Answers

1 Enterprise b Answers could include:

•  aving a brand name and recognisable
h
1.1 The nature of business activity brand identity
Knowledge recall questions • providing good customer service
• creating personalised designs.
1 Suggested answers could include:
4 Two reasons why a business might fail could include
• They identify the needs of customers.
the following.
• They purchase necessary resources to allow
• Poor record keeping. A new entrepreneur may
production to take place.
not have the knowledge of how to manage the
• They produce goods and services which satisfy records within a firm or may not think it is
customers’ needs, usually with the aim of as important as keeping the customers happy
making a profit. when starting up the business. Failure to keep
2 The four factors of production are as follows. records correctly could lead to the business
losing customer orders or not being able to
• Land. This includes land itself as well as all manage its own stock and payments and could
renewable and non-renewable resources that can mean that the business does not have the
be taken from land or sea (such as coal, timber evidence it needs for tax authorities.
and water).
• Lack of cash. Many new businesses fail as they
• Labour. This refers to the workforce of a do not have the finance available to cover their
business. This can include the level of skills day-to-day expenses, for holding inventories
held, any training they have received (or or to give credit to their customers. Without
need), education levels and productivity this working capital, firms are unable to buy
measurements. more supplies, pay suppliers or offer credit to
• Capital. This is the finance used to start up and important customers. These factors could lead
run a firm as well as the manufactured resources to the business having to close down.
used in production (called capital goods). • Poor management skills. Entrepreneurs
This can include machinery, computers often have an idea that they want to turn
and vehicles. into a business that may use their skills. For
• Enterprise. This is the activity undertaken by example, a skilled musician may want to start
the entrepreneur. It refers to the initiative and a music academy – but they may not have any
risk taking that are involved in setting up experience in running a business. As a result,
a business. they may be unable to make decisions, conduct
marketing or manage their finances effectively.
3 a Adding value is when a business increases the
difference between the cost of bought-in inputs
(materials) and the selling price of the finished
goods. The customer needs to be prepared to
pay for this difference. For example, a firm
selling laptops could add value to the customer
by offering free technical support for a period of
time after the customer has bought the product.

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 Answers

1.2 The role of entrepreneurs 3 a Answer provided in the main chapter.

and intrapreneurs b An entrepreneur is someone who sets up
Knowledge recall and Exam skills questions a business and takes the financial risk involved
in doing this.
1 Three barriers to entrepreneurship could include
the following. c Answer provided in the main chapter.
• Lack of a business opportunity. Entrepreneurs d One quality of a successful entrepreneur is that
may not have the skills needed to fill a gap they must be persistent because they may not be
in the market, or the market may already successful in their first attempt, so they need to
be saturated. keep trying new things until they are successful.
• Obtaining sufficient capital (finance). Starting
a business can be expensive and an entrepreneur 1.3 Purpose and key elements of
may have insufficient savings; a lack of business plans
knowledge of sources of finance or a poor
Knowledge recall questions
business plan makes the entrepreneur unable
to access finance from investors or banks. 1 The purpose of a business plan is:
• Cost of a good location. If finance is limited, • to provide a focus on the business idea
finding a good location could be challenging • to help to gain finance
as high rent, land or building costs can seem
unaffordable to an entrepreneur. • to communicate business goals with
stakeholders
• Competition. There are many existing businesses
in markets who have an established customer base • to provide clarity in ideas
as well as good knowledge of the market; this can • to encourage the entrepreneur to consider
make it difficult for new firms to enter the market. all aspects of their business enterprise
2 a Three benefits to an economy from a successful • to identify resources required and how these
business enterprise can include the following. will be sourced.
•  conomic growth. There should be
E 2 Elements that might be found in a business
an increase in the output of goods plan include:
and services, which will increase gross
domestic product (the measure of • An executive summary: an overview of the new
economic growth). business and its strategies. This could include
a description of the business opportunity:
• Innovation and technological change.
details of the entrepreneur’s skills and
New businesses can be dynamic and bring
experience; nature of the product; the target
new ideas to the market, which other
market at which the product is aimed.
firms may be able to benefit from; this can
stimulate creativity within an economy. • A marketing and sales strategy: details of
• Personal development. If people start why the entrepreneur thinks customers will
their own businesses, others may decide buy the product and how the business will
to follow their example. This can lead to sell to them.
skill development within the economy, • Financial forecasts: the future projections
with more people aiming to meet their of sales, profit and cash flow for at least
self-actualisation needs. one year ahead.
b Students’ own answers.
• Operations: premises to be used, production
facilities, IT systems.

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2 Business Structure
2.1 Economic sectors
Knowledge recall and Exam skills questions
1 a The primary sector involves firms engaged in farming, fishing, oil extraction and all other industries
that extract natural resources so that they can be used and processed.
b The secondary sector involves firms that manufacture and process products from natural resources,
including computers, brewing, baking, clothes-making and construction.
c The tertiary sector involves firms providing services to consumers and other businesses,
such as retailing, transport, insurance, banking, hotels and tourism.
d The quaternary sector involves businesses providing information services, such as computing,
web design, information technology (IT), management consultancy and research and development (R&D),
particularly in scientific fields.
2 Advantages of public-sector organisations:
• They are managed with social objectives rather than solely with profit objectives.
• Loss-making services might still be kept operating if the social benefit is great enough.
• Finance is raised mainly from the government.
Disadvantages of public-sector organisations:
• There can be a tendency towards inefficiency due to the lack of strict profit targets.
• Subsidies from government can also encourage inefficiencies.
• Government may interfere in business decisions for political reasons, for example by opening
a new branch in a certain area to gain popularity.

2.2 Business ownership

Knowledge recall and Exam skills questions
1 Answers could include the following.

Benefits Costs
Sole trader • It is easy to set up as a sole trader, • There is unlimited liability; all of the owner’s
with no legal formalities. assets are potentially at risk.
• The owner has complete control • There is often intense competition from
and is not answerable to bigger firms.
anybody else. • The owner is unable to specialise in areas
• The owner keeps all profits. of the business that are most interesting,
• The owner can choose times and instead being responsible for all aspects
patterns of working. of management.
• Business can be based on the • Raising additional capital is difficult.
interests or skills of the owner, • There is a lack of continuity as the business
rather than them working as an does not have a separate legal status; when
employee for a larger firm. the owner dies, the business also ends.

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Benefits Costs
Partnership • Partners may specialise in different • All partners have unlimited liability (with
areas of business management. some exceptions).
• They share decision-making. • Profits are shared.
• Additional capital is injected by • There is no continuity; the partnership will
each partner. have to be reformed in the event of the
• Business losses are shared between death of one of the partners.
the partners. • All partners are bound by the decisions
of any one of them.
• It is not possible to raise capital from
selling shares.
Private • Shareholders have limited liability. • There are legal formalities involved in
limited • The company has a separate establishing the business.
company legal personality. • Capital cannot be raised by the sale of
• There is continuity in the event of shares to the general public.
the death of a shareholder. • It is quite difficult for shareholders to
• The original owner is still often able sell shares.
to retain control. • End-of-year accounts must be sent to
• The company is able to raise capital the government office responsible for
from the sale of shares to family, companies and are available for public
friends and employees. inspection, resulting in less secrecy over
financial affairs than for a sole trader
or partnership.
Public • Shareholders have limited liability. • Formation entails legal formalities.
limited • The company has a separate • Advice from business consultants when
company legal identity. creating a public limited company can
• There is continuity in the event of be expensive.
the death of a shareholder. • Share prices are subject to fluctuation,
• It is easy for shareholders to sometimes for reasons beyond a business’s
buy and sell shares, control (e.g., the state of the economy).
encouraging investment. • There are legal requirements concerning
• Substantial capital sources can disclosure of information to shareholders
be accessed due to the ability to and the public (e.g., annual publication of
issue a prospectus to the public detailed reports and accounts).
and to offer shares for sale • There is a risk of takeover due to
(called a flotation). the availability of the shares on the
stock exchange.
Cooperative • Goods can be bought in bulk. • There is a risk of members having poor
• Members can work together to management skills, unless professional
solve problems and take decisions. managers are employed.
• There is good motivation for all • There might be capital shortages because
members to work hard as they will the sale of shares to non-members is
benefit from shared profits. not allowed.
• If all members are to be consulted on
important issues, decision-making
can be slow.

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 Answers

2 sole trader; unlimited liability; capital; partnership; This means that Silva was able to run his business in the
responsibility; deed; profits; unincorporated; way that he wanted, without having to discuss his ideas
liability; legal personality; continuity; shareholders. with others, which he would have had to if he had been in
a partnership. As a result, Silva was able to give more of
3 Letters could include the following points:
his time to running the business and focus on making sales,
Advantages which would lead to his business potentially being more
• There are fewer chances of a new business successful.
failing because it is using an established brand One disadvantage to Silva of being a sole trader was that
name and product. Silva may have found he had limited sources of finance.
• Advice and training are offered by Sole traders often use their own savings to start up
the franchiser. their business, and Silva may not have had much finance
available when he set up his carpet shop and would struggle
• The franchiser pays for national advertising. to access a loan from a bank as he was setting up a new
• Supplies are obtained from established and business. This may have meant that he had to start with a
quality-checked suppliers. smaller range of carpets to sell than if he had set up the
business with other people who could have provided him with
• The franchiser agrees not to open another some capital. As a result, the growth of his business could
branch in the local area. have been slower in the early part than Silva would have
Disadvantages liked, lowering the amount of income he was able to make
for himself.
• A share of the profits or revenue has to be paid
to the franchiser each year. Recall and connect 1
• The initial franchise licence fee can If an entrepreneur wants to earn an income for
be expensive. themselves, they are more likely to select a sole trader
• Local promotions may still have to be paid for business organisation structure so that they do not
by the franchisee. need to share their profits with another owner such as
a partner. If an entrepreneur wants to reduce the risk
• The franchisee cannot choose which supplies to their personal possessions when starting a business,
or suppliers to use. they might want to consider setting up using a limited
• Strict rules over pricing and layout of the liability company structure.
outlet reduce the franchisee’s control over their
own business. Recall and connect 2
4 Skills are identified using the following colours: Opportunity cost is the next most desired option
that is given up. This is an important concept for
AO1 Knowledge and understanding someone when setting up a business, as an entrepreneur
AO2 Application will unlikely be able to have everything that they
desire due to limited time, capital and other resources,
AO3 Analysis so they need to make decisions and will need to give
One advantage to Silva of being a sole trader was that up options.
Silva was able to be his own boss. This means that he
was able to make any decisions that he wanted to about
his carpet shop when he opened it up ten years ago,
such as what types of carpet to sell, who to employ and
what hours the shop should open, giving him the freedom
he did not have when he was working for someone else.

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 Answers

3 Size of business
3.1 Measurements of business size
Knowledge recall and Exam skills questions
1 Answers could include the following.

Outline Advantage Disadvantage

a Number of employees How many workers Easy to understand: Some large businesses
a business has, also larger businesses have use capital more than
known as labour more employees labour: this is not shown
in this measure
b Revenue The total value of sales Figures are an easy way Only suitable when
made during the trading to make comparisons making comparisons
period = selling price × between businesses between businesses
quantity sold in the same industry
c Capital employed The total value of all Provides a good Firms with high levels
long-term finance indication of how of labour may not be
invested in the business investments are being well recognised in this
used: higher investments measure, meaning the
are usually an indicator of assessment of size could
a larger business be misleading
d Market share Sales of the business This measure can be A large market share
as a proportion of total used for firms of all sizes of a very small market
market sales within the same industry, could be misleading
meaning it is useful for when measuring size
decision-making

2 Examples of other measures of business size • There is no best measure. The one that
include the following. should be used depends on what needs to
be established about the businesses being
• The number of guest beds or guest rooms could
compared. This could depend on whether we
be used to compare hotel businesses.
are interested in absolute size or comparative
• The number of shops could be used to size within an industry.
compare retailers.
• Total floor sales space could also be used to 3.2 Significance of small businesses
compare retail businesses. Knowledge recall and Exam skills questions
• The number of units sold could be used to 1 Answers could include the following.
compare businesses in the same industry.
• Small businesses can create employment
3 Answers could include the following: opportunities. This means that this can lead
• There are several different ways of measuring to more members of the population having
business size. They often give different income to spend, which can improve standards
comparative results. A business might appear of living. This should reduce government
large by one measure but quite small by another. expenditure on this area.

• There is no internationally agreed definition of • Small businesses can be very important

a small, medium or large business. However, the suppliers to larger businesses. Without
number of employees is often used to make this their existence, larger businesses may not
distinction. be able to access the components they need

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for their manufacturing, meaning they are hostile when there is strong resistance from the
unable to operate. business being taken over. An example of a merger
is Heinz and Kraft Foods in 2016. An example of
• Small businesses are often run by dynamic
a takeover is Kraft Foods by Cadbury in 2009.
entrepreneurs with new ideas of consumer
goods and services. This can lead to an 2 Speedy Cars could grow through internal growth by
increased reputation for a country and can lead launching a new range of cars, either in the sports
to other businesses wishing to locate there to car market or in a new car market. It could also
benefit from the new ideas being generated. start to develop its own engine building division.
2 Brain tip example: 3 A strategic alliance allows businesses to increase
their business scale by pooling their resources.
• Step 1. Topic: Family businesses.
They may be able to provide goods, services and
• Step 2. Continuity, commitment, capital to each other that complement what they
succession, informality, tradition, conflict, already have to support their growth. By working
knowledge, pride. together to achieve an aim, the businesses may
be able to gain economies of scale, lowering their
• Step 3. Knowledge and continuity.
average costs. A strategic alliance allows each
Responses might include the following business to remain independent and keep its overall
One benefit to Aisha of her decision to operate business ventures separate.
AK Designs as a family business is that it allows 4 Answers could include the following.
for knowledge continuity. This is because Aisha
a Horizontal integration: elimination of the
can pass down her knowledge of dressmaking to
competition, potential for economies of scale,
her daughter Sita. By teaching Sita how to run the
scope to increase power over suppliers to obtain
business, such as how to conduct the accounting
lower prices.
documentation and manage customer needs, Aisha
should feel more confident that these skills will b Backward vertical integration: gaining control
pass down to the next generation of her family to over suppliers, leading to lower costs and better
maintain the legacy of tailoring into the future. delivery times and the control of supplies
This would mean that Aisha can feel proud of her to competitors.
achievements and know that her daughter will have
c Conglomerate diversification: diversifying the
the skills she needs to run a business herself in the
business away from its original industry and
future, which is likely to make Aisha happy.
markets, spreading risk and possibly taking the
business into a faster-growing market.
Recall and connect 1
The type of business organisation structure can affect d Forward vertical integration: control of the
how business size is measured. For example, the measure pricing and promotion of its own products,
of market capitalisation can only be used to measure the providing an outlet for the products of the
size of a private limited company. Additionally, it may business, meaning it can keep all profits from
be challenging to gain sales data for small businesses the sale of these rather than the product being
such as sole traders and partnerships, making market sold through a third party.
share calculations challenging.
Recall and connect 2
3.3 Business growth A joint venture is when two or more businesses work
closely together on a project. It is not the same as a
Knowledge recall and Exam skills questions merger as the businesses only work together and are
1 A merger is an agreement by owners and managers not joining together their ownership. Joint ventures
of two businesses to combine to create a new allow the costs and risks of a new business venture
business. A takeover is when one business buys to be shared, which is a major consideration when
more than 50% of shares in another business and the cost of developing new products is rising rapidly.
takes ownership of them. This is sometimes called

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4 Business objectives Recall and connect 1

An intrapreneur is a business employee who takes
direct responsibility for turning an idea into a profitable
4.1 The importance of new product or business venture. An entrepreneur is an
business objectives individual who has the idea for a new business, starts it
up and carries most of the risks but benefits from
Knowledge recall and Exam skills questions the rewards.
1 Profit maximisation is producing the greatest
amount of profit. Profit satisficing means achieving Recall and connect 2
just enough profit to keep the owners satisfied.
The dynamic business environment refers to the
2 Businesses that are not social enterprises are more fact it is constantly changing. This could be due to
likely to have economic/financial objectives. Social new competitors, legal changes, economic changes
enterprises are likely to have three objectives: or technological changes, for example. As a result,
economic/financial, social and environmental. businesses may be forced to change their objectives.
For example, a firm in the technology market may find
• Economic (financial): to make a profit to
a new competitor offers more up-to-date technology
re-invest back into the business and provide
to the market, and if this threatens the firm’s position
some financial return to the owners.
it may need to change its objective from increasing
• Social: to provide jobs or support for local, market share to survival.
often disadvantaged, communities.
• Environmental: to protect the environment and 4.2 Objectives and business decisions
to manage the business in an environmentally
sustainable way. Knowledge recall and Exam skills questions
These aims are often referred to as the triple bottom 1 The seven stages are as follows.
line. This means that profit is not the sole objective • Set objectives to provide focus for
of these enterprises. strategic decisions.
3 a Answer provided in the main chapter. • Assess and clarify the problem that requires
b Answer provided in the main chapter. strategic action.
c It has met the objective. • Gather data about the problem and identify
possible strategic solutions.
d One reason why MC might change its
objectives is because it has met them. For • Analyse the likely impacts of all decision
example, Jack may have had an objective to options on the chance of achieving
survive during his first year of running the business objectives.
restaurant, which he has achieved so he needs • Make the strategic decision.
to set new objectives to aim for to keep him • Plan and implement the decision.
focused and challenged such as how to survive • Review its success against the original business
if a new competitor restaurant opened up in objectives. Has the business, through its
City A. decisions, achieved its objectives?
e When it faces a threat. 2 Students’ own answers. Some points to consider
f When a business faces a threat, such as an include the following.
economic downturn, it may need to change its
• Profit can be used to satisfy stakeholders.
objective to survival. This is because customers
Shareholders may receive higher dividends,
may stop buying goods, such as luxuries like
workers may get better pay and conditions and
fish and chips and meals out, as they cannot
customers may get better quality products.
afford them, so MC may need to focus on
just getting through the economic downturn, • Profit can provide finance for further growth,
so Jack will continue to have a business in which can lead to increased market share and
the future. even further profits in the long term.
4 Students’ own answers.

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 Answers

• However, a profit motive can mean the firm c Employees. Their role is to provide manual
does not focus on the needs of its stakeholders; and other labour services to the business, in
workers may be left on low pay, customers accordance with the employment contract,
may receive poor-quality items and the local to allow goods and services to be provided
community may face a lot of pollution as these all to customers. They have the right to be
keep costs lower, leading to higher profit levels. offered employment contracts that meet legal
• Being ethical can attract a new group of standards, for example, minimum wage rate,
consumers who care about ethical business and they have the responsibility to meet the
practices, which can lead to higher revenues. conditions and requirements of the
employment contract.
• Well-qualified and motivated workers may
be attracted to work for firms that have an d Local community. Their role is to provide the
ethical motive. labour services required by the business. They
• However, operating ethically usually adds to have the right to be consulted about major
a business’s costs due to having to pay fair changes by the business that affect them,
wages and promote the fact it is acting ethically. for example, expansion plans or changing
In addition, sourcing from ethical and methods of production and the responsibility
fair-trade suppliers usually comes at a premium. to cooperate with the business, where reasonable
to do so, on expansion and other plans.
Recall and connect 3 e Government. Their role is to provide law and
Businesses in the public sector usually operate for the order and economic stability to allow business
benefit of the country. They often have the objective to activity to take place. They have the right to
provide goods and services to the public and improve expect the business to meet all legal constraints,
the economy of the country. such as producing only legal goods and paying
Businesses in the private sector often have a profit taxes on time, and the responsibility to prevent
motive for their owners as their main objective. Private unfair competition that could damage chances
sector organisations are likely to want to keep costs low of business survival.
to maximise profits, so their interests are likely to be f Owners/shareholders. Their role is to provide/
focused on themselves and not society. manage finance. They have the right to receive
a share of profits and to receive accurate reports
on business performance and the responsibility
5 Stakeholders in a business to set targets for managers, which they need
to do by giving managers adequate time and
5.1 Business stakeholders resources to meet the targets.
Knowledge recall and Exam skills questions 2 I nternal stakeholders are individuals or groups
who work within the business, or own it, and are
1 a Customers. Their role is to purchase goods and
affected by the operations of the business, for
services. They have the right to receive goods
example the cabin crew on the planes. External
and services that meet local laws regarding
stakeholders are individuals or groups who are
health and safety, design and performance, and
separate from the business but are affected by or
they have the responsibility to pay for goods
interested in its operations, such as the suppliers
bought or services received when requested.
of the airline meals and drinks.
b Suppliers. Their role is to supply goods and
3 a Skills are identified using the following colours:
services to allow the business to offer its
products to its own customers. They have the AO1 Knowledge and understanding
right to be paid on time, as stated in the service
AO2 Application
agreement between the business and suppliers,
and they have the responsibility to supply goods AO3 Analysis
and services ordered by the business in the AO4 Evaluation
time and condition laid down by the purchase
contract or supplier’s service agreements.

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One stakeholder that will be affected by the decision Recall and connect 1
by QuickFly Airlines to cut 20 of its travel routes is A shareholder is someone who owns shares in a
its employees as they might lose their jobs. This is business (usually a public or private limited company).
because if there are fewer flights taking place, then A stakeholder is an individual (or group) with an
there is going to be less need for employees such as interest in any action taken by an organisation.
cabin crew or baggage handlers. As a result, some A shareholder is a stakeholder, but a stakeholder
employees might find they have had their work hours is not always a shareholder.
cut, which could lead to a lower level of income. This
is likely to mean that these workers will have a lower
standard of living as they will not be able to afford to 5.2 Importance and influence of
buy all the things that they want to buy. stakeholders on business activities
Another impact on the employees is that they may be Knowledge recall and Exam skills questions
placed on different flight routes to those they are used 1 Accountability means ‘to have responsibility for/be
to working on. As QuickFly Airlines are removing 20 of responsible to’.
its travel routes over the next year, the cabin crew and
pilots may be moved to flights to different destinations. 2 a Businesses need to satisfy customer needs and
This may be a benefit to these employees as they will demands. They also need to make sure goods
get to experience new places, as well as having a new and services are of high quality, perform as
challenge in their day-to-day working lives dealing intended and are a reasonable price. Firms also
with customers from different countries and cultures, need to make sure they do not break any
which could be motivational. laws relating to consumer protection and
accurate advertising.
The greatest impact on employees is that they may lose
their jobs entirely. This is because if there are fewer b Suppliers should be given prompt and accurate
flights taking place, and if QuickFly Airlines continues with payments. They should also get regular
its cost-cutting measures, cabin crew and pilots might orders and the offer of long-term contracts.
find that they lose their jobs altogether. This is a bigger If there are any changes to terms, conditions
impact than being moved to work on different travel or frequency of orders, suppliers should be
routes as if the employees are moved to work on flights communicated with, so they are aware of
to different destinations, at least they will still have a changes in advance.
job and some income. However, this may depend on the c Firms should make sure they act in a legal
actions of the firm as it may decide to move employees manner towards their employees, as well
like cabin crew and pilots over from the cut routes to as providing them with a safe working
other routes that are doing well, allowing employees to environment. They should also provide them
keep working and earning an income. There may not with training opportunities and pay rates
be this option, as all travel routes not being cut may above minimum wage and involve employees
already be fully staffed, meaning that QuickFly have no in decision-making.
option other than to make a large number of employees
redundant. This means it is more likely that employees d Business decisions that focus on the aims of
will lose their jobs than keep them. the local community include offering secure
employment so that there is less local fear of
b Other stakeholders could include: job losses, using local suppliers where possible
• owners: saving on costs should stabilise to generate more income, reducing the transport
the business, possibly leading to gaining impact of the business and keeping other
a return on investment adverse environmental effects to a minimum.
• suppliers: a reduction in travel routes e All businesses should meet their legal
would mean less supplies of items such as responsibilities as defined by government
in-flight meals are needed so suppliers gain legislation, pay taxes on time, complete
less revenue government statistical and other forms
• government: job losses could lead to accurately and, where possible, seek
the government having to support those export markets.
without a job.

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3 Stakeholders What is the potential How might this be

conflict? reduced or resolved?
A large public limited Employees and owners The owners may want to Owners could decide
company has decided to reward senior managers to increase all workers’
award a pay increase to because this may wages slightly, so that
senior managers, but not improve their efficiency everyone feels valued.
to any other employees or ability to do their
in the company. job, which should lead
to more profitability for
the firm. It is likely the
owners will benefit
from this.
Employees may be
disappointed that only
senior managers are
getting a pay increase
and they are not,
which could affect
their productivity.
A car manufacturer has Local community Local community may Depending on how the
decided to increase the and suppliers not be happy if the factory capacity will need
capacity of its factory. increased capacity to be increased, the firm
means the factory may need to consider
getting larger, creating ways to limit the noise
more pollution or and impact on the local
leading to more community. It may offer
deliveries of supplies. to spend money on
Suppliers may be happy improving roads around
as they will receive more the factory to allow
orders, leading to for more deliveries
higher revenues. without affecting the
local community.
A small fruit farm has Customers and owners Owners may have made It may not be financially
decided to stop selling the decision as the cost viable for the farm to do
some of its least to continue with the anything here – it is not
popular products. least popular products going to continue to sell
could be too high, something customers
affecting their profits. don’t want. It may want
Customers will be to try and convince the
unhappy because they unhappy customers to
cannot get the items buy some alternative
they want. fruits that are still for sale
by the farm.

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4 Responses might include the following. On one 5 Responses might include the following.
hand, the customers of CEK Furniture are likely to
Reasons for considering stakeholders are as follows.
be impacted by the decision to take over Pawfection
in a positive way. This is because the takeover could • Businesses have responsibilities towards
lead to exciting new products being created using their customers, suppliers, employees and
the expertise of both companies, for example, pet local community.
furniture. This means that the customers would • If a stakeholder group is unhappy, it can be
have a greater variety of items to choose from, detrimental for the business.
which should help them meet their individual needs.
• A decision to increase the price of
However, the customers of Pawfection may not be
a product could make customers go
as happy as they may find there is some disruption
to a competitor.
to the goods on offer from Pawfection as CEK may
decide to make some changes to the products on • A reduction in available working hours
offer, especially if it tries to integrate both firms could reduce worker motivation.
into one. This could mean that these customers • Closure of branches may lead to less
are likely to be impacted by the decision by CEK revenue for suppliers, and they may
to take over perfection in a negative way. not survive.
Depending on which suppliers CEK chooses to Reasons for not considering stakeholders are
keep after the takeover, some suppliers may find as follows.
that their services are no longer required. For • If the business is a monopoly, there is
example, if Pawfection used a small supplier for no incentive to consider the needs of the
its pet accessories and CEK has access to its own customers other than to keep providing them
larger supplier that could also provide it with pet with the good/service.
accessories, then the smaller supplier is likely to • Job losses due to workers being replaced by
be impacted the most as it is likely to lose orders. machinery can lead to higher profits, which
However, if CEK does not change the suppliers will keep the owners happy (consideration of
for either firm as part of this takeover, keeping the which stakeholders’ objectives might be the
two businesses running as separate entities, then the most important).
suppliers may not be impacted by this takeover by
CEK, at least in the short term. Recall and connect 2
Overall, I think the stakeholders are likely to Conglomerate integration (integration with a business
be affected the decision by CEK to take over in a different industry).
Pawfection in a very positive way. By growing
through conglomerate integration, customers are
not likely to be affected by a loss of a business but 6 External influences on
are more likely to be positively impacted through
lower prices due to economies of scale gained, business activity
increased product development and innovation due
to the increase size and scale of the firms due to
the shared expertise and resources from within the
6.1 Political and legal influences
furniture and pet accessory markets. The customers’ Knowledge recall and Exam skills questions
experience of the takeover may be impacted if there 1 By breaking up a state monopoly into more than
is a reduction in the offering of CEK Furniture or one private business, this increases competition
Pawfection during the takeover period. However, in the market and also generates significant sums
as long as the two firms continue to operate as for the government which can then be spent
separate entities under the ownership of CEK, on public services. Finally, as a PLC the new
customers are likely to have a positive experience business is able to raise significant funds from
following this takeover as they will still have their issuing shares, releasing capital for investment
needs met, which is their main objective. in the business.

