■ Explain the main media used for advertising, including an
advantage and disadvantage of each.
■ Evaluate when to use each method of point of sales promotion and
each type of media.
Importance of the ‘4 Ps’ of marketing – place:

distribution of products and services
Physical distribution is the movement of goods from the producer to the
consumer. Figure 2.8 shows the different physical distribution channels Physical distribution: The
in which goods can be moved from the producer to the consumer. distribution of a good or
service using a physical
presence such as a shop or
For example, goods sold office.
by a farmer from a farm
Channel 1 Producer Consumer shop or one business
selling to another
business.
For example, goods sold

by an electronics
Channel 2 Producer Retailer Consumer
company to a big retail
chain such as Currys.
For example, goods such

as Heinz baked beans
Channel 3 Producer Wholesaler Retailer Consumer sold to a regional
wholesaler to be sold
on to local retailers.
Figure 2.8 Physical distribution channels
The advantages of the three channels are as follows:

● Channel 1 – by missing out wholesalers and consumers, the producer
makes more profit, rather than sharing it with a wholesaler and/or
retailer.
● Channel 2 – selling directly to the retailer means the producer can
benefit from keeping some of the profit that would have been made
9781510423695.indb 35 7/17/18 8:35 AM

by the wholesaler, while being confident the retailer will be able to
2 Marketing
market the goods to consumers.

● Channel 3 – a wholesaler can break up bulk stock and offer retailers the
goods in the quantities that they can afford, and which they can sell, so
more retailers are willing to sell the goods. Digital distribution: The
distribution of goods
Digital distribution is when the product can be downloaded by the and services digitally by
consumer directly from the seller, as in the case of books from Amazon downloading from a website.
onto a Kindle or music from Spotify onto a MP3 player.
Table 2.3 Advantages and disadvantages of digital distribution
Advantages of digital distribution Disadvantages of digital distribution

The consumer can buy the product 24/7. Physical goods cannot be distributed digitally.
It is a method of selling, without the costs It is a very competitive market as consumers can compare
of physical shops or transport. prices and products online.
Customers who do not own a computer will be unable to
buy online.
Some customers do not like sharing their bank or credit
card details online.

Always state an advantage
1 Dulux produces paints for indoor and external use. It sells:
and then give a detailed
● some paint directly to large retailers
explanation as to why it is an
● some paint to wholesalers who then sell it on to retailers.
advantage. The same advice
(a) Analyse one advantage to Dulux of each of these
applies when writing about
methods of selling its paint. [2 x 3]
disadvantages.
(b) Analyse one disadvantage to Dulux of selling its paint
to wholesalers. [3]
2 LV Insurance sells many insurance policies online. Explain
one advantage to LV Insurance of selling its policies online. [2]
I can …
■ Explain the difference ■ Explain the benefits of the
between physical and digital different methods of physical
distribution. distribution.
■ State examples of physical ■ Explain the advantages and
and digital distribution. disadvantages of digital
■ Explain the different channels distribution.
of physical distribution.
9781510423695.indb 36 7/17/18 8:35 AM

How the '4 Ps' of the marketing mix work
2 Marketing
together and Use of the marketing mix to
inform and implement business decisions
The 4 Ps of the marketing mix work together. When making decisions
about the marketing mix, businesses must consider: Marketing mix: The mix
● the type of product they are selling of different parts of the
● the cost of the product marketing campaign –
● the stage of the product life cycle of the product price, product, place and
● the target market promotion (the 4 Ps).
● the funds available for marketing.
Table 2.4 shows how the 4 Ps may mix together at different stages of
the product life cycle of a mobile phone. All 4 Ps need to be used and
be consistent with each other. Price skimming should be used only if
the product is significantly better or different to those of competitors.
It would not make sense to introduce a new product without also using
promotional advertising to make customers aware of the product and
advertising is necessary when a new product is introduced.
Table 2.4 The marketing mix and its effect on the product life cycle of a mobile phone
Product life cycle stage

Marketing Introduction Growth Maturity Decline
mix
Product ● Introduce a new, ● The phone ● Add new ● Introduce new features
high-tech phone. does not styles of to attract sales, for
change. the phone example, a larger
● Begin the to attract a memory or a better
process of wider range camera.
innovating of customers. ● Be ready to introduce
and designing ● Continue the the new model once
a model to design and sales of the current
replace the development phone can no longer be
phone. process. extended.
Price ● Use price skimming to ● Reduce price ● Maintain a ● Use promotional
make high profits from to maintain stable price. ‘reduced’ pricing to
the phone, because some sales. extend sales of the
consumers will be willing phone.
to pay the high price.
Place ● Sell through exclusive ● Sell through ● Continue ● Continue sales through
shops to stress the a wider range sales through a wide range of outlets
product’s quality and to of shops a wide range but reduce sales in
be able to sell at a high and online of outlets. outlets that are not
price. to increase selling many of the
custom. phones.
Promotion ● Use targeted ● Advertise ● Continue to ● Advertise to raise
advertising to generate widely to advertise awareness of price
interest in the product stress the to highlight reductions.
and stress its quality benefits of differences ● Give special offers such
and exclusivity to people the phone to a of the as free phone cases with
who are interested in wider market. phone to its the phone to encourage
new technology. competitors. people to buy.
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It is possible to judge the effectiveness of a marketing mix by asking the
2 Marketing
following questions:
● Have total sales increased and if so, by how much?
● Has the stock of products been sold off?
● Has the number of people who buy a good or service increased and if
so, by how many?
● Has the business been able to increase the price or has it reduced the
price?
● Has total sales revenue increased or decreased and by how much?
● Has the profit made by the business increased or decreased and by how
much?
Now test yourself

Large supermarket chains such as Morrisons, Tesco and Sainsbury have traditionally achieved success
by selling mainly high quality brands at prices which were not necessarily cheap but which were
competitive with each other. Their advertising campaigns stressed their quality and why they were
better than their competitors. Following the recession of 2008 and 2009, many people lost their jobs
and their income fell. The large supermarket chains were affected by the development of the ‘no frills’
supermarkets such as Aldi and Lidl, which offered a smaller range of goods, sometimes of lower quality
than those at the large supermarkets, and at lower prices.
Analyse how the large supermarkets such as Morrisons, Tesco and Sainsbury may have changed their
marketing mix to respond to this competition from the ‘no frills’ supermarkets. You should refer to
product, price, promotion and place in your answer. [4 x 3]
I can … Exam tip

Read the question carefully
■ Explain how the 4 Ps of the marketing mix work together. and answer the question set.
■ Analyse and evaluate the factors which influence decisions made by If the question is only about
a business about the marketing mix it should use. one of the 4 Ps, your answer
■ Analyse and evaluate the effectiveness of marketing mix strategies. should only refer to that P.
If it is about the marketing
mix, refer to all 4 Ps in your
answer.
Interpretation of market data

Most businesses collect market data to help them to make decisions.
Using and interpreting data means that decisions are informed – not just
guesses about what is needed or what is happening. Data which can help
marketing decisions is described in Table 2.5.
Market data: Information that can help marketing decisions. It

includes data on such things as market share, changes in demand and
the effect of promotions.
Market share: The percentage of total sales of a product that a
business has made. For example, if a business sells 20,000 products
and the total market for a product is 50,000 then the business has a
market share of 40% (20,000 ÷ 50,000 x 100)
Target market: A group of consumers to whom the business tries to
sell its products. It can be based on such areas as gender, age and
lifestyle and will influence the methods of advertising and promotion
that are used.
9781510423695.indb 38 7/17/18 8:35 AM

Table 2.5 Use of data to aid marketing decisions
2 Marketing
Example of data Information provided Example use of data
Changes in demand Data can shows if demand for Inform possible changes to:
a product is rising, falling or is ● price – increase or reduce
unchanged. ● advertising – more or less needed
● the type of advertising
● promotional offers
● introduce a new product.
Target market Who the customers are. To decide:

● the design of the product
What the customers want.
● how much to charge for the product
Any changes in the target market, for ● where, when and how to advertise
example, increase in older people who ● which retail outlets to use
are interested in the product. ● which promotional offers, if any, to use.
Market share The percentage of the total sales in a To help decide whether to change or to
market of the business, and how this maintain the current marketing mix.
may be changing.
Product changes This will indicate if consumers The first decision will be whether or not
(introduced by a want different products and if those the business needs to introduce a new
business or its of competitors are more or less product to match consumer needs and/or
competitors) successful. competitor products.
Effect of promotion How the promotion is affecting sales Use data to evaluate the effectiveness of
and profits. any current promotion and make changes
if necessary.
Now test yourself

Joe Allen runs a market stall in Nantwich, one of several market towns in the county of Cheshire. The
market is open on Tuesdays, Thursdays and Saturdays. Nantwich is a prosperous town with lots of
retired people living in the area, many of whom have incomes that are above the national average. In
the past, running his stall on just three days a week brought in enough income for Joe to support his
family and gave him time to work as a volunteer on environmental projects. Joe has targeted sales at
young families whose incomes are around the national average. He buys vegetables from the local fruit
and vegetable wholesale market. His prices are generally lower than those in the supermarkets. Sales
figures for the past year show a 15 per cent decline and his profits have fallen by 20 per cent, while
competition from supermarkets has increased.
Recommend how Joe might change his marketing mix in response to the fall in sales and profits. [9]
Exam tip
Any data provided in a case study is there to help you to answer
questions, so try to make as much use of this information as possible.
I can …
■ Explain the main types of market data.
■ Interpret market data and its impact on a business.
■ Recommend marketing decisions based on market data.
9781510423695.indb 39 7/17/18 8:35 AM

3 People
3.1 Role of human resources

Identifying and meeting human resource needs
Businesses need to identify what human resources and functions they
need when they start up and throughout the lifetime of the business. Functions: The different
Identifying human resource needs enables a business to create a types of work that need to
personnel plan. This will include: be done in business, for
example, in production,
● how many workers it needs to employ
finance and marketing.
● the type of workers it needs – skilled or unskilled, managers, full time
or part time, where they will work and at what time they will work Human resources: The
● how the business will get the best out of its workers. workers employed by a
business.
Table 3.1 Factors influencing the human resource needs of a business Identifying human resource
needs: The act of thinking
Factor Influence on the human resource need about the purposes of
What it produces Are skilled or unskilled workers needed, or human resources and how
a mix of both? many and what types of
workers will be needed.
How much it produces How many workers will the business need?
The method of production Can machines rather than workers be used? Personnel plan: A plan
detailing the employees a
When production takes Are workers needed seven days a week or business needs – how many,
place only on specific occasions? whether they will be full or
The ‘functions’ or ‘jobs’ What type of workers are needed – finance, part time workers, the skills
to be completed production, marketing, human resources. they should have and when
they will work.
The budget available to How much can be spent on workers?
the business

When revising, try learning
While in the Premier League, Bolton Wanderers football club earned
information as a list, e.g.
a lot of money from gate money and the TV companies paid for the
things that a business needs
rights to televise games. The Club had paid big transfer fees and
to consider when identifying
high wages to recruit new players and its ‘backroom’ staff such as
its staffing needs. You could
coaches, specialist medical staff, player scouts and sales staff in its
reduce the list to single
shops. Relegation led to severe financial trouble for the club as it now
words or short phrases, for
had big debts and a much-reduced income from attendance and TV.
example, what, how much,
New owners bought the Club and had to reduce spending on human
production method, when,
resources, affecting its chances of success.
functions, budget. In the
Evaluate the impact of relegation and the reduction in income on the exam, try to recall the list to
human resource needs of Bolton Wanderers Football Club. [9] help you write your answer.
I can …
■ Explain what is meant by human resources and the human resource needs of a business.
■ State and explain the main influences on the human resource needs of a business.
■ Evaluate how human resource needs may be affected by changes affecting the business.
9781510423695.indb 40 7/17/18 8:35 AM

3.2 Organisational structures and
3 People
different ways of working
Different organisational structures
Organisational structures can be classed as either ‘tall’ or ‘f lat’.
Organisation structure: How
Tall organisational structures have many layers of staff from top to people and departments are
bottom. Here there are eight layers, including the board of directors at arranged within a business.
the top, and down to shop-f loor workers at the bottom.
Figure 3.1 Tall organisational structure Figure 3.2 Flat organisational structure
Flat organisational structures will only have a few layers, maybe as little
as two or three. There may be a board of directors at the top, one layer of
managers and the shop f loor workers.
Table 3.2 summarises the advantages of tall and f lat organisation
structures and what type of business situation they may be suitable for.
Table 3.2 Different types of organisation structure
Tall structure Flat structure

Advantages ● There are clear lines of communication ● Managers tend to delegate
from the people at the top to the people responsibilities to the workers they
at the bottom of the organisation. have responsibility for, which is good
● Managers tend to have only a few people for motivation.
that they are responsible for. ● Workers are likely to talk to a wider
● There will be opportunities for people to range of colleagues, so structure is good
gain promotion within the organisation, for generating ideas.
which can be good for motivation.
Disadvantages ● Subordinates may feel they are too ● There are not always clear lines of
controlled by their line manager which communication and some workers may
can stifle motivation and creativity. miss out on information which would help
● Workers may only talk to immediate them and the business.
colleagues and may be less sympathetic ● Managers may have a large number of
or supportive to workers in other areas workers to oversee.
of the business. ● Promotion opportunities may be few and
may be unclear to workers, which may
reduce motivation.
Suitability ● Tall structures suit large organisations, ● Flat structures are suitable for creative
such as a large hospital. businesses, such as computer game
● Tall structures suit non-creative design.
businesses where workers perform ● Flat structures are good for smaller
limited, clear tasks, for example, a businesses, because they can help
building company. workers feel valued.
9781510423695.indb 41 7/17/18 8:35 AM

Now test yourself
3 People
Vauxhall Cars employs over 2000 workers at its site in Ellesmere Port, where it produces the Astra
car. The organisation is divided into departments, the largest of which is the Operations Department,
which is responsible for the assembly of the cars. Workers are divided into teams, each with a specific
responsibility. One person may be responsible for doors, another for engines and so on. There are
environmental teams who look after the cleanliness and safety of the plant and quality control teams.
Squarespace is a small US business which creates websites. It employs several webpage designers who
create websites for their clients.
For each of the businesses above, recommend the type of organisational structure – tall or flat – which
the business should use. Give reasons for your recommendations. [6]
I can … Exam tip

In the examination, expect
■ Explain what is meant by an organisational structure. questions that ask you
■ Explain the difference between tall and flat organisational to explain the difference
structures. between tall and flat
■ Explain the advantages and disadvantages of tall and flat structures, the advantages
organisational structures. of each, and evaluation
■ Recommend when a tall or flat organisational structure is most questions which ask you
appropriate for a business. when it will be suitable to
have a tall or flat structure.
Terminology of organisation charts

The organisation chart below is for J.J. Jewellery, a sole trader business
owned by Joe Johnson. Joe is responsible for the business, its finances and Organisation chart: A
its accounts. The business makes its own jewellery and sells it through a diagram that shows how
shop, also owned by Joe Johnson, in the town of Bowton. The jewellery the workers are organised
is designed by Amna Johnson, Joe’s wife. It is made in a workshop by in a business and who is in
charge of whom.
a team of three. Vafi Oman, Amna’s brother, manages the production
team. The shop is run by Myiesha Oman, Amna’s sister. There are four
shop assistants. Zac Doyle is a part-time buyer who buys jewellery from
other manufacturers to sell in the shop.
Owner – Joe Johnson
Production
Designer – Amna Shop manager –
manager – Vafi
Johnson Myiesha Oman
Oman
Production
Buyer – Zac Doyle Shop assistants × 4 assistants × 2
Figure 3.3 Organisation chart for J.J. Jewellery
There are five important terms connected to organisation charts that you
need to know. Table 3.3 lists and explains these, and gives an example
from the chart.
9781510423695.indb 42 7/17/18 8:35 AM

Table 3.3 Terminology used in organisation charts
3 People
Term Explanation Example from the organisation chart
Authority The power that one person has to make Vafi has authority over two production
decisions and to give instructions to those assistants.
workers they are in charge of. A line manager
is a person who is in charge of other workers.
Subordinates Workers that a line manager is responsible for. Myiesha is a subordinate of Joe Johnson.
Delegation A process where a manager gives a Joe Johnson has delegated responsibility
subordinate responsibility to make certain for designing jewellery to Amna Johnson.
decisions, for which the manager remains
ultimately responsible.
Chain of The link in authority from those at the top If Joe Johnson wants to pass an
command (who have most authority) to those at the instruction to the production workers, the
bottom (who have the least). chain of command would be from him to
Vafi and then to the production workers.
Span of The number of subordinates that a manager The span of control for Joe is three – he
control has authority over. has authority over Amna, Myiesha and Vafi.
Now test yourself

Look again at Figure 3.2 and then answer these questions on the organisation chart for J.J. Jewellery.
1 What is the span of control of Myiesha? [1]
2 Name one subordinate of Joe Johnson. [1]
3 Who has Myiesha delegated authority to for buying jewellery to sell in the shop? [1]
4 If Joe Johnson wants to tell Zac Doyle to look at jewellery from a manufacturer he has heard of,
what would be the chain of command? [1]
5 Who does Vafi have authority over? [1]
I can … Exam tip

A typical question on
■ Define the terms connected with organisation charts. organisation charts will
■ Apply the terms connected with organisation charts to specific ask you to apply the
examples. terms. It may be followed
by questions about why
businesses have different
organisation charts (see the
next section).
Why businesses have different organisational structures

Businesses can be organised in different ways. Compare these
organisation charts with the one for J.J. Jewellery on page 42.
Organisation by product Organisation by place
Managing director Managing director
Product A Product B Area 1 Area 2

e.g. medicines e.g. perfumes e.g. Europe e.g. North America
Figure 3.4 Organisation of a business by product and by place
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When a business is organised by product (i.e. it makes different products,
3 People
each in a different division of the business), the workers involved in the

production of one product are grouped together – whether they are
production, finance or marketing workers.
Another business may organise by place – all the workers in one
geographical area are in one part of the organisation.
For J.J. Jewellery (see page 42), the workers are organised by function –
all the production workers are together in one department, all the sales
workers are in another. We have also seen (on page 41) that businesses can
be organised as tall or f lat structures.
There are three main reasons why businesses choose different
organisation charts.
● Importance of effective communication: Communication is very
important in all businesses. A business will organise its structure in
a way it thinks will result in the best communications between its
workers. One business may put all the workers connected with one
particular product in one department so that they consider all the
different but connected functions (such as marketing, production and
finance) when making decisions. A business which operates in different
parts of the world may organise its workers by place or area so that it is
easier for them to communicate.
● Different job roles and responsibilities: A business may decide that all
its workers for one function should be together so that, for example,
the marketing experts are helping each other with decisions. Each
function or department will focus on what it does best. It is an example
of specialisation in production.
● Different ways of working: You have seen that tall and f lat organisation
structures suit different types of businesses. Tall organisations suit large
businesses where the success depends on workers carrying out clearly
defined tasks. Flat organisations are better for businesses that need
their workers to be creative – a f lat structure will enable workers to
communicate with a range of different workers and to share ideas.

