What is business?

The nature and purpose of business#

FoundationAQA 7132 3.1.1DfE GCE Business - the nature and purpose of business

Business as a transformation process

Fig. 1Inputs (the factors of production and bought-in resources) are transformed into outputs worth more than the inputs cost - the added value that funds wages, overheads and profit.

A business is any organisation that brings together the factors of production to make goods or provide services that satisfy customers' needs and wants. Needs are the things people must have to survive - food, shelter, clothing - while wants are the far larger set of things people would like but could live without. Because human wants are effectively unlimited while the resources to satisfy them are scarce, every business, and indeed every society, faces the fundamental economic problem of scarcity and must make choices about what to produce. This is why opportunity cost - the value of the next best alternative given up when a choice is made - runs through the whole subject: a business that spends £1 million on a new warehouse cannot also spend that £1 million on marketing.

The factors of production are the four categories of input a business combines: land (all natural resources, including the physical site and raw materials), labour (the human effort, both physical and mental), capital (the manufactured aids to production - machinery, tools, buildings and vehicles - not to be confused with money, which is financial capital), and enterprise (the entrepreneurial function of taking the risk of combining the other three factors in the hope of a profit). Each factor earns a reward: land earns rent, labour earns wages, capital earns interest and enterprise earns profit. A business is essentially a mechanism for organising these factors productively.

The central purpose of business activity is to add value. Added value (value added) is the difference between the price a customer is willing to pay for the finished good or service and the cost of the bought-in materials and components used to make it. A coffee shop that buys beans, milk and a cup for 40p and sells the finished latte for £3.20 has added £2.80 of value through its skill, brand, location, service and convenience. Adding value matters because it is the source of the margin from which wages, overheads and profit are paid: the more value a business adds, the more scope it has to be profitable and the less vulnerable it is to competing on price alone. Value can be added by branding, by superior quality or design, by convenience, by excellent service, or by unique selling points that differentiate the product.

It is helpful to picture a business as a transformation process: inputs (the factors of production and bought-in resources) flow in, are transformed by the firm's processes, and flow out as more valuable outputs. This model applies just as well to a service (a hairdresser transforms time, skill and products into a finished haircut) as to a manufacturer. The purpose of a business, though, is contested and depends on who owns it and what its objectives are: a private-sector firm typically exists to make a profit for its owners, a social enterprise to achieve a social or environmental mission, and a public-sector or not-for-profit body to provide a service. Recognising that purpose varies is the foundation for the objectives and ownership work that follows.

\text{Value added} = \text{Selling price} - \text{Cost of bought-in materials and components}

Added value

The value a business creates through its own activity. It is the margin from which wages, overheads and profit are paid - not the same as profit, because value added must still cover the firm's own labour and overhead costs.

Worked example

Calculating added value

A sandwich shop buys bread, fillings and packaging for £1.10 per sandwich and sells each finished sandwich for £3.60. It employs staff at a labour cost of £0.90 per sandwich and has other overheads of £0.70 per sandwich. Calculate the value added per sandwich and the profit per sandwich, and explain the difference.

Value added
Value added = selling price - cost of bought-in materials = £3.60 - £1.10 = £2.50 per sandwich.
Profit
Profit deducts the firm's own costs too: profit = value added - labour - other overheads = £2.50 - £0.90 - £0.70 = £0.90 per sandwich.
Explain the difference
Value added (£2.50) measures what the shop creates from its inputs; profit (£0.90) is what is left after the shop pays for its own labour and overheads. The two are not the same - a common error is to treat added value as profit.

Result: Value added is £2.50 per sandwich; profit is £0.90 per sandwich. Added value funds wages, overheads and profit, so it is larger than profit.

Typical mistakes

Confusing added value with profit: added value must still pay the firm's own wages and overheads, so it is larger than profit.
Treating money as a factor of production - money is a means of acquiring capital; capital is the physical machinery, tools and buildings.