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 Answers

2 Nationalising an industry ensures that ownership Finally, like McDonald’s, a Michelin-starred

remains within the nation’s borders and is not restaurant is labour-intensive and likely to have
transferred to overseas owners. A number of large numbers of employees. Therefore, it is likely
governments have chosen to nationalise either to see significant rises in its costs of producing
power or water generation for this reason. meals; however, unlike McDonald’s, it may not see
The state is normally able to borrow money more any rise in demand from customers as it can be very
cheaply than a private business which can be expensive to eat in a Michelin-starred restaurant, so
invested in the business. it will only ever be affordable to those earning well
above the average wage rate.
3 a
Area of Purpose/example of use 5 Responses might include the following.
legislation
The new law, which makes the wearing of seat belts
Conditions of Covers occupational
compulsory in India, will create both opportunities
work health and safety in
and threats for individual businesses. One threat
the workplace
for a car manufacturer is that the new law will
Location Prevents heavy industry create extra costs during manufacturing because
decisions or firms that might cause they will be forced to provide air bags for each
pollution from operating seat. This will be very expensive as they may need
close to high-density to introduce new machinery. This could be very
housing challenging as the law only applies to cars sold
Wage levels Provides a minimum after the introduction of the law, meaning that the
living standard for car company will not get any revenue for these new
all employees cars until people decide they want to buy a new car,
Competition Prohibits anti-competitive because their current car is not covered by this new
agreements between law. This could mean the car manufacturer makes
businesses and the abuse a loss until they can recover the cost of introducing
of a dominant position the new machinery to include air bags into their car
in a market manufacturing process.
Marketing Makes it an offence An opportunity created by this change in the law
behaviour for businesses or could be the possibility that the car manufacturer
salespeople to sell a may sell more new cars. If people are looking to
product or service based buy a new car, they now need to buy one with air
on misinformation bags fitted at every seat. This is a great opportunity
for the car manufacturers to develop a new
marketing campaign to encourage people to buy
b Students’ own answers.
a new car from them, as the law applies to any car
4 Responses might include the following. now being sold. They could let people know that
On one hand, many businesses will see their costs their cars are fully compliant with the law, so if they
rise following a rise in average wages. This is buy them, the customer will not be fined 1000r. This
especially true of those businesses that are labour could see a large increase in people wanting to buy
intensive and/or have large numbers of employees, a car that is compliant with the law, thus increasing
for example, McDonald’s. However, a rise in revenues for the car manufacturer.
incomes across the country is also likely to increase
demand for McDonald’s burgers. Recall and connect 1
HSBC is likely to see some costs rise if their When a business is privatised, it is able to raise
workers are getting paid more. However, it depends significant funds for investment through the stock
on how their workers are impacted. If the average market. These investors will bring about a change in the
wage increase in the country is mainly due to an primary purpose of the business from the provision of
increase in the wages of low skilled workers it is a service (in the public sector) to profit maximisation.
unlikely to impact on HSBC’s costs as bankers
are usually already on a good wage.

13
 Answers

6.2 Social and demographic influences Benefits to the Costs to the business
Knowledge recall and Exam skills questions business
1 Improves the It is questionable
Opportunity Threat public image of whether consumers
Ageing Businesses A decline in the business. are really interested
population can sell working-age in CSR or just want
products people can cheap products.
aimed at this cause labour
demographic. shortages. 3 This policy is likely to motivate workers as they
Increase Businesses Lower total feel like they are given the responsibility to make
in workers willing to offer incomes decisions about their working day. This means that,
wishing to flexibility of reduce the for example, the hotel room cleaners and reception
work part-time hours have demand for staff are likely to be motivated as they have some
increased products in freedom to work hours that suit them and their
hiring the economy. lives better.
opportunities.
Growing Firms can Additional 6.3 Technological influences
awareness target socially costs are on business activities
of corporate concerned imposed on
Knowledge recall and Exam skills questions
social consumers businesses in
responbility with products completing 1
Business that have Businesses that have
(CSR) aimed at this the required benefitted been harmed
demographic. audits.
Some businesses, Some products have
Greater An increase in Staff shortages such as Lyft and Uber, been completely
number of skill levels in may arise as have grown almost removed from the
young people the workforce a more skilled entirely thanks to marketplace, e.g.,
attending should make workforce is Apple technology, BlackBerry, once
university employees unwilling to e.g., GPS location. a market leader.
more work low-
productive. skilled jobs. Opportunities have Rivals’ supply chains
been created for have either had to
2 Students’ own answers. suppliers to make adapt their products
the parts that go into to supply Apple
General benefits and costs include the following. the iPhone and other or disappear.
smartphones, e.g.,
Benefits to the Costs to the business tiny cameras, dense
business batteries, high-quality
Identifies what social Unless independently touch screens, etc.
responsibilities the verified, the social Rivals such as Google GPS location
business needs audit may lack and Android have technology has
to meet so it can credibility. taken inspiration from eliminated some
address them. Apple’s iPhone and businesses that sell
Enables managers Audits can be made improvements products like maps
to set targets expensive and to their devices. and compasses from
for improvement. time-consuming. the marketplace.

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 Answers

6.4 Influence of competitors 4 Many multi-national companies are keen to

develop and publicise a positive image of their
and suppliers business. For this reason, Coca-Cola may employ
Exam skills questions CSR to promote its ethical policies, outlining its
1 The decision to allow Uber to continue operating in commitment to human rights, employee conditions
the city provides a threat to Ubers competitors, who and pay and its impact on the environment. This
are mainly other taxi firms. If Uber are allowed to may lead to more people wanting to work for
still operate, then existing taxi operators may lose Coca-Cola or buy their soft drinks.
market share as customers may decide to use Uber 5 Responses might include the following.
and its app to book taxi journeys. This means that
traditional taxi drivers may look to differentiate Multi-national companies provide much-needed
themselves from Uber by offering a greater sources of capital, often in the form of new
premium service or by using electric vehicles, which technology, skills and knowledge, for example
may be popular with environmentally concerned the bottling technology required to make the soft
consumers, thereby potentially turning a threat drink Coca-Cola. A second advantage comes
into an opportunity and taking the customers away from potential upgrades to communication
from Uber. infrastructure in the area, which can also be used
by local residents. In the case of Coca-Cola setting
2 The suppliers of Uber (the self-employed drivers) up production in a developing country, the firm
are likely to be more motivated knowing that Uber provides increased employment opportunities, while
has been granted a licence to operate for the next the host country will also gain tax revenue from
30 months. This provides the drivers with some profits generated by Coca-Cola’s activities.
form of job security, which is so important given
that they are all self-employed. As a result, they are Domestic consumers many also benefit from multi-
likely to remain with Uber, rather than looking for national companies in the form of reduced prices
alternative employment within the gig-economy. and increased consumer choice. This may be of
particular benefit to the middle class of the host
country. Finally, when multi-national companies
6.5 International influences emerge in a location, this can also encourage other
Knowledge recall and Exam skills questions local businesses to locate to an area, increasing
1 Answers could include: economic activity further.

• Increased access to customers around the On the other hand, there are also disadvantages
world: this could lead to more revenue associated with a multi-national company like
opportunities. Coca-Cola investing in a developing country.

• More competition: customers can buy For example, many multi-nationals have been
instruments from businesses in other countries, accused of exploiting workers in developing
not just those in country A. countries by offering low wages and inferior
working conditions. It is also sometimes
• Increased availability of cheaper workers: argued that any improvements to transport and
the business may be able to produce their communications infrastructure (often built at the
instruments in a country where the labour costs host nation’s expense) are sometimes designed
are lower. to serve only the direct routes required by the
2 • They operate in more than one country. company and not necessarily to provide benefits
to local businesses.
• They are generally large in nature.
Second, many multi-nationals also have particularly
3 Governments in many developing countries will poor records on pollution and the safety of their
be aware that to attract overseas investment they workforce. Other multi-nationals have also been
may have to attract multi-national companies who accused of ignoring the environment in their quest
might want to offer low wages and poor working for profits.
conditions, leaving workers open to exploitation.

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 Answers

In conclusion, however, there is near universal Another reason for the chamber of commerce
agreement as to the positive impact of multi- conducting an environmental audit with public
nationals on growth and development in developing sector businesses is that it may lead to a change
nations. However, there are concerns as regards in law. The chamber of commerce may find that
the impact on sustainability. The overall impact following an environmental audit, laws protecting
ultimately depends on the type of investment as the environment need to be introduced, or if they
well as the ability of the host nation to regulate exist, then they need to be more strictly enforced.
the worst excesses of the multi-national company. This will lead to businesses operating within
relevant legal guidelines that will improve the
Recall and connect 2 environment.
Non-organically.
Recall and connect 3
6.6 Environmental influences on The ‘triple bottom line’ approach measure a business’s
success in three key areas: profit, people and the planet.
business activity The environmental component of the approach identifies
Knowledge recall and Exam skills questions and then analyses the environmental footprint of the
1 a A business might use an audit to report company, including the sustainability of its supply chains.
its environmental credentials and develop
a positive image of itself.
7 External economic influences
b Managers may use the audit to set sustainability
targets for departments for the coming year. on business activity
c Pressure groups might use the audit to influence
consumer behaviour and put pressure on the 7.1 Government support for
business to improve its CSR.
business activity
d Investors–especially ethical investors–might use Knowledge recall questions
the audit to decide whether or not to invest in
the business. 1 Answers could include:

e Employees may feel pride in working in a • Providing information, advice and training
business with strong CSR credentials based schemes for entrepreneurs through government
on the audit. industry departments and local colleges.

2 Responses might include the following. • Financing the building of small workshops,
which are let to entrepreneurs and small
One reason for the chamber of commerce businesses at low rents. This assistance is
conducting an environmental audit with public commonly made available in economically
sector businesses is that it may allow them to deprived areas, such as cities with high
identify where costs can be cut. If the chamber of unemployment.
commerce can identify ways that businesses can
reduce their costs through potential reductions in • Reducing the paperwork and legal formalities
waste, water and energy costs, then they can make needed to set up a new business.
these suggestions to the public sector industries. • Cutting the rate of profits tax (corporation
If the suggestions are taken on, then the businesses tax) for new and small businesses. This allows
can either invest the cost savings in other areas them to retain more profits in the business
of the business or if the businesses are funded by for expansion.
the government, then the cost savings can be felt
by the government. This may allow them to spend
the cost savings in other areas of the economy.

16
 Answers

2 Answers could include: 7.3 Macroeconomic objectives

Advantages of Disadvantages of of governments
subsidies subsidies Knowledge recall questions
• They avoid rising • Government has 1 Economic growth: the annual percentage increase
unemployment to raise taxes or in a country’s total level of output, known as
due to business cut other spending gross domestic product (GDP), which is usually
failure. programmes in order measured by changes in real GDP.
• Avoiding business to provide subsidies.
Low price inflation: the rate at which consumer
failure also keeps • Subsidies act as prices, on average, increase each year.
suppliers in a disincentive to
business. businesses to become Low rate of unemployment of the workforce.
• If a business more efficient. 2 An example of a conflict between macroeconomic
fails, consumers • Consumers buy objectives could be if it is believed that the rate
may switch to subsidised products of inflation is too high, then policies might
buying imported at lower prices, be introduced to reduce spending. This will
products, making so spend less lead to lower demand and result in increased
the balance of on unsubsidised unemployment.
payments worse. products, distorting
the market.
7.4 How economic objectives and
performance impact business activity
Recall and connect 1
Knowledge recall questions
Governments influence business through legislation
such as the Companies Act 2006, as well as 1 Answers could include the following:
regulation relating to employment, minimum a 
DT Designs may experience increased demand
wage and trade policy. for their branding and packaging designs. Their
customers may be experiencing an increase in
7.2 How governments deal demand for their own products/services and
may want to have new packaging/branding
with market failure to stand out from their competitors.
Knowledge recall questions
b 
DT Designs may experience a fall in demand
1 a 
Investments in public transport infrastructure for their branding and packaging designs. Their
and or restrictions/taxes on driving into cities. customers may be experiencing a decrease in
b 
Investments in public transport and road demand for their own products/services so may
infrastructure and or restrictions/taxes on cars, not be willing to spend more on unnecessary
petrol, etc., to make driving more expensive purchases such as new packaging/branding
relative to using public transport. as survival may become more of an objective.

c 
Investments in training and recruiting skilled c 
DT Designs may be able to easily pass on cost
engineers are the long-term solution, while a increases to their customers.
short-term, stop-gap solution could be easing d 
Increased unemployment may mean that
visa restrictions to attract talented workers from DT Designs have a wider pool of potential
overseas. applicants to choose from if they were looking
d 
In the long term, the state-run water and energy to recruit a new designer.
companies could be privatised or broken up 2 There are some opportunities of a recession that
to encourage greater competition within them. some businesses could take advantage of:
In the short term, governments could introduce
legislation to cap prices and/or set minimum • Capital assets, such as factories, may be
targets for customer service. relatively cheap and businesses could invest
in expectation of an economic recovery.

17
 Answers

• Demand for inferior goods (negative income b 

If VAT rises, retail prices of the taxed products
elasticity of demand) could actually increase. increase. This could reduce the demand for
WT’s products. However, the customers are
• The risk of retrenchment and job losses
already paying a high price, so as long as the
may encourage improved relations between
VAT increase is not too much, demand is
employers and employees, leading to increased
unlikely to be affected.
efficiency.
c 
IF WT already have loans, they will not be
• Decisions to close factories and offices could
affected if these were on a fixed rate basis. If
reduce business costs significantly. They
the loans were on a variable rate basis, then the
will then be more able to take advantage
interest payments are likely to increase. If WT
of economic growth when this starts again.
are considering a source of finance for growth,
3 High rates of inflation–such as over 6% a year– they may want to select one that does not have
can have very serious drawbacks for business: an interest incurred or take a loan out sooner
rather than later if they expect interest rates to
• Employees will demand big wage increases
continue to increase.
to maintain the real value of their incomes.
d 
WT is an importer of foreign raw materials
• Consumers may become more price sensitive
and components – the domestic currency cost
and look for bargains, rather than buying from
of these imports will fall. This increases the
big brand names.
competitiveness of WT: they could lower their
• Rapid inflation will often lead to higher rates of prices or maintain the prices and make more
interest. These higher rates could make it very profit per unit.
difficult for highly indebted companies to find
e 
WT is a manufacturer who depend heavily on
the cash to make interest payments.
imported supplies of materials (wood). These
• Cash flow problems may occur for all businesses costs will rise and will reduce competitiveness
as they struggle to finance the higher costs of as they are likely to pass these onto customers
materials and other supplies. through higher prices. However, the impact of
• If inflation is higher in one country than in this on demand is likely to be limited as WT are
other countries, then businesses in that country offering a unique product to the customer that
will lose competitiveness in overseas markets. they are willing to pay more for.

• Businesses that sell goods on credit will be 2 Answers could include the following:
reluctant to offer extended credit periods. • Increasing state provision at colleges for skills
• Repayments by creditors will be with money training. This is likely to lead to a wider pool
that has lost real value. of potential workers for WT, assuming the skills
are relevant to woodworking.
• Consumers may stockpile some items and cut
back on non-essential items of spending. • Low rates of income tax to encourage workers
to set up their own businesses and to encourage
work incentives. This could lead to increased
7.5 Government policies to achieve competition for WT from others who want to
macroeconomic objectives set up their own furniture making businesses.
Knowledge recall and Exam skills questions • Increased spending on infrastructure projects
1 Answers could include the following: including a more reliable internet provision.
This could allow WT to trade online with more
a 
Consumers’ disposable incomes fall, so reliability if this is currently an issue. It could
demand for products falls. This could lead to also allow them to communicate with their
a lower demand for handmade furniture as the suppliers in other countries.
customer cannot afford this luxury, reducing
the revenues of WT. This depends on how much
disposable incomes fall by.

18
 Answers

Recall and connect 2 Recall and connect 1

To protect entrepreneurs against falls in economic Decisions must be focused, as well as specific (success
activity, governments will make use of the fiscal and criteria must be easily identifiable) and time-specific –
monetary policies at their disposal to keep the four main otherwise, how will a business know whether the objective
macroeconomic objectives within their target range, as has been reached or not? Last, objectives must be realistic
well as providing direct support in the form of subsidies because any objective that is unachievable is of little use.
or direct support to individual businesses.
8.2 Strategic management:
8 Business strategy Meaning and purpose
Knowledge recall questions
8.1 Business strategy: 1 Answers could include the following:
Meaning and purpose a 
Strategic analysis involves assessing the
Knowledge recall questions current position of the company in relation
to its market, its competitors and the external
1 In simple terms a business strategy is ‘how we get environment.
from where we are now to where we want to be in
the future’. A successful business will have SMART b 
Strategic choice is taking important long-term
objectives. Its business strategy will be a clear plan decisions that will push the business towards
and set of policies that should help a business to the objectives set.
focus on achieving these aims and objectives. c 
Strategic implementation involves allocating
2 Answers could include the following: sufficient resources to put decisions into effect
and evaluating success.
• Resources available: all business resources
are finite. Limited resources force a business 2 Answers could include the following:
to choose which strategies to proceed with, • An appropriate organisational structure to deal
and which to drop or scale back. with the change.
• Strengths of the business: if a business has • Adequate resources to make the change happen.
proven capabilities in certain areas, it is often
advisable to apply these strengths when • Well-motivated staff who want the change to
developing future strategies. A long-term plan happen successfully.
that takes a business away from a proven area • Leadership style and organisational culture
of operation may require the business to have that allow change to be implemented with
skills and experience that it does not have. wide-ranging support.
• Competitive environmental: competitors’ • Control and review systems to monitor the
actions are a major constraint on business business’s progress towards the desired final
strategy. Innovations by competitors may be objectives.
difficult to copy or better.
3 Decision making involving a new strategy for a
• Objectives: the objectives of the business business needs to consider the likely impact of
also influence strategy. Increasing returns to potential changes in the business environment.
shareholders in the short term might not be If businesses did not have a strategy, they may
achieved by investing in extensive research find it difficult to make decisions as they do not
and development with a payback period many know what they are planning for. Having a strategy
years into the future. Maximising returns to allows a business to have a focus for their short-term
shareholders might not be the central objective and long-term decisions.
of the business if it aims for the triple bottom line
approach to corporate objectives. If a business has Recall and connect 2
a clear social responsibility objective, it will pursue a Strategic decisions: senior managers/directors.
different strategies from those of a business that is
b Tactical decisions: junior managers/supervisors.
focusing solely on shareholder returns.

19
 Answers

8.3 Approaches to developing Academy

business strategy $165 000 3 0.4 5 $66 000
Knowledge recall and Exam skills questions plus
1 SWOT Factors in the competitive $25 000 3 0.6 5 $15 000
environment 5 $81 000
Strength Established reputation No Academy
operating over 30 years, with
an audience of over 200 million $140 000 3 0.4 5 $56 000
people worldwide plus
Threat Competition from other forms $50 000 3 0.6 5 $30 000
of entertainment such as
theatre music productions 5 $86 000
Opportunity A rise in concern for animal 4 a Answers could include the following points:
welfare causes among •
 eference to the data in the decision
R
consumer groups tree: given the cost of the new academy,
Threat A number of the world’s leading the expected income would be $81 000
sports nations invest in its ($165 000 × 0.4) + ($25 000 × 0.6). If they
gymnastic programmes do not build the academy the expected
Weakness Stedding’s Circus’s strategy is outcome is $86 000 ($140 000 × 0.4) +
based on product development ($50 000 × 0.6). Therefore, based on the
and not a marketing approach decision tree analysis the circus should
Strength A rise in revenues of 20% abandon plans for the academy.
since 2015 • The maximum expected for the academy
is greater ($200 000).
2 • Development of their circus acts through
PEST PEST factors
the academy would support their product
Political Government regulations and development strategy. It is also their USP.
laws International trade and
other treaties • Sales are rising, so the circus needs to
continue to develop what they are offering
Economic Employment rate and to the market to support this.
availability of labour
• Could the investment be spent on other
Government spending and ways to improve the business?
national income
• No costs of the academy are provided;
Social Attitude towards concern for these would be needed to make a final
animals and health and safety decision.
Demographic changes b Advantages can include:
Technological Changes in technology
of acrobatic instruments •  ecision trees are a useful visual
D
representation of the options and
Changes in e-commerce/IT outcomes, making them easy to
understand and make decisions from.
3 0.4 Good
$165000 • They force the decision-maker to consider
Academy
all of the options and variables related to
0.6 Poor a decision.
$25000
0.4 Good • Decision trees put the options and variables
$140000
No academy on an easy-to-follow diagram, which allows
for numerical considerations of risk and
0.6 Poor economic returns to be included.
$50000

20
 Answers

•  he approach encourages logical thinking

T to those changes. This means that the changes
and discussion among managers. become an opportunity and not a threat to
Limitations can include: the business’s operations.

•  robabilities of events occurring may be

P b The possession of an effective business plan
based on past data, but circumstances makes it easier to sell the idea to investors and
may change. provides direction to business stakeholders.
This includes being able to prioritise the
• Decision trees aid the decision-making
allocation of resources towards specific
process, but they cannot replace either the
projects/tasks.
consideration of risk or the impact of non-
One disadvantage is the time and resources
numerical, qualitative factors on a decision.
required to complete the plan. Other critics
• The expected values are average returns, of the process have suggested that an over-
assuming that the outcomes occur more obsession with plans makes the business
than once. With any single, one-off too rigid in its decision-making, while other
decision, the average will not, in fact, commentators have suggested that sometimes
be the final result. even the best plans do not end up working
Consideration could be given to the following: as intended. The obvious similarity between
the two is that both business planning and
•  ecision trees allow a quantitative
D
corporate planning involve defining goals
consideration of future risks to be made
and then creating plans to support the
but they do not eliminate those risks.
business. However, each is different, with
• The possibility for the inaccuracy of the business planning describing the ‘what’ of an
data used makes the results of decision- organisation’s goals and corporate planning
tree analysis no more than a useful guide describing ‘how’ each goal can be achieved.
for managers.
• Recommendations (with justification) may 9.2 Corporate culture
be given for other strategic decision making Knowledge recall questions
tools that might be more useful such as
1 • Power culture: This is associated with autocratic
Porter’s Five Forces, Force Field Analysis
leadership. Power is concentrated at the centre of
and the Core Competence Framework.
the organisation. Quick decisions can be made
Recall and connect 3 as so few people are involved in making them.
a Investment decisions will make or break any • Role culture: This is most associated with
business and failure to properly prepare for any bureaucratic organisations. People in an
investment increases the chance that any investment organisation with this culture operate within
will be unsuccessful. the rules and show little creativity. The structure
of the organisation is well defined, and each
b Tertiary sector. individual has clear delegated authority. These
c Public limited company (PLC). individuals have the authority to make decisions
with minimal input from others, meaning they
can be made quickly, but must always be focused
9 Corporate planning on the rules and guidelines of the organisation.
• Task culture: Groups are formed to solve
and implementation particular problems and there will be lines of
communication similar to a matrix structure.
9.1 Corporate planning Such teams often develop a distinctive culture
because they are empowered to take decisions.
Knowledge recall questions
Team members are encouraged to be creative
1 a In a constantly changing business environment, and are allowed to make decisions based on
continual revision of a firm’s corporate plans their specific task.
enables the business to respond appropriately

21
 Answers

• Person culture: There may be some conflict cheapest in the market. A low-cost producer might
between individual goals and those of the whole simply have a high level of profitability.
organisation, but this is the most creative type
A second source of competitive advantage might be
of culture. Decisions are often based on the
through product differentiation, either in product
needs of the individual.
quality, brand recognition or quality of customer
• Entrepreneurial culture: Success is rewarded service. The role of marketing plays a part in this
in an organisation with this culture. However, differentiation, as does organisational culture.
failure is not necessarily criticised as it is
Competitive advantage can also be developed
considered an inevitable consequence of
through strategic alliances, when a business
showing initiative and risk-taking. Decisions
partners with another to gain an advantage over
can be quick and based on limited evidence.
their rivals, through sharing contacts, expertise
9.3 Transformational leadership and research budgets. One clear benefit is that
by sharing resources and research teams, the
Knowledge recall and Exam skills questions businesses can get products to market more quickly.
1 Answers can include:
Some businesses, however, have recognised that
• Transformational leadership increases the competitive advantages based on pricing, cost,
chances of successful change within a business. product or strategic alliances are often short-lived.
Change that is supported by employees and Only a sustainable competitive advantage, through
benefits from their input is likely to lead to organisational culture, can ensure that customers
continued business success. stay with a business in the long run.
• It increases the flexibility and adaptability of Perhaps the most important contribution that a
a business to cope with frequent change. The strong organisational culture makes to a business
business world is becoming more dynamic and is that it tends to lead to higher motivation levels
one change may be followed by the need for among employees, as employees are inspired by
further flexibility in future. an organisational culture that promotes intrinsic
rewards. Theorist Herzberg, for instance, noted that
• It focuses on leading change, not forcing it
while workers are interested in financial rewards,
on employees with an autocratic style. That
they are unlikely to be motivated by these factors
encourages workers to accept change and work
alone. Instead, employee motivation comes from
towards making it a success.
intrinsic rewards such as the opportunity for
2 Responses might include the following. advancement as well as investment in their personal
development. In turn, higher motivation leads to
There are generally considered to be four sources
better customer relations and greater productivity,
of competitive advantage, including cost leadership,
through an increased sense of employee ownership.
differentiation, organisational culture and
strategic alliance. Second, a by-product of the above is that the
development of a strong organisational culture
Cost leadership can be described as when a firm
strengthens employee retention, with the obvious
establishes a competitive advantage by developing
benefits that this brings. It is estimated that
lower production costs than its competitors and
recruitment and training of each new employee
will normally be driven by developing the most
costs in the region of one month’s salary as well
efficient practices available. This might come from
as an obvious slump in performance while the
developing economies of scale, meaning producing
newly recruited employee gets up to speed with
in higher volumes than competing firms or the use
how ‘things are done’ in the business. A strong
of cutting-edge machinery. Firms that establish
organisational culture also attracts a high calibre
a competitive advantage in this way will also
of employees.
rely heavily on highly skilled labour, so another
feature of highly efficient businesses is a significant Finally, a third source of comparative advantage
commitment to recruitment and training of through organisational culture, while perhaps
their workforce. Competitive advantage through considered less important, is through an effective
efficiency should not be confused with being the vision and mission statement. Often described as

22
 Answers

‘how a business does things’, an effective vision 2 Benefits of contingency planning can include:
and mission statement provide direction and focus
• It reassures employees, customers and local
for a business.
residents that concerns for safety are a priority.
In conclusion, therefore, there are a number
• It minimises the negative impact on customers
of sources of competitive advantage; however,
and suppliers in the event of a major disaster.
while those that do not arise directly through
organisational culture (cost, differentiation or • The public relations response is much more
strategic alliances) often turn out to be short-lived, likely to be speedy and appropriate, with senior
those that arise from an effective organisational managers explaining what the company intends
culture are often the most long-lasting. to do, by when and how.
Costs of contingency planning can include:
9.4 Managing and controlling
• It is costly and time-consuming, including the
strategic change need to train employees and have practice runs
Knowledge recall questions of what to do in the event of a fire, IT failure,
an accident involving company vehicles, and
1 The major causes of strategic change can be
so on.
categorised under the four headings of PEST:
political, economic, social and technological. • It needs to be constantly updated as the number
Any strategic change is likely to be opposed by and range of potential disasters can change
some stakeholders and supported by others. over time.
This can be illustrated using a force-field diagram.
• Employee training needs to increase if labour
turnover is high.
Recall and connect 1
A business without long-term goals and objectives will Recall and connect 2
struggle to set company direction, focus efforts and Even the most smoothly run business may end up failing
gain competitive advantage. Given that change is an in situations where there is a crisis or significant change
almost constant factor in any business, any effective in the business environment to which the organisation
strategy should consider processes to be implemented fails to adapt accordingly, making any existing plans no
in managing and controlling that change. longer fit for purpose.

9.5 Contingency planning and

crisis management 10 Human resource
Knowledge recall questions management
1 Contingency planning allows a business to have a
plan for unlikely events, often having a plan in place 10.1 Human resource management:
to minimise the impact of a disaster happening.
For example, if a business is located in an area that
Purpose and role
is prone to flooding, then they can have a plan of Knowledge recall and Exam skills questions
what to do if there is a flood that enters the business 1 • It allows a firm to be competitive.
premises. Crisis management is when you are
unable to plan for an event as it is unexpected and • It means the firm has the right workers it needs
is often a sudden emergency event. For example, to operate.
if a business is located in an area that is not prone • If workers are given the correct skills the firm
to flooding, but they find there is a period of is unlikely to face legal action due to injury.
unexpectedly heavy rain and the business premises
floods, they cannot plan for this, but they will need 2 Students’ own answers.
to manage the situation.

