Gcse business studies qa 2004 final

tutor2u™

GCSE Business Studies Questions and Answers 2004

Authors: Dan Cottrell, Charlie Boddington www.tutor2u.net © Dan Cottrell and Charles Boddington

INTRODUCTION

This Tutor2u GCSE Business Studies Q&A 2004 aims to answer many of the typical GCSE questions that might appear in the summer exams. It uses the language and diagrams the examiners are looking for.

What does it cover? It has been written with reference to all the main exam board specifications. Each board and indeed each textbook splits Business Studies into to its own sections (product differentiation!). We have split the courses into six main sections, following the major sections of the boards, but your board might approach it in a different order.

How to use the Q&A? The Q&A needs you to add your own notes, questions and answers so it can be used as an effective revision tool. We’ve left plenty of space to make your own adjustments, highlight the key points or make references to your textbook. Remember - TAKE OWNERSHIP and ADD VALUE!

Don’t’ be afraid to TEST YOURSELF. The simple way is to cover up the right hand side of the page, read a question and then see if the answer is similar to one you would give.

We are happy to receive suggestions about this edition of GCSE Business Studies Q&A 2004. Perhaps you have some further questions that you think should be included in the next edition. Please email us at [email protected].

We would like to thank Jim Riley, Managing Director of Tutor2u for his excellent support and guidance and also to John Cottrell for his proof reading and learned advice. Good luck with your studies and our best wishes to you in the exams!

Dan Cottrell & Charlie Boddington

GCSE Business Studies Questions & Answers 2004

© Dan Cottrell, Charlie Boddington & Tutor2u Limited 2004 Page 3 of 87

TABLE OF CONTENTS 1 EXTERNAL ENVIRONMENT AND BUSINESS ......................................................................................................................................... 17

1.1 The Business Environment ............................................................................................................................................................................................................... 17 1.1.1 What is a business?............................................................................................................................................................................................................... 17 1.1.2 Why do businesses exist?...................................................................................................................................................................................................... 17 1.1.3 What is the difference between a need and a want? ............................................................................................................................................................. 17 1.1.4 What is a business activity? ................................................................................................................................................................................................... 17 1.1.5 What are the main categories of inputs to business activity?................................................................................................................................................. 17 1.1.6 What is a product? ................................................................................................................................................................................................................. 17 1.1.7 What is the difference between a consumer good and a producer good? ............................................................................................................................. 17 1.1.8 Provide five examples of consumer goods............................................................................................................................................................................. 17 1.1.9 Provide five examples of producer goods .............................................................................................................................................................................. 17 1.1.10 Explain what is meant by “value added”................................................................................................................................................................................. 17 1.1.11 What are the main categories of cost incurred by a business when it starts up? ................................................................................................................... 18 1.1.12 What is “profit”?...................................................................................................................................................................................................................... 18 1.1.13 What happens if a business makes a loss? ........................................................................................................................................................................... 18 1.1.14 What is meant by the term “entrepreneur”? ........................................................................................................................................................................... 18

1.2 External Factors Affecting Business................................................................................................................................................................................................ 18 1.2.1 What are the main areas in which external factors affect a business..................................................................................................................................... 18 1.2.2 Why does the external environment keep changing? ............................................................................................................................................................ 18 1.2.3 Are external factors a threat or an opportunity to a business? ............................................................................................................................................... 18 1.2.4 Give examples of how new technology has affected point of sale and production in a business?......................................................................................... 18

1.3 Economic Environment ..................................................................................................................................................................................................................... 19 1.3.1 Describe the main types of economic sector that are used to categorise different business activities................................................................................... 19 1.3.2 State three reasons for the increased importance of the tertiary sector ................................................................................................................................. 19 1.3.3 An airport hopes to expand by building another runway. Describe how three industries might be affected by this............................................................... 19 1.3.4 Using examples, explain the term “chain of production”......................................................................................................................................................... 19 1.3.5 What is meant by the term “specialisation”? .......................................................................................................................................................................... 19 1.3.6 Explain the difference between the “private sector” and the “public sector” ........................................................................................................................... 19 1.3.7 What is meant by the term “mixed economy”?....................................................................................................................................................................... 19 1.3.8 What kinds of businesses operate in the “voluntary sector”? ................................................................................................................................................. 19 1.3.9 Provide five examples of business organisations in the UK currently in the public sector ..................................................................................................... 19 1.3.10 What are the main objectives of private businesses? ............................................................................................................................................................ 19 1.3.11 What are the main objectives of public sector organisations?................................................................................................................................................ 19



1.3.12 Explain how a fall in the rate of income tax might affect the sales and profits of a business ................................................................................................. 19 1.3.13 Explain how a business might be affected by an increase in the price of raw materials ........................................................................................................ 19 1.3.14 Outline three ways in which changes in exchange rates might affect a business .................................................................................................................. 19 1.3.15 How might an increase in interest rates affect a business? ................................................................................................................................................... 19 1.3.16 Explain why a shortage of labour might affect a business...................................................................................................................................................... 19 1.3.17 Explain what is meant by the term “mobility of labour” ........................................................................................................................................................... 21 1.3.18 Provide four examples of “labour-intensive” industries .......................................................................................................................................................... 21 1.3.19 What is meant by the term “capital-intensive” industry?......................................................................................................................................................... 21 1.3.20 State two benefits and two costs to UK businesses of EU membership ................................................................................................................................ 21 1.3.21 Describe the main forms of legislation for consumer protection............................................................................................................................................. 21 1.3.22 Give examples of support and advisory agencies available to businesses............................................................................................................................ 21

2 BUSINESS ORGANISATION AND OBJECTIVES .................................................................................................................................... 22 2.1 Forms of Business Ownership and Operation ................................................................................................................................................................................ 22

2.1.1 What are the main types of business organisation?............................................................................................................................................................... 22 2.1.2 How can the size of a business be measured?...................................................................................................................................................................... 22 2.1.3 What are the advantages and disadvantages of operating as a sole trader?......................................................................................................................... 22 2.1.4 Explain the legal requirements of a sole trader ...................................................................................................................................................................... 22 2.1.5 What is meant by unlimited liability? ...................................................................................................................................................................................... 22 2.1.6 Explain why a sole trader might consider taking on a partner and forming a partnership ...................................................................................................... 23 2.1.7 Explain what objectives a new partnership might have for its business ................................................................................................................................. 23 2.1.8 Explain why entrepreneurs might decide to remain a partnership rather than a private limited company.............................................................................. 23 2.1.9 What are the disadvantages of operating as a partnership? .................................................................................................................................................. 23 2.1.10 What is contained within a deed of partnership...................................................................................................................................................................... 23 2.1.11 What happens if a partnership business fails?....................................................................................................................................................................... 23 2.1.12 Explain what is meant by “a limited company” ....................................................................................................................................................................... 23 2.1.13 Explain what is involved in setting up a private limited company ........................................................................................................................................... 23 2.1.14 Who controls a company?...................................................................................................................................................................................................... 24 2.1.15 Explain why limited liability is an important feature of business organisation......................................................................................................................... 24 2.1.16 Explain why the ownership and management of a company are often separate ................................................................................................................... 24 2.1.17 What are the differences between a private limited company and a public limited company (plc)? ....................................................................................... 24 2.1.18 Why might a private limited company want to become a “plc”? ............................................................................................................................................. 24 2.1.19 What are the disadvantages of being a “plc”?........................................................................................................................................................................ 24 2.1.20 What is a flotation? ................................................................................................................................................................................................................ 24 2.1.21 Why might an individual want to buy shares in a company? .................................................................................................................................................. 24 2.1.22 What are the risks faced by an individual who buys shares in a company?........................................................................................................................... 24



2.1.23 What are the three main forms of co-operative? .................................................................................................................................................................... 25 2.1.24 List four examples of co-operatives currently operating in the UK ......................................................................................................................................... 25 2.1.25 Why might acquiring a franchise be a good way for an individual to start a business?.......................................................................................................... 25 2.1.26 Provide some examples of well-known businesses that use the franchise model ................................................................................................................. 25 2.1.27 What are the advantages and disadvantages of franchising?................................................................................................................................................ 25 2.1.28 State three possible reasons why franchising has become more popular in recent years ..................................................................................................... 25 2.1.29 Why are some organisations owned and run by the public sector? ....................................................................................................................................... 25 2.1.30 What reasons have been given to justify the privatisation of former public organisations in the UK? .................................................................................... 25 2.1.31 What are the possible disadvantages of privatisation? .......................................................................................................................................................... 25 2.1.32 Why do some businesses fail?............................................................................................................................................................................................... 25

2.2 Organisation of a Business............................................................................................................................................................................................................... 25 2.2.1 Explain what is meant by the “Span of Control” ..................................................................................................................................................................... 25 2.2.2 What is the advantage of a narrow span of control ................................................................................................................................................................ 25 2.2.3 What is the difference between a tall and flat organisation .................................................................................................................................................... 25 2.2.4 What is meant by the term “hierarchy”? ................................................................................................................................................................................. 25 2.2.5 Explain what is meant by the term “chain of command”......................................................................................................................................................... 27 2.2.6 Why is it important for a manager to achieve effective delegation? ....................................................................................................................................... 27 2.2.7 What are the main departments you might expect to find in a large manufacturing business? What role do these departments play? ............................... 27

2.3 Business Aims and Objectives ......................................................................................................................................................................................................... 27 2.3.1 Explain what is meant by a “business aim” ............................................................................................................................................................................ 27 2.3.2 What is a mission statement? ................................................................................................................................................................................................ 27 2.3.3 What is the difference between an aim and an objective? ..................................................................................................................................................... 27 2.3.4 Why should a business set objectives?.................................................................................................................................................................................. 27 2.3.5 What criteria should a business objective meet? ................................................................................................................................................................... 28 2.3.6 Describe three reasons why business objectives may change over time .............................................................................................................................. 28 2.3.7 What are the main conflicts in business objectives ................................................................................................................................................................ 28 2.3.8 How might a business react to increase competition for their customers?............................................................................................................................. 28 2.3.9 Explain why profit might be more important to a business that revenue growth..................................................................................................................... 28 2.3.10 Describe two ways in which the aims of a public sector enterprise are different from those of a private sector organisation ................................................ 28

2.4 Stakeholders....................................................................................................................................................................................................................................... 28 2.4.1 What is a stakeholder?........................................................................................................................................................................................................... 28 2.4.2 Who are the main stakeholders in a large company that is quoted on the Stock Exchange? ................................................................................................ 28 2.4.3 Explain the difference between a stakeholder and a shareholder.......................................................................................................................................... 29 2.4.4 What is meant by social responsibility?.................................................................................................................................................................................. 29 2.4.5 Give examples of ethical policies a business may adopt ....................................................................................................................................................... 29



2.5 Starting a Business............................................................................................................................................................................................................................ 29 2.5.1 What are the main things a new business needs to start up? ................................................................................................................................................ 29 2.5.2 Explain why a business needs finance to start-up ................................................................................................................................................................. 29 2.5.3 Explain why it is important for a sole trader to prepare a detailed cash flow forecast when setting up a business ................................................................ 29 2.5.4 Describe the main ways in which entrepreneurs finance a new business.............................................................................................................................. 29 2.5.5 Apart from costs and a cash flow forecast, describe the main information a sole trader would include in the business plan ................................................ 29 2.5.6 Explain how a sole trader’s business might benefit from regular orders from customers....................................................................................................... 29 2.5.7 What are the main kinds of external finance available to a new business?............................................................................................................................ 29 2.5.8 Explain what a new business can do to protect its ideas and products.................................................................................................................................. 31 2.5.9 Assess the qualities that an entrepreneur must possess to be successful in business.......................................................................................................... 31 2.5.10 State and explain three reasons why small businesses may be successful when competing against larger businesses ...................................................... 31

