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1Business Studies Key Terms

Theme 1
Market; any medium in which buyers and sellers interact and agree to trade at a price

Niche market; a small part of the overall market with specific characteristics focusing on a
narrow market segment, e.g. providing a specialist or luxury service or product

Mass market; large market with high sales volume with standardised product aimed at the
largest group of consumers for the product

Dynamic markets; countless decisions by both buyers and sellers constantly alter the nature and
behaviour of the market. Sellers respond by constantly improving existing products and
introducing new ones

Stable markets; where the pace of change is slow, innovation is rare and consists mainly of
minor changes to existing products. The market size and market share are fairly constant with
little variation in price

Digital economy; internet business

Product innovation; when new technologies market it possible to create completely new
products

Process innovation; new technology improves production methods, reducing costs and maintain
quality

Marketing; the process of promoting and selling products, including market research and
advertising, connecting a business to its customers

Risk; where the chance of things going wrong can be calculated

Uncertainty; unpredictable and uncontrollable capable of creating minor and major problems

Contingency planning; an activity undertaken to ensure that proper and immediate follow-up
steps are taken by both management and employees in an emergency

Market research; an activity that provides information about a business’s products, customers
or the competition in the market it operates in

Primary research; (Field research) gathering information first hand from an original source, e.g.
asking people for specific information through questionnaires, focus groups and direct
interviews or observation

Secondary research; (Desk research) using information that has already been gathered, e.g.
from journals, company accounts and online information

Quantitative research; based on numerical data to produce statistical information capable of

measuring phenomena, e.g. through sampling and questionnaires

Qualitative research; attempting to identify why consumers behave the way they do, based on
feeling attitudes and opinions, e.g. through focus groups and interviews
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Market segmentation; dividing that market into groups of consumers with similar characteristics
to cater for or target separate preferences, e.g. by income, age, gender, location or interests and
tastes

Market positioning; how individual products are seen in relation to their competition by
consumers, e.g. from pricing, marketing or perceived quality

Market mapping; to position products in relation to each other, the use of a grid showing 2
features of a market, e.g. price and consumer age. Individual brands or businesses are added to
the grid to identify potential niches or gaps in the market

Competitive advantage; any feature of a business that enables it to compete effectively with
rivals, e.g. through price, quality, location, service reputation or innovation. Product
differentiation may be used to achieve an advantage

Product differentiation; when businesses make their product distinct from rival products, e.g.
from unique features, or changing perceptions about the function or image of the product

Unique selling point; an attractive feature or benefit associated with one particular brand alone

Added value; the difference between the price paid and the total cost of the inputs needed to
create the product

Demand; the amount of a good or service that people are willing and able to buy at a given
price, at a given time

Demand schedule; a table showing the quantities demanded at different price levels

Demand curve; shows the relationship between the quantity demanded and the price of a
product

Contraction of demand; a movement up along a demand curve due to a products price rising

Extension of demand; a movement down along a demand curve due to a products price falling

Supply; the amount of a good or service that producers are willing and able to bring to market,
at a given price, in a given time period

Supply curve; the relationship between the quantity supplied and the price of a product

Short run; the time period in which at least one component in production cannot be changed

Long run; the time period in which all productive assets can be changed

Equilibrium price; the price at which the quantity demand and quantity supplied are equal,
leaving neither excess demand or excess supply

Market clearing; balance between quantity supplied and quantity demanded, y operating at
equilibrium price

Profit signalling mechanism; shifts resources between activities, e.g. high profits attract
entrepreneurs, and losses lead businesses to leave the market

Ceteris paribus; assumption that all variables, other than the one being studied are frozen

Elasticity; how much one variable changes in response to a change in another variable
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Price elasticity of demand (PED); measurers the responsiveness of quantity demanded to a

change in price, % change in quantity demanded / % change in price

Income elasticity of demand (YED); measurers the responsiveness of quantity demanded to a

change in income, % change in quantity demanded / % change in income

Marketing mix (4Ps); all elements of a firms marketing strategy, used to make products more
attractive to customers, e.g. Price, product, promotion and place

Operations management; covers all aspects of production including the sourcing of all inputs
and their efficient organisation in production

