AS Business Studies
OCR F291 Business Introduction
Q&A
Rapid Revision Handbook
 Step by step guide to key concepts
 Question and Answer format
 Glossary
Richard Young
2010 Edition
Business Introduction
Contents
The nature of business......................................... 2
Economies & Diseconomies of Scale ...... 23
Adding Value....................................................... 3
Unincorporated businesses................... 25
Business Activity ............................................... 2
Cost revenue and profit.................................. 4
Legal structure ................................................ 25
Incorporated businesses ........................ 26
Types of customer ............................................ 4
Franchising ....................................................... 28
Decision Making ................................................ 6
Objectives ............................................................... 29
What businesses need.......................................... 7
Strategy and tactics ....................................... 31
Stakeholders ....................................................... 5
Opportunity Cost............................................... 6
Ownership......................................................... 28
Corporate objectives..................................... 29
Sources of finance ............................................. 7
The Market............................................................. 32
Cash flow ........................................................... 10
Demand and Supply ...................................... 32
Business Plan................................................... 10
Human Resources .......................................... 12
Recruitment...................................................... 13
Market research and analysis ................... 15
Sampling ............................................................ 16
The Market........................................................ 32
Supply ................................................................. 34
Equilibrium Market Price ........................... 35
Capacity and markets ................................... 38
Market Structures and Competition....... 39
Organisation..................................................... 18
Other influences................................................... 41
Classification of business................................. 21
Technological Change................................... 42
Accountability.................................................. 19
Economic sector ............................................. 21
Size ....................................................................... 21
Market size and share .................................. 22
External environment .................................. 41
Social and Cultural ......................................... 43
Moral and ethical issues .............................. 44
AS F291 Glossary................................................. 45
1st Edition. First published 2010 © Richard Young.
All rights reserved. The right of Richard Young to be identified as the author of this Work has been
asserted in accordance with the Copyright, Designs and Patents Act 1988.
| Business Activity
1
Stakeholders
What is a stakeholder? A stakeholder is anyone with an interest in a business. Stakeholders
are individuals, groups or organisations affected by the activity of the business
List types of stakeholder
Stakeholder
Interest
Owners
Someone to whom a firm legally belongs eg shareholders part own a company
Managers
A member of staff responsible for planning, organising controlling and coordinating
production. Managers ‘get things done through other
Workers
Staff who are employed by the business
Customers
Individuals or other businesses that buy products made by the firm
Suppliers
Firms selling products to another business eg components or support services
Lenders
any individual or organisation to whom money is owed
Community
People living in a given area
List internal and external stakeholders. Internal stakeholders within a firm include owners,
managers & employees. External stakeholders outside a firm include customers, suppliers,
creditors, local & national government and local communities.
What is a stakeholder objective? A stakeholder objective is an aim of a stakeholder group.
List typical stakeholder objectives. Each stakeholder group has its own set of aims. Typically:
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Owners want a profit and capital gain from an increasing share price
Managers want high salaries and benefits and job satisfaction
Workers seek high wages, long holidays and good working conditions
Customers seek low priced good quality products ie value for money
Suppliers expect to be paid on time and to be a regular customer ie repeat business
Creditors want a loan to be paid back on time, with interest
The community wants jobs but no harmful spillover effects from production eg noise
Government wants employment for voters, a source of taxes to pay for public services
Competitors want to maintain a price and quality advantage over its rival
Can stakeholder objectives conflict? Stakeholders can have objectives that conflict with other
stakeholders or corporate objectives. Eg:
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A wage rise for employees increases costs and so reduces short term profits for owners
A price rise may increase profits but disappoint customers
Delaying the payment of bills improves cash flow but loses the goodwill of suppliers
Why must firms take account of all its stakeholders' views? Particular attention is paid to
meeting the requirements of dominant stakeholders eg owners. Note aims and priorities may
vary within anyone stakeholder group eg some in the community may want growth and jobs.