2.6 Growing a Business........................................................................................................................................................................................................................... 31 2.6.1 Describe how the use of loss-leaders might help a business increase its sales .................................................................................................................... 31 2.6.2 State and explain four factors which might help the sales of a firm grow............................................................................................................................... 31 2.6.3 What is meant by the phrase organic growth ......................................................................................................................................................................... 31 2.6.4 Explain the reasons why a business might choose to diversify away from its original product .............................................................................................. 32 2.6.5 Using an example, explain what is meant by the term “transnational” ................................................................................................................................... 32 2.6.6 Assess the factors that might give a firm competitive advantage........................................................................................................................................... 32 2.6.7 Explain what is meant by the phrase “market share” ............................................................................................................................................................. 32 2.6.8 What is the difference between mergers and acquisitions ..................................................................................................................................................... 32 2.6.9 What is meant by the term “horizontal integration”?............................................................................................................................................................... 32 2.6.10 Explain what is meant by the term “vertical integration” ......................................................................................................................................................... 32 2.6.11 What are the advantages and disadvantages of mergers ...................................................................................................................................................... 32 2.6.12 What is a multinational organisation? .................................................................................................................................................................................... 33

3 MANAGING PEOPLE................................................................................................................................................................................. 34 3.1 Recruitment, Selection and Retention.............................................................................................................................................................................................. 34

3.1.1 Why might a business need to recruit staff? .......................................................................................................................................................................... 34 3.1.2 What changes in employment patterns might affect the recruitment needs of a business?................................................................................................... 34 3.1.3 What are the main advantages and disadvantages of employing part-time staff? ................................................................................................................. 34 3.1.4 What are the different recruitment methods a business can use? ......................................................................................................................................... 34 3.1.5 What is the difference between internal and external recruitment?........................................................................................................................................ 34 3.1.6 What are the main advantages and disadvantages of internal and external recruitment ....................................................................................................... 35 3.1.7 What are the main stages of the recruitment process?.......................................................................................................................................................... 35 3.1.8 What is the role of a recruitment agency................................................................................................................................................................................ 35 3.1.9 What is a job description and job specification?..................................................................................................................................................................... 35



3.1.10 What are the main objectives of a recruitment advertisement?.............................................................................................................................................. 35 3.1.11 Where could a business place a job advertisement? ............................................................................................................................................................. 36 3.1.12 What are the factors that a business should consider when advertising a job? ..................................................................................................................... 36 3.1.13 What are the typical contents of a job application form?........................................................................................................................................................ 36 3.1.14 What is a Curriculum Vitae?................................................................................................................................................................................................... 36 3.1.15 Why would a business use their own application form rather than rely on a candidate’s curriculum vitae?........................................................................... 36 3.1.16 Explain why some candidates may be rejected after a business has received their application forms .................................................................................. 37 3.1.17 Explain why a business might use both a long and a short list to select the best applicants ................................................................................................. 37 3.1.18 Why is the interview an important part of any recruitment and selection process? ................................................................................................................ 37 3.1.19 List the kinds of information an employer will want to obtain during a recruitment interview.................................................................................................. 37 3.1.20 What kinds of information should a prospective employee try to find out during an interview?.............................................................................................. 37 3.1.21 What kinds of selection tests are sometimes used during the interview process? ................................................................................................................. 37 3.1.22 Why are businesses making greater use of selection tests?.................................................................................................................................................. 37 3.1.23 Why should an employer take up job candidate references before offering a job? ................................................................................................................ 37 3.1.24 What is meant by employee retention?.................................................................................................................................................................................. 38 3.1.25 What is meant by labour/staff turnover?................................................................................................................................................................................. 38 3.1.26 Explain why high staff turnover is a problem for many businesses ........................................................................................................................................ 38 3.1.27 Describe some of the ways in which a business can retain the staff it wants to keep............................................................................................................ 38

3.2 Training ............................................................................................................................................................................................................................................... 38 3.2.1 What are the main reasons why a business should provide training for its employees?........................................................................................................ 38 3.2.2 What is meant by induction training? ..................................................................................................................................................................................... 38 3.2.3 What factors determine the length and type of induction training?......................................................................................................................................... 38 3.2.4 Name five elements likely to be included in an induction programme.................................................................................................................................... 39 3.2.5 Describe the main differences between “on-the-job” and “off-the-job” training....................................................................................................................... 39 3.2.6 Give three reasons why an employee might prefer off-the-job training .................................................................................................................................. 39 3.2.7 What are the disadvantages to a business of sending employees to off the job training? ..................................................................................................... 39 3.2.8 What is involved in an appraisal system? .............................................................................................................................................................................. 39 3.2.9 How can training motivate employees?.................................................................................................................................................................................. 39 3.2.10 In what ways does the Government get involved in helping businesses train employees?.................................................................................................... 40 3.2.11 Why is Health and Safety training needed? ........................................................................................................................................................................... 40

3.3 Motivation ........................................................................................................................................................................................................................................... 40 3.3.1 What is meant by motivation? ................................................................................................................................................................................................ 40 3.3.2 Outline the methods available for a business to motivate its employees ............................................................................................................................... 40 3.3.3 What are the advantages of having a well-motivated workforce? .......................................................................................................................................... 40 3.3.4 Who are the four main motivational theorists? ....................................................................................................................................................................... 40 3.3.5 What is Taylor’s theory of motivation and how did he believe employees should be motivated?........................................................................................... 40



3.3.6 What is Mayo’s theory of motivation and how did he believe employees should be motivated?............................................................................................ 41 3.3.7 What is Maslow’s theory of motivation and how did he believe employees should be motivated? ........................................................................................ 41 3.3.8 What is Herzberg’s theory of motivation and how did he believe employees should be motivated?...................................................................................... 42 3.3.9 What is meant by an autocratic management style?.............................................................................................................................................................. 42 3.3.10 When might an autocratic management style be suitable?.................................................................................................................................................... 42 3.3.11 What is meant by a democratic management style?.............................................................................................................................................................. 42 3.3.12 Distinguish between McGregor’s classification of workers into Theory X and Theory Y for motivation at work? ................................................................... 42 3.3.13 How could a business demonstrate to its employees that it believes in Theory Y? ............................................................................................................... 42 3.3.14 What is the best approach/style for a manager to use? ......................................................................................................................................................... 42

3.4 Rewarding Employees ....................................................................................................................................................................................................................... 42 3.4.1 Name five reasons why people go to work............................................................................................................................................................................. 43 3.4.2 What are the main types of financial incentives at work?....................................................................................................................................................... 43 3.4.3 What are the main types of non-financial incentives at work?................................................................................................................................................ 43 3.4.4 Explain why a business might offer its staff discretionary fringe benefits ............................................................................................................................... 44 3.4.5 What are the differences between wages and salaries?........................................................................................................................................................ 44 3.4.6 What is the difference between gross pay and net pay?........................................................................................................................................................ 44 3.4.7 What is the difference between overtime and bonus pay?..................................................................................................................................................... 44 3.4.8 Which system of payment would be best for a team of car salesmen at a dealership? ......................................................................................................... 44 3.4.9 What are the advantages of profit sharing? ........................................................................................................................................................................... 44 3.4.10 How might a business use a bonus system to improve performance? .................................................................................................................................. 44 3.4.11 What are the advantages and disadvantages of the piece-rate system................................................................................................................................. 45 3.4.12 What kind of pay package might be expected by a managing director of a company quoted on the London Stock Exchange ............................................. 45 3.4.13 What are the advantages and disadvantages of performance-related pay? .......................................................................................................................... 45 3.4.14 Which motivation theorists viewed money/pay as a good way of motivating employees? ..................................................................................................... 45 3.4.15 Explain the difference between job enrichment and job enlargement? .................................................................................................................................. 45 3.4.16 What is meant by empowerment?.......................................................................................................................................................................................... 45 3.4.17 What are the main reasons for differences in pay between different jobs and regions? ........................................................................................................ 46

3.5 Groups at Work .................................................................................................................................................................................................................................. 46 3.5.1 What is a trade union? ........................................................................................................................................................................................................... 46 3.5.2 What are the main categories of trade union? ....................................................................................................................................................................... 46 3.5.3 What is the role of the Trades Union Congress (“TUC”)? ...................................................................................................................................................... 46 3.5.4 What are the benefits of trade union membership to an employee and to an employer? ...................................................................................................... 46 3.5.5 What is meant by collective bargaining?................................................................................................................................................................................ 46 3.5.6 List the main forms of industrial action a trade union can take against an employer. ............................................................................................................ 46 3.5.7 Why has the power and influence of trade unions declined over the last 20 years? .............................................................................................................. 47 3.5.8 What is an employers’ association?....................................................................................................................................................................................... 47



3.6 Employee Legislation ........................................................................................................................................................................................................................ 47 3.6.1 What are the main laws that affect how businesses manage people at work in the UK?....................................................................................................... 47 3.6.2 What is meant by the Minimum Wage?.................................................................................................................................................................................. 47 3.6.3 What type of firms would be most affected by an increase in the minimum wage? ............................................................................................................... 47

3.7 Communication .................................................................................................................................................................................................................................. 47 3.7.1 What is communication?............................................................................................................................................................................................................... 47 3.7.2 Who might be the receivers of internal communications and external communications from a manager of a business? ............................................................. 48 3.7.3 Why is effective communication vital to a business? ..................................................................................................................................................................... 48 3.7.4 Explain how effective communication can motivate employees..................................................................................................................................................... 48 3.7.5 What is two-way communication?.................................................................................................................................................................................................. 48 3.7.6 What are the five best methods of communication for obtaining feedback? .................................................................................................................................. 48 3.7.7 What factors would determine which method of communication should be used? ........................................................................................................................ 49 3.7.8 Describe three barriers to communication that a firm may face. .................................................................................................................................................... 49

4 ACCOUNTING AND FINANCE .................................................................................................................................................................. 50 4.1 Sources and Uses of Finance ........................................................................................................................................................................................................... 50

4.1.1 What are the main reasons a business needs finance?......................................................................................................................................................... 50 4.1.2 What is the difference between internal and external sources of finance? ............................................................................................................................ 50 4.1.3 What is the difference between short and long-term finance? ............................................................................................................................................... 50 4.1.4 What are the main kinds of long-term finance available to a business?................................................................................................................................. 50 4.1.5 How do businesses choose from the different sources of finance available to them? ........................................................................................................... 50 4.1.6 Why might a businessman wish to finance the start-up of a firm with his own cash or that of his family? ............................................................................. 51 4.1.7 What are the main sources of finance available to sole traders and partnerships? ............................................................................................................... 51 4.1.8 Why might a company wish to issue shares as a source of finance? .................................................................................................................................... 51 4.1.9 What are the differences between Ordinary Shares and Preference Shares......................................................................................................................... 51 4.1.10 How do the owners of shares (“shareholders”) receive a return on their investment? ........................................................................................................... 51 4.1.11 Explain what is meant by a “debenture” ................................................................................................................................................................................. 51 4.1.12 How do debentures (or loans) differ from ordinary shares? ................................................................................................................................................... 51 4.1.13 What are the main kinds of finance available to a business from a bank?............................................................................................................................. 51 4.1.14 What is the difference between a bank overdraft and a bank loan?....................................................................................................................................... 52 4.1.15 Explain what is meant by the term “working capital” .............................................................................................................................................................. 52 4.1.16 What is “debt factoring”? ........................................................................................................................................................................................................ 52 4.1.17 Why do the Government and European Union provide grant finance to businesses? ........................................................................................................... 52 4.1.18 How might a business “lease” the assets it needs to operate? .............................................................................................................................................. 52 4.1.19 What are the advantages and disadvantages of leasing equipment? .................................................................................................................................... 52 4.1.20 Describe what is meant by hire purchase .............................................................................................................................................................................. 52



4.1.21 What are the main sources of finance available to public sector businesses?....................................................................................................................... 52 4.2 Financial accounting.......................................................................................................................................................................................................................... 53