Most questions ask you to
1 Which of these statements about organisation structures of
apply what you have learnt
businesses is false? [1]
to a case study business.
(a) An organisation structure makes it easier to communicate
Make sure that you explain
in a business.
clearly how what you are
(b) All organisation structures are tall.
writing about is connected to
(c) An organisation shows the different roles and responsibilities of
the business in the question.
workers in a business.
(d) Different businesses suit different types of organisation
structure.
2 Coca-Cola is organised into different geographical regions. For I can …
example, there is a Middle East and North Africa Group, a Western
■ Describe different ways in
Europe Group, a Central and Eastern Europe Group and a West
which businesses may be
Africa Unit. Coca-Cola is produced from flavouring ingredients
organised.
provided by the parent company in the USA and uses local factories,
■ Analyse the reasons why
people, water (its biggest ingredient) and other ingredients from the
businesses may organise
region in which it is sold. Each group is responsible for producing
in different ways
and bottling Coca-Cola in their region.
Analyse why it is appropriate for Coca-Cola to be organised into
different geographical regions. [3]
9781510423695.indb 44 7/17/18 8:35 AM

Ways of working
3 People
Tables 3.4 and 3.5 summarise the different ways of working you need to
learn and the main advantages and disadvantages of each – from the point Flexible working: The
of view of both the business and the worker. Each type is defined in the practice of people working
key terms on this page, so make sure you have learnt these before reading partly at their place of
the tables. work and partly elsewhere,
perhaps at home or while
Table 3.4 Advantages and disadvantages of different ways of working mobile, and possibly at
for a business times that suit them.
Advantage to the Disadvantage to the Full-time working: When a
Way of working business business person works 35 hours or
more per week.
Full-time The worker is The business may have
working permanently available to pay a worker at a time Part-time working: When a
for the business. when no work needs to be person works fewer than
done. 35 hours per week.
Part-time The worker can be The business may have to Self-employment: When
working asked to work at train many more workers people work in their own
specific times needed than if it employed only business, selling their
by the business. full-time workers. work to buyers who may
Flexible The business may The worker may not be be consumers or other
working benefit from motivated available to work when businesses.
workers who like the needed by the business. Temporary working: When
flexibility of when they a person only works for a
will work. short period of time for an
Temporary The business only The business may find it employer, sometimes on
working needs to employ difficult to recruit enough a short-term contract or
workers for the length workers at times when they sometimes on a day-to-day
of time they need are needed. basis.
them, for example, at Working from home: When
harvesting time. a person completes work for
Working from The business may save Workers may not a business (or themselves
home costs by not having to communicate with each if they are self-employed) in
provide office space. other very well, reducing their home.
their efficiency. Working while mobile:
Working while The business benefits The business may not be When people work while
mobile from the increased able to monitor that the they are on the move,
productivity of the worker is working as much travelling or on holiday.
worker. as he or she should.
Self- Businesses often like The self-employed person
employment to use self-employed may not work in the way
contractors to do work that the business’ own
for them because they employees are trained to.
only need them for a
specific job and they do
not need to pay national
insurance or pension
contributions for them,
or to pay them when
there is no work to be
done.
9781510423695.indb 45 7/17/18 8:35 AM

Table 3.5 Advantages and disadvantages of different ways of working for a worker
3 People
Way of working Advantage to the worker Disadvantage to the worker

Full-time The worker is paid for a full working week. The worker is tied to working a full
working working week throughout the year
(except for holiday periods).
Part-time The worker can work when it suits them, for The worker will only get paid for the
working example, during the hours their children are hours they work and this may mean
in school. less money than they need or want. The
worker may have to take a second job.
Flexible The worker can work at times that suits The worker may not be offered as much
working them, for example, they can work four long work as they want.
days and take the fifth day off as flexi-time.
Temporary The worker can work and earn for a period The worker may find there are times of
working and then have time to do other things they the year when there is no work for them.
want to, such as going on long holidays.
Working from The worker saves time and money by not The worker may find there are
home having to travel to work. distractions at home such as noisy
children or they may miss socialising
with other workers.
Working while The worker can make full use of their time, The worker may feel under pressure to
mobile even when they are travelling. work a lot, even while on holiday.
Self- The worker may like being in control and There is less job security for the worker
employment may be highly motivated because their as there may be times when there is no
earnings depend on how much they produce. work and so no income.
Now test yourself

Most of McDonald’s’ restaurant workers work on a part-time basis. They may work the same regular
hours each week, for example, during a lunch period and then returning for an evening shift.
1 Analyse one advantage to McDonald’s of employing workers on a part-time basis. [3]
2 Analyse one advantage to the worker of being employed by McDonald’s on a part-time basis. [3]
Bolton Gates sells its products in all areas of the UK. The company sells doors and shutters for use in
commercial premises such as shops and factories. John Chilton is a sales representative for Bolton
Gates, and is responsible for visiting prospective customers in the Midlands. He lives in Solihull, not far
from Birmingham, which is where he sells a lot of products. Some days he will visit up to four customers,
on others he may have no visits to make but instead may spend time on the telephone contacting
customers or writing reports to the business about the visits he makes. He mainly works from home.
3 Evaluate the possible benefits and problems for Bolton Gates of John Chilton working from home. [9]
I can … Exam tip

These revision notes give one
■ Explain different ways of working. key advantage and one key
■ Analyse the advantages of different ways of working to the business disadvantage to businesses
and to the worker. and to workers of the different
■ Analyse the disadvantages of different ways of working to the ways of working. This will be
business and to the worker. enough for most questions. If
■ Evaluate whether one way of working is suitable for a business or a you are interested in finding
worker. out more, refer to the Hodder
textbook OCR GCSE (9–1)
Business.
9781510423695.indb 46 7/17/18 8:35 AM

3.3 Communication in business
3 People
Ways of communicating in a business context
Table 3.6 Advantages and disadvantages of methods of communication
Method of communication Advantages Disadvantages

Verbal/spoken
Phone – communication ● Good for discussion of ideas or ● No record of the discussion
using a mobile phone or a problems and making arrangements. (unless it is recorded).
landline. ● It is immediate, providing the ● Can be difficult with long
communicators are available to speak. waiting times to get through to
a call centre.
Meeting – people come ● It is a good way to exchange ideas ● Can be expensive to get
together to have a discussion, and to check understanding. people together.
either in person or through ● Minutes (a written summary) provide ● If it is a formal meeting, it can
video-conferencing. a record of the meeting. take time to arrange.
Presentation – a speaker ● The speaker has time to prepare in ● There may be a lot of listeners
explains something, often advance what they wish to say and and it may be difficult to check
using projected slides or then to explain clearly. they all understand.
real objects. ● It is often possible to ask questions ● Presentations take time to
to help understanding. arrange and can be expensive.
Non-verbal/written
Letter – a written document ● Provides a record of the ● It takes time for letters sent in
that is usually sent through communication. the post to be delivered.
the post. ● The sender can take time to make ● If the meaning of the message
sure ideas are clearly expressed is unclear, it is difficult for the
while the reader can read the receiver to check.
message more than once.
Email – an electronic ● A very fast method of ● A person may not check their
message that can be sent communicating. emails regularly.
to an individual, a group ● Good for short messages although ● Bulk emails are often ignored
or many people (known as attachments are a way of adding and deleted or lost in spam.
‘bulkemails’). more information.
Text – a written message ● A very fast method of communicating ● Only limited information can
sent from one phone to that can include a lot of people. be given.
another. Texts can be to ● The receiver can save the text to ● Not good for discussing ideas.
individuals, groups or to remember details in the message,
many people (bulk texts). for example, of an appointment.
Social media – a message ● The message can be sent to selected ● Somebody in the business
sent through sites such as groups or in bulk to large numbers needs to manage the
Facebook and Twitter. cheaply. communications, for example,
● Sometimes pictures can be added to responses from receivers.
the message. ● It is not always easy to judge
how successful the message
has been.
Website – a business can ● It saves money because information ● Customers cannot ask for
post information on a does not need to be printed and information easily (unless a
website or let customers posted. ‘chat’ facility is available).
order on it. ● Customers can order online so ● Customers cannot view the
the business may not need to goods.
have a shop or office accessible to
customers.
9781510423695.indb 47 7/17/18 8:35 AM

Table 3.6 summarises the main ways of communicating that you need
3 People
to know: verbal communication and written communication. Two

advantages and two disadvantages are given for each communication
method.
Communication: The transmission of a message from a sender to a

receiver through a means of communication.
Verbal communication: Communicating by speaking – in meetings, by
telephone, by video-conferencing or through a presentation.
Written communication: Communication by written words – text,
email and letters.
Now test yourself

For each of the situations below, recommend an appropriate way of
communicating. Give a reason for your recommendation.
1 Next plc wants to inform its customers of what it sells and make
it possible for customers to buy clothes from the comfort of
their home. [3]
2 The human resources manager of LV, an insurance company,
wishes to discuss with a member of staff how well he is working
and to set targets for the year. [3]
3 The leader of a double glazing sales team wants to inform members
of her team that their meeting will start at 4.30 p.m. and not at
4 p.m. as first announced. It is 9 a.m. on the day of the meeting. [3]
Exam tip
Questions will often ask you to recommend a way of communicating
that should be used in a situation. You need to state the method you
recommend and then explain clearly why it makes sense to use that
method.
I can …
■ State the main verbal and non-verbal ways of communicating in
business.
■ Recommend the best method of communication to use for different
situations.
9781510423695.indb 48 7/17/18 8:35 AM

Importance of business communications
3 People
Good communication and feedback is very important in business.
Communication can be internal (between people working in the same Feedback: The response
business) or external (between the business and outsiders such as customers made by the person who
and suppliers). Figure 3.5 shows some of the types of communication used received a communication
in different business divisions. which indicates whether
they have understood the
communication.
Marketing communication
• Research needs to be done to find out what
customers want.
• Communication is important for telling
customers about the goods and services.
• The sales team may need to communicate with
each other about selling the product.
Communications about human resources Communications about finance

• Workers need to be recruited. • The business may need to communicate with
• Workers need to be appraised. Importance of the bank to arrange a loan.
• Problems between workers need to communication • Bills need to be sent out and payment recorded.
be resolved • The accounts department need information
about sales and purchases to keep accurate
accounts.
Communications with government Business operations communications

• The business will need to know the • The production team will need to know how
government’s rules and regulations about safety many goods to make.
and environmental regulations, for example. • They will need to discuss problems about
• The business may ask the government for quality.
help – with money or to change rules and
regulations to help it.
Figure 3.5 Importance of communication within different business divisions
Now test yourself

1 The pharmacy chain, Boots, plans to increase its profits by increasing sales in its existing shops.
Which of the following types of communication would Boots not need to use? [1]
(a) The business would need to communicate with its market to advertise products.
(b) Communications would be needed in human resources to plan if more workers should be
recruited.
(c) The finance department would need to communicate with business operations and marketing to
find out how much finance is needed to increase sales and production.
(d) The business would need to communicate with the government to obtain permission to increase
output.
2 The Entertainer toy shop is planning a marketing campaign for the period leading up to Christmas.
Analyse why communication is a very important part of this campaign. [3]
I can … Exam tip

Read the question carefully.
■ Explain the difference between internal and external For communications
communications. questions, think about whether
■ Give examples of how communication is used in business. the answer needs you to
■ Analyse the importance of communications to business. deal with internal or external
communications, or both.
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Influence of digital communication on
3 People
business activity
Email, social media, websites, mobile phones and messaging sites such as
What’s App and Twitter enable the digital communication of voice Digital communication:
messages, video, images and text messages. The use of digital The electronic exchange of
communications has changed the way many companies operate across all information using ICT.
their business functions. Table 3.7 gives examples of the ways in which
business functions have changed as a result of digital communications.
Table 3.7 Effect of digital communications on business functions
Function Examples of changes and their advantages or businesses and consumers

Marketing ● Businesses can sell online which means they do not need to run expensive
shops or they have fewer shops or offices (e.g. banks and insurance companies).
● Businesses have changed their marketing, with more emphasis now on
promoting via websites and social media.
● Competition has increased as it is cheaper for businesses to sell online and
easier for consumers to shop around.
● New business opportunities have developed such as new online TV stations and
delivery services.
Human resources ● Working while mobile has become easier and is now more widely used.
● Recruitment and other websites have made it easier for businesses to recruit
workers.
● Digital communications have increased the productivity of workers, for
example, they can do more tasks (such as accounts) and do them more quickly
using computers, reducing business costs.
Operations ● Production has become highly automated with the use of computer-controlled
robots. Fewer workers are needed in manufacturing, reducing costs.
Now test yourself

Blockbusters was a retail business which rented out film DVDs.
Customers visited the shop to choose and rent the DVD, before
returning it (usually within 24 hours or they had to pay a small fine).
The development of digital communications has made it possible for
companies like Netflix to offer an online film (and TV) rental service
which many consumers prefer.
1 Using an example, explain the term ‘digital communication
in business’. [2] Exam tip
2 Analyse how the way in which films are rented has changed
in recent years. [3] Digital communications have
3 Analyse two ways in which digital communication has greatly influenced business
affected workers. [6] activity and it is likely that
you will be aware of many
of these through your own
personal experiences. Use
I can … your own knowledge of
digital communications to
■ Explain what is meant by digital communications. analyse how it is used in
■ Analyse how digital communications have affected the different business. You will probably
functions of business, including marketing, human resources and know most about how digital
operations. communications benefits
■ Analyse the benefits to business of using digital communications. customers.
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3.4 Recruitment and selection
3 People
Why businesses recruit
Recruitment refers to the process of finding people to work in a new or
established business. Businesses analyse their human resource needs Analysing human
when they start up and, usually, at regular intervals once the business resource needs: When an
organisation decides how
is established. The analysis will tell them if they need to recruit new
many and what type of
workers to fill a skills gap and will identify the type of workers needed
workers it should employ.
as well as how many, when and for how long. Figure 3.6 shows the main
reasons why businesses need to recruit workers. Skills gap: When a business
recruits skilled workers
To start up a When a business because it is short of them.
business grows
A business that is starting up If a business grows it may need
will need workers to run it and to more workers to produce the goods
make the goods or provide the or service, and more managers to
services it offers. oversee them.
Why businesses
recruit
To replace employees To fill a skills gap

who leave A business may be short of skilled
Workers leave businesses for
workers either because it is growing or
different reasons – retirement,
promotion, increased pay from because it is changing the way it produces
another business and dismissal to a method which requires more
(sacked). skilled workers.
Figure 3.6 Why businesses recruit workers
Now test yourself

1 Which of the following is not a reason why a business would recruit workers? [1]
(a) The business intends to increase sales.
(b) The business needs to cut costs.
(c) The business is short of skilled workers.
(d) Employees have retired from the business.
2 Cyber security is concerned with preventing people gaining illegal access (hacking) into computer
systems. In 2016, TalkTalk, a provider of internet services, was attacked by hackers who introduced the
‘Mirai worm’ into its IT systems. The worm prevented customers from using the internet. In 2017, the
National Health Service was attacked when hackers locked many of its computers. Cyber criminals then
asked for money to unlock the computers. In the UK, there are simply not enough cyber security experts
who can produce software to protect computer systems. Some organisations employ their own cyber
security experts, while others employ specialist firms. As the use of ICT increases, more cyber security
firms are setting up or expanding. Cyber security experts can earn a lot of money and often move from
one business to another for better pay.
Analyse two reasons why cyber security firms need to recruit experts. [6]
Exam tip
I can … When a question is worth

six marks and asks you to
■ Explain the term ‘recruitment’. do two things, each will be
■ Analyse four reasons why businesses need to recruit workers. worth three marks.
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Use of different recruitment methods to meet
3 People
different needs
Two documents are very important in recruitment – the job description
and the person specification. The information given in these documents External methods of
makes it more likely that only workers able to do a job will apply, saving recruitment: Includes
time for the business and the applicants. websites, newspapers,
social media and specialist
Business must choose whether to use internal recruitment or external magazines.
recruitment when looking for a new worker. Both methods have their
Internal methods of
advantages and these are shown in Table 3.8. You can work out the
recruitment: Includes notice
disadvantages of each by thinking about the opposite of each point. For boards, word of mouth,
example, a disadvantage of external recruitment is that it is usually more company website and emails
expensive than internal recruitment. to staff.
Table 3.8 Advantages of internal and external recruitment Job description: A list of
the main duties, tasks and
Advantages of internal Advantages of external responsibilities of a worker.
recruitment recruitment
Person specification:
It is cheaper to advertise It can fill a skills gap when there is
A list of the qualities,
internally. no one already employed who can
qualifications and
do the job.
knowledge that a person
Often quicker to recruit than People from outside can bring should have to do a
external recruitment. new ideas. particular job.
The worker will already be known Avoids workers becoming unhappy
to the managers so they can be if they are not selected but a
confident about the work he or she colleague is.
will do.
The worker knows the business so It is necessary when the business
there are no problems settling in. is growing and additional workers
are needed.
It can motivate workers if they see It saves having to recruit someone
colleagues being promoted. to replace a worker promoted
internally.
Table 3.9 describes the media which a business can use to recruit workers.
It states whether the media is suitable for internal and/or external
recruitment and some gives key points to remember about each type.
Table 3.9 Recruitment media
Internal or
Media external Key points
Website Both The firm’s own website or a special site advertising jobs.
Social media Both This is now widely used as many potential applicants use social media.
Local newspapers External Appropriate when the job is likely to appeal only to people who live
near the business.
National newspapers External Appropriate when workers from a very wide geographical area may
apply, but advertising in them is expensive.
Specialist magazines External Good for recruiting workers such as engineers, doctors and HR
and journals specialists who read journals and magazines relevant to their
particularly job expertise.
Job centre External These are run by the government and give workers the opportunity
to use computers and find out about a wide range of jobs.
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Internal or
3 People
Media external Key points
Word of mouth Both Existing employees tell friends and others about jobs, which saves
the business money.
Email Internal The business can send an advertisement to workers they know may
be interested in the job.
Noticeboard or Internal This is cheap and will be seen by workers likely to be interested in
company magazine the job.
Job advertisements need to include enough detail to attract the right kind
of person to apply, for example, contact information (business address and
phone number/email address), details about the job (some information
from the job description), details about the person needed (some
information from the person specification), pay and conditions.
Now test yourself

Aldi is opening a new supermarket in Stoke. It needs to recruit:
● an experienced shop manager to get the supermarket off to a good
start
● 20 shop assistants to work in the store.
Recommend how you would recruit these workers. Give reasons for
your recommendations. [6]
Exam tip
Use the information in the table about the advantages of internal and
external recruitment when recommending which recruitment method
to use. Think about the types of workers needed, the numbers needed,
where the work is and how much money the business can afford to
spend on recruitment. The key is to justify any recommendation you
make.
I can …
■ Explain what is meant by internal and external recruitment.
■ Explain the terms ‘job description’ and ‘person specification’ and
why these are useful when recruiting workers.
■ Analyse when to use internal or external recruitment.
■ Recommend the media to use when recruiting workers.
■ Explain what should be included in a job advertisement.
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Methods of selection
3 People
Businesses need to obtain information about the people who apply for a
job. They use this information to decide which of the applicants will be Selection: The process
best be able to do the job. of choosing between
applicants for a job.
Figure 3.7 gives the main points about each of the methods of selection a
business can use.
Letter of application
• The applicant uses this to
explain why they think they
are suitable for the job.
Application form • It is helpful to see how well CV
the applicant’s information
• The firm can specify the is put together. • A summary of the personal
information it needs and all details, qualifications and
applicants will need to experience of the applicant.
complete a form.
• A good way to compare
applicants.
Tests and presentations Interview

Methods of
• The applicant’s ability for a • The business
selection
specific skill, such as typing, representative asks
can be tested. questions of the applicants.
• A presentation enables the • Good for finding
applicant to demonstrate out what applicants have
their ideas and ability to to say and judging their
communicate. personality and
communication skills.
Reference Group activities

• A statement from a previous • Applicants work together
employer to give information on a task.
about work done by an • Good for showing how well
applicant and how well they people work with others.
did their job.
Figure 3.7 Methods of selecting a job applicant
Now test yourself