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 Answers

10.2 Workforce planning AO3 Analysis

Knowledge recall and Exam skills questions • Staff may need to be replaced and training
1 • The level of demand in the market for the given; all of this can be expensive.
product/service. • New ideas can be bought in by new
workers.
• Objectives such as growth or introducing
a new product/department. • If staff are not replaced, this can lead to
poor customer service, which can lower
• How many employees leave (labour customer numbers.
turnover rate).
AO4 Evaluation
• If the firm is labour- or capital-intensive.
• Impact of labour turnover might be
number of employees leaving in 1 year
_____________________________ limited if it knows it usually loses this
2 ​​     
    average number of people employed ​​ × 100 number of staff as it can plan for this.
3 • Cost to select and recruit new workers. • Customer service workers are likely
to be easy to replace.
• Training costs for new workers.
• Is 55% labour turnover a high or low
• Reduction in motivation and morale levels figure for this firm?
among remaining employees.
Recall and connect 1
4 • New workers that are bought in to replace those
who leave may bring in new ideas. The two documents are the memorandum of association
and the articles of association. The memorandum of
• Workers who leave may not need to be replaced, association states the name of the company, the address
therefore reducing costs. of the head office through which it can be contacted,
• There is the potential to bring in workers with the maximum share capital for which the company seeks
greater skills. authorisation and the declared aims of the business.
The articles of association cover the internal workings
5 • Motivate workers. and control of the business, the names of directors and
• Offer flexibility in working practices. the procedures to be followed at meetings.

• Improve manager–employee relations.

10.3 Recruiting and selecting employees
• Increase pay rates.
Knowledge recall and Exam skills questions
number of employees leaving in 1 year 1 This is a detailed list of the qualities, skills and
6 a _____________________________
​​     
    average number of people employed ​​ × 100
qualifications that a successful applicant will need
165 to have. This allows a firm to know what sort of
​​ ___
300 ​​ × 100 person it is looking to employ.
= 55%
2 • A curriculum vitae (CV) allows a firm to see
b Answers can include the following. an applicant’s professional and academic
AO1 Knowledge and understanding achievements and work history. These may
contain the contact information for trusted
• Explanation of what labour turnover is. people (called referees) who can be contacted to
provide a comment on an applicant’s character
AO2 Application or how they performed in a previous job role.
• Reference to UB case study. • An application form can be used to gather
• Customer service staff. specific information the firm wants to know
about its potential employees. This makes sure
all applicants are asked the same questions
providing a fair way of making comparisons
between applicants.

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 Answers

• Interviews are used to gather more detailed 10.4 Redundancy and dismissal
information from a candidate, as well as to ask
them questions on any information provided
of employees
in CVs and application forms. These give Knowledge recall and Exam skills questions
the employers the opportunity to assess the 1 Answer could include:
candidates interpersonal and communication
skills. • inability to do their job role, despite being
given sufficient training
3 • Available finance. A firm may have limited • not following health and safety procedures
finance available and not be able to afford
expensive recruitment methods. • breaking the terms and conditions of their
contract of employment
• Type of job role being filled. Roles near the top of • bullying another employee
the organisational hierarchy often require a more
robust selection process due to the risks that may • consistent lateness, absence or negative attitude
occur if they recruit the wrong applicant. at work.
2 Answer could include:
• Number of applicants. If there are a lot of
applicants for a job, a firm may need to use • pregnancy
more than one method to support it in making • being a member of a trade union
a shortlist of applicants. • discrimination.
4 Mark allocation: 3 Responses might include the following:
• AO1 Knowledge and understanding [2] One consequence for TrainWay if it were found
• AO2 Application [3] to have unfairly dismissed a train driver is that
it may lose customers. This is because if the
• AO3 Analysis [4] customers find out that TrainWay does not look
Points that could be included in the answer: after its workers, the customers may decide not to
use TrainWay’s train services. This would mean
Benefits: that TrainWay would lose out on the revenues
• The candidate may bring more knowledge from these train tickets, which would affect its
to the firm. overall profits.

• It is unlikely that the airline would have any Another consequence for TrainWay if it were
current workers who could be ‘promoted’ found to have unfairly dismissed a train driver
to the role of pilot. is that it may find it difficult to attract more
workers in the future. This is because if it gets
• It would give the airline a greater pool of a reputation for unfairly dismissing its workers,
candidates to choose from. people may not want to take a job with it in
Costs: roles such as train driver and ticket inspector.
As a result, TrainWay may struggle to recruit
• External recruitment can be more expensive enough workers in the future so it may find
than internal recruitment. day-to-day operations challenging if it doesn’t
• If there are eligible internal candidates, they have enough train drivers. This could lead to it
may be unhappy about not having to reduce the number of services it offers,
being considered. affecting customer satisfaction.
• An external candidate will not have knowledge
of the internal organisation and culture of
the firm.

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 Answers

Answer assessment:

Skill Tick if done

Shown knowledge of unfair dismissal
Applied your answer to a train service operator
Analysed the impact of being found to have unfairly dismissed an
employee to the firm

10.5 Employee morale and welfare

Knowledge recall and Exam skills questions
1 Answer can include:
• flexible working hours which supports employees in being able to manage areas
of their own life such as childcare
• sabbatical periods to allow a period of paid time away from work where an
employee can undertake other things such as further study for their own development
• encouraging workers to take breaks during the workday to allow them adequate rest time.
2 Answer can include:
• increasing market share as customers feel represented by a diverse workforce and may decide
to purchase from the business as a result
• access to a greater pool of workers when recruiting as people want to work for a firm that
does not discriminate
• greater cultural awareness which can support development into new global markets.

10.6 Training and developing employees

Knowledge recall and Exam skills questions
1 Answer can include:
• health and safety training
• tour of the workplace
• explanation of the organisational structure (note: there must be no mention of aspects
of completing the job task).
2 Answer can include:
• Benefits:
• It is cheaper than off-the-job training.
• It can be tailored to the firm’s own specific needs.
• Costs:
• Another member of staff may need to come away from their own work to train
the new worker, affecting productivity levels. The worker may make mistakes
(possibly in front of a customer), which can be costly and damaging to the
firm’s reputation.

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 Answers

3 Answers could include the points given in the following table.

Training type Arguments for Arguments against

On-the-job • Can be quite cheap in comparison to • Another member of staff might need
off-the job training. to be taken away from their work to
do the training, reducing productivity.
• Can be tailored to the specific job and
how FizzPop would like it performed. • Such training can cause mistakes,
which could cause quality issues
• The worker will be working while being
or increased waste.
trained, so they are being productive.

10.7 Management and workforce relations

Knowledge recall and Exam skills questions
1 Answer could include:
• Go slow
• This involves workers working at the slowest pace they can that will still allow them
to get their jobs completed as per their contracts.
• This would slow down production in a way that does not breach contracts so no legal
action can be taken against the employee.
• Work-to rule
• Workers only complete tasks that are outlined in their contract of employment.
• Any activities that workers may have done before, such as helping in different areas,
will no longer be done, potentially impacting on productivity or customer service.
• Overtime ban
• Workers do not work any hours above their contracted obligations.
• Some firms rely on overtime to meet production targets, so this could lead to lost output.
• Strike action
• Workers withdraw their labour for a period of time.
• All production is stopped, and the business may need to shut down during the strike period.

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 Answers

Recall and connect 2

Answer could include the information given in the following table.

Stakeholder Impact
Current employees • Employees may feel left out if they are not being offered increased training.
• The cost of the training could have impacts on current employees,
e.g., not gaining a pay increase, a reduction in fringe benefits.
Managers • Having to plan all the additional training may lead to an increased workload.
• Well-trained workers should be able to do their job better, resulting in less
supervision from managers.
Shareholders • Costs of additional training may lead to lower profits, so lower dividends.
• If workers are better trained, this should lead to better employee performances,
which could lead to higher profit levels, and therefore increased dividends in the
longer term.
Customers • Better trained employees should lead to the higher quality of goods produced,
or a higher quality of customer service.
• If new workers are given on-the-job training, this could lead to slower service,
potentially with some errors.

11 Motivation Recall and connect 1

Advantages of being a sole trader include:
11.1 What is motivation, and why does it • ease of set-up with no legal formalities
matter? • the owner has complete control and is not
Knowledge recall questions answerable to anybody else
• the owner keeps all profits
1 Well-motivated workers benefit the businesses they
work for in several ways. • the owner can choose times and patterns
of working
• The level of productivity will be high,
• the owner can establish close relationships with
increasing the competitiveness of the business.
staff (if any are employed) and customers
• Workers will be keen to stay with the business,
• the business can be based on the interests
reducing the costs of labour turnover.
or skills of the owner, rather than the owner
• Workers will be more likely to offer useful working as an employee for a larger firm.
suggestions to help the business achieve
its objectives.
11.2 Human needs
• Workers will often work hard to seek
promotion and responsibility.
Knowledge recall questions
Without motivated workers, businesses will find 1 Social connections can be met by providing
they may not have the desired level of productivity, working groups/teams. Workers can feel significant
they may have a high level of labour turnover and to the workplace through recognition of their
business objectives may not be met. performance. Challenges can be provided through
different work tasks and promotion opportunities.
A sense of certainty can be provided through
employment contracts and the provision of
job security.

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 Answers

11.3 Motivation theories

Knowledge recall and Exam skills questions

1
Theorist What are the main features Are any key terms What impact does Are there any
of the theory? related to the this theory have other points
theory? on motivation? to note?
Taylor Focus on finding the most Scientific Can lead to quite Can be seen in
efficient way of performing management repetitive tasks. manufacturing –
a task. Productivity and Piece rate Focus on money mass-production
efficiency are the most being the main techniques.
important factors contributing motivator.
to business profits.
Herzberg Job satisfaction results Hygiene factors Paying workers is ‘If you want people
from five main factors: Motivators not motivational. motivated to do
achievement, recognition Herzberg calls a good job, give
Two-factor theory
for achievement, the work this ‘movement’: them a good job
itself, responsibility and Job enrichment pay makes people to do’, as Herzberg
advancement. These are do their job but puts it.
called motivators. doesn’t make them
Job dissatisfaction results want to do it well.
from five main factors: Teamwork and
company policy and responsibility are
administration, supervision, motivators for
salary, relationships workers. There
with others and working needs to be variety
conditions. He terms these in the work being
hygiene factors. done and chances
for personal
development need
to be given.
Mayo Changes to the working Hawthorne Giving workers Known as the
conditions and pay have experiments some control over human relations
limited effect on productivity: their working school of thought,
consultation with workers lives can be which established
about potential changes motivational. the concept of
is more of a motivator. Pay and working human resource
Establishes that group conditions departments.
working is important themselves are not
for motivation. motivational.

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 Answers

2 a

Self-actualisation

Esteem needs

Social needs

Safety needs

Physical needs

b Level of need How needs may be satisfied at work by

effective HRM
Self-actualisation: fulfilment of potential Challenging work that stretches the individual
will give a sense of achievement; opportunities
to develop and apply new skills will increase
potential.
Esteem needs Recognition for work done well–status,
advancement and responsibility–will gain the
respect of others.
Social/belonging needs Working in teams or groups and ensuring
good communication will make workers feel
involved.
Safety needs A contract of employment with some job
security, a structured organisation that gives
clear lines of authority to reduce uncertainty
and ensuring health and safety conditions are
met will meet workers’ safety needs.
Physical needs Income from employment should be high
enough to meet essential needs.

c Limitations of Maslow’s hierarchy include the following.

• Not everyone has the same needs, as is assumed by the hierarchy.
• In practice it can be very difficult to identify the degree to which each need has been met
and which level a worker is on.
• Money is necessary to satisfy physical needs, yet it might also play a role in satisfying
the other levels of needs. High incomes can increase status and esteem.
• Self-actualisation is never permanently achieved. Jobs must continually offer challenges
and opportunities for fulfilment; otherwise, regression will occur.

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 Answers

3 Students’ own answers. 2 Students’ own answers.

4 Valence The depth of the desire of 3 a S Customers are called shoppers.
an employee for an extrinsic Workers are shop-floor workers,
reward, such as money, or store managers. Suppliers are likely
an intrinsic reward, such to be large grocery producers.
as satisfaction. T Bulk buying (economies of scale),
Expectancy The degree to which people own-brand products: quality
believe that putting effort and affordability.
into work will lead to a given E Affordable groceries: suggests
level of performance. they would do well in an economic
Instrumentality The confidence of employees downturn more than a high-end
that they will actually get supermarket. Quite a competitive
what they desire, even if market. Income levels in economy
it has been promised by would affect them.
the manager. P Groceries: food and drink
for households.
Recall and connect 2
S Quite large: 75 stores. Only in one
current share price × total number of shares issued =
country. 2000 workers. This could
market capitalisation
mean they are very stable, and have
$0.30 × 400 000 = $120 000 access to assets (such as stores) to
use as loan collateral or to be sold
11.4 Motivation methods in practice to raise finance.
Knowledge recall and Exam skills questions b Financial motivators are a useful method of improving
1 a Roles in which workers’ hours can be measured. the motivation of SuperSavers supermarket workers
as they help the shop workers meet their basic needs.
b Where a worker is responsible for the complete
By providing financial motivators such as increased pay
production of a good/service.
for the shop-floor workers or bonuses for the store
c Often managerial roles where the number managers based on meeting grocery sales targets
of hours worked are difficult to measure. from head office, then workers will be more
motivated. This will make them more productive, which
d Used for salespeople, who are awarded a
can be measured through the level of customer
payment based on the number of sales made.
service the 2000 workers give to shoppers when
e Where criteria can be created and met for the purchasing their household groceries, meaning they
bonus to be awarded. will perform better. This is a benefit for a business
f Suitable for roles in which output cannot because it should mean that there are more goods for
be measured (such as managerial roles) but sale. This is a benefit for SS as it operates in a very
contribution to a business’s success can be competitive market and more people may come
calculated – usually through the use to it to buy their groceries rather than competitor
of appraisals and worker targets. supermarkets due to the increased customer service
being provided. This is likely to lead to higher revenues
g Can be used in any situation in which a business for the supermarket.
wants to share profits with its workers – often 4 Job rotation is a scheme that allows employees
these workers will be financially motivated. to switch from one job to another. Job
h Can be tailored to the job role or what the enlargement is an attempt to increase the scope
business has to offer – for example, a bank may of a job by broadening or deepening the tasks
offer reduced-rate mortgages to employees, undertaken. Job enrichment aims to use the
or a clothing shop might offer discounted clothes full capabilities of workers by giving them
to its workers. the opportunity to do more challenging and
fulfilling work.

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5 Training and development can be useful as

a method of motivation for many reasons.
12 Management
• Training and development increase the status
12.1 Management and managers
of workers and give them access to more
challenging, and probably better-paid, jobs Knowledge recall and Exam skills questions
within the business. 1 a • Planning: giving the business a direction
• Developing employees and encouraging them for the future.
to reach their full potential increases the • Organising: the people and other
opportunities for self-actualisation. resources needed.
• Training and development are often important • Directing: leading and motivating people
incentives for employees to stay with a business in the organisation.
as they feel that they are being fully recognised
and appreciated by the company. • Controlling: ensuring that the original
plan is being followed.
6 Teamworking
b • Planning: all managers need to think
• Teams are empowered by being given ahead. Senior management will establish
decision-making authority over their work and overall objectives and these will be
the planning of it. This is a good example translated into tactical objectives for less
of job enrichment. senior managers.
• Workers are likely to be better motivated • Organising resources to meet objectives:
as social and esteem needs are more likely employees need to be recruited carefully
to be met. and encouraged, via delegation,
Empowerment to take some authority and accept
some accountability.
• Workers are given more challenging work and
are recognised for it. • Commanding, directing and motivating
employees: this means guiding, leading
• Higher levels of involvement and commitment
and overseeing employees to ensure that
improve two-way communication and help
business objectives are being met.
reduce labour turnover.
• Coordinating activities: as businesses
Quality circles
grow, there is a greater need to ensure
• Quality circles are an effective method of consistency and coordination between
allowing the participation of all employees. different parts of the business.
• They fit in well with Herzberg’s ideas of • Controlling and measuring performance
workers accepting responsibility and being against targets: it is management’s
offered challenging tasks. responsibility to appraise performance
against targets and to take action if
Recall and connect 3 underperformance occurs.
Businesses can grow externally through a merger or c Interpersonal roles, informational roles and
takeover. A merger is an agreement by owners and decisional roles.
managers of two businesses to bring them together in 2 Students’ own answers.
a new combined business. This is often referred to as
a friendly merger. A takeover is when a company buys
more than 50% of the shares of another company
and becomes its controlling owner. It can be called
an acquisition.

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 Answers

3 Answers can include the following. Recall and connect 2

Advantages Disadvantages Public sector organisations usually have the objective
to provide a service and private sector organisations
• Employees may • If employees often have a profit motive as their objective. Public
feel empowered if are not used to sector organisations are owned and operated by the
they are involved being involved in government and private sector organisations are owned
in the decision- decision-making, and operated by private individuals and organisations.
making process, they may not
improving know what to do.
motivation and
productivity.
• Slower decision- 13 Organisational structure
making (than
• Can lead to autocratic, for 13.1 Organisations need structure
better decision- example) as
making as more people Knowledge recall questions
employees may are involved. 1 An organisational structure is the internal, formal
have a greater framework of a business that shows the way
• Not always
understanding in which management is organised and linked
appropriate
of how things are together, and how authority is passed through
to involve
done on a day- the organisation.
employees in
to-day basis.
decision-making: 2 If a business did not have a clear organisational
• Changes they may not structure it would be impossible to know who
made due to have the skills does which job and who is responsible for decision
democratic or knowledge making.
consultation are required.
3 The main features of an organisational structure
likely to face less
include:
resistance as
the employees • who has overall responsibility for decision-
may feel making
some ownership
• the formal relationships between different
over them.
people and departments

Recall and connect 1 • the position of each individual in the business

and who their line manager is
Horizontal integration, forward vertical
integration, backwards vertical integration and • the way in which accountability and authority
conglomerate integration. may be passed down the organisation
• the number of subordinates reporting to each
12.2 McGregor’s Theory X and Theory Y more senior manager
Knowledge recall questions • formal channels of communication, both
1 • Theory X: statements a, c, d. vertical and horizontal

• Theory Y: statements b, e, f. • the identity of the supervisor or manager

to whom each worker is accountable.

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13.2 Types of organisational structure • There are few levels of hierarchy so fewer
middle managers are needed, reducing business
Knowledge recall and Exam skills questions
costs. This increases the average size of each
1 span of control. This helps to demonstrate
Type of structure Definition
the clear link between the number of levels
Entrepreneurial Suitable for small of hierarchy and spans of control.
structure businesses and
illustrates a narrow 4 Advantages include:
chain of command. • Delayering reduces business costs.
Hierarchical structure An organisational
• It shortens the chain of command and
structure illustrating
should improve communication through the
levels of hierarchy,
organisation.
spans of control and
a chain of command. • It increases spans of control and opportunities
Geographical/product An organisation for delegation.
structures characterised by a • It may increase workforce motivation due to
divisional structure, less remoteness from top management and
rather than a structure greater chance of having more responsible
based on function. work to perform.
Matrix structure An organisational Disadvantages include:
structure showing
relationships as a • There could be one-off costs of making
grid, rather than the managers redundant (e.g., redundancy
traditional structure. payments).
Functional structure A hierarchical • It can be very time consuming to manage
structure showing the process of delayering.
job titles and lines
• Managers who remain have increased
of authority.
workloads, which could lead to overwork
and stress.
2 In a matrix structure team members report to two • Fear that redundancies might be used to cut
managers, rather than just one in a hierarchy-based costs could reduce the sense of security of the
structure. A matrix structure is both vertical and whole workforce (one of Maslow’s needs).
horizontal and has increased connections between
members; hierarchical structures contain just 5 In centralised structures workers are likely
vertical lines of authority/communication. to feel more detached from the organisation.
Those workers who wish to feel part of the overall
3 Advantages include: decision-making process are likely to feel less
• Each worker is delegated more authority motivated.
as there is less direct control from a manager There are fewer opportunities for promotion
who is responsible for many other employees. into decision-making positions. For individual
• Employee empowerment can be an important employees who are motivated by the prospects of
motivational force. promotion/greater involvement in decision-making,
this may lead to lower motivation levels. Other
• A short chain of command results in better
employees may be motivated primarily by financial
communications: there is a clear link between
reward, in which case centralised structures will not
the number of hierarchy levels and the spans
impact on motivation.
of control.

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6 Organisational Type of organisational of senior managers (probably each of the four

structure feature structure directors) and above, with decisions likely to be
made relatively quickly. There are few layers for
Employees are usually Functional messages to travel through, and communication
grouped together barriers are likely to be relatively few.
by their particular
specialism. Recall and connect 1
Focus on particular Organisation
a The objectives of organisational structure are to
market segments. by product or
establish accountability, information flow, authority
geographical area
and distribution of responsibilities. Without
The structure is a Functional a suitable structure, the chances of a business
vertical one and this achieving those objectives are diminished.
often does not allow
for good connections b The type of business structure influences the
between departments. suitability of different organisational structures,
e.g., bureaucratic structures suit a strict hierarchical
Crossover of ideas Matrix organisational structure (by function), while
between people with small business (sole traders and partnerships)
specialist knowledge might be suited to an entrepreneurial structure.
in different areas Organisational structures based on geography and
tends to create product, rather than function, tend to be found in
more successful and large retail businesses.
innovative solutions.
This type of structure Tall 13.3 Delegation and accountability
is likely to have
very long chains of Knowledge recall questions
command. 1 Narrow spans of control mean that decision-
Team members may Matrix making is centralised by nature, with key decisions
have two managers to made by a small range of senior managers. As
report to. the span of control widens, senior managers find
it more difficult to maintain control of an ever-
Communication is Hierarchical
expanding operation and are forced (or find it
often one-way
preferable) to delegate more of the tasks required,
(top-downward).
while maintaining overall control of their division.
Spans of control are Flat
likely to be very wide. 2 Delegation allows ambitious employees to take
a more active part in decision-making, as well as
7 The organisational structure shown in Figure providing them with new skills and experience.
13.1 is an example of an organisational chart by These are all motivators according to Herzberg’s
function, meaning that employees are positioned two-factor theory.
on the diagram based on their job title, their span 3 Response (d). Responses (a)–(c) are all strengths
of control and who they report to. It is a flat, of delegating tasks to junior members of staff.
fairly horizontal structure with just six layers of By contrast, when senior managers delegate tasks
hierarchy: relatively few for an organisation of they are reducing their direct control of the tasks
this size. Spans of control are relatively small, with (while still maintaining some indirect control).
only the regional sales managers, factory manager
and factory supervisors responsible for more 4 Response (b) is the most accurate response as
than three employees (each) and a formal chain it contains two of the key elements: provide
of command, operating downwards. Being a flat clear expectations and establish a two-way
structure suggests a highly centralised organisation, communication process. Both are crucial for
meaning that decisions are made by a small number the process to work effectively.

35
 Answers

Recall and connect 2 of ML this means that a majority of crucial decisions are
a As the business grows, managers may need to made by a team of senior managers with over 20 years of
delegate more tasks to their staff because their span experience in the drinks market [Ap], which should make it
of control and areas of responsibility are growing, easier to achieve consistency in providing a premium brand
increasing the number of tasks each manager is to the market, which is important in making their decision to
responsible for. franchise their operations successful [An].

b Democratic and laissez-faire leadership styles are Another advantage of centralisation might be cost savings
most likely to use delegation and accountability; [K] of being able to buy milk in larger quantities. If the
bureaucratic and authoritarian managers are the milk and other ingredients are purchased centrally from
least likely to do so. suppliers and farmers [Ap] by ML for all their shops and
on behalf of their franchisees [Ap], they will be purchasing
these items in bulk which usually leads to lower unit costs,
13.4 Control, authority and trust which can enable ML to compete against global brands,
Knowledge recall questions possibly through the ability to now offer lower prices [An].
1 Authority is the power to give orders and make
decisions, while responsibility is the outcome of Recall and connect 4
authority. It entails the obligation of the subordinate, As businesses grow through integration, centralised
who has been assigned the duty by their superior. organisational structures will be less effective. This is
because when two firms merge there will need to be a
2 Some managers feel less important when they
merging of the two cultures and management groups
give up control of a task to a subordinate and
and a centralised structure cannot simply be imposed
the individual personality and management style
by one group of directors on another.
of each manager is a factor in this. The culture
of the organisation (whether or not delegation is
encouraged) is also a factor in whether a manager 13.6 Line and staff management
will be enthusiastic or reluctant to pass over control functions
to a subordinate.
Knowledge recall questions
Recall and connect 3 1 A line manager is the person that an employee
directly reports to, while staff managers
Managers who follow Taylor’s approach, as well those
are specialists employed to give advice to
who hold McGregor’s Theory X views, are likely to
senior managers; they do not directly line
maintain a high level of control and authority over
manage employees.
employees. These employees are likely to be the least
motivated in the workplace. Managers giving greater
freedom to employees, including the use of delegation
and trust, are likely to be rewarded with more motivated
14 Business communication
workers. Herzberg’s two-factor theory of motivation
could also be applied here. 14.1 Purposes of communication
Knowledge recall questions
13.5 Centralisation and decentralisation 1
1 Sender (transmitter) of the message
Knowledge recall and Exam skills questions
2 Appropriate language/medium of
1 A geographically decentralised structure is likely communication
to lead to more decisions made by local managers
with greater local experience. 3 Understanding of the message
4 Response/action
2 Responses might include the following.
5 Feedback to sender
One advantage of a centralised management structure
is that quicker decisions can be made [K]. In the case

36
 Answers

2 Communicating with customers: for example, about 6 Response (b) is an obvious weakness of written
new products, variations in existing products, safety communication, while (a), (c) and (d) are all
warnings about products purchased, constant strengths of this form of communication.
feedback as part of customer relationship marketing,
7 Answers should include the advantages and
special offers and other promotions.
disadvantages of the communication method
Communicating with suppliers: for example, about being used for the intended purpose, as well as
details of the next supply order, delivery details, a judgement on the overall suitability of its use.
discount requests and queries about incorrect
Points that could be considered:
products supplied.
a The annual report to shareholders: such a
Communicating with shareholders: for example,
report can only be communicated in written
about the date of the next AGM, the latest dividend
format, generally a formal shareholders’ letter.
payments, the election of new directors and the latest
The letter may also be sent electronically,
reports and accounts.
depending on an individual shareholder’s
preference. This is because the information
Recall and connect 1 transmitted contains significant detail that
• Communicating with customers, for example, about cannot be communicated verbally or visually,
new products or upgrades to existing ones. and sending out the report will allow each
• Communicating with suppliers, for example, about shareholder to study the content in their own
the next supply order, delivery and discounts, etc. time and respond if needed.

• Communicating with shareholders, for example, b A disciplinary meeting with an employee:

about the AGM or recent dividends and the meeting should take place face-to-face
company performance. (verbally), followed by written confirmation
by letter.

14.2 Methods of communication c Interviewing for an internal promotion:

the interview will initially be held face-to-
Knowledge recall questions face (verbally), ideally with any decision also
1 Email; fax; social media channels; visual meeting delivered verbally. This would also be followed
channels, e.g., Zoom, Teams; voice mail; video by written confirmation, to provide evidence
messaging; instant messaging. of the message.
2 a Strength. d An announcement that applies to all staff: this
message is best delivered electronically, using
b Weakness.
work email addresses.
c Weakness.
e Key instructions to a specific member of
d Strength. staff: this message would be best delivered
3 Response (d) is correct. Responses (a)–(c) all verbally, with the use of visual aids.
apply to spoken communication but they are It may well be that body language or tone
strengths rather than weaknesses of this form forms an important part of the message
of communication. delivery.

4 Response (c) is correct. Response (a) is incorrect f A social gathering of close friends within the
(this is not part of spoken communication) and same department: the simplest and probably
(b) and (d) are weaknesses rather than strengths most effective way to communicate an
of spoken communication. informal gathering would be via an informal
social media message, but it might also be
5 Response (a); (b) and (c) do not apply to written communicated verbally/visually (where tone
communication methods, while (d) is incorrect and body language might be employed).
(written communication does provide a
permanent record).

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 Answers

Recall and connect 2 Recall and connect 3

One of the drivers of effective communication, Effective communication between employees at all levels
within any business, comes from setting an open and strengthens relationships and ensures everyone has the
transparent corporate culture that encourages feedback. same understanding. This creates a positive working
environment, as well as improving both employee
14.3 Formal communication channels motivation and productivity.