Active revision

For a named local business of your choice, explain two ways it adds value to its bought-in inputs, and explain why adding value matters to its survival.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for business (Department for Education) · AQA A-level Business 7132 specification (AQA)

Enterprise, entrepreneurs and starting a business#

StandardAQA 7132 3.1.1DfE GCE Business - enterprise and entrepreneurs

Risk and reward in starting a business

Fig. 2Starting a business means weighing the potential rewards against the risks, always mindful of the opportunity cost of the money and time committed.

Enterprise is the willingness and ability to take a calculated risk to set up and run a business by combining the other factors of production. The entrepreneur is the individual who performs this function - who spots an opportunity, organises resources, bears the uncertainty and takes the residual reward (profit) or loss. The characteristics commonly associated with entrepreneurs include a tolerance of risk and uncertainty, determination and resilience, creativity, initiative, and the ability to make decisions with incomplete information. It is important to describe enterprise as risk-taking with judgement, not reckless gambling: a good entrepreneur assesses and manages risk rather than ignoring it.

Entrepreneurs are motivated by a mixture of financial and non-financial factors. Financial motives include the pursuit of profit and the desire to build personal wealth. Non-financial motives are often just as powerful: independence and being one's own boss, the satisfaction of building something, a passion for a product or a social cause, dissatisfaction with employment, or the flexibility to fit work around a life. Understanding the entrepreneur's motive matters because it shapes the objectives the business will pursue - a founder chasing rapid wealth will behave very differently from one pursuing a lifestyle business or a social mission.

Every start-up faces risk and reward and must weigh opportunity cost. The rewards of success are profit, independence and the value of the business built; the risks are the loss of the money invested, the income given up by not being employed (an opportunity cost), and the personal stress and long hours. Because resources are scarce, choosing to start a business always means giving up the next best use of that time and money - the opportunity cost. Recognising opportunity cost is what turns a hopeful idea into a disciplined decision.

A business plan is the document that sets out the idea, the market, the operations and, crucially, the financial forecasts (sales, costs, cash flow and break-even). Its value is threefold: it forces the entrepreneur to research and think the venture through, reducing the chance of avoidable mistakes; it is the essential tool for raising finance, because banks and investors will not lend without one; and it becomes a benchmark against which actual performance can later be judged. Its limitation is that it is only as good as its assumptions - a plan built on optimistic sales forecasts can give false confidence - so a plan should be treated as a living document, revised as the market reveals itself, not a guarantee of success.

Worked example

Weighing the opportunity cost of a start-up

An employed graphic designer earns £38,000 a year. She plans to invest £20,000 of savings to start her own studio, which she forecasts will make £30,000 of profit in year one. Assess whether, in purely financial terms, the venture is worthwhile in year one.

Identify the opportunity costs
By starting the studio she gives up the £38,000 salary (income forgone) and the interest her £20,000 savings could have earned elsewhere - both are opportunity costs, not accounting costs.
Compare with the forecast reward
The forecast profit of £30,000 is below the £38,000 salary given up, so in year-one financial terms she is £8,000 worse off before counting lost interest on savings.
Evaluate
On a one-year financial view the venture does not cover its opportunity cost. But the judgement depends on non-financial motives (independence, satisfaction), the reliability of the £30,000 forecast, and the longer-term growth in profit and business value - year one is rarely the whole story.

Result: In year-one financial terms she is worse off by at least £8,000 once the salary given up is counted; whether to proceed depends on non-financial motives and the longer-term outlook, showing why opportunity cost must be weighed.

Typical mistakes

Listing entrepreneur characteristics generically instead of applying them to the given founder and their situation.
Ignoring opportunity cost - the income and alternatives given up - when discussing whether to start a business.

Active revision

A software developer earning £45,000 a year is considering leaving to launch a start-up. Analyse the opportunity cost of this decision and evaluate how a business plan could reduce the risk she faces.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for business (Department for Education) · AQA A-level Business 7132 specification (AQA)

Mission, aims and the hierarchy of objectives#

StandardAQA 7132 3.1.2DfE GCE Business - mission and corporate objectives

The hierarchy of objectives

Fig. 3The mission at the apex is translated downwards into corporate, then functional, then operational objectives, so that day-to-day targets should ultimately serve the mission.

