IGCSE Unit 1 Revision Notes

Needs, Wants, Scarcity and Opportunity cost

● Businesses thrive when they are able to meet customer needs and wants
○ Needs are considered to be essential, e.g. shelter or food
○ Wants are desires which are not essential, even if consumers consider them to be
essential, e.g Nike trainers

● Due to the problem of scarcity, there is a basic economic problem

○ Choices have to be made by producers, consumers, workers and governments,
about the most efficient use of resources
○ Resources, known as the factors of production, are land, labour, capital and
Enterprise

● Opportunity cost is the loss of the next best alternative when making a decision
● There is an opportunity cost in the allocation of resources:
○ When a consumer chooses to purchase a new phone, they may be unable to
purchase new jeans
■ The jeans represent the loss of the next best alternative (the opportunity cost)
○ When a producer decides to allocate all of their resources to producing electric
vehicles, they may be unable to produce petrol vehicles
■ The petrol vehicles represent the loss of the next best alternative (the
opportunity cost)
○ When a government decides to provide free school meals to all primary students in
the country, they may be unable to fund some rural libraries, which may have to
close
■ The libraries represent the loss of the next best alternative (the opportunity
cost)

The importance of specialisation

● Specialisation occurs when workers focus on one particular role or task and thereby
gain significant skill in doing it
○ It is now more common due to specialised technology and increasing global
competition
● Specialisation occurs on several different levels
○ On an individual level, through the division of labour
 ■ Division of labour is the separation of work processes into tasks that are
completed by separate people or groups of people
○ On a business level, e.g. one firm may only specialise in manufacturing drill bits for
concrete work
○ On a regional level, e.g. Silicon Valley has specialised in the tech industry
○ On a global level, as countries seek to trade, e.g. Bangladesh specialises in textiles
& exports them to the world
● It results in higher output per worker, which increases productivity

The Purpose of Business Activity

● The purpose of business activity is to produce goods or services that meet
customer needs while adding value

The purpose of business activity is to take inputs, add value to them, and create
products which meet customer needs

To produce goods or services

● The primary purpose of business activity is to produce goods or services that satisfy a
need or demand in the market
○ Goods are physical products, such as bicycles and T-shirts
○ Services are non-physical items such as hairdressing, tourism and manicures
Meeting customer needs
● The ultimate goal is to create products that meet the needs and preferences of
customers and provide value to them
● By meeting customer needs, businesses can build customer loyalty, increase brand
awareness, and generate revenue

To add value
● The third purpose of business activity is to add value to products or services
● Value-added features can differentiate products from competitors, create a unique
selling point, and increase customer satisfaction
○ E.g. A product that is easier to use, has a better design, or is of higher quality than
competitors can create a competitive advantage for a business

The process of adding value

● Adding value is the process of taking raw materials and using them in such a way
that the end product created is worth more than the cost of the raw materials used
to create it - value has been added
● The added value is the difference between the price that is charged to the customer
and the cost of inputs required to create the product or service
○ E.g. Customers are prepared to pay more for potatoes when they are packaged as
oven chips than they would be willing to pay for a bag of potatoes
○ If value is not added to the materials and components that a business buys then
fixed costs cannot be paid and no profit will be made
● The greater the added value, the more successful the business is likely to be and the
higher their profits
Some of the methods of adding value allow for product differentiation, which allows
the business to charge a higher selling price.