Design mix; the way in which function, aesthetics and economic manufacture are combined in
overall design

Added value; the difference between the selling price of the product and the cost of its material
inputs

Unique selling point (USP); any feature of a product that sets it apart from its competitors

Pricing strategy; the approach which the firm decides on for setting the price of its product

Distribution; concerned with getting products to the right place at the right time for customers

Distribution channel; the route taken by the product as it moves from the producer to the
customer

Product life cycle; the different stages a product pass through as it progresses from an idea to
the end of its life, e.g. development, introduction, growth, maturity and decline

Economies of scale; falling average cost as output increases, e.g. bulk buying raw materials

Extension strategy; a way of prolonging or renewing the life cycle of a product, normally used
during the maturity stage of the product life cycle

Boson matrix; a method of analysing a firm’s products in terms of their market share and growth
potential

Product portfolio (product mix); the range of products that the business provides

Customer loyalty; customers preference for a product, based on experience and emotional
attachment leading to repeat purchases, ignoring rival products

Outsourcing; shifting production to lower cost suppliers, often in developing countries

Multi-skilling; training employees to do several different jobs

Flexible hours; employees are expected to work a given number of hours a week, but the hours
per day are not set

Flexible working; employees vary their way of working, e.g. the tasks, working hours and
location

Dismissal; employee required to leave their job because of unsatisfactory behaviour or failure to
work to the required standard

Redundancy; employee told to leave job due to their skills no longer being required
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Internal recruitment; potential applicants are found from within a firm

External recruitment; potential applicants are found from outside a firm using adverts or
recruitment agencies

Labour turnover; the rate at which firms’ loose staff, which may or may not need replacing

On-the-job training; learning in the workplace, e.g. apprenticeships

Off-the-job training; staff are away from their normal working tasks, often delivered by outside
agencies

Organisational structure; framework, usually hierarchical, showing how a firm arranges its lines
of authority and communications, and allocates responsibilities and duties

Chain of command; the official hierarchy of authority in an organisation, setting out the
sequence of responsibility for giving and taking instruction

Span of control; a measure of how many people are directly answerable to each person n the
chain of command

Centralisation; concentrating power at head office, at the top of the hierarchy, standard
approaches and policies are applied throughout the business

Decentralisation; delegating responsibility to local managers, so they can make decisions that
are responsive to local conditions

Delayering; flattens an organisational structure by removing levels of management

Matrix structure; combines departmental organisation with teams forms from across
departments to undertake specific projects

Scientific management; entailed detailed analysis of work processes to find out the most
efficient methods, and money is seen as the only motivator of workers

Human relations approach; emphasises the importance of the ways in which people interact
and how they ae treated, i.e. motivation can improve when the worker feels more involved

Maslow; approach which saw meeting people’s needs as essential to motivation, with
motivation stronger at the higher levels of his hierarchy

Delegation; giving individuals more responsibility for making decisions, this encourages initiative
and increases motivation

Consultation; discussions with employees about working methods and practices, creating a
feeling of importance and of being valued for more than just their labour, thus increasing
motivation

Empowerment; ways in which employees can make independent decisions without consulting a
manager, often giving more freedom than simple delegation, increases feelings of self-worth and
improve morale and motivation, as well as generating new ideas

Team working; organising employees into teams with shared decision making and responsibility
for production, often resulting in improved productivity and faster problem solving

Flexible working; any arrangement that allows employees to have a more flexible working
schedule, giving employees more control over their working lives and increasing job satisfaction
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Job enrichment; giving employees meaningful whole tasks to do rather than boring, repetitive,
fragments of work

Job rotation; allows employees to change jobs, introducing variety and reducing time spent
repeating tedious and routing processes that can lead to boredom and carelessness

Job enlargement; increasing the range of tasks an employee is expected to perform, often
involves multi-skilling, bring a sense of responsibility and motivation, and reduces boredom

Entrepreneurs; people who bring the factors of production together to create a desirable
product

Intrapreneures; people who bring innovation to existing businesses rather than to business
start-ups, i.e. improving products, processes or productivity

Profit maximisation; aiming to make as much profit as possible, pursuing this objective
regardless of other objectives