Aldi is opening a new supermarket in Stoke. It needs to recruit an
experienced shop manager to get the supermarket off to a good start.
The HR manager has used information from letters of application
and CVs to choose five candidates to go to the final stage of selection.
The HR manager needs to choose two methods of selection to use to
decide which of the five applicants to employ.
Exam tip
Recommend two methods of selection that Aldi should use to decide
which of the five applicants to employ. [6] Make sure you are clear
about the job the worker
will do and the skills and
qualifications needed. You
I can … should be able to analyse
how the different methods
■ Explain the different methods of selection. of selection will provide the
■ Recommend when a business should make use of each of the information the business
different methods of selection. needs.
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3.5 Motivation and retention
3 People
Financial methods of motivation
Workers who feel safe at work, who feel that their contribution to
the organisation is valued and that their talents are recognised and Bonus: An additional
encouraged are likely to feel motivated. Successful organisations ensure payment to workers for
they motivate their workers. achieving a target.
Fringe benefits: Additional
Financial methods of motivation (see Figure 3.8) all involve some kind
benefits that workers
of payment, either in money or in kind (i.e. free goods and/or services)
may receive in addition to
to encourage workers to work longer or more efficiently. their pay, such as health
insurance, gym membership
and childcare vouchers.
Pay (wage or salary)
• A wage is usually paid weekly and is Motivation: Encouragement
based on the number of hours worked. given to workers to work well.
An extra amount per hour can be paid
for overtime or unsociable hours. It Pay: The money earned by
motivates workers because the more Bonus workers as a reward for the
they work the more they earn.
• A payment that a worker receives in work they do.
• A problem is that a wage does not addition to their pay, usually for meeting
reward workers for how well they work, a production or sales target. A bonus is Profit sharing: When
only how long. often paid to individuals or teams whose workers receive some of the
• A salary is an annual sum divided into output can be measured.
12 monthly payments. A salary is often
profits made by a business.
• It motivates workers because the more
paid to professional workers such as they produce or sell, the more they earn.
teachers, accountants, HR managers. It improves their productivity.
• It motivates workers as they receive a • Targets need to be fair and realistic or
regular income. workers will not feel motivated.
Financial methods
of motivation
Profit sharing Fringe-benefit

• Workers are paid a part of the profits • These are benefits in kind given to
of the business. workers on top of their pay, such Exam tip
• A profit share may be paid to workers as free health insurance.
Be sure you can recommend
whose individual output cannot be • They motivate workers because
measured. they provide them with an which type of financial
• It motivates them because they know attractive package of pay and benefits. method of motivation is
if they work efficiently, the business They can be good for motivating appropriate for a particular
will make more profit and it will workers not to leave a business. type of worker. Be ready to
increase their income. • Fringe benefits are a cost to a
business so may reduce profits.
justify (explain) your answer.
• A drawback is that it reduces the
profits for shareholders.
Figure 3.8 Financial methods of motivation I can …

■ Explain what motivation
means.
Now test yourself ■ Explain what financial
motivation is.
A farm employs workers to pick cabbages during the harvest period. ■ Explain the methods of
Which method of financial motivation would motivate the workers to financial motivation.
pick as many cabbages in a day as they could? [1] ■ Describe the types of
(a) A weekly wage. workers who will be
(b) A bonus system. motivated by different
(c) Fringe benefits such as free health insurance. methods of financial
(d) A salary. motivation.
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Non-financial methods of motivation
3 People
Non-financial methods of motivation (see Table 3.10) are ways of

encouraging workers to work longer or more efficiently but which do Award scheme: A
not involve paying them extra money for example, by praise, an award presentation to recognise an
individual worker or team’s
scheme or providing a good working environment.
effort and achievement.
Table 3.10 Non-financial methods of motivation
Method Praise Award scheme Working environment

Description Workers are thanked Workers are presented Improving the workplace so that
and praised for the with rewards for their it is a pleasant place to work.
(good) work they have work. These might It can also involve listening to
done, either in private or include vouchers for days people and giving them a say in
publicly in front of other out, holidays or simply the business or sending them on
workers. certificates of achievement. team building activities.
How it It makes workers feel Makes workers feel valued Makes workers feel well looked
motivates appreciated and valued. and will encourage them after and that their opinions are
Those not praised may and others to continue to valued.
feel that they need to do increase their efforts.
better to earn praise.
Advantage It does not cost the Cost of these rewards If workers feel valued they will
business anything and it varies but not all are respect the business and their
helps to create a positive expensive to give. colleagues, creating a positive
climate. attitude to work.
Disadvantage Sometimes if there is no There is some cost to them. There is a cost to some of
financial reward for good They need to be given fairly this, for example, improving
work over a long period, or workers who do not the furniture or facilities in a
workers may feel that receive an award may be building or paying for activities.
they are not truly valued. upset.
Suitable for All workers as everyone All workers as everyone Most workers, except for those
likes to feel appreciated. likes to feel appreciated. who work in conditions where
improvements to comfort are
difficult, such as those working on
a North Sea oil rig or in a mine.
Now test yourself Praise: A way of motivating

a worker by complimenting
Herefordshire Care Homes uses non-financial methods of motivation their work and so making
for the care assistants who look after the elderly people who live in its them feel recognised and
homes. Employees can be nominated for awards by a colleague. The valued.
awards include:
● a certificate and letter of recognition Working environment:
● a gift The quality of the physical
● a brief article about the worker on the company website. workplace and its
1 Analyse one advantage of this scheme. [3] atmosphere (how people
2 Analyse one disadvantage of this scheme. [3] treat each other, etc.)
Exam tip
I can … Be sure you can recommend

which type of non-financial
■ Explain what non-financial motivation is. method of motivation is
■ Explain the methods of non-financial motivation. appropriate for each type of
■ Recommend the types of workers who will be motivated by different worker. Be ready to justify
methods of non-financial motivation. (explain) your answer.
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Importance of employee motivation and
3 People
Importance of employee retention
Motivated workers will reduce costs and increase sales, through improved
employee performance. Table 3.11 explains why motivated workers help
businesses to compete, survive and grow.
Table 3.11 Benefits of motivated workers
Benefit Explanation
High worker productivity Workers will produce more goods or improved services in the time they
work. This will reduce the costs of production and the prices the business
charges can be reduced so that sales and profits rise.
Reduced levels of worker Workers will want to do their job well. This may reduce business costs as
supervision fewer supervisors need to be employed.
Low worker absenteeism Workers will be happy about coming into work and less likely to take a day
off if they are only slightly unwell.
Improved quality Workers will take pride in doing their work well and will produce quality
goods and services, knowing that this will satisfy consumers and give the
business a good name. There will be less waste which helps to reduce
costs.
A high employee retention means workers stay with a business for a long
period of time. A low employee retention rate means that workers do not Labour turnover: A
stay long and there is a high labour turnover. measure of the number or
proportion of staff who leave
Workers will be happy to stay with a business if they feel they are being an organisation each year
treated fairly. For example, they will feel that their pay is what they and who therefore need to
deserve, that they are respected by their managers and that there are be replaced.
opportunities in the business for them to develop their skills and make
Motivation: How workers
progress in their careers. are encouraged to work
Benefits of workers staying a long period of time: well.
● The business will need to recruit workers less often, saving time and Retention: When workers
recruitment costs. choose to stay employed in a
● Training costs will be lower because the business will not need to business rather than leaving
train as many new workers. Workers will already be familiar with the to work elsewhere.
business and its customers, so will need less training.
● When the firm does want to recruit new workers, it will be easier for
them to do so because it will have a good reputation for treating its
workers well.
However, not all businesses want to retain their workers for a long period
of time. Sometimes workers may only needed for a particular length of
time, for example, a hotel may require more workers during the summer
tourist season and shops may take on extra staff for the Christmas period.
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Now test yourself
3 People
Blossom Farm grows a range of vegetables. These are harvested

during the months of August and September and during this period,
farm labourers are needed to work in the fields doing hard manual
work such as bending down to cut cabbages from their stems.
Belle Hair is a chain of hairdressing salons with shops in several
towns. It has a good reputation and many of its customers are
regulars. It employs 76 workers, most of whom are hairdressers.
1 Evaluate why the retention of workers is likely to be more important
for Belle Hair than it is for Blossom Farm. [9]
2 Recommend one way in which Blossom Farm could motivate the
farm labourers it employs.
Give a reason for your recommendation. [3]
3 Recommend one way in which Belle Hair could motivate the
hairdressers it employs. Give a
reason for your recommendation. [3]
Exam tip
With ‘recommend’ questions there may be more than one possible
answer. While your recommendation needs to be appropriate,
the key to gaining further marks will be how well you justify your
recommendation.
I can …
■ Analyse the importance of motivation to a business.
■ Evaluate when to use different methods of motivation.
■ Explain the meaning of retention.
■ Analyse the importance of retention to a business.
■ Evaluate when high retention is good for a business and when it is
not necessary.
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3.6 Training and development
3 People
Different training methods
Training involves developing a worker’s specific skills, for example, by
teaching them to operate the company computer system, deal with customers Induction: Training to
or work safely. Induction training occurs when a worker first joins a introduce a new worker to
company. Training is divided into on-the-job and off-the-job. an organisation, including
how to do the job, how it fits
On-the-job training usually involves a trainee working with a more within the operation of the
experienced worker who shows the trainee what to do and then gives business and an introduction
them feedback to improve their skills as they do their work. Somebody to others in the organisation.
learning to ice a cake might learn in this way. Table 3.12 describes the
advantages and disadvantages of on-the-job training.
Table 3.12 Advantages and disadvantages of on-the-job training
Advantages of on-the-job training Disadvantages of on-the-job training

It is specific to the individual and the business. The work done as the learner starts to train may
not be of a good enough quality.
It saves on the cost of travel to a course. The trainer may be good at their job but not at
training others how to do it.
The worker produces something as he or she The worker may learn only how to do the work in the
trains. way the business does it.
The business can teach the person exactly how they The worker may not obtain a qualification as a
want the job done. result of the training.
It is not easy to train a group of trainees.
Off-the-job training is when the worker is away from his or her work.
Off-the-job training: Occurs
Figure 3.9 shows the different types of off-the-job training while
away from the job. It may
Table 3.13 shows the advantages and disadvantages.
still be at the place of work
or the employee may be sent
elsewhere for training.
Lectures On-the-job training: Occurs
• Good for giving out information at the place of work and
to people. while the worker is doing his
• Not good for improving skills –
practice is better.
or her job.
Role play or simulation Demonstrations

• Good for practicing what to do • Good for showing how a job
in a pretend situation, for should be done.
example, how to deal with a Off-the-job
• The worker will still need to
difficult customer. training
practise the skill.
• Difficult to prepare workers for
every type of real-life situation
they may have to deal with.
Training: Short-term
Reading and reflecting on Team building activities
instruction that focuses on
online materials (e-learning) • Can be expensive.
• Good for learning about a task helping a worker to do his or
• Good for getting people to work
and different situations. her job correctly.
together.
• The worker will need to practise
what they have learnt in the real
world.
Figure 3.9 Types of off-the-job training
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Table 3.13 Advantages and disadvantages of off-the-job training
3 People
Advantages of off-the-job training Disadvantages of off-the-job training

Training is often given by experts. It can be expensive – the employer will have to pay
travel costs and training fees.
The trainee may be motivated by a day away from The business loses output while the worker is
work. away from work.
A worker can feel valued because the business is Improving a worker’s skills may make it possible
paying for the training. for them to get work in another business.
Some types of training, e.g. safety, are better
carried out by experts.
The training a worker receives when they first start working at a business
is known as induction training and can be either on- or off-the-job
training. An advantage of induction training is that the worker will more
quickly get to know their co-workers and better understand their role and
the business as a whole. A disadvantage to the business is that the worker’s
wages, and the wages of the person training them, will be paid even
though they are not producing anything during the induction period.
Now test yourself

1 A health clinic wishes to begin offering acupuncture to its patients. Acupuncture involves inserting
fine needles into the patient. The clinic needs to train one of its physiotherapists how to do this.
Recommend whether on-the-job or off-the-job training should be used. [3]
2 A garage wishes to train an apprentice mechanic. The firm employs several fully-trained, highly-
skilled mechanics. Analyse one advantage and one disadvantage to the business of using on-the-job
training for this. [6]
Exam tip
Questions will either be about on- or off-the-job training or about how
off-the-job training is done. Be ready to discuss how the advantages
and disadvantages of each apply to a specific training situation.
I can …
■ Explain the meaning of on- and off-the-job training, and induction
training.
■ Apply the advantages and disadvantages of on-the-job training to an
example training need.
■ Apply the advantages and disadvantages of off-the-job training to
an example training need.
■ Recommend the type of training appropriate for different situations.
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Why businesses train their workers
3 People
Reasons why a business trains its workers:
● Introduces new recruits to the business and their work (induction
Productivity: A measure of
output per worker, which
training).
can be used to measure the
● Gives workers technical skills such as how to use a fork-lift truck.
performance of a worker.
● Develops workers’ personal skills such as leadership, communication
and organisation.
● Inform workers of health and safety procedures.
● Inform workers about employment law or rules such as discrimination
in the workplace.
● Teach workers to manage others.
● Teach workers to function together as a group.
● Tell workers about the features of new products that they will be
selling.
● Train workers to be f lexible so that they can do different types of jobs
as needed.
● Teach workers new skills if their existing skills are no longer needed.
Benefits to a business of training its workers:

● Improves workers’ productivity and so it reduces the business’
production costs.
● Improves the quality of goods or services (including customer service)
offered by the business, increasing its sales, revenue and profits.
● Helps the growth and development of the business.
● Solves skill shortages by training up existing staff.
● May improve motivation and retention.
● Ensures that goods and services are produced safely.

When writing about why
1 A business has recruited ten new workers. Which of the following
businesses train their
will not be a reason for training these workers? [1]
workers, think about the
(a) To introduce them to other workers and show them around the
skills a trainee will learn
premises.
and how this will benefit
(b) To tell them about health and safety in the business.
the business.
(c) To help them to move on to other companies.
(d) To teach them the skills needed to do their jobs.
2 Homebase, the DIY store, sends sales assistants who work in
the gardening sections of its shops on a garden licence training
scheme. The course takes a year and is accredited by City & Guilds.
Analyse two benefits that Homebase may gain by sending workers on
the garden licence training scheme. [6]
I can …
■ List the reasons why workers train their workers.
■ Explain and apply the benefits businesses gain from training their
workers.
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Staff development
3 People
Staff development involves learning over a long period of time. Workers

may learn through an external course, with learning being reinforced by Apprenticeship: A long-term
practical activity in the workplace. The aim is to realise the long-term development programme for
workers to learn job skills
potential of the employee. Workers can gain vocational qualifications
while they work.
(which are specific to a job) or academic qualifications (which are
more theoretical). Professional development:
Involves developing the long-
Two types of staff development are compared in Table 3.14. In practice, term potential of workers.
they are not quite so different as apprentices may experience professional
development at the same time they complete their apprenticeship, or Staff development: Includes
apprenticeships and
they may progress to a professional development programme.
professional development
programmes.
Table 3.14 Comparison of two types of staff development
Apprenticeship Professional development programme

A long-term learning programme – often over A long-term programme – often two years or more.
two, three or four years.
Usually leads to a specific National Vocational May lead to a professional qualification such as a
Qualification (NVQ), for example, Level 2 Chartered Surveyor or a member of the Association
qualification in childcare or a Level 3 qualification of Dental Anaesthetists. It may lead to general
in plumbing. academic qualifications such as a degree.
It develops skills and knowledge relevant to a It contributes to a person’s general education as well
specific job, e.g. veterinary nursing. as enabling them to develop a set of skills and body
of knowledge related to a specific vocation, such as
medicine, business management or accountancy.
Available at two main levels – intermediate (for Professional development applies at all levels from
people with GCSEs) and advanced (for people with junior to senior workers.
GCSEs and A levels). Some apprenticeships go on
to degree-level work and beyond.
The development programme is usually Professional development programmes often include
completed partly in the work place and partly in a high academic content completed at college or
a college. online, but there will also be a practical element.
Now test yourself

The White Horse Inn has trained several apprentice chefs in recent years. Ryan Bollard was an
apprentice at the Inn. He worked with the chef to learn to produce a range of meals and during this time
he gained a Level 2 and a Level 3 NVQ. Ryan went on to study for a degree in hospitality management.
Now he is the Operations Manager for the business.
1 Analyse how Ryan’s experience was typical of an apprenticeship. [3]
2 Explain two features of a professional development programme. [4]
I can … Exam tip

■ Explain the meaning of the term ‘staff development’. If the question asks about
■ Explain the difference between vocational and academic staff development in general
qualifications. you can use information
■ Explain how an apprenticeship is an example of staff development. about either apprenticeships
■ Explain how professional development is as an example of staff and/or professional
development. development programmes.
9781510423695.indb 62 7/17/18 8:35 AM

Benefits to employees and businesses of staff
3 People
development
Can motivate workers,

leading to an increase in
output, improvement
Staff develop skills in quality and reduction
and gain in costs.
qualifications.
Benefits to Can improve staff

Staff are paid Can help to overcome
Benefits to businesses of retention, saving on the
while they a skills shortage.
employees of staff staff development costs of recruitment.
develop new
skills. development
Staff may receive Can aid recuitment if

Can help the business
promotion or other workers believe the
to meet its future
benefits as a result business will help them
staffing needs.
of development. to develop.
Figure 3.10 Benefits of staff development to businesses and employees
Figure 3.10 describes the benefits of staff development to both the

business and the employees. However, there may be problems for the
business resulting from staff development, as outlined below.
● Staff development costs money, so when a business is experiencing a
decrease in its profits or a financial loss, it may decide to reduce staff
development costs as a way of increasing profits or even of staying in
business.
● Staff who have completed their training may find that they can get a
better job elsewhere.
Now test yourself

Of the 20 people who work at Holts Jewellery, 9 started with the business as an apprentice. The business
found that when experienced jewellers retired there were not enough skilled people to replace them,
so it started to train its own apprentices in jewellery design and manufacturing, including skills such
as pearl stringing, lapidary (engraving, cutting and polishing stones and gems) and goldsmithing. Holts
Jewellery now has expert jewellers which it believes sets it apart from many other jewellery businesses.
Evaluate the benefits to Holts Jewellery of its apprenticeship scheme. [9]
I can … Exam tip

When answering ‘evaluate’
■ Explain the benefits of staff development for employees. questions, write about
■ Explain the benefits of staff development for business. the advantages and
■ Explain the costs of staff development for businesses. disadvantages of the given
■ Evaluate the usefulness of staff development for a business. scenario, then try to come
to an overall conclusion.
Use evidence from the case
study as well as from what
you know of the real world
of business, or say what
information you would need
to make a judgement.
9781510423695.indb 63 7/17/18 8:35 AM

3.7 Employment law
3 People
Impact of current legislation on recruitment

and employment
Discrimination laws
Discrimination is illegal. The Equality Act 2010 says a person cannot
be treated differently on the grounds of their gender, race, ethnicity,
disability, sexual orientation (LGBT – lesbian, gay, bisexual and
transgender), religion or beliefs.
A business must not:
● pay workers differently for doing the same work
● favour certain types of people when recruiting workers, for example,
advertising for male workers (unless an exception in law has been made)
● discriminate when promoting or training workers or making then
redundant
● allow workers to be mistreated by other workers because of, for
example, their skin colour, sexual orientation or religion.
A business that does discriminate may find:
● staffbecome less motivated, which may affect the performance of
the business
● workers decide to leave, so the business must recruit workers
● it develops a poor reputation, which could reduce sales and affect
recruitment
● it can be fined and made to pay compensation to employees.
A business that takes action to stop discrimination may find:

● it increases costs, for example, it may have to raise the pay for women
● it needs to rewrite recruitment and training policies to prevent
discrimination
● it needs to monitor what goes on in the business to prevent
discrimination taking place.
Contract of employment
A contract of employment makes clear what the worker is being
employed to do and the pay and conditions that the business will give to
the worker, including holiday entitlement. A statement of employment
particulars is a written part of a contract of employment which gives
details of pay, conditions and holiday entitlement. It must be given to
the worker within eight weeks of starting work.
Contract of employment: A legal agreement between an employer

and an employee.
Discrimination: Treating one worker differently to another for no
acceptable reason.
Employment law: Regulations and rules put in place to protect
workers from employers who may treat them unfairly.
Statement of employment particulars: Part of a contract of
employment, it gives details of the terms of employment.
9781510423695.indb 64 7/17/18 8:35 AM