Knowledge recall questions

14.4 Barriers to effective communication
1 One-way communication is when messages are
sent in one direction, from the sender to the Exam skills questions
receiver, with no feedback expected. Two-way 1 One type of communication that can be used by
communication is communication between two KLY is written communication such as email.
or more people involving the transmission of They could have sent an email to all staff to explain
messages that encourage response and feedback. the error about the pay and conditions that was
initially sent out in the first memo. This may mean
2 a The receiver cannot question the meaning of
that the message may have got to the workers
the message or ask for further explanation.
quicker than a second memo, stopping the rumours
There is no discussion between sender and from spreading.
receiver.
2 Answers might include some of the
The sender is not sure that the message has been following points.
received, understood and acted upon.
• Advice to the director of communications
It is usually associated with authoritarian of the company on how the business could
managers. improve communication processes in future
messages includes ensuring that a written
b It is time-consuming and employees may have
record is provided of important information
to stop work to attend meetings.
transmitted.
It may be inappropriate for some messages that
• Two-way communication should be encouraged
give clear information that cannot be argued
in the business, including the opportunity for
with and requires no discussion, such as a list of
feedback.
telephone extension numbers for all employees
on a noticeboard. • To consider the cost of communication in any
situation, for example, it might be quicker and
c It is nearly always down the organisation,
cheaper to send an email rather than hold
for example from senior managers to the
a meeting.
production employees.
• A consideration of the appropriateness
It is usually used by authoritarian managers
of communication methods for any given
using one-way communication.
situation. It would also be better to use multiple
If there are many intermediaries in the chain, communication methods, when necessary. For
the message might become distorted. example, an initial conversation followed by
Messages take time to be received by the final an email to confirm details would be more
person in the chain. appropriate than the method used by the
company (a mass email was insensitive and
d Different departments may not understand the the wrong way to send the message out, even
culture, ways of working, objectives, problems though it was sent out in error).
or technical language of the others.
• Impact on improving employee–employer
The outlook and objectives of different relations following the recent errors in
departments could conflict, for example, communication that meant that ‘trust in
spending money on an advertising campaign the business was diminished’.
that the finance department feels is unnecessary.

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 Answers

3 Answers might include the following. • Generally, written communication includes

less ambiguity than a spoken message.
• Cultural differences have a variety of impacts
This is particularly important when
on communication within HSBC, some positive
precise instructions are required.
and others negative. For example, positive
impacts include that being a global business
and providing a clear understanding of cultures
Recall and connect 5
and organisational goals, expectations and a Successful entrepreneurs are also likely to be
processes can lead to effective communication effective leaders and communicators because
by anticipating potential challenges or barriers. so much of their success is tied to their own
management of individuals and using their
• Embracing diverse views and perspectives can
charisma and powers of communication to lead
often strengthen an organisation.
employees and attract customers.
• However, some of the negative impacts that
b The most effective management styles for
cultural differences have on communication
communicating a message are likely to be the
include that ignoring cultural differences
democratic style, with bureaucratic and autocratic
can lead to communication problems and
managers the least effective.
the difficulties associated with having to
accommodate different languages: HSBC
operates in 65 different nations.
15 Leadership
• An informed judgement of, for example,
whether cultural differences impact on
communication in HSBC, whether there
15.1 The purpose of leadership and
is a main way this will be impacted or how qualities needed
this affects HSBC overall. Knowledge recall questions
1 Leadership Definition
Recall and connect 4
position
Communication within business becomes more difficult
as a business grows because of the number of people Supervisors Appointed by managers
involved in any decision as well as the number of people to watch over the work of
that need to be included in any communication. As a others; responsible for
company grows spans of control become larger while leading teams and working
additional layers are often added to the organisational towards a preset list
structure. The level of difficulty is likely to increase when of goals.
the growth in the size of the business is derived from the Directors Elected by shareholders,
result of a merger or acquisition because of the different they are responsible
cultures of the two newly merged businesses as well as for delegating tasks,
suspicion/fear from those concerned about losing either recruitment and meeting
their job or having their power eroded. the overall objectives of
the organisation.
14.5 Role of management in Workers’ Elected by the workers as
facilitating communication representatives trade union officials or work
council representatives.
Knowledge recall questions
Managers Individuals responsible
1 • Managers find written communication more for people, resources or
convenient because it can be composed at their decision-making. They have
own choosing, while the recipient can read the authority over workers
letter at their convenience. below them.
• Written communication provides a written
proof of the message which may be required
at a later date (if disputed).

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 Answers

2 A number of personal qualities have been identified 3 Response (b). Knowledge of the business practice
as being common among the most successful or technique, an ability to interact with people and
leaders: conceptual skills are all leadership skills according
to ‘Behavioural’ theory. Relevant experience, while
• the desire to succeed and sufficient self-
desirable, is not necessarily a trait of leadership.
confidence that they will succeed
• the ability to be innovative and think beyond Recall and connect 2
the obvious, and to encourage others to do the
a Successful entrepreneurs/intrapreneurs will often
same
have many of the same traits as successful leaders,
• multi-talented, so that they can understand e.g., risk-taking, leading, inspiring, and so it is little
discussions about a wide range of issues surprise that many great leaders are also successful
affecting their business entrepreneurs: Bill Gates, Mark Zuckerburg,
Elon Musk.
• an incisive mind, to identify the heart of an
issue rather than unnecessary details b The difference between management and leadership
is that while leaders are probably ‘born’ and lead
• being inspirational so others want to follow
by example and through inspiring and challenging
their example and be part of their success
others, managers are often the opposite, looking
• complete honesty, integrity and the highest to stifle the creativity and ambition among
ethical standards subordinates. Also significant is that followers
choose to be led by great leaders, whereas in many
• being a good communicator, so their passion
cases managers are simply recruited to complete
and vision are transmitted to employees
a role (that they are no doubt qualified for), and
• empathy and emotional intelligence, to better it is this that gives them the authority over their
understand their followers. subordinates. That said, many successful managers
are also great leaders and vice versa.
Recall and connect 1
Leadership as the
15.3 Emotional intelligence
factor of production Knowledge recall and Exam skills questions
entrepreneurship/labour
1 Emotional quotient
Their vision ensures Drives organizational 2
the continuity of strategy and planning Competence Explanation
the business through their vision Self- Guiding our decision making
awareness by understanding how we feel
Motivates, about ourselves
Recruits and
inspires and
trains staff Self- Being able to recover quickly
organises staff
that share confidence from stress, being trustworthy,
to turn inputs
their vision
into outputs conscientious and possessing
self control

15.2 Theories of leadership Social Sensing what others are thinking,

awareness taking other views into account
Knowledge recall questions and being able to interact with
1 Charm and the expert knowledge of the leader a wide range of people
in question. Social skills Handling emotions well,
2 Response (a). Creativity, charisma and emotional understanding of different
intelligence are all leadership skills according social situations, using social
to ‘Trait’ theory. Academic intelligence, while skills to persuade, negotiate
desirable, is not necessarily a trait of leadership. and lead

40
 Answers

3 • They would take on projects beyond their Recall and connect 3

capabilities and then lack the confidence to
Managers with low levels of emotional intelligence
meet those targets.
have a demotivating effect on staff for reasons such as
• They would lack the confidence and that they lack the confidence and trust of others, they
trust of others and become stressed become stressed and unapproachable, they fail to take
and unapproachable. the views of others into account when making decisions
• They would fail to take the views of others and they perform poorly in social situations. Managers
into account when making decisions. with high emotional intelligence have the opposite effect;
they will trust employees implicitly, build teams, be
• They would perform poorly in social
responsive to feedback and generally contribute towards
situations, finding it difficult to talk and
a positive working environment.
negotiate with others and lacking the ability
to build a team.
4 Emotional intelligence can be described as the ability
to understand, interpret and respond to the emotions
16 Human resource
of others. Effective managers will use emotions to management strategy
communicate with and relate to their employees effectively
and constructively. According to Goleman, the four
competencies of emotional intelligence are self-awareness, 16.1 Approaches to HRM strategy
self-management, social awareness and social skills. Lydia’s Exam skills questions
start-up internet business employs a number of young
1 One advantage is that they will gain a good brand
staff who lack experience [Ap]. All staff are part-time and
image. If staff are trained, they will gain more
so not necessarily always connected to the organisation,
skills, which means that they might be able to do
making it more important than ever to keep them
their job more effectively. This means that when
motivated to ensure good customer relations [Ap].
working on the website, the employees will make
Self-awareness would help Lydia to recognise emotions less mistakes when listing holiday details, which
as they arise in response to an action or situation. makes Hollidayvillas.web look like a reliable brand
As a result, she would be in a better position to address to book a holiday with.
problems/future complications. For example, greater
2 Answers could include some of the following:
self-awareness may help her recognise that her current
laissez-faire management style is not appropriate given Advantages of flexible working contracts:
that staff are unlikely to have many opportunities to •  ixed labour costs are reduced. Employees can
F
meet as they are working from home [Ap], which can be be required to work at particularly busy times
alienating, and a leader should recognise this and take of the day or week, but not during less busy
action to help develop a team spirit/engage employees [An]. periods.
Improved social skills would also help Lydia convey directions • Flexibility offers firms real competitive
and know what to say in order to inspire and motivate advantages, as they can give good customer
others. An important skill for leaders, communication can service without substantial cost increases.
be a deciding factor in whether the team listens or not. • More workers are available to be called upon
She should be able to handle any disagreements that should there be sickness or other causes of
arise between employees, customers and other parties absenteeism.
[Ap]. In conjunction with the above skills, leaders can use
their emotional intelligence to develop a more effective • The efficiency of employees can be assessed
workplace [An]. before they are offered a full-time contract.

41
 Answers

Disadvantages of flexible working contracts: and experience) reduces the total amount of
time that recruitment managers have to spend
•  here are more employees to manage than
T
on the process.
if they were all full-time. This could lead
to higher training costs as there are more • The use of biometric and optical recognition
employees to train. software can improve security within
the business.
• Effective communication will be difficult.
There are more employees in total, so it may The costs of IT and AI in HRM, however, include
be impossible to hold meetings with all the the following.
workers at any one time and the business • Social contact is reduced, making the HRM’s
will have to rely on good IT communication position more remote.
methods.
• Security measures can also be perceived as
• Motivation levels may be low. Temporary/ overly obtrusive and are unpopular with
part-time workers can feel less involved and some employees.
committed to the business than full-time
workers. Recall and connect 2
• It will be more difficult to establish a teamwork a As businesses grow, they are likely to require greater
culture if workers never meet because of their use of IT and AI within HRM departments. Many
different working hours, or they only attend to small businesses do not have a specialist department
complete their contract. dedicated to HRM and have fewer employees.
The answer should include an evaluation of the points IT and AI packages are generally expensive to
for and against a particular decision. The course purchase, and so any business using them will need
of action to be taken must be clearly expressed and to have a significant number of employees to justify
supported by evaluative comments which weigh up key the initial cost.
arguments. There should be a reasoned judgement and b Specialist human resource departments are an
a supported conclusion. example of a specialisation economy of scale.

Recall and connect 1

a Providing an employee with a full-time permanent 17 The nature of marketing
contact can provide a worker’s security needs,
identified by Maslow as one of the hierarchy
of needs and a source of motivation.
17.1 The role of marketing
Knowledge recall and Exam skills questions
b The recruitment of temporary/contract workers
is likely to reduce the running costs of a business. 1 Departmental objectives (such as marketing
While it will probably pay contract workers a higher objectives) should be linked to the corporate
hourly rate than permanent employees, there will be objectives of the business as there needs to be
fewer additional costs, e.g., training costs, benefits coordination of objectives between all departments
and pension contributions. for objectives to be successful.
2 Finance
16.2 The changing role of IT and • The finance department will use the sales
AI in HRM forecasts of the marketing department to
Knowledge recall questions help construct cash flow forecasts and
operational budgets.
1 Benefits of IT and AI in HRM include
the following. • The finance department will have to ensure
that the necessary capital is available to pay
• The use of IT and AI in HRM can free up for the agreed marketing budget for
time and resources for HRM teams to engage promotional expenditure.
in more strategic decisions. For instance, the
ability to scan hundreds of job applications for
key terms (such as desired personal qualities

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 Answers

Human resources For example, if there is an increase in the

birth rate, this may lead to an increase
• Sales forecasts will be used by human resources
in demand for school places and school
to help prepare a workforce plan. For example,
uniforms in the future.
additional workers will be needed in sales
teams and production to increase sales. • Fashion and taste: if a product becomes
fashionable, customers are more likely
• Human resources must ensure the
to demand it. For example, if a famous
recruitment and selection of qualified and
music artist is seen wearing a particular
experienced workers.
item of clothing, this is likely to lead to
• There must be sufficient workers to produce it becoming fashionable to own and the
and sell the increased number of products demand for the item will increase.
planned by the marketing department.
2 As price goes up, demand is likely to fall; as price
Operations goes down, demand is likely to go up.
• Market research data will play a key role in 3 a Supply is the quantity of a product that firms
new product development. are prepared to supply at a given price in
• The operations department will use sales a specific time period.
forecasts to plan the capacity needed, the b Factors could include:
purchase of the machines that will be used and
the raw material inventories required for the • Costs of production: an increase is a wage
higher output level. rate in an industry could lead to an increase
in labour costs. This would mean the firm
Recall and connect 1 may need to reduce the number of workers
Specific, measurable, achievable, realistic and relevant, they employ as they cannot afford to employ
time-limited. them, leading to a decrease in supply.
• Government taxes imposed on the
17.2 Demand and supply suppliers: such as those faced by firms
Knowledge recall questions who pollute the environment, could lead
to increased costs. This could make it more
1 a Demand is the quantity of a product that expensive for the firm to produce, meaning
consumers are willing and able to buy at a given they are less willing to supply the same
price in a specific time period. amount of goods and services.
b Factors could include the following. • Weather conditions: depending on
• Consumer incomes: determines whether the weather condition this could lead
customers can afford to purchase a to an increase or decrease in supply.
product. For example, if consumer For example, if the weather is sunny and
incomes fall, then the demand for luxury the right temperature, then crops such as
products is likely to decrease. wheat will thrive allowing a good supply to
be grown. However, if the weather is cold
• Prices of substitute goods and
and wet then some crops will not be able
complementary goods: customers may
to grow which affects the firm’s ability to
decide to buy alternative products based
supply their crops.
on the price of others. For example, if the
price of printer ink increases, the demand • Advances in technology: better machinery
for printers is likely to fall as they become can be purchased which can produce at a
too expensive to run. higher rate than humans, eliminating the
need for labour, which lower the cost of
• Population size and structure: a change
production. This means a firm is likely
in population size can affect the number
to be able and willing to supply more to
of potential customers within a market.
the market.

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 Answers

4 Change Does this affect supply Does this cause supply Explain how this change
or demand? or demand to increase might affect a business
or fall?
A decrease in rice Supply Fall Less rice to sell could lead to
grown following a bad less revenue being gained.
harvest
An increase in the Supply Fall Materials to make cars
cost of steel for a becoming more expensive
car manufacturer means firms will make less
profit unless they increase
their prices.
A decrease in customer Demand Fall If customers have less
incomes for a fast-food income, they may not be able
restaurant to afford non-essentials such
as fast food, so the businesses
revenue is likely to fall.
A government subsidy Supply Increase The subsidy should allow the
being awarded to business to reduce its cost,
electric scooter meaning it should be able
manufacturers to lower its prices to increase
the demand and therefore
revenue.
An increase in wage Supply Fall The business may decide
costs for a fruit farm to increase the prices of
the fruit it sells to cover the
cost of the wages, meaning
demand may fall, affecting
revenues negatively.
An increase in Demand Increase There should be an increase
advertising for a in demand for sportswear,
sportswear retailer leading to an increase in
revenue for the business.
An increase in interest Demand Decrease If the luxury shoe shops
rates for a luxury that the producer supplies
shoe producer find they have a decrease
in demand due to increased
payments on borrowing, the
producer may find it receives
fewer orders and therefore
less revenue.

5 Students’ own answers.

44
 Answers

Recall and connect 2 17.4 Consumer marketing and industrial

An internal stakeholder is a group within a business, marketing
such as an employee. An external stakeholder is a group Knowledge recall and Exam skills questions
outside the business, such as a supplier.
1 Answers can include the following.

17.3 Markets • Most industrial products, such as equipment

for power stations, are much more complex
Knowledge recall and Exam skills questions than many consumer products, so specialist
1 A market is where buyers and sellers meet to engage sales employees and support services will be
in exchange. more important with B2B selling.
2 An industrial market is the selling of products • Industrial buyers often have much more
by businesses to other businesses, also known market power and are better informed than
as business-to-business or B2B, whereas a the average consumer. They need to be sold
consumer market involves the selling of products products by well-trained and experienced
by businesses to the final end user, also known sales employees.
as business-to-consumer or B2C. • Industrial buyers will rarely buy on impulse.
3 a Customer (or market) orientation is an They will only purchase after long consideration
outward-looking approach that bases product and detailed analysis of alternative products.
decisions on consumer demand, as established A business selling B2B needs to keep in regular
by market research. contact with industrial customers.
• Traditional mass media advertising and sales
b Benefits can include the following. promotion techniques are not used in most
• The chances of newly developed products industrial markets. Selling can be via trade
failing in the market are reduced. fairs or direct contact with industrial buyers,
• Products based on consumers’ needs often initially via websites.
will have a longer lifespan and be more
profitable than those that are sold using Recall and connect 3
a product-led approach. Factors that can affect the demand for workers include
the following.
4 a Product orientation is an inward-looking
approach that focuses on making products that • The forecast demand for the product: the higher
can be made–or have been made for a long the demand for the product, the more workers
time–and then trying to sell them. needed to produce it.
b Benefits can include the following. • The labour turnover rate: if more people are
leaving the business, then they may need to be
• If a business can produce a product of
replaced by new workers.
such good quality that enough people want
to buy it, it should make a good return on • The level of productivity required: if workers
its research and development spend. are not being as productive as required, they may
• Products developed through this method be replaced by capital machinery that can be
can be innovative and create a change in more productive.
the market or benefit society, leading to • The objectives of the business: if the business
an increased reputation. plans to expand, it may need to increase employee
5 Students’ own answers. numbers to accommodate this.

45
 Answers

17.5 Mass marketing and niche marketing

Knowledge recall and Exam skills questions
1 Students’ own answers.
2 Responses might include the following.
One benefit for ET of niche marketing is that it can allow it to operate in a market with minimal
to no competition. If ET is the only firm providing ecotourism holidays, then it may find it has the
opportunity to sell its holidays for a high price. This means that ET should be able to maintain high
profit margins, which it could then invest in finding more places of natural beauty to sell holidays to,
increasing its product portfolio further.
Another benefit for ET of niche marketing is that it can allow it to survive within the tourist market.
There are many different companies that provide holidays to different parts of the world, so if ET can
do things a little bit differently this should allow it to be able to survive in the market. This is because
if ET started selling the same types of holidays as its large competitors, then it would not be large enough
to be able to compete with them successfully. As a result, by operating within the niche of ecotourism,
ET is setting itself apart from the other businesses, giving it a greater chance of creating a customer base
for itself, which should allow it to generate revenue and therefore survive in the long term.
Overall, ET would benefit from niche marketing because it allows them to operate with minimal
competition. This is because it means it can be the leading business in providing ecotourism so people
will always come to ET when they want to book such a holiday, generating consistent revenues.
However, ET needs to make sure it maintains this niche because if bigger businesses notice this is
a profitable market, they may try to come into the market and take over from ET, which they may
have the funds to do. This would negatively affect ET in the long term as it has no other markets
to fall back on if it loses ecotourism.

17.6 Market segmentation

Knowledge recall and Exam skills questions
1 Market segmentation is important because if businesses can define their target market precisely,
and design and produce goods that are specifically aimed at these groups, this will lead to increased
sales. Also, it enables identification of gaps in the market and groups of consumers that are not
currently being targeted, which might then be successfully exploited.
2 Students’ own answers.
3 AO1 AO2 AO3 AO4
Required? Marks Required? Marks Required? Marks Required? Marks
allocated allocated allocated allocated

3(a) 3 2
3(b) 3 1 3 2
3(c) 3 2 3 2 3 2 3 6

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 Answers

17.7 Customer relationship marketing conditions, status and over-supervision by managers)

that need to be taken into consideration when
Knowledge recall and Exam skills questions motivating workers.
1 Students’ own answers. Costs and benefits of CRM
can include the following.
18 Market research
Costs of CRM Benefits of CRM
• IT systems and • For businesses 18.1 Market research
software are with an existing
needed, and customer Knowledge recall questions
employees need base, CRM has 1 The main purposes of market research include:
to be trained proved to be
• identifying the main features of the market
to respond cost-effective.
to customer Higher sales from • reducing the risk of new product launches
feedback. effective CRM • identifying customer characteristics
nearly always • explaining patterns of sales of existing
• Effective CRM
exceed its cost. products and market trends
campaigns may
require the use • It is a sustainable • predicting future demand changes.
of an external strategy creating 2 Market research supports new product
marketing long-term development by helping to identify consumer
consultancy at customers, unlike needs and tastes, testing the product and product
high cost. ‘special price design, assessing the brand position and impact of
offers’ or similar advertising and monitoring sales to determine the
• CRM needs an
promotions. success of the product during and after launch.
existing customer
base to be • Loyal customers
established first often recommend Recall and connect 1
before investing the business The purpose of business activity is to use resources
in CRM. If this to friends and to meet the needs of customers by providing a product
is not done, the family, providing or service that they demand.
costs will not lead additional
to higher sales. marketing benefit
at no cost.
18.2 Primary research and
• It may be costly secondary research
to respond to • It costs less per
each customer’s customer than Knowledge recall and Exam skills questions
feedback, trying to attract 1 Secondary research data can be useful for
especially if it new customers. many reasons.
contains special
• It can provide information about the
requests or
population, the economy, the market
requirements.
conditions that a business operates in or plans
to operate in and major trends in that market.
Recall and connect 4 • It can help identify the key areas of market
‘Two-Factor’ theory was created by Frederick Herzberg. information that primary research needs to
The main implications of this theory for a business focus on.
include the use of motivators (aspects of a worker’s • It provides evidence that can be used as a
job that can lead to positive job satisfaction, such as baseline against which primary research data
achievement, recognition, meaningful and interesting can be compared.
work, responsibility and advancement at work) and • Large samples are often used, which increases
hygiene factors (aspects of a worker’s job that have the accuracy and reliability.
potential to cause dissatisfaction, such as pay, working

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 Answers

• Many of the sources of secondary data can be Primary data Benefit of its Cost of its
accessed via the internet. collection use use
• If time or finances are very limited, secondary method
research might be the only option.
Test marketing: It is a A small
2 The main sources of secondary data include in a specific more cost- test market
government census data, industry-specific geographical effective way may not be
magazines, market research agency reports, internal area of testing representative
company records and competitor accounts. a product of the whole
3 Primary research data may not be useful because: than a whole market.
market
• the selection of a sufficiently large and
launch.
representative sample greatly influences the
accuracy of data Focus groups: It can People may
discussions encourage give the
• business start-ups may not be able to finance
with potential discussion answers they
detailed primary research
or existing and debate, think the
• newly formed businesses do not yet have consumers, allowing researcher
customers from whom they can gain with the aim for greater wants as they
important data of gaining feedback. do not want
• it can be time-consuming to collect and analyse qualitative data to let them
primary research data. down.
4
Primary data Benefit of its Cost of its 5 Businesses are increasingly using electronic means
collection use use to gather the data needed before deciding on
method their marketing strategies. Questionnaires can be
Questionnaire: It can include The questions sent out, answered and returned via tablets and
postal, in-store, detailed, may not be mobile (cell) phones. Businesses can also access the
online, mobile open written in vast quantity of information that electronic data
(cell) phone questions a way the retrieval methods offer them. This is particularly
to collect respondent true of retailers such as supermarkets that operate
information. understands. loyalty card schemes. By collecting data on
the number and type of goods bought by each
Interview: It allows for It can be a
consumer, retailers can have a complete picture of
face-to-face or follow-up very costly
what each consumer purchases, how often they buy
mobile (cell) questions to and time-
and each consumer’s age, gender and possibly their
phone be used. consuming
income (via the details initially provided to obtain
process
the loyalty card). This allows retailers to target
if many
each consumer with advertisements and special
respondents
offers about the goods they are most interested in.
need to be
This form of targeted marketing is cost-effective.
interviewed.
Money is not wasted on promoting products that
Observation It allows a People consumers are not interested in.
(e.g., in a large business behave
shop to see to see how differently 6 Answers can include any relevant methods of
which displays customers when they primary or secondary research methods.
and promotions respond know they An example paragraph is ‘FWW could use
attract physically. are being questionnaires. It could go into City H and ask the
shoppers) observed, local residents whether they would be interested in
so this a new water park in their city, what facilities they
may return would like, how much they would be willing to pay
incorrect for a family day out and what other attractions they
findings. use on a regular basis. Questionnaires would be

48
 Answers

very useful for FWW as they can enable the gathering of lots of information from the local
community which they could use to help them make decisions. However, they can be very
time-consuming and the results might be misleading beacuse people in City H may say they
want a water park in their city, but they may not actually use it when it is built, meaning the
market research was not useful. This means that FWW could make costly mistakes based on
incorrect information, such as locating their new water park in City H, when City M might
have been the better option.’

18.3 Sampling
Knowledge recall questions
1 Two limitations for a business using sampling when collecting market research data could
be that the sample is too small to be really representative of the market and that the higher
risk of sampling bias means that the results may not be statistically accurate.

Recall and connect 2

Limited liability means that the only liability–or potential loss–a shareholder has, if the company fails,
is the amount invested in the company, not the total wealth of the shareholder.

18.4 Market research data

Knowledge recall and Exam skills questions
1 Last month This month
a The mean 852/20 = 42.6 889/20 = 44.45
b The mode 30 22
c The median 34.5 44
d The range of the data 81 – 21 = 60 71 – 22 = 49

2 Average measure Advantages Disadvantages

The mean • It includes all of the data in • It can be affected by one or two
its calculation. extreme results.
• It is the most well-known average; it is • It is usually not a whole number. If the
widely used and easily understood. mean size of shoes sold by a show
retailer is 6.38, is this useful for making
inventory-holding decisions?
The median • It is less influenced by extreme • The calculation from grouped data
results than the mean. So, it is more is complicated.
appropriate than the mean where there • An even number of results means the
are a few very high or very low results. value is approximated.
The mode • It is easily observed, and no calculation • It does not consider all of the data;
is necessary. therefore, it cannot be used for further
• The result is a whole number and statistical analysis.
easily understood. • There may be more than one modal
result, which could cause confusion.

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3 Students’ own answers. 19.2 Product: Why is this a key part

4 a 51+ age group. of the marketing mix?
b 225 people were sampled; 70 of these preferred Knowledge recall and Exam skills questions
apples (70/225) × 100 = 31.11%. 1 Goods are products which have a physical
c One advantage of using a questionnaire via existence, such as washing machines and
social media is that it can be used to gather chocolate bars. Services are products which have
information from people who interact with the no physical existence but satisfy consumer needs
farm shop’s business, meaning the answers SF in other ways, such as hairdressing, car repairs,
get are likely to be more helpful as they are childminding and banking.
provided by people who already care about 2 Students’ own answers.
the fruit farm, such as families who go there
for a day out to pick their own fruit. 3 Intangible attributes are the subjective opinions
of customers about a product, which cannot be
d The total sample in the 31–50 age category is measured or compared easily, for example how
35 + 20 = 55 people. they personally feel about a brand. Tangible
e One disadvantage of using a sample when attributes are the measurable features of a product,
gathering data is that it might not fully reflect which can be easily compared with other products,
the total market. For example, SF may have for example the colour of a t-shirt.
only asked people on one day who were already Recall and connect 2
making a purchase in the farm shop, so it does
not provide SF with any data on why people The advantages of being a private limited company
were not visiting their farm shop that day and include the following.
will not provide them with the additional data • Shareholders have limited liability.
about its market that they are aiming to achieve
from the research. • The company has a separate legal personality.
• There is continuity in the event of the death
Recall and connect 3 of a shareholder.
sales of the business in time period
__________________________
Market share =    
​​     
total market sales in time period ​​ × 100 • The original owner is still often able to retain control.

= (45 000 / 500 000) × 100 = 9% • The company is able to raise capital from the sale
of shares to family, friends and employees.
• The company has greater status than an
19 The marketing mix – unincorporated business.