Profit satisficing; having several objectives which influence decision making, accepting less than
maximum profits, in order to combine ‘enough’ income with other priorities

Social entrepreneur; someone who uses their business to achieve benefits for society

Liability; responsibility for the financial debts of a business

Unlimited liability; business owners have a legal duty for all the debts and can have their
personal possessions ceased to pay bad debts, e.g. sole traders and partnerships

Limited companies; businesses are legal entities, so the personal wealth of the owners is
protected

Opportunity cost; T

Trade off; a choice

Emotional intelligence; combination of recognising the impact of one’s own emotions, feelings
and actions, with consideration of other people’s emotions and feeling when interacting with
them

Verification; process of reviewing, inspecting and testing to check the quality of work

Validation; similar to verification, containing an element of recognition for the work and the
worker involves

Business Theme 2 Key Terms

Working capital; the cash needed by the business to cover day to day payments for inputs required
for the production process, i.e. wages and other input costs have to be covered for the period
between the start of the production period and the time when sales revenue is coming in

Collateral; assets that can be used to repay the lender in case the borrower does not have sufficient
money to cover the interest and repayments

A creditor; owed money, either by a business or individual, for providing supplies or finance
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A debtor; a person or business that owes money to a creditor. Unlimited liability could mean that
the credit is easier to obtain as suppliers have a greater chance of getting paid if things go wrong

Insolvency; occurs when a company cannot pay its debts because it is making a loss

Liquidation; occurs when a business is clearly insolvent and has to close down. Its assets are sold to
raise cash to pay at least some of the debts

Trade credit; good for easing cashflow problems, but would be no use for extending the business
premises, irrespective of whether it is a limited or unlimited company

Retained profit; an excellent source of finance – but not available to start-ups

P2P; lending won’t suit a big business – it would involve too many people and become too
complicated

A business plan; a document that sets out what the business is, what it does, what it wants to
achieve and how it is going to do it. It is normally used as part of an attempt to gain financial backing
for a business

A cash flow forecast; a statement of the expected cash inflow coming from sales revenue and the
expected cash outflow needed to cover production costs.

Net cash flow; the difference between the cash inflow and outflow, a crucial indicator of the ability
of the business to cover its day-to-day running costs

Opening balance; what is in the bank on the first day of the month

Total cash inflow; all monies entering the business that month

Total cash outflow; all monies leaving the business that month

Net cash flow; total cash inflow – total cash outflow

Closing balance; opening balance +net cash flow

Sales forecast; an estimate of future sales that may be based on previous sales figures, market
surveys and trends or managerial estimates

Sales volume; sales revenue / unit price, the number of a specific product that is sold in a given time
period

Sales revenue; selling price x sales volume (P x Q), the income that is generated from the sales of a
product or service

Total revenue (TR); the total of all revenues earned by a business

Costs; the expenses that business must pay in order to produce goods and services, e.g. wages, rent,
power, advertising and raw materials

Total costs (TC); TFC + TVC, or cost per unit of output x quantity produced, all the costs involved in
producing a good or service

Fixed Costs (FC); costs that do not change with the level of output, e.g. rent, business rates, loan
repayments, managers salaries

Variable Costs (VC); costs that do change with the level of output, e.g. raw material costs, packaging,
energy bills and wage costs (where the number of people changes with output levels)
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Average variable costs (AVC); TVC / Q

Average fixed costs (AFC); TFC / Q

Average total Costs (ATC); TC / Q

Profit; TR – TC or (Total sales – Breakeven sales level) x Contribution, the difference between the
total sales revenue and total costs involved in production

Breakeven point (BEP); TR = TC or FC / Contribution (P – VC), neither profit or loss is being made

Contribution; P – VC, selling price – variable cost per unit

Total contribution; Sales revenue – TVC

Margin of safety; the difference between the actual level of output and the breakeven level of
output

A budget; a financial plan for the future that sets out targets to be met, the costs of achieving them
and how that spending might be financed

Extrapolation; assuming that past trends will continue into the future, must be used with care due
to changes in business conditions requiring adjustments