4.2.1 Describe the main roles of the accounting function in a business.......................................................................................................................................... 53 4.2.2 What are the main accounting records that make up the financial accounting information of a business.............................................................................. 53 4.2.3 What are the financial statements of a business?.................................................................................................................................................................. 53 4.2.4 Explain the purpose of the profit and loss account................................................................................................................................................................. 53 4.2.5 How is the gross profit of a business calculated? .................................................................................................................................................................. 53 4.2.6 What are the main types of cost that would be included in “cost of sales”? ........................................................................................................................... 53 4.2.7 What are the main overhead costs of a business? ................................................................................................................................................................ 54 4.2.8 What is the difference between revenue expenditure and capital expenditure? .................................................................................................................... 54 4.2.9 Provide three examples in each case of costs that would be classified as revenue and capital expenditure......................................................................... 54 4.2.10 What is meant by “net profit”? ................................................................................................................................................................................................ 54 4.2.11 Give four examples in each case of how to improve gross profit and how to cut overheads ................................................................................................. 54 4.2.12 What information is provided by the balance sheet?.............................................................................................................................................................. 55 4.2.13 What are fixed assets?........................................................................................................................................................................................................... 55 4.2.14 Why do businesses need to account for “depreciation” of their assets? ................................................................................................................................ 55 4.2.15 What are the main categories of current assets..................................................................................................................................................................... 55 4.2.16 What are the main categories of current liabilities?................................................................................................................................................................ 55 4.2.17 What is a “provision”? ............................................................................................................................................................................................................ 55 4.2.18 Explain how the purchase of some plant and machinery by a business using a bank loan would affect its balance sheet ................................................... 55 4.2.19 What is meant by capital? ...................................................................................................................................................................................................... 55 4.2.20 What is the purpose of a cash flow statement?...................................................................................................................................................................... 56 4.2.21 Why can a profitable business go bankrupt? ......................................................................................................................................................................... 56 4.2.22 What accounting statements must be published by a limited company? ............................................................................................................................... 56

4.3 Analysing Financial Performance..................................................................................................................................................................................................... 56 4.3.1 What are the main ways in which management can measure the financial success of their business? ................................................................................ 56 4.3.2 Who are the main users of financial information? .................................................................................................................................................................. 57 4.3.3 Why would the government be interested in the financial performance of a business? ......................................................................................................... 57 4.3.4 What kinds of financial information would be of interest to a bank lending money to a business?......................................................................................... 57 4.3.5 What is the difference between “profit” and “profitability”? ..................................................................................................................................................... 57 4.3.6 What are the main uses of profitability ratios? ....................................................................................................................................................................... 57 4.3.7 Explain what is meant by the return on capital employed (“ROCE”) ...................................................................................................................................... 57 4.3.8 Explain why management might want to use the ROCE figure to measure the success of their business ............................................................................ 57 4.3.9 How might a business increase its ROCE?............................................................................................................................................................................ 57 4.3.10 How is the gross profit margin calculated?............................................................................................................................................................................. 58 4.3.11 Why might the gross profit margin of a business increase? ................................................................................................................................................... 58



4.3.12 What is the net profit margin? ................................................................................................................................................................................................ 58 4.3.13 Explain what is meant by a “liquidity ratio” ............................................................................................................................................................................. 58 4.3.14 What is the current ratio? ....................................................................................................................................................................................................... 58 4.3.15 What steps could a business take to improve its current ratio? ............................................................................................................................................. 58 4.3.16 How does the “Acid test” ratio differ from the current ratio? ................................................................................................................................................... 58 4.3.17 What is “stock turnover”? ....................................................................................................................................................................................................... 58 4.3.18 Why might a business experience an increase in its stock turnover ratio? ............................................................................................................................ 58 4.3.19 Explain what is meant by “debtor days” ................................................................................................................................................................................. 58 4.3.20 What steps could a business take to encourage customers to pay their debts more quickly? ............................................................................................... 59 4.3.21 What is meant by the “creditor days” ratio?............................................................................................................................................................................ 59

4.4 Business costs ................................................................................................................................................................................................................................... 59 4.4.1 What is the difference between a variable and a fixed cost? ................................................................................................................................................. 59 4.4.2 What are the main kinds of variable and fixed costs .............................................................................................................................................................. 59 4.4.3 When might a cost be described as being “semi-fixed”?........................................................................................................................................................ 59 4.4.4 What is meant by a “standard cost”? ..................................................................................................................................................................................... 59 4.4.5 What is a variance? ............................................................................................................................................................................................................... 59 4.4.6 How would a business use standard costing to help manage its business? .......................................................................................................................... 59 4.4.7 Explain what is meant by opportunity cost ............................................................................................................................................................................. 60 4.4.8 What are the main differences between direct and indirect costs? ........................................................................................................................................ 60 4.4.9 What is meant by the “break-even point” for a business? ...................................................................................................................................................... 60 4.4.10 What is meant by contribution?.............................................................................................................................................................................................. 60 4.4.11 What is meant by the “margin of safety”?............................................................................................................................................................................... 61 4.4.12 Why is it important for a business to understand its break-even point? ................................................................................................................................. 61 4.4.13 What is the formula for the break even point.......................................................................................................................................................................... 61 4.4.14 What are the limitations of break-even charts ........................................................................................................................................................................ 61

4.5 Budgeting and Business Plans......................................................................................................................................................................................................... 62 4.5.1 What is a budget? .................................................................................................................................................................................................................. 62 4.5.2 How does budgeting help managers control a business?...................................................................................................................................................... 62 4.5.3 What are the main budgets produced by a business? ........................................................................................................................................................... 62 4.5.4 Explain the role a budget can play in motivating employees.................................................................................................................................................. 62 4.5.5 Explain what is involved in preparing a cash flow budget ...................................................................................................................................................... 62 4.5.6 Explain how a business plan could be used to help manage a business............................................................................................................................... 63 4.5.7 Explain why a bank manager might want to see a business plan before giving a business a new loan ................................................................................ 63 4.5.8 Explain why it is wise for a firm to keep monitoring its cash flow forecast.............................................................................................................................. 63 4.5.9 How can a business improve its cash flow?........................................................................................................................................................................... 63



5 PRODUCTION ............................................................................................................................................................................................ 64 5.1 Introduction to Production ................................................................................................................................................................................................................ 64

5.1.1 What are the three main stages of production? ..................................................................................................................................................................... 64 5.1.2 What are the main kinds of input into production? ................................................................................................................................................................. 64 5.1.3 What activities are typical of businesses engaged in primary production? ............................................................................................................................ 64 5.1.4 How does secondary production compare with primary production? ..................................................................................................................................... 64 5.1.5 Provide five examples of businesses engaged in the tertiary production sector .................................................................................................................... 64 5.1.6 What is meant by mass production? ...................................................................................................................................................................................... 64 5.1.7 What are the typical features of a business that uses mass production?............................................................................................................................... 64 5.1.8 What are the main differences between unskilled and skilled work? ..................................................................................................................................... 64

5.2 Methods of Production ...................................................................................................................................................................................................................... 64 5.2.1 What are the three main methods of production in manufacturing?....................................................................................................................................... 65 5.2.2 What are the main characteristics of the job production method............................................................................................................................................ 65 5.2.3 List some examples of businesses that use the job production method ................................................................................................................................ 65 5.2.4 What is meant by the term “batch production”? ..................................................................................................................................................................... 65 5.2.5 In what circumstances would a business use a batch production method? ........................................................................................................................... 65 5.2.6 What are the main aims of the batch method......................................................................................................................................................................... 65 5.2.7 Name three advantages of the flow method........................................................................................................................................................................... 65 5.2.8 How should flow production be organised in order for this method to be effective?............................................................................................................... 65 5.2.9 Explain how changing seasonal demand can affect the production process of a business ................................................................................................... 65

5.3 Production Efficiency ........................................................................................................................................................................................................................ 66 5.3.1 What is meant by the productive capacity of a business?...................................................................................................................................................... 66 5.3.2 What is meant by efficiency? ................................................................................................................................................................................................. 66 5.3.3 What is meant by the term “productivity”?.............................................................................................................................................................................. 66 5.3.4 How might a business measure its productivity? ................................................................................................................................................................... 66 5.3.5 How can a business improve its productivity?........................................................................................................................................................................ 66 5.3.6 How might measuring levels of stock indicate a change in productive efficiency?................................................................................................................. 66 5.3.7 Explain two ways in which mass production can lead to poor productivity............................................................................................................................. 66 5.3.8 What are the main objectives of lean production? ................................................................................................................................................................. 66 5.3.9 How does cell production lead to improved productivity?....................................................................................................................................................... 66 5.3.10 What is Kaizen? ..................................................................................................................................................................................................................... 66 5.3.11 What are the advantages and disadvantages of just-in-time (“JIT”) production? ................................................................................................................... 67 5.3.12 What are the main ways in which technology can be used to improve production efficiency?............................................................................................... 67 5.3.13 Explain the benefits to a business of investing in new technology ......................................................................................................................................... 67

5.4 Economies of Scale ........................................................................................................................................................................................................................... 67



5.4.1 Define economies of scale ..................................................................................................................................................................................................... 67 5.4.2 What are the main kinds of internal economies of scale? ...................................................................................................................................................... 67 5.4.3 What are the main kinds of external economies of scale? ..................................................................................................................................................... 68 5.4.4 How can economies of scale occur if the total costs of a business are increasing? .............................................................................................................. 68 5.4.5 What are diseconomies of scale? .......................................................................................................................................................................................... 68

5.5 Quality Management .......................................................................................................................................................................................................................... 68 5.5.1 What is meant by quality? ...................................................................................................................................................................................................... 68 5.5.2 List four common examples of poor product or service quality .............................................................................................................................................. 68 5.5.3 Why is it important for a business to monitor and measure quality? ...................................................................................................................................... 69 5.5.4 What is the objective of quality control? ................................................................................................................................................................................. 69 5.5.5 What is Total Quality Management (“TQM”) .......................................................................................................................................................................... 69 5.5.6 What are the key advantages of TQM?.................................................................................................................................................................................. 69 5.5.7 Why is research and development important for quality control?........................................................................................................................................... 69

5.6 Business Location ............................................................................................................................................................................................................................. 69 5.6.1 Why might the availability of labour influence the location chosen by a business?................................................................................................................ 69 5.6.2 Which forms of business infrastructure would a business consider when choosing a business location? ............................................................................. 69 5.6.3 Explain the factors a business needs to consider before deciding to change location........................................................................................................... 70 5.6.4 Why do governments provide financial and other incentives to businesses that locate in a particular place? ....................................................................... 70 5.6.5 What is meant by the Uniform Business Rate?...................................................................................................................................................................... 70

5.7 Stock Control...................................................................................................................................................................................................................................... 70 5.7.1 What is the role of the purchasing department?..................................................................................................................................................................... 70 5.7.2 What are the main consequences of a stock-out? ................................................................................................................................................................. 70 5.7.3 What are the advantages and disadvantages of increasing the level of stock held by a business?....................................................................................... 70 5.7.4 What is meant by “economic order quantity (“EOQ”)? ........................................................................................................................................................... 70 5.7.5 What is the buffer stock level? ............................................................................................................................................................................................... 70

6 MARKETING .............................................................................................................................................................................................. 71 6.1 Introduction to Marketing .................................................................................................................................................................................................................. 71

6.1.1 Explain the meaning of the term “marketing” ......................................................................................................................................................................... 71 6.1.2 What are the four main kinds of market? Provide an example of each ................................................................................................................................. 71 6.1.3 Why does a business need to market its products?............................................................................................................................................................... 71 6.1.4 What is a “marketing orientated business”? ........................................................................................................................................................................... 71 6.1.5 What is a “product orientated” business?............................................................................................................................................................................... 71 6.1.6 Why have industrial markets become more market-orientated? ............................................................................................................................................ 71 6.1.7 Explain the difference between the roles played by a firm’s marketing department and the research and development department.................................... 71



6.2 Market Segmentation ......................................................................................................................................................................................................................... 71 6.2.1 What is a market segment ..................................................................................................................................................................................................... 71 6.2.2 What are the advantages for a business by segmenting a market?....................................................................................................................................... 72 6.2.3 What is a mass-market? Give an example............................................................................................................................................................................. 72 6.2.4 What is a niche market? Give an example............................................................................................................................................................................. 72 6.2.5 What are the main ways in which a market can be segmented? ........................................................................................................................................... 72 6.2.6 Why is age an important characteristic in segmentation? ...................................................................................................................................................... 72 6.2.7 What are the six standard socio-economic groupings in the UK? .......................................................................................................................................... 72