Product and price 19.3 Product portfolio analysis

Knowledge recall questions
19.1 The elements of the marketing mix
1 The product life cycle explores the pattern of sales
Knowledge recall questions for a product and can help identify when changes
1 Price, product, promotion place; also known need to be made, for example, an increase in
as the four Ps. promotion or price to try and encourage sales.
It can even help to identify when sales are falling so
Recall and connect 1 the product can be removed from the market before
it starts to make too great of a loss.
Added value is the difference between the cost of
purchasing bought-in inputs (materials) and the 2 The main disadvantage of using the product life
selling price of the finished goods (it is a financial cycle for marketing decisions is that the product life
value). Adding value is how to increase the difference cycle is based on past or current data and cannot
between the cost of bought-in inputs (materials) and always be accurately used to predict the future. Just
the selling price of the finished goods (it is the method because a product’s sales grew over the past few
used to add value). months does not mean that they will continue to

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 Answers

grow until a long period of maturity is reached. Sales could crash very quickly, giving no chance
to use an extension strategy.
3 Stage of the Aspect of the
product life cycle marketing mix
a Product is found in restricted outlets, possibly high-class Introduction Place
outlets if a skimming strategy is adopted.
b New models and accessories may start to be introduced. Maturity Product
c Spend on this area is likely to be reduced and it might Decline Promotion
just be used to inform customers of the low prices for any
remaining stock.
d Any initial use of a penetration strategy will start to be Growth Price
replaced by an increase in prices.

4
Potential answers Correct answer (3) or incorrect Explanation
answer (7)?
a Growth and decline 7 In growth, the firm is likely to make
lots of sales, so cash flow should be
positive. In decline, sales are falling
and not much revenue is coming
in, so cash flow is not likely to be
positive. This is an incorrect answer
as both stages are not going to lead
to cash flow not being positive.
b Maturity and decline 7 Cash flow is likely to be positive in
the maturity stage, as lots of sales
are being made. It will likely be
negative in the decline stage only.
This is an incorrect answer as both
stages are not going to lead to cash
flow not being positive.
c Introduction and maturity 7 Cash flow will likely be negative
in the introduction stage as new
products need a lot of investment to
gain market share. Cash flow is likely
to be positive in the maturity stage
as lots of sales are being made. This
is an incorrect answer as both stages
are not going to lead to cash flow
not being positive.
d Introduction and decline 3 This is correct as both of these
stages of the product life cycle will
most likely see negative cash flows.

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 Answers

5 • Building is supporting question-mark products with additional advertising or further distribution

outlets. The finance for this could be obtained from the established cash cow products.
• Holding is continuing support for star products so that they maintain their good market position.
Work may be needed to freshen the product in the eyes of the consumers so that high sales growth
can be sustained.
• Milking is taking the positive cash flow from established products and investing it in other products
in the portfolio.
• Divesting is identifying the worst-performing dogs and stopping the production and supply of these
products. This strategic decision should not be taken lightly as it will involve other issues, such as the
impact on the workforce and whether the spare capacity freed up by stopping production can be used
profitably on another product.

19.4 Price is a key part of the marketing mix

Knowledge recall questions
1 Answers include the following.
• Costs of production. If the business is to make a profit on the sale of a product, then at least in
the long term the price must cover all of the costs of producing it and of bringing it to the market.
• Competitive conditions in the market. If the business is a monopolist, it is the only seller of
a product. It is likely to have more freedom in price-setting than if it is one of many businesses
selling the same type of product.
• Competitors’ prices. It may be difficult to set a price that is very different from that of the market
leader, unless true product differentiation can be established.
• Business and marketing objectives. If the aim is to become market leader through mass marketing,
this will require a different price level to that set by a business aiming for select niche marketing.
If the marketing objective is to establish a premium-branded product, then this will not be achieved
with very low prices.
• Price elasticity of demand. This measures the responsiveness of demand following a change in price.
• Whether it is a new or an existing product. For a new product, a decision will have to be made
as to whether a skimming strategy or a penetration strategy is to be adopted.
2 Potential answers Correct answer (3) or incorrect Explanation
answer (7)?
A $210 000 7 This is incorrect. This figure is the
contribution multiplied by the
number of units. Fixed costs have
not been deducted.
B $420 000 7 This is incorrect. This figure is the price
multiplied by units sold (which gives
the revenue).
C $160 000 3 This is the correct answer. Contribution
per unit, multiplied by the number of
units, then minus the fixed costs.
D $369 997 7 This is incorrect. This figure is total
revenue, minus fixed costs, minus $3
(one instance of variable costs).

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 Answers

3 Pricing strategy How the pricing Advantage of the Disadvantage of the

strategy works pricing strategy pricing strategy
Cost-based pricing Companies will assess It’s a simple method It often does not take
their costs of producing of pricing. into account
or supplying each unit, competitor prices.
and then add an amount
for profit to the calculated
cost.
Competitive pricing Making pricing decisions It can be flexible to reflect The price may have to
based on the price set by market and competitive vary frequently due to
competitors. conditions. changing market and
competitive conditions.

Charging different groups This uses price elasticity Customers paying higher
of customers different (the responsiveness of prices may object and
Price discrimination prices for the same good demand to price changes) look for alternatives.
or service. to charge different prices
to increase total revenue.
Offering products at This offers flexibility to This can cause
a price that changes respond to changes dissatisfaction among
Dynamic pricing according to the level in demand. customers if they
of demand and the discover they have paid
customer’s ability to pay. different prices.
Penetration pricing Setting a relatively low Low initial prices can Low prices can put
price to achieve a high encourage customers to customers off as they
volume of sales. take a risk when buying question the quality of
a new product. the good.
Market skimming Setting a high price for a High prices can bring in Prices can seem too high
new product when a firm large revenues to help and put off customers.
has a unique or highly cover high research and
differentiated product development costs.
with low price elasticity
of demand.
Psychological pricing Setting a price at a level This can make customers Customers are very aware
which matches customers’ feel they are getting a of this type of pricing
views about a product’s better deal than they are. tactic, so it doesn’t work
perceived value. as well.

Recall and connect 3

Qualitative data is non-numerical data which provide insight into the detailed motivations of consumers
and helps to explain their buying behaviour or opinions. Quantitative data are numerical results from
research that can be statistically analysed.

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20 The marketing mix: Promotion and place

20.1 Promotion methods
Knowledge recall questions
1 a The main objectives of promotion campaigns include:
• increasing sales by raising consumer awareness of a product, which is especially important
for those that are newly launched
• increasing consumer recall of an existing product and its distinctive qualities
• increasing purchases by existing consumers or attracting new consumers to the brand
• demonstrating the superior specification or qualities of a product compared with those
of competitors, often used when the product has been updated or adapted in some way
• creating or reinforcing the brand image or personality of the product. This is becoming increasingly
important in consumer markets where it is often claimed that all products look the same
• correcting misleading reports about the product or the business to reassure the public after
a scare or an accident involving the product
• improving the public image of the business, rather than the product, through corporate advertising
• encouraging retailers to hold inventories of the product and actively promote products to the
final consumer.
b The success of promotion campaigns can be measured against any of the objectives covered
in Question 1(a). For example, if there is a rise in sales following a promotional campaign,
then success is evident.
2 Advertising Example of Explanation of Benefits Limitations
methods use method
Print This includes • It can be directed at • It is expensive
advertising advertising in particular towns or to gain national
newspapers, regions, or consumers coverage.
magazines who read particular • Evidence suggests
and specialist special-interest that it is now much
publications. magazines. less effective with
• It provides a hard younger consumers
copy, which can be than digital
cut out and kept by communications.
Advertising the consumer for
promotion future reference.
Broadcast This is • Adverts have visual • It is expensive to buy
advertising advertising on appeal and can create media time.
TV and radio a brand image • It is expensive to
and in cinemas. through the actors design and produce
used. the adverts.
• National or even
international
coverage is possible.

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Advertising Example of Explanation of Benefits Limitations

methods use method
Outdoor This includes • It is low-cost • The best locations
advertising advertising on compared are the most
billboards and to other media. expensive.
bus shelter • It can be located • It can be damaged
posters. in prime positions or vandalised.
with many potential
consumers passing by.
Price offers These are • Encourages existing • Price reductions will
temporary customers to make a reduce the gross
reductions purchase. profit on each
in price, also • Can attract new item sold.
known as price customers as the • There could be
discounting. product now appears a negative impact
more competitive. on the brand’s
reputation from the
discounted price.
Customer Awarding • Can discourage • The discount cuts the
loyalty customers customers from gross profit on each
schemes who regularly buying from purchase.
purchase from competitors. • There are
a firm through • Loyalty cards give the administration costs
the use of things business information (e.g., informing
such as points. about customers’ consumers of loyalty
Sales
promotion buying preferences. points earned),
and the costs may
outweigh the benefits
from increased
consumer loyalty.
Point-of-sale The use of • Maximum impact on • The best display
displays informative and customer behaviour points are usually
well-positioned as the item is placed offered to the market
displays in where they will be leaders: products
stores. able to purchase it. with high market
• Can be helpful for share.
new products when • New products may
looking to encourage struggle for the best
customers to try the positions in stores
product. unless big discounts
are offered to
retailers.

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Advertising Example of Explanation of Benefits Limitations

methods use method
Direct mail Direct mail is • This is low-cost, and • Many potential
sent out by post. well-defined areas/ consumers now
regions can be prefer digital
targeted. communication.
• It is easy to evaluate • The mailing may be
the success of a viewed as junk mail
campaign by checking and quickly thrown
response rates (e.g., away.
tear-off slips).
Telemarketing This includes • This is lower-cost than • Many consumers
all marketing personal selling. object to cold
activities • It is easy to monitor calling.
conducted over the response/ • It is very easy for
the telephone rejection rate. consumers to reject
(often from a telemarketing
Direct customer message.
promotion call centres),
including
selling, market
researching
and promoting
products.
Personal With this • Sales success rates • Sales employees
selling method, are often high with need to be well
a salesperson skilled direct sales trained. They should
is employed employees. avoid selling to a
to sell to each • It is effective with reluctant consumer
individual expensive and who later regrets the
customer. complex products decision.
that require specialist • This is a high-cost
knowledge. method of promotion
and selling.

3 a i 
Social media marketing is the use of iii Online advertising is the use of pop-up
social media platforms to get a message banners on websites other than your own
to a customer. Twitter and Facebook to advertise to a customer.
advertisements, hashtag campaigns and
iv Smartphone marketing involves sending
influencer marketing are among the most
text messages to a customer, as well
popular methods of social media marketing.
as push notifications from apps that are
ii Email marketing is the use of email to sent to a phone.
connect a business to its customers. There
v Viral marketing’s essence is to create a
are many different ways businesses can
post, video, meme or similar short form
reach out to customers through email
of content that spreads across the web
marketing, including newsletter campaigns,
like a virus. To make a successful viral
purchase confirmation emails, thank-
marketing campaign, businesses promote
you emails and email notifications
the same content across multiple channels
about new products.
such as Twitter, YouTube, blog posts and
newsletters over a short period of time.

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 Answers

vi Search engine optimisation is when a business uses methods to make sure its content appears
within the first few results on a search engine. This is done through the optimisation of specific
keywords and understanding search engine algorithms.
b Benefits of using digital promotion Limitations of using digital promotion
Worldwide coverage. A website allows Time consumption. Unless a digital promotion
businesses to find new markets and trade agency is used (which can be high-cost), tasks
globally, increasing potential market size. such as optimising online advertising campaigns
Relatively low cost. A well-planned and well- and creating marketing content can be
targeted digital promotion campaign can reach time-consuming.
the right customers at a much lower cost than Need for skills and training. Employees must
traditional forms of advertising. have up-to-date knowledge and expertise to
Ease of tracking and measuring results. Web carry out digital promotion with success.
analytics and other techniques of measuring Tools, platforms and trends change rapidly.
response rates make it easy to establish how Employees may need training to keep their skills
effective a promotion campaign has been. at the right level.
Detailed information about how customers use Global competition. Reaching a worldwide
a website or respond to advertising is available, audience is easy but this means competitors can
which helps improve the effectiveness of do so too. Standing out clearly against a large
future campaigns. number of competitors can be difficult and costly.
Personalisation. This is a very important benefit Search engine optimisation is one way of trying
of digital promotion. Each customer can be made to do this.
to feel that only they are being sent a special Complaints and negative feedback. Unhappy
offer. The business’s customer database needs customers can quickly send out negative
to be linked to the website; then whenever messages about a business or its products. Any
someone visits the site, the business can greet negative feedback or criticism of a brand can
them with targeted offers. be visible to the target audience through social
media and review websites. It is essential for
a business to respond quickly and effectively
to such criticism.

Recall and connect 1 if the business is failing, it may be able to make

some changes to its marketing mix to help it regain
a Three reasons businesses might fail include:
its success. For example, it may be able to lower the
• poor record-keeping price for its product in the market to try to be more
• lack of cash competitive and attract more customers or use the
• poor management skills. product life cycle to develop an extension strategy
if one of its products is in decline.
b If a business is failing, this might mean that its
marketing mix was not integrated correctly; for
example, the price may have been too high in
comparison to the perceived value of the product
by the consumer or the message being given out
in the promotional campaigns. On the other hand,

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 Answers

20.2 Place: An important part of the marketing mix

Knowledge recall and Exam skills questions
1 Advantages Disadvantages
a Direct selling • No mark-up or profit margin is taken • There are no retail outlets so consumers
by intermediaries. cannot see and try before they buy.
• The producer has complete control • It may not be convenient for consumers.
over the marketing mix. • No after-sales service is offered
• It is quicker than other channels so may by shops.
lead to fresher food products.
b Single- • Retailers incur the cost of holding • The intermediary takes a profit mark-up,
intermediary inventories. making the product more expensive
channel • Retailers display the products and offer to consumers.
after-sales service. • Producers lose control over the
• Retailers should be in locations that are marketing mix.
convenient to consumers. • The outlet is not exclusive as retailers
sell competitors’ products too.
c Two-intermediary • Wholesalers hold the goods and buy in • Another intermediary takes a profit
channel bulk from producers. mark-up, making the product more
• It reduces producers’ inventory costs. expensive to consumers.
• Wholesalers pay for the costs of • Producers lose further control over the
transport to retailers. marketing mix.
• It slows down the distribution chain.

2 a The term ‘channels of distribution’ refers to an international audience, there is likely to be

the chain of intermediaries a product passes lots of customers in different countries, so this
through from producer to final consumer. also reduces the need to post the magazines
An example would be passing a product from long distances if orders are being placed on
the manufacturer to the retailer and then to their website. If customers can download the
the consumer. magazines digitally and download a copy
to use on their laptops, this will reduce the
b One way that GB Magazines can use the place
overall costs for GB Magazines, allowing
element of the marketing mix is to control
them to increase their profit margins if they
how its customers are able to access what the
sell their digital versions for the same price
business is selling. GB Magazines provides
as a physical magazine.
their products to shops owned by people who
know how to sell magazines so that they can One disadvantage to GB Magazines is that
sell the magazines to customers on their behalf they might find their overall revenues decrease.
and GB Magazines can focus on the printing By using digital distribution, this means that
aspect of their business. This is called physical someone can buy and download a digital
distribution. copy of a magazine and then they might share
it with their friends. This means that these
c Responses might include the following.
customers no longer need to buy their own
One advantage to GB Magazines of using copy of the magazine as they have been given
digital distribution is that it can reduce a copy of the digital download. This therefore
their costs. By having a digital download of reduces the revenue that GB Magazines would
their magazine available to purchase, GB receive compared to if each person bought
Magazines do not have to print copies or pay their own physical version of the magazine.
to physically distribute these to shops. As GB
Magazines produce magazines of interest to

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3 Students’ own answers.

21 Marketing analysis
Recall and connect 2
a The main features of a social enterprise include:
21.1 Elasticity of demand
Knowledge recall and Exam skills questions
• having environmental-based objectives,
such as to protect the environment 1 Evaluate Judge or calculate the
• the desire to make a profit to re-invest back quality, importance,
into the business (as well as some level of amount or value of
return for the owners) something
• social aims such as providing jobs in the Explain Set out purposes
local community. or reasons/make
relationships between
b • Price. A social enterprise needs to have a price
things evident/provide
that allows it to generate the maximum level
why and/or how and
of revenue it can, allowing it to provide more
support with relevant
funds towards its chosen good causes.
evidence
• Product. A social enterprise needs to make sure Advise Write down a
its product is produced in a way that does not suggested course
use unsustainable resources or does damage to of action in a given
the environment. The product/service it sells situation
may aim to ‘do good’ for its customers.
Calculate Work out from given
• Promotion. A social enterprise may decide to facts, figures or
focus more on the social or environmental information
aspects of its business rather than what it is
selling in its promotion so that customers Identify Name/select/
understand this element. recognise
• Place. This is unlikely to differ much between Define Give precise meaning
a social enterprise and a standard business Analyse Examine in detail
organisation. They both will want to make to show meaning,
sure that customers can get hold of what the identify elements
business is selling. A social enterprise may and the relationship
want to lower its costs and carbon footprint between them
by selling via e-commerce, for example.
2 For Questions 2a–c, the formula needed is:
Recall and connect 3
percentage change in quantity demanded
______________________________
a Opening new branches, shops or factories. ​​ 
       
percentage change in price ​​
b Opening new branches or shops would link in with a
20
Deluxe ​​ __
the ‘place’ element of the marketing mix. These 50 ​​ 5 0.4 (inelastic)
33.33
new branches or shops may need to be promoted b Super _____
​​  50 ​​ 5 0.67 (inelastic)
so customers know where they are. The new 80
factories may be opened to develop new products, c King Cone ​​ __
50 ​​ 5 1.6 (elastic).
which links in with the ‘product’ element of the
marketing mix.

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 Answers

3 For Questions 3a–c, the formula needed is: also use demand-based pricing, which is when an
percentage change in quantity demanded
______________________________
organisation sets its price at the highest level it
​​     
    percentage change in promotional spend ​​ believes the consumer is willing and able to pay, and
50 this is where PED theory will be employed.
a Deluxe ​​ __
50 ​​ 5 1 (unitary)
b Marketing directors negotiate their marketing
75
b Super __
​​  50 ​​ 5 1.5 (inelastic) budgets with the other directors and must defend
12.48 their interests, arguing that money allocated to
c King Cone _____
​​  50 ​​ 5 0.25 (inelastic). marketing will bring financial benefits to the
4 Responses might include the following: business in the long run. As such, the promotional
elasticity of demand for each good or service would
• Income elasticity of demand is a measure of be used to strengthen their argument.
the responsiveness of demand for a product
following a change in consumer incomes.
21.2 New product development
• The Deluxe has an income elasticity of 1.5. Knowledge recall and Exam skills questions
This means it is luxury good. As incomes
increase, there is a large percentage increase 1
Generating
demand for this good. new ideas
• The Super has an income elasticity of 0.75.
This means it is a normal good. As incomes Commercialisation Idea screening
rise, demand for this good increases. Product
development
• The King Cone has an income elasticity of process
Concept
-0.2. This means it is an inferior good. As Test marketing
development
incomes increase, the demand for this good
decreases. Product Business
• During periods of economic growth, where testing analysis
incomes for most consumers rise, AIC might
want to focus on increasing promotion and 2 a The nature of the industry; the level of R&D
output of the Deluxe and Super: this should spending by competitors; business expectations;
lead to increased revenues. the risk profile or culture of the business;
government policy towards grants to businesses
• During periods of economic recession, when and universities for R&D.
incomes for most consumers fall, AIC might
want to focus on increasing promotion and b Students’ own answers.
output of the King Cone: this should lead to 3 Developing new products provides a means to
increased revenues. target new markets, increase market share, sell
• Ice-cream cafés can already be seen as a more and increase revenue streams. Meanwhile,
luxury in themselves, so there is no guarantee redesigning existing products enables costs to be
that if incomes rise, demand will increase. cut, margins to be increased, and ultimately more
Additionally, if incomes fall, treats such as profits to be made.
ice-cream may not be seen as a priority for
household spending. Recall and connect 2
• It depends how much incomes change. Goods and services at the beginning of the product
lifecycle require the most spent on marketing, as the
Recall and connect 1 product needs to establish itself in the market and
consumers will need to be informed of the new product’s
a Organisations use a range of different pricing existence and capabilities.
strategies when setting prices: loss leader,
penetration pricing, cost plus, etc. Some businesses

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21.3 Sales forecasting

Knowledge recall and Exam skills questions
1 Year Quarter Sales Four-quarter Eight-quarter Quarterly moving Seasonal Average
revenue moving total moving total average (trend) moving seasonal
(in $m) variation variation
1 36
2 110
2020
3 135 82.00 53.00 55.56
4 45 326 84.38 −39.38 −35.94
1 40 330 656 88.75 −48.75 −50.00
2 125 345 675 93.75 31.25 30.31
2021
3 155 365 710 96.88 58.13 55.56
4 65 385 750 97.50 −32.50 −35.94
1 45 390 775 96.25 −51.25 −50.00
2 125 390 780 95.63 29.38 30.31
2022
3 145 380 770
4 70 385 765

2 Answers can include: • The limitations of sales forecasting methods

mean that the predicted data should not
• The main purpose of sales forecasting is to enable
be the only factor that determines these
a business to make better-informed business
decisions. However, when sales forecasts
decisions and plans for growth. Decisions within
indicate a sharp increase or decline in sales, the
all major functional areas can be improved by
benefits of operating a flexible and adaptable
detailed sales forecasts. For example, assume sales
organisation, which is able to make speedy
forecasts are showing a downturn or downward
decisions, become clear.
trend in sales. The following decisions could be
based on this prediction:
Recall and connect 3
• Marketing: reduce price, increase
a Sales forecasting plays a crucial role in the business
promotional spending, widen and extend
strategy process because the information collected
channels of distribution, new product
will be used as part of the basis for identifying
development, or undertake market
which products or cost centres need to be the
development in countries with more
focus for attention.
positive sales forecasts.
• Operations: reduce the risk of excess b Sales forecasting also plays a role in the budget
capacity by rationalisation, keep inventory allocation process because the information collected
levels low, or aim for flexible operations to will be used as part of the basis for identifying
switch to other products. where resources need to be targeted and when the
strategy might be expected to make a return.
• Finance: seek short-term financing if net
cash flows become negative, reduce cash
outflows where possible, or seek long-term
finance to develop new products.
• Human resources: make plans for
flexible employment contracts, plan for
redundancies or cut back on recruitment
for vacant posts.

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 Answers

22 Marketing strategy Recall and connect 1

Businesses use force-field analysis to weigh up the
strengths and weaknesses of any business idea by
22.1 Planning the marketing strategy analysing the forces driving any decision as well
Knowledge recall questions as the opposing forces to calculate which of the
1 Objectives, resources, research, marketing mix. two forces is stronger.
2 Answers can include the following:
Recall and connect 2
Marketing planning advantages:
a Any marketing plan involves recruitment and
• The marketing plan is an essential part of the training of employees as well as planning how
overall business plan of existing businesses many workers will be needed to execute the
or proposed new start-ups. The plan should plan, and this falls under the remit of the
demonstrate that a market exists for the product; HRM department.
that it would be profitable to exploit this
b Any marketing plan involves allocating funds
market; and that the marketing-mix tactics are
to the project, and this will fall under the remit
appropriate for the market.
of budgeting (the finance department).
• Marketing planning reduces the risk of failure
of strategies that are very different to those the 22.2 Approaches to marketing strategy
business has followed before. By following the
stages of a plan, major potential risks are much Knowledge recall and Exam skills questions
reduced because clear objectives are set, market 1 Consistency, coordination and focus.
research is undertaken, a coordinated strategy
2 Responses might include the following.
is used, and promotion spending is kept within
budget. IT might help BC with its promotion via the
numerous ways in which the internet could be
• Planning marketing activities helps to give
used, especially in this target market: social media,
clear direction to other departments within the
viral marketing, etc. IT might also allow the use
business: finance prepares the cash resources
of specific platforms, such as Facebook, Twitter,
needed, operations ensure sufficient output is
Snapchat, etc. Social media is a relatively cheap
produced and human resources recruits and
method of promotion and can show elements of
trains the workforce needed.
the product in videos, etc. This form of promotion
Marketing planning disadvantages: is particularly good for targeting the younger age
• Marketing plans take up much management time group, who can access it on various devices and
and a small business may not have the skilled would certainly be part of BC’s expansion plans.
management expertise to produce an effective IT could also be used by BC in the price element
and professional plan. of the marketing mix. This could be used through
• Any plan can be affected by events, and, in a fast- dynamic pricing to change prices based on demand,
changing market, a complex and inflexible plan timing, etc. IT would make it easier to adapt prices
could be a disadvantage. When facing changes, and change in a short period of time.
such as the entry of a new competitor, only a IT could also be used in the product element,
flexible marketing plan is likely to be successful. for example, tied into the product, through the offer
• A plan that is not based on adequate research of free vouchers/discounts online.
of the market and customers’ preferences can Finally, for the place element, BC could explore
result in inappropriate marketing strategies being selling its product through the internet and in so
adopted. doing reducing its labour costs, and again, this
could be particularly effective when targeting
young consumers.

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 Answers

3 Responses might include the following: • By sourcing and importing materials and
supplies from low-cost countries, with no
Using social media to explore what chocolates
tariffs or quotas, businesses should be able to
customers are buying, AI can help with using
reduce prices and become more competitive.
trackers to analyse which competitor chocolatier
companies they are searching for and buying • More opportunities to arrange mergers,
from online. They can then use this data to create takeovers and joint ventures with businesses
a consumer profile of someone who might buy in other countries which could make marketing
chocolate in one of the European countries they in other countries easier.
are planning on expanding into.
Negative implications of globalisation:
If BC are planning on significantly increasing their
• Businesses from other countries now have freer
marketing spend, AI can gather data from digital
access to the domestic market. This increases
marketing such as clicks and likes online. Different
competition. Wider consumer choice means
European countries may respond in different ways
that if national businesses are uncompetitive,
to different methods of digital promotion, so BC
sales will fall.
would need to monitor the success rate of what
they use in each country. • Increased competition from multinational
businesses will force national businesses to
AI allows BC to track word usage online from
reduce prices and profits may fall.
different websites located in the European countries
they want to expand into – they could include • Using the same marketing strategy across the
words such as ‘Nestlé’, ‘Hershey’ and ‘Cadbury’ world does not consider the cultural and taste
to see what people are talking about online to differences between consumers of different
find out what is and is not already popular in the nations. Businesses may need to ‘think global
confectionary market. but act local’.
• Activity from anti-globalisation pressure
Recall and connect 3 groups may result in bad publicity for
Any marketing strategy involves allocating funds to multinationals in particular. There is growing
the project and this will fall under the remit of the concern about the cultural and environmental
finance department. impact of globalisation and pressure-group
activity could lead to consumer boycotts and
22.3 Strategies for a fall in demand.
international marketing 2 • Saturated domestic markets
Knowledge recall and Exam skills questions • Profit opportunities from untapped markets
1 Answers could include: • Spreading risks, for example, operating in more
than one nation, allowing BC to benefit from
Positive implications of globalisation: periods of economic boom overseas, as well
• Greater opportunity for selling goods in other as shift production away from Belgium during
countries without tariffs and quotas. The difficult times
national markets may be saturated. Moving
internationally gives the chance of higher sales, Recall and connect 4
economies of scale and improved profitability. Faced with the difficulty of international marketing,
• One global marketing strategy can be used to many businesses decide to form a strategic
create a global brand identity. This saves on alliance and/or joint venture with a local business
the costs of ‘different products for different to take advantage of their local knowledge.
markets’.

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23 The nature of operations

23.1 The production (transformational) process
Knowledge recall questions
1 Enterprise Finished goods
Production
Land (transformational) Services
Inputs Outputs
Capital process: capital or
Components for
labour intensive
Labour other firms

2 • Land. All businesses need somewhere to operate • purchasing technologically advanced

from, even if it is the bedroom of a sole trader equipment: modern machinery, from office
operating an internet-based website design service. computers to robot-controlled production
machines, should allow increased output with
• Labour. All business activity requires some
fewer workers
labour input. The quality of the labour input
will have a significant impact on the operational • more effective management: ineffective
success of a business. management can reduce the overall productivity
of a business.
• Capital. This refers to the tools, machinery,
computers and other equipment that businesses 2 labour productivity
total output in a given time period
use to produce the goods and services they sell. (number of units = _________________________
​​ 
      
total workers employed ​​
Intellectual capital is becoming increasingly per worker)
important too in knowledge-based economies. 10 000
_____
​​  25 ​​
• Enterprise. This refers to the decision-making
skills and risk-taking qualities of entrepreneurs = 400 units
which are essential for new business formation.
3
S Stakeholders Carlos and Dani: owners
Recall and connect 1 Customers: interested in
Three barriers for an entrepreneur include: sustainability and hiking
T Text Sell via their own website
• a lack of a business opportunity
Deliver internationally
• being unable to access sufficient capital Durability of recyclable
• a lack of a customer base. materials?
E External No information given Text
environment mentions large customer
23.2 Efficiency, effectiveness,
base: possible niche
productivity and sustainability market which CD Footwear
Knowledge recall and Exam skills questions specialises in?
1 Four ways a business can increase its P Product/ Footwear for hiking
productivity include: service
• improving the training of employees to raise S Size Possibly quite small
skills levels: employees with higher skill compared to other footwear
levels and more flexible skills should be businesses
more productive
• improving worker motivation: using appropriate
financial and non-financial methods of
motivation should encourage employees to
work more efficiently

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Responses might include the following.