A mission (or mission statement) is a qualitative statement of a business's overriding purpose - its reason for existing and what it aspires to be. It answers the question 'what business are we in and why?' A good mission gives direction, motivates and unites employees around a shared purpose, and signals the firm's values to customers and other stakeholders. Its limitation is that it can be vague, aspirational public relations that has little effect on day-to-day behaviour; a mission only has value if it genuinely informs the objectives and decisions beneath it.

Corporate objectives are the specific, measurable medium-to-long-term goals that translate the mission into targets for the whole business - for example, to increase market share by three percentage points within two years, or to achieve a 15 per cent return on capital. Well-set objectives are often described as SMART: Specific, Measurable, Achievable, Realistic and Time-bound. SMART objectives matter because they turn a vague aspiration into something the business can plan for, coordinate around, and later measure performance against. Common corporate objectives include survival (especially for a start-up or in a recession), profit maximisation, growth, increasing market share, diversification, and increasingly social and environmental objectives.

Objectives form a hierarchy that cascades down the organisation. At the top sits the mission; beneath it, corporate objectives for the whole firm; beneath those, functional (departmental) objectives for marketing, operations, finance and human resources that are each designed to help deliver the corporate objectives; and at the base, the tactical or operational targets of individual teams and employees. The value of this hierarchy is coherence - if it works, everyone's day-to-day targets pull in the same direction as the mission. The danger is a lack of alignment, where functional objectives conflict (for example marketing wants rapid sales growth while finance wants tight cost control) or where the mission is disconnected from what actually happens below it.

Objectives are not fixed; they change with circumstances. A new start-up may prioritise survival and cash flow; once established it may switch to growth and market share; a mature firm may focus on profitability and returning cash to owners; and in a downturn even a large firm may revert to survival. Internal factors (a change of ownership or leadership, poor performance) and external factors (a recession, new competition, new technology, changing social attitudes) all drive objectives to change. The best-run businesses review their objectives regularly so that the targets everyone is working towards still make sense for the environment the firm actually faces.

Worked example

Turning an aim into a SMART objective and cascading it down

A chain of ten gyms has the mission 'to make the nation healthier'. Convert this into a SMART corporate objective and derive one supporting functional objective for the marketing department.

Set a SMART corporate objective
Specific and measurable: increase total membership by 20 per cent (from 10,000 to 12,000 members); Time-bound: within 18 months; Achievable/Realistic given recent 8 per cent annual growth. The mission ('make the nation healthier') becomes a concrete, measurable target.
Derive a functional objective
Marketing objective that supports it: 'generate 2,500 new membership enquiries over the next 12 months through a targeted digital campaign', which, at the current conversion rate, would deliver the extra members needed.
Check alignment
The functional target feeds the corporate objective, which serves the mission - the hierarchy is coherent. If, say, finance simultaneously demanded a cut in the marketing budget, the objectives would conflict and alignment would break down.

Result: The mission becomes a SMART corporate objective (grow membership 20 per cent to 12,000 in 18 months), which cascades into a supporting marketing objective (2,500 enquiries in 12 months) - illustrating a coherent hierarchy of objectives.

Typical mistakes

Confusing a mission (qualitative purpose) with a corporate objective (specific, measurable target).
Asserting that objectives are always SMART or always followed - many missions are vague PR, and functional objectives can conflict.

Active revision

Rewrite the vague aim 'we want to grow' as a SMART corporate objective for a small bakery, and analyse how one functional objective could be set to help achieve it.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for business (Department for Education) · AQA A-level Business 7132 specification (AQA)

Forms of business ownership and liability#

StandardAQA 7132 3.1.3DfE GCE Business - business forms

Forms of business ownership

Fig. 4The key split is liability: unincorporated forms carry unlimited liability, incorporated companies limited liability. Not-for-profit organisations reinvest any surplus in their mission.

Businesses take different legal forms, and the single most important distinction between them is limited versus unlimited liability. Unincorporated businesses - the sole trader and the ordinary partnership - have no separate legal identity from their owners, so the owners have unlimited liability: they are personally responsible for all the debts of the business and could lose their personal assets, including their home, if it fails. Incorporated businesses - the private limited company (Ltd) and the public limited company (Plc) - are separate legal persons, so their owners (shareholders) have limited liability: the most they can lose is the amount they invested in their shares. Limited liability is a powerful engine of enterprise because it caps the downside for investors and so encourages people to risk their money in businesses.