6.3 Marketing Research ........................................................................................................................................................................................................................... 72 6.3.1 What are the main purposes of marketing research? ............................................................................................................................................................ 73 6.3.2 What are the two main methods of marketing research and how do they differ?................................................................................................................... 73 6.3.3 What kinds of data are used in marketing research? ............................................................................................................................................................. 73 6.3.4 What are the main kinds of secondary data? ......................................................................................................................................................................... 73 6.3.5 Name four kinds of information that might be obtained from secondary research data ......................................................................................................... 73 6.3.6 Why is it important to use secondary data as part of marketing research?............................................................................................................................ 73 6.3.7 What are the main aims of market and customer surveys? ................................................................................................................................................... 73 6.3.8 What is primary data? ............................................................................................................................................................................................................ 73 6.3.9 What are the main methods of field research to collect primary data?................................................................................................................................... 74 6.3.10 Explain why marketing research is important when considering whether to make new products .......................................................................................... 74 6.3.11 What desk research would be useful for a business introducing a new product? .................................................................................................................. 74 6.3.12 How is sampling used in marketing research......................................................................................................................................................................... 74 6.3.13 Describe four different kinds of sampling used in marketing research ................................................................................................................................... 74 6.3.14 Discuss the best ways in which a business could monitor the satisfaction of its customers .................................................................................................. 74

6.4 Marketing Strategy and Objectives................................................................................................................................................................................................... 74 6.4.1 Why is it important for businesses to set marketing objectives? ............................................................................................................................................ 74 6.4.2 Give some examples of marketing objectives and strategies................................................................................................................................................. 75

6.5 Marketing Mix ..................................................................................................................................................................................................................................... 75 6.5.1 What are the main elements of the marketing mix? ............................................................................................................................................................... 75 6.5.2 Provide three examples of how the elements of the marketing mix interact with each other ................................................................................................. 75

6.6 Products and Brands ......................................................................................................................................................................................................................... 75 6.6.1 Explain what is meant by product differentiation .................................................................................................................................................................... 75 6.6.2 What are the main stages involved in launching a new product?........................................................................................................................................... 75 6.6.3 Why do most businesses sell a range of products? ............................................................................................................................................................... 75 6.6.4 Explain how services are marketed? How does this differ from the marketing of goods?..................................................................................................... 75 6.6.5 Explain what is meant by a brand .......................................................................................................................................................................................... 76



6.6.6 What are the benefits of branding? ........................................................................................................................................................................................ 76 6.6.7 What is an “own-label” brand? Provide some examples ....................................................................................................................................................... 76 6.6.8 Give five examples of well-known “global” brands ................................................................................................................................................................. 76 6.6.9 Explain what is meant by brand extension. Provide some examples. ................................................................................................................................... 76 6.6.10 Explain what is meant by brand stretching. Provide some examples.................................................................................................................................... 76 6.6.11 What are the main purposes of packaging?........................................................................................................................................................................... 76 6.6.12 What are the main stages of the product life cycle?............................................................................................................................................................... 77 6.6.13 What product extension techniques are available to help prolong the life cycle of a product?............................................................................................... 77 6.6.14 Give some example of some products in the different stages of the PLC.............................................................................................................................. 77 6.6.15 What is meant by a product range? ....................................................................................................................................................................................... 77 6.6.16 How are products categorised in the Boston Group Consulting matrix? ................................................................................................................................ 78 6.6.17 How can a SWOT analysis help a business make decisions about its products?.................................................................................................................. 78

6.7 Pricing ................................................................................................................................................................................................................................................. 78 6.7.1 What are the main pricing strategies open to a business?..................................................................................................................................................... 79 6.7.2 What price might a business use if it were trying to enter a new market?.............................................................................................................................. 79 6.7.3 What effect does the product life cycle have on pricing? ....................................................................................................................................................... 79 6.7.4 What is a loss leader?............................................................................................................................................................................................................ 79 6.7.5 Provide two examples of price skimming ............................................................................................................................................................................... 79

6.8 Promotion ........................................................................................................................................................................................................................................... 79 6.8.1 What role does advertising play in promotion? ...................................................................................................................................................................... 79 6.8.2 What factors should a business consider when choosing the medium through which to do advertising?.............................................................................. 80 6.8.3 What are the pros and cons of advertising on television?...................................................................................................................................................... 80 6.8.4 What is the difference between a classified and a display advertisement?............................................................................................................................ 80 6.8.5 What is the difference between persuasive and information advertising................................................................................................................................ 80 6.8.6 What are the main advantages of newspaper advertisements?............................................................................................................................................. 80 6.8.7 What role is played by an advertising agency? ...................................................................................................................................................................... 80 6.8.8 What are the main laws which affect how a business can advertise?.................................................................................................................................... 80 6.8.9 What is the difference between “above the line” and “below the line” promotion? ................................................................................................................. 80 6.8.10 What is public relations? ........................................................................................................................................................................................................ 81 6.8.11 What are the main objectives of public relations? .................................................................................................................................................................. 81 6.8.12 How does public relations differ from advertising?................................................................................................................................................................. 81 6.8.13 How important is a business logo in the promotional process?.............................................................................................................................................. 81 6.8.14 Explain the role personal selling can play in the promotional process ................................................................................................................................... 81

6.9 Place (Distribution) ............................................................................................................................................................................................................................ 81 6.9.1 Explain what is meant by a distribution channel..................................................................................................................................................................... 81



6.9.2 Describe the main channels of distribution............................................................................................................................................................................. 82 6.9.3 What are the advantages of wholesalers in a market? .......................................................................................................................................................... 82 6.9.4 Provide some examples of distribution agents....................................................................................................................................................................... 82 6.9.5 What is direct marketing?....................................................................................................................................................................................................... 82 6.9.6 Provide three examples of businesses that market direct to customers ................................................................................................................................ 82 6.9.7 What are the advantages and disadvantages of direct marketing?........................................................................................................................................ 82 6.9.8 What are the main methods of sales promotion?................................................................................................................................................................... 82 6.9.9 What are the advantages and disadvantages of sales promotion?........................................................................................................................................ 83 6.9.10 Give four recent examples of sales promotions in the UK...................................................................................................................................................... 83 6.9.11 Why have retailers in the UK increasingly invested in customer loyalty cards? ..................................................................................................................... 83 6.9.12 What are the main types of retail business? .......................................................................................................................................................................... 83 6.9.13 What is meant by “point-of-sale” material? Provide some examples .................................................................................................................................... 83 6.9.14 What are the main challenges faced by a business wishing to sell its products overseas? ................................................................................................... 83 6.9.15 Explain why a marketing manager will find it easier to export to European Union countries than elsewhere in Europe ........................................................ 83

6.10 E-Commerce .................................................................................................................................................................................................................................. 83 6.10.1 What is meant by online marketing? ...................................................................................................................................................................................... 83 6.10.2 Describe the benefits to a business of e-commerce .............................................................................................................................................................. 84

7 EXAM TECHNIQUE.................................................................................................................................................................................... 85 7.1.1 What do I need to revise with?............................................................................................................................................................................................... 85 7.1.2 How long should I spend on the questions in the exam? ....................................................................................................................................................... 85 7.1.3 What is the first thing I should do in the exam and before answering each question? ........................................................................................................... 85 7.1.4 What do the question words mean?....................................................................................................................................................................................... 86 7.1.5 How should I approach longer answer questions?................................................................................................................................................................. 86 7.1.6 What is meant by evaluation? ................................................................................................................................................................................................ 86 7.1.7 When should I use examples? ............................................................................................................................................................................................... 86 7.1.8 What is needed to get an A/A*? ............................................................................................................................................................................................. 87



1 External Environment and Business

1.1 The Business Environment

1.1.1 What is a business? A business is any organisation that is involved in the production of a good or the provision of a service.

1.1.2 Why do businesses exist? People, firms and governments need and want goods and services. A business aims to satisfy these needs and wants, thus making a profit for itself, paying its workers and repaying its owners.

1.1.3 What is the difference between a need and a want?

Needs satisfy our basic requirements for living: e.g. food, water, warmth, security, shelter and clothing. A want is something we desire beyond our needs. However, once a want has been satisfied, something more is then wanted. E.g. a better mobile phone or faster car.

1.1.4 What is a business activity?

Business activities refer to any part of a three-stage process that involves taking INPUTS (e.g. raw materials, labour, and machinery) and TRANSFORMING them into OUTPUTS (e.g. products, services). TRANSFORMING the inputs is known as adding value.

1.1.5 What are the main categories of inputs to business activity?

Land and natural resources: e.g. fields to build factories on; energy to power the factory Labour: e.g. the employees needed to operate machines, sell to customers Capital: e.g. plant and machinery, computers, finance Entrepreneurship: people who are prepared to invest in and manage a business; they give the business a sense of direction and energy

1.1.6 What is a product? Anything that satisfies the needs and wants of customers. A product can be: - A “good” - something tangible, something you can touch and use (e.g. a mobile phone) - A “service” – usually intangible, something other people do for you (e.g. the service you receive when you stay in a hotel)

1.1.7 What is the difference between a consumer good and a producer good?

Consumer goods are those that are consumed by consumers to satisfy a need or a want. They are produced for households. They cannot be used to produce more goods, though they may give a flow of services e.g. a television, once purchased can be watched without being used up; by contrast a chocolate bar, once eaten, is gone. Producer (sometime also called “industrial”) goods are used in the production process – often to help make consumer goods. They can be used to make more producer goods or consumer goods.

1.1.8 Provide five examples of consumer goods

Televisions; baked beans; t-shirts; computer games; package holidays

1.1.9 Provide five examples of producer goods

Printing press; van; mechanical digger; sheet metal cutter; conveyor belt

1.1.10 Explain what is meant by When a business transforms inputs into outputs, the value added is the difference between the cost of the inputs and the price of



“value added” the outputs. It is the way that a business makes a profit.

1.1.11 What are the main categories of cost incurred by a business when it starts up?

Costs of company formation (e.g. legal bills, amounts paid to Companies House) Costs of research and development – creating the product or service before it can be sold Marketing costs – e.g. designing the business logo; advertising for the first customers; promotional launch discounts Employee costs – new businesses usually have to employ staff some time before customers start to buy Operational set-up costs – e.g. the cost in equipping and setting up the factory; or paying the first rent and rates due

1.1.12 What is “profit”? Profit is the difference between the total revenues (or “sales”) of a business and its total costs. If total costs are higher than total revenues, a business makes a “loss”. The profit or loss of a business is usually measured over a period of time (e.g. a year) and is shown in an accounting statement called the profit and loss account.

1.1.13 What happens if a business makes a loss?

It has a choice – (i) to continue trading and see if it can survive on past profits, (ii) to raise cash from another source, or (iii) to close down and pay off all the money it owes. Most businesses will believe they can manage the first option. Some businesses take many years to make their first profit (e.g. Amazon, the internet book and CD seller). However, in the long-run businesses need to make a profit in order to satisfy the needs of their investors.

1.1.14 What is meant by the term “entrepreneur”?

A person who is willing to (i) take a risk on a business idea, probably with some of their own money (ii) organise elements of production within a business. Both require skill, judgement – and often some luck.

1.2 External Factors Affecting Business

1.2.1 What are the main areas in which external factors affect a business

Social (e.g. greater numbers of older and retired people in the UK population) Legal (e.g. effect of Human Rights Act on rights of customers to remain private) Economic (e.g. an increase in income tax which reduces the amount customers have to spend) Political (e.g. decision to spend more on public services such as education and health)

Technological (e.g. effect of widespread use of the Internet) Ethical (e.g. changing attitudes to employing older people)

1.2.2 Why does the external environment keep changing?

Markets keep changing. Customers develop new wants and needs (e.g. want DVD’s rather than CD’s). New competitors enter a market. New technologies (ways of making things, or delivering things) emerge (e.g. image mobile phones)

1.2.3 Are external factors a threat or an opportunity to a business?

They can be both! It depends on what the business does and how it responds to the changing environment. E.g. an increase in the Minimum Wage (a change in a political and economic factor) might increase the costs of some businesses (e.g. clothing factories) but allow employees to spend more money on goods or services sold by other businesses (e.g. Bingo Halls)

1.2.4 Give examples of how Point of Sale Production



of sale and production in a business?

