AQA 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 and objectives

A business converts inputs into outputs that satisfy customer needs, adding value in the process — the difference between the cost of inputs and the price the customer pays. Added value is increased by branding, quality, service, convenience and design, not only by raising price.

Mission → corporate objectives → functional objectives → tactics.

Common corporate objectives include profit maximisation, growth, market share, survival, cash flow, and increasingly social and ethical goals. They conflict as often as they align — growth frequently consumes the cash a firm needs for stability, and ethical sourcing often raises costs. Which objective dominates depends on the stage of the business, the state of the market and stakeholder expectations.

Objectives must be SMART, and they change with circumstance — survival in a downturn, growth in a boom.

Profit and shareholder value can diverge, because maximising short-run profit by cutting R&D or damaging reputation reduces long-run value. Noticing that time-horizon conflict is an evaluation point rather than a definition.

Ownership

Structure	Liability	Key issue
Sole trader	Unlimited	All control, all risk
Partnership	Unlimited	Shared capital, shared liability
Private limited	Limited	Separate legal identity
Public limited	Limited	Stock-market capital, but takeover risk and divorce of ownership from control

Unlimited liability means the owner’s personal assets can be taken to settle business debts — that exact phrase is what mark schemes reward.

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

Stakeholders

Conflict is the assessed skill, not identification:

• 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.

Name the conflict, explain why the interests oppose, then judge whose should take priority in this business.

Stakeholder and shareholder approaches often converge over time — treating employees and customers well protects shareholder value in the long run.

Market analysis

market share  = firm sales / total market sales x 100
market growth = change in size / original size x 100

Mass versus niche: niche means lower volume but often higher margins and loyalty, with concentration risk if that segment declines.

Price elasticity drives pricing decisions: where demand is inelastic a price rise raises revenue; where it is elastic, competing on price destroys it.

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

The external environment

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

Variable	Effect
Interest rates	Rising rates raise borrowing costs and cut spending
Exchange rates	SPICED — Strong Pound, Imports Cheap, Exports Dear
Inflation	Raises costs and uncertainty
Unemployment	Lowers wage pressure but also demand

Decision making

Scientific decision making uses data and models — decision trees, investment appraisal — and is more defensible, but relies on estimates and ignores qualitative factors.

Intuitive decision making is faster and draws on experience, but is harder to justify and prone to bias.

Decision trees: work right to left, expected value = Σ(probability × payoff), then subtract the cost. The evaluation is the point: probabilities are estimates, qualitative factors such as morale and reputation are excluded, and timing is ignored. It is a decision aid, not a decision.

Opportunity cost and risk should feature in any recommendation, alongside the firm’s objectives, resources, market and competition.

Worked example — flotation. A private limited company considers floating on the stock market. For: raises substantial capital for expansion; shares become liquid and easier to sell; raises public profile and credibility. Against: dilutes ownership and control; vulnerable to hostile takeover; costly flotation and reporting requirements; short-term pressure from shareholders for dividends. The marks come from a judgement that depends on context — the scale of expansion planned, and how much the current owners value retaining control.

Answering the questions

Application — use the case study’s actual figures and context. Analysis — 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 ignoring the case study.
• Objectives that are not SMART.
• Listing stakeholders instead of explaining conflict.
• Reversing the exchange-rate effect.
• Calculating a decision tree without evaluating the model.
• A conclusion with no criterion.

Self-test

1. Explain the divorce of ownership from control and one remedy.
2. A currency strengthens — what happens to importers and exporters?
3. Why can discount retailers grow in a recession?
4. Give two limitations of decision trees.
5. What three things does a top-band evaluation contain?

Answers: 1. Shareholders own a plc but directors control decisions, so their objectives can diverge; share options and performance-related pay align directors’ interests with shareholders’. 2. Importers benefit as imports become cheaper; exporters are hurt as their goods become dearer abroad. 3. Their goods are inferior goods with negative income elasticity, so demand rises as incomes fall. 4. Probabilities are subjective estimates, and qualitative factors such as staff morale and brand reputation are excluded — also that timing of returns is ignored. 5. Both sides of the argument, a clear judgement, and a statement of what that judgement depends on.