What You Need to Learn
- Understand what a business is and what businesses set out to achieve
- Know the four main business objectives: profit, quality, market share, and social/environmental service
- Understand different business types and how objectives differ between them
- Explain why people start their own businesses
- Identify what makes a business successful
- Understand how businesses differentiate themselves through USPs and competitive advantage
1.1 What is a Business?
A business is an organisation that produces products (goods) or services, which are sold to customers or other businesses. Businesses come in all shapes and sizes, ranging from sole traders (one person running a small business) to huge international corporations that operate across the globe.
Remember: A business does not have to be large or make millions of pounds. A sole trader selling cakes at a market stall is just as much a business as a multinational company like Tesco or Apple.
Business Objectives
Every business needs a way to measure whether it is successful. Business objectives are the goals a business sets out to achieve. Different types of businesses may have different objectives depending on their purpose and structure.
1.2 What Do Businesses Set Out to Achieve?
There are four main business objectives that businesses typically pursue:
| Objective | Explanation |
|---|---|
| Profit | Most private businesses aim to make a profit. Profit is the money left over after all costs have been paid. Profit = Revenue - Costs. Revenue is the income a business earns from selling its goods or services. |
| Quality | Some businesses focus on producing the highest quality goods or services. This can help justify higher prices and build a loyal customer base. |
| Market Share | Market share is the proportion of total sales in a market that a business holds. Some businesses aim to grow their market share to become the dominant player in their industry. |
| Social/Environmental Service | Some businesses exist primarily to benefit society or the environment rather than to make a profit. Charities and social enterprises often have this as their main objective. |
Key Formula: Profit = Revenue - Costs. Make sure you know this formula. Revenue is the total income from sales. Costs include everything the business spends (wages, rent, materials, etc.). If costs exceed revenue, the business makes a loss.
Card Sort: Business Objectives
Sort these examples into the correct business objective category:
1.3 Business Objectives and Business Types
Different types of businesses have different structures and objectives. Businesses can be broadly divided into private companies, not-for-profit organisations, and public-sector businesses.
Private Companies
| Business Type | Description | Key Features |
|---|---|---|
| Sole Trader | A business owned and run by one person. The simplest form of business. | Unlimited liability - the owner is personally responsible for all debts. Easy to set up. Owner keeps all profits. |
| Partnership | A business owned by two or more people who share responsibility, profits, and losses. | Unlimited liability for most partnerships. Partners share decision-making and workload. Governed by a partnership agreement. |
| Franchise | A business model where a person (franchisee) pays to use the brand name, products, and systems of an established business (franchisor). | Examples: McDonald's, Subway. The franchisee pays an initial fee and ongoing royalties. Benefits from an established brand and support. |
| Private Limited Company (Ltd) | A company owned by shareholders but shares cannot be sold to the general public. | Limited liability - shareholders can only lose the amount they invested. Profits distributed as dividends. Separate legal identity from owners. |
| Public Limited Company (plc) | A company whose shares are traded on the stock exchange and can be bought by anyone. | Limited liability. Can raise large amounts of capital by selling shares. Must publish annual accounts. Profits distributed as dividends. |
Key terms:
- Limited liability - the owners (shareholders) can only lose the money they invested in the business. Their personal assets are protected.
- Unlimited liability - the owner is personally responsible for all business debts. Personal assets (house, car, savings) can be used to pay debts.
- Dividends - a share of the company's profits paid to shareholders.
Not-for-Profit Organisations
| Organisation Type | Description |
|---|---|
| Charities | Organisations set up to raise money for a cause and help people in need. Any surplus is reinvested into the charity's mission, not distributed to owners. Examples: Oxfam, Cancer Research UK. |
| Social Enterprises | Businesses that trade to make a profit but reinvest that profit into a social or environmental cause. They aim to make a difference, not just money. Examples: The Big Issue, Divine Chocolate. |
| Mutually Owned Businesses | Owned by their members (customers or employees) rather than external shareholders. Profits are shared among members or reinvested. Examples: Nationwide Building Society, The Co-operative Group. |
| Worker Co-operatives | Businesses owned and democratically controlled by their workers. Each worker has an equal say in how the business is run. Profits are shared among the workers. |
Public-Sector Businesses
Public-sector businesses are owned and run by the government. Their main objective is to provide services to the public, not to make a profit. Examples include the NHS, state schools, and the BBC. They are funded through taxation.
EXAM ALERT: Make sure you know the difference between a private limited company (Ltd) and a public limited company (plc). The key difference is that a plc can sell shares to the general public on the stock exchange, while an Ltd cannot.
