Section External influences on business

6
activity: practice case study
80 marks.
Read the case study and answer all of the questions.

KS Juice Bars go multinational

The expansion into Country X had been a great success. Several new bars had been
opened there. The local consumers seemed to prefer KS’s international image and
products to the well established cafés and bars in the country. Some of these had
actually closed due to KS’s competitiveness. However, many of the former workers
had found jobs in KS bars.
The bars in Country X all received supplies of frozen fruit juices from KS’s main
depot in its home country. KS had decided to export these rather than to allow
the bars to press their own fruit. This decision was helped by recent government
agreements to reduce import tariffs.
The company could now consider itself to be a true multinational as an outlet
had also been opened in Country Y. This country was experiencing much faster
economic growth than the home country of KS. The market for cafés and bars was
saturated there. Not only did KS have 125 bars open in the home country, but
several rivals were operating there too.

Economic changes cause problems for KS

Salman and Karen knew that expanding abroad would carry risks. One of these
risks concerned exchange rates. Recent economic changes by the Government in
the home country had led to an appreciation of the currency exchange rate. Against
the currency in Country X, it had appreciated by 15 per cent. This made imports of
juice by the bars in Country X much more expensive. The bars in Country X had
put up their prices to cover the extra costs. This made them less competitive.
On the other hand, KS had gained from lower prices of imported bar equipment
purchased from other countries due to the appreciation of the currency.
In KS’s home country the Government has increased interest rates and direct
taxes. The Government’s main economic objective is to reduce the rate of inflation.
These measures have reduced the income consumers have to spend on going out
and enjoying themselves. However, the Government has also reduced taxes on
company profits and indirect taxes on products bought by consumers.

Environmental and ethical issues

Karen and Salman were proud of the growth and achievements of their company.
They believed that their company was based on ethical ideas and that its activities
did not damage the environment. They were shocked to see the following headline
in the newspaper.

Daily Echo
30/6/13

Shocking report into KS Juice Bars suppliers and advertising!

Our special business reporter can today announce that he has discovered that
one of KS Juice Bars’ main suppliers of fresh fruit employs child workers for
less than $1 per day! What is more, the children have to handle dangerous
fertilisers even though KS claims that its fruit is all ‘organic’. He has also

Cambridge IGCSE Business Studies 4th edition Teacher’s CD © Hodder & Stoughton Ltd 2013 1
 Section 6

found out that one of the KS bars in Country X is claiming to sell ‘Fresh
juices made just for you’ when a pressure group has found out that all KS
juices are in fact frozen and exported to that country.
How will KS Juice Bars ever recover from this bad publicity?
The reporter plans to ask the owners Karen and Salman today – so make
sure you read tomorrow’s Daily Echo!

Karen and Salman met the Daily Echo reporter the next day. They said that they
honestly believed that all suppliers were following ethical guidelines. They were
going to take steps immediately to ensure that only farmers and producers that
promised to use sustainable production methods without the employment of
children would supply KS in future.
The reporter also asked about the advertising claims in Country X. Salman said
that the advert was almost true because although the juices had been frozen, they
were still fresh once they were served to customers.
In response to this bad publicity, Karen and Salman arranged an expensive
advertising campaign in all of the countries in which they operated. The adverts
explained the external benefits of KS Juice Bars. Unfortunately, a pressure group
paid for posters showing empty KS Juice Bar plastic containers – used for take away
juices – in a beautiful park with the slogan:
‘KS juices cost you more than you thought – think of the external costs too.’
After several years of rapid growth for Karen and Salman’s business, the external
environment was becoming less favourable. In addition the environmental and
ethical pressures were mounting. Was now the time to sell the business and take a
well-earned holiday?

