The Association of Business Executives

QCF

The Business Environment Examiner’s Report and Suggested Answers

Unit Title: The Business Environment

Unit Code: 5TBE

QCF Level: 5

Date of Examination:

June 2014

Structure of paper: Answer all four sections

Section A: Answer all three questions Q1 Q2 Q3

Section B: Answer one question Either Q4 or Q5

Section C: Answer one question Either Q6 or Q7

Section D: Answer one question Either Q8 or Q9

Introduction There was some improvement in the overall performance of candidates, and it was pleasing to see some papers of a high standard. Some centres had prepared candidates well, and they were quite strong on the economics questions. Others, however, had insufficient knowledge of the syllabus and lacked the range of knowledge required. In many cases there was little clear understanding of the expected standard of answers. There were too many responses restricted to short lists of bullet points, which were not developed, and context was weak or non-existent, as a result gaining low grades. In summary, yet again the main reasons why candidates scored poorly on questions were (i) lack of knowledge (ii) lack of application (iii) inability to develop points and (iv) not reading questions carefully to make sure they are answering the question set. To score higher grades it is important when preparing for the exam to study relevant examples which can be applied to questions set. The emphasis in The Business Environment is on application of business and economic concepts to the contemporary world of business at national and international level.

Section A Question 1 Learning Outcome 1: Understand the significance of the environment on business activity. Explain how key changes in the external environment could impact on a business that manufactures computers.

Suggested answer:

PESTEL factors affecting manufacturing could include:

Political – stability of government, government policies affecting rules and regulations (which might originate in the EU), trade union power, opportunities for foreign investment, local authorities.

Economic – general state of the economy – boom or recession, tax rates, interest rates, exchange rates, global markets.

Social – culture of society, changes in lifestyles affecting both workers and customers, demography.

Technological – technology changes in the environment, speed of technology transfer, product life cycles shortening.

Environmental – green issues and legislation, CSR influences.

Legal - legislation affecting companies, consumer rights, employment rights.

Examiner’s comments:

Most candidates used the PESTEL analysis to answer this question and most had some knowledge of the model, although the points made were often very general and application was generally weak. Many mentioned political stability and the passing of new laws without giving any idea of what these events might actually mean. Some used a SWOT analysis and whilst being aware that only the opportunities and threats apply to the external environment, there was little application to a computer manufacturing business.

Question 2 Learning Outcome 2: Understand the structure and organisation of business. In many economies large firms dominate the business and industrial sectors. Discuss the advantages and disadvantages of operating as a large company.

Suggested answer:

Advantages could include:

More opportunities for trade and new customers.

Lower risk as not all business is concentrated in one location.

Economies of scale.

Buying power over suppliers to reduce costs of resources.

Higher level of management expertise.

Potential for new ideas.

Easier access to finance. Disadvantages could include:

Loss of control by owners due to takeover threats.

Higher risk when trading with developing economies.

Environmental and ethical issues of pollution, use of resources or corruption.

Too much bureaucracy.

Communication between employees more difficult in large organisation.

Failures in co-ordination.

Difficulties in managerial control.

Examiner’s comments:

This was a straightforward question which was quite well answered, although in many cases lacking in sufficient analysis. A more detailed discussion of the advantages of size, including various types of economies of scale, was rather skimmed over in many cases. Most candidates were able to give some disadvantages, although paying higher taxes as a disadvantage does not stand up because this will only occur as a result of higher profits and is therefore relative.

Question 3 Learning Outcome 4: Understand the impact of the macro-economic environment on business. (a) Describe the main macro-economic objectives of a government and explain how each of these objectives is measured.

Suggested answer:

Low inflation/price stability – measured by the consumer prices index, which indicates the price movements of the average family’s spending on goods and services.

Economic growth – measured by the increase in GDP over a period of time, usually a year.

Low unemployment – measured in the UK by the number of people out of work, either: i. The claimant count of those in receipt of benefits and actively seeking work; or ii. The ILO, international labour organisation, survey of those of working age actively

seeking work. Other countries have different ways of measuring unemployment.

Stability in the balance of payments – measured by the difference between imports and exports of goods and services.

(b) Explain, using examples, why there might be a conflict between two of these objectives being achieved at the same time.

Suggested answer:

Pursuing low unemployment and higher economic growth with low interest rates or lower taxes may cause prices to rise through demand pull inflation.

Controlling inflation by raising interest rates or raising taxes and reducing government spending may reduce economic growth and cause unemployment to rise.

Pursuing higher economic growth, resulting in higher inflation, may reduce the demand for exports as prices rise and become uncompetitive, and also imports could be cheaper. This would have an adverse effect on the balance of payments.

Examiner’s comments: This question was very badly answered. Many candidates did not understand the meaning of ‘macroeconomic objectives’ and discussed economic models, taxation, CSR and business-oriented points. Those who did know the meaning of the concept were able to name several objectives but did not explain these fully. Almost all candidates misunderstood the last part of (a), which asks for an explanation of how the objectives are measured; instead they described types of policy. Perhaps the measurement of economic variables has not been taught. The quality of the answers to (b) on conflicts between objectives depended on the extent to which the concepts had been understood. Some candidates were able to show the problems of achieving low unemployment with low inflation but other answers were very confused.