One positive impact on CD Footwear of increasing the sustainability of its operations is that it
might attract more demand from green customers. As hiking and outdoor pursuits are things
you do outside, this suggests that those involved like the environment, so if CD Footwear is
selling hiking boots, for example, that use fewer nonbiodegradable materials, then it may
attract more customers. As a result, this could mean that CD Footwear is able to generate
more revenue, which it could then invest into developing more ways to be sustainable
in the long term.
One negative impact on CD Footwear of increasing the sustainability of its operations is that
it might affect its reputation if the product quality falls. Carlos and Dani are worried that
recyclable materials might not be durable enough to use in their footwear. If a customer buys
some hiking boots and they break when they are out walking, then they will be very unhappy.
As a result, they might tell their hiking friends about CD Footwear’s poor-quality shoes,
which might mean that other customers do not buy their shoes from CD Footwear, which
would be really damaging for the company in the future as it doesn’t have anything else to
sell in the market. This could mean that Carlos and Dani’s business fails in the long term
if it loses enough customers due to its bad reputation.
Overall, I think the impact on CD Footwear is going to be positive. Selling eco-friendly shoes
should please their core customer base, meaning they should be able to continue to make
a revenue from selling shoes. Carlos and Dani are experienced in what they do and, as they
are interested in hiking and outdoor pursuits, they are likely to be knowledgeable about
how durable the shoes need to be. As a result, they will probably do lots of testing of new
recyclable materials that could be used before they sell their new designs, therefore reducing
the risk of this damaging their reputation. However, Carlos and Dani need to make sure that
being sustainable in their operations is financially beneficial because they may find suitable
recyclable materials to use in their shoes, but this could mean their costs increase so much
that if it is passed on through higher prices, then their customers may not buy shoes from
them in the future. Carlos and Dani need to make sure they really control and manage
their move to become more sustainable so that they do not damage their positive place
in the outdoor pursuits market.

23.3 Labour-intensive and capital-intensive operations

Knowledge recall questions
1
Labour-intensive Capital-intensive Benefit Cost

Interesting and varied work 3 3

High fixed costs 3 3
Low machine costs 3 3
Consistent quality 3 3
Economies of scale 3 3
Low output levels 3 3
High maintenance cost 3 3

2 Craft-based industries and those industries where specialist customised items are created.
For example, handmade jewellery, decorative arts, baked goods and woodwork.

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Recall and connect 2

A cooperative is a jointly owned business operated by members for their mutual benefit,
to produce or distribute goods or services, as in consumers’ cooperatives or farmers’ cooperatives.
The features of a cooperative include the following.
• Owners are called ‘members’.
•  embers can contribute to the running of the business, decision-making
M
and managing responsibilities.
• All members have a vote at important meetings.
• Profits are shared equally between the members.

23.4 Operations (production) methods

Knowledge recall and Exam skills questions
1
Job production The production of a one-off item specially designed for the customer
Batch production The production of a limited number of identical products: each item in the batch
passes through one stage of production before passing on to the next stage
Flow production The production of items in a continually moving process
Mass customisation The use of flexible computer-aided technology on production lines to make
products that meet individual customers’ requirements for customised products

2 a Two advantages of job production include the • Unit costs likely to be higher than with
following. flow production.
• It allows for specialist projects or jobs, b Two examples of when using batch production
often with high added value. would be most suitable are both when a
small amount of a standardised product is
• It can lead to high levels of worker
needed, such as a batch of bread rolls or when
motivation.
producing sports kit for a college soccer team.
Two disadvantages of job production include
the following. 4 a Two advantages of flow production include
the following.
• There are often high unit production costs
involved. • There is likely to be low unit cost due
• Production is very time-consuming. to constant working of machines.
b Two examples of when using job production • There is likely to high labour productivity
would be most suitable are both when and economies of scale are likely to
a one-off item is required, such as a made-to- be gained.
measure suit or a wedding cake. Two disadvantages of flow production include
the following.
3 a Two advantages of batch production include
the following. • It is very inflexible: it is often difficult and
time-consuming to switch from one type
• Some economies of scale can be gained of product to another.
(unlike with job production).
• It can be very expensive to set up flow-line
• There should be faster production with machinery.
lower unit costs than with job production.
b Two examples of when using flow production
Two disadvantages of batch production would be most suitable would be when a large
include the following. amount of the same product is needed, such
• High levels of inventory are required at as when producing a soft drink or a model
each production stage. of cell phone.

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 Answers

5 Three factors that may be used to determine the Responses might include the following.
production method chosen by a business include
One factor that Jonathan and Candy will need to
the following.
consider when growing Serenity Scents is whether
• Size of market. If the market is very small, their costs will increase. If they are aiming to grow
job production is likely to be used. Flow organically by producing different fragrances of candles,
production is most efficient when the market then this may increase their costs as they have to buy
for similar or identical products is large and in more fragrances. As a result, they may need to pass
consistent throughout the year. this onto their customers in the form of higher prices,
• The capital available. A purpose-built flow- which could put some customers off buying the candles.
production line is difficult and expensive to This could mean that Jonathan and Candy do not sell
construct. Small firms are unlikely to be able enough candles to cover the costs of running their
to afford this type of investment and are more venture and their business could end up failing.
likely to use job or batch production. Another factor that Jonathan and Candy will need
• Other resources. Large-scale flow production to consider when growing Serenity Scents is related
often requires a supply of relatively unskilled to their available production capacity. Currently, they
workers and a large, flat area of land. Job are operating out of a spare room in their house,
production needs skilled craftspeople. If any which may not be large enough for them to increase
of these resources are unavailable, or limited in their production levels. This means that Jonathan and
supply, then the production method may have Candy may need to find a new premises to operate their
to be adapted to suit the available resources, business from. This is likely to increase their overall
depending on market size. costs. However, if they are able to operate on a larger
scale, then their total costs will be spread over more
6 Operation factor How this links to a units so their average unit cost may actually fall.
marketing factor
I think that the availability of enough production
Costs: will costs increase Prices: SS may need capacity will be the greatest factor affecting Jonathan
with increased number to change its prices to and Candy if they decide to grow. This is because without
of fragrances? cover the increased costs, available capacity to produce more candles, then they are
which could put off unable to grow, so everything else they consider becomes
some customers. irrelevant. They need to decide how much more capacity
Production capacity: Product: SS may not they require to grow their business and should try to
SS is currently making have the space to find a new premises that allows them to do this at an
its product from a produce any new affordable rate. However, if there is still spare capacity
spare room, so does fragrances of candles, while operating from the spare room, this is no longer
it have the capacity so it will not be able an issue. If this is the case, Jonathan and Candy need
to increase its to develop its product to focus more on keeping all costs related to growth low
production levels? for the market. so they can maximise their overall profits.
Access to materials Promotion: if it has
for production: SS said it has specific Recall and connect 3
might not be able fragrances in its Redundancy is when a job is no longer required and the
to gain the materials promotion and it does employee doing this job becomes unnecessary through
for its production; for not have these for sale, no fault of their own. Dismissal means being dismissed
example, its supplier customers may feel or sacked from a job due to incompetence or breach
might run out of they have been misled of discipline.
lavender oil, meaning it and may be unhappy.
cannot make lavender
candles that week.

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24 Inventory management to be given to a supplier to deliver

additional materials.
• Large orders of new supplies reduce
24.1 Managing inventory costs. To keep inventory levels low,
Knowledge recall and Exam skills questions goods and supplies may be ordered
1 • Raw materials and components. These will in small quantities.
have been purchased from outside suppliers. b If a firm does not manage inventory correctly,
They will be held in storage until they are used the following problems may arise.
in the production process. These inventories • There might be insufficient inventories to
can be sent to the production line quickly. meet unforeseen changes in demand.
The business can meet increases in demand • Out-of-date or obsolete inventories might
by increasing the rate of production quickly. be held if an effective rotation system is
• Work in progress. At any one time, the not used, for example, for fresh foods or
production process will be converting raw for fast-changing technological products.
materials and components into finished • Inventory wastage might occur
goods. During this process there will be due to mishandling or incorrect
work in progress and for some businesses, storage conditions.
such as building and construction businesses,
• High inventory levels have high storage
this will be the main form of inventories
costs and a high opportunity cost.
held. The value of work in progress depends
on the length of time needed to complete • Poor management of the supply purchasing
production and on the method of production. function can result in late deliveries, low
Batch production tends to have high work-in- discounts from suppliers or a delivery too
progress levels. large for the warehouse to cope with.
• Finished goods. Having been through the 3 Supply chain management is the handling of the
complete production process, goods may then entire production flow of a product from raw
be held in storage until sold and dispatched materials to finished product. The aim is to minimise
to the customer. These inventories can be costs but improve customer service. Effective supply
displayed to potential customers and increase chain management can reduce the time taken to
the chances of sales. They are also held to convert raw materials into completed products by:
cope with sudden unpredicted increases in • establishing excellent communications with
demand, so that customers can be satisfied supplier companies, which helps to ensure the
without delay. Firms will also stockpile right number of goods of the right quality are
completed goods to meet anticipated increases received exactly when needed
in demand, for example, seasonal goods
• cutting the time taken to deliver all materials
or products such as toys or fireworks at
required for production by improving
festival times.
transport systems
2 a The benefits of holding inventory are
• minimising waste at all production stages to
as follows.
cut costs.
• I t reduces risk of lost sales. If a business 4 a 1 hour 15 minutes.
cannot supply customers from goods
held in storage, then sales could be lost b 40 marks.
to businesses with higher inventory levels. c Short-answer questions.
• It allows for continuous production. d Essay questions.
If inventories of raw materials and e AO1 Knowledge and understanding is 35%;
components run out, then production AO2 Application is 30%; AO3 Analysis is 20%;
will have to stop. and AO4 Evaluation is 15%.
• It avoids the need for special orders f 40% (each section of AS Level Paper 1 is worth
from suppliers. If a business runs out 20% of the total AS Level marks).
of inventory, an urgent order may have

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5 Students’ own answers. The following time • Sandra has a stock room full of items she
allocations are only a suggestion. The timings will cannot sell. These items are getting old and
need to be adapted to the paper and the questions might get damaged. There is also the cost
being answered. to Sandra of not being able to get any new
stock as she will have nowhere to store it.
Question Command Number Time • Risk of wastage and obsolescence: if inventories
word of allocated are not used or sold as rapidly as expected,
marks (in minutes) then there is a danger of goods deteriorating or
Section 1(a) Define 2 2–3 becoming outdated. This will lower the value of
A 1(b) Explain 3 2–4 such inventories. Goods often become damaged
while held in storage or when moved. They can
2(a) Define 2 2–3 then only be sold for a much lower price.
2(b) Explain 3 2–4 • Because Sandra sells fashion items direct
3(a) Define 2 2–3 from catwalk trends, these have a very short
3(b) Explain 3 2–4 trend life. This means that if Sandra does
not sell the item in that fashion season,
4 Analyse 5 8–10 it becomes outdated, and no-one will want
Section (a) Analyse 8 10–15 to buy items not in fashion from Sandra.
B (b) Evaluate 12 20–25
Recall and connect 1
Remaining time for
checking answers, The role of intrapreneurship is to allow people to take
planning, etc. risks and show initiative. This should empower and
motivate the workers, as well as generate new ideas
Total 40 75 and opportunities to allow a business to be successful
in the future.
6 Answers could include the following:
• Opportunity cost: working capital tied up in 24.2 JIT inventory management
goods in storage could be put to other uses. Knowledge recall questions
It might be used to pay off loans, buy new 1 Three factors that can affect the effectiveness of JIT
equipment or pay suppliers early to gain an for inventory management include the following.
early payment discount. The capital could
be left in the bank to earn interest. The most • Excellent supplier relationships. Suppliers must
favourable alternative use of the capital tied be prepared and able to deliver additional
up in inventories is called its opportunity cost. supplies at very short notice (i.e., on a short
The higher the value of inventories held and lead time). This often means that a business
the more capital used to finance them, then the might have only one supplier for each
greater will be this opportunity cost. component so that a relationship of mutual
• When Sandra orders clothing that her benefit can be built up.
customers do not want, this means she • Production employees must be multi-skilled and
cannot spend this finance on other areas flexible. It is wasteful for a worker to produce the
of her business or other fashion items. same item all the time if this leads to inventories
• Storage costs: inventories have to be held building up. Workers must be able to switch to
in secure warehouses. They often require making different items at very short notice so that
special conditions, such as refrigeration. no excess supplies of any one product are made.
Employees will be needed to guard and • Equipment and machinery must be flexible.
transport the goods. Insurance of inventories Old-fashioned manufacturing equipment was
is recommended in case they are stolen or designed to produce products which were
damaged by fire or flood. If finance has to be very similar. Modern, computer-controlled
borrowed to buy the goods held in storage, equipment is more flexible as it is able to quickly
then this will incur interest charges. switch to making another type of product with
no more than a different software programme.

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2 Advantages of JIT Disadvantages of JIT 25 Capacity utilisation and

• Capital invested • Any failure to
in inventory is receive supplies outsourcing
reduced and of materials or
the opportunity components in 25.1 Measurement and significance
cost of inventory time, caused
holding is by, for example,
of capacity utilisation
reduced. a strike at Knowledge recall and Exam skills questions
the supplier’s 1 The disadvantages to a business of operating at
• Costs of storage
factory, transport full capacity for a long period of time include
and inventory
problems or IT the following.
holding are
failure, will lead
reduced. • Employees may feel under pressure due to the
to expensive
Space released workload and this could raise stress levels.
production
from holding Operations managers cannot afford to make
delays.
inventories can any production scheduling mistakes, as there
be used for a • Delivery costs is no slack time to make up for lost output.
more productive will increase as • Regular customers who wish to increase their
purpose. frequent small orders will have to be turned away or kept
deliveries are an waiting for long periods. This could encourage
• There is much
essential feature them to use other suppliers, with the danger
less chance
of JIT. that they might be lost as long-term clients.
of inventories
becoming • Order • Machinery will be working continuously and
outdated or administration there may be insufficient time for maintenance
obsolete. Fewer costs may rise and repairs. This lack of servicing may
goods held in because so many store up trouble in the form of increased
storage also small orders need unreliability in the future.
reduces the risk to be processed.
of damage or 2 a In the short term, a business can deal with
• There could be excess capacity by maintaining its high level
wastage.
a reduction in the of output, allowing it to keep producing
• The greater bulk discounts for future demand, adopt a more flexible
flexibility needed offered by production system to change to produce
for JIT leads to suppliers because different products that it sells or insist on
quicker response each order is flexible working contracts so it can minimise
times to changes likely to be very its staffing levels when workers are not needed
in consumer small. to reduce capacity and costs.
demand or tastes.
• The reputation b In the long term, a business can deal with
• The multi-skilled of the business excess capacity by closing factories or
and adaptable depends production units (called rationalisation) or it
staff required for significantly on could undertake research and development
JIT to work may outside factors into new products to replace existing products.
gain improved such as the
motivation. reliability of 3 a Capacity utilisation is the proportion of maximum
suppliers and output currently being used, for example Olaf
traffic delays. makes 120 tractors of a possible 150 tractors.
current output level
b _____________________________
​​ maximum
      output level ​​ × 100
Recall and connect 2
120
Three methods of employee participation could include ​​ _150
______________
 ​​ × 100
teamworking, quality circles and empowerment.
= 80%

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 Answers

c One impact for PA of operating under capacity Overall, I think that PA should outsource
is that it is a waste of resources. Currently, Olaf some of its production of agricultural vehicles
has the capacity to make 150 vehicles, but is to another business. This would mean that it
only producing 120. This means he is not using would be able to meet any increase in demand,
his land, labour and machinery to its fullest without the cost and risk of moving to a larger
level where he could be making more vehicles manufacturing facility. Should the demand
that he could sell to increase his revenue. continue to increase for a sustained period of
time, then it might be beneficial for Olaf to
d Responses might include the following:
explore the possibility of moving to a larger
One way that PA could improve its capacity manufacturing facility, but he needs to weigh up
utilisation in the long term is to outsource the costs and benefits of doing this in relation
some work to another firm. This means that PA to the level of demand.
would pay another manufacturing business to
produce any excess orders for its agricultural Recall and connect 1
vehicles that it is unable to produce itself.
The benefits of a business plan are that:
By doing this, PA would be able to satisfy its
customers by providing them with the vehicles • it can support the owner in gaining finance from
that they have ordered, leading to PA keeping a bank or investors
its excellent reputation for customer service. • it forces the owner to think seriously about
However, it would need to make sure that the proposal, its strengths and any
the business to which it outsources keeps the potential weaknesses
same high-quality standards for producing
agricultural vehicles that PA has worked • it gives the owner and managers a clear plan
hard to develop over the last 50 years; of action to guide their actions and decisions
otherwise, customers may not be satisfied with in the early months and years of the business.
their orders, damaging PA’s excellent reputation. The costs of a business plan are that:
Another way that PA could improve its capacity • it does not guarantee success; it can provide
utilisation in the long term is to invest into a a false sense of security to an owner if they rely
new, larger manufacturing facility of its own. too much on it
Olaf has seen a steady increase in demand
for his agricultural vehicles recently, so if this • if the plan is not backed up by sufficient market
continues, he may need to move to a larger research, then it is unlikely to be reliable
factory to allow PA to increase its capacity • owners may want to stick to the plan rigidly, so
potential so that it can make more vehicles, it does not allow them to be flexible to changing
which means that it will be able to capitalise market conditions.
on future increases in demand, increasing its
potential to gain revenues. However, in the short Recall and connect 2
term, investing in a new, larger manufacturing
facility will be very expensive and could be a An employment contract is a legal document that sets
risk for PA. If demand does not increase by out the terms and conditions governing a worker’s job.
that much in the future, Olaf might find that Care needs to be taken to ensure that they are fair
the larger capacity of the new factory is not and comply with current employment laws where the
used, leading to a drop in operational efficiency, worker is employed. A typical employment contract
which could increase PA’s overall costs and lead will contain:
to lower profits being made. • the employee’s work responsibilities and the main
tasks to be undertaken

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 Answers

• whether the contract is permanent or temporary experience a loss of job security. Bad publicity
may result from redundancies too, especially
• working hours and the level of flexibility expected,
if the business is accused of employing very
including whether the job is part-time or full-time,
low-wage employees in other countries in place
whether it includes working weekends or not, the
of the jobs lost. This could lead to the firm’s
payment method and the pay level
ethical standards being questioned.
• holiday entitlement and other benefits such • Quality issues. The quality levels of the goods
as pensions or services being outsourced will be difficult
• the number of days’ notice that must be given by to check on. A clear contract with minimum
the worker (if they wish to leave) or the employer service level agreements or product quality
(if they want to make the worker redundant). standards will be needed. The company
outsourcing the functions may have to send
the employees responsible for quality control
25.2 Outsourcing to the business used for outsourcing, in order
Knowledge recall and Exam skills questions to ensure that product quality and customer
1 The main reasons for a business to use outsourcing service standards will be met.
include the following. • Customer resistance. Customers may object to
dealing with overseas-outsourced operations.
• Reduction and control of operating costs.
Bought-in components and functions may
Instead of employing expensive specialists who
raise doubts in customers’ minds about quality
might not be required at all times, it could be
and reliability.
cheaper to buy in specialist services as and
when they are needed. • Security risks. Using outside businesses to
perform important IT functions may be
• Increased flexibility. By removing departments
a security risk.
altogether and buying in services when needed,
the fixed costs of office and factory space and • Risks to corporate social responsibility (CSR).
salaried employees are reduced. Using outsourced contracts, especially in
low-wage economies, means that the business is
• Improved company focus. By outsourcing
less able to ensure that its CSR policy towards
peripheral activities, management can
workers or the environment is being upheld.
concentrate on the main objectives and tasks
of the business. 3 a 1 hour 30 minutes.
• Access to quality service or resources that are b 60 marks.
not available internally. Many outsourcing
c Paper 2 includes case study data, which
firms employ quality specialists that small
Paper 1 does not.
to medium-sized businesses could not afford
to employ directly. d Data response questions.
2 If a business outsources operations to another firm, e AO1 Knowledge and understanding is 30%;
the following issues may occur. AO2 Application is 30%; AO3 Analysis is 20%;
• Loss of jobs within the business. This can have and AO4 Evaluation is 20%.
a negative impact on employee motivation. f 60%.
Workers who remain directly employed may

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 Answers

4 Students' own answers. The following time

allocations are only a suggestion. The timings will
26 Location and scale
need to be adapted to the paper and the questions
being answered. 26.1 Location decisions
Knowledge recall and Exam skills questions
Question Command Number Time
1 Answers could include:
word of allocated
marks (in • labour costs
minutes) • transport costs
Question 1(a)(i) Identify 1 1–2 • investment appraisal.
1
1(a)(ii) Explain 3 2–4 2 One factor for AIC to consider is the cost of running its
factory [K]. If they were to select Option 2, this has an
1(b)(i) Calculate 3 2–5 increased yearly fixed cost of $2 000 000 [Ap]. Due to the
1(b)(ii) Explain 3 2–4 increased cost of running a factory in Option 2, AIC would
possibly make lower profits than Option 1 as their fixed costs
1(c) Analyse 8 10–15 are higher [An]. This could affect any further growth plans
they have as they may take longer to be able to afford
1(d) Evaluate 12 20–25 them [An+].
Question 2(a)(i) Identify 1 1–2 Another factor for AIC to consider is the potential revenue
2 they can make at the location [K]. Option 1 has a potential
2(a)(ii) Explain 3 2–4
monthly revenue of $5 000 000 (price x sales) and Option 2
2(b)(i) Calculate 3 2–5 has a potential monthly revenue of $5 565 000 [Ap] which
means that AIC would potentially make more revenue if
2(b)(ii) Explain 3 2–4 they decided to locate at Option 2, which would lead to the
2(c) Analyse 8 10–15 business potentially being able to make more profits [An],
if costs are not too high.
2(d) Evaluate 12 20–25
Recall and connect 1
Remaining time for
checking answers, The culture of a business might change when it opens
planning, reading up in a new location because much of organisational
the case studies, culture comes from the managers/leaders and employees
etc. in the business. Both management and employees
are likely to be different in each new location.
Total 60 90
This is particularly likely when the relocation
involves a move overseas.
Recall and connect 3
The marketing mix is a range of tactical decisions for 26.2 Scale of operations
marketing a product and is made up of four interrelated
decisions, often called the four Ps. These are product Knowledge recall questions
design and performance, price, promotion (including 1
The ambition
advertising) and place (where and how a product will Scope for
of the owners
be sold to consumers). economies
of scale

Factors The capital

influencing available to AIC
the potential
scale
of operations
Number of for AIC The size of
competitors the market

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 Answers

2 Answers could include:

Internal economy Explain Example Effect on average costs

of scale
a Purchasing These economies are A supermarket buying The average cost per unit
economies often known as bulk tinned produce from a is likely to decrease. Only
buying economies. supplier. They could get one delivery needs to
Suppliers will often offer 1000 tins delivered a be made, possibly with
substantial discounts for day, or they could get one delivery driver, rather
large orders. It is cheaper 10 000 tins delivered at than having deliveries
for them to process one time. each day. This reduces
and deliver one large the average cost to the
order rather than several supermarket receiving
smaller ones. each tin.
b Financial These are the financial A business has decided Professional advisers’
economies benefits that can be it wants to go public and fees, prospectus
achieved by large issue shares for sale. publishing costs and
businesses, mainly advertising charges will
through banks offering not vary greatly whether it
lower interest rates on is a large or a small issue
borrowings to established of shares. Therefore, the
businesses and larger average cost of raising
businesses being able finance will be lower for
to raise more sources of large businesses selling
finance, such as going many millions of dollars’
public. worth of shares.
c Technical This is when large A firm producing t-shirts If this technology is
economies businesses are more likely needs to increase their worked at a high-
to be able to justify the scale of production due capacity level, then they
cost of flow production to increased popularity. offer lower unit costs
lines. This means that they than other production
may need to invest in methods.
more technology such
as production lines and
automated machinery
to manufacture the
increased level of t-shirts.
d Marketing Where a business can For example, if a firm The higher the output
economies spread their marketing producing ten units levels, the more units that
budget over a larger spends $100 on an the marketing spend can
number of units. advert, the average be spread over, reducing
marketing cost per unit average unit costs.
is $10. If a firm producing
100 units spends $100,
then their average
marketing cost per
unit is $1.

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 Answers

Internal economy Explain Example Effect on average costs

of scale
e Managerial Small businesses The skills of specialist If a specialist manager
economies often employ general managers and the chance makes fewer mistakes,
managers who have a of them making fewer this will reduce the
range of management mistakes because of their average costs of the
functions to perform. training is a potential company as they will be
Business expansion economy for larger doing their job efficiently.
provides finance to be organisations.
able to employ specialist
functional managers who
should operate more
efficiently than general
managers.

Recall and connect 2 • If checking takes place only at a few

points in the production process, faulty
a As a business grows, it will also expand its
products may pass through several
workforce, and the recruitment and training of staff
production stages before being picked up.
is the role of the HRM department. It is important
that the department recruits carefully and ensures • It reduces workers’ responsibility for
adequate training is provided so that the character quality.
of the organisation is not changed adversely. c Quality assurance involves setting and
monitoring agreed quality standards at all
b As the business grows, communication becomes
stages of production to ensure that customers’
more difficult, and this makes the role of the
satisfaction is achieved. It does not just focus
manager/leader more difficult.
on the finished product.
d Answers can include the following.
27 Quality management • Everyone is responsible for quality;
this can be a form of job enrichment.
27.1 Quality control and • Worker motivation is increased when
quality assurance employees are responsible for self-
checking products and services, and being
Knowledge recall and Exam skills questions involved in efforts to improve quality.
1 a Quality control is the checking based on • The system can be used to trace quality
inspection of the product or a sample of problems back to the stage of the
products. production process where a problem
b Answers can include the following. is occurring.
• Inspection is looking for problems and • It reduces the need for the high costs of
is negative in its culture. final inspection and reworking of faulty
products.
• Employees may view inspectors as
management employees who are there just • It reduces total quality costs. An overall
to check on output and to find problems culture of quality can lead to reduced
with the work. costs of wastage and faulty products.
• The job of inspection can be tedious,
so inspectors become demotivated and
may not carry out their tasks efficiently.

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 Answers

2 For a customer, their expectations of what is • Comparisons between businesses in different

meant by quality will be very different for goods industries–for example, customer service
and services sold at different prices. A quality departments in a retailer compared with a
product does not have to be made with the highest bank–can lead to a useful crossover of ideas.
quality materials to the most exacting standards, • It is important to involve the workforce, then
but it must meet consumer expectations and be their participation can lead to better ideas for
fit for purpose. For a producer, quality is often improvement and increased motivation.
determined by a particular level of testing that a
Possible disadvantages of benchmarking:
product has been through and can also be explained
as a set of minimum expectations that must be • Benchmarking depends on obtaining relevant
evident in a finished product before it leaves the and up-to-date information from other
factory, such as look, feel and weight. businesses in the industry. If this is difficult
to obtain, then the process will be limited.
3
Correction and • Merely copying the ideas and practices of
Prevention Inspection
improvement other businesses may discourage initiative
and original ideas.
4 Answers can include the following. • The costs of the comparison exercise may not
be recovered by the improvements obtained
• Helps create customer loyalty.
from benchmarking.
• Reduces costs of customer complaints: paying
compensation, replacing defective products Recall and connect 2
and loss of consumer goodwill.
Operational strategy includes organisational vision and
• Helps prolong product life cycles. benchmarking of best practice provides a guide for the
• Reduces the cost of advertising, as the brand business as to how it might improve.
will establish a quality image through the
performance of its products.
• Raises the prices that can be charged for 28 Operations strategy
quality goods and services.
28.1 Operations decisions
Recall and connect 1
Knowledge recall questions
Quality increases staff motivation and morale, with
staff more motivated to keep standards high if they 1 Answers could include:
know that each product is going through quality a Expand capacity: this will require long-term
management before being sold. Quality management sales forecasts from the marketing department,
practices can reduce human error and improve a revised workforce plan from human resources
a company’s validation activities. and financial resources to pay for it. If these
resources are not available, the decision to
27.2 Benchmarking expand might have to be abandoned.
Exam skills questions b Relocate operations: this will require a suitable
1 Answers could include: supply of labour in the new location, an
efficient distribution system to customers from
Possible advantages of benchmarking: the proposed site, and financial resources to
• The areas of greatest significance for pay for the costs of buying and developing
customers are identified, and action is directed the site. If these resources are not available or
to improving these. are inadequate, then an alternative site will be
needed, or the decision could even be made to
• It is a process that can help a business increase
remain on the existing site.
international competitiveness.