All workers are entitled to holidays each year, depending on how many
3 People
hours per week they work for the business. Normally, workers cannot
be asked to work more than 48 hours per week, though there are some
exceptions (e.g. police officers, people in the armed forces, seamen and
servants in private households), but workers can opt out of this legal
restriction if they wish to.
The effects of providing a contract of employment to all workers include:
● increased costs because the business may need to employ additional
people to cover workers who are on holiday or who can only work a
limited number of hours each week
● managing staff holidays to ensure there are always enough workers to
do the work.
Now test yourself

1 Analyse two problems that a business may face if it discriminates
against an employee. [6]
2 Analyse the benefit of a contract of employment to:
(a) the business
(b) a worker. [6]
Exam tip
When revising this topic, make sure you understand what is meant by
discrimination and what a contract of employment is, but focus on the
effect of these on a business.
I can …
■ Explain what is meant by discrimination in recruitment and
employment.
■ Analyse the impact on business of laws which are designed to stop
discrimination.
■ Explain what a contract of employment and a statement of
employment particulars are.
■ Analyse the impact on a business of contracts of employment.
9781510423695.indb 65 7/17/18 8:35 AM

4 Operations
4.1 Production processes

Different production processes and their
impact on businesses
Businesses can use job, batch or flow production to manufacture goods.
You need to be able to discuss the impact of these types of production
processes on a business, both in terms of the positive impacts (advantages)
and the possible negative impacts (disadvantages) (see Table 4.1).
Batch production: A method of production where one type of product

is made and then production is switched to make a different product.
Flow production: Production of one product that takes place
continuously using a production assembly line. It is sometimes called
mass production.
Job production: A method of production where products are made
individually.
Production processes: The three methods or processes of production
– job, batch and flow.
Table 4.1 Advantages and disadvantages of three types of production

processes
Method of production Advantages Disadvantages

Job production, ● The item is likely to be of a high ● Can be a high cost method of production,
e.g. a bridge, piece quality and is a one-off, bespoke especially if it requires especially skilled
of artwork, item of item (i.e. designed to meet the workers to produce the item.
furniture, hand-made individual needs of the customer). ● Production may be slow and the
item of clothing. ● The business can often charge a customer may have to wait for the
high price and make a good profit. product.
Batch production, ● Batches can be varied to meet the ● Machines need re-setting between
e.g. loaves of bread, needs of different customers. different batches, which costs money.
paint. ● There are no storage costs if goods ● Stocks of raw materials may be needed
are made to order. – extra costs.
● It is cheaper than job production. ● Tasks may be repetitive and boring
for workers, leading to motivation and
staff retention problems.
Flow production, e.g. ● Large quantities are produced for ● Mass-produced goods may not be of
motor car assembly sale. high quality.
● The business may gain economies ● The business may need to store large
of large-scale production which stocks of materials ready for use on
can reduce unit costs. the production line.
● Use of machinery/automation can ● Production can be disrupted, for
reduce costs. example, by a mechanical break-down.
● Use of computer controlled ● Tasks may be repetitive and boring
machinery allows some variation for workers, leading to motivation and
in products. staff retention problems.
9781510423695.indb 66 7/17/18 8:35 AM

Now test yourself
4 Operations
Cadbury’s has enough demand for its chocolate bars to be able to
manufacture them using flow production. This means the chocolate
bars are produced continuously on a production line. Cadbury’s does
not use batch production, which would involve making one type of bar
and then switching to another type of chocolate bar.
1 Analyse one benefit to Cadbury’s of producing its chocolate bars
using flow production. [3]
2 Analyse one possible problem to Cadbury’s of producing its
chocolate bars using flow production. [3] Exam tip
Adam Ansel is a portrait photographer. He takes pictures of families If the question asks you to
and children. recommend the production
3 Recommend the production process that Adam Ansel process a business should
should use. [3] use, think about the type
of product and buyer, how
much consumers are willing
I can … to pay, the importance of
low costs and prices and the
■ Explain the different types of production – job, batch and flow. number of competitors the
■ Recommend when businesses should use each type of production. business has.
Influence of technology on production and the

impact on businesses
Automation, robotics and computers are examples of how technology
can be used in the production of goods and services. They are treated Automation: A production
separately below but most questions in the exam will focus on technology process involving machinery
in general. that is controlled by a
computer rather than a
Robotics Computers person.
Robots are machines that are programmed Computers can be programmed to control Robotics: The use of robots
to do work such as welding, tightening machines.Workers use computers to help
bolts and paint-spraying in the production them do their work, e.g. keeping accounts
in the production process.
of cars. on spreadsheets, writing letters.
Use of technology
in production
Automation
Machinery completes repetitive tasks without
continuous input from an operator, for example:
• a machine to fill tins of paint and put lids
on them
• sensors to control heating systems
• sensors used to automatically control the
direction and speed of a vehicle
• a vending machine to automatically
dispense food and drinks.
Figure 4.1 Use of technology in production
9781510423695.indb 67 7/17/18 8:35 AM

The impact of using technology in production is summarised in Table 4.2.
4 Operations
Table 4.2 Impact of using technology in production
Advantages of using technology in production Disadvantages of using technology in production

Machines can replace workers, reducing costs. The business may need to recruit skilled labour to
program the computers which control production.
Worker productivity is increased as computers help Workers may need to be retrained to work with
them to work faster and produce more. This reduces the new technology and training costs money.
costs.
Waste is reduced as machines are usually more Machines can break down, disrupting production.
accurate than humans.
Production can be flexible as machines can be New technology may be expensive to buy.
programmed to change what is produced.
Customers may not like automation, for example,
automated telephone response systems.
Technology can operate 24/7 and never needs time off The storage of data about customers must meet
work, again reducing costs and increasing output. the requirements of data protection laws.
Human safety is improved as machines can do
dangerous jobs.
New technology can lead to new products for
businesses to sell.
Be ready to explain that technology is being used more and more in all
kinds of production because of the advantages it can bring. However, it is
not always useful. For example, craft workers may still need to use their
manual skills, for example, to paint or make pottery. Service workers may
still need to use their manual skills, for example, hairdressers and nurses.
Now test yourself

Manchester Airport uses an automated system for handling passengers’ baggage. For every flight, the
system sends each customer’s baggage on a conveyor belt to the gate where their plane will leave from.
It is then manually transferred onto the plane by baggage handlers.
1 Analyse one advantage to Manchester Airport of using an automated system for handling baggage.[3]
2 Analyse one disadvantage to Manchester Airport of using an automated system for handling
baggage. [3]
I can … Exam tip

Most questions will be about
■ Explain what is meant by technology in the production process. the impact of technology
■ Give examples of the use of technology in the production of goods on production. The key
and services. advantage is about reductions
■ Analyse the impact (possible advantages and disadvantages) of in costs, but remember there
technology on businesses. are several ways to explain
■ Evaluate when using technology will be useful and when it will not. why this happens.
9781510423695.indb 68 7/17/18 8:35 AM

4.2 Quality of goods and services
4 Operations
Concept of quality and Importance of quality
in the production of goods and the provision
of services
The concept of quality means the good or service:
● is fit for purpose (i.e. it does what it is supposed to do) Quality: Refers to a product
● complies with all relevant legal requirements, for example, design and (goods or service) being fit
safety legislation for purpose.
● does what the customer expects, for example, if the customer has paid
Recalls: When a fault occurs
for a high quality hotel, this is what should be provided. with a product and the
Figure 4.2 summarises the key benefits of providing quality goods and business asks for the product
services. to be brought back so it can be
repaired or replaced.
Benefits of providing Returns: Goods which
quality goods and services
customers take back to
the shop or online retailer
because they are unsuitable
Waste is reduced The business gains a good reputation or faulty.
The number of goods which are Satisfied customers will:
‘rejects’ is reduced. This reduces: • buy in the future from the
• recalls of defective products business, so it retains customers
• the return of products from • recommend the business to others,
dissatisfied customers so the business gains customers
• goods having to be sold as • reduce the risk of the business
‘second’ a lower price and profit developing a poor reputation, so
(seconds are goods that have a it does not lose customers.
minor fault)
Figure 4.2 Benefits of providing quality goods and services
Now test yourself

According to the 2006 American Customer Satisfaction Index, Papa John’s does better pizza than larger
rivals Pizza Hut and Domino’s in a survey of the quality of pizzas and service provided in the restaurants.
‘We have a fundamental belief that if you serve a superior quality pizza with excellent service and value,
consumers will recognize the difference and reward you with repeat business,’ said John H. Schnatter,
Papa John’s founder and executive chairman.
Analyse two possible benefits to Papa John’s of having a better reputation for quality than its competitors. [6]
I can … Exam tip

When evaluating the effect
■ Explain what is meant by quality. of poor quality, it will depend
■ Analyse the importance of quality in the production of goods and on the extent of the quality
provision of services. problems. If there is only
one customer complaint,
this is unlikely to greatly
affect the company, but if
there are lots of customer
complaints, word will
spread and this can lead to a
reduction in sales.
9781510423695.indb 69 7/17/18 8:35 AM

Methods of ensuring quality
4 Operations
Quality control usually involves a physical inspection by an inspector or

by a machine to check each product is of a sufficiently high standard. For
services, it may involve a mystery shopper buying a product in a shop or
buying a service.
Advantages of Disadvantages of
quality control quality control
Stops poor quality Production can Producing good It does not Inspection can be It does not
goods and services continue while quality products prevent waste. costly (unless done encourage
being sold. inspection takes will improve by machines). workers to be
place - output is reputation of this responsible
not affected. business. for quality.
Figure 4.3 Advantages and disadvantages of quality control

A firm that uses quality assurance makes all its workers responsible
for quality. If a worker makes something which is then used by another Quality assurance: An
worker, the second worker is a ‘customer’ of the first who needs to be approach that involves the
whole business focusing
satisfied that what he or she has been given is of a high enough quality.
on quality with the aim of
Table 4.3 Advantages and disadvantages of quality assurance preventing quality problems
from arising.
Advantages of quality Disadvantages of quality
assurance assurance Quality control: A system
for inspecting the quality
It should reduce wastage and Workers may be stressed by the of the goods or services
costs. responsibility of having to check produced and ensuring that
the quality of their own work. they are of the required
All workers are responsible for standard.
quality which may motivate them
to take care.
If quality goods and services Exam tip
result it will improve the Be ready to distinguish
reputation of the business. between the two methods of
ensuring quality. You may need
to say which system is being
Now test yourself used in a case study business.
Also be ready to apply the
The Santa Cruz Guitar company is a small company manufacturing advantages and disadvantages
guitars. To maintain efficiency, the shop floor is divided into six of the appropriate system.
workstations in which guitars are partially assembled and then moved
to the next station. Each bench is manned by a senior craft worker, and
no guitar leaves a station until the craft worker is 100 per cent happy
with its quality.
1 State the method of ensuring quality that is used by the Santa
Cruz Guitar Company. Explain your answer. [2]
2 Analyse one advantage to the Santa Cruz Guitar Company of
using this method of ensuring quality. [3]
I can …
■ Explain the meaning of quality control and quality assurance.
■ Analyse the advantages and disadvantages of each method of
ensuring quality.
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4.3 Sales process and customer
4 Operations
services
Methods of selling
The three methods of selling that you need to know are e-commerce,
face to face and telesales. These methods can be used to sell both goods Face to face: Involves direct
and services and to sell to consumers and other businesses. contact between buyer and
seller, for example, a sale
E-commerce is dealt with in detail in the next section but it refers to selling completed in a shop.
online. Face-to-face selling and telesales are dealt with in Table 4.4. The
Telesales: Sales completed
bullet points indicate the advantages and disadvantages to the customer (c)
over the telephone.
and business (b).
Table 4.4 Advantages and disadvantages of different methods of selling
Method Advantages Disadvantages

Face-to-face selling l Can increase sales (b). l May not always be convenient
– when the buyer l U
seful where customers like advice and for customers (c).
and seller meet, personal service from assistants (c), e.g. l If the customer bargains with
e.g. in a shop when choosing a wedding dress or for detailed the seller for a better deal,
information about a holiday destination. profits may be reduced (b).
l Can help sales in business-to-business (B2B) l Retailer costs are high if
selling (c and b), e.g. for discussing detailed expensive shops are needed (b).
specifications of technical equipment.
l For some services, it may be unavoidable,
for example, restaurant meals or in door-to-
door selling (c).
l The customer can bargain with the seller
over the price or the services (c).
Telesales – the Can increase sales (b) as customers can ask Costs involved such as a
buyer buys from a questions about products and bargain about warehouse to store goods and
telesales worker by the price (e.g. renewing Sky TV contracts and payment to telesales workers (b).
phone. mobile phone contracts) (c). Sellers may ‘cold call’ which can
May cost less than selling from a shop (c and b). be a nuisance to customers (c).
Now test yourself

1 Face-to-face selling involves: [1]
(a) advertising goods on a website
(b) a buyer meeting with a seller.
(c) a seller telephoning buyers to ask them if they want to buy.
(d) using a website to take orders from customers.
2 John Lewis is one of the UK’s most successful retailers. It used to sell all its goods through its
department stores in major UK cities, but now it also sells online.
(a) Identify two methods of selling that John Lewis uses. [2]
(b) Explain one advantage to customers of face-to-face shopping at John Lewis. (2)
I can … Exam tip

When dealing with different
■ Explain how face-to-face selling and telesales operate. ways of selling, you need
■ Explain the advantages and disadvantages of face-to-face selling to to describe your suggested
businesses and individual customers. method of selling and
■ Explain the advantages and disadvantages of telesales selling to explain its advantages and
businesses and individual customers. disadvantages.
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Influence of e-commerce on business activity
4 Operations
The inf luence of e-commerce on businesses is summarised in Figure 4.4.

E-commerce: The bringing
together of buying and
selling electronically.
Levels of
employment
Some e-commerce
businesses have reduced
the number of
Delivery options
workers they employ by
Speed of delivery is
using technology instead.
important in competitive New skills
markets and e-commerce E-commerce businesses
businesses have developed need to recruit workers with
efficient delivery systems, relevant skills such as web
as well as experimenting designers, workers to
with new ways of pack orders and drivers.
delivering, such as
using drones.
Location
Business Influences of Businesses who sell
opportunities commerce on online can use warehouses
E-commerce has increased business in cheaper locations but which
business opportunities – in
still have good transport links.
retailing, banking, insurance
Online retailers do not need
sales and accountancy and
shops (or not as many shops)
the manufacture and sales
in expensive shopping
of technology. Markets
centres or on the
are now worldwide.
high street.
Provision of click
Creation of new and collect services
departments Businesses have developed
Some businesses, including websites and computer
many major retailers who systems to organise click and
collect services (where the
use e-commerce alongside customer orders online, then
their more traditional picks up the product at a
services, have created collection point). Businesses
online departments. need storage and
staff to deal with this.
Figure 4.4 Influence of e-commerce on business

The advantages and disadvantages of e-commerce to businesses are
summarised in Table 4.5.
Table 4.5 Advantages and disadvantages of e-commerce to businesses
Advantages of e-commerce to businesses Disadvantages of e-commerce to businesses

Markets have increased as businesses can Competition has increased, including greater competition
now sell more easily around the world. from abroad.
It is possible to sell 24/7. Delivery systems need to be organised as well as ways of
dealing with the increase in goods that are returned.
The costs of selling are usually much lower E-commerce businesses need to provide cyber security
as a result of savings on rental of premises for themselves and their customers.
and a reduction in the number of workers
that need to be employed.
Web designers can make businesses appear As technology develops so must the e-commerce
attractive at little cost. business, which can add to costs and lead to changes in
the operation of the business and the workers it needs.
9781510423695.indb 72 7/17/18 8:35 AM

E-commerce brings some advantages to customers but also some
4 Operations
disadvantages. These are summarised in Table 4.6.
Table 4.6 Advantages and disadvantages of e-commerce to customers
Advantages of e-commerce to customers Disadvantages of e-commerce to customers

Online selling has made it easier for customers It is impersonal and so customers may not be able to
to compare prices and find the best deals. ask questions (unless an online chat option is provided).
Customers can buy 24/7. Goods are bought as seen and described on the website
and they may not be what is wanted when they arrive.
Customers must return the goods, often at their own
cost.
Choice has increased because customers can If the computer systems are not secure, customers may
buy from sellers around the world. be at risk of personal data theft and bank fraud.
Not everyone has access to or can use computer
technology.
Now test yourself

Aldi is a very successful supermarket business. It has grown by selling a limited range of goods at lower
prices than its competitors. Although some of Aldi’s products are of lower quality, much of its produce is
high quality. It does not currently have an e-commerce part of its business that customers could use to
order goods online.
1 Explain two ways in which Aldi would have to develop its business to make selling via e-commerce
possible. [4]
2 Explain one benefit customers would gain if Aldi introduced online selling. [2]
3 Explain one possible disadvantage for customers of buying online from Aldi. [2]
4 Evaluate the costs and benefits to Aldi of introducing online selling. [7]
Despite the successful growth of its online business, Waterstones has kept many of its shops open.
5 Analyse one reason why Waterstones has kept its shops. [3]
Exam tip
Learn lists such as the advantages and disadvantages of e-commerce
for both businesses and for customers. If you can remember a number
of advantages and disadvantages, it will help you to write answers to
questions which require lengthy, well-developed answers.
I can …
■ Explain how businesses have been influenced by the development of
e-commerce.
■ State and explain the advantages and disadvantages of e-commerce
to businesses.
■ State and explain the advantages and disadvantages of e-commerce
to customers.
■ Evaluate e-commerce from a business point of view.
9781510423695.indb 73 7/17/18 8:35 AM

Importance to a business of good customer
4 Operations
service including after-sales service and

Contribution of product knowledge and
customer engagement to good customer service
One of the most important reasons for good customer service is that it
helps a business to gain and retain customers. The main areas of customer
service, and the advantages and disadvantages of each, are described in
Figure 4.5.
Disadvantages:
Advantages:
Advantages: There are costs in terms
It increases sales by Disadvantage:
A good after sales of training workers to
making customers feel There are costs in terms
service increases sales deal with customers and
confident about the seller of training workers to
as customers can buy refund returns.
and what they are buying. deal with customers and
with confidence. Returned goods may have
It encourages customers provide refunds.
to be sold, at a loss, as
to return in the future.
clearance goods.
Customer service
After sales service
The business gives help to customers
Service provided to customers after
before they buy (advice), during the
they have bought the product.
buying process (providing finance advice,
It will include providing further
packing, etc.,) and after the buying
advice as well as dealing with returns
process (dealing with queries, including
if the customer is not satisfied.
being willing to accept returned goods).
The importance of:
Product knowledge Customer engagement

Sales assistants know about the goods Refers to communication between
or services they sell and are able to the buyer and the seller in face-to-face
provide customers with information sales, telesales and e-commerce.
and advice, for example, they can It involves providing a friendly,
explain the features of a camera and welcoming and respectful service
show customers how to use it. and being helpful rather than pushy.
Advantage:
Advantage:
It increases sales as Disadvantage: Disadvantage:
It increases sales as
customers are given
There are costs in customers feel There are costs in
information that helps
training staff. comfortable with the training staff.
them to make good
buying experience.
decisions.
Figure 4.5 Importance of customer service
9781510423695.indb 74 7/17/18 8:35 AM

After-sales service: Advice and help given to a customer after they
4 Operations
have bought a product or service.
Customer service: The name given to an area of business that deals
with customer enquiries.
Now test yourself