Electronic Point Of Sale (EPOS) Electronic Funds Transfer at Point of Sale (EFTPOS)

Computer Aided Design (CAD) Computer Aided Manufacture (CAM) Computer Integrated Manufacture (CIM)

1.3 Economic Environment

1.3.1 Describe the main types of economic sector that are used to categorise different business activities

Primary sector: the extraction and production of raw materials, such as coal, wood and steel Secondary sector: transformation of raw materials in goods, e.g. manufacturing steel into cars Tertiary sector: the provision of services to consumers and businesses, such as the cinema and banking

1.3.2 State three reasons for the increased importance of the tertiary sector

(1) Higher incomes in the UK mean that households demand more services such as more holidays and restaurants (2) More leisure time means more time to spend on services (3) Businesses offer more after sales services, e.g. help lines offered through telephone call centres

1.3.3 An airport hopes to expand by building another runway. Describe how three industries might be affected by this

TERTIARY INDUSTRY HOW AFFECTED

Bank Money will need to be raised to pay for the expansion through possible bank loans

Telecoms the site will need to be fully wired for communications, both within the airport and outside

Local services local shops may benefit from the increased passing trade as will car parking firms, taxi companies or local hotels

1.3.4 Using examples, explain the term “chain of production”

The chain of production follows the construction of a good from its extraction as a raw material through to its final sale to the consumer. So a piece of wood is cut from a felled tree (primary sector), made into a table by a carpenter (secondary) and finally sold in a shop (tertiary).

1.3.5 What is meant by the term “specialisation”?

Specialisation occurs when a producer concentrates on making a small number of products, or on providing a narrowly defined service. For instance a baker baking only bread, machinery that only cuts sheet metal or a lawyer dealing only with criminal law. This means that the producer becomes more efficient because he learns the best way (all the short cuts) to produce at the lowest cost. Specialisation also allows a producer to get a higher price from a customer – where the customer is prepared to pay more for expert / specialist knowledge (e.g. a cosmetic surgeon)

1.3.6 Explain the difference between the “private sector” and the “public sector”

In the private sector of the economy, private individuals and organisations own the business activity In the public sector, organisations are owned and controlled by the Government. These include central government, local government and public corporations

1.3.7 What is meant by the term “mixed economy”?

An economy where goods and services are produced by a combination of government controlled corporations and private businesses acting on their own behalf, without intervention from government. A mixed economy sits between the two extremes of centrally planned economies (communism) and free market economies. The UK is a mixed economy, the USA has less government

http://www.nhsdirect.nhs.uk/

http://www.patent.gov.uk/

http://www.royalmail.com/

http://www.visitbritain.com/uk/home6.asp

http://www.bbc.co.uk/



1.3.8 What kinds of businesses operate in the “voluntary sector”?

These are businesses, often called charities, which are operated “not for profit”. There are usually staffed by volunteers who work without pay. E.g. Voluntary Service Organisation Some “not for profit” businesses have parts that do try to make money – to help raise money for the activities of the organisation – e.g. charity shops

1.3.9 Provide five examples of business organisations in the UK currently in the public sector

National Health Service; The Patent Office; Royal Mail, British Tourist Authority; BBC

1.3.10 What are the main objectives of private businesses?

Short term objectives: survival, make a profit Long term objectives: (could be) expand, international recognition or market leader (make the most sales of all the competitors), be environmentally aware , satisfy shareholders i.e. investors

1.3.11 What are the main objectives of public sector organisations?

Provision of equitable level of goods and services, i.e. low price, affordable and available for those who need the good. Provision of products not provided by private businesses, such as free health care and defence

1.3.12 Explain how a fall in the rate of income tax might affect the sales and profits of a business

A fall in income tax leads to an increase in the amount of money available for households to spend on products (known as “disposable income). The increased money available may be spent on products of the business leading to increased sales and profits

1.3.13 Explain how a business might be affected by an increase in the price of raw materials

An increase in the price of raw materials will mean that costs of production may increase. The firm can either (i) increase its selling price and risk losing sales or (ii) keep the same selling price and accept lower profits.

1.3.14 Outline three ways in which changes in exchange rates might affect a business

(1) Exchange rates changes can increase or lower the price of a product sold abroad (2) The price of imported raw materials may change (see answer above) (3) The price of competitors’ products may change in the home market. For example an increase in the exchange rate will mean that price abroad goes up, lowering sales; price of imported raw materials falls, either leading to a fall in price and more sales, or an increase in profits; competitors’ prices fall, meaning lower sales.

1.3.15 How might an increase in interest rates affect a business?

Decrease demand for a business’ product as consumer less likely to borrow to fund spending Increase business financial costs as the interest charges on existing loans will increase.

1.3.16 Explain why a shortage of (1) It may be more difficult to recruit new people - which might prevent the business from growing as fast as it wishes

intervention and France has more intervention.



labour might affect a business (2) Existing workers may demand higher wages because they know that the business will be reluctant to release them (3) Competitors may try harder to poach the best staff (4) The business may have to invest further in staff training and development rather than rely on “recruiting” new skills into the business

1.3.17 Explain what is meant by the term “mobility of labour”

Mobility of labour means the speed with which a person can move into a different job. There are two main types: (1) Geographical mobility - can they physically move to that place of work? (2) Occupational mobility - do they have the skills to do the new job?

1.3.18 Provide four examples of “labour-intensive” industries

Hairdressing; house-building; teaching; fashion industry

1.3.19 What is meant by the term “capital-intensive” industry?

A capital-intensive industry is where a business relies heavily on machinery and technology in its transformation of inputs into outputs. Good examples include the car industry; steel production and the rail industry.

1.3.20 State two benefits and two costs to UK businesses of EU membership

BENEFITS COSTS

Increase in market size (a greater number of potential customers) as a result of the freedom of movement of goods and service

Greater competition from EU businesses

Greater access to cheap factors of production, e.g. raw materials, technology and labour

Increased costs due to compliance with EU regulations e.g. common technical standards

1.3.21 Describe the main forms of legislation for consumer protection

Sale and Supply of Goods Act Stated that goods must be of satisfactory quality

Trade Description Act Goods and services must perform in the way advertised by the business

Consumer Credit Act Protects the consumer when borrowing money or buying on credit 1.3.22 Give examples of support and advisory agencies available to businesses

Chamber of Commerce Department of Trade and Industry (DTI) Employers Associations Training & Enterprise Council

http://www.chamberonline.co.uk/

http://www.dti.gov.uk/



2 Business Organisation and Objectives

2.1 Forms of Business Ownership and Operation

2.1.1 What are the main types of business organisation?

Sole trader (sometimes also known as a “sole proprietor”) – the business is owned and managed by one person Partnership – the business is owned by two or more people who agree to share ownership and responsibility for the business Private Limited Company (“Ltd”) – a company owned by a group of private shareholders Public Limited Company (“plc”) – a company that can sell its shares to the general public Co-operatives – organisations jointly owned by their members Franchises – a business idea licensed by a franchisor to be operated by other people (“franchisees”) Public sector – organisations owned/controlled by the government

2.1.2 How can the size of a business be measured?

There are lots of different measures: the most popular ones are: Number of employees Number of outlets (e.g. shops) Total revenues (or “sales” per year) Profit Capital employed – the amount invested in the business Market value (for example as reflected in the share price of a business quoted on the Stock Exchange)

2.1.3 What are the advantages and disadvantages of operating as a sole trader?

ADVANTAGES Total control of the business by the owner Cheap to start up Keep all the profit NEED TO BALANCE THE BUSINESS PROS AND CONS AGAINST THE PERSONAL COSTS AND BENEFITS – e.g. satisfaction of running a business with little paper work against the risks, pressure, probably long working hours, with little holiday – remember most businesses are sole traders.

DISADVANTAGES Unlimited liability Difficult to raise finance May be difficult to specialise or enjoy economies of scale Problem with continuity if the sole trader retires or dies

2.1.4 Explain the legal requirements of a sole trader

MAINLY to keep proper business accounts and records for the Inland Revenue, and if necessary VAT accounts ALSO The sole trader also has to comply with legal requirements that concern protection of the customer (e.g. the Sale of Goods Act)

2.1.5 What is meant by The owner is responsible for all the debts of the business and might have to sell own possessions to pay creditors



unlimited liability?

2.1.6 Explain why a sole trader might consider taking on a partner and forming a partnership

Spreads the risk across more people Partner may bring money and resources to the business (e.g. better premises to work from) Partner may bring other skills and ideas to the business Increased credibility with potential customers and suppliers – who may see dealing with the business as less risky

2.1.7 Explain what objectives a new partnership might have for its business

Increase sales through new product ideas Grow profits by sharing responsibilities and increasing the amount of specialisation by each partner

2.1.8 Explain why entrepreneurs might decide to remain a partnership rather than a private limited company

Costs money to set up limited company (may need to employ a solicitor to set up the paper work) Company accounts are filed so the public can view them (and competitors) May need to spend money on an auditor to check the accounts before they are filed

2.1.9 What are the disadvantages of operating as a partnership?

Have to share the profits Less control of the business for the individual Disputes over workload

Problems if partners disagree over of direction of business

2.1.10 What is contained within a deed of partnership

Amount of capital each partner should provide How profits or losses should be divided How many votes each partner has (usually based on proportion of capital provided) Rules on how take on new partners How the partnership is brought to an end, or how a partner leaves

2.1.11 What happens if a partnership business fails?

Depending on how the Deed of Partnership is set up, each partner has an agreed slice of the business.

2.1.12 Explain what is meant by “a limited company”

A business which is owned by shareholders, run by directors and MOST IMPORTANTLY whose liability is limited (see below)

2.1.13 Explain what is involved in setting up a private limited company

A company has to register with Companies House and is issued with a Certificate of Incorporation. It also needs to have a Memorandum of Association which sets out what the company has been formed to do, and Articles of Association which are internal rules over including what the directors can do and voting rights of the shareholders.



2.1.14 Who controls a company? The shareholders (who own the business) form a company which employs directors to control the management of the business. The managers are responsible to the shareholders and have a duty to act in the best interests of the shareholders

2.1.15 Explain why limited liability is an important feature of business organisation

Limited liability means that the investors can only lose the money they have invested and no more. This encourages people to finance the company, and/or set up such a business, knowing that they can only lose what they put in, if the company fails. For people or businesses who have a claim against the company, “limited liability” means that they can only recover money from the existing assets of the business. They cannot claim the personal assets of the shareholders to recover amounts owed by the company.

2.1.16 Explain why the ownership and management of a company are often separate

The shareholders may have the money, but not the time or the management skills to run the company. Therefore, the day to day running of the business is entrusted to the directors, who are employed for their skills.

2.1.17 What are the differences between a private limited company and a public limited company (plc)?

(1) Shares in a plc can be traded on the Stock Exchange and can be bought by members of the general public. Shares in a private limited company are not available to the general public. (2) Issued share capital (the initial value of the shares put on sale) must be greater than £50,000 in a plc. A private limited company may a smaller capital.

2.1.18 Why might a private limited company want to become a “plc”?

Shares in a private limited company cannot be offered for sale to the general public, so restricting availability of finance, especially if the business wants to expand. Therefore, it is attractive to change status. It is also easier to raise money through other sources of finance e.g. from banks. [Note: becoming a “plc” does not necessarily mean that the company is quoted on the Stock Exchange. To do that, the company must do a “flotation” (see below)

2.1.19 What are the disadvantages of being a “plc”?

(1) Costly and complicated to set up as a plc (2) Certain financial information must be made available for everyone, competitors and customers included (would you want them to know how much profit you are making?)(3) Shareholders in public companies expect a steady stream of income from dividends (4) Threat of takeover, because another company can buy up a large number of shares because they are traded publicly.