● Product and marketing teams will constantly explore ways in which to increase the
added value
○ The most common methods have been summarised in the diagram and include
branding, offering more convenience to customers, improving the product quality or
design, and building out the unique selling points

Examples of Added Value

Method Example

Branding ● Apple has built a brand that many customers believe is

superior to other brands
● They have achieved this through the use of quality materials,
innovative design and good marketing
● This branding allows the firm to charge a higher price for its
products, thus increasing the added value

Convenience ● Persil initially provided a bottle of dishwashing liquid for

dishwashing machine use
● This resulted in spillage as customers added the liquid to
their machines, so Persil then created tablets
● The tablets offered a much more convenient option and
Persil was able to charge a higher selling price for them

Quality ● Jo Malone perfume products are well known for their

beautiful packaging, which creates an exciting opening
experience for the customer
● This allows the firm to charge a higher price for its products,
thus increasing the added value
Unique selling ● MoonPig birthday cards can be completely customised (size,
points (USPs) colour, design etc.) and the level of customisation has helped
them gain a competitive advantage
● This customisation allows the firm to charge a higher price
for its cards, thus increasing the added value

Design ● Samsung Galaxy Watch 5 has robust health tracking tools

built into it, along with an amazing screen, which has helped
it gain a competitive advantage
● These features allow the firm to charge a higher price for its
products, thus increasing the added value

Primary, Secondary and Tertiary Sectors

The Three Main Business Sectors
● Businesses can be classified according to the type of business sector in which they
operate
● Classification into these sectors is a simplified way of categorising industries
○ It helps to provide a means of making comparisons between firms in the same
sector
● However, it does not capture the full complexity of the business world
○ Many businesses operate across multiple sectors or may not fit neatly into a single
category

● The primary sector is concerned with the extraction of raw materials from land, sea or air
○ Examples include farming, mining or fishing
● The secondary sector is concerned with the processing of raw materials and the
manufacture of goods
○ Examples include oil refinement and vehicle manufacture
● The tertiary sector is concerned with the provision of a wide range services for
consumers and other businesses
○ Examples include leisure, banking or hospitality businesses

The chain of production

● The chain of production is the series of steps taken to turn raw materials into
finished products that can be marketed and sold

Changes in sector importance

● As economies grow and develop, many of the firms within that economy will change
their sector of operation (sectoral change)
● Generally speaking, their are successively higher levels of profits to be made in each
subsequent sector
○ The reason for this is that each sector adds more value than the previous sector
○ Higher added value equates to higher profits
Less-developed economies
● A less developed economy will primarily be focused on the primary sector – with
most people employed in agriculture and the production of food
○ Countries with large primary sectors include Ethiopia, Laos and Afghanistan
● There has been a global trend away from employment in primary sector industries
over the last two decades
○ Only in the least developed nations is the proportion of the workforce employed in
the primary sector consistently high
○ This is partly as a result of lower participation rates in education and a lack of
infrastructure to support manufacturing or service provision

Emerging economies
● In emerging economies, technology means that less labour is required in the
primary sector, and more workers are involved in manufacturing
○ The proportion of workers employed in manufacturing has risen over the last
few decades, especially in countries such as Vietnam and Cambodia
○ Many businesses have relocated production facilities to take advantage of
the lower average wage rates in these economies
● Emerging economies have experienced growth in the tertiary and quaternary
sectors in recent years, with many businesses now focused on the provision of
consumer services

Developed economies
● The most developed economies have a very high proportion of the workforce
employed in the provision of services
○ There is an increasing focus on the quaternary sector, including the
provision of knowledge-based services such as information technology.
■ Developed economies use their wealth to fund advanced education and
higher-level skills training, which further supports the growth of these
industries
■ Some exceptions, such as Australia (wine production) and Norway
(forestry and oil extraction) continue to have significant primary sectors
Classification Using the Public & Private Sector
Differences between the Public and Private Sector
Public and Private Sector Firms
● Public sector firms are owned and controlled by the Government
● Private sector firms are owned and controlled by other firms and private individuals
(entrepreneurs and shareholders)
● Privatisation occurs when government-owned firms are sold to the private sector
● Many government owned firms have been partially privatised
○ The government retains a share in them so they can influence decision-making and
receive a share of the profits
○ E.g. Singapore Airlines shares are 55% government owned and 45% privately
owned

