CAIE A-Level Business

Purpose of business activity

A business is an organisation that uses resources to produce goods or services that people want, in order to meet some objective. Most private businesses aim for profit, but a business may also exist to provide a public service, to serve a community or to meet social or environmental aims. What every business shares is that it takes inputs, changes them into something customers value, and has to cover its costs from what it earns or is given.

A good is a physical product that can be touched and stored, such as a phone or a loaf of bread. A service is an activity done for a customer, such as a haircut, a bus ticket or a bank loan, and it cannot normally be stored.

Factors of production

Four resources are needed to produce anything, and businesses have to pay for each of them.

Businesses differ in how heavily they use each factor. A software company uses a great deal of skilled labour and little land, whereas a mining company needs much more land and capital. The mix a business chooses affects its costs and its flexibility, which is why the same factors reappear in the study of operations.

Adding value

Value added is the difference between the price a business sells its output for and the cost of the inputs it bought in to make it. If a café buys ingredients for £1.20 and sells the finished sandwich for £4.00, it has added £2.80 of value. That £2.80 has to pay for the staff, the rent and the equipment, and what is left is profit.

A business can add value by changing the product itself (turning flour into bread), by presentation and branding, by service and convenience, or by customer experience. Adding more value than competitors usually lets a business charge a higher price or win more customers, so it is a central source of competitive advantage.

Scarcity, choice and opportunity cost

Resources are limited but wants are not, so every society and every business has to choose what to produce and what to leave out. This is the economic problem, and a business meets it each time it decides how to spend a limited budget or a limited number of working hours.

Opportunity cost is the value of the next best alternative given up when a choice is made. If a business has £50,000 to spend and can either buy a new machine or run an advertising campaign, then choosing the machine means the opportunity cost is the benefit the campaign would have brought. Opportunity cost is not the same as the money spent: it is the best use of those resources that was not taken.

Thinking in opportunity costs forces managers to compare options rather than judge each in isolation. A project may look profitable by itself, yet be a poor choice if the same money would earn more elsewhere.

The dynamic business environment

The conditions in which a business operates keep changing. Customer tastes shift, new technologies arrive, rivals enter or leave the market, laws change and the economy moves between growth and recession. A business that is slow to respond can find its products out of date or its costs uncompetitive. A dynamic environment therefore rewards flexibility, a willingness to change products and methods, and regular monitoring of the market. It also adds uncertainty to every plan, since forecasts made today may turn out wrong.

Why businesses succeed or fail

Many new businesses do not survive their first few years. The usual reasons for failure are:

• poor cash flow, which is the most common cause, because a business can have orders and still be unable to pay suppliers and wages on time
• weak market research, so the product does not match what customers want
• poor management, including lack of experience or planning
• competition that the business did not anticipate, or a change in the economy or in demand
• too much borrowing, leaving the business unable to meet interest payments
• over-expansion before the business has the resources and systems to cope

Success usually comes from the opposite: a clear understanding of customers, a product that offers good value or a real point of difference, careful control of cash and costs, a capable and motivated workforce, and the ability to adapt when conditions change. Luck and timing also play a part, so no single factor guarantees either outcome.

Local, national, international and multinational businesses

The difference between an international and a multinational business is ownership of operations abroad. An international business may simply export; a multinational has factories, offices or shops of its own in other countries. A business often moves along this range as it grows, though a small online business can sell internationally from the start.