Starbucks, the coffee shop chain, had a campaign to improve
relationships between their staff and customers. Staff were asked to
find out and use the names of customers to make them feel welcome.
Customers who gave their first names were given a free drink.
1 The Starbucks campaign to improve relations between staff and
customers was designed to improve:
(a) customer service
(b) after-sales service
(c) product knowledge
(d) customer engagement. [1]
2 Evaluate the benefits of this campaign to Starbucks. [9]
Exam tip
When evaluating, it is useful to think about what evidence you have to
make a judgement on whether something had been, or was going to
be, successful. This could be information such as sales, revenue, cost
or profit data. Weigh these up – for example, is the revenue from extra
sales greater than the costs?
I can …
■ Describe customer service and explain its advantages and
disadvantages.
■ Describe after-sales service and explain its advantages and
disadvantages.
■ Describe product knowledge and explain its advantages and
disadvantages.
■ Describe customer engagement and explain its advantages and
disadvantages.
9781510423695.indb 75 7/17/18 8:35 AM

4.4 Consumer law
4 Operations
Impact of consumer law on businesses

Although you do not need to be an expert on consumer law for the
examination, you will find it helpful to know how the law affects As described: Means that
businesses and what they sell: goods must be as the
● Consumer laws are designed to protect consumers from unscrupulous
business has described them.
sellers. Consumer law: The area
● Laws often apply to both goods and services. of law which protects the
● The key law is the Consumer Rights Act of 2015 which states that customers of a business,
goods and services must be ‘of satisfactory quality,’ ‘fit for purpose’ mainly through the
and ‘as described’. Consumer Rights Act of 2015.
● Advertising is controlled by law – it must be legal, decent, honest and Fit for purpose: Means that
truthful. a good or service must do
● Consumers have the right to return faulty goods within 30 days. what it is meant to do.
● When services are not completed on time, or to a reasonable standard, Satisfactory quality of goods:
the consumer can ask for work to be done again, or given a price Means that goods should
reduction. reflect the price charged for
them, for example a high-
The impact of consumer law on business is summarised in Figure 4.6.
priced product must be of a
high quality.
Production of quality
Issue Advertising Safety of goods
goods and services
Good and services produced must

Goods and services must be safe
Responsibility be of a good standard – ‘fit for Goods and services must be
to use – they must not lead to a
purpose’ and ‘of satisfactory as described.
risk of injury or death.
quality’.
What the The business must make sure the

The business must have good The business must be legal,
business design of its product is safe and
quality control or assurance decent, honest and truthful
must do that services are provided in a
processes. in its advertising.
safe way.
• The business will need either to • Goods can be returned by the • The business could have to pay out
replace or repair a faulty good or consumer which costs money. a lot of money in compensation for
provide a refund. • The business may gain a causing injuries or death.
When the • The business may lose a sale. reputation for poor quality, • The business may gain a reputation
law is broken • It will cost the business to replace leading to a reduction in sales. for poor quality, leading to a
or repair a product. reduction in sales.
• The business may gain a • The business will have to stop
selling the unsafe product or service
reputation for poor quality,
which can cost money.
leading to a reduction in sales.
• The business may be forced to close.
Figure 4.6 Consumer law and its impact on business
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Responsible businesses weigh up (evaluate) the risks involved in not
Business reputation: Refers
4 Operations
acting within the law:
to what customers say
● The examples of ‘What the business must do’ in Figure 4.6 often mean
and feel about a business.
increased costs for a business. Damage to reputation can
● When a law is broken, there will be costs for the business, including seriously affect a business.
the loss of business reputation.
● Responsible businesses know that it makes financial sense to spend
money to ensure they do not break consumer laws as this will save
them money and help the business to survive.
Now test yourself

In 2015, there was an accident involving the ‘Smiler’ ride at the
amusement park, Alton Towers, which resulted in a 17-year-old girl
suffering life-changing injuries.
Evaluate the benefits to a business such as Alton Towers of making
sure that they provide safe services. [9]
Exam tip
Although you do not need a detailed knowledge of consumer law for
the examination, you do need to be able to write about how consumer
laws affect the behaviour of businesses and the consequences to
business of failing to obey these laws.
I can …
■ Analyse the effect of consumer law on businesses.
■ Evaluate the benefit to a business of obeying consumer laws.
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4.5 Business location
4 Operations
Factors influencing business location

Table 4.7 explains the main influences on the location of a business and gives
an example of each. Although the specification does not show government as Location: Refers to the place
an influence, it is an influence on cost, which is why it is included in this table. where a business is sited.
Proximity: Means ‘nearness to.’
Table 4.7 Factors influencing business location
Factor Explanation and example

influencing
location
Costs l Locating in an area where the cost of land, premises or labour is low, such as areas in
the north east of the UK, will enable a business to save on the cost of renting an office or
factory and on wages.
l Businesses need to transport raw materials in and finished goods out, so areas with
good road, rail, sea or air links, such as the junction of the M6 and M5 motorways, will
keep transport costs low.
l Access to reliable and cheap ICT communication, such as fast broadband. London has
good ICT facilities but many remote, rural areas do not.
Proximity to l Service businesses must locate near their customers, e.g. a hairdresser will locate near
the market to where consumers live; a department store will be located in a shopping centre where
there are lots of customers.
l Manufacturing businesses may locate near their customers for easier communication,
e.g. a business that makes car components may locate near to the company that
purchases them, to enable them to respond quickly to purchase orders.
l A business located near its customers may be able to reduce the cost of transporting
products to this market, e.g. a local bakery will not transport bread to shops outside its area.
Proximity to l A business needs a supply of skilled workers. ‘Silicon Fen’ is an area near Cambridge
labour where many ITC firms and skilled workers are located, so an ICT business might wish to
locate here.
l A business that needs a lot of unskilled labour might locate in an area of high population
and/or high unemployment, e.g. Middlesbrough where steel mills have closed, resulting
in workers becoming unemployed.
Proximity to l A business may locate near to a source of raw materials to save on transportation costs
materials (particularly when the materials are bulky or heavy), e.g. fish processing businesses are
usually located near a fishing port to reduce the need to transport the fish.
l Shorter transport journeys are good for the environment as this minimises carbon emissions
and enables the business to be more environmentally friendly. A cheese manufacturer may
locate near to dairy farms so milk does not need to be transported a long distance.
Government l The government may give business grants towards start-up costs, or it may reduce
corporation tax for those businesses locating to an area of high unemployment, which
may encourage firms to locate in enterprise zones, such as in South Wales.

Analyse one reason for the location of each of the following. [15] ■ List the main factors
1 A dentist in the city of Oxford. influencing the location of
2 A pea processing factory in an area of farmland. a business.
3 Asda warehouse near the junction of several motorways. ■ Analyse and give
4 A specialist bank in the financial district of London. examples of the main
5 A small manufacturing business in an enterprise zone in south Yorkshire. factors influencing the
location of a business.
Exam tip
Note that a business’ location may be influenced by more than one factor.
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4.6 Working with suppliers
4 Operations
Role of procurement
The f low chart in Figure 4.7 shows the four stages of procurement and
explains the decisions made at each stage. Procurement: The
management of purchasing
Stage of
Influences on decisions Examples within a business.
procurement
• Which season the business • A clothes retailer needs to decide

is buying for. what clothes it will sell during the
Identifying • Changes in technology affect summer months.
goods and the products a business sells. • A TV retailer will need to decide
services to buy • Changes in fashion and lifestyle how many new types of TV to stock
affect the products a business sells. and how many old ones.
• A food store needs to decide if it
should sell more vegetarian meals.
• Dependent on the quality of goods • A furniture store will need high

or services consumers want. quality stock.
Choosing • Reputation and reliability of • Next will want to obtain clothing
suppliers suppliers is important. from ethical suppliers (e.g. those
that do not use child labour).
• A business completes an order • A bakery will need to send an

Ordering goods form stating what it wants and order for flour to the supplier.
and services sends it to the supplier.
• A business will arrange for • The owner of a small shop may

Receiving workers to receive the goods put goods on shelves as they
deliveries from and have an area where they arrive if they do not have much
suppliers can be stored. storage space.
Figure 4.7 Stages in the procurement process
Now test yourself

A garden centre sells a range of Christmas decorations in the two
months before Christmas.
1 Explain what is meant by the term ‘procurement’. [2]
2 Explain the four stages involved in the procurement of Christmas
decorations by the garden centre. [8]
Exam tip
An examination question
I can … might ask you to write about
just one stage in the process
■ Explain what is meant by the term ‘procurement’. of procurement or about the
■ Explain each of the four stages in the process of procurement. process as a whole.
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Impact of logistical and supply decisions on
4 Operations
businesses
Table 4.8 gives examples of issues that need to be considered and
potential problems connected with logistical decisions (those involving
transportation of goods to customers) and supply decisions (those
involving companies the business buys from).
Table 4.8 Logistical issues
Issue Explanation Potential problem

Time The supplier must be able to deliver the The supplier may be short of materials or
goods on time. components and this may delay its production
of goods or services. The business could lose
sales and revenue as a result.
Reliability As well as being able to deliver on time, the If the supplier is short of materials or they
supplier must be able to supply the quantity are not of sufficient quality, it may have to
and quality of goods needed by the customer. delay or stop production. The business could
lose sales and revenue as a result.
Length of A long supply chain (one that contains a large A business which makes a component may
the supply number of businesses) has an increased risk not get the materials it needs and so cannot
chain of problems occurring along the chain. produce the components its customer needs
to assemble its product.
Costs The customer will want delivery costs to be High delivery costs may make the total
as low as possible but this must not be at the production costs too high and the firm may
expense of reliability. not be able to sell its goods at a profit.
Customer A supplier will need to provide a customer The business may lose customers if
service service to deal with problems and enquiries businesses that buy from it are not happy
from its potential and actual customers. with the service they receive.
Now test yourself Logistics: The process of

organising the transport of
In 2016, supermarkets such as Tesco were unable to buy enough
goods from the seller to the
custard cream biscuits to meet demand. The biscuits were made by
buyer.
Crawford’s Biscuits at its factory in Carlisle. The factory was damaged
during winter floods and this led to production being halted while the Supply chain: The chain of
factory was refurbished. Once production re-started, fuel prices rose businesses involved in the
in the UK, leading to a rise in the cost of transporting goods. production of a product and
1 Analyse the impact on Tesco of the problems with the supply chain its delivery to the user.
of custard creams. [3]
2 Analyse how the rise in fuel prices might affect sales of custard
creams at Tesco. [3]
3 Analyse the importance of good customer service to firms such as
Crawford’s Biscuits. [3]
4 Explain:
(a) what is meant by logistics [1]
(b) how logistics is involved in the production of custard creams.[2]
I can …
Exam tip
■ Explain the meaning of
Remember that there may be several businesses in a supply chain, the terms ‘logistics’ and
all of which can be affected if there are problems. In the case study ‘supply chain’.
example, the businesses that supply Crawford’s Biscuits with ■ Analyse how a business
ingredients and transport firms would also have been affected by what can be affected by its
happened. supply chain.
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5 Finance
5.1 Role of the finance function

Purpose of the finance function and Influence
of the finance function on business activity
The term ‘role of the finance function’ refers to the jobs that are done by a
finance department in a business and these are summarised in Figure 5.1. Finance: Money raised and
The work may be done by a department in a large company or by an used by a business.
individual worker in a small business. Finance function: This
Calculating sales
refers to the finance
revenues and department, which is
production costs. usually only found in larger
Calculating the average
Calculating profit or businesses. Small business
rate of return to
measure how well the loss using sales revenue usually employ a firm of
and production cost.
business is doing. accountants to help them
with their finance function.
Role of the Forecasting cash Financial information:

Calculating the finance function flow – expected Includes details of profit,
revenues and
break-even
expenditures (costs) loss, cash flow, break-
output needed
to avoid a loss.
to decide if finance even, profit margin and
(e.g. an overdraft) average rate of return.
is needed.
This information is used in
Arranging finance, Managing payments business decision-making.
e.g. from loans (wages, bills) and
or shares. receipts of money
(from sales).
Figure 5.1 Role of the finance function Exam tip

The work of the finance function is important for decision making. For Evaluation involves making
example, a business may want to bring out a new product. The finance a judgement. You may need
function would provide financial information about cash f low, spending to say how useful the work
of the finance function is to
on marketing, break even, production costs, profits and a comparison of
a business. One approach
the costs of different types of selling, such as online or through a shop.
would be to state the ways
Other departments will also inf luence decision making, for example, the in which the finance function
production department may suggest the number and types of workers helps a business to make
needed and the machinery required. This illustrates how departments in a decisions.
business are interdependent (see Section 7).

Cheeseman Publishers produces guide books. The finance department ■ Explain the jobs that the
has told the business owners that profits are likely to fall. Currently, finance function does.
books are designed in the UK and printed in Italy. The owners have ■ Evaluate the importance
asked the manager to look at ways of reducing costs. They also want of the finance function.
to know if it would help if the prices they charge for the books were
increased, and if new guide books on different areas would be useful.
Evaluate the importance of the finance department in helping
Cheeseman Publishers to be successful. [9]
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5.2 Sources of finance
5 Finance
Reasons businesses need finance

Some of the reasons businesses need finance are summarised in Table 5.1.
Table 5.1 Why businesses need finance
Need for finance Explanation

Establishing When a business starts up, it will need to buy items before it can produce or sell
(setting up) a anything. For example, it may need to buy or rent a factory, office or shop as well as
new business furniture and machinery.
Funding If a business decides to increase its scale by producing and selling more goods, it may
expansion need to pay for a larger factory, shop or office, along with the furniture and machinery
for these. It may need to buy more materials or stocks.
Recruitment A business will need to recruit workers when it starts up, when it expands and when
workers leave and new ones are employed. It costs money to advertise jobs and select
workers. Wages and salaries of new staff also need to be paid.
Marketing Marketing campaigns need to be funded. Advertising and public relations, for example,
cost money.
Running the All businesses need finance for day-to-day costs such as buying materials, paying
business expenses such as heating and paying wages.
Now test yourself

1 BP is planning to open 20 new filling stations around the country. It will need to raise £5m in finance to
buy the land and build the stations. Which of the following describes BP’s need for finance? [1]
(a) It is starting up a new business.
(b) It is expanding its business.
(c) It is recruiting new workers.
(d) It is marketing its product.
2 Lidl is a discount supermarket chain. In 2017, it had 670 stores in the UK. Lidl planned to open 50 to 60
new shops in different towns in each of the next two years. The aim was to make it possible for more
customers to be able to shop in Lidl stores. Once built, the stores would need to employ staff, buy
stock to sell and advertise the new shops to the public. The supermarket chain needed to raise and
spend at least £1.45 billion pounds on this investment by 2019.
Using information in the case study, explain three reasons Lidl would have to raise finance between
2017 and 2019. [6]
I can … Exam tip

Some questions will only
■ List the main reasons why businesses need finance. need brief details of why
■ Explain the main reasons why business need finance. businesses need finance.
This unit helps with this.
Unit 5.2 will give you more
details about the finance
needs of businesses to use
in longer questions.
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Ways of raising finance
5 Finance
All business need to raise finance. Table 5.2 summarises the advantages
and disadvantages of different sources of finance.
Table 5.2 Advantages and disadvantages of different sources of finance.
Source of finance Advantages Disadvantages Overdraft: An arrangement

Owners’ capital ● No need to repay. ● Owner risks with a bank that a business
– the owners’ ● No interest to pay. savings. can spend more money than
savings are ● Does not affect ● Owner may not it has in its account.
invested. ownership and control. have (enough)
Owners’ capital: Money
savings.
from savings put into the
Retained profit ● No need to repay. ● Business may not business by the owner(s).
– money not ● No interest to pay. have made profits.
Retained profit: Profit
distributed to ● Owners will not get
that is not distributed to
the owners profit as income.
shareholders as dividend.
(shareholders) as
profit. Sale of assets: Items sold by
Sale of assets – ● No need to repay. ● May be difficult to the business.
goods, etc., owned ● No interest to pay. sell. Taking on a partner:
by the business ● Good if selling off old ● May take time to Adding a new partner who
are sold to raise equipment or stock. sell. contributes some new
money. capital.
Overdraft – a ● Meets short-term cash ● Interest is charged Trade credit: When the
bank makes flow problem. for each day money business buys goods to sell
available to a ● Interest is only paid on is owed, which can and does not need to pay the
business more the amount owed. be expensive. supplier for a period of time
money than they ● Repayment is only due – often 30 days.
have in their when the business
account. closes or the overdraft
is no longer needed.
Trade credit – a ● The business can have ● Goods must be paid
business sells goods to sell before for even if they do
goods after paying for them, via a not sell.
agreeing to pay credit period (usually ● Interest is charged
for them at a later 30 days but can be up to if payment is late.
date. 90 days).
● No interest if repaid
within agreed time
limit.
● Can help with a cash
flow problem.
Taking on a new ● The new partner may ● The existing
partner – the new bring new skills. owner(s) will have
partner invests ● No need to repay. to give the new
some of their ● No interest to pay. partner a say in
savings in the the running of the
business. business and a
share of the profits.
● Partnerships
can take on new
partners. Sole
traders can also
do so but must
then become
partnerships.
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Source of finance Advantages Disadvantages
5 Finance
Loan – a set ● Repayment is made ● Interest must be

Crowdfunding: Money
amount of money, in fixed sums over a paid.
raised through an appeal
borrowed for a set period of time and ● The business may
to the public who are
period of time. usually paid monthly. need to give the
supporters of the business.
● The money is available lender security.
immediately the loan is Loan: A sum of money
agreed with the lender borrowed for a stated period
(for example, a bank). at an agreed rate of interest.
Share issue – new ● New investors can ● The existing Share issue: Money raised
shares are sold to contribute a lot of owner(s) will have from investors by selling
raise more money. money to the business to give the new new shares.
● No need to repay. shareholders a say
● No interest to pay. in the running of
the business and a
share of the profits.
● Shares can only
be sold by limited
companies, not by
sole traders and
partnerships.
Crowdfunding – ● New supporters can ● Interest will be
money is donated contribute a lot of paid if the money
or invested by money to the business is raised through a
sponsors or through loans, loan.
people invest to donations or investing ● Ownership will be
become part- as part-owners. shared if the money
owners of the ● No need to repay. is raised through
business. ● No interest to pay. investment.
You also need to know which sources of finance are typically used to
provide short-term finance and which are used for medium- and long-
term finance – see Table 5.3. Note that some sources of finance come
under more than one heading, depending on circumstances.
Table 5.3 Short-, medium- and long-term sources of finance
Short-term finance Medium-term finance Long-term finance

(up to 12 months) (1–5 years) (5 years or more).
Owners’ capital Owners’ capital Owners’ capital
Sale of assets Sale of assets Sale of assets
Trade credit Retained profit Retained profit
Bank loan Bank loan
Crowdfunding Crowdfunding
Taking on a new partner
Share issue
9781510423695.indb 84 7/17/18 8:35 AM

Now test yourself
5 Finance
The main features of different sources of finance and four case studies are shown below.
A No repayment needed.
B Repayment is needed.
C Interest is paid.
D Interest does not have to be paid.
E The number of owners increases, reducing the control of the business of existing owners.
F There are no new owners and existing owners keep control of the business.
G A short-term source of finance.
H A medium-term source of finance.
I A long-term source of finance.
1 Jo Smith runs a small general store selling groceries and other goods. She takes goods on 90-day
trade credit from a wholesaler to sell in the shop.
2 Verditek plc is selling new shares to raise the money it needs to produce clean energy. Verditek plc
will use the money to expand the business over the next 10 years.
3 Qais Abu Samra is a professional photographer who has a two-year loan of £18,000 from the bank to
upgrade his photography studio and equipment.
4 Rajpreet Heir is a wedding organiser. The business has been growing rapidly. She has taken on a
new business partner, Alice Curran, to help raise the money needed to open a bigger office. Alice has
invested £15,000 of her own savings in the business.
For each case study:
(a) State which of the different sources of finance described above will apply (note there will be
more than one source for each situation). [4 × 4]
(b) For each source of finance mentioned, state one advantage and one disadvantage of using it. [4 × 2]
Exam tip
It is very useful to learn the features of different sources of finance.
Examination questions may ask you about these features or you can
use your knowledge of them to write about why a particular source of
finance would be suitable for a given case study (see next section for
more on this).
I can …
■ Explain each source of finance.
■ State whether or not repayment is needed and why.
■ State whether or not interest must be paid.
■ State how the ownership and control of the business is affected by a
source of finance.
■ Classify the sources of finance in to short, medium and long term.
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How and why different sources of finance are
5 Finance
suitable for new and established businesses