Others may oppose expansion because of associated external costs eg extra noise and pollution
How does adding value meet the needs of stakeholders? Profitable firms can benefit
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Owners by generating profits which rewards risk taking
Staff by creating jobs and income
Customers by supplying products that meet their requirements
Government by paying taxes and reducing unemployment
Local community by offering work and better infrastructure eg new roads
What is the difference between a shareholder and a stakeholder? Shareholders are part
owners of a company while stakeholders are any group affected by the activities of a firm.
| Stakeholders
5
What is a cash flow forecast? A cash flow forecast predicts the future flow of cash in and out of
the business over a given period of time eg three months.
Interpret January’s cash flow
forecast. At the beginning of January
the business has £1,000 worth of cash.
This is the opening balance for the
month of January
The total flow of cash into the business
(receipts) for January is expected to be
£12,000, while the total outflow from the business (payments) is forecast at £10,000. Net cash
flow is the difference between receipts and payments of money over a period. January’s net cash
flow is £12,000 from cash in less £10,000 from cash out. This means net cash flow is = £2,000.
Given an opening balance of £1,000 and a net cash flow of £2,000 there is a closing balance of
£3,000 at the end of January that can be carried forward to February
Why is projected net cash flow negative in February? In February cash outflows are greater
than cash inflows by £2,000. The firm has received £8,000 in cash but paid out £10,000 cash.
Why is the firm predicting cash flow problems in March? The firm starts March with £1,000
cash. Given payments of £13,000 and cash receipts of only £10,000 net cash flow is -£3,000.
Unless action is taken the firm does not have enough cash to pay its bills at the end of the month
How can the firm tackle its future cash problem? The owners can take action to
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Increase receipts by getting more cash in from sales or arranging a loan from the bank or
put more of their own money into the business.
Reduce payments by cutting costs eg cut staff wages, or delaying paying suppliers
Can the business survive until the end of April? The business has a cash flow problem for
just one month: March. If they take action and say arrange a one month overdraft with the bank
for £2,000 during March they can avoid becoming
insolvent ie being unable to pay their bills
Define net cash flow. Net cash = business
receipts minus business payments
What are cumulative cash flows? Cumulative
cash flow is the total amount of money that flows
through a business over a given period and is
calculated by adding net cash inflows and
deducting cash outflows. The cumulative cash
flow in the diagram from January to May inclusive
is £2,000 - £2,000 -£3,000 +£9,000 = £6,000
What is overtrading? Overtrading occurs when a firms expands without adequate working
capital. If a firm has insufficient funds to pay day to day expenses it may have to cease trading.
What is working capital? Working capital is money used to fund the day-to-day operation of a
business and pay bills. Technically: current assets less the current liabilities.
| Cash flow
11
Define a workforce plan. A workforce plan identifies the present workforce and the desired
future workforce. It highlights future expected shortages, surpluses and competency gaps.
Are workforce plans important? A workforce plan helps a firm to anticipate both how many
workers they will need in the future and their skill level. Without the right number of people
with the right level of skills, a firm is unlikely to meet its objectives.
Is a workforce plan always useful? Workforce planning requires accurate data and
forecasting. Are marketing research forecasts of future sales accurate? Workforce planning
costs time and money and delays decisions.
Recruitment
Define recruitment. Recruitment is the process by which a business seeks to hire the ‘right’
person for a vacancy
Why do firms recruit? New staff are required to help make products
How do firms recruit and select staff for a post? Recruitment and selection involves:
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Identifying skills required for a post
Writing a job description and person specification
Advertising the post internally and/or externally
Short listing: selecting some applicants for an interview whose experience and potential
most match the job
Selection using interview, psychometric (personality) or aptitude (skill) test or role play
Issuing a contract of employment including job title, starting date, tasks, duties, hours,
leave, pension, etc
Outline the main features of a job description. Typically a job
description listing the title of the post, expected tasks and duties, the line
manager, targets and pay
Outline the main features of a person specification. A person
specification describes the attributes an employee performing this role must
have eg their qualifications & experience.
What is internal recruitment? Internal recruitment is when a business
appoints a current employee to another post within the organisation.
What are the benefits of internal recruitment? This saves the cost of
advertising and induction but may result in low calibre appointments and
resentment from former colleagues. It also does not encourage the
introduction of new skills and attitudes into an organisation.