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 Answers

2 Examples could include: the same as they may fall behind in the market,
• banking applications for processing bank impacting on their level of competitiveness.
loans, giving a much quicker response • For BC specifically, by outsourcing their
• online payment systems which identify production to another company, this can allow
potential fraud BC to focus on other areas of their business
such as marketing, which could be needed to
• logistical applications for scheduling the best
make them stand out in a crowded market.
time to maintain equipment
• If the business decides to grow and open more
• pharmaceutical research and development
stores, they need to make sure their inventory
applications for predicting the success of
management systems are able to deal with
medical drugs
an increased need for inventory distribution
• cyber security software to monitor to the new stores.
online behaviour.
Recall and connect 2
Recall and connect 1 Self-awareness, social awareness, self-management
$20 – $17 = $3 per unit contribution. and social skills.

28.2 Flexibility and innovation 28.3 Enterprise resource planning

Knowledge recall and Exam skills questions Knowledge recall and Exam skills questions
1 • Adapting the volume of output to changes 1 Enterprise resource planning (ERP) is the use of
in market demand. a single computer application to plan the purchase
• Changing delivery time schedules to meet and use of resources in an organisation in order
timing changes requested by the customer. to improve operations efficiency.
• Responding to unique customer demands. Example 1. Specialist bicycle manufacturer:
The ERP program could handle bicycle repair
2 Advantages of process innovation include:
orders, manage spare parts inventories and provide
• Lower-cost production methods. forecasts of future sales to plan workforce needs
• More effective production methods leading over the next few months.
to a competitive advantage.
Example 2. Water supply company: A customer
• Development of computer tracking for requests repairs to a water supply pipe. A date is
inventories to monitor stock levels. scheduled in by the company’s ERP system. The
• If the innovation involves patents of new job is allocated to a team of workers. The correct
techniques, that these could be sold or licensed spare parts are ordered. When the job is completed,
to other businesses for a profit. it is entered on the database. The customer is sent
3 Process innovation is important for some of the an invoice for the job and their payment is recorded
following reasons: in the accounts section of the database.
• By introducing lower cost production methods, 2 The efficiency improvements gained from ERP
a business may be able to lower their prices for software include:
customers or maintain their prices and increase
• Supply only according to demand, avoiding
their profits.
waste of raw ingredients to make the chocolate
• More effective production methods can lead and moving the business towards achieving
to quicker production that can lead to less sustainability in its operations.
waste being produced. It could also include the
• More effective utilisation of capacity and
introduction of more IT and AI in operations,
quicker response to changes, such as variations
reducing the need for labour (therefore
in consumer demand (such as the sales growth
reducing labour costs).
of 5% per year that is being experienced).
• If competitors are innovating their process, it These improvements are also a result of the
is essential that all other businesses are doing greater workforce flexibility that ERP achieves.

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 Answers

• Just-in-time ordering of inventories (raw Consumers buy subsidised products at lower prices,
materials such as cocoa beans). so spend less on unsubsidised products, distorting the
• Reductions in costs at all stages of the market.
supply chain. Materials and products are
electronically tracked at all stages from 28.4 Lean production
ordering to the final production of the
Knowledge recall and Exam skills questions
chocolate.
1
• More accurate costing and pricing of
products as components and labour costs are
Continuous
appropriately allocated to each product. improvement

Product quality
• Improved delivery times and better customer
service.
One-off
• Departments linked more closely together improvements
by the single database, resulting in better
coordination between them and less waste.
• Management information is increased. Data
from all stages of the production process and
all the supporting departments is available to
0
senior management via the computer system. Time
This could help in future decision-making
(e.g., changing suppliers of cocoa beans if 2 Answers could include the following.
lower-priced supplies of consistent quality
are offered). • Lower waste levels can lead to improved
inventory turnover ratio and allow the firm
ERP has potential limitations which include:
to reduce its inventory levels, thus improving
• The costs of the database and computer cash flow.
systems have to be considered, although these • By reducing wastage, a difficult process for a
costs are falling with technological advances firm producing a perishable product, BC will
in computing power. be more efficient and this would reduce the
• Employee training costs have to be incurred as unit cost of production, making BC more
a badly implemented ERP system could make competitive if they chose to pass this on
operations less efficient. through lower prices.
• The different ways in which different • More worker training will be required, thus
departments can operate now have to be increasing BC’s costs.
reduced to one common system. This may • With complex supply chains, for example,
cause resentment as departments are forced components such as cocoa or sugar imported
to give up tried-and-tested ways of operating. from around the world, JIT production may be
• In most businesses the full implementation of difficult to implement as lead times may be long.
ERP can take one to three years. Technological
advances over this period could make the Recall and connect 4
chosen software obsolete. Financing further • Kaizen improves product quality through the
investment in the most up-to-date ERP system process of continuous improvement.
might require other projects to be abandoned.
• Simultaneous engineering provides the means
Recall and connect 3 to ensure quality through the incorporation
of manufacturing processes so that they can
Government has to raise taxes or cut other spending
be performed simultaneously.
programmes in order to provide subsidies.
• Cell production can improve product quality
Subsidies act as a disincentive to businesses to become
through the involvement of fine-tuning all aspects
more efficient.
of cell operation.

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 Answers

28.5 Operations planning

Knowledge recall and Exam skills questions
1 12
2
15
.
A ng St
ici ) ir
e
th tes (9 the
re inu mi ici E
a nu ng
ep m te .
Pr (12 s)

0 B 10 F 34 G 44 H 54
1 3 5 6 7
0 Prepare the 20 Mix the butter 34 Combine the 44 Add mix to the 54
sponge. and sugar. ingredients. pan and bake.
(10 minutes) (14 minutes) (10 minutes) (10 minutes)
Pr
ep
a
(8 re th C D it.
mi e ru )
nu fill h e f utes
te ing 8 t in
ir
s) . 4 St 6 m
8 ( 2

2 a C, D, G, H. • The need for rapid development of new

products is now very great in today’s
b 54 minutes.
fast-changing consumer markets, such as
3 Reasons why critical path analysis may be useful confectionary. Critical path analysis gives
to a business could include: design and engineering departments an
advantage by showing them the tasks that can
• Using a network diagram to calculate the
be undertaken simultaneously in developing a
total project duration allows businesses to give
new product to get this to the market quicker
accurate delivery dates. Customers may insist
and gain a competitive advantage over other
on a particular completion date and the critical
chocolate companies.
time shows whether the firm can make this
date or not. For example, if they were looking Evaluation of CPA
to produce a chocolate order for a large • A plan is only as good as the management
supermarket, they would be able to work behind it. If management of the project is poor,
out an accurate delivery date. then even a good critical path network diagram
• If a new chocolate was being launched, will not ensure success. This is particularly true
knowing the EST for each activity allows the when attempting to make up for lost time on a
operations manager to order special equipment critical activity. This could lead to poor quality
or materials needed for that task at the correct chocolate being produced as they are rushing
time. This ties the use of network analysis in to make up the time on the order.
with JIT strategies and assists in the control • When using CPA for a completely new project,
of cash flow and working capital. such as a brand-new chocolate, there may be
• Knowing the critical path is important. If considerable guesswork involved in estimating
there is a delay on a critical activity, as there is the durations for each activity. There will be no
no float time, this will put back the timing of previous experience to go on. This is especially
the whole project. This could lead to expensive true if it is a very different type of chocolate
damage claims from customers. If they had than BC are used to producing such as a dairy
promised to deliver chocolate for a business free version.
event and missed this deadline, their customers
would not be happy.

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 Answers

29 Business finance 3 • Administration is when administrators manage

a business that is unable to pay its debts with
the intention of selling it as a going concern.
29.1 The need for business finance
• Bankruptcy is the legal procedure for
Knowledge recall questions liquidating a business (or property owned
1 Businesses need finance for many reasons. by a sole trader or partnership) which cannot
fully pay its debts out of its current assets.
• Setting up a business will require cash injections
from the owner(s) to purchase essential capital • Liquidation is when a business ceases trading
equipment and, possibly, premises. This is called and its assets are sold for cash to pay suppliers
start-up capital. and other creditors.
• All businesses need to finance their working
Recall and connect 1
capital, the day-to-day finance needed to pay
bills and expenses and to build up inventories. The public sector refers to the organisations accountable
In accounting terms, working capital = current to and controlled by the central or local government
assets – current liabilities. (the state). They are owned by the government and often
provide essential services to society such as defence and
• When businesses grow, further finance will education. They usually do not have a profit motive
be needed to buy more assets and to pay for as their objective is usually to provide a service that is
higher working capital needs. Growth through good for the economy or to provide public goods. The
developing new products will require finance private sector contains businesses owned and controlled
for research and development. by individuals or groups of individuals. These businesses
• Growth can be achieved by taking over other have objectives related to making profit for the owners.
businesses. Finance is then needed to buy out In the private sector, you would find sole traders,
the owners of the other firm. partnerships, Ltds and PLCs.
• Special situations may lead to a need for
finance. A decline in sales, possibly as a result 29.2 Working capital
of economic recession, could lead to the need Knowledge recall and Exam skills questions
for additional finance so that the business can
1 Without sufficient working capital, a business
pay its debts. If a large customer fails to pay
will be illiquid and unable to pay its immediate
for goods, finance will quickly be needed to pay
or short-term debts.
for essential expenses. In these cases, finance is
needed for the survival of the business. 2 There is an opportunity cost of having too much
capital tied up in inventories, accounts receivable
2 Short-term finance is money required for short
and idle cash. It is likely that this money could earn
periods of time of (often) up to one year. Long-
a higher return elsewhere in the business, possibly
term finance is money required for (often) more
by being invested in fixed assets.
than one year. Short-term sources of finance can
be helpful to businesses that experience seasonal
demand, or need to make small purchases, such
as inventory. Long-term sources of finance are
more suitable for larger investments such as buying
buildings.

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 Answers

3 Answers could include the following. 5 a Working capital = Current assets minus current
liabilities
Managing Managing Managing
Current assets 5 $6 000 000 1 $2 500 000 1
inventory trade trade
$1 500 000 5 $10 000 000
payables receivables
• Keeping • Delaying • Only $10 000 000 2 $8 000 000 5 $2 000 000
smaller payments selling b One way that CC could increase its working
inventory to products capital is by reducing the level of stock it holds
levels suppliers for cash in the future. This is because if it reduces the
to and not amount of frozen food it holds while it is
• Using
increase on credit waiting for orders from cruise ships and moves
computer
the credit towards a JIT ordering approach, this would
systems • Reducing
period reduce future expenditure on stock. Reducing
to record the credit
sales and • Only period the stock figure means that CC would hold the
inventory buying offered cash instead, meaning it will be easier to pay off
levels, goods to any current liabilities than if the cash was tied
and to from customers up in stock.
order suppliers
inventory who will Recall and connect 2
as offer Theory X managers, according to McGregor, view
required credit their workers as lazy and disliking work. On the other
• Efficient hand, McGregor considered that managers who hold
inventory Theory Y views believe that workers enjoy work.
control, McGregor did not suggest that there were two types
inventory of workers, X and Y. The X and Y refer to different
use and attitudes of management towards workers. In practice,
inventory most managers will have views somewhere between
handling these two extremes.
so as to
reduce 29.3 Sources of finance
losses
Knowledge recall and Exam skills questions
through
damage, 1 A public limited company can apply for a full
wastage listing on the stock exchange, allowing it to sell
and shares to the public to raise finance. A private
shrinkage limited company cannot sell its shares on the stock
exchange, and it needs to invite people to buy
4 Revenue expenditure refers to spending on all costs shares (often family, friends and employees) to raise
and assets other than non-current assets, which finance.
includes wages, salaries and inventory of materials. 2 The benefits of crowdfunding for a new business
It is spending to allow the business to operate day include:
to day. Capital expenditure refers to the purchase of
non-current assets that are expected to last for more • not incurring debt
than one year, such as buildings and machinery. • not losing ownership of the business
• positive exposure for the business, bringing
in new customers.

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3 The purpose of a mortgage is as a source of finance 6 Debt factoring is the selling of claims over trade
to purchase property. receivables (debtors) to a specialist organisation
(debt factor) in exchange for immediate liquidity.
4 Students’ own answers.
7 Sale and leaseback is when a business sells its non-
5 Source of finance Where the finance current assets to a specialist organisation and then
is from pays a lease to continue to use these.
Internal External 8 An overdraft is a credit that a bank agrees can be
Share capital (through 3 borrowed by a business up to an agreed limit as and
sale of shares to the when required.
public)
9 Venture capital is when someone called a venture
Debentures 3 capitalist is prepared to lend risk capital to,
Owners’ investment 3 or purchase shares in, business start-ups or small
to medium-sized businesses that find it difficult
Debt factoring 3
to raise capital from other sources.
Sale of unwanted 3
assets 10 Trade credit is delaying payment to suppliers for
goods or services received. A business is, in effect,
Share capital (through 3 obtaining finance.
rights issue of shares)
11 A mortgage is a long-term loan used for purchasing
Bank overdraft 3
a property, with the property acting as collateral
Mortgage 3 security on the loan.
Crowdfunding 3 12 Hire purchase is when a company purchases an
Microfinance 3 asset and agrees to pay fixed repayments over
an agreed time period. The asset belongs to the
purchasing company once the final payment has
been made.

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 Answers

29.4 Factors affecting the source of finance

Knowledge recall questions
1 Factors influencing Why factor is important
finance choice
Why finance is needed • It is risky and expensive to use long-term finance to pay for short-term
and the time period it needs. Businesses should match the sources of finance to the length of time
is needed for it is needed for.
• Permanent capital such as issues of shares may be needed for long-term
business expansion or long-term research projects.
• Short-term finance would be advisable to finance a short-term need
to increase inventories or pay creditors.
Cost • Obtaining finance is never free – even internal finance may have an
opportunity cost.
• Loans may become very costly during a period of rising interest rates.
• A stock exchange listing of a newly formed public limited company can
cost millions of dollars in fees and promotion of the share sale.
• Once equity finance has been raised, dividends to shareholders are not
tax-deductible for the business, unlike loan interest.
Amount required • Issues of new shares and debentures, because of administration and other
costs, are generally used only for large capital sums.
• Small bank loans, overdrafts or reducing trade receivables’ payment periods
could be used to raise small sums.
• Retained profit may be too low to provide the finance needed for a major
expansion programme. External finance may be required too.
Form of business • Share issues can only be used by limited companies, and only public limited
ownership and desire companies can sell shares directly to the public.
to retain control
• Issuing additional shares risks the current owners losing some control,
unless they all buy shares with a rights issue.
• If the owners want to retain control of the business at all costs, then a sale
of shares might be unwise.
Level of existing debt • The higher the existing debts of a business (compared with its equity
capital), the greater the risk of borrowing more. Banks and other lenders
will become anxious about lending more finance.
• This concept is referred to as gearing.
• A high level of existing debt might mean that internal sources should
be considered, such as the sale of assets.
Flexibility • When a firm has a variable need for finance (for example, it has a seasonal
pattern of sales and cash receipts), a flexible form of finance is better than
a long-term and inflexible source.

Recall and connect 3

‘Demographic market segmentation’ means breaking up a market based on demographic factors
such as age, gender, income, family size, social class and ethnic background.

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29.5 Selecting the appropriate source of finance

Knowledge recall and Exam skills questions
1 Students’ own answers. The methods should be suitable for you and a sole trader
(methods such as share issue and debentures are not suitable).
2 Methods of finance that are not suitable to be included in this answer include
shares being sold on the stock exchange, debentures, overdrafts, microfinance
or crowdfunding. This is a large sum of money that is required to purchase
long-term assets.
An example answer is as follows.
One method of finance that NDG could use is a bank loan. It is a private limited
company which appears to have a good trading record as its customers are retail
stores, so it is probably quite established. As a result, a bank loan would give NDG
immediate access to the cash to buy the vans, however there is likely to be interest
charged, increasing NDG’s costs.

30 Forecasting and managing cash flow

30.1 Cash flow forecasts: Meaning and purpose
Knowledge recall and Exam skills questions
1 Causes of cash flow problems can include:
• lack of planning
• poor credit control
• unexpected events
• allowing customers too long to pay debts
• expanding too quickly.

2 Method Reduces inflows or outflows? How it works

a Sale of unwanted Increasing cash inflows Cash receipts can be obtained from selling off
assets non-current assets that are no longer required,
which will boost cash inflow.
b Managing trade Increasing cash inflows Managing trade receivables by not extending
receivables credit to customers, or asking them to pay more
quickly, can increase the speed or frequency
of cash entering the business.
c Overdraft Increasing cash inflows An overdraft is a flexible source of cash from a
bank which a business can draw on as necessary
up to an agreed limit.
d Cutting overhead Reducing cash outflows These costs will not reduce production capacity
expenditure and cash outflows will be reduced.
e Managing trade Reducing cash outflows Trade payables (credit from suppliers) can
payables be managed to improve next cash flows
by purchasing more supplies on credit and
arranging more time to pay for goods received
to extend time taken for cash to leave the firm.

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 Answers

3 a Limitations of cash flow forecasts can include:

• mistakes made in the production of the data, which could be an issue due to Zachir’s lack
of business experience
• unexpected cost increases which affect the forecast such as an increase in utility costs
• incorrect assumptions relating to sales data: it may take longer than anticipated for Zachir
to become established and start generating a revenue
• changes in the external environment which affect cash inflows and outflows such as an
increase in any national minimum wage for workers.
b Advantages of a short-term loan:
• quick source of finance
• can be easy to obtain
• allows Zachir to start trading quickly
• improves cash flow.
Disadvantages of a short-term loan:
• interest will have to be paid
• will negatively affect cash outflows
• loan needs to be repaid by a specified date.
c The correct answer is ‘(9000)’. It must be clear than the answer is a minus (negative) figure.

Month 1 Month 2 Month 3 Month 4

Cash in
Owners’ capital $20 000 $0 $0 $0
Grant $10 000 $0 $0 $0
Revenue $0 $15 000 $23 000 $29 000
Total cash in $30 000 $15 000 $23 000 $29 000
Cash out
Capital expenditure $25 000 $0 $0 $0
Utilities (power, water, etc.) $0 $0 $15 000 $0
Labour costs (wages and salaries) $7000 $7000 $7000 $7000
Trade payables (materials) $8000 $9000 $10 000 $11 000
Total cash out $40 000 $16 000 $32 000 $18 000
Net cash flow $(10 000) $(1000) $(9000) $11 000
Opening cash balance $0 $(10 000) $(11 000) $(20 000)
Closing cash balance $(10 000) $(11 000) $(20 000) $(9000)

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 Answers

d Responses might include the following.

One benefit to Zachir of producing a cash
31 Costs
flow forecast is that it can help him gain a
loan from the bank. This is because the 31.1 The need for accurate
bank will want to see a business plan and cost information
a cash flow forecast before giving Zachir
a loan to make sure he has shown an
Knowledge recall questions
understanding of how the loan will be used, 1 The calculation of profit or loss, pricing decisions,
especially for a new business like DBSP. measuring performance, setting budgets and
As a result, Zachir is more likely to be awarded making choices.
a bank loan if he has a clear cash flow, 2 Some costs can be semi-variable, containing
meaning he can access the finance that he an element of fixed and variable costs, such
needs to invest into his business, such as the as electricity.
initial $25 000 capital he needed in month 1.
Another benefit to Zachir of producing a cash Recall and connect 1
flow forecast is that it can help him identify
A free-market economy is where economic resources
periods of negative cash flows. This means that
are owned largely by the private sector, with very little
Zachir can be aware of where he might need
state intervention. A command economy is where
some additional finance to help him manage
economic resources are owned, planned and controlled
payments, for example, in month 3 he has a
by the state. A mixed economy is where economic
negative cash balance of $20 000 he needs to
resources are owned and controlled by both private
cover. As a result of this planning, Zachir can
and public sectors.
arrange to have some additional finance in
place so he can cover the excess cash outflows
in months that are needed (such as months 1, 2 31.2 Approaches to costing
and 3), meaning he will be able to manage his Knowledge recall and Exam skills questions
day-to-day cash flow, allowing his business to
continue operating. total cost of producing this product
_____________________________
1 a average cost = ​​    
   
number of units produced ​​
Overall, I think the biggest benefit to Zachir
of producing a cash flow forecast is that it can f ixed costs ($2 000 000.00) + total variable costs (50 000 × $2.50)
b ​​ ________________________________________________
         
50 000 ​​
help him gain a loan from the bank. This is
because setting up a swimming pool company 2 125 000
= ​​ __________
50 000 ​​
is going to require an investment of $25 000,
and it is unlikely Zachir would have this money = $42.50
himself to do this so he will need a loan. The
2 It can be challenging to know how to divide the
cash flow forecast would not only be useful to
overhead costs accurately to each product as a
show the bank, but would also allow Zachir to
business may not know how much of the overhead
plan how his monthly repayments on the loan
has been used by each product. Decisions need to
will impact the business. By planning for these
be made whether overheads will be allocated by
repayments, he is less likely to encounter cash
number of employees used, factory space used,
flow problems as he has planned his outgoings,
proportion of overall output or another method.
meaning he is likely to make it through the first
few months of trading more successfully than
3 a Answers could include the following:
if he did not have a cash flow forecast.
Advantages of full costing:
Recall and connect 1 • All costs are allocated so no costs are left
If a firm does not have cash, then it cannot pay its out of the calculation of total full cost or
day-to-day expenses. This is likely to lead to problems unit full cost.
in the long-term, causing business failure. • Full costing is a good basis for pricing
decisions in single-product firms.

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 Answers

•Full costing data can be compared from 31.3 Uses of cost information
one time period to another to assess
Knowledge recall questions
performance, as long as the same method
of allocating overheads is used. 1 Using marginal costing, it could be assumed that
Disadvantages of full costing: the current level of production of SDB covers the
overheads, so the only cost that will be incurred on
• Can be difficult to allocate all costs this order is the marginal (variable) cost. To produce
incurred. this order, it will cost $2500 (25 000 units × $0.10
• Inappropriate methods of overhead variable cost). The profit on this order is $1250
allocation can lead to inconsistencies (revenue = 25 000 × $0.15 − minus total variable
between departments and products. costs). There is enough capacity to produce the order,
• Cost figures allocated may be misleading, and this initial order may lead to more orders in the
affecting decision making. future. Based on this, SDB should accept the order.
b Answers could include the following: 2 Examples of other areas to consider based on the
Advantages of contribution costing: topic grid are as follows.

• It only allocates the direct costs incurred • Opportunity cost. If this initial order leads
by the product. to more, potentially larger, future orders,
will SDB need to stop supplying some of
• Useful for decision making in firms with
its current customers to be able to do this?
more than one product.
• Stakeholders. The supermarket want to pay
• Costs should be covered as well as making
SDB a lower price than their current customers
a positive contribution towards overheads.
are paying. How will other customers feel if
• Can be very useful determining the they find out?
suitability of special orders.
• Cash flow. Does SDB have the finance available
Disadvantages of contribution costing: to purchase the additional materials needed to
• Any pricing strategies that follow the use make the supermarket order?
of the contribution costing method may • Adding value. By having its product in a
not be flexible to what customers are supermarket, consumers may see the brand
prepared to pay for a product. as ‘too commercial’, so the brand reputation
• If a certain level of sales is not reached, may fall.
then there will not be enough contribution
to cover the overhead costs. 31.4 Break-even analysis
• By ignoring indirect costs, contribution Knowledge recall and Exam skills questions
costing does not consider that some 1 Margin of safety = current production level −
products may result in much higher break-even level
indirect costs than others.
570 − 420 = 150 units
Recall and connect 2
2 • Pricing decisions. Different prices can be
Autocratic management is a management style where one explored to determine how many units need
manager takes all decisions, with very little, if any, input to be sold at each price to cover all costs.
from others. Democratic management is a management
style that encourages the active participation of workers • Location decisions. Businesses can assess
in taking decisions. Paternalistic management is a different locations for their business based
management style based on the view that the manager on the fixed costs incurred (such as rent)
is in a better position than the workers to know what and how many units will need to be sold
is best for an organisation. Laissez-faire management to cover these costs.
is a management style that leaves much of the business • Costing decisions. The impact of increases
decision-making to the workforce. or decreases in costs and the impact these
have on the break-even point can be assessed
to support decision-making.

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 Answers

10 000
3 a i ​​ _____
18 ​​ • have demotivated employees with no plans
or targets to work towards; this may result in
= 556 units (555.55 rounded up to nearest
workers not being as productive as they could be
full unit)
• be unable to measure its progress by measuring
ii 600 − 556 = 44 units
the plans against actual performance; the
iii Total revenue: 800 units × $30 = business may be unable to measure how it
$24 000 is doing to assess if it is moving forwards
Total costs: $10 000 + ($12 × 800) = or backwards.
$19 600 2 a This method takes last year’s budget and makes
Profit: $24 000 − $19 600 = $4400 changes for this year. The revised budget might
10 000 be raised or lowered, depending on market
b i ​​ __________
28 ​​ conditions. Cost budgets will be adjusted for
= 358 units (357.14 rounded up to nearest forecasted inflation and expected changes in
full unit) output. Incremental budgeting does not allow
ii 600 − 358 = 242 units for unforeseen events. Using last year’s figure
as a basis means that each department does not
iii Total revenue: 800 units × $40 = have to justify its whole budget for the coming
$32 000 year: only the change or increment. There is no
Total costs: $10 000 + ($12 × 800) fundamental appraisal of each department’s
= $19 600 targets or need for resources.
Profit: $32 000 − $19 600 = $12 400 b The zero-budgeting approach requires all
Recall and connect 3 departments and budget holders to justify
their whole budget each year. This is time-
Tangible attributes are the measurable features of consuming, as a fundamental review of the
a product that can be easily compared with other work and importance of each budget-holding
products, for example, size, shape, colour and function. section is needed each year. However, it does
Intangible attributes are the subjective opinions of provide added incentive for managers to
customers about a product, which cannot be measured defend the work of their own section.
or compared easily. Also, changing situations, such as the
external environment, can be reflected
in very different budget levels each year.
32 Budgets c Most budgets are fixed for the time period
under review. This means that they assume that
32.1 The meaning and purpose the level of output remains at the predicted or
of budgets budgeted level. If actual output falls or rises
above this level, then this could lead to obvious
Knowledge recall and Exam skills questions variances from the fixed budgets. Flexible
1 Financial planning for the future is important for budgeting is when cost budgets for each expense
all businesses. If no plans are made, a business will: are allowed to vary if sales or output vary from
budgeted levels. Flexible budgets are more
• be without a direction or purpose; it will not
motivating for budget-holding managers as
know where it is going or whether it is meeting
they will not be criticised for adverse variances,
any targets
which might occur just because output was
• be unable to allocate the scarce resources of lower than budgeted. The flexible targets are
the business effectively; this could lead to more realistic. Also, flexible budgets make it
resources being used in the wrong way, or the easier to produce valid and accurate variance
business running out of resources, which could analyses as they indicate changes in efficiency,
affect its ability to meet demand not changes in output.

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3 Benefits of using budgets can include:

• Planning: The budgetary process makes managers consider future plans carefully
so that realistic targets can be set. This is important for Nadia as CD is a relatively
new business, so any future strategy needs to be planned to support the business
in being successful.
• Allocating resources: Budgets can be an effective way of making sure that the business
does not spend more resources than it has access to. Nadia does not understand the
financial side of the business, so taking time to learn how to budget will support her
in being efficient with how she manages her finances.
• Measuring and assessing performance: Once the budgeted period ends, variance
analysis is used to compare actual performance with the original budgets.
Nadia can determine if CD has been successful or not by looking at the
differences between the budgeted and actual figures using variance analysis.