The sole trader is the simplest and most common form: one owner, easy and cheap to set up, complete control, and the privacy of not having to publish accounts. The drawbacks are unlimited liability, the difficulty and cost of raising finance (limited to the owner's savings and bank loans), the burden of doing everything alone, and a lack of continuity - the business often ends if the owner dies or retires. A partnership shares ownership between (typically 2 to 20) partners, which brings in more capital, more skills and shared workload, but partners usually still have unlimited liability, must share profits, and can be bound by one another's decisions, so disagreements can be damaging. A deed of partnership setting out shares and responsibilities is strongly advisable.

A private limited company (Ltd) is owned by shareholders, has limited liability and a separate legal identity, and can raise capital by selling shares privately (typically to family, friends and private investors); its shares cannot be sold to the general public. This gives better access to finance and continuity than an unincorporated business while keeping ownership closed and control secure. A public limited company (Plc) can sell its shares to the public, usually by floating on a stock exchange, giving access to very large amounts of capital. But flotation is expensive and heavily regulated, accounts are public, and - crucially - the divorce of ownership (many dispersed shareholders) from control (professional managers) can create a principal-agent problem and short-term pressure from shareholders for dividends and a rising share price. A Plc is also vulnerable to a hostile takeover once its shares trade publicly.

Not all organisations aim to distribute profit to owners. Not-for-profit organisations - charities, community interest companies, mutuals and social enterprises - pursue a social or environmental mission and reinvest any surplus into that mission rather than paying it out. The choice of form is an evaluative judgement that depends on the owner's objectives, the need for finance, the appetite for risk, and the desire for control and privacy: an entrepreneur who wants total control and secrecy and needs little capital may stay a sole trader, while one who needs millions to expand and will accept outside shareholders may incorporate as a company. There is no single best form - it depends on the circumstances, and a business often changes form as it grows.

Worked example

Recommending a form of ownership

A sole trader runs a profitable single restaurant but has been offered the chance to expand to six sites. He needs £500,000, wants to protect his family home, but fears losing control. Recommend and justify a form of ownership.

Identify the decisive needs
He needs substantial external finance (£500,000), wants to protect personal assets (points to limited liability), but wants to retain control (points against a public flotation with dispersed shareholders).
Weigh the options
Staying a sole trader fails on finance and leaves unlimited liability. A Plc raises the most capital but he would lose control and face public scrutiny. A private limited company (Ltd) gives limited liability and lets him sell shares privately to chosen investors while keeping a controlling stake.
Recommend and justify
Recommend converting to a private limited company: it meets the finance need, protects his home through limited liability, and - by choosing whom he sells shares to and retaining a majority - preserves his control. The judgement depends on his willingness to share ownership and profits at all.

Result: A private limited company (Ltd) best balances his three priorities - raising £500,000, protecting personal assets through limited liability, and keeping control - making it the most appropriate form for this expansion.

Typical mistakes

Saying a company 'has no liability' - shareholders have limited liability (capped at their investment); the company itself is still liable for its debts.
Claiming a private limited company can sell shares to the public - only a Plc can; an Ltd sells shares privately.

Active revision

A successful sole trader wants to open five more branches and needs £400,000 of finance. Evaluate whether she should become a private limited company.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for business (Department for Education) · AQA A-level Business 7132 specification (AQA)

Markets: size, share and growth#

StandardAQA 7132 3.1.4DfE GCE Business - understanding the external environment

Market share (illustrative)

Fig. 5Illustrative market shares by value. Market leadership brings economies of scale and bargaining power, but the trend in share matters as much as the level.

A market is any arrangement that brings buyers and sellers together, whether a physical place or an online platform. Three related measures describe a market and a firm's place within it. Market size is the total value (in pounds of sales) or volume (in units) of all sales in the market over a period; it tells a business how large the opportunity is. Market share is the proportion of that market held by one firm or brand, expressed as a percentage of total market sales. Market growth is the percentage change in market size over a period; a fast-growing market is attractive because a firm can grow without having to take customers from rivals, whereas a shrinking market forces firms to fight for share.