The Characteristics of Public and Private Sector Firms

Public Sector Firms Private Sector Firms

● Their main goal is usually to ● The objective of most private

provide a service sector organisations is profit
● Public sector firms can operate maximisation
on a local, regional or national ● This often causes the private
government level sector to be more efficient than
○ E.g. Transport for London the public sector with higher
(local); Agricultural State levels of productivity
Service in India (regional); ● Types of business ownership
Caribbean Airlines vary from sole trader to
(national) partnerships to company
shareholders
Reasons Why Public Firms Exist
● Public firms are government-owned
○ They are often referred to as state-owned enterprises (SOEs) or
government corporations
○ Public firms exist to
■ Ensure public service provision of goods and services that are not
profitable enough to be provided in the private sector
■ Protect strategic industries and national security, such as energy
production or water supply
■ Create jobs
■ Encourage economic growth

Public service provision

● Government-owned firms are often established to provide essential public
services such as transportation, healthcare, education, and utilities
● They ensure that critical services are accessible to the public, and their
operations may prioritise social welfare over profit maximisation

Strategic industries and national security

● Governments may own firms operating in strategic industries, such as defence,
energy, telecommunications, and natural resources
● This ownership allows the government to exert control over sectors vital to
national security, economic stability, and long-term development

Employment and economic development

● Government-owned firms can play a role in promoting employment and
economic development
● By investing in and owning enterprises, governments can stimulate economic
activity, create jobs, and support industries that contribute to the overall growth
and stability of the economy
Characteristics of Successful Entrepreneurs
Entrepreneurs Create & set-up a Business
● An entrepreneur is a person who is willing and able to create a new business idea or
invention and takes risks in pursuing success
○ Successful entrepreneurs can identify and pursue opportunities, create value for
customers and build thriving businesses
What do Entrepreneurs do?

They Organise They make Business They take Risks

Resources Decisions

● An entrepreneur ● Entrepreneurs must ● Entrepreneurship

must be able to be able to make involves taking
gather and decisions that will risks - financial,
coordinate the determine the personal, or
resources necessary success or failure of professional
to start and operate a their business ● E.g. An
business ● E.g. A restaurant entrepreneur may
● E.g. When Michael owner may need to invest their life
Dell started his decide what type of savings into a new
computer company food to serve, where venture or quit a
from his garage, he to locate the secure job to start
had to organise restaurant, and what their own business
resources such as prices to charge. ○ They may
space, computers, These decisions also take
software tools, and require a combination risks by
employees, and of market research, introducin
manage the finances creativity, and g new
business skill products
● Making the wrong or entering
decisions can lead to new
wasted resources, markets
lost opportunities, and ● These risks can
ultimately business pay off with great
failure rewards, but they
can also lead to
failure and
financial loss
Characteristics & Skills Required by Entrepreneurs
● Entrepreneurs require a unique set of characteristics and skills

● Successful entrepreneurs tend to be very persuasive in their communication and

decisive in their decision-making

Characteristics of Successful Entrepreneurs

Characteristic Explanation

Risk taker ● Entrepreneurs take financial, personal, or professional

risks
● An entrepreneur may invest their life savings into a new
venture or quit a secure job to start their own business
○ They may also take risks by introducing new
products or entering new markets
○ These risks can payoff with great rewards, but
they can also lead to failure and financial loss
Decision maker ● Entrepreneurs must be able to make decisions that will
determine the success or failure of their business
○ E.g. A restaurant owner needs to decide what
type of food to serve, where to locate the
restaurant, and what prices to charge
○ These decisions require a combination of market
research, creativity, and business skills
○ Making the wrong decisions can lead to wasted
resources, lost opportunities, and ultimately
business failure

Organised ● An entrepreneur must be able to gather and coordinate

the resources necessary to start and operate a
business
○ E.g. When Michael Dell started his computer
company from his garage, he had to organise
resources such as space, computers, software
tools, employees, and finances