Recall and connect 1

A quality circle (QC) is a group of five to ten employees who have experience in a particular work area.
They meet regularly to identify, analyse and solve the problems arising in their area of operation.
Quality circles are used to identify problem areas in business processes and members work on these
to improve product quality and productivity.

32.2 Variance analysis

Knowledge recall and Exam skills questions
1 Budgeted Actual Variance Adverse or favourable?
figures figures
Revenue $9000 $10 000 $1000 Favourable
Cost of materials $1200 $1560 $360 Adverse
Labour costs $1500 $1680 $180 Adverse
Gross profit $6300 $6760 $460 Favourable
Overheads $2700 $2700 $0 No variance (overheads are
usually fixed costs)
Operating profit $3600 $4060 $460 Favourable

2 a Answers can include the following:

• lack of flexibility
• only focuses on the short term
• time-consuming
• manager might not have the skills required to construct accurate budgets
• can lead to unnecessary spending if workers think they can spend up to the budgeted amount.
b A favourable variance is a change in the budget that leads to higher than planned profit.
This could be due to a higher level of income than budgeted for, such as revenue,
or a lower level of costs than budgeted for, such as raw materials.

89
 Answers

c
Budgeted figures Actual figures Variance
Revenue $8500 $6250 $2250
Cost of materials $1750 $1275 $475
Labour costs $1200 $1344 $144
Gross profit $5550 $3631 $1919
Overheads $3200 $3200 $0
Operating profit $2350 $431 $1919

3 Issue faced Favourable Why might this happen? Impact on the business
by the or adverse
business variance?
Revenue Adverse Business has sold less This may mean the business does not
is below than expected. make the level of profit it is expecting,
budgeted. which could impact on its ability to meet
its objectives.
Raw material Adverse Suppliers may have increased Depending on why the costs were higher
costs are their prices, or an alternative than expected, the business may need to
higher than supplier needed to be used, look for new suppliers or adjust its expected
budgeted. which charges more than the costs for the future based on the higher
previous supplier. Business costs, which could mean that it also needs
may also no longer be gaining to look at adjusting its prices to keep profit
economies of scale. levels the same.
Labour Favourable If employees are in zero-hours The business needs to find out why the
costs are contracts, overall wage costs labour costs were lower than anticipated
lower than may have been lower than to address the issue – if wages costs were
budgeted. expected. Alternatively, tasks lower, was this because the need for labour
may have been completed was lower than anticipated? This would
quicker than anticipated. suggest the business did not sell as much
as expected and needs to be investigated.
If the labour costs were lower because the
workers finished their work quicker, has the
desired level of quality still been achieved?
If not, the business may need to explore this.
Overheads Adverse Depending on when the Overheads are generally fixed costs, and
are higher budget was constructed, there any changes in these should not be a
than may have been an increase surprise to a business. It is important that
budgeted. in rent or standing electricity if a business is aware that costs such as
charges introduced and the energy or rent are increasing, budgets
budget has not been adjusted should be updated and redone to reflect
to reflect this. these changes to make them more accurate.
Gross profit Adverse Either the revenue was lower If the revenue was lower than expected, the
is lower than than anticipated or the cost business needs to investigate why this has
budgeted. of materials was higher than happened and how to improve this going
anticipated. forward. If it is because costs of materials
are higher than anticipated, the business
may need to look into alternative suppliers
or buying in bulk to reduce costs.

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Recall and connect 2

Cash flow forecasts and budgets differ in a number of ways.
• Budgets are usually for a whole accounting period (generally a year), whereas cash flow
forecasts often take a month-by-month approach.
• Budgets show all relevant income and expenditure, but do not show the cash movement
separately, which the cash flow forecast does.
• A budget is used to plan ahead against a particular target. A cash flow forecast aims
to manage cash and identify in advance areas where additional finance may be required
to allow operations to continue.

33 Financial statements
33.1 Statement of profit or loss
Knowledge recall and Exam skills questions
1 Profit or loss (P&L) statements help companies benchmark current performance relative
to future projections, and also help companies to compare performance to rivals in the same
industry. Investors and lenders use P&L statements to determine a company’s risk level
and inform investing or lending decisions.
2
Million rupees
2014 2015 2016 2017 2018 2019
Revenue 3332 3363 5011 7369 12 154 14 850
Cost of sales 2819 2802 4039 6304 10 542 12 820
Gross profit 513 561 972 1065 1612 2030
Expenses 254 267 369 364    725    871
Profit from 259 294 603 701    887 1159
operations
(operating profit)
Taxation (25%) 64.75    73.5 150.75 175.25    221.75    289.75
Profit for the year 194.25 220.5 452.25 525.75    665.25    869.25
Dividends (30%)    58.28    66.15 135.68 157.73    199.58    260.78
Retained earnings 135.98 154.35 316.58 368.03    465.68    608.48

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3
Million rupees
2020 2021
Revenue 17 820.00 21 384.00
Cost of sales 15 384.00 18 460.80
Gross profit 2436.00 2923.20
Expenses 958.10 1053.91
Profit from operations 1477.90 1869.29
(operating profit)
Taxation (25%) 369.48 467.32
Profit for the year 1108.42 1401.97
Dividends (30%) 332.53 420.59
Retained earnings 775.89 981.38

4 Answers can include reference to any changes in the figures for Nimir Industrial
between 2014 and 2019 and an assessment of whether this could be classified
as a positive or negative financial performance.
For example:
Revenue has increased year on year from 3332 million in 2014 to 14 850 million in 2019
which could suggest a positive financial performance.
Retained earnings have increased year on year, suggesting that Nimir Industry
is performing well as there is no evidence of them making a loss.
Shareholders might view the performance as positive as there has been an increase
in the total value of the dividends being given to the shareholders.

Recall and connect 1

Businesses will use profit or loss and other financial statements from previous years
to steer their organisation in the right direction and support their future planning
and strategy. This helps ensure a business remains financially viable and does not
run out of cash, default on loans or become over-leveraged.

33.2 The statement of financial position: Meaning and purpose

Knowledge recall and Exam skills questions
1 Current liabilities are the debts that a business expects to pay within 12 months,
e.g., trade payables, overdraft and tax owed. Non-current liabilities are longer term,
such as bank loans.
2 Current assets are items of monetary value that are owned by a business and can be
liquidated quickly and used for a company’s immediate needs, e.g., cash, inventory and
trade receivables. Non-current assets are long-term and have a useful life of more than
a year, e.g., machinery, factory assets and patents/copyrights.
3 Investors will make use of the statement of profit or loss to understand how much
profit (or loss) the firm is making and what potential dividend they might receive.

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 Answers

4 Responses could include the following. • It reduces the net book value of a non-current
asset. The value of non-current assets on the
• One obvious limitation is that accounts are
statement of financial position will fall as
backward-looking (historic). They report what
a consequence.
has happened, not what is going to happen,
and when issued may be up to six months out 3
of date. Only management accounts, which are 2020 2021
intended for internal use, look forward. These Non-current
accounts are used as planning and navigation assets
documents for the management and are not Property (factory $11 000 000 $10 450 000
available to the general public. and office)
• A second limitation is window dressing, which Machinery $14 600 000 $13 870 000
is when accounts are presented in the best
Intangible assets $2 000 000 $1 900 000
possible, or most flattering, way. For instance,
accountants will sometimes use specific ‘tricks $27 600 000 $26 220 000
of the trade’ to make their businesses look Current assets
more successful than they are.
Value of $3 000 000 $3 500 000
Recall and connect 2 inventory

Variance analysis. Cash $330 000 $300 000

Trade receivables $4 600 000 $4 200 000
33.3 Inventory valuation $7 930 000 $8 000 000
Knowledge recall questions Total assets $35 530 000 $34 220 000
1 The price at which the stock can realistically be sold Equity and
for, minus the cost required to sell it. liabilities
Current
Recall and connect 3 liabilities
a Limited companies are required by law to publish Trade payables $3 400 000 $3 600 000
accounts, while sole traders and partnerships are Overdraft $325 000 $330 000
not required to do so.
Tax owed $250 000 $250 000
b Just-in-time (JIT) and just-in-case (JIC).
$3 975 000 $4 180 000
Non-current
33.4 Depreciation liabilities
Knowledge recall questions
Bank loans $8 000 000 $6 800 000
1 Answers could include: Total liabilities $11 975 000 $10 980 000
• normal wear and tear through usage Shareholders’
• technological change that makes the asset equity
obsolete. Share capital $22 000 000 $23 000 000
2 Answers could include: Retained $1 000 000 $20 000
• The assets will retain some value on the earnings
statement of financial position each year until Other reserves $455 000 $200 000
fully depreciated or sold off.
Total equity and $23 455 000 $23 220 000
• It is a business expense so it will reduce profit liabilities
from operations on the statement of profit
or loss.

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 Answers

Recall and connect 4 For most businesses, the current ratio is an adequate
Sales revenue and costings are found on the income measure of liquidity and so can be used by investors
or profit or loss statement, while assets, liabilities and to measure the success of a business but there will
reserves are included on the financial statement. be exceptions to this rule –when it does not provide an
The current assets, on the financial statement, would accurate metric for investors. An example of this might be
also be included on a firm’s cash flow statement. when a business holds a high level of inventory, which may
All three must balance, so, for instance, the final cash not be easy to turn into cash. In such a case, the acid test
flow figure will be transferred to the value of cash on ratio is a better measure as it excludes stock levels from its
the balance sheet, while the net profit (or loss) each year value of current assets. This may be typical of many retail
is then transferred as a liability (a source of funds) on businesses, for example [E].
the financial statement. In conclusion potential investors would consider a firm’s
liquidity ratios when making an investment decision but
must consider other factors as well, e.g., profit trends, while
34 Analysis of published any analysis must compare any financial information for
a business with other businesses in the same industry [E].
accounts
Recall and connect 1
34.1 Liquidity ratios A firm’s cash flow is represented by the value of cash
Knowledge recall and Exam skills questions held at a particular moment in time. Liquidity includes
cash and liquid assets (stock and payments receivables).
1 • Current ratio for Coca-Cola: 20 411 / 26 973 =
0.76; for PepsiCo: 17 645 / 20 461 = 0.86.
34.2 Profitability ratios
• Acid test ratio for Coca-Cola: 17 186 / 26 973 =
0.64; for PepsiCo: 14 412 / 20 461 = 0.70. Knowledge recall and Exam skills questions
2 Liquidity ratios are an important class of financial metrics 1 Gross profit margin for Coca-Cola:
used to determine a debtor’s ability to pay off current 22 647/37 266 = 60.77%; gross profit margin
debt obligations without raising external capital. Common for PepsiCo: 37 029/67 161 = 55.13%.
liquidity ratios include the quick ratio and current ratio. Operating profit margin for Coca-Cola:
An investor is any person or other entity (such as a firm 10 086/37 266 = 27.06%; operating profit margin
or mutual fund) who commits capital with the expectation for PepsiCo: 10 291/67 161 = 15.32%.
of receiving financial returns.
Return on capital employed for Coca-Cola:
Potential investors in a business need to know that the 10 086/59 408 = 16.98%; return on capital employed
business they invest in has the ability to survive and be for PepsiCo: 10 291/59 086 = 17.42%
profitable in the longer term [Ap]. A business that is unable
to meet its current liabilities in unlikely to survive, even if it is 2 Answers may include the following:
profitable. A business that cannot meet its current liabilities • Use lower-cost materials. Quality image may
will find that banks might recall overdrafts or that suppliers be damaged, which could hit the product’s
will refuse to supply the business due to lack of payment reputation.
for goods supplied or fear of lack of payment [An]. • Cut labour costs (for example, offshoring
An unsatisfactory liquidity ratio could indicate poor production to low-cost countries). Quality
management or poor decision-making, which might deter may be at risk: there may be communication
potential investors. Alternatively, poor liquidity might be problems with distant factories.
a consequence of a fast-growing business, where the • Cut labour costs by increasing productivity
business overextends itself in terms of the spending to through automation. Purchasing machinery
facilitate that growth. This could be highlighted by the will increase overhead costs, workers will need
liquidity ratio. Has the business arranged a large overdraft? retraining and short-term profits may be cut.
Is it taking on more employees [An]? • Cut wage costs by reducing workers’ pay.
Motivation levels might fall, which could
reduce productivity and quality.

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• Increase prices. This will increase profit on • Application can be seen through the use
each item sold. Total profit could fall if too of financial ratios for PepsiCo, for example,
many consumers switch to competitors. inventory turnover ratio for PepsiCo =
This links to price elasticity of demand. 9.32 times, trade receivables for PepsiCo =
• Relocate to low-cost site. Lower rental costs 42.51 days.
could mean moving to a less attractive area,
which could damage image.
Recall and connect 3
• Reduce promotion costs. Cutting promotion As a business grows, it should gain greater opportunities
costs could lead to sales falling by more than to make efficiency savings from economies of scale,
fixed costs. e.g., specialisation and marketing economies, but larger
firms may also grow wasteful as pride in the business
• Delayer the organisation. Having fewer
declines and employees become more detached from
managers could reduce the efficient operation
the organisation they work for.
of the business.
• Reduce long-term borrowing, perhaps by
raising finance from a new issue of shares.
34.4 Gearing ratio
The success of a new issue of shares will Knowledge recall and Exam skills questions
depend on the prospects for the business 1 Gearing is a measurement of the entity’s financial
and investor confidence. leverage, i.e., the degree to which a firm’s activities
• Application can be seen through the use of are funded by shareholders’ funds versus borrowed/
profitability ratios for Coca-Cola. For example, creditors’ funds. The greater the reliance of a
Gross Profit Margin = 60.77%, Profit Margin business on loan capital, the more highly geared it
= 27.06%, ROCE = 16.98%. is said to be. A highly geared business runs the risk
of not being able to repay debts or the interest on
Recall and connect 2 them, especially if profits fall significantly.
As a business grows it will generally be able to benefit 2 a Gearing ratio for Coca-Cola:
from increased economies of scale, allowing it to
improve its profitability and efficiency. The company 27 516/59 408 × 100 = 46.32%
may also experience diseconomies of scale, however, b Gearing ratio for PepsiCo:
which will have the opposite effect.
9979/59 086 × 100 = 16.89%
34.3 Financial efficiency ratios Recall and connect 4
Knowledge recall and Exam skills questions Equity financing does not take funds out of the business,
1 Inventory turnover ratio for Coca-Cola: 8100/ whereas debt loan repayments do. Interest payments reduce
3225 = 2.51; inventory turnover ratio for PepsiCo: the money available for working capital. On the other
30 132/3233 = 9.32. hand, equity-based finance involves dilution of ownership
(and therefore control) and shareholders will also receive a
Trade receivables for Coca-Cola: 3971/37 266 × 365
share of the firm’s profits in the form of dividends.
= 38.89 days; trade receivables for PepsiCo =
7822/67 161 × 365 = 42.51 days.
34.5 Investment ratios
2 Answers may include the following:
Knowledge recall and Exam skills questions
• Increase inventory turnover by adopting JIT 1 One impact is that shareholders may then decide
inventory management. to sell their shares (presuming the firm is a PLC),
• Reduce the credit period offered to customers. reducing the share price and leading to a potential
This will reduce the debt collection period. takeover of the company.
• Delay payment to suppliers. This will increase This may also create a poor image for the
the creditor payment period. organisation and may also be seen as a sign of
weakness in the market. Shareholders may also
expect a bigger dividend in the future.

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The money retained can be used to expand the

business and to reduce the gearing of the company
35 Investment appraisal
as well as to improve cash flow/working capital.
35.1 What is meant by
2 Answers might include the following.
investment appraisal?
A company can improve its dividend yield by
increasing its profit without increasing the capital Knowledge recall and Exam skills questions
employed through raising prices, increasing sales 1 • The initial capital cost of the investment such
and/or lowering costs. as the cost of buildings and equipment.
Dividend yield can also be improved by increasing • The estimated life expectancy or ‘useful life’
the dividends paid to shareholders, but this could of an asset.
reduce the capital reinvested in the business,
• Residual value of an investment: at the end
reducing the ability of the business to make profit
of their useful lives, the assets will be sold or
in the future.
scrapped, leading to a further cash inflow.
Directors may decide to reduce the annual dividend
• Forecasted net cash flows from the project:
even if profits have not fallen, to increase retained
these are expected returns from the investment
earnings. These retained earnings may be invested
less its annual operating cost.
in areas such as growth to improve profits in the
future, so a short-term fall in dividend yield may 2 All figures are based on estimates, which are often
be worth it for an increase in the future. subject to changes in the external environment, e.g.,
PESTEL changes, that make any forecast uncertain.
If directors decided to increase dividends to
Some of the assumptions, such that cash inflows are
shareholders, with no increase in profits, then the
the same as the annual revenues earned from the
dividend cover ratio would fall. To increase the
project, may be incorrect.
dividend cover ratio, profits would need to increase,
or the annual dividends would need to fall, which 3 Answers could include the following:
would improve the investment ratio results, but may A 4 years, 4.8 months
upset the shareholders.
B 3 years, 6 months
The most effective way to improve returns to
investors is to increase profits. Higher profit levels C 4 years
allow for increased dividends, which raise the ARR for each project is:
dividend yield. The prospect of business growth
and increased profitability is likely to increase the A total return = $125 000 000 − $100 000 000 =
share price of the company. Shareholders will 25/5 (the number of years) = 5/100
therefore benefit from higher dividends and or 5% per year
a higher share price. B 15 / 5 = 3 / 95 or 3.16% per year

Recall and connect 5 C 60 / 5 = 12 / 135 or 8.89% per year

a It is possible for a business to grow quickly  ased on the returns on payback and ARR,
B
without high levels of borrowing. However, this is the best project would appear to be project C,
difficult because relying entirely on retained profit offering the best return by far on all three projects
and shareholders’ equity may be difficult and/or in terms of ARR and the second-shortest
impossible for some businesses. Franchising may also payback period.
provide a way of achieving this, but the franchise
model is not open to all types of firms. It tends to Recall and connect 1
be most suitable for retail/restaurant businesses. The budgeting process will use investment appraisal
b Franchising may offer a way of enabling a business techniques to estimate the likely (or budgeted) financial
to grow without the organisation running a outcome of any decision.
dangerous level of gearing or using its own funds,
but this model is not always possible for a business.

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35.2 Quantitative techniques: Payback and accounting rate of return

Knowledge recall and Exam skills questions
1 While Jill’s Snacks would need to consider a range of quantitative and qualitative measures
when deciding on the best project, when choosing between ARR and payback period it is likely
to lean more towards ARR as it calculates the total profit made, as an average, over the whole
lifespan of the investment. There are circumstances when payback period is the more significant
factor, but these would probably not apply to a large, well-established business like Jill’s Snacks.
Normally, newly established businesses, or those suffering from poor cash flow/liquidity, would
prioritise the project with the shortest payback period, but this is unlikely to be the case with
Jill’s Snacks.
2 a Answers may include the following:
• Payback is quick and easy to calculate.
• The results are easily understood by managers.
• The emphasis on speed of return of cash flows gives the advantage of
concentrating on the more accurate short-term forecasts of the project’s profitability.
b Answers may include the following:
• ARR uses all of the cash flows, unlike the payback method.
• It focuses on profitability, which is the central objective of many business decisions.
• The result is easily understood and easy to compare with other projects that
may be competing for the limited investment funds available.

Recall and connect 2

When a company needs to recover its investment quickly in order to reinvest or where liquidity is a critical
issue, it is more likely to lean its decision-making towards projects that offer the lowest payback period,
even if this means that the project chosen offers a lower ARR.

35.3 Quantitative techniques: Discounted cash flow

Knowledge recall and Exam skills questions
1 Advantages could include:
• It considers both the timing of cash flows and the size of them in arriving at an appraisal.
• The rate of discount can be varied to allow for different economic circumstances. For instance,
the rate of discount could be increased if there was a general expectation that interest rates were
about to rise.
• It considers the time value of money and takes the opportunity cost of money into account.
Disadvantages could include:
• It is reasonably complex to calculate and to explain, especially to non-numerate managers.
• The final result depends on the rate of discount used, and expectations about interest
rates may be wrong.
• NPVs can be compared with other projects, but only if the initial capital cost is the same.
This is because the method does not provide a percentage rate of return on the investment.

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2 Option A is the correct response because unlike the payback period and ARR, NPV considers both
the size of the net cash flows as well as the timing of them: how quickly the cash revenue is received.
All of the other responses sound reasonable but on close inspection are all untrue. All investment
methods consider the minimum (required) criteria of any investment, while none of the techniques
consider either the amount borrowed/invested or the rate of inflation in any calculation.
3 Value of the investment Project A Project B Project C
Initial cost $100 000 000 $95 000 000 $135 000 000
Year 1 $18 600 000 $37 200 000 $27 900 000
Year 2 $17 200 000 $25 800 000 $30 100 000
Year 3 $19 750 000 $15 800 000 $27 650 000
Year 4 $18 500 000 $7 400 000 $25 900 000
Year 5 $17 000 000 $6 800 000 $23 800 000
Year 6 $6 300 000 $0 $15 750 000
Net present value of $4 070 000 $2 000 000 $15 100 000
the investment

Recall and connect 3

The difference between a firm’s cash flow and the discounted cash flow investment appraisal
technique is that under the latter net cash flows are ‘discounted’ by the opportunity cost of
the investment, often the rate of interest. It is important for businesses to ‘discount’ any net
cash flows so that the organisation is also able to compare the investment with its opportunity
cost to understand whether the project is viable or not.

35.4 Investment appraisal decisions

Knowledge recall and Exam skills questions
1 • The impact on the environment and local community might have an impact on the
business decision.
• Any potential refusal of planning permission might delay or cancel the project.
• The aims and objectives of the business might have an impact on the business decision,
e.g., the decision to replace the existing energy provider with a wind turbine is costly
in the short term, but will make savings in the long term. Which of these is being prioritised
by the organisation’s management?
• The impact on the workforce might impact on any investment decision if it leads to job losses
or reorganisation of labour.
• Acceptability of risk might have an impact on the business decision, with some managers more
prepared to accept risk than others, and hence the degree of quantitative data may be irrelevant
if managers are unprepared to take risks.

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2
Payback ARR NPV
What is being The time period to pay The average profit as Present-day value of all
measured? back the initial cost a percentage of the net cash flows
average capital cost
When is it most useful? When finance is limited Comparing with the To assess whether the
When interest rates criterion rate project makes a return
are high Comparing with the when cashflows are
return from other projects discounted
Comparing with the cost For comparing other
of finance (interest rate) projects with a similar
capital cost
Major limitations Does not calculate the Does not take the timing Difficulty of choosing an
profit from an investment of cash flows into account appropriate discount rate,
Does not give a present- Does not give a present- for example, in times of
day value to cash flows day value to cash flows fluctuating interest rates
Difficulty of comparing
projects with very
different initial
capital costs

3 Answers could include the following:

• reference to the advantages and disadvantages of the investment appraisal technique being used
• a comparison of investment appraisal techniques on decision making
• application of relevant data for the projects (calculated earlier in the chapter).

Project A Project B Project C

Payback 4 years, 4.8 months 3 years, 6 months 4 years
ARR 5% 3.16% 8.89%
NPV $4 070 000 $2 000 000 $15 100 000

Consideration of other factors in decision making:

• impact on the environment and the local community
• refusal of planning permission
• aims and objectives of the business
• impact on the workforce
• acceptability of risk
• access to finance required for investment and any additional costs incurred in the longer term.

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36 Finance and accounting strategy

36.1 The use of accounting data in strategic decision-making
Knowledge recall questions
1 • financial statements, e.g., statement of profit or loss and financial position
• chairman’s statement, consisting of a general report highlighting the company’s major achievements
over the previous year and future plans for the company
• chief executive report, consisting of a more detailed analysis of the previous year’s financial
performance, broken down by individual product, geographical area or division
• auditor’s report, which consists of the final report by the independent group of auditors and
focuses on the validity of the report and the accounting measures used
• account notes, including more specific information on the type of fixed assets owned by the business,
the precise long-term liabilities owed by the company, etc.
2
Managers might compare Banks will look at the Suppliers will look at the
the performance against accounts before deciding published accounts to see
targets and use for future whether to lend them if they are sufficiently liquid
planning, etc. money or not. to pay for their supplies.

Customers will look at the Governments’ primary

published accounts to see interest will be
Published accounts
if they will be around whether or not they are
in the future. paying enough tax.

Potential investors/
Employees will be interested The local community’s interest
shareholders will look at the
to see if the company is secure will lie in its contribution to
accounts to check on the value
enough to ask for a pay rise. local CSR, pollution, etc.
of their investment.

3 Managers
• measure the performance of the business to compare against targets, previous time periods and competitors
• help take strategic decisions.
Banks
• decide whether to lend money to the business
• assess whether to allow an increase in overdraft facilities.
Suppliers
• see if the business is liquid enough to pay off its debts
• decide whether to demand early repayment of outstanding debts.

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Government and tax authorities 2 • Rationalisation. Reductions in operating

expenses should increase the gross and
• calculate how much tax is due from the business
operating profit margin, providing current
• determine whether the business is likely to sales levels are maintained.
expand and create more jobs, and be of
• New product development. In the short-term
increasing importance to the country’s economy.
profit and liquidity may fall due to the expenses
Shareholders and potential shareholders incurred, so RoCE and liquidity ratios could
• assess the value of the business and their reduce. In the long term, however, if the
investment in it new product or products are successful then
profitability, liquidity and RoCE are likely
• establish whether the business is becoming more to improve.
or less profitable.
• Market development. As with new product
Employees development, in the short-term profit and
• assess whether the business is secure enough liquidity may fall due to the expenses of
to pay wages and salaries developing new markets, so RoCE and liquidity
ratios could reduce. In the long term, however,
• determine whether the business is likely to if the new market or markets prove successful,
expand or be reduced in size. then profitability, liquidity and RoCE are likely
Local community to improve.

• assess whether the business is profitable and • Low price strategy. This depends on the
likely to expand, which could be good for the PED elasticity of the product. If the good or
local economy service is PED-elastic, then overall profitability
and liquidity may rise, despite lower gross
• determine whether the business is making losses and operating profit margins. If the good or
and whether this could lead to closure. service is PED-inelastic, then all liquidity and
profitability ratios will likely worsen.
Recall and connect 1
3 Areas to consider for improvement:
The purpose of the report is to provide users, such as
shareholders or potential investors, with information AO1 Knowledge and understanding: Demonstrate
about the company’s operations and financial knowledge and understanding of business concepts,
performance. This is required by law to protect those terms and theories.
investors from financial mismanagement and so that • Has the answer shown correct knowledge
investors are encouraged to invest their savings, safe relating to relevant accounting ratios?
in the knowledge that they will kept informed of the
company’s progress. Unincorporated businesses do not • Has the answer shown correct knowledge
have shareholders and so are not legally required to relating to business performance?
make their accounts public. AO2 Application: Apply knowledge and
understanding of business concepts, terms and
36.2 The use of accounting data and theories to problems and issues in a variety of
familiar and unfamiliar business situations and
ratio analysis
contexts.
Knowledge recall and Exam skills questions
• Has the answer used the data provided in the
1 A company’s board of directors will consider case study?
factors like reinvestment opportunities and balance
sheet stability as they determine its dividend • Is there evidence of accounting ratios being
payout. A company can also use its dividends as used/calculated?
a way of attracting wealthier, more stable investors
who may be more likely to buy and hold stock.

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AO3 Analysis: Analyse business problems, issues AO4 Evaluation: Evaluate evidence in order to
and situations by: make reasoned judgements, present substantiated
conclusions and, where appropriate, make
•  sing appropriate methods and techniques
u
recommendations for action and implementation.
to make sense of qualitative and
quantitative business information • Has the answer provided a judgement to the
• searching for causes, impact and question: the impact on business strategy?
consequences • Has this been justified using data?
• distinguishing between factual evidence
• Has a strategy been presented and
and opinion or value judgement
recommendations made?
• drawing valid inferences and making valid
generalisations. • Are there any other points that need to be
considered in any action taken by the business?
• Has the answer identified any implications of
the accounting ratios used for the business?
Recall and connect 2
• Have any issues been identified in the use Any strategic plan will require finance and so one
of the accounting ratios? obvious way that this will be impacted by economic
performance is in the amount of funds available to
complete the plan. An organisation’s overall strategic
plan is also influenced by director sentiment and how
confident the directors feel in the company’s prospects.
Therefore, it is likely that a successful financial
performance by the business will encourage directors
to be more expansive in their overall strategic planning.

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