What are the benefits of external recruitment? Chosen on merit, new
staff can bring new ideas and experience of alternative working practices.
There is a risk the new worker may not ‘fit in’ or be incompetent
Why is the recruitment process important? Careful staff selection is
important as it is difficult and costly to dismiss a member of staff. Recruiting
the right person for the right job minimises the risk of a conflict between
personal and corporate objectives.
Explain induction. Induction is the training given to new staff on work procedures, culture,
managers, colleagues and expectations to help them perform their role.
Why is induction important? Induction reduces the time taken for a new worker to become
productive and helps avoid costly errors time delays from not knowing what to do. Moreover it
reduces labour turnover by making new employees feel welcome and part of the team
| Recruitment
13
Classification of business
How are organisations classified? Classification means putting items into groups according to
type. There are a number of equally valid ways of classifying businesses eg by:
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Economic Sector: primary secondary or tertiary
Private or public sector: businesses owned by private households or the state
Size: small medium or large
Legal identity: unincorporated sole traders or partnerships and companies
Economic sector
Explain specialisation. Specialisation is when workers, firms, regions or countries concentrate
on a particular product or task. Eg bakers spend all day making bread
Define economic sectors. Economic sectors refer to categories of economic activity
List economic sectors Business activity falls into one of three types of economic sector
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Primary: extracting raw materials eg agriculture, forestry, fishing, quarrying, and mining
Secondary: production of goods eg energy, manufacturing and construction
Tertiary: services such as banking, finance, insurance, retail, education and transport
What is the quaternary sector of the
economy? Intellectual services eg data
gathering, education and research and
development.
What is the chain of production? The chain of
production is the different stages of making,
distributing and selling a product.
What is interdependence? Firms that rely on
other businesses are interdependent
How are sectors related? Sectors are
interdependent. The primary sector supplies raw
materials for processing into products to be sold
by the tertiary sector. Eg a farm (primary)
supplies wheat for breakfast cereals (secondary)
for sale in a supermarket (tertiary).
Define deindustrialisation. Deindustrialisation is a decline in the size of the secondary sector
Size
How can business size be measured? Indicators of size include:
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Turnover: large firms generate millions of £s worth of sales revenue in a year
Number of employees: large firms generally employ many workers
Profit: large firms make large profits – or large losses
Capital employed: large firms use of millions of pounds worth of plant and equipment
Market share: the larger the percentage share of the market the larger the business,
Define turnover. Turnover is total sales made in a given period of time eg annual sale of £1m.
Large firms have large turnover.
| Economic sector
21
Why set objectives? Setting clear objectives
Give the firm a structure and agreed sense of direction ie ‘where we are going’. Eg staff
understand what they are expected to achieve within a given period of time
Allow firms to monitor and review the performance of employees, departments or the
whole business against set targets.
Where objectives are SMART success can be measured
Are motivational: workers and departments understand clearly the target to be achieved
within a given time period.
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Define departmental objectives. Departmental objectives are the target for a specific function,
eg marketing. They are aim to contribute to the successful delivery of corporate objectives.
Give an example of conflicting departmental objectives. The accounts objective to reduce
credit may conflict with marketing aim of seeking increased sales by offering interest free credit
How are corporate, departmental and staff objectives linked? Corporate objectives set the
overall targets for the business for the next, say, year. Individual departments then establish
their own objectives for their function to contribute to the successful delivery of corporate aims.
Corporate Objectives
Finance objectives
HRM objectives
Operations objectives
Marketing objectives
Manager's objective
Manager's objective
Manager's objective
Manager's objective
An employee’s
objective
An employee’s
objective
An employee’s
objective
An employee’s
objective
Within each department, each team set targets to deliver the department’s objectives. Managers
and subordinates then agree individual targets needed to meet team objectives.
Explain Management by Objectives (MBO). MBO involves managers agreeing SMART
objectives with subordinates and then regularly monitoring their progress. Eg a performance
management meeting may be called to review a subordinate’s progress against set targets.
What are the advantages of MBO? The process of negotiated target setting and appraisal can
improve the two flow of information within an organisation. Training needs are identified.
