A Level Business: Business and Its Environment — Revision Notes

Condensed for the final weeks. For the full explanation, use the Business and Its Environment study guide.

Enterprise

Enterprise is the willingness to take on financial and personal risk to start and run a business in pursuit of reward. Key entrepreneurial qualities, best applied to a given scenario rather than listed abstractly: opportunity recognition, the ability to secure and manage finance, resilience in the face of setbacks, and the capacity to plan and adapt a business idea as circumstances change.

Purpose and objectives

Mission → corporate objectives → functional objectives → tactics.

Objectives must be SMART, and they change with circumstance — survival dominates in a downturn, growth in a boom. Objectives also shift across the business lifecycle: a new business prioritises survival and building a customer base; an established, profitable business shifts towards growth, profit maximisation or market share; some businesses, especially under stakeholder pressure or founder values, adopt social or environmental objectives even at some cost to short-term profit.

Profit maximisation can conflict with long-term shareholder value if it means cutting R&D or damaging reputation. The two diverge over different time horizons, and noticing that is an evaluation point.

Ownership

Structure	Liability	Key point
Sole trader	Unlimited	Full control, all risk
Partnership	Unlimited	Shared capital and expertise
Private limited	Limited	Separate legal identity
Public limited	Limited	Stock market capital, but takeover risk and divorce of ownership from control
Social enterprise	Varies	Surplus reinvested

Divorce of ownership from control is the plc’s structural problem: shareholders own but directors run, and their objectives can diverge — directors may pursue growth or status while shareholders want returns. Share options and performance-related pay exist to realign them.

Stakeholders

Shareholders, employees, customers, suppliers, government, community, lenders.

Conflict is the assessed skill, not identification. Name the conflict, explain why the interests oppose, then judge whose should take priority in this business:

• Shareholders want cost cuts; employees want pay and security.
• Customers want low prices; shareholders want margin.
• The community wants low pollution; the firm wants low compliance cost.

Shareholder versus stakeholder approaches often converge in the long run — treating employees and customers well tends to protect shareholder value.

Power and interest vary between groups, which affects how closely a business must manage each: a small group with high power and high interest in a decision, such as a major shareholder, typically needs managing far more closely than a large but low-interest group, even where that group is more numerous.

The external environment

PESTLE — Political, Economic, Social, Technological, Legal, Environmental.

Variable	Effect on business
Interest rates	Rising rates raise borrowing costs and cut consumer spending — durables and housing hit hardest
Exchange rates	SPICED — Strong Pound, Imports Cheap, Exports Dear
Inflation	Raises costs, creates uncertainty, drives wage demands
Unemployment	Lowers wage pressure but also lowers demand
GDP growth	Drives demand, especially for income-elastic goods

Income elasticity decides who suffers in a recession. Luxury goods have high positive YED and fall sharply; inferior goods have negative YED, so demand can actually rise — which is why discount retailers grow in downturns.

Growth

Internal (organic) — slower, retains control, lower risk. External — merger or takeover:

Type	Direction
Horizontal	Same industry, same stage
Vertical forward	Towards the customer
Vertical backward	Towards the supplier
Conglomerate	Unrelated, spreading risk

Economies of scale lower average cost — total costs still rise. Diseconomies raise average cost when communication and coordination break down.

Strategy

SWOT — strengths and weaknesses are internal; opportunities and threats are external. The useful move is pairing them: which strength exploits which opportunity.

Ansoff: market penetration (lowest risk) → product development / market development → diversification (highest risk), because both product and market are unfamiliar.

Porter’s Five Forces assesses the attractiveness of an industry, not the strength of a firm — a routine misapplication.

Answering the questions

Application — use the case study’s actual figures and context. Analysis — build a chain: because X, therefore Y, which means Z for this firm. Evaluation — weigh both sides, judge, and state what the judgement depends on.

Exam traps

• Generic answers with no case-study reference.
• Listing stakeholders rather than explaining conflict.
• Reversing the exchange-rate effect.
• Saying economies of scale reduce total costs.
• Using Five Forces on a single firm.
• A conclusion without a criterion.

Self-test

1. What is the divorce of ownership from control, and how is it addressed?
2. A currency strengthens — what happens to exporters?
3. Why can discount retailers grow in a recession?
4. Which parts of SWOT are internal?
5. Why is diversification the riskiest Ansoff strategy?

Answers: 1. Shareholders own a plc but directors control decisions, so their objectives can diverge; share options and performance-related pay are used to align directors’ interests with shareholders’. 2. Their goods become more expensive abroad, so exports fall — Strong Pound, Imports Cheap, Exports Dear. 3. Their goods are inferior goods with negative income elasticity, so as incomes fall demand for them rises. 4. Strengths and weaknesses. 5. Both the product and the market are new to the business, so it has no existing competence in either.