Paper 1 style questions

1 Define the following terms:
a) Multinational business [2]
These have factories, production or service operations in more than one country.
They are sometimes known as transnational businesses. (2K)
b) Import tariffs [2]
A tax on an imported product. (2K)
c) Inflation [2]
The increase in the average price level of goods and services over time. (2K)
d) Sustainable production methods [2]
Production methods that do as little damage to the environment as possible. (2K)
2 Identify two economic objectives of governments apart from low inflation. [2]
i) Economic growth
ii) Low level of unemployment (2K)
3 Identify two possible external costs resulting from the operation of a KS
Juice Bar. [2]
i) Transport of fruit from long distances – perhaps abroad – adds to air pollution/
global warming.
ii) If any juices are sold as ‘take aways’ then some cartons or glasses may be
thrown away and the litter caused is an external cost. (2App)
4 Identify and explain two possible reasons why KS Juice Bars decided to become a
multinational. [6]
i) Karen and Salman were very ambitious and wanted to expand their business.
The market for juice bars in their own country might have been quite small – it
might have been saturated by the number of KS bars there – so growth overseas
was thought to be the best way to expand the business. (1K; 1App; 1An)

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 Section 6

ii) Governments in other countries may have been offering incentives to foreign
businesses to set up in their country. If they offered capital grants or low rent
levels on shops, KS’s costs of setting up in another country might have been
lower than in the original ‘home’ country. (1K; 1App; 1An)
5 Identify and explain two effects on KS Juice Bars of the recent appreciation of
the home country’s currency. [6]
i) An appreciation means that a currency rises in value against other currencies.
This can make exports from the country more expensive but imports cheaper.
KS exports frozen juice to other countries so this will now be more expensive,
in local currency, in the countries that import the juices. This might mean that
KS bars in other countries have to raise their prices to consumers.
ii) KS imports some of its specialist bar equipment from abroad. Following the
appreciation this equipment will now appear cheaper in KS’s home currency
and this will help to reduce the capital cost of setting up a new juice bar in
that country. (2K; 2App; 2An)
6 Identify and explain two likely reasons why some governments impose tariffs on
imports. [4]
i) To reduce the level of imports coming into a country. This could increase the
demand for goods and services produced within that country. (1K; 1An)
ii) To earn revenue for the government as each time an import is purchased the
import tariff is paid to the government. (1K; 1An)
7 Identify two government economic policy changes from the case and explain
how they might impact on KS Juice Bars’ business. [6]
i) An increase in interest rates: This will have several effects on KS Juice Bars.
One of them will be that if the business has any loans from banks, the interest
rates on these will increase – unless they had a fixed interest rate. This will
increase the expenses of KS Juice Bars and could reduce their net profit.
(1K; 1App; 1An)
ii) Higher direct taxes: The main direct tax is income tax. Higher rates of income
tax will reduce consumers’ disposable incomes. As juices are not an essential
good, the demand for these might fall as consumers will need to buy essential
items first from their smaller disposable incomes. (1K; 1App; 1An)
8 Do you think the government of Country X was right to allow KS Juice Bars to
open branches there? Consider the advantages to Country X and its government
in your answer. [6]
Yes: Creates jobs, creates competition for local cafés and this might force them to be
more efficient; tax revenue increases for the government.
No: Jobs might be lost from existing cafés; imports of juices will worsen the Balance
of Payments; litter pollution might increase.
Student’s own conclusion. (1K; 1App; 2An) + (2Eval)

Paper 2 style questions

9 a) Identify and explain two ways in which KS could benefit from operating in
ethical ways. [8]
i) Acting ethically means ‘doing the right thing’ and KS could benefit in
two ways. If they act ethically, for example by organising litter clean up
campaigns in local parks, then there will be much good publicity. This could
cancel out the negative publicity about litter caused by KS drink containers.
Many consumers may be attracted towards KS and its products by this
positive publicity. (1K; 1App; 2An)
ii) Acting ethically will reduce the chances of breaking the law and being
fined by the law courts. For example, if Salman is completely honest about
the advertising used by KS and makes it clear how juices are frozen and