Negotiating and achieving goals helps satisfy higher order Maslow needs.
List factors that determine if a firm meets its objectives. The ability of business to meet its
aims depends on
Ensuring quality leads to repeat purchases ie customers keep buying the firm’s products
Adequate finance for operations and expansion – if required
Sufficient cash flow to pay bills on time
Good supplier relationships so that production is maintained
Monitoring customers, markets and products trends and have the flexibility to
responding to change quickly
The ‘right’ workforce with the skills and size to enable the firm to meet objectives
Effective organisation so that staff understand their objectives and role
Monitoring progress to ensure the firm stays on track to meet objectives
External factors such as the state of the economy and the extent of competition
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30
Corporate objectives |
What is the impact of competition on the market? An increase in the number of firms
offering a product shifts the supply curve to the right, causing a fall in price.
List the main categories of market structure. The four categories of market structure are
perfect competition with no barriers to entry where many firms produce identical
products
monopolistic competition with low barriers to entry where many firms produce
differentiated products
oligopoly with high barriers to entry where a few large firms dominate the market
monopoly with high barriers to entry where a single firm supplies the market.
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perfect
competition
monopolistic
competition
oligopoly
monopoly
Less competition so more market power
Summarise the characteristics of different types of market structure
Characteristic
Perfect competition
Oligopoly
Monopoly
Number of firms
many small
a few large
One firm or 25% market share
Barriers to entry
none
high
very high
New entrants
Easily possible
Difficult
Very difficult or impossible
Substitutes
Many
Few
Few or none
Profits
normal
Super normal
Super normal
Customers
Lots of choice
Limited choice
Limited or no choice
Concentration ratio
very low
high
very high
What is product differentiation? Product differentiation occurs when firms make their
product distinctly different from goods or services offered by rivals.
How can firms differentiate their products? Firms adjust the marketing mix (price product,
promotion, and place) make items distinct from those offered by rivals. Advertising is used to
establish a brand image and suggest an item meets customer needs better than rival products.
Why do firms differentiate their products? Product differentiation is a source of market
power and creates a barrier to entry enabling high long run profits to be sustained.
40
Market Structures and Competition |
AS F291 Glossary
Accountability: the process of holding
individuals or institutions answerable for
their responsibilities, actions and
decisions.
Aims: the main objective of the business
eg survive, make a profit, or grow
Appraisal: an evaluation of staff
performance over a given period of time
usually against stated objectives
Articles of Association: rule governing
the internal running of a company
Assets: items of value owned by a
business eg cash, equipment and stock
Authority: the power managers have to
direct subordinates and make decisions.
Average cost: the cost of making one item
ie unit cost
Bankruptcy: when a judge decides an
individual is insolvent ie unable to pay
their debts
Barriers to entry: the obstacles that
restrict firms breaking into a market and
competing with established firms.
Biased sample: the subjects chosen for a
survey are unrepresentative of the
population
Billion: £ billion denotes £1,000 million ie
£1,000,000,000
Board of Directors: individuals elected by
the shareholders of a company to manage
the business. Directors control the
business
Business: any organisation that uses
resources to create products for its
customers
Business activity: the process of turning
inputs such as raw materials into outputs
ie goods and services
Business culture: shared attitudes, values
and behaviours within an organisation.
Business cycle: fluctuations in the level of
economic activity over time causing booms
and slumps. Also called the economic
cycle.
Business functions: the activities of
different departments in an organisation
Business organisation: the way in which
staff roles and responsibilities are
arranged within a firm
Business plan: a report stating the nature
of the business, research findings, cash
flow and sales forecasts, and an action plan
for future business activity
Calculated risk: a number value of the
chance of bad outcome from a decision. Eg
a 75% or 75:25 chance of a new business
surviving its first year.