Creative ● Developing new solutions to solve existing or emerging

problems is a key entrepreneurial role that helps a
business stand out from rivals and achieve success
○ During the 2020 COVID-19 pandemic, many
businesses used their creativity to switch
production techniques to cater for what the
market wanted
○ E.g Harrogate Gin switched from producing gin
to hand sanitiser
 Great ● Entrepreneurs need to be persuasive communicators
communicator ● Persuading lenders, investors and customers to support
their business is central to achieving financial success

Independent ● Starting a business is often the sole responsibility of a

single entrepreneur, who will need to be able to solve
problems with limited support
○ E.g. The owner of Gymshark, Ben Francis, started
off the company by buying a sewing machine and
making gym clothes in his parents garage with a
few school friends
■ This led to the growth of a multi million pound
company employing hundreds of people

Business Plans & Government Support

Contents of a Business Plan
● A business plan is a document produced by the owner at start-up, which
provides forecasts of items such as sales, costs and cash flow
● Producing a business plan forces the owner to think about every aspect of the
business before they start, which should reduce the risk of failure

Elements of a Business Plan

Element Explanation

The business ● A clear explanation of the goods or services provided by

idea the business which helps to attract investors
○ This may also include the history of the business
idea

Business ● What the business wants to achieve in the medium and

aims & long term
objectives ○ These aims may be both financial and
non-financial depending on the business

Target market ● This section explains who the business is aimed at e.g.
age, gender, income and will form part of the firms
marketing strategy

Forecast ● This section projects how much income the business

revenue plans to make through sales
○ Sales Revenue = Price x Quantity Sold
○ This can help plan for break even levels of output

Forecast ● Firms need to forecast their fixed, variable and total costs
costs in order to manage their spending
○ Some new businesses may have high startup
costs, e.g. new stock

Profit ● Investors will be interested to see the firms profit

forecasts forecasts to see whether the business will have the ability
to pay back loaned funds e.g. bank
 Marketing mix ● An explanation of the firms marketing strategy for the
product/service which will outline how the firm plans to
attract customers
○ This includes Product, Place, Price and Promotion

Cash-flow ● This explains how the firm plans to manage its inflows
forecast and outflows of cash on a monthly basis in order to avoid
liquidity problems

Sources of ● This section shows the sources of finance used to fund

finance the new business e.g. loans, owners funds or venture
capital

Business ● The location of the business is proposed, including a map

location along with an explanation of potential advantages such
as transport links or proximity to customers

How Business Plans help Entrepreneurs

● The main aim of producing a business plan is to reduce the risk associated with
starting a new business and help the owners raise finance
● Having carried out research to support the plan, the business will be well-informed
about the potential problems and chance of success
● A well-written business plan can help a business obtain finance
○ Lenders (e.g. banks) and other investors will be able to explore the plan and make
an informed decision about whether the business is credible and worth the
financial risk
○ Investors (e.g. venture capitalists) will use the business plan to explore whether
there is an opportunity to increase the value of their investment and make a
worthwhile profit
● A clear action plan provides direction for the business and helps lenders and
investors have confidence in the future success of the business
● Most high street banks can provide a detailed template for business owners to complete
when applying for finance
Government Support of Business Start-ups
● Governments often provide support to entrepreneurs
○ This encourages them to set up new businesses or take steps to grow their
business
● Reasons for providing government support include:
○ Increase the country's level of output to achieve economic growth
○ Reduce the level of unemployment as new or growing businesses create
jobs
○ Improve choice for consumers by providing competition for existing
businesses
● Encourage entrepreneurs to set up social enterprises which may support
disadvantaged groups or improve communities

How Governments Support Business Start-ups

Support Explanation

Training and ● Advice regarding finance, operations and marketing

support sessions can often be accessed through local authorities
● Support sessions offered by business mentors allow
entrepreneurs to ask specific questions related to their
business

Enterprise zones ● Enterprise zones are geographic areas which provide

tax breaks and Government support to help
businesses grow
○ Enterprise Zones can provide access to
low-cost premises and incentives such as
reduced business rates
○ They are often linked with universities that share
expertise and facilities, especially in less
economically-developed regions
 Finance ● Some governments provide low-interest start-up loans
and grants for new or growing businesses that create
jobs or invest in training workers