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transported then this will reduce the risk of breaking the law on ‘unfair or
misleading’ advertising. This will reduce the cost of fines and the risk of
bad publicity from legal action against the business. (1K; 1App; 2An)
b) By considering the advantages and disadvantages of further expansion
abroad, would you recommend Salman and Karen to open bars in even more
countries rather than opening more bars at home? Give reasons for your
answer. [12]
Benefits of new markets abroad/ Disadvantages of new markets abroad/
disadvantages of home market benefits of home market
Opening in • Home markets might be becoming • More countries means more
more countries saturated – market no longer problems too – e.g. distance, transport,
growing – so one of the ways for communications. There might be
KS to grow is to open up bars in yet diseconomies of scale
more countries • There might be cultural differences, e.g.
• It will expand the global recognition in terms of what flavours are most
of the brand – just opening more popular, styles of advertising that are
bars in the home market will not allowed in different countries, etc.
do this This could add to KS’s costs if it has to
• Some governments might be change its marketing mix for different
offering substantial incentives to countries
new businesses in their country • KS might have very good market
knowledge of home market and this
could reduce the risk of expanding there
rather than starting to open new bars in
new countries

Knowledge/Analysis/Evaluation
Level 3 7–10 marks
Well justified conclusion about whether to open more bars in other countries or
at home
Level 2 4–6 marks
Detailed discussion of impacts of expansion by entering more countries or
opening more bars at home
Level 1 1–3 marks
Outline of advantages/disadvantages of expansion by entering more countries or
opening more bars at home
Level 0 No creditworthy response

In addition to the marks for levels 1, 2 and 3 – Up to 2 additional marks can be

awarded for application.
1 mark – Limited application to the case. At least one example of reference to, or
use of, case.
2 marks – Well applied to case. At least two examples of reference to, or use of,
the case.
10 a) Identify and explain two benefits to a business such as KS of achieving more
sustainable development.  [8]
i) One way of achieving this is by insisting that suppliers always use
sustainable and environmentally friendly methods of production; this will
gain good publicity. Many consumers might be attracted towards products
that have been produced in a sustainable way and which are actually
‘organically produced’ and this might improve the brand image of KS and
the sales of juice. (1K; 1App; 2An)
ii) Sustainable development and the production methods this involves may
actually be cheaper, in the long run, than wasteful methods of production.

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 Section 6

For example, artificial fertilisers may become very expensive if more farmers
use them. By using organic, sustainable methods, one important cost of
production will be eliminated and this might reduce the cost of the fruit
used by KS in the long term. This will help to make KS juices competitive.
(1K; 1App; 2An)
b) You have been asked to advise KS Juice Bars on whether the business will
benefit or lose from further globalisation. Explain the possible advantages and
disadvantages of globalisation to KS Juice Bars in your answer and give an
overall conclusion.  [12]
Advantages Disadvantages
Further • Fewer trade barriers, e.g. no • Increased competition in all markets
globalisation tariffs, quotas on fruit or frozen from other multinationals. These might
juices. This will lower costs for a be much bigger than KS and have a
multinational business such as KS globally known brand name – this is
• Easier to enter new markets in common in the ‘café industry’. This
other countries – this will allow could make it more difficult for KS to
KS to expand further as a compete
multinational • Increased trade may lead to increased
• Lower transport costs might demand for fruit from all juice producers
be the reason for increased and this could drive up the cost of KS’s
globalisation – this will benefit KS main raw material. The business might
from cheaper transport of fruit have to raise prices to customers
and frozen juices

Knowledge/Analysis/Evaluation
Level 3 7–10 marks
Well justified conclusion about the overall impact of further globalisation on KS
Level 2 4–6 marks
Detailed discussion of impact of further globalisation
Level 1 1–3 marks
Outline of advantages/disadvantages of further globalisation
Level 0 No creditworthy response

In addition to the marks for levels 1, 2 and 3 – Up to 2 additional marks can be

awarded for application.
1 mark – Limited application to the case. At least one example of reference to, or
use of, case.
2 marks – Well applied to case. At least two examples of reference to, or use of,
the case.

Cambridge IGCSE Business Studies 4th edition Teacher’s CD © Hodder & Stoughton Ltd 2013 5