Market share is calculated as a firm's sales divided by total market sales, multiplied by 100, and it can be measured by value or by volume - which can differ, because a premium brand may have a larger share by value than by volume. A high or rising market share signals competitiveness and brings advantages: economies of scale, bargaining power over suppliers and retailers, brand recognition, and the status of market leader. Analysing changes in share is often more revealing than the level itself: a firm can grow its sales yet lose market share if the whole market is growing faster - so sales growth and share growth are not the same thing, a distinction examiners reward.

Market growth is calculated as the change in market size divided by the original market size, multiplied by 100. Positive growth widens the opportunity for every firm; negative growth (a declining market, such as printed newspapers) intensifies rivalry and may prompt firms to diversify or retrench. The growth rate shapes strategy: fast-growing markets attract new entrants and investment but can be volatile, while mature or declining markets reward efficiency, cost control and taking share from weaker rivals. Interpreting these figures in context - is 4 per cent growth fast or slow for this industry? - matters more than the raw number.

These market measures connect the internal business to its external environment and feed directly into decisions across the specification: marketing uses share and growth to set objectives and choose strategies (see Ansoff's matrix); operations uses market size to plan capacity; and finance uses growth forecasts to plan investment. A vital evaluative point is data quality: market size and share are usually estimates drawn from market research, they can be out of date, and defining 'the market' (narrowly or broadly) changes the figures dramatically - so decisions built on them should acknowledge their uncertainty.

\text{Market share} = \frac{\text{Firm's sales}}{\text{Total market sales}} \times 100\%

Market share

A firm's proportion of the market, by value or by volume. A firm's sales can rise while its share falls if the whole market grows faster.

\text{Market growth} = \frac{\text{Market size}_{\text{new}} - \text{Market size}_{\text{old}}}{\text{Market size}_{\text{old}}} \times 100\%

Market growth

The percentage change in the total size of the market over a period. Positive growth widens the opportunity; negative growth intensifies competition.

Market size over time (illustrative)

Fig. 6An illustrative growing market. Growth widens the opportunity for all firms, but the interpretation depends on what is normal for the industry.

Worked example

Market share and market growth together

A drinks brand sold £12m last year and £13.5m this year. The whole market grew from £150m to £180m. Calculate the market growth rate and the brand's market share in each year, and judge whether the brand strengthened its position.

Market growth
Growth = (180 - 150) / 150 x 100 = 30 / 150 x 100 = 20 per cent.
Market share each year
Last year: 12 / 150 x 100 = 8.0 per cent. This year: 13.5 / 180 x 100 = 7.5 per cent.
Interpret
Sales rose by £1.5m (+12.5 per cent), which looks positive - but the market grew faster (20 per cent), so the brand's share fell from 8.0 to 7.5 per cent. Its competitive position weakened despite higher sales.

Result: The market grew 20 per cent; the brand's share fell from 8.0 to 7.5 per cent even though sales rose, showing that rising sales can hide a loss of competitive position.

Typical mistakes

Confusing sales growth with market-share growth - a firm can grow sales yet lose share in a faster-growing market.
Dividing by the wrong base when calculating growth (always divide the change by the original, earlier figure).

Active revision

A firm's sales rose from £8m to £9m while the market grew from £40m to £50m. Calculate its market share in each year and state, with reasoning, whether its competitive position improved.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for business (Department for Education) · AQA A-level Business 7132 specification (AQA)

Stakeholders and the purpose of business#

StandardAQA 7132 3.1.1DfE GCE Business - stakeholders

The stakeholder power-interest grid

Fig. 7The power-interest grid tells a business how to manage each stakeholder group: high power and high interest means active engagement as a key player.

A stakeholder is any individual or group with an interest in, or affected by, the activities of a business. The main stakeholder groups are shareholders (owners), employees, customers, suppliers, the local community, the government, and creditors such as banks. This is broader than the shareholder view, which holds that a company's primary duty is to its owners - to maximise shareholder value. The stakeholder view holds instead that a business should balance the interests of all those it affects. The two views frame one of the central debates in the subject: whose interests should a business serve?