Capacity: the maximum amount a firm can
make in a set time period using all its
current resources eg 100,000 cakes a week
Capacity management: the process of
organising production to ensure the
forecast level of demand can be met
Capital: (1) funds invested in a business
(2) producer goods (3) assets available to
a business
Capital employed: the total amount of
funds invested in the business. The
difference between total assets and
current liabilities
Capital intensive: the extensive use of
machines compared to workers in the
production process
Cartel: a group set up by rival firms to
take common action eg agree prices,
market share or exchange information on
costs
Cash: the amount of money the firm has in
notes, coins, and money in the bank
Cash flow: the movement of money in an
out of the business over a given trading
period eg one month
Centralisation: authority is retained by
senior managers at the top of the
organisational chart. There is minimal
delegation.
Chain of command: how instructions are
passed down a business from superiors to
subordinates.
Chain of production: the different stages
of making, distributing and selling a
product
Choice: the selection of one option
between alternatives
Clearing price: market clearing price is
the one price which leaves neither unsold
products nor unsatisfied demand ie
equilibrium price.
Collateral: assets pledged as security by
borrowers that can be sold by lenders if
the loan is not repaid
Collusion: when rival producers
cooperate or collaborate eg agree a
minimum market price.
Communication: the transfer of
information between individuals
Communication medium: a method of
transferring a message
Company: a business with its own legal
status separate from its owners called
shareholders
| Moral and ethical issues
45
Competition: when rival firms in the same
industry contend for customers
Competitive market: an industry made
up of many rival sellers each competing for
the same customers.
Concentration ratios: the proportion of
total sales (market share) of the largest
firms.
Confidence levels: the number of times
out of 100 the results of a survey are
expected to be representative
Constraints: factors that restrict business
activity, both internal and external
Consultation: the process of identifying
the views of individuals and stakeholders
Consumer: the individual or business who
finally uses a product
Consumer taste: the preferences of
households
Control: responsibility for day to day
running of a firm
Corporate: whole organisation
Corporate culture: the shared attitudes,
values and behaviours within an
organisation which affect expectations of
staff
Corporate objectives: a specific target the
entire organisation aims to achieve
through the combined activity of staff and
departments
Corporate social responsibility: an
organisation voluntarily considers the
interests of society in its business activities
Cost: the expenses incurred in supplying a
product
Credit: borrowed money
Creditor: any individual or organisation to
whom money is owed
Culture: refers to shared attitudes, values
and behaviours of a group
Current liabilities: short term business
debts that must be paid back within a year
Customers: individuals or organisations
that buy a product
Data mining: the process of analysing
data to establish patterns and
relationships between variables
Decentralisation: authority is delegated
down the chain of command to
subordinates who are empowered to take
decisions
Decision making: selecting a course of
action between several alternatives
Decrease in demand: when less of a
product is demanded at each and every
price causing the demand curve to shift to
the left
46
Moral and ethical issues |
Deed of partnership: a legal document
setting out in writing the duties and
responsibilities of partners eg how to
share profits and working hours
Deindustrialisation: a decline in the size
of the secondary sector
Delayering: a reduction in the number of
layers of hierarchy within the
organisational structure
Delegation: managers pass down
authority to subordinates while retaining
responsibility for the outcome
Demand: the amount of a product
consumers are willing and able to
purchase at various prices in a given time
period eg one month
Demand curve: a graph showing the
amount of a product consumers are willing
and able to buy at different prices, in a
given period of time eg one month
Demand schedule: a table showing the
amount of a product consumers are willing
and able to buy at different prices, in a
given time period, eg one month
Demographics: the size and composition
of the population
Departmental objectives: the target for a
specific function eg marketing
Desk research: secondary research
Diffusion: the process where a new idea
or new product is taken up by producers
and consumers
Director: an individual appointed by
shareholders to help manage a company
Diseconomies of scale: the disadvantages
to the firm, in the form of higher unit costs,
from increasing their size of operation
Disequilibrium: a situation where there
is a state of imbalance and so a tendency
for change
Disposable income: income left over after
paying direct taxes and receiving state
benefits ie take-home pay or net pay.
Distributed profit: the amount of profit
paid out to shareholders (owners)
Dividends: that part of company profits
distributed (paid out to) to its
shareholders
Division of Labour: where production is
broken down into separate tasks and each
task is completed by an individual worker.
Dynamic: Ever changing
Economies of scale: the benefits, in the
form of lower unit costs, from increasing
the size of operation