Match the Business Types
1.4 Why Do People Start Their Own Businesses?
There are many reasons why people decide to set up their own business. Here are the most common motivations:
| Reason | Explanation |
|---|---|
| Spotting a gap in the market | Seeing a need that is not currently being met by existing businesses. The entrepreneur develops a product or service to fill that gap. |
| Invention or innovation | Creating something completely new (invention) or improving an existing product or process (innovation). This can give the business a competitive edge. |
| Redundancy | When someone loses their job, they may use their redundancy payment and skills to start their own business rather than seek new employment. |
| "To be my own boss" | Many people want the freedom and independence of running their own business. They want to make their own decisions about when, where, and how they work. |
| Charitable objectives | Some people start businesses (such as social enterprises) because they want to make a positive difference in their community or the world. |
Case Study: Sue Baker Opens Her Dream Cafe
Sue Baker always dreamed of opening her own restaurant. After years of working in the catering industry, she spotted a gap in the market for a gourmet burger restaurant in her local high street. She set up Burgers a la Carte as a sole trader.
Sue used her savings and a small bank loan to fund the start-up costs. Her USP was offering high-quality, locally sourced gourmet burgers at affordable prices. She chose to be a sole trader because it was quick and easy to set up, and she wanted full control over all decisions.
However, as a sole trader, Sue has unlimited liability, meaning her personal assets are at risk if the business fails. She also has to work very long hours and cannot easily take time off.
Key learning points from Sue's case: Sue spotted a gap in the market, used a USP to stand out, and chose a sole trader structure for simplicity and control. But she faces the risks of unlimited liability and working alone.
True or False: Business Objectives and Types
1.5 What Makes a Business Successful?
Success means different things to different types of businesses. The way we measure success depends on the business's objectives.
| Business Type | How Success is Measured |
|---|---|
| Private companies | Profit and growth are the main indicators. A successful company increases its profits and expands over time - more customers, more products, more locations. |
| Charities and social enterprises | Success is measured by achieving social objectives - how many people helped, how much money raised for the cause, the impact on the community or environment. |
| Sole traders | Success might simply mean making enough money to live on and doing work they enjoy. Survival in the first few years is a key measure. |
Other Measures of Business Success
| Measure | Explanation |
|---|---|
| Employment | A successful business creates jobs and provides good working conditions, fair pay, and opportunities for staff development. |
| Environmental | Increasingly, businesses are judged on their environmental impact - reducing carbon emissions, minimising waste, using sustainable materials. |
| Ethical | Ethical businesses treat their workers fairly, source products responsibly, and act honestly. This can build customer trust and loyalty. |
Remember: Profit is not the only measure of success. The exam may ask about non-financial measures such as employment, environmental impact, and ethical behaviour. Modern businesses are increasingly expected to balance profit with social responsibility.
1.6 What Makes a Business Stand Out from Others?
In a competitive market, businesses need to differentiate themselves - to stand out from their rivals. A business's USP (Unique Selling Point) is the feature that makes it different from and better than the competition. This gives the business a competitive advantage.
Ways Businesses Can Differentiate Themselves
| Method | Explanation |
|---|---|
| Invention | Creating something completely new that no other business offers. This gives a first-mover advantage. Example: Dyson invented the bagless vacuum cleaner. |
| Innovation | Improving existing products, services, or processes to make them better. Example: Apple didn't invent the smartphone, but innovated with the iPhone's touchscreen interface. |
| Marketing | Using market research (finding out what customers want), design (making products attractive), advertising (promoting products through media), and promotion/PR (building a positive public image) to attract customers. |
| Pricing | Setting the right price to attract customers. This could mean being the cheapest (like Aldi) or charging premium prices for high-quality products (like Apple). |
| Customer Service | Providing excellent service before, during, and after a purchase. Good customer service builds loyalty and repeat business. Example: John Lewis's "Never Knowingly Undersold" promise. |
| Staff Development | Investing in training and developing employees so they can provide better service and contribute new ideas. Well-trained, motivated staff are more productive. |
| Social/Ethical Values | Businesses that demonstrate strong ethical or social values can attract customers who care about these issues. Example: Fairtrade products, companies that donate to charity. |
| Brand Image | Building a strong, recognisable brand that customers trust and feel loyal to. A powerful brand can charge higher prices and attract more customers. Example: Nike, Coca-Cola. |
Key distinction: Invention means creating something completely new. Innovation means improving something that already exists. In the exam, make sure you use the correct term!
Practice Quiz
Flip Cards: Key Terms
Summary
| Topic | Key Points |
|---|---|
| What is a business? | An organisation that produces goods or services sold to customers or other businesses |
| Business objectives | Profit, Quality, Market Share, Social/Environmental Service |
| Profit formula | Profit = Revenue - Costs |
| Private companies | Sole traders, Partnerships, Franchises, Ltd (private limited), plc (public limited) |
| Not-for-profit | Charities, Social enterprises, Mutually owned businesses, Worker co-operatives |
| Why start a business? | Gap in market, Invention/innovation, Redundancy, Be own boss, Charitable objectives |
| Measuring success | Profit & growth (private), Social objectives (charities), Survival (sole traders), Employment, Environmental, Ethical |
| Standing out | USP, Invention, Innovation, Marketing, Pricing, Customer Service, Staff Development, Social/Ethical Values, Brand Image |
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