Different stakeholders want different, sometimes conflicting, things. Shareholders typically want profit, dividends and a rising share value; employees want good pay, security and conditions; customers want quality, value and service; suppliers want prompt payment and reliable orders; the community wants jobs and a clean environment; and the government wants tax revenue, employment and compliance with the law. These interests frequently conflict - for example, higher pay for employees or greener production for the community can reduce short-term profit for shareholders - so managers must constantly trade off competing claims. Recognising and naming these conflicts is central to evaluation in Business.

A useful tool for managing stakeholders is the power-interest grid (stakeholder map), which classifies each group by how much power it has over the business and how much interest it has in a given decision. Those with high power and high interest are 'key players' who must be actively managed and engaged; those with high power but low interest should be kept satisfied; those with low power but high interest should be kept informed; and those with low power and low interest need only minimal effort. Mapping stakeholders in this way helps a business prioritise its communication and decide whose views most need to be accommodated on any particular issue.

How far a business should prioritise stakeholders over shareholders is an evaluative judgement with no fixed answer - it 'depends'. The case for a stakeholder approach is that satisfied employees, loyal customers and a supportive community build a sustainable, reputable business and, in the long run, greater shareholder value too; ignoring stakeholders invites strikes, boycotts, regulation and reputational damage. The case for the shareholder approach is that owners bear the financial risk and provide the capital, that trying to please everyone can paralyse decisions, and that a clear profit focus disciplines the business. In practice most firms pursue an 'enlightened shareholder value' middle path, and the right balance depends on the firm's ethics, its ownership, the industry, and the time horizon over which success is judged.

Worked example

Mapping and trading off stakeholders

A manufacturer is deciding whether to relocate production overseas to cut costs by 20 per cent. Use stakeholder analysis to evaluate the decision.

Identify stakeholders and interests
Shareholders gain from a 20 per cent cost cut (higher profit); UK employees lose jobs; the local community loses employment and spending; customers may gain lower prices; the government loses tax and may face higher welfare costs.
Map power and interest
Shareholders are high-power, high-interest key players pushing for the move; employees are high-interest but often lower-power; the community is high-interest but low-power. The grid suggests shareholders' views will dominate unless employees are unionised or the community can mobilise public opinion.
Evaluate to a judgement
In the short run the move raises profit and may cut prices, favouring shareholders and customers. But redundancies and reputational damage could reduce loyalty and invite bad publicity, harming long-run shareholder value. The right choice depends on the size of the saving, the reputational risk, and whether the firm publicly commits to a stakeholder or shareholder philosophy.

Result: Stakeholder analysis shows the move benefits shareholders and customers but harms employees and the community; whether it serves the firm's long-term interest depends on the reputational risk and the firm's time horizon - a classic 'it depends' evaluation.

Typical mistakes

Confusing shareholders (owners with a financial stake) with stakeholders (the wider set of affected groups) - shareholders are one type of stakeholder.
Assuming stakeholder interests always conflict with profit - satisfied stakeholders can raise long-run shareholder value.

Active revision

A supermarket plans to automate its checkouts, cutting staff but lowering prices. Analyse the effect on two stakeholder groups and evaluate whether the decision serves the business's long-term interests.

Active recall

Recall the key points — then reveal.

Sources: GCE AS and A level subject content for business (Department for Education) · AQA A-level Business 7132 specification (AQA)

Key points

Calculating added value

Key points

Weighing the opportunity cost of a start-up

Key points

Turning an aim into a SMART objective and cascading it down

Key points

Recommending a form of ownership

Key points

Market share and market growth together

Key points

Mapping and trading off stakeholders

Sources

What is business?

Key points

Calculating added value

Key points

Weighing the opportunity cost of a start-up

Key points

Turning an aim into a SMART objective and cascading it down

Key points

Recommending a form of ownership

Key points

Market share and market growth together

Key points

Mapping and trading off stakeholders

Sources