Businesses need to decide which of the sources of finance available to
them they should use. To make this decision, they will evaluate the
External finance: Finance
advantages and disadvantages of internal finance and external finance
raised from sources outside
by asking a series of questions. Once they have the answers to these
the business. The main
questions, they can make their decision. Figure 5.2 gives some examples external sources of finance
of the type of questions a business might ask itself. are overdraft, trade credit,
• Do we need external finance • How long do we need the loan, crowd funding and
or can we finance it ourselves? finance for? share issues.
• Do we have savings or retained • Is it just for the short term, e.g.
Internal finance: Finance
profits to use or assets such as to help with cash flow?
machinery we can sell? If not, raised from within the
• Will we need the money to pay
external finance is needed. for a long-term investment plan business. The main internal
such as expanding the business sources of finance are
over 10 years? owners’ capital, retained
profit and sale of assets.
Questions to ask when

deciding on a source
of finance
• Do we want to keep control • Is this source of finance

over the business as owners? available to our type of
• Will it help if other people business?
become owners, providing • Is it possible for our type of
more money and, perhaps, business to take on a new
more expertise? partner or to sell new shares?
Figure 5.2 Questions to ask when deciding on a source of finance
Now test yourself

Gordon Baines runs a business fitting kitchens. He asks customers to pay a 10 per cent deposit towards the
cost of the work. He then buys the kitchen units using trade credit. However, Gordon must pay the wages
of the workmen who fit the kitchens, often before the customer pays the balance of what they owe. If this
happens, Gordon will use either an overdraft facility at the bank or his own savings to pay the wages.
Bowton Airport plc wishes to build a new terminal. The cost of this will be £50m. It is considering a new
share issue or a bank loan to raise the money. It does have some retained profit but some shareholders
do not want to use this.
Wendy Ingrams plans to open a sunbed salon. She needs £10,000 to buy sunbeds for the salon. She has
£4,000 pounds in savings, some of which she will need to use to pay rent on the premises and to pay for
some marketing for the business. She is considering asking the bank for a loan.
For each of the above situations, analyse the use of the sources of finance by the
businesses concerned. [3 x 4]
Exam tip I can …

Typical questions may ask you to recommend a source of finance to
use to finance something or whether a business has used the correct ■ Evaluate the use of the
source to finance something. This is an evaluation question. Use the different sources of
questions in the diagram above to work out an answer. You can also finance.
use your knowledge of the features and advantages and disadvantages
of sources of finance to work out your answer.
9781510423695.indb 86 7/17/18 8:35 AM

5.3 Revenue, costs and profits
5 Finance
Concept of revenue in business and its
importance in business decision making
and Calculation of revenue
Total revenue is the sum of money a business earns from all the sales it
makes. Revenue: The money
received from sales.
Revenue is important for business because it pays for costs, is a measure of Q × P = Total revenue where
success and, along with costs, determines profits. Q is the total quantity sold
and P is the price at which
Revenue inf luences business decision making in several ways. For
the product is sold.
example, if a business wished to increase its revenue, it could opt for one
or more of the following:
● Increase the price of the product. This will work if customers do not
switch to a cheaper competitor and is likely to succeed if there are few
or no competitors.
● Reduce the price to increase sales. This will work if sales rise, perhaps
if there are lots of competitors (who do not also reduce their prices).
● Increase its sales by increasing:
– advertising (targeted correctly and sending the right message)
– producing more by having a new factory or shop or buying a competitor
– selling a wider range of products (if customers want to buy these).
However, sometimes a business may not want to make as much as
revenue as possible:
● The owner(s) do not want to expand, perhaps to avoid sharing control.
● The business may want to sell to a niche market, for example, selling
only to very wealthy people, so they can charge a high price to make
their product exclusive.
Now test yourself

Primark sells clothes at the low-cost end of the market. Several
retailers can be considered as competitors in this end of the market
including Matalan, New Look, ASDA, H&M and Tesco. There are plenty
of more expensive clothes retailers, such as Marks and Spencer,
Debenhams and so on.
1 Explain the meaning of the term ‘revenue’. [1]
2 Calculate the revenue Primark would make from selling 10,000
t-shirts at £4 each. [1]
3 State one reason why revenue is important to Primark. [1]
4 Primark is considering raising its prices to increase its revenue.
Evaluate whether this would be successful. [7]
I can … Exam tip

Be ready for questions
■ Define the term ‘revenue’. that ask you to calculate
■ Explain the importance of revenue to a business. the amount of revenue
■ List and explain how a business may increase revenue. a business may earn by
■ Analyse and evaluate ways to increase sales. learning the formula.
■ Explain why a business may not wish to make as much revenue as
possible.
9781510423695.indb 87 7/17/18 8:35 AM

Concept of costs in a business and their
5 Finance
importance in business decision making

and Calculation of costs
Example calculations for variable costs and total costs are shown below.
Fixed costs: Costs that
Example stay the same regardless
Total variable costs: of a change in output, for
example, rent for offices,
Number of workers × Wage paid to each worker
shops, factories or land and
10 workers × £400 = £4,000 the uniform business tax
which is a tax based on the
Cost of materials per product × Number of products sold
location of the business.
£3 per product × 6,000 products sold = £18,000
Total costs: The addition of
Total variable cost = £4,000 + £18,000 = £22,000 total fixed and total variable
costs.
Total cost:
Total fixed cost (£12,000) + Total variable cost (£22,000) = £34,000 Variable costs: Costs that
(total cost). change as output changes,
for example, wage and
material costs will increase
Costs are necessary for production to take place and, along with revenue, if more products are made
they determine how much profit a business will make. or sold.
A business may want to minimise its costs to help it to:

● increase profits
● reduce prices to become more competitive without cutting profits
● save money in order to expand or to update machinery.
Costs may be reduced by:

● employing new technology instead of workers (although there may
be costs in making workers redundant)
● finding cheaper supplies of materials or goods to sell (although the
business would need to ensure quality and reliability)
● asking a supplier to reduce its prices or asking workers to take a pay
cut. Although suppliers and workers will not want to do this, they may
have no alternative but to agree if they could lose sales or their jobs.
Sometimes a business may not need to minimise its costs because, for
example, it makes a high-quality product and it knows that its customers
are prepared to pay a high price or it does not have any competitors.
Now test yourself

Desmond Mills runs a business making pallets which are used by other businesses to transport loads
on and off lorries and to move the loads to where they will be stored. Desmond pays £30,000 per year
to rent a small factory where the pallets are made and stored. The materials used in the production
of pallets are wood and nails which together cost 80p per pallet. One worker can make 20 pallets in
an hour. Workers are paid £10 per hour. Pallet making is a very competitive industry. Desmond makes
90,000 pallets per year.
1 State one fixed cost and one variable cost that Desmond pays. [2]
2 Calculate the:
(a) cost per pallet for labour (hourly wage ÷ number of pallets made each hour) [1]
(b) the total variable cost of each pallet (labour cost for each pallet + cost of wood and nails per
pallet). [1]
3 Explain how Desmond would calculate the total cost of producing 90,000 pallets. [2]
4 Analyse why total costs are important to Desmond. [4]
9781510423695.indb 88 7/17/18 8:35 AM

I can … Exam tip
5 Finance
Be ready for questions
■ Define the terms ‘fixed costs’, ‘variable costs’ and ‘total costs’. that ask you to calculate
■ State examples of fixed and variable costs. the costs of a business.
■ Explain the importance of costs to a business. Learn how to calculate total
■ List and explain how a business may reduce costs. variable costs and total
■ Analyse and evaluate ways of reducing costs. costs.
■ Explain why a business may not wish to minimise costs.
Concept of profit and loss in business and

its importance in business decision making
and Calculation of profit and loss
The concept of profit, at its simplest, is that when the total revenue of a
business is more than its total costs of production the business has made Cost of sales: The cost to
a profit. the business of producing
goods to sell, for example,
Example buying stock to sell or
Total revenue of the business: £22m in revenue buying materials and
employing workers to
Total costs: £12m make a product.
Profit: £10m
Expenses: The costs of
operating the business,
A loss occurs when the total revenue of a business is less than the total
including wages and
costs of the business.
salaries, rent, or mortgage
Example payments, insurance,
heating and lighting and
Total revenue of the business: £56m advertising.
Total costs: £80m
Gross profit: Sales minus
Loss: £24m the cost of sales. In this
equation, ‘sales’ refers to
The examples below show how to calculate the gross profit and the sales income. Sales income
net profit of a business. is the same as total revenue.
Example Loss: When the costs of a
business are greater than
Gross profit is calculated by:
the revenue it makes.
Sales (total revenue) – Cost of sales = Gross profit
Net profit: Gross profit
Note: the cost of sales is the cost of buying in the goods the business
minus the expenses of
sells, or the cost of producing goods.
operating the business.
Sales (total revenue): £35,000
Cost of sales: £15,000
£35,000 – £15,000 = £20,000
Gross profit = £20,000
Example
Net profit is calculated by:
Gross profit – Expenses = Net profit
Note: expenses are the costs of running the business.
Gross profit: £20,000
Expenses: £12,000
£20,000 – £12,000 = £8,000
Net profit = £8,000
9781510423695.indb 89 7/17/18 8:35 AM

Now test yourself
5 Finance
BW Trains Ltd makes toy steam trains. The following information is taken from the business accounts of
the company:
Total revenue: £8m Cost of sales: £5m
Total costs: £6m Expenses: £1m
Calculate the company’s:
1 profit or loss [1]
2 gross profit [2]
3 net profit [2]
Exam tip
I can …
Make sure you learn the
■ Explain the meaning of the terms ‘profit’, ‘loss’, ‘gross profit’, formulas and remember to
‘net profit’, ‘cost of sales’ and ‘cost of expenses’. write out the formulas as
■ Calculate profit and loss. part of your exam answer –
■ Calculate gross and net profit. this is a good way to check
you are doing the correct
calculation.
Calculation and interpretation of profitability

ratios
The gross profit margin is about comparing the total revenue earned by
the business with the cost of the sales it makes. Gross profit margin: Gross
profit divided by sales (or total
The net profit margin is about comparing the gross profit the business revenue) multiplied by 100.
earns with its expenses.
Net profit margin: Net profit
Although profit and loss figures are useful, gross and net profit margins divided by sales (or total
give a better indication of how well a business is performing. They revenue) multiplied by 100.
can help the business to know where its performance can be improved
and whether action needs to be taken. Gross and net profit margins are
discussed in Tables 5.4 and 5.5. Example
Table 5.4 Evaluating improving performance using gross and net profit Gross profit margin is
margins calculated by:
Gross profit × 100
Performance Gross profit margin Net profit margin
Total revenue
Improving Gross profit margin rises, Net profit margin rises, for = Gross profit margin
performance for example: example:
£20,000 × 100
2018 = 57.1% 2018 = 22.8% = 57.1%
£35,000
2017 = 44% 2017 = 18%
Reasons for ● Total revenue rose ● Gross profit rose faster
improvement faster than cost of sales. than expenses. Example
● Total revenue fell but ● Gross profit has fallen Net profit is calculated by:
cost of sales fell more. but expenses fell more. Net profit × 100
● Total revenue rose and ● Gross profit rose and
cost of sales fell. expenses fell. Total revenue
= Net profit margin
£8,000 × 100
= 22.8%
£35,000
9781510423695.indb 90 7/17/18 8:35 AM

Table 5.5 Evaluating worsening performance using gross and net profit
5 Finance
margins
Performance Gross profit margin Net profit margin

Worsening Gross profit margin falls, for example: Net profit margin falls, for example:
performance
2018 = 57.1% 2018 = 22.8%
2017 = 64% 2017 = 14%
Reasons for ● A fall in total revenue and a rise in the ● A fall in gross profit and a rise in
worsening cost of sales. expenses.
performance ● A rise in total revenue but a bigger rise in ● A rise in gross profit but a bigger rise
cost of sales. in expenses.
● A fall in total revenue but a smaller fall in ● A fall in gross profit but a smaller fall
cost of sales. in expenses.
Possible ● Increase total revenue by better ● Increase total revenue by better
Actions marketing, for example: marketing – see strategies in column 1.
– raise (or reduce price) ● Reduce expenses by, for example:
– increase advertising – reducing the wage bill (reducing
– sell in new markets (e.g. export overseas) hours, cutting hourly pay, replacing
– increase the range of products sold. labour with machines)
● Reduce cost of sales by, for example: – saving on heating and lighting bills.
– negotiate a lower price from suppliers
– buy from cheaper suppliers.
It is also worth remembering that a business may compare its gross and
Exam tip
net profit margins against other similar business to decide if it is
performing well enough and if any action is needed. More formulas here – learn
them and remember to write
Now test yourself them out in the examination
to help you to do the
1 Food4U is a restaurant selling Chinese takeaway food. The figures calculation correctly. Be
below are taken from its accounts: ready to write about why
business performance is not
Year 1 Year 2 good enough and suggest
Total revenue £240,000 £250,000 how it can be improved.
Gross profit £76,800 £85,000

Net profit £36,000 £30,000 I can …
(a) Calculate the gross profit margin in Year 1 and Year 2. [2]
■ Calculate gross and net
(b) Calculate the net profit margin in Year 1 and Year 2. [2]
profit margins.
(c) Evaluate the performance of Food4U in Year 2 compared with
■ Use gross and net profit
Year 1. [3]
margin figures to evaluate
2 North West Trains Ltd runs rail services in the north west of the UK.
business performance.
The following information is taken from the business accounts of
■ Analyse and evaluate
the company.
actions businesses
2017 2018 can take to improve
performance.
Gross profit margin 37.5% 30%
Net profit margin 25% 20%
(a) Analyse the performance of North West Trains Ltd in 2018
compared to 2017. [2]
(b) Evaluate strategies that North West Trains Ltd could use to
improve performance in the future. [9]
9781510423695.indb 91 7/17/18 8:35 AM

Calculation and interpretation of average rate
5 Finance
of return (ARR)
Average rate of return (ARR) is used to judge whether investment in the
business by its owners is worthwhile – will it give a good enough return? Average rate of return
ARR is a forecast – it is based on the expected profit the investment will (ARR): A method of
make, compared with the cost of the investment. There are three stages measuring and comparing
in the calculation of ARR which are shown in Table 5.6. The example uses the profitability of an
an investment by a business in a piece of machinery costing £300,000, used investment over the life time
of the investment.
over a period of three years – this is the life of the investment.
Table 5.6 Calculating average rate of return
Calculation Formula Example

1 Calculate the total profit from the Total revenue (from the investment) £570,000 – £300,000
investment over the life of the investment – Cost of the investment = Profit
= £270,000
(three years in this example). over the life of the investment
2 Calculate the annual average profit per Total profit £270,000
= £90,000
year Life of the investment (years) 3
= Average annual profit
3 Calculate the ARR Annual average profit £90,000
× 100 × 100 = 30%
Cost of investment £300,000
= Annual rate of return
Businesses use ARR to:

● compare different investments, e.g. machine A costs £300,000 and
gives an ARR of 30 per cent, while machine B costs £400,000 and
produces an ARR of 42 per cent. If the business can afford the extra
cost of machine B, this is a better investment because it gives a better
average rate of return
● compare an investment with saving, e.g. a business could save £300,000 Exam tip
in a savings account and receive 5 per cent interest or it could invest its
Make sure you know how
£300,000 and receive an ARR of 30 per cent. The ARR shows that it
to do the various formulas
would be better to invest, but if the ARR of the investment was only required to calculate average
3 per cent, it would be better to put the money into a savings account. rate of return. Remember
to write them out in the
Now test yourself examination to help you
when doing a calculation.
Farmer Bill’s Adventure Farm offers attractions and activities for Questions are also likely
families. Farmer Bill’s has £200,000 of retained profit in the bank to evaluate investment
which earns 5 per cent interest. The manager of Farmer Bill’s is opportunities and will ask
considering investing in a reptile house to show snakes and lizards you to judge if an investment
to visitors. It will cost £200,000. He has estimated that over a period is worth doing.
of 10 years, the reptile house will add £500,000 to the profits of the
business.
1 Calculate: I can …
(a) the total profit Farmer Bill’s will make from the reptile
house over the period of 10 years. [2] ■ Define average rate of
(b) the annual average profit Farmer Bill’s will make return (ARR).
from the reptile house over the period of 10 years. [2] ■ Calculate ARR.
(c) the annual rate of return Farmer Bill’s will make from the ■ Evaluate whether an
reptile house over the period of 10 years [2] investment is worth doing
2 Recommend whether Farmer Bill’s should invest in the reptile by comparing the ARR of
house. Give a reason for your recommendation. [3] different options.
9781510423695.indb 92 7/17/18 8:35 AM

5.4 Break-even
5 Finance
Concept of break-even and Simple calculation
of break-even quantity
A business will break even when the revenue it earns from sales is equal
to the cost of selling that output. The output at which revenue is equal Break-even quantity: The
to cost is called the break-even quantity. The business is neither making amount a business must sell
a profit or a loss. The concept can be applied to a business as a whole or to earn enough revenue to
to just one product that the business sells. just cover its costs so it does
not make a profit or a loss.
The break-even output can be calculated in three ways and these are
shown below.
Method 1: Calculating break-even from a table of

output, revenue and cost figures
Output – cans Total variable Total fixed Total Total The table shows the costs
of deodorant costs (£) costs (£) costs (£) revenue (£) and revenues for a business
producing cans of deodorant,
0 0 8,000 8,000 0
which it sells at £2 each.
2,000 2,000 8,000 10,000 4,000 The variable costs are £1 per
4,000 4,000 8,000 12,000 8,000 can and the fixed cost of
6,000 6,000 8,000 14,000 12,000
production is £8,000.
8,000 8,000 8,000 16,000 16,000 To find the break-even output,

look down the total cost and
10,000 10,000 8,000 18,000 20,000
total revenue columns to see
12,000 12,000 8,000 20,000 24,000 at which output the two are
14,000 14,000 8,000 22,000 28,000 equal. In this example, this is at
16,000 16,000 8,000 24,000 32,000 an output of 8,000 cans.
18,000 18,000 8,000 26,000 36,000
20,000 20,000 8,000 28,000 40,000
Method 2: Calculating break-even from a graph The graph shows the revenue
and costs per week of the Silver
Break-even chart − Silver Ridge Guest House, per week
y Ridge Guest House. The
900 variable cost per room is £25
800 and the selling price per room
700 is £85. The number of rooms
600 the Silver Ridge Guest House
500 must sell each week to break-
£
400 even is six. This can be found

300
where the total revenue line
200
crosses the total cost line.
100
0
1 2 3 4 5 6 7 8 9 10 11 x
Number of rooms
Total variable cost Total revenue Total cost Total fixed costs
Figure 5.3 Break-even chart for the Silver Ridge Guest House
9781510423695.indb 93 7/17/18 8:35 AM

Method 3: Calculating the break-even output using
5 Finance
a formula
The formula for calculating break-even and an example calculation are
shown below.
Total fixed cost
Break-even output =
Contribution per unit
The contribution per unit is calculated by price minus variable cost per unit.
So the formula can also be written:
Total fixed cost
Break-even output =
Price – variable costs per unit
Example
A business makes and sells earphones. It sells each set of earphones
for £20 (price). The variable cost is £8. The fixed cost is £30,000. The
calculation of break-even is shown below.
£30,000
= 2,500
£12
The business must sell 2,500 sets of earphones to break-even.
Now test yourself