Zero based budgeting; no money is set, and no money is allocated to cover costs, which means
managers must examine all their costs and be prepared to bid for and justify spending on their
departments

A variance; the difference between a budgeted figure and the actual figure

Gross profit; turnover (TR) – VC, usually shown as cost of goods sold (COGS)

Operating profit; turnover (TR) – (FC + VC), also known as EBIT (Earnings Before Interest and Taxes)
and does not include any profit earned from any investments the business has. It is the key indicator
that shareholders watch

Profit for the year; operating profit – tax + interest or profit for the year x 100 / turnover, the
interest may be positive or negative

Statement of comprehensive incomes (income statement); turnover (TR) – each group of costs to
arrive at a figure for profit, measures the financial performance of the business

Profitability; the ability of the business to generate profits from its resources, it relates profit levels
to the size of the business. Profit figures on their own may not help making comparisons

Profit margin; profit / turnover x 100, the ratio of profit to turnover expressed as a percentage, i.e.
the percentage of turnover that is actually profit

Gross profit margin; gross profit x 100 / turnover

Operating profit margin; operating profit x 100 / turnover

Profit for the year margin; profit for the year x 100 / turnover

Cash; usually in the form of money or bank deposits, also some assets that can easily be converted
into money, e.g. finished products
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Overtrading; when a business expands too quickly, beyond what the investment in working capital
will allow

Working capital; the cash that can be used to pay bills and employees

Liquidity; the ability of the business to pay its debts

The statement of financial position (Balance sheet); shows the assets, liabilities and net worth of a
business on a given date

Assets; all of the things that could be of benefit to an organisation, the ones on the statement of
financial position are the ones that can be given a money value

Liabilities; all the debts that must be repaid at some time in the future

Non-current (fixed) assets; the assets that will be of lasting value to the business, e.g. tangible items
like land, buildings, machinery and equipment and intangible items like goodwill, brands and patents

Depreciation; assets lose value over time and are shown in non-current fixed assets at their current
value not their original cost

Current assets (inventory, debtors and cash); assets tat the business has for a short period of time,
which can be quickly (within one year) be turned into cash e.g. inventory (stocks) including inputs
and outputs

Current liabilities; debts that the business will need to pay within a year, e.g. money owed to
creditors, tax bills and overdrafts

Net current assets; current assets – current liabilities, i.e. the working capital of the business,
available to cover everyday spending

Net assets; total assets – total liabilities, i.e. the worth or value of the business

Non-current liabilities; the long-term debts of the business, payable over several years, e.g.
mortgages, loans

Shareholders’ equity; a liability similar to the money put into a business by a sole trader or
partnership (owner’s equity), which will not be paid back if the business becomes insolvent, until
every other debt has been repaid

Retained earnings; includes retained profits and increases in asset values, e.g. property, which count
as a liability because they are a source of finance

Current ratio; Current assets / current liabilities

Acid test ratio; current assets – stock / current liabilities

Working capital; current assets – current liabilities

Efficiency; maximum output from minimum input, i.e. using resources in a way that production costs
are kept as low as possible

Job production; producing a single item at a time, e.g. a unique picture and products with individual
specifications

Batch production; a medium sized production run, usually partly mechanised, capable of producing
relatively cheaply, e.g. newspaper production
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Flow production; production for a mass market, e.g. continuous production on a car assembly line

Cell production; individual products do not need to be identical, each cell has multiskilled members,
e.g. making cars with specific refinements

Productivity; output per unit of input over a given time period, i.e. a measurement of how efficiently
resources are actually being used

Process innovation; using new technology to improve production methods, so that costs are
reduced

Human capital; the knowledge and skills acquired by employees

Outsourcing; a business buying some inputs from another business, rather than using its own
employees

Offshoring; building a factory in another country with lower labour costs, a type of outsourcing

Capital intensive; production which uses large amounts of capital and relatively little labour

Labour intensive; production which uses large amounts of labour and relatively little capital

Capacity utilisation; current output / maximum possible output x 100, i.e. measures the percentage
of the potential output that is actually produced

Under-utilisation of capacity; production is not as high as it could be because some of the resources
are not being used

Over-utilisation of capacity; the business is trying to produce more than its capital equipment was
designed for

StocK control; the process of optimising stock levels (inventory), i.e. so demand can be met while
costs of holding stocks are minimised

Buffer stocks; the level of stock held ‘just in case’, e.g. enough stocks to continue production if there
is a delivery problem.