2.1.20 What is a flotation? When shares in a “plc” are first offered for sale to the general public as the company is given a “listing” on the Stock Exchange

2.1.21 Why might an individual want to buy shares in a company?

(1) Shares normally pay dividends, which is a share of the profits at the end of the year. Companies on the Stock Exchange usually pay dividends twice each year (2) Over time the value of the share may increase and so can be sold for a profit – this is known as a “capital gain”. Of course, the price of shares can go down as well as up, so investing in shares can be very risky. (3) If they have enough shares they can influence the management of the company. A good example is a “venture capitalist” that will often buy up to 80% of the shares of a company and insist on choosing some of the directors.

2.1.22 What are the risks faced by an individual who buys shares in a company?

The company reduces its dividend or pays no dividend, or the value of the share falls below the shareholder paid or the company fails and the investor loses all the money invested.



2.1.23 What are the three main forms of co-operative?

Retail co-ops; Marketing or trader co-ops Workers co-ops

2.1.24 List four examples of co-operatives currently operating in the UK

Co-operative Retail Society Farmer’s co-operatives marketing and distributing food products (e.g. Scottish Agricultural Association) Small business credit unions Artists’ co-operatives sharing studio and exhibition facilities

2.1.25 Why might acquiring a franchise be a good way for an individual to start a business?

The franchisee is given support by the franchisor. This includes marketing and staff training. So starting a business in this way requires less expertise and is less lonely! The franchisee may benefit from national advertising and being part of a well-known organisation with an established name, format and product. Less investment is required at the start-up stage since the franchise business idea has already been developed A franchise allows people to start and run their own business with less risk. The chance of failure among new franchises is lower as their product is a proven success and has a secure place in the market.

2.1.26 Provide some examples of well-known businesses that use the franchise model

McDonalds; Clarks Shoes; Pizza Hut; Holiday Inn You can find lots more good examples from this franchise website

2.1.27 What are the advantages and disadvantages of franchising?

ADVANTAGES OF FRANCHISING Tried and tested market place, so should have a customer base Easier to raise money from bank to buy a franchise Given the right and appropriate equipment to do the job well Normally receive training National advertising paid for by the franchisor Tried and tested business model

DISADVANTAGES OF FRANCHISING Cost to buy franchise Have to pay a percentage of your revenue to the business you have bought the franchisor Have to follow the franchise model, so less flexible.

2.1.28 State three possible reasons why franchising has become more popular in recent years

(1) Large companies have seen it as a means of rapid expansion with the franchisee providing most of the finance (2) Local entrepreneur with inherited or redundancy money sees the opportunity to set up business with reduced risk (3) Banks like the combination of large company and small local business as a reduced lending risk.

2.1.29 Why are some organisations owned and run by the public sector?

The public sector is run by the government. The government needs to (1) Provide essential services not fully provided by the private sector (2) Prevent exploitation of customers

http://www.co-op.co.uk/

http://www.saos.co.uk/

http://www.fsbcu.co.uk/

http://www.mcdonalds.com/

http://www.clarks.co.uk/

http://www.pizzahut.co.uk/home.html

http://www.holiday-inn.co.uk/

http://www.franinfo.co.uk/



2.1.30 What reasons have been given to justify the privatisation of former public organisations in the UK?

State run firms are inefficient - there is no incentive to cut costs or provide high quality services because there is no competition State run firms can be a financial burden on the government Selling them off raises valuable money for the government.

2.1.31 What are the possible disadvantages of privatisation?

Private companies may put prices up, cut jobs and reduce services that are not profitable, to the disadvantage of the needy.

2.1.32 Why do some businesses fail?

Poor management (this is the most important reason – and the most common) Too much competition Not enough demand for the product Business located in the wrong place Poor cash flow (particularly in the early stages of a business, or where the business operates on “thin” profit margins) Not profitable enough to keep the entrepreneur in that line of business (could be earning more elsewhere) Lack of innovation

2.2 Organisation of a Business

2.2.1 Explain what is meant by the “Span of Control”

The number of people (subordinates) who are controlled by a manager. The more people under one manager the wider the span of control

2.2.2 What is the advantage of a narrow span of control

A narrow span of control allows a manager to communicate quickly with the employees under them and control them more easily. Feedback of ideas from the workers will be more effective. It requires a higher level of management skill to control a greater number of employees.

2.2.3 What is the difference between a tall and flat organisation

A tall organisation has a large number of managers with narrow spans of control. A flat organisation has few managers with a wide span of control. A tall organisation can suffer from having too many managers (a huge expense) and decisions can take a long time to reach the bottom of the hierarchy. BUT, a tall organisation can provide good opportunities for promotion and the manager does not have to spend so much time managing the staff.

2.2.4 What is meant by the term A hierarchy describes the structure of the management of the business, from the top of the company – the managing director, through

(3) Avoid duplication of resources (4) Protect jobs and maintain key industries



“hierarchy”? to the shop floor worker, who reports to their foreman. The hierarchy of a business is usually best understood by drawing an organisation chart showing which levels of management and employees report to whom.

2.2.5 Explain what is meant by the term “chain of command”

Chain of command is the line on which orders and decisions are passed down, from the top of the hierarchy to the bottom

2.2.6 Why is it important for a manager to achieve effective delegation?

Delegation is giving the authority for certain decisions to those below the manager. This gives the manager more time to work on other aspects of the business. Effective delegation can also play an important part in increasing the job satisfaction and motivation of employees. You can revise more about motivation here

2.2.7 What are the main departments you might expect to find in a large manufacturing business? What role do these departments play?

DEPARTMENT ROLE

Production Makes sure that the production plans are met on time and products of the right quality are produced

Accounts Provides a detailed record of the money coming in and going out of the business and prepares accounts as a basis for financial decisions

Sales and marketing Sales function deals with all aspects of selling to customers; the marketing function carries out marketing research, organises advertising and product promotion

Purchasing Buys all the raw materials and goods required for production

Human Resources Deals with all the recruitment, training, health and safety and pay negotiations with unions/workers

2.3 Business Aims and Objectives

2.3.1 Explain what is meant by a “business aim”

The long term goals of the business

2.3.2 What is a mission statement?

A statement that sets out the business vision and values which enables employees, managers, customers and even suppliers to understand the underlying basis for the actions of the business.

2.3.3 What is the difference between an aim and an objective?

An aim is a general statement of purpose (e.g. we want to grow the business in European markets) An objective is a measurable target (e.g. we want to achieve sales of €10 million in European markets in 2004)

2.3.4 Why should a business set objectives?

Objectives give the business a clearly defined target. Plans can then be made to achieve these targets. This can motivate the employees. It also enables the business to measure the progress towards to its stated aims.



2.3.5 What criteria should a business objective meet?

Business objectives should ideally meet the SMART criteria: i.e. they should be:

Specific

Measurable

Achievable

Realistic

Timed

2.3.6 Describe three reasons why business objectives may change over time

(1) A business may achieve an objective and will need to move onto another one (e.g. survival in the first year may lead to an objective of increasing profit in the second year) (2) The competitive environment might change, with the launch of new products from competitors (3) Technology might change product designs, so sales and production targets might need to change

2.3.7 What are the main conflicts in business objectives

Growth versus profit: for example, achieving higher sales in the short term (e.g. by cutting prices) will reduce short-term profit Short-term versus long-term: for example, a business may decide to accept lower cash flows in the short-term whilst it invests heavily in new products or plant and equipment Large investors in the Stock Exchange are often accused of looking too much at short-term objectives and company performance rather than investing in a business for the long-term

2.3.8 How might a business react to increase competition for their customers?

Lower prices Advertising campaign Improve design or quality of product

2.3.9 Explain why profit might be more important to a business that revenue growth

Profit is an important source of funds for a business (to learn more about this, click here); a business may need to focus more on generating profits and cash flows (for example to satisfy investors) rather than focus on much higher sales

2.3.10 Describe two ways in which the aims of a public sector enterprise are different from those of a private sector organisation

(1) Most public sector enterprises are required to deliver more than just a profit for the shareholders. Many provide a form of public service (e.g. Royal Mail, BBC) in addition to their more commercial activities (2) Many public sector organisations are involved with the monitoring or control of private sector activities (e.g. the Inland Revenue controls the payment of tax by individuals and businesses). The aims of such enterprises would include ensuring compliance with the law rather than, say, achieving a profit.

2.4 Stakeholders

2.4.1 What is a stakeholder? A stakeholder is any individual or organisation that is affected by the activities of a business.

2.4.2 Who are the main Shareholders (who are likely to be a mix of the general public and larger “institutional” shareholders like pension funds)

http://www.inlandrevenue.gov.uk/



stakeholders in a large company that is quoted on the Stock Exchange?

Management and employees (who may also be shareholders) Customers and Suppliers Banks and other organisations lending the company money Government (particularly the Inland Revenue) Trade Unions Pressure Groups

2.4.3 Explain the difference between a stakeholder and a shareholder

Shareholders hold shares in the company – i.e. they own part of it Stakeholders have an “interest” in the company but do not own the company

2.4.4 What is meant by social responsibility?

The duties and obligations of a business to other stakeholders e.g. customers, employees, shareholders, local community

2.4.5 Give examples of ethical policies a business may adopt

Reduce pollution by using non-fossil fuels Disposal of waste safely and in an environmentally friendly manner Sponsoring local charity events Trading fairly with developing countries

2.5 Starting a Business

2.5.1 What are the main things a new business needs to start up?

Finance – to fund the other elements listed below: finance is usually the hardest thing to obtain in a start-up business Labour – to help develop a product or service and then to produce/deliver it Customers – without them, the business will fail. Obtaining customers means the business must undertake marketing Suppliers – provide many of the “inputs”, such as raw materials Premises and equipment – maybe a simple office, or possibly a large, modern factory; depending on what the business activity is Management organisation & structure – this is often very simple at the start-up stage (e.g. a sole trader!) Designed, researched and tested product or service – a successful business is about more than just having a good idea

2.5.2 Explain why a business needs finance to start-up

Finance is needed for several reasons: To purchase plant & machinery, office equipment etc To pay for premises and offices (e.g. the first 3 months’ rent may need to be paid in advance) To pay for essential business services such as insurance To purchase stocks of raw materials and components to allow production to start To pay the wages and salaries of the first employees to join the business (who may be needed before any goods or services are



2.5.3 Explain why it is important for a sole trader to prepare a detailed cash flow forecast when setting up a business

In the early days of setting up a business, finance is hardest to manage. It is uncertain how easy it will be to find customers – and will they buy the product or service at the price that is being asked? The business will be incurring significant “start-up costs” which will eat into the available funds. You can learn more about start-up costs here Accordingly, great care should be taken to estimate and forecast how the cash will come into and leave the business in the early weeks and months.

2.5.4 Describe the main ways in which entrepreneurs finance a new business

Own money Bank loans Bank overdraft Money from friends Grant assistance from government bodies

2.5.5 Apart from costs and a cash flow forecast, describe the main information a sole trader would include in the business plan

Statement of aims and objectives Description of market the business is selling to Main competitors (how will they respond to a new competitor?) Production and sales forecasts Equipment needed Distribution plan for how to get product to customers

2.5.6 Explain how a sole trader’s business might benefit from regular orders from customers

Regular (or “repeat customers”) are often the most profitable kind of customers. They provide a regular, predictable stream of income that might be important for the sole trader. They may also recommend the product or service of the sole trader to their family and friends. This reduces the amount the sole trader will need to spend on marketing.

2.5.7 What are the main kinds of external finance available to a new business?

Short term: bank overdraft; Medium term: bank loan; lease; hire purchase; government grants Long term: bank loan; mortgage; share issue (for limited companies); debenture

actually sold) To provide financial cover whilst the business waits for customers to pay



2.5.8 Explain what a new business can do to protect its ideas and products

Copyright and patents make it illegal for other firms to copy directly the business idea or invention Keep new products and services secret until they are ready for launch Focus on retaining key staff would be otherwise be valuable for competitors to poach!