Tunstall Pottery makes commemoration pottery objects. Its managing
director, Katie Tunstall, is planning to produce a set of figures to
commemorate members of the Royal Family. Each figure will cost £60.
The variable cost per figure is estimated to be £25. The fixed cost of
the Royal Family range will be £700,000. Exam tip
1 Explain what is meant by the term ‘break-even output’. [2] The quickest way to
2 Calculate the number of figures in the Royal Family range that calculate the break-even
Tunstall Pottery must sell to break-even. [3] output from a set of figures
is to use the formula. Learn
the formula and write it out
I can … before putting in the figures
so that you know you are
■ Explain the term ‘break-even quantity’. performing the correct
■ Calculate the break-even quantity. calculation.
Usefulness of break-even analysis

in business decision making
Break-even forecasts can be used by businesses to plan how much to
Break-even forecast: A
produce or how much to charge, as described in Figure 5.4.
prediction about the break-
There are problems with break-even forecasting so businesses need to even quantity, based on
take care when making decisions based on them. The problems include: estimates of future sales
● It is only a forecast, a prediction, so things may change in the future. revenues and costs.
● The business may not be able to sell at the price planned. New Forecast: A prediction. The
competition in the market may force the price down or demand may forecast break-even output
be lower at that price, perhaps because incomes have fallen or the of a business is a prediction.
price is simply too high.
● Higher than forecast costs may occur if prices of materials or
stocks rise.
9781510423695.indb 94 7/17/18 8:35 AM

Uses of break-even
5 Finance
forecasts
Planning how much Planning the price

to produce to charge
The forecast shows The break-even

how much the forecast shows that
business must sell to the business will not
break-even. break-even at the
proposed selling price.
If the business does not If the business thinks it can The business may decide to The business could try to
think it can sell this sell this amount, it may increase the selling price in reduce costs, e.g. by
amount, it may decide not decide to produce this order to increase revenue buying materials or stock
to produce at all. amount initially and then and reduce the break-even from a cheaper supplier.
increase production as output. However, if the
sales begin to reach the market is very competitive,
break-even level. this may not be possible.
Figure 5.4 Uses of break-even forecasts
Now test yourself

Which statement about break-even forecasts is false? [1]
(a) A break-even forecast is a prediction.
(b) By completing a break-even forecast a business will know how much it will sell.
(c) A break-even forecast can help a business decide if it should reduce its costs.
(d) A break-even forecast can help a business decide if it should reduce the price it charges for a product.
Exam tip
Be ready to explain why a break-even forecast may not turn out to
be accurate. Make sure your answer goes beyond saying it is only a
forecast and explain what changes can affect the forecast.
I can …
■ Explain the uses of break-even forecasts.
■ Apply the limitations of break-even forecasts to a business.
9781510423695.indb 95 7/17/18 8:35 AM

5.5 Cash and cash flow
5 Finance
Importance of cash to a business and

Difference between cash and profit and
Usefulness of cash flow forecasting to
a business
Cash is money that a business has on its premises or in its bank accounts.
Figure 5.5 explains the importance of cash to a business. Cash flow forecast: A
statement showing the
Provides liquidity and Examples of expenses expected flow of money into
Importance of enables a business paid using cash are:
and out of a business over
cash to a business to meet its short-term material costs, wages,
debts/expenses power and rent a period of time.
Liquidity: The ability of a
Figure 5.5 Importance of cash to a business business to pay its short-
Profit is the difference between sales revenue and production costs. term debts.
Remember that cash and profits are not the same. A business can have a Negative cash flow: A
lot of cash but not make a profit, equally it can be short of cash but still forecast that there will be
make a profit. Table 5.7 explains why cash flow forecasts are useful to a more cash going out of the
business. business than coming in.
Table 5.7 Usefulness of cash flow forecasts
Use Explanation
Planning tool ● A cash flow forecast is a plan which will help a business know if it will
have liquidity. Liquidity is when a business can pay its bills.
● A bank manager who sees a well-thought out cash flow forecast is
more likely to give a business a loan, especially if there is a positive
cash flow.
Anticipating periods of cash ● A cash flow forecast might show that the business will have a cash
shortages shortage at some time – it does not have liquidity. Knowing this, the
business will be able to plan how to deal with this.
Dealing with a cash flow ● A shortage can be dealt with by:
shortage when the business – arranging for finance (usually an overdraft, though this will mean paying
has a negative cash flow (it interest) so the business can pay its bills (e.g. wages, suppliers) to
does not have liquidity) continue production
– trying to reduce spending or increase revenue to avoid the shortage.
Providing targets ● A business may set a target for cash held so it knows it can pay bills
during a period of negative cash flow.
Note: Cash f low forecasts are not always accurate. Sales may not be as
high as expected, the price lower and the costs higher. Sales may be Positive cash flow: A
forecast that there will be
affected by the weather or changes in the economy (for example, changes
more cash coming into the
to people’s employment and incomes). Costs may rise or fall depending business than going out.
on economic conditions.
9781510423695.indb 96 7/17/18 8:35 AM

5 Finance
Which of these statements about cash flow is correct? [1] ■ Explain the importance of
(a) A business that has a negative cash flow cannot make a profit. cash to a business.
(b) A negative cash flow is a sign that the business is badly managed. ■ Explain the difference
(c) A negative cash flow may be financed using an overdraft. between cash held by a
(d) A business that has a negative cash flow will not get a loan from a business and the profits
bank. of a business.
■ Explain the usefulness of
cash flow forecasts
■ Evaluate ways of dealing
with cash flow problems.
Completion of cash flow forecasts

Table 5.8 shows the cash flow forecast for a convenience shop in Bowton. Its
cash inflow comes from selling groceries and newspapers and renting out two Cash: Notes and coins held
apartments above the shop. Its cash outflow is payments for stock, heating and in the business plus money
lighting bills, workers’ wages and interest and loan repayments due each month. it has in its bank accounts.
Table 5.8 Cash flow forecast – convenience shop, Bowton Closing balance: The
amount of cash left at
Cash flow forecast – convenience shop the end of the month. It
becomes the opening
January February March April
balance for the next month.
£ £ £ £
Net cash flow: Total inflow
Cash inflow of cash minus total outflow.
Sales 100,000 80,000 60,000 70,000 Opening balance: The
Rental income 10,000 10,000 10,000 10,000 amount of cash available at
the beginning of the month.
Total inflow 110,000 90,000 70,000 80,000
It is the closing balance for
Cash outflow the previous month.
Stock 50,000 80,000 60,000 40,000 Profit: The total revenue a
Energy costs 5,000 10,000 5,000 5,000 business receives minus the
total costs of production.
Wages 10,000 30,000 20,000 10,000
Interest and loan 10,000 15,000 10,000 5,000
repayments
Total outflow 75,000 135,000 95,000 60,000

Net cash flow 35,000 -45,000 -25,000 20,000
Opening balance 25,000 60,000 15,000 -10,000
Closing balance 60,000 15,000 -10,000 10,000
The notes below explain how the cash f low statement is drawn up.
1 Cash that f lows in is added up and the total for each month is put in
the ‘Total inf low’ row.
2 Cash that f lows out is added up and the total for each month is put in
the ‘Total outf low’ row.
3 Total outf low is deducted from total inf low each month and this is
the ‘Net cash flow’. The opening balance is the cash the business has
at the start of the month (usually kept in its bank account).
4 Net cash outflow is added to the opening balance if it is a positive or
deducted from the opening balance if it is a negative. This gives the
‘closing balance’ (cash the business has at the end of the month). This
becomes the opening balance for the next month.
9781510423695.indb 97 7/17/18 8:35 AM

Notes:
5 Finance
● For January and April, the shop is forecasting a positive cash f low.
● For February and March, the shop is forecasting a negative cash f low.
● For January, February and April, the shop is forecasting a positive
closing balance. The shop has cash at the end of the month.
● For March, the shop is forecasting a negative closing balance. This
means the business does not have enough cash to pay all its bills. It
could finance this by using an overdraft or it could delay payment of
some of its bills to avoid this. Note that a negative cash f low may not
be a problem if it is temporary.
Now test yourself

The cash flow forecast below is for Bowton Garage Ltd for the first three months of the year.
Cash flow forecast – Bowton Garage Ltd

January February March
£ £ £
Cash inflow
Sales 35,000 25,000 30,000
Total inflow 35,000 25,000 30,000
Cash outflow
Materials 8,000 8,000 6,000
Electricity and gas 1,000 1,000 1,000
Rent paid for premises 2,000 2,000 2,000
Wages 14,000 A 14,000
Total outflow 25,000 22,000 23,000
Net cash flow 10,000 3,000 7,000
Opening balance 5,000 15,000 18,000
Closing balance 15,000 18,000 B
Now test yourself

1 Explain the meaning of the term ‘cash flow forecast’. [2]
2 Calculate the missing figures in the cash flow for Bowton Garage Ltd:
A – the wages paid by Bowton Garage Ltd in February.
B – the closing balance for March. [2]
3 Explain the meaning of the following terms:
(a) Total inflow (b) Net cash flow (c) Opening balance [3]
4 State one reason why drawing up a cash flow forecast is useful for Bowton Garage Ltd. [2]
5 If Bowton Garage Ltd had a negative cash flow, explain two ways in which the business
could deal with it. [4]
Exam tip I can …

An examination question will often test your understanding of cash
flow forecasts by giving you an incomplete example and asking you ■ Explain the term ‘cash
to fill in the missing spaces. To do this, you need to understand how flow forecast’.
a cash flow forecast is drawn up. A question may include a negative ■ Explain the terms used in
cash flow forecast as this is a good opportunity to ask candidates a cash flow forecast.
to think of a solution to the problem. Always give reasons for any ■ Calculate missing figures
recommendations you make. in a cash flow forecast.
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6.1 Ethical and environmental

considerations
Ethical considerations in businesses
What is ethical or right or wrong is not always clear. Some people think
that it is unethical to use animals to test products such as cosmetics or Ethical: Concerned with
medicines, while others think this is acceptable as it stops humans being what is right and wrong
damaged by unsafe products. Animal rights supporters say that there are or behaving in a morally
other ways of testing without involving animals. Figure 6.1 describes correct way.
some ethical considerations that a business might consider.
Treatment of workers
• Not employ child labour
• Pay workers a fair wage
• Ensure workers do not work too long hours
• Provide safe working conditions
• Not discriminate against workers,
e.g. because of their gender, race or
disability.
Sourcing of materials
Treatment of suppliers
• Avoid buying from businesses that
Ethical considerations • Avoid late payment of money they owe
employ child labour
in business other businesses as this will cause cash
• Not buy from suppliers who do not
flow problems for the supplier
produce in a sustainable way (unless this
• Pay prices that are fair to the supplier.
cannot be avoided).
Treatment of customers and

marketing decisions
• Be careful not to overcharge customers
• Avoid making false claims about goods or
services in advertisements
• Avoid putting customers in danger by Exam tip
selling dangerous products or providing
unsafe services. Learn the different types
of ethical considerations in
Figure 6.1 Ethical considerations in businesses business and be ready to
apply these to a case study.
Now test yourself
Some private health firms have been accused by the UK National
Screening Committee of doing unnecessary tests on patients. Patients
I can …
have been charged up to £2,000 for tests such as MRI scans, heart ■ State and explain
tests and cancer tests. Doctors think that some of the tests may cause ethical considerations in
problems as they can lead to anxiety, may give a false diagnosis and business.
may even result in treatment that is not needed. ■ Analyse how a business
1 State four ethical considerations in business. [4] practice may be
2 State and explain how the health firms conducting unnecessary considered ethical or
health tests may be considered unethical. [3] unethical.
9781510423695.indb 99 7/17/18 8:35 AM

Impact of ethical considerations on businesses
Table 6.1 shows the possible advantages and disadvantages for a business
that behaves ethically. Ethical and unethical behaviour can affect the
costs, sales, profits and investments of a business.
The ethical or unethical behaviour of one firm may also impact on
another firm. For example, if customers find out that a business that
claims to be ethical buys stock from an unethical supplier (whether
knowingly or unknowingly), it can affect the business’ reputation.
Table 6.1 Advantages and disadvantages of behaving ethically in business
Possible advantages Possible disadvantages

Costs may be lower because workers who are paid Costs may be higher because the business may
fairly and work in safe conditions are well-motivated have to pay more for fair wages or because it does
so productivity is high. They are less likely to look for not employ cheaper child labour. There are also
jobs elsewhere, increasing retention and reducing costs involved in health and safety provision and
training and recruitment costs, and it will be easier purchasing ethically-produced goods.
and cheaper to recruit additional new workers.
Sales may be higher because a reputation for being Sales may be lower because the business is honest
ethical will lead to trust from customers. Some with customers in its advertising and does not sell
business buyers only want to buy from ethical goods to customers they do not need.
suppliers to protect their own reputation.
Profits may be higher because there may be higher Profit may be lower because the business charges a
sales and lower costs. lower price than its competitors or pays higher costs
than its competitors or customers prefer to buy
from an unethical producer if its prices are lower.
Investment may be higher because some investors Investment may be lower because profits may not be
only want to invest in ethical businesses. as high, which may put some investors off investing.
Now test yourself

Sports Direct sells sports clothing and accessories. In 2015, newspapers reported that Sports Direct was
treating its warehouse workers unfairly. The reports indicated that the business was paying workers less
that the National Minimum Wage, searched them intrusively when they finished work and used zero-
hours contracts (some workers got little, or no work in some weeks). That year, company sales fell and on
one day the share price fell by 11 per cent as investors decided to sell their shares. Sports Direct claims
it has now improved the way it operates and says pay has increased and all workers are guaranteed a
minimum of 12 hours work each week. However, many of those who work in the warehouse at Sports
Direct are supplied by agencies, so were unaffected by these changes.
Evaluate the possible effects on Sports Direct of improving the way it treats its workers. [9]
I can … Exam tip

You may be asked to
■ State and explain ways in which businesses may be affected by evaluate the advantages
ethical or unethical behaviour. or disadvantages of ethical
■ Evaluate the impact of ethical considerations on a business. practices of a business
in a case study. If the
information is inconclusive,
you can write that the
answer depends on the
effect on costs, sales, profit
and investment.
9781510423695.indb 100 7/17/18 8:35 AM

Environmental considerations in businesses
Table 6.2 describes the four environmental considerations you need to learn.
Climate change: When
Table 6.2 Environmental considerations
average temperatures
Environmental rise or fall and patterns of
consideration Explanation Example weather change.
Sustainability When the production Wind and solar power are Environmentally friendly:
and sale of a examples of renewable Describes consumers and
product involves the resources which generate businesses that act to make
use of renewable sustainable electricity. A production sustainable.
resources, rather business that uses this type Pollution: Causing harm to
than scarce of energy is environmentally the environment, including
resources. friendly. Electricity generated air, land and water.
from coal is not sustainable
because it uses up coal stocks. Sustainability: Production
that does not lead to the
Waste disposal Waste disposal is A business which recycles depletion of natural
environmentally the aluminium cans that resources.
friendly only if a it uses is environmentally
business reduces, friendly, while a business Waste disposal: The
reuses or recycles which sends the cans to land process of getting rid of
its waste. fill is not. unwanted materials.
Pollution Pollution is the A business that switches

introduction of from diesel to battery-
something harmful powered cars is helping to
into the environment reduce air pollution.
as a result of
the activity of a
business. Pollution
can affect air, rivers
and people’s hearing
in the form of noise.
Climate change Climate change A business that burns fossil
occurs when fuels helps to raise average
weather patterns temperatures, which is an
change or average example of global warming.
temperatures rise This in turn is leading to
or fall. changes in the seasons and
unusual weather patterns.
Now test yourself

Which statement is false? [1]
(a) An environmentally-friendly business will not produce any waste products at all.
(b) An environmentally-friendly business will recycle waste products where possible.
(c) An environmentally-friendly business will minimise its use of non-renewable resources.
(d) An environmentally-friendly business will minimise the pollution it causes.
I can … Exam tip

There is some overlap
■ State and explain environmental considerations in business. between the different
■ Explain how businesses may respond to environmental considerations environmental considerations.
Make sure that you explain
your points fully and clearly.
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Impact of environmental considerations on
businesses
The impact of an environmental consideration on a business depends on
how the business responds to it.
Environmentally friendly production can affect costs, sales, taxes,
subsidies, profits and capital costs.
Table 6.3 Advantages and disadvantages of being environmentally friendly for a business
Advantages of being environmentally friendly Disadvantages of being environmentally friendly

Costs may be lower because a business may have Production costs may be higher if materials
taken steps to use less energy or create less waste, produced in an environmentally-friendly way are
reducing energy bills and waste disposal costs. more expensive.
Sales may be higher because customers may Sales may be lower if the business charges
prefer to buy from a business that care about the higher prices to cover any extra costs of
environment. environmentally-friendly production.
Lower taxes and avoidance of paying fines may occur Capital costs may rise if the business invests
because the business creates less pollution. in new machines and plant to produce in an
environmentally-friendly way.
A business may gain subsidies from the government
to help pay for environmentally-friendly production.
Profits may be higher because sales revenue rise and
costs fall.
Businesses that fail to be environmentally-friendly may lose out on the

advantages this can bring and this may make it difficult for them to compete.
However, they will also avoid the disadvantages associated with being
environmentally friendly and this might give them a competitive advantage.
Whether it is better for a business to be environmentally friendly depends
on a number of factors:
● Some business owners view being environmentally-friendly as the
‘right’ thing to do and want to protect the planet and its people, now
and in the future. Exam tip
● If customers place importance on environmentally-friendly production,
Remember that with
this will help sales, but sometimes they just want low-price goods
evaluation questions you
and this may (though not always) favour businesses that do not use must give two sides of the
environmentally-friendly production. argument and then come
● Sometimes businesses based in a country with strict environmental to a conclusion by weighing
regulations struggle to export to countries where businesses that are them up.
less environmentally-friendly are allowed to sell.