Measuring Business Size

Methods of Measuring Business Size
● A simple way to classify businesses is to consider their size

Size of the workforce

● A measure of how many workers are in the business
● Small and medium-sized businesses (SMEs) employ less than 250 employees
● Large businesses have 250 or more employees

Value of capital employed by the business

● A measure of all the capital (money, equipment, buildings) that is currently invested in a
business

Value of business sales

● The total sales revenue achieved during a trading period
● It is calculated using the formula Price x Quantity

Value of business output

● The financial worth of goods produced, even though they may not all be sold
● It is calculated using the formula Total Costs x Quantity
Stakeholder interest in business size
● Banks wish to know how likely any loans will be repaid
○ Larger businesses may present less of a lending risk
● Employees wish to know how secure their jobs are
○ A growing business is likely to offer job security
● Suppliers may prefer to sell products to larger businesses
○ Large business are likely to purchase in greater quantities
● Investors compare business size to distinguish between investment opportunities
● Competitors may set growth objectives or benchmark their progress against
similar-sized rival businesses
● Governments apply different tax rates for small and large businesses
○ Larger firms may need careful monitoring to ensure they do not abuse their market
power

Limitations of the Methods of Measuring Business size

● Each method of measuring business size has significant limitations

Limitations of Measures of Business Size

Method Limitations

Size of the ● The method of production can influence this metric

workforce significantly
○ Capital-intensive businesses produce high levels of
output with few employees
○ Labour intensive businesses have many employees
that may generate a small volume of output
● The nature of workers' contracts can make this measure
unreliable
○ Some businesses hire many part-time workers, while
others prefer full-time workers
○ Short-term, zero hours or agency worker contracts
may not be included in workforce measurement
Value of ● Not accurate when comparing labour-intensive and capital
capital intensive production methods
employed ○ European manufacturing businesses tend to have
high levels of capital, such as robots or advanced
machinery, compared to those located in countries
such as Vietnam and Indonesia
○ Property values differ significantly across the world,
and even between regions
■ E.g. The value of property in Singapore is
significantly greater than property in mainland
China

Value of ● Businesses sell very different products

sales ○ Comparing a market stall selling sweets with a
retailer of luxury handbags would be unrealistic, as
their prices and volumes sold are very different
● Selling prices vary between markets
○ Businesses may sell products to customers in
low-income markets at a lower price than in a
higher-income market

Value of ● High value output can be produced by businesses with very

output few employees or with limited capital employed
○ E.g. A bespoke jewellery maker may produce only a
few expensive items each year
● The value of output does not measure how successful a
business has been at selling goods produced. If they are left
unsold, they are a poor measure of business size
Types of Business Growth
Reasons for Business Growth
● Many firms start small & will grow into large companies or even multinational
corporations
○ E.g. Amazon and Dell both started in entrepreneurs' garages

Reasons why Businesses Grow

● The owner's or ● The owner's desire ● The desire for

manager's desire to for higher levels of stronger market
run a large market share and power (monopoly)
business & profitability over its customers
continually seek to and suppliers
grow it

● The desire to ● Growth provides ● Larger firms often

reduce costs by opportunities for have easier access
benefiting from product to finance
lower unit costs as diversification
output increases

Methods of Business Growth

● Business growth can be achieved by growing organically, or inorganically (mergers and
takeovers)

Organic (Internal) growth

● Organic growth is growth that is driven by internal expansion using reinvested
profits or loans
● It is usually achieved by:
○ Gaining a greater market share
○ Product diversification
○ Opening new outlets
○ International expansion (new markets)
○ Investing in new technology/production machinery
Examples of Organic Growth

Business Explanation

Apple ● International Expansion (new markets)

Apple expanded into new markets by opening its stores in
new countries, such as China and India, and by partnering
with telecom providers to sell its products.
● This helped them to organically increase their market
share, sales revenue and profitability