Section B Question 4 Learning Outcome 5: Understand the influence of the global economy on business. (a) Explain the main disadvantages of international trade from the perspective of a developing country.

Suggested answer:

Infant industries can be crushed by foreign competition.

Dumping can occur, swamping markets with cheap goods.

Reduced demand for home produced goods.

National security may be compromised by reliance on strategic imports.

Foreign companies may create monopolies in the home market.

Externalities of pollution and congestion.

Influence on consumer tastes at variance with local culture.

(b) Discuss the advantages to a developing country of becoming a member of a trading bloc.

Suggested answer:

Trade creation where previously trade barriers between members existed.

Economies of scale develop with larger home market.

Specialisation through comparative advantage.

Greater competition leads to greater efficiency

Greater consumer choice.

Increase political co-operation between members – prevents conflicts.

Examiner’s comments: a) Most candidates had an awareness of the down side of international trade for developing countries, and there were some good answers. However there was still a tendency for short bullet points with little development or explanation. The usual disadvantages were included such as dumping, infant industries, and loss of cultural identity, but the importing of dangerous and illegal products is not relevant as these do not constitute legitimate trade. b) Most candidates knew what a trading bloc was and were able to make some relevant points, although in many cases merely repeated the benefits of international trade in general. It should be noted that the BRICS countries do not constitute a trading bloc.

Question 5 Learning Outcome 5: Understand the influence of the global economy on business. (a) In recent years the British pound sterling has fallen in value against the euro. Discuss the likely impact of this on: (i) British exports to the Eurozone. (ii) Imports into Britain from the Eurozone. (iii) The overall balance of payments position of Britain.

Suggested answer:

(i) The price of British exports will be cheaper within the Eurozone, therefore it is likely that demand for British exports will rise (depending on price elasticity of demand). However most manufactured goods contain imported raw materials and the fall in the pound will increase costs of these raw materials, resulting in higher prices of finished goods, which may be passed on to the consumer in the home and export market, reducing demand.

(ii) The price of imports from the Eurozone will increase and may result in lower demand in Britain for EU imports (depending on price elasticity of demand). Imported food prices from the EU will increase and this may lead to higher wage demands from British workers, increasing costs of production, thus making it harder to sell goods abroad by reducing the advantage of lower export prices in euros.

(iii) Brief explanation of the components of the balance of payments. The result may help correct a balance of payments deficit in Britain if demand for British exports does increase and demand for imports from the Eurozone does fall.

(b) Explain three ways in which a country could protect its economy against imports.

Suggested answer:

Import tariffs (customs duties) on selected items to raise the cost of imported goods, so that domestic producers supply more to the home market.

Import quotas – restrictions on the quantity of goods allowed into the country.

Embargoes – total ban on goods entering the country, usually during a period of conflict.

Non-tariff barriers – safety and administrative controls making it much harder for exporters to enter the market.

Exchange control – limiting amount of foreign exchange that can be purchased through the central bank.

(c) Discuss the role of the World Trade Organisation (WTO) in international trade.

Suggested answer: WTO is responsible for:

Global rules of trade to ensure trade flows as smoothly and freely as possible.

Decisions taken by international consensus among members.

Handling conflicts over trade.

Campaigns for lower trade barriers.

Examiner’s comments: a) This was not a popular question. The answers to the first part of the question on the effects of a fall in the value of sterling were quite confused. Some candidates managed to get the relationship the right way round but were not able to develop this further, simply saying that a fall in sterling makes exports cheaper and imports more expensive. Most candidates did not know what to write about the overall balance of payments. This does not appear to have been well taught. b) Protection against imports was better known and some candidates were able to say something about the WTO.

Section C Question 6 Learning Outcome 6: Understand the impact of socio-cultural influences and technology on business decisions. ‘Businesses should be concerned only to pursue profit, and they should not get involved in corporate social responsibility (CSR).’ Discuss this statement in the context of a clothing retailer that sells very cheap clothing to western consumers which has been manufactured in low-wage, developing countries.

Suggested answer: Disadvantages of CSR for this company include:

CSR policies are a cost to business when it is trying to maximise shareholder value. Costs include personnel to design, implement, monitor, and control policies and keep them updated.

New production processes in the west require expensive R and D, whilst clothes made with very cheap labour maximise profits.

Competition, especially price competition, is very fierce on the High Street and the UK company wants to retain its market share and its high profit margins.

CSR failures in the supply chain may come to light and the resultant bad publicity may be with the company for a very long time, resulting in a consumer boycott.

Advantages of CSR for this company include:

Avoiding negative publicity of exploitation of workers through low wages, long hours, very poor and unsafe working conditions, child labour.

Pursuing positive PR from ethical sourcing.

Consumer loyalty if wishing to buy ethically produced clothes.

Potential employees are more likely to be attracted to a company pursuing CSR.