Just in time (JIT); a stock control system where stocks arrive as and where they are needed

Waste minimisation; an examination of every stage of production to see if they can be improved,
intended to increase productivity

Lean production; a general term given to any system of production that tries to minimise waste
during the production process

Quality control; traditional method of checking the quality of products

Quality assurance; attempting to improve the quality of the product or service by taking account of
customer’s needs and involves employees looking at every aspect of the business

Quality circles; small groups of employees that meet regularly to look at how quality can be
improved, making recommendations to management

Kaizen; Japanese word for continuous improvement, i.e. Kai – change + Zen = good

5 Whys; a question asking technique used in Kaizen to find out the fundamental cause of a problem,
i.e. the answer to each question forms the basis of the next question until the root cause is reached
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Inflation; a persistent rise in the average price level in the economy, leading to a fall in the value of
money

Exchange rate; the price of one currency expressed in terms of another, e.g. £1 = $1.45

Interest rate; the price of borrowed money, vary depending on the level of risk

Direct taxation; taxes that are charged on earnings, e.g. income tax, national insurance and
corporation tax

Indirect taxation; tax on consumption, e.g. VAT, excise duties, car tax etc

GDP; the total value of all goods and services produced in an economy within a year, representing
total income

The business cycle; the fluctuations in the rates of growth of GDP over a given period, also called the
economic cycle

Boom; a time of rapid growth and expansion within the economy

Downturn; the boom slows and the rate of growth decreases

Recession; 2 consecutive quarters of negative growth

Recovery; positive growth after a recession

Economic forecasting; the process of predicting future economic variables and events

A contingency plan; a plan devised in advance to cope with a range of possible situation

Regulation; government rules that set standards for organisations, i.e. protecting employees,
consumers and the environment

Cartels; agreements between two or more firms to fix prices or carve up markets or reduce output,
in order to reduce competition and drive up prices, illegal in most developed economies

Theme 3 Key Terms Business

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Aims; broad ideas of how a business should develop, can relate to quality, reputation or expansion
aspirations

Mission Statement; inspirational and motivating version of the corporate aim. Short, relevant and
specific and covey the value of the brand and why it exists. It can influence customer perceptions of
the product as well as encouraging employees to focus on costs and quality

Corporate objectives; specific, realistic and measurable goals which an organisation plans to achieve
within a given period of time, influencing internal strategic decisions.

Strategy; a plan of action that is designed to fulfil an objective. A strategy cannot be formed until the
objective has been designed

Market penetration; selling more of the same products to the same customers, involving changes in
the marketing mix, e.g. trying to increase brand loyalty, or encouraging customers to buy the
product more often – focusing on market share, it is the least risky strategy

Product development; selling new products to existing, well-known customers. The strategy is
particularly useful where there is strong competition and the firm needs to keep its products clearly
differentiated, the risk is higher as the products are new, but the customers are familiar

Market development; selling the same products to new customers, e.g. looking for new
geographical areas in which the product can succeed or new uses for the existing product

Diversification; new products being sold to new customers, so the riskiest strategy

Product portfolio; the whole range of products and brands that a business sells

Portfolio analysis; the appraisal of the product portfolio to determine the relative worth of each
item and its contribution to the business. Common measures used are the portfolio analysis and the
relative market share

Competitive advantage; any feature of the business that enables it to compete effectively

Distinctive capabilities; the ideas, resources and capabilities that a business possesses that are
better than those of its competitors and cannot be easily copied

Strategic decisions; decisions made in order to meet the objectives of the business, usually long
term in nature, e.g. should we enter a new market?

Tactical decisions; short term decisions to help achieve the strategy, e.g. what price should we
charge?