2.5.9 Assess the qualities that an entrepreneur must possess to be successful in business

Have ideas Ability to take risks Ability to persuade others to join the business or lend the business money Energy to keep the business going under tough circumstances – it is often said that the best entrepreneurs are the most persistent

2.5.10 State and explain three reasons why small businesses may be successful when competing against larger businesses

REASON EXPLANATION

Personal service A small business can be more personal, so a customer feels they are talking more directly to the person who makes and supports the product

Closer to the market A small business can react more quickly to small changes in the market place because the chain of command is much shorter

Flexible A small business can change its product to suit the customer’s needs because it does not have to fit in with large production runs. For instance, wedding cakes and tailored clothes

2.6 Growing a Business

2.6.1 Describe how the use of loss-leaders might help a business increase its sales

A loss-leader is where a product is sold at a price below the cost of making it. The customer then buys this product and either another product at the same time, or repeats the purchase at a later date of the loss-leader at a higher price. A loss-leader is an example of a “pricing-strategy” used by a business. You can learn more about these here

2.6.2 State and explain four factors which might help the sales of a firm grow

FACTOR EXPLANATION

Lower price People will buy more at lower prices

Increase advertising Customers are made more aware of the attraction of the products

Sell in different location Selling to a new set of customers, more potential

Sell on credit Customers are attracted by the ability to buy now pay later

2.6.3 What is meant by the phrase organic growth

When a business grows by ploughing back profits into the business, increasing sales and expanding their operations. Organic growth can be compared with “acquisitive growth” – this is where the business grows and expands by buying other businesses.



2.6.4 Explain the reasons why a business might choose to diversify away from its original product

Helps spread the risks across a number of products. If one product fails due to market conditions then other products in different markets should not be affected Good way of expanding if present market seems already full Gives the business fresh objectives and may act to motivate managers and staff

2.6.5 Using an example, explain what is meant by the term “transnational”

A transnational company has no country as its base, but has regional Head offices in many countries and is owned by people from many different nationalities. Unilever who make a wide range of products such as tea, deodorants and soap powder could be regarded as a good example of a transnational.

2.6.6 Assess the factors that might give a firm competitive advantage

USP (unique selling point) – something that makes the product different from the other products available First in the market – a chance to develop a loyal customer base before others have a chance to establish themselves (you may see this referred to as “first-mover advantage”.) Market leader – customers are prepared to pay higher prices for the market leader and, because shops want to sell the market leader, it can secure good positions on the shelves, Lowest cost producer – a business that is able to produce products and services at the lowest cost (perhaps because they are the biggest business in an industry) is able to charge a lower price than any competitor. Brands – having brands that customers recognise and trust can be a vital kind of competitive advantage

2.6.7 Explain what is meant by the phrase “market share”

Market share means the sales of the business of a particular product as a proportion of all the sales of that type of product. A 5% market share would mean that 1 in 20 of all products sold are sold by that business.

2.6.8 What is the difference between mergers and acquisitions

A merger is when two or more firms AGREE to join together to become one larger firm. An acquisition is when one firm BUYS another firm

2.6.9 What is meant by the term “horizontal integration”?

When a business buys another business which is making the same sort of product. Does not have to be a competitor, but might be a business in another geographical region.

2.6.10 Explain what is meant by the term “vertical integration”

When a business buys another business which it either sells to (forward integration) or buys from (backward integration)

2.6.11 What are the advantages and disadvantages of mergers

ADVANTAGES DISADVANTAGES

Economies of scale Greater market share for horizontal integration Spreads risks if products different Reduces competition Can bring new skills and specialist departments to the business

Diseconomies of scale if business becomes too large Clashes of culture between different types of businesses May need to make some workers redundant May be a conflict of objectives between different businesses

http://www.unilever.co.uk/



Easy to raise money if a larger business

2.6.12 What is a multinational organisation?

A firm which has a head office in one country but manufactures goods in a number of different countries.



3 Managing People

3.1 Recruitment, Selection and Retention

3.1.1 Why might a business need to recruit staff?

Business is expanding due to: - Increasing sales of existing products - Developing new products - Entering new markets

Existing employees leaving to work with competitors or other local employers Existing employees leaving due to factors such as retirement, sick leave, maternity leave Business needs employees with new skills Business is relocating – and not all of the existing workforce want to move to the new location

3.1.2 What changes in employment patterns might affect the recruitment needs of a business?

Increase in part-time working Increases in numbers of single-parent families More women seeking work Ageing population Greater emphasis on flexible working hours

3.1.3 What are the main advantages and disadvantages of employing part-time staff?

ADVANTAGES Cheaper to employ as entitled to less benefits More flexible workforce e.g. easier to reduce labour hours when sales fall.

DISADVANTAGES Employees feel less loyal to the business and therefore less motivated Harder for managers to control and coordinate the workforce

3.1.4 What are the different recruitment methods a business can use?

Internal recruitment Job centres Job advertisements Recruitment agency Personal recommendation

3.1.5 What is the difference between internal and external recruitment?

Internal recruitment is when the business looks to fill the vacancy from within its existing workforce External recruitment is when the business looks to fill the vacancy from any suitable applicant outside the business



3.1.6 What are the main advantages and disadvantages of internal and external recruitment

INTERNAL RECRUITMENT ADVANTAGES Cheaper and quicker to recruit People already familiar with the business and how it operates Provides opportunities for promotion with in the business Business already knows the strengths and weaknesses of candidates DISADVANTAGES Limits the number of potential applicants No new ideas can be introduced from outside May cause resentment amongst candidates not appointed Creates another vacancy which needs to be filled

EXTERNAL RECRUITMENT ADVANTAGES Outside people bring in new ideas Larger pool of workers from which to find the best candidate People have a wider range of experience DISADVANTAGES Longer process More expensive process due to advertisements and interviews required Selection process may not be effective enough to reveal the best candidate

3.1.7 What are the main stages of the recruitment process?

The main stages the of the recruitment process are: Preparation: identifying what jobs need filling and what the role and specification of the job is Finding possible candidates: using the various methods (e.g. advertising) to encourage potential candidates to apply for the job Selection: using interviews and other selection processes to choose the best person for the job and completing the contractual employment of that person Induction: introducing the selected candidate to the business

3.1.8 What is the role of a recruitment agency

Provides employers with details of suitable candidates for a vacancy. They work for a fee and often specialise in particular employment areas e.g. nursing, financial services, teacher recruitment

3.1.9 What is a job description and job specification?

A job description is a detailed explanation of the roles and responsibilities of the post advertised. Most applicants will ask for this before applying for the job. It refers to the post available rather than the person. A job specification is drawn up by the business and sets out the kind of qualifications, skills, experience and personal attributes a successful candidate should possess. It is a vital tool in assessing the suitability of job applicants and refers to the person rather than the post.

3.1.10 What are the main objectives of a recruitment advertisement?

To inform the audience of potential candidates about the opportunity To provide enough information to both inform and interest possible applicants To help “screen” or dissuade unsuitable applicants To obtain the most number of suitably qualified applicants for the post advertised



3.1.11 Where could a business place a job advertisement?

With internal recruitment, the human resources department could use: - Notice boards - Staff magazines & newsletters - Email

With external recruitment, the following methods are often used: - Newspapers and magazines - Job centres - Employment agencies and “Head-hunters” - Direct contacts (e.g. with employees in a competitor business) - Internet recruitment websites

3.1.12 What are the factors that a business should consider when advertising a job?

Wide coverage- reach a large audience Cost – which methods should be used; what is the advertising budget for the job? Advertise locally, nationally or sometimes internationally Are the alternatives to advertising (e.g. recruitment agencies, existing contacts) more likely to achieve the required result?

3.1.13 What are the typical contents of a job application form?

Personal details Name, address, date of birth, nationality

Educational history Including examination results, schools/universities attended, professional qualifications

Previous employment history Names of employers, position held, main achievements, remuneration package, reasons for leaving

Suitability and reasons for applying for the job

A chance for applicants to ‘sell themselves’

Names of referees Often recent employer or people who know applicant well and are ideally independent

3.1.14 What is a Curriculum Vitae?

A document (usually referred to as a “CV”), often on one or two sides of A4, which the applicant designs and gives the main details described above in an application form. An application form is different from a CV in that the employer designs it and sends to applicants.

3.1.15 Why would a business use their own application form rather than rely on a candidate’s curriculum vitae?

A business can tailor the questions and format to their exact needs An application form forces candidates to answer the same questions and provide information in a consistent format. By contrast, CV’s often come in many different formats, with key information either missing or presented in different ways



3.1.16 Explain why some candidates may be rejected after a business has received their application forms

They may not meet the standards set out in the job specification such as wrong qualifications or insufficient experience. The business would not then incur costs putting then through the selection process such as interview. They may not have completed the application form to a satisfactory standard They may be unlucky – in that the recruiting employer has set a limit on the number of candidates who progress through to the interview stage

3.1.17 Explain why a business might use both a long and a short list to select the best applicants

The business will want to ensure they do not reject a decent candidate who may impress more at interview than on paper, particularly for important jobs at a high level in the business, and will not mind incurring the extra cost of selection. The short list (often 3-10 candidates) can then be decided.

3.1.18 Why is the interview an important part of any recruitment and selection process?

The chance for an employer to meet the applicant face to face and so obtain much more information on what the person is like and whether they are suitable for the job and for working in their business. The interview is also an important opportunity for the candidate to obtain information about the job and the working culture of a possible new employer.

3.1.19 List the kinds of information an employer will want to obtain during a recruitment interview

Information that cannot be obtained on paper from a CV or application form: - Conversational ability- often known as people skills - Natural enthusiasm or manner of the applicant - See how applicant reacts under pressure - Queries or extra details missing from CV or application form

3.1.20 What kinds of information should a prospective employee try to find out during an interview?

Whether the job or the business is right for them. What is the culture of the company like? What are the exact details of the job that may be omitted from the job description?

3.1.21 What kinds of selection tests are sometimes used during the interview process?

Aptitude tests Intelligence tests Personality tests

3.1.22 Why are businesses making greater use of selection tests?

The basic interview can be unreliable as applicants can perform well at interview but not have the qualities or skills needed for the job. Selection tests increase the chances of choosing the best applicant and so minimise the high costs of recruiting the wrong people.

3.1.23 Why should an employer take up job candidate references before offering a job?

It is the final check that all the information given by the candidate is correct. A good honest reference from an independent source can also reveal good or bad incidences from the candidate’s past or particular traits that may have been missed.



3.1.24 What is meant by employee retention?

The ability of a firm to convince its employees to remain with the business.

3.1.25 What is meant by labour/staff turnover?

The proportion of a firm’s workforce that leaves during the course of a year. A business with a high staff turnover is said to have problems with “staff retention”.

3.1.26 Explain why high staff turnover is a problem for many businesses

Increases recruitment costs (e.g. advertising for replacement staff; employing temporary staff whilst the job vacancies are filled) Reflects poor morale in workforce Increases training costs of new workers Loss of productivity while new worker settles in

3.1.27 Describe some of the ways in which a business can retain the staff it wants to keep

The business can offer financial (e.g. bonus, salary rise) or non-financial (e.g. promotion, more decision making power) incentives. Click here to learn more about methods of staff motivation

3.2 Training

3.2.1 What are the main reasons why a business should provide training for its employees?

Introduce new employees to the business (this is known as “induction training”) – see below Help provide the skills the business needs (in particular make the workforce more flexible) Provide employees with better knowledge about the business and the market it operates in Provide support for jobs that are complex and for which the required skills and knowledge are often changing (e.g. a firm of lawyers training staff about new legislation) Support the introduction of new working methods Reduce the need for supervision Help achieve a good health and safety record Help improve quality and lower customer complaints Increase employee motivation and loyalty to the business

3.2.2 What is meant by induction training?

Introducing new employees to the job, their new colleagues, the premises and to the values, and aims of the business

3.2.3 What factors determine the length and type of induction training?

The size of the business Complexity of the job

Level or position of the job within the business



3.2.4 Name five elements likely to be included in an induction programme

(1) Learning about the duties of the job (2) Meeting new colleagues (3) Seeing the layout the premises (4) Learning the values and aims of the business (5) Learning about the internal workings and policies of the business

3.2.5 Describe the main differences between “on-the-job” and “off-the-job” training

ON THE JOB TRAINING Takes place at the workplace New employee learns from experienced worker- may shadow or observe to start with May be given instruction manuals

OFF THE JOB TRAINING Takes place outside the workplace e.g. at a college or training agency Learn from specialists in that work area May take the form of lectures or self-study

3.2.6 Give three reasons why an employee might prefer off-the-job training

(1) A wider range of skills or qualifications can be obtained (2) Can learn from specialists or experts (3) More confident when starting the job

3.2.7 What are the disadvantages to a business of sending employees to off the job training?

More expensive – means spending money on transport and accommodation Lose working time and potential output from employee New employees may still need some induction training Employees now have new skills/qualifications and may leave for better jobs

3.2.8 What is involved in an appraisal system?

Appraisal system is designed to identify an individual employee’s strengths and weaknesses. The appraisal involves: - Collecting information and assessing the performance of the individual - An interview - Setting targets and evaluating training needs

3.2.9 How can training motivate employees?

Assuming the training is effective: then… Employees feel more loyal to the firm Shows that the business is taking an interest in its workers Provide employees with greater promotional opportunities Enables employees to achieve more at work – perhaps gaining financially from this



3.2.10 In what ways does the Government get involved in helping businesses train employees?

The Department for Education and Skills is the government department responsible for training It funds and overseas training schemes at a national and local level, mainly through 78 Training and Enterprise Councils (TECs) across England and Wales Other notable schemes are the New Deal (aimed at people aged between 18-24 and out of work for more than 6 months) and ‘Investors in People’ programme (encouraging businesses to put training as a priority)

3.2.11 Why is Health and Safety training needed?

All businesses have to reach a certain health and safety standard which is monitored by the government run Health and Safety Executive. If employees do not adopt good health and safety practices then the business could be closed down.