Examiner’s comments: Candidates appeared to know very little in detail about CSR and its increasing importance in the public profile of companies. Many candidates managed to comment on the plight of the low-paid workers, but did not then address the wider issues of the business case for companies to promote ethical practices to encourage customers to buy ethically sourced clothing, encourage ethically minded investors and attract ethically minded employees. For companies to focus solely on profit maximisation at all costs may well give short-term returns, but does not necessarily lead to long-term growth.

Question 7 Learning Outcome 6: Understand the impact of socio-cultural influences and technology on business decisions. You work as a product manager for a company that produces many of the information technology products used in business today. You have been asked to explain to a group of business leaders how information technology has helped to transform business activity today, using your company as an example. Explain the points you would want to make: (a) On the impact of information technology on the internal management of the company.

Suggested answer:

Internal communication between employees and management – e-mail, teleconferencing, video conferencing.

Administration – management information systems facilitating speed of strategic decision making, and storage of data.

Manufacturing technology including robot technology on production lines.

Advanced manufacturing.

Travel – use of portable computing devices enabling business to be done globally whilst travelling.

Virtual working in remote locations.

Virtual learning for employee training.

(b) On the impact of information technology on the external operations of the company.

Suggested answer:

Internet is a promotional showcase to advertise to the world very economically.

E-commerce through websites and social media give much greater reach for businesses.

Access is available to customers to businesses products and services required via search engines.

Consumers can interact with businesses and each other resulting in instant feedback from customers and growing consumer power.

Commercial purchasing staff have access to data and products of other organisations and can negotiate more effectively on price.

Examiner’s comments: This question was more popular and was not badly answered. Although some of the points were very general and sometimes vague, nevertheless a range of ideas was usually included on how IT has affected the workplace, both on internal management and external operations. Candidates should expand answers with more specific examples.

Section D Question 8 Learning Outcome 3: Understand the competitive and political environment facing businesses. The market structure comprising many small companies competing for business is described as ‘monopolistic competition’. (a) Using examples, describe the key characteristics of monopolistic competition.

Suggested answer:

Many firms with little market power.

Unrestricted entry and exit.

Products are close substitutes.

Good knowledge of market (not perfect) – small differences in price.

Abnormal profits in short run, competed away in long run.

(b) Explain ways in which these monopolistically competitive companies differentiate their products or services. Use examples to support your answer.

Suggested answer: Examples could include small local businesses such as hairdressers, corner shops, local garage repair centres, building tradesmen, other local businesses overseas.

Personal customer service.

Quality of workmanship.

Reliability.

Branding of products and services.

Advertising at local level.

Special offers – loyalty cards, etc.

Technical improvements to products and after sales technical support.

Examiner’s comments: This was a less popular question, but it was answered by a number of candidates. Unfortunately, quite a lot of them confused monopolistic competition with monopoly and therefore discussed monopoly. This has occurred in previous examination questions. This topic is a specific part of the syllabus that must be learned. In part b) answers were very general and lacking in detail. Many candidates gave examples from very large multinational companies, which clearly are not categorised as monopolistic competition.

Question 9 Learning Outcome 3: Understand the competitive and political environment facing businesses. Public sector colleges are increasingly being encouraged by governments to compete with private training companies on a more commercial basis by analysing what their competitors are doing. (a) Discuss how SWOT analysis could help managers of a college understand their competitive environment.

Suggested answer: Internal analysis:

Strengths could include market share, exam results, reputation of college and number of applications each year, range of subjects and courses, student destinations.

Weaknesses could include poor teaching and poor exam results, low enrolments, bad publicity in the past, poor image of college, college budgetary problems, poor management.

External analysis:

Opportunities could include expansion of student numbers, increasing range of courses offered, expansion into overseas markets for candidates, e-marketing of college and courses.

Threats could include private sector colleges undercutting prices and having greater budget for marketing, new courses offered, greater use of IT and distance learning.

(b) Suggest an alternative approach that could be used to assess the competitive position of the college.

Suggested answer: Benchmarking could be used to compare the success of the college with private providers. Criteria used could include exam results and league tables, budget management. Porter’s 5 forces could also be considered.

Examiner’s comments: This was a more popular question, and there was a reasonable attempt to discuss SWOT and to mention some indicators which applied to colleges, but these were usually listed without being discussed. The answers were therefore very general and did not usually score high grades. A range of alternatives was proposed in (b) and these were usually relevant although rather briefly outlined. It should be noted that PEST analysis is not relevant here in assessing the competitive position of a college.

Conclusions

Recommendations to candidates and tutors for future examinations: Although it was pleasing that some centres had prepared their candidates well, especially in the area of Economics, it was clear in many cases yet again that understanding of specific topics was very limited because they had not been studied in sufficient depth. There is a need to encourage candidates to spend more time studying carefully and using the syllabus as a checklist on progress and revision, as all the learning outcomes are tested in each exam and must be passed in order to pass the subject. There is still too much use of brief bullet points in answers, without the application to business which is expected at this level. Business concepts should be studied with practical examples, so that their impact can be discussed in detail.