PESTLE; an analytical tool designed to make a business think more carefully about what is happening
outside the business, that is likely to have an impact inside the business

Porter’s five forces; used to investigate the intensity of competition within an industry, helping the
business to analyse the competitive forces that it faces and to devise an effective strategy for
achieving a competitive advantage and greater profitability

Internal economies of scale; involves a reduction in AC bought about by an increase in the size of
the business

External economies of scale; involves a reduction in AC bought about by an increase in the size of
the whole industry
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Market power; means that the seller can have some control over the price charged, it starts with
product differentiation

Product differentiation; as the business grows it becomes better known and brand recognition
enhances its market power. It also means that big business can control prices they pay when buying
from small supplier businesses that compete with each other

Diseconomies of scale; when a business or a subsidiary encounters cost increases that make the
larger scale of production less efficient

Mergers; combine two businesses by mutual agreement, then operate under a unified management
structure

Take overs; when one business succeeds in buying more than half the shares of another business, it
may be by agreement or may follow a long battle

Horizontal integration; two businesses in the same industry, at the same stage in the chain of
production, joining together

Vertical integration; two businesses in the same industry, but at different stages in the production
process or supply chain, have joined together

Conglomerate integration; when two businesses that have nothing in common join together

Organic growth; when a business increases its sales revenue by expanding its facilities, producing
and selling more, likely to be quite slow, but steady and secure

Inorganic growth; a business merging with or taking over another business to increase output and
sales

Quantitative sales forecasting; using statistical techniques to analyse existing data in order to make
decisions for the future

Time series analysis; looks at existing short and long term data over a period of time in order to
provide information on likely current and future trends

A scatter graph; shows the degree of correlation between two variables by plotting them against
each other on a diagram

Correlation; measures how closely related on set of data is with other sets of data

A line of best fit; drawn through the middle of the points on a scatter graph, the closer the points
are to the line, the stronger the correlation

Extrapolation; means that future trends are predicted by analysing past data and making
assumptions about its continuing behaviour

Investment appraisal; covers a range of analytical techniques designed to aid decision making,
helping the business decide on the relative merits of different investment projects

The payback period; the length of time it takes to get the cost of investment back from the net cash
flow that it generates

Average Rate of Return (ARR); Average annual -profit / cost of investment x 100, method of
comparing the average annual level of profit with the original cost of investment
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Discounted cash flow (DCF); takes into account the future or time value of money, i.e. adjusting the
value of money received in the future to its present value

Net present value; the sales revenue generated by an investment, less the other costs of
production, all discounted from the year that they are received, to give their present value, today.

Decision trees; mathematical models that use probability as a way of determining the best outcome

Probability; the likelihood of a specific outcome actually happening, in numerical terms

Expected value; the average value of a range of possible outcomes, each financial outcome is
multiplied by its probability

Critical Path Analysis (CPA); a technique used to work out the shortest and most efficient way to
complete a project, i.e. it identifies the processes that take the longest to complete, where avoiding
delay is paramount, e.g. useful in construction projects and assembly processes

Earliest start time (EST); the earliest possible day of the project that a task can be started on

Latest finish time (LFT); the latest time that a task can be completed without holding up the next
task

Float time; the spare time available between the time an activity takes and the time it must be
completed by

Free float; EST of the next activity – duration of this activity – EST of this activity, i.e. the amount of
time that an activity can be delayed without affecting the EST of the next activity

Total float; LFT of this activity – duration of this activity -EST of this activity, i.e. the total time by
which an activity can be delayed without delaying the scheduled end date of a project

Short-termism; an excessive focus on short-term results at the expense of long-term interests

Evidence based decision making; arriving at an objective decision based on the best available
evidence in a rational and logical manner

Subjective decision making; relying more on instinct and ‘gut feeling’ without developing a logical
argument

Corporate culture; the set of important assumptions that are shared by people working in a
particular business, that influence the way decisions are taken

Stakeholders; all of the people that have a ‘stake’ in a particular business, e.g. consumers,
employees, suppliers, shareholders, government, pressure groups and local communities

Internal stakeholders; those directly affected by the business, including the owners, employees and
managers

External stakeholders; those indirectly affected by the business including customers, suppliers,
competitors, the local community, pressure groups and the government

Business ethics; the principals and standards that determine socially acceptable conduct in business