3.3 Motivation

3.3.1 What is meant by motivation?

Motivation is the will to work. This comes from the enjoyment of the work itself and/or from the desire to achieve certain goals e.g. earn more money or achieve promotion

3.3.2 Outline the methods available for a business to motivate its employees

Financial methods (e.g. salary, bonus) Non-financial methods (passing on responsibility or praise). In reality, businesses use a wide variety of methods to motivate employees

3.3.3 What are the advantages of having a well-motivated workforce?

Better productivity (amount produced per employee) Better quality Lower levels of absenteeism Lower levels of staff turnover (the number of employees leaving the business) Lower training and recruitment costs

3.3.4 Who are the four main motivational theorists?

Taylor, Mayo, Maslow, Herzberg

3.3.5 What is Taylor’s theory of motivation and how did he believe employees should be motivated?

Managers should maintain close control and supervision over their employees. Autocratic style of management- managers make all decisions themselves Theory X approach to workers- believe workers are lazy and are only motivated by money Motivate by pay via piece-rate.

http://www.dfes.gov.uk/index.htm



3.3.6 What is Mayo’s theory of motivation and how did he believe employees should be motivated?

Workers are not just motivated by money but by having their human/social needs met Concluded that increase motivation by:

- Better communication between managers and workers - Greater manager involvement in employees working lives - Working in groups

In practice therefore businesses should introduce team working and personnel departments to look after employees interests

3.3.7 What is Maslow’s theory of motivation and how did he believe employees should be motivated?



3.3.8 What is Herzberg’s theory of motivation and how did he believe employees should be motivated?

Believed in the two-factor theory. Motivators- factors that directly motivate employees to work harder

- Giving responsibility, recognition for good work, sense of achievement, opportunities for promotion. Hygiene factors- factors that can de-motivate if not present but do not actually motivate employees to work harder.

- Pay, working conditions, job security. Motivate by using motivators plus ensuring hygiene factors are met. Use job enrichment and empowerment (delegating more power to employees to make their own decisions).

3.3.9 What is meant by an autocratic management style?

Senior managers make all the important decisions and closely supervise and control workers. Managers do not trust workers and simply give orders (one-way communication)

3.3.10 When might an autocratic management style be suitable?

When quick decisions are needed in a company, e.g. in a time of crises, or when controlling large numbers of low skilled workers

3.3.11 What is meant by a democratic management style?

Managers trust employees and encourage them to make decisions, delegate to them authority/power and listen to their advice

3.3.12 Distinguish between McGregor’s classification of workers into Theory X and Theory Y for motivation at work?

McGregor believed that managers have two very different views of workers in terms of their attitudes to work and motivation. Theory X view of workers: Workers dislike work and are lazy. Workers must be controlled and punished were necessary. Workers try to avoid responsibility. Theory Y view of workers: Workers like to work and enjoy new challenges. Workers like to make decisions and are creative and imaginative. Workers seek responsibility.

3.3.13 How could a business demonstrate to its employees that it believes in Theory Y?

By managers adopting a more democratic style of management. Giving workers a variety of interesting tasks and delegating to them the authority to make decisions

3.3.14 What is the best approach/style for a manager to use?

It depends on the circumstances; whether workers are skilled or experienced, are genuinely motivated, whether quick decisions are needed etc. The best managers are those that are versatile and can call upon the right style at the right time.

3.4 Rewarding Employees



3.4.1 Name five reasons why people go to work

To earn money To feel a sense of achievement or job satisfaction To feel a sense of belonging to a group To achieve a sense of security To obtain a feeling of self-worth

3.4.2 What are the main types of financial incentives at work?

Wages Normally paid per hour worked and receive money at the end of the week

Salaries Normally an annual salary which is paid at the end of each month

Piece-rate Pay per item produced in a certain period of time

Bonus system Usually only paid when certain targets have been achieved

Commission Some workers, often salesmen, are partly paid according to the number of products they sell

Profit sharing A system whereby employees receive a proportion of the company’s profits

Performance related pay

Paid to those employees who meet certain targets. The targets are often evaluated and reviewed in regular appraisals

Share options A common incentive for senior managers who are given shares in the company rather than a straightforward bonus or membership of a profit sharing scheme

Fringe benefits Often known as ‘perks’, these are items an employee receives in addition to their normal wage or salary e.g. company car, private health insurance, free meals; discounted season tickets

3.4.3 What are the main types of non-financial incentives at work?

Empowerment Delegating power to employees so they can make their own decisions

Praise Recognition for good work

Promotional opportunities Promoting employees to a position of higher responsibility

Job enrichment Giving employees more challenging and interesting tasks

Job enlargement Giving employees more tasks of a similar level of complexity

Better two-way communication

Employees have a chance to give feedback and advice to managers

Better working environment Providing a safe, clean, comfortable environment to work in

Team working Offers employees an opportunity to meet their social needs; often accompanied by some form empowerment for the team



3.4.4 Explain why a business might offer its staff discretionary fringe benefits

Often increases loyalty to the company as these benefits are not always taxed or are taxed at a reduced rate. More likely to recruit the best people to the company.

3.4.5 What are the differences between wages and salaries?

WAGES Paid by the hour with the pay packet normally received at the end of each week Often paid to lower skilled workers or to temporary staff Any additional hours worked normally paid a higher rate on an overtime basis

SALARIES Often set on an annual basis but payment is made at the end of each month Normally paid to managers or those higher up in a company A set number of hours is not normally agreed but the employment contract requires enough hours worked to get the job done.

3.4.6 What is the difference between gross pay and net pay?

Gross pay is the pay each month or week before any deductions have been removed (e.g. income tax, national insurance contributions). Net pay is the pay after deductions have been taken off and is sometimes known as take-home pay.

3.4.7 What is the difference between overtime and bonus pay?

Overtime is additional hours worked over and above the normal working hours, such as at weekends or holiday time. This is paid at a higher rate - often 1.5 or 2 time’s normal hourly wage. Bonus pay is given out when certain performance targets have been met and is normally applicable at manager level in a company

3.4.8 Which system of payment would be best for a team of car salesmen at a dealership?

A basic salary would be appropriate so that the essential needs of employees could be met regardless of sales and then additional payments in proportion to the number of sales made to act as an incentive. As the salesmen are working in a team, commission may not be possible as sales could not be credited to just one worker, so a system of profit sharing or shared bonuses may be appropriate.

3.4.9 What are the advantages of profit sharing?

Creates a direct link between pay and performance Creates a sense of team spirit- helps remove ‘them and us’ barrier between managers and workers if all employees involved May improve employee’s loyalty to the company Employees more likely to accept changes in working practices if can see that profits will increase overall

3.4.10 How might a business use a bonus system to improve performance?

By motivating employees to work harder in order to meet a realistic yet challenging target and therefore achieve a bonus payment. Would only be effective if bonus payments were a significant sum



3.4.11 What are the advantages and disadvantages of the piece-rate system


It requires low levels of manager supervision Workers are focused on quantity not quality

Encourages high speed production It is repetitive for workers and can be de-motivating

Provides good incentive for workers who are mainly motivated by pay

Workers are only used to one set method of production and may resistant change

3.4.12 What kind of pay package might be expected by a managing director of a company quoted on the London Stock Exchange

A high annual salary and often share options as part of a performance related pay approach based on the overall success of the company. The Managing Director would also expect to get significant “non-financial” incentives in a benefit package. These would include: Pension contributions Health insurance (both for the MD and his or her family) Provision of a company car

3.4.13 What are the advantages and disadvantages of performance-related pay?


Senior managers can easily monitor and assess individual employee performance during appraisal process

Setting of targets for employees can ensure they are all closely focused to the company objectives

Discourages a team based approach- can create unhealthy rivalry between managers Can be difficult to accurately measure performance of some workers e.g. in service sector firms

Incentives may not be larger enough to motivate employees

3.4.14 Which motivation theorists viewed money/pay as a good way of motivating employees?

Taylor was the only theorist to emphasis pay, in particular piece-rate, as the best way of motivating employees Mayo, Maslow and Herzberg all felt that non-financial rewards, such as teamworking, empowerment or job enrichment, acted as a better incentive for employees to work harder

3.4.15 Explain the difference between job enrichment and job enlargement?

Job enlargement means simply giving workers more tasks to do of a similar nature or complexity. Job rotation is a part of this. Job enrichment means giving workers more interesting and challenging tasks. This is therefore seen as more motivating as it gives workers the chance to further themselves- Herzberg in particular recommended this approach

3.4.16 What is meant by empowerment?

Delegating power to employees so they can make their own decisions regarding their working life



3.4.17 What are the main reasons for differences in pay between different jobs and regions?

The cost of living (e.g. house prices) varies between regions Some jobs require higher qualified workers who expect to be paid more for their time spent gaining qualifications People work hard to gain positions of responsibility and expect to be rewarded

3.5 Groups at Work

3.5.1 What is a trade union? An organisation that employees can join in order to have their interests and goals better represented

3.5.2 What are the main categories of trade union?

Craft of skills union To represent skilled workers e.g. Musicians Union (MU)

Industrial unions To represent the members of one particular industry e.g. Fire Brigades Union (FBU)

General unions Unions which recruit workers from all types of industries and with any level or range of skills e.g. Amicus – the Manufacturing Science and Finance Union (MSF)

White-collar unions Represent office workers e.g. National Union of Teachers (NUT)

3.5.3 What is the role of the Trades Union Congress (“TUC”)?

To represent all British trade unions at a national and international level. In particular to try and influence government decision making in the best interests of unions and workers and to coordinate with trade union movements in other EU countries. You can learn more about the TUC here

3.5.4 What are the benefits of trade union membership to an employee and to an employer?

BENEFITS TO AN EMPLOYEE More powerful voice when bargaining as a group (e.g. for pay rises) as can threaten industrial action such as strikes Workers will have their individual rights better protected e.g. if dismissed unfairly or discriminated against

BENEFITS TO AN EMPLOYER Cheaper and quicker to bargain with one trade union representative than individual workers Workers are better motivated if they feel their interests are being looked after by trade unions

3.5.5 What is meant by collective bargaining?

When one trade union representative negotiates with employers on behalf of all workers belonging to that trade union. Negotiations may involve areas such as pay, working conditions and fringe benefits.

3.5.6 List the main forms of industrial action a trade union can take against an employer.

Strike; work to rule; go slow; picketing; overtime ban

http://www.musiciansunion.org.uk/welcome.shtml

http://www.fbu.org.uk/

http://www.msf.org.uk/

http://www.data.teachers.org.uk/index.html

http://www.tuc.org.uk/



3.5