Northumbrian Water is the sole provider of water supplies and ■ State and explain the
sewage disposal services to all households in Northumberland. impact on businesses
The Environment Agency reported that Northumbrian Water had of environmental
been fined £375,000 because it pumped raw sewage into a river. considerations.
Northumbrian Water has spent money on investment so that this ■ Evaluate the impact of
problem does not happen again, as well as paying to clean up the either failing to deal
damage it had caused. with environmental
considerations or of
Evaluate the impact on Northumbrian Water of allowing raw sewage to dealing successfully
be pumped into a river. [9] with them.
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6.2 The economic climate
The economic climate and its impact on
business
The economic climate is made up of two main elements:
● Consumer income levels: the level of income received by people in a Consumer income: The
country is important for businesses because it inf luences how much amount of money consumers
money people have to spend on goods and services. receive from work and from
● Employment and unemployment levels: employment and assets they own such as
unemployment levels inf luence income. A person in work will earn a shares and property.
wage or salary and will often have more income than a person who is Economic climate: Refers
unemployed, who may only receive welfare benefits. to how well the country is
doing in terms of levels of
The level of income and level of employment are linked. When employment income and employment.
rises, the level of income usually rises. When employment falls, unemployment
rises and when employment rises, unemployment will usually fall. Level of income: The average
income of people in a country.
These changes in income and employment have an impact on businesses
Level of unemployment:
on sales, production and profits as well as on business strategy.
The number of people out of
work in a country.
Impact on sales, production and profits
Figure 6.2 summarises the possible impacts of rising levels of income and
employment on business.
Possible impacts on businesses of rising income and employment
Many businesses will Sales of luxury goods Businesses that

experience an increase will increase more produce cheaper
in sales as consumers than sales of goods and services
have more money to necessities, as these may experience a fall
spend. are now more in sales as people
Businesses may increase affordable for people switch to better,
production and profits more expensive goods.
may rise.
Figure 6.2 Possible impacts on businesses of rising income and

employment
Note the following as they are useful evaluation points:
● The impact of economic changes on business will depend on what
kind of goods it sells.
● The bigger the change in income, the greater the impact on businesses.
● Falling income and employment will have the opposite effects of those
described above.
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Impact on business strategy
Business strategy is what the business does in response to a change in

income and employment. Figure 6.3 shows possible ways in which
businesses may change what they do when income and employment fall.
Possible changes in business strategy when income and employment falls
Production Human resources Finance Marketing

The business may The business may The business may The business may try
try to reduce try to reduce costs try to reduce to increase sales by:
costs by: by: costs by: • increasing
• reducing waste • improving worker • taking out advertising
• improving worker productivity cheaper loans • producing a
productivity. • laying off workers • reducing its cheaper product
to reduce the overdraft. • lowering prices.
wage bill.
Figure 6.3 Possible changes in business strategy due to a fall in income

and employment
Now test yourself

1 Which of the following statements is true? [1]
(a) The sales of a business will always increase when incomes rise.
(b) Rising incomes often lead to an increase in the sales of luxury goods.
(c) A rise in unemployment will make all consumers worse off.
(d) A fall in consumer income will always cause a business to sell less.
2 In 2017, Dixons Carphone experienced falling sales of mobile phones. One reason for this, they said,
was that the level of real income was falling. As a result, customers were holding onto their mobile
phones longer, rather than buying newer models. The company announced that it expected its
profits to fall.
In 2009, Poundland reported a big increase in sales. Poundland is a retailer that sells a large variety
of goods, including clearance items usually sold at supermarkets or other retailers as well as some
‘own brand’ goods. Most items are sold at £1 and the goods are often cheaper than in other retail
stores. At the time, there was a recession in the UK and the level of real income was falling.
(a) Analyse why, at times of falling real income, Poundland increased its sales while sales
at Dixons Carphone fell. [6]
(b) Recommend how Dixons Carphone could have changed its marketing to minimise the
fall in sales it was expecting. Give a reason for your recommendation. [3]
I can … Exam tip

Useful evaluation points
■ Explain the terms ‘level of income’ and ‘level of employment’. include the size of changes
■ Analyse the impact of changes in income and employment on in income and employment,
businesses.
how different kinds of
■ Evaluate the factors which influence the impact on a business when businesses will be affected
income and employment levels change.
and different ways in which
■ Recommend strategies that businesses can use when income and businesses can respond to
employment levels change.
changes in the economic
climate.
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6.3 Globalisation
Concept of globalisation
Globalisation is the process by which businesses around the world have
become increasingly interconnected. Figure 6.4 shows the main ways in Globalisation: The process
by which business activity
which this may happen:
around the world has
Global buying and selling Global production become increasingly
Businesses buy and sell goods Businesses may produce all or interconnected.
and services from and to each part of a product in different
other, e.g. finished goods to countries, e.g. design and
retail, components to use in marketing in country A,
manufacturing goods and manufacture of components
services, such as accountancy, in countries B, C and D and
shipping, insurance and assembly of the final product
advertising. in country E.
Globalisation – how
businesses
are interconnected
Exam tip
Apply your answers to the
Global movement of people Global movement of capital business given in the case
Businesses may recruit workers Businesses may raise study as much as possible.
from other countries and send investment money from other
The case study is intended to
workers to work abroad. countries by borrowing money
and selling shares. help you understand what the
question means, but also tests
Figure 6.4 Globalisation of businesses whether you can apply your
knowledge to the business
Globalisation has been made easier for the following reasons: given in the case study.
● Improvements to transport: larger ships and planes and better road and
rail networks have led to a reduction in transport costs.
● Better telecommunications and the internet: websites, email, social I can …
media, telephone and video-conferencing have reduced costs and
made it easier to arrange international business or to share plans and ■ State and explain the
different ways in which
knowledge.
businesses around the
● Reduced trading barriers: a reduction in tariffs (taxes on imports) and
world are interconnected.
quotas (limits on the amount that can be imported) as countries agree ■ Explain why globalisation
to trade deals or to free trade arrangements. Tariffs and quotas can has increased.
make it uncompetitive for businesses to export.
Now test yourself

Jaguar Land Rover (JLR) makes cars and its headquarters is in the UK. The cars are sold in many
countries around the world, including the USA and in the Far East. Cars are assembled in the UK and
China. Components used in the cars come from many countries, for example, gear boxes are made in
the Czech Republic and tyres in Italy. The UK offices and factories employ workers from many countries
other than the UK, such as engineers from Romania, Spain, India and Australia. UK workers go to work in
China and Germany. Services are bought from the UK and other countries, including India. The business
is owned by TATA, an Indian business. Communications between the UK HQ and its business in China
have been helped by the development of ICT and UK managers can now easily send designs and talk
about quality issues with workers in China. Transport costs have reduced as bigger ships are now used
to carry greater numbers of cars. JLR has also favoured countries developing free trade deals.
1 Explain two ways in which JLR can be said to be involved in globalised trade. [4]
2 Explain one reason why JLR has been able to become a global business. [2]
9781510423695.indb 105 7/17/18 8:35 AM

Impact of globalisation on businesses
The impact of globalisation is discussed under four headings. There is some

overlap between the sections but this will help with your understanding.
Growth of multinational companies

Multinational companies (MNCs), such as Coca Cola and Google, are
examples of globalisation. They operate in more than one country. The
advantages to the business of being an MNC are shown in Figure 6.5.
1 Increased sales 2 Risk is spread 3 Lower costs 4 Tax avoidance
Each country has more Sales are not dependent Production of part or all of Multinational companies
potential customers. on one country. a good or service can take can avoid paying tax by
Sales in one country may place in a country with low locating part(s) of their
be low, but not in all the costs, for example, one business in low tax
countries where the that has cheaper land or countries.
business sells. labour.
Figure 6.5 Advantages of being a multinational company
Influence on business location International brand: An

Globalisation has inf luenced where businesses choose to locate. Some image or values for a product
businesses have chosen to locate part of their production abroad, perhaps that are communicated in
keeping their headquarters in the country where the business started. countries around the world.
However, some businesses have moved production back to the UK Multinational companies:
from abroad because the advantages of producing abroad have been Businesses that operate in
lost over time (for example, wages in other countries have risen) or the different countries around
disadvantages have proved too great. the world.
Advantages of locating abroad

l Lower production costs, for example, because labour, land, property
and technology is cheaper in some countries.
l Expert/skilled workers may be in plentiful supply in some countries
but not in the country where the business currently produces.
l The business can be located near to the market (its customers).
Disadvantages of locating abroad

l Quality control may be difficult as managers in the headquarters may
not be able to check work easily.
l Transport costs may be higher if the goods are not sold where they are
produced.
l Sales may be lost if customers do not like goods being made abroad
(e.g. they prefer ‘made in Britain’).
l Skilled labour is not always available.
l Productivity may be low if workers are unskilled, leading to a rise in
production costs.
International branding
Businesses that sell in many different countries need to think about how
they will market their goods and services in a way that will suit the local
market – they need to create an international brand. Figure 6.6 shows
some considerations they need to think about.
9781510423695.indb 106 7/17/18 8:35 AM

Income level
Incomes are higher in some countries
than others. Lower cost products may
be produced for sale in lower cost
Product promotion countries. TATA produces some
Decisions on advertising method, use very low priced vehicles (about £1,500)
of PR and promotions will be influenced for sale in India, but higher priced
by the culture in the countries where vehicles (e.g. those produced by
the business wishes to sell – how the Jaguar and Land Rover) for sale in
people live and what they value. other countries.
International branding
considerations Language
Words used to describe a product or
service in one country may have
Legal issues different meanings in others. For
Laws on what can be sold and how example, Ford Motors made a truck
goods can be advertised vary between which it called the ‘Fiera’, only to
countries, e.g. alcohol cannot be sold discover later it meant
to those under 21 in many US states. ‘ugly old woman’ in Spanish.
Bribery
Bribery is accepted (and expected)
in some countries, but not in others.
Businesses need to decide if they
should bribe people to sell their
products or not.
Figure 6.6 International branding considerations
How businesses compete internationally

Businesses that compete internationally sell goods and services abroad and
in the UK where overseas firms also compete. Table 6.4 summarises the
factors which inf luence how businesses compete internationally.
Table 6.4 Factors which influence how businesses compete internationally
Factor Influence
Growth ● Expand overseas, for example, open shops in other countries.
Marketing ● Make products to suit different countries.
● Promote goods and services in different countries.
● Set prices that are affordable in different countries.
● Locate outlets in specific places in different countries where there will be customers.
Human ● Recruit, train and motivate local workers.
resources ● Establish good communications with workers in different countries so that
production is efficient.
● Obey laws about employing workers in different countries.
Business ● Choose the most efficient method of production for the location, such as changing
operations from batch to flow production to reduce costs or introducing technology.
● Ensure good quality assurance processes to guarantee products/services produced
in different countries maintain the same standards.
● Provide an appropriate sales process (online or face to face) for the country in which
it is selling.
● Locate locally to be near the market.
Finance ● Arrange loans, overdrafts and sales of shares that may be needed abroad.
● Make sure the costs of selling abroad can be covered.
9781510423695.indb 107 7/17/18 8:35 AM

Factor Influence
Exchange rate ● The exchange rate is the price of one currency in terms of another. It influences the
price of exports and imports.
● Business may benefit or be disadvantaged by changes in the exchange rate:
– A rise in the exchange rate makes exports dearer. An exporting business would
need to reduce costs to keep its prices competitive.
– A fall in the exchange rate makes imports cheaper. A UK producer selling in the UK
would need to reduce costs to keep its prices competitive.
Ethical and ● Businesses that wish to be ethical need to consider the wages, who they employ
environmental (avoiding child labour) and health and safety wherever they produce, so that
influences consumers have confidence in them.
Economic ● Businesses need to respond to the economic climate in the countries where they sell.
climate ● If incomes in a country are rising, they may be able to sell more.
● If incomes in a country are falling, they may need to reduce prices to maintain sales.
Now test yourself

Spanish retailer Zara sells a range of fashion clothing in what is a very competitive market. Zara is a
multinational company which sells through around 2,100 shops and online in 88 different countries,
including Spain, UK, USA, Canada, China, South Korea, South Africa and India. Zara produces clothes in
its Spanish factories, in the nearby countries of Portugal, Morocco and Turkey and in Asia where there
are many low-paid workers. Locating in Spain and nearby countries makes communications between
its headquarters and its factories easy. This means Zara is good at meeting changing consumer needs,
introducing new designs which can be manufactured and available to buy within about four weeks. If these
are not quite what consumers want, further design changes are possible within two to three weeks.
1 Explain one advantage to Zara of being a multinational company. [2]
2 Analyse one advantage to Zara of producing clothes in nearby countries. [3]
3 Analyse why, as a multinational company selling in many different countries, it is important to
Zara to be able to change designs quickly. [3]
4 Analyse how a rise in the value of the euro (the currency used in Spain) against the pound would
affect the price and sales of clothes made in Spain but which are exported to the UK. [6]
Exam tip
Two useful evaluation strategies include:
● discuss the extent of changes, for example, how much the exchange
rate changes will decide how much import and export prices rise or
fall
● weigh up advantages and disadvantages that apply to the business
as it stands.
I can …
■ Analyse and evaluate the advantages to a business of being a
multinational company.
■ Analyse and evaluate the advantages and disadvantages of locating
abroad (or in the UK for an overseas business).
■ Analyse and evaluate the main considerations that affect a business
when creating an international brand.
■ Analyse and evaluate the different ways in which businesses
compete internationally.
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7 The interdependent nature
of business
The interdependent nature of business operations, finance, marketing
and human resources within a business context and How these
interdependencies underpin business decision making
This part of the specification is very different from the other parts because it
is about the links that exist between the different business functions. There Interdependent nature of
are four functions – business operations, finance, marketing and human business: Refers to the links
resources – and you should already have studied and revised these. You between different areas of
need to know what these links are and how a business should consider them business that affect decision
making, the risks and
when making decisions. The examples below illustrate the interdependent
rewards of business activity
nature of business and show some links between departments.
and the use of financial
information to aid business
decision making.
Example Example
Link
Link
● Business operations (producing goods or
● Business operations and marketing.
services) and human resources (workers).
● The amount that a business produces and how Decisions
a business produces will link with the number
● A firm wishes to increase production.
and type of workers it needs.
● The marketing department may decide to
Decisions increase advertising and other marketing
● A gardening business may want to increase the activities to make sure the business can sell
number of customers it has. It is likely to need the increased output. It may also change its
to increase the number of gardeners it employs, marketing, for example, advertising nationally
in order to carry out work for new customers. rather than just locally.
● A firm manufactures and fits signs, including
road signs and signs placed on or outside
buildings. It wants to increase production. Example
It may be able to do this by introducing new
technology such as robots to carry out the Link
manufacturing process. This may require more ● Finance and marketing.
skilled specialists to control the technology.
It may need to employ more fitters to fit the Decisions
signs. It might be able to lay off some workers ● A firm may want to increase its marketing
whose job can now be done by new technology. to introduce a new product or because of
increased competition.
● The finance department will have to finance
Example this spending, perhaps by arranging an
overdraft or finding the money in the business’
Link reserves.
● Business operations and finance.
Decisions
● A business wishes to expand production by
building a new factory.
● The finance department will have to arrange
finance for this, perhaps by selling shares or
taking out a bank loan.
9781510423695.indb 109 7/17/18 8:35 AM

Now test yourself
Merseyside Beds Ltd produces mattresses and bed frames in its Liverpool factory located just outside
the city centre. The company wants to increase production and is considering building a new factory on a
disused site on the outskirts of the city.
Analyse the possible effect on each of the following if Merseyside Beds increases production by
building a new factory. [9]
1 Human resources
2 Finance
3 Marketing
I can … Exam tip

If you are asked a question
■ Identify links between different business functions. about how a business
■ Analyse how different business functions may be linked. decision might affect the
different functions in a
business, remember that
there may be more than one
way in which the decision
affects each function.
Impact of risk and reward on business activity
and Use of financial information in measuring
and understanding business performance
and decision making
Businesses use financial information to help them make decisions. The
information can help to maximise the profit a business can make and Financial information:
reduce its chances of making a loss. Business information may be either Includes information about
forecasts or records. Forecasts are predictions of what may happen. revenues, costs, profit,
Records show what did happen but there are no guarantees that what rates of return, break-even
did happen will continue to happen in the future. So, while business and cash flow. Financial
information is useful in making decisions, businesses must think about information helps a business
to make decisions.
other things that can affect their decisions, for example:
● new competition entering a market which could affect sales, prices and Non-financial rewards: To
expected revenues owners, this includes the
● changes in costs, including wages, will be affected by the level of satisfaction of running a
unemployment, while material costs will be affected by a world successful business, being
shortage or a change in the exchange rate of the pound. in charge, being independent
and having an impact on
When making decisions, businesses also need to consider the impact of what consumers buy.
non-financial risk and non-financial rewards. The examples below show
Non-financial risk: To
how financial information can measure performance and help decision business owners, this
making. includes their health due
to stress and strained
relationships with family and
friends.
9781510423695.indb 110 7/17/18 8:35 AM

Example

Decision: Is the business making a good profit?
Profit figures may help with this judgement, but a better way to decide
is to calculate the average rate of return (ARR), which gives owners
a percentage rate of return on their investment. A business’ ARR can
be compared with that made by other businesses, or with how much
they could earn in interest by saving their money. This can help a Business performance:
business decide whether its performance is good enough, if changes A measure of how well
are needed to improve business performance, if it should switch its a business is doing. Key
investment to a different line of business or simply save its money measures are sales, profits
instead. (For more information, see Section 5.3, page 92.) and rates of return.
Example
Decision: Increasing sales revenue

A business may decide it needs to increase sales revenue to increase
profits. Revenue can be increased by raising the price of what it sells
or increasing the amount it sells. A rise in price usually leads to lower
sales, although sales revenue may rise if sales do not fall very much.
Financial information predicting the effects of changes in price will
help the business to make this decision.
Example
Decision: Reducing costs

A business may decide to increase its profits by reducing costs, through
the introduction of new technology. Using financial information, it could
calculate the cost of buying and using the new technology and any
savings that might result by reducing the amount of labour it employs.
(For more information, see Section 5.3, pages 89–91.)
Example
Decision: Producing a new product

A business may want to produce a new product. Break-even analysis
will help the business decide how many it must sell, and at what price,
to make a profit. If the business does not think it can sell this amount,
it may decide not to produce the new product so that it does not make
a loss on it. Alternatively, it may look at ways of reducing the cost,
or raising the price, to make the new product profitable. (For more
information, see Section 5.4, pages 93–95.)
Example
Decision: How to finance business activities

A cash flow forecast may show that a business will have a negative
cash flow for a time (see Section 5.5, page 96). The business may
consider having an overdraft or using trade credit, if possible. From
the cash flow forecast the business could find out how much finance
it will need, and for how long. This information, and the interest rate it
would be charged for the period, could be used to calculate the cost.
(For more information, see Section 5.2, pages 83–84.)
9781510423695.indb 111 7/17/18 8:35 AM

Now test yourself
Jo Swindale runs a convenience store, which is open seven days a week from 7 a.m. until 6 p.m. She
is considering keeping the shop open until 10 p.m. She would need to employ two additional workers
to share the 6–10 p.m. shift during the week. Jo needs information to decide whether to open for the
additional hours.
1 Explain how financial information would help Jo to make this decision. [6]
Supersmoothies Ltd makes smoothie drinks from fruit. The company is considering expanding by buying
either a fruit grower in Spain or a fruit grower in Israel. Using information provided by the two fruit
growers, the financial director of Supersmoothies has estimated that the average rate of return (ARR)
from investing money in the Spanish company would be 8 per cent and 10.5 per cent from the Israeli
business in the first year. Wage costs in Spain have been low and have not risen much in the past
10 years, although employment is expected to start to rise in the next year.
2 Explain the possible financial risk and financial reward to Supersmoothies Ltd in buying another
business. [4]
3 Evaluate whether the information about the Spanish and Israeli businesses is useful to
Supersmoothies in helping it to decide which business to buy. [7]
Exam tip Financial reward: The profit

An exam question may give financial data. Be ready to recommend a made by business.
decision based on the financial information given and, if the question Financial risk: The
directs you, any other information you consider to be relevant. Another possibility a business will
type of question may ask you to state the financial information that a lose money from decisions
business needs to make a decision. it makes. Owners may lose
money they have invested.
I can …
■ State the financial information a business should use for different
types of decisions.
■ Analyse and evaluate financial information to make
recommendations about business decisions.
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OCR GCSE 9-1 Business: My Revision Guide

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What information would help Jo decide whether to extend her store's opening hours?

What information would help Jo decide whether to extend her store's opening hours?

What are the potential financial risks and rewards for Supersmoothies Ltd. in buying another business?

What are the potential financial risks and rewards for Supersmoothies Ltd. in buying another business?

OCR GCSE (9–1)

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one topic in the specification. Learning points are 2 Marketing

The examples below show how to calculate the

Features to help you succeed

4 Now Test Yourself Answers at www.hoddereducation.co.uk/myrevisionnotes

Exam tips ‘I can’ checklist

Key terms Online

OCR GCSE (9–1) Business 3

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4 Now test yourself answers at www.hoddereducation.co.uk/myrevisionnotesdownloads

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Now test yourself answers at

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1.1 Role of business enterprise

Spotting an opportunity Developing an idea Satisfying customer needs

Figure 1.1 Main purposes of business enterprise and entrepreneurship

Now test yourself

Entrepreneur: A person who takes the risk of starting and running a

OCR GCSE (9–1) Business 7

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‘Characteristics’ refers to the qualities, skills or abilities that a person must

Figure 1.2 Characteristics of an entrepreneur

Now test yourself

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Table 1.1 Risks and rewards of entrepreneurship

Now test yourself Rewards: The benefits an

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Purpose of planning business activity

Now test yourself I can …

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Identifying the resources

Identify the finance needed to Achieve the business' aims

Now test yourself

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Features of different types of business

Private limited Public limited

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Now test yourself Deed of partnership: A

Evaluate the advantages and disadvantages to Aaron of taking

Concept of limited liability

OCR GCSE (9–1) Business 13

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Issue Limited liability Unlimited liability

Now test yourself Assets: Items owned by the

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