Social responsibility; the obligation a business has to maximise its positive impact and minimise its
negative impact on employees, customers, society and the environment
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Ethical decision making; following codes of practice that embody moral values. The objective is to
do the right thing, acting with honesty and integrity and taking into consideration the interests of
everyone affected by a decision

Corporate Social Responsibility (CSR); taking decisions in a way that takes account of all stakeholder
interests, i.e. treating employees, customers and suppliers fairly, e.g. avoiding polluting activities and
contributing positively to the lives of the local community

Financial statement; a general term for a key document based on financial information generated by
a business

Statement of comprehensive income (also called the income statement or profit and loss account);
shows a company’s net profit or loss, over a given period of time, detailing the revenues and costs of
a company

Statement of financial position (balance sheet); shows the assets, liabilities and the net worth of a
business on a given date

Liquidity; the ease and speed with which assets can be turned into cash

Capital employed; the total figure for all the long-term finance that the business has, including share
capital, retained profits and loans, together providing the funded needed to pay for the company’s
assets

Ratio analysis; using information from the financial statements to relate one measure of
performance to another by highlighting key features in the financial results, e.g. the relationship
between current assets and current liabilities

The current ratio; the relationship between current assets and current liabilities

Profit margin; profit / turnover x 100, i.e. a financial ratio taken from the statement of
comprehensive income, showing what percentage of business turnover is actually profit

Gearing ratio; long-term liabilities (loans) / capital employed x 100, the proportion of capital
employed which comes from long-term liabilities, i.e. the proportion of the money used in a business
which is interest-bearing debt – usually 50% is considered low, while over 50% is considered high

Return on capital employed (ROCE); operating profit x100 / capital employed,

Labour productivity; output per time period / number of employees, measures output per person
employed, e.g. output per hour worked – measuring efficiency

Labour turnover; number of staff leaving / number of staff employed x 100, measures the number of
staff who leave in a given time period

Labour retention; number of employees in post for more than one year / number of staff in post one
year ago x 100

Absence rate %; number of employees absent / total number of employees x 100 or number of
working days lost per time period / total possible number of working days per time period x 100

Scenario or contingency planning; having a plan in readiness in case of a crisis or an unwanted

event, i.e. anything unexpected that occurs outside the range of normal operations that might
adversely affect an organisations ability to operate
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Risks; threats that may or may not occur, but can be quantified using probabilities, e.g. insurance for
fires

Uncertainty; possibilities that cannot be quantified and may appear without warning, e.g. a new
product threatening the business

Business Key Terms Theme 4

Primary sector; production of raw materials
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Secondary sector; manufacturing and the production of tangible goods

Tertiary sector; services and other knowledge-based industries

Developed economies; high per capita incomes, literacy levels and life expectancy, with large
service sectors, health care and welfare provision

Developing economies; generally low incomes, weal education and welfare systems, abundant
cheap labour and relatively little capital investment. Setting up new businesses may be difficult
and risky. Manufacturing is mainly clothing and footwear

Emerging economies; rising levels of capital invest spending and growth, increasingly productive
secondary sectors. International trade is growing rapidly. Diversification into new lines of
production often in collaboration with MNCs

GDP; measures the value of all goods and services produced within an economy over a year

Literacy rate; the percentage of the population aged over 15 years who can read and write a
short statement on their everyday lives (World Bank definition)

The Human Development Index (HDI); measure of development based on access to health care,
education and national income – includes qualitative and quantitative aspects of development

Visible imports and exports; physical products, e.g. cars, raw materials, drinks, computers

Invisible imports and exports; services, e.g. tourism, transport, financial services, legal services

Specialisation; process by which individuals, firms and economies concentrate on creating and
selling goods and services that they produce most efficiently and cost effectively

Foreign Direct Investment (FDI); a flow of investment from one country to another, e.g. when a
firm’s HQ is n one country and it sets up factories, offices or distribution outlets in another
country

Trade barrier; anything that stops or impedes trade between countries, e.g. tariffs and quotas

Trade liberalisation; process of limiting or reducing barriers to trade, moving closer to free trade

Multinational Corporations (MNCs); businesses with operations in more than one country