Google ● Product Innovation

Google introduced new products, such as Google Drive and
Google Maps, to complement its search engine and
advertising businesses
● This helped them to organically increase their market
penetration, sales revenue and profitability

Disney ● Product Diversification

Disney has diversified into several areas, such as theme
parks, cruise lines, television networks, and movie studios.
● The brand strength has helped them organically increase
market penetration in each of these markets, resulting in
higher sales revenue and profitability

● Product diversification opens up new revenue streams for a business

○ Firms may spend money on research and development, or innovation to existing
products to help create a new revenue stream
● Firms will often grow organically to the point where they are in a financial position to
integrate (merge or buy) with others
○ Integration speeds up growth but also creates new challenges
Evaluation of Internal Growth

Advantages Disadvantages

● The pace of growth is ● The pace of growth can be slow

manageable and frustrating
● Less risky as growth is financed ● Not necessarily able to benefit from
by profits and there is existing lower unit costs (e.g. bulk
business expertise in the industry purchasing discounts from
● The management knows & suppliers) as larger firms would be
understands every part of the able to
business ● Access to finance may be limited

Inorganic (External) growth

● Firms will often grow organically to the point where they are in a financial
position to integrate (merge or takeover) with others
○ Integration in the form of mergers or takeovers results in rapid business
growth and is referred to as external or inorganic growth
● A merger occurs when two or more companies combine to form a new
company
○ The original companies cease to exist and their assets and liabilities are
transferred to the newly created entity
● A takeover occurs when one company purchases another company, often
against its will
○ The acquiring company buys a controlling stake in the target company's
shares (>50%) and gains control of its operations

Vertical integration
● Vertical integration refers to the merger or takeover of another firm in the
supply chain or different stage of the production process
○ Forward vertical integration involves a merger with or takeover of a firm
further forward in the supply chain
■ E.g. A dairy farmer merges with an ice cream manufacturer
 ○ Backward vertical integration involves a merger with or takeover of a firm
further backwards in the supply chain
■ E.g. An ice cream retailer takes over an ice cream manufacturer

Horizontal integration
● Horizontal integration is the merger or takeover of a firm at the same stage of the
production process
○ E.g. An ice cream manufacturer merges with another ice cream manufacturer
Evaluation of Types of Growth

Type of Growth Advantages Disadvantages

Vertical Integration ● Reduces the cost of ● Diseconomies of scale

(Inorganic growth) production as middle occur as costs increase
man profits are e.g. unnecessary
eliminated duplication of
● Lower costs make the management roles
firm more competitive ● There can be a culture
● Greater control over the clash between the two
supply chain reduces firms that have merged
risk as access to raw ● Possibly little expertise
materials is more certain in running the new firm
● Quality of raw materials results in inefficiencies
can be controlled ● The price paid for the
● Forward integration new firm may take a
adds additional profit as long time to recoup
the profits from the next
stage of production are
assimilated
● Forward integration can
increase brand visibility

Horizontal ● Rapid increase of ● Diseconomies of scale

Integration market share may occur as costs

(Inorganic growth) ● Reductions in the cost increase e.g.

per unit due to unnecessary
economies of scale duplication of
● Reduces competition management roles
● Existing knowledge of ● There can be a culture
the industry means the clash between the two
merger is more likely to firms that have merged
be successful
● Firm may gain new
knowledge or expertise
Overcoming Business Growth Issues
Problems Caused by Business Growth
● In some cases, growing the size of a business can fail to improve its profitability and
can lead to cash flow and coordination problems

Problems and solutions of business growth

Problem Explanation Solution

Poor ● Longer chains of ● Use the latest

communication command and wider communication
spans of control for technologies, such as
managers may lead to instant video calls, to
slower decision-making improve
times and inefficiency communication
between managers
and workers
● Decentralisation may
help to delegate
decision-making
Larger firms are ● As a business grows in ● Operate as a series
often harder to size, it can experience of smaller units which
control diseconomies of scale allows local or
such as poor functional area
coordination of resources managers to have
more control
● Increase delegation
in order to empower
workers and get jobs
done more quickly

