A Level Business: What is Business — Revision Notes

Condensed for the final weeks. For the full explanation, use the What is Business study guide.

Purpose, mission and objectives

Mission states why the business exists. Corporate objectives flow from it, then functional objectives, then tactics.

Objectives must be SMART. “Increase sales” is not an objective; “increase sales by 10% within twelve months” is.

Common objectives: profit maximisation, growth, market share, survival, diversification, and social or environmental goals. They change over time — survival dominates for a start-up, growth and profit once established.

The profit-versus-shareholder-value question: profit maximisation may conflict with long-term shareholder value if it means cutting R&D or damaging reputation. The strongest answers note that the two diverge over different time horizons.

Ownership

Structure	Liability	Note
Sole trader	Unlimited	Full control, all profit, all risk
Partnership	Unlimited (usually)	More capital and expertise, shared profit
Private limited (Ltd)	Limited	Separate legal identity; shares not publicly traded
Public limited (plc)	Limited	Stock-market capital, but public accounts, takeover risk, divorce of ownership from control
Non-profit / social enterprise	Varies	Surplus reinvested rather than distributed

Unlimited liability means personal assets can be taken to pay business debts — that phrase earns the mark.

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; shareholders want returns. Share options and performance-linked pay exist to realign them.

Stakeholders

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

Conflict is the assessed skill. Name the conflict, explain why the interests oppose, then judge whose interest 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.

Stakeholder versus shareholder approaches: shareholder theory says the firm’s duty is to owners; stakeholder theory says sustainable success requires balancing all interests. Note that they often converge in the long run — treating employees and customers well tends to protect shareholder value.

Market analysis

market share  = firm sales / total market sales x 100
market growth = change in market size / original size x 100
market size   = volume (units) or value (revenue)

Mass versus niche markets: niche means lower volume but often higher margins, greater customer loyalty and less direct competition — while carrying concentration risk if that segment declines.

Segmentation: demographic, geographic, psychographic, behavioural.

Demand and supply determine price. Demand shifts with income, substitutes, complements, tastes, and marketing. Price elasticity of demand determines whether a price rise increases revenue: inelastic yes, elastic no. That single calculation drives most pricing recommendations.

The external environment

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

Key economic variables and their effect on business:

Variable	Effect
Interest rates	Rising rates raise borrowing costs and reduce consumer spending, hitting durables and housing hardest
Exchange rates	A weak currency helps exporters, hurts importers
Inflation	Raises costs and creates uncertainty; wage demands follow
Unemployment	High unemployment lowers wage pressure but also lowers demand
GDP growth	Drives demand, especially for income-elastic goods

The memory hook for exchange rates: SPICED — Strong Pound, Imports Cheap, Exports Dear.

Income elasticity determines who suffers in a downturn. Luxury goods have high positive YED, so demand falls sharply in a recession; inferior goods have negative YED, so demand can actually rise. This is why discount retailers often grow during downturns — a point worth having ready.

Decision-making

Scientific decision-making uses data and quantitative techniques — decision trees, investment appraisal, market research. It is evidence-based and defensible, but the data behind it may be incomplete, out of date or misleading, and gathering and analysing it can be slow.

Intuitive decision-making instead relies on the decision-maker’s own experience and judgement. It is fast and works even where data is absent, but is prone to personal bias and harder to justify to stakeholders after the fact.

Most real business decisions combine both approaches, and evaluation questions reward recognising that the right balance between them depends on the level of risk involved, the time available, and the quality of the data on hand.

Answering the questions

Marks come from application, analysis and evaluation:

• Application — use the case study’s actual figures, names and market.
• 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: firm size, market conditions, time frame, financial position.

Exam traps

• Generic answers with no reference to the case study.
• Objectives that are not SMART.
• Saying limited liability means limited debts.
• Confusing public limited company with public sector.
• Listing stakeholders rather than explaining conflict.
• Getting exchange-rate effects backwards.
• A conclusion with no criterion.

Self-test

1. What does SMART stand for, and why does it matter?
2. Explain the divorce of ownership from control and one way firms address it.
3. Explain one stakeholder conflict in full.
4. A currency strengthens. What happens to exporters and importers?
5. Why can discount retailers grow during a recession?

Answers: 1. Specific, Measurable, Achievable, Relevant, Time-bound; without these an objective cannot be monitored or judged to have been met. 2. Shareholders own a plc but directors run it, so objectives can diverge; share options and performance-related pay are used to align directors’ interests with shareholders’. 3. For example, shareholders want costs cut to increase returns while employees want higher pay and job security — the same funds cannot do both. 4. Exporters are hurt because their goods become dearer abroad; importers benefit because imports become cheaper (SPICED). 5. Their goods are inferior goods with negative income elasticity, so as incomes fall demand for them rises.