Protectionism; any policy that restricts international trade to minimise competition from foreign
businesses, e.g. government using tariffs and quotas to make imports more expensive, or
subsidies to domestic firms reducing production costs

Trade blocs; group of countries where barriers to trade are reduced or eliminated between
member countries

Free Trade Areas (FTAs); group of countries that trade completely freely, with few or no trade
barriers, but each member country retains its own independent trade policies in relation to the
rest of the world

Common markets; group of countries with completely free trade internally and a single unified
trade policy (CET) covering all members trade with the rest of the world. There is also free
movement of goods, services, people and capital, i.e. individuals can work and businesses can
invest in any other member country
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Push factor; an event within an existing market that forces a business to look elsewhere for
survival or success

Pull factor; an event that happens in another market that attracts a business towards it, to take
advantage of the conditions

Market saturation; when it becomes impossible to expand sales further in a particular market.
In durable goods markets, e.g. washing machines, it may still be possible t sell replacement
machines

Infrastructure; includes all transport and communication facilities and utility services, e.g.
energy and water supplies

Intellectual property rights (IPRs); allows business to own and exploit their own inventions and
ideas, usually by patenting them, providing legal protection and preventing others from copying
them

Commodities; raw materials or semi manufactured products (intermediate goods) that are
traded in bulk, e.g. iron ore, cotton, sugar, wheat and oil

Organic growth; business grows by investing and expanding sales and output from within

Inorganic growth; business grows by joining with another firm, e.g. merger or takeover

Merger; mutual decision made by two ‘equal’ firms to combine and become a single entity

Takeover; the purchase of a smaller company by a larger one

Joint ventures; business in a collaborative relationship with a local producer. Used as a way to
spread risks, when wanting to produce and sell into an unfamiliar market

Supply chain; sequence of processes which start with acquiring inputs and ends with the
delivery of the product to the customer

Synergy; after a merger or takeover, the performance of the combined enterprise will exceed
that of the previously separate parts

Global marketing; marketing strategies used by a business when operating in global markets,
the elements of the marketing mix may be the same or varied to suit a particular part of a global
market

Glocalisation; combines ‘globalisation’ and localisation’ based on the idea that a global product
or service is more likely to succeed if it is adapted to the specific requirements of local practices
and cultural expectations

Ethnocentric Model; an approach to marketing based on the tendency to look at the world
primarily from the perspective of one’s own culture, believing that what was a success story in
the domestic market will also be so in other countries in which it operates

Geocentric Model; an approach to marketing based on seeing the world as a potential market
with both similarities and differences in domestic and foreign markets, an effort is made to
develop integrated world market strategies to gain the best from both
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Polycentric Model; an approach to marketing based on each host country being unique, each of
its subsidiary business develops its own unique business and marketing strategies in order to suit
these particular needs

Global market niches; smaller, more specialised parts of the global market, the products are
likely to be differentiated from the mass market

Subcultures; groups of people who have interests and values in common, based on hobbies, life-
styles, ethic or religious background or enthusiasms and preferences

Social and cultural differences; individual societies and groups within them have distinctive
ways of life, affecting their patterns of consumption and the products they favour, as well as the
way they do business with one another

Balance of Payments (BOP); the difference in total value between payments into and out of a
country over a period of time, i.e. a record of all the financial transactions between consumers,
businesses and governments of one country with the rest of the world.

Technology transfer; when foreign businesses locate in emerging economies, bringing with
them new skills and techniques that were not previously accessible

Transfer pricing; when one part of an MNC sell goods and services to another part in another
country (the price charges is the ‘transfer price’, which may be unrelated to the costs incurred,
i.e. set at the level which reduces or eliminates profit and hence the total tax paid by the MNC)

Stakeholders; all people with an interest in a business; customers, employees, suppliers,

shareholders, government, pressure groups, local communities and the environment

Ethical decision making; following a code of practice that embodies mora; values – the objective
is doing the right thing – acting with honesty, integrity and taking account the interests of
everyone affected by the decision

Exploitation of labour; employers paying employees less than the value of what they produce,
abusing the power they have in the labour market, when there is excess supply of labour

Pressure groups; organisations that attempt to influence public policy, i.e. legislation regarding
their particular concerns
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