High costs and ● Expansion can be very ● Grow slowly using

cashflow expensive as it may profits rather than
problems involve developing a new loans to fund gradual
product range or buying and less risky
a new factory expansion
○ High costs in the ● Manage cash flow
short/medium carefully, making use
term means the of retained profits and
business may short-term borrowing
need additional to counter cash flow
finance to avoid shortfalls
cashflow
problems

Difficulties of ● A culture clash may occur if ● Ensure good

mergers and a merger or acquisition communication so

acquisitions takes place between two employees are less

different firms due to likely to be resistant to
different management change
styles ● Take time to carefully
negotiate and plan
mergers/acquisitions to
 reduce 'teething
problems'

Reasons for Businesses to Remain Small

Why Some Businesses Remain Small

Reasons why small firms exist

They offer a personalised They are unable to access They provide a product
service and focus on building external finance for expansion that is in a niche market -
relationships with customers small market size but
(excellent customer service) potential for high profits

By remaining small they are Rapid growth can cause Small business owner's
able to respond quickly to diseconomies of scale which can goal is (satisficing) rather
changing customer be avoided by remaining small than profit maximisation
needs/preferences

● While developments in technology often benefit large businesses, some can work to
the advantage of small firms
● The Internet offers low cost access to market for many firms
○ Social media allows even the smallest business to achieve an online presence
and target specific groups of customers
○ Online storefronts such as Amazon Marketplace, Etsy and Ebay provide low-cost
distribution options
Evaluation of Remaining Small

Advantages Disadvantages

● Small firms often provide highly ● Small firms are unlikely to

customised or unique benefit from economies of scale
goods/services which are sold as the level of output is lower
profitably in small quantities at than that of larger firms
high prices e.g. pet grooming in ● Access to finance such as bank
the customer's home loans or trade credit is likely to
● Personal relationships can be be limited
developed with loyal customers ● Recruiting/retaining high quality
which helps to generate staff can be challenging as wage
word-of-mouth advertising & non-wage benefits are less
● Smaller firms can respond competitive than those offered
quickly to changing market by bigger firms
conditions such as changes in ● Small business owners may
fashions/trends struggle to take holidays/sick
leave as the business relies on
their presence to function

Why Businesses Fail

Causes of Business Failure
● Business failure is a risk to both new and established businesses
○ In 2021, an average of 8% of businesses in EU countries failed
■ The highest failure rate was in Estonia, where almost one in four
businesses failed
■ The lowest failure rate was in Greece, where just over 2% of businesses
failed
● New businesses are often more at risk of failure than well-established
businesses
 ○ This is often due to lack of management skills, limited experience or
cash flow problems during the initial start-up phase
○ The volume and variety of tasks required of new business owners can be
overwhelming
○ Market research is unlikely to be detailed, as small business owners may
lack the skills to understand findings and make effective decisions

The Main Reasons why Some Businesses Fail

Financial Factors Poor Management

● A business may be unable to ● Lack of experience can lead to poor

generate enough revenue to decisions related to product range,
sustain its operations pricing or promotional activity
● Costs may rise sharply and ● Making decisions based on hunches
eliminate profit margins rather than market research
● Cash shortages mean that ● Ineffective coordination and
creditors cannot be paid what they planning of business operations,
are owed such as stock purchasing or staffing,
● Limited access to finance, such as can increase costs
loans/trade credit can be
particularly problematic for
start-ups

External Factors Overtrading

● Ineffective or delayed response ● This occurs when a business
to new technology, powerful expands too quickly
new competitors and major ● Poor coordination and planning
economic change of growth can lead to
● Changes in laws or taxation diseconomies of scale, which
can increase pressure on increases costs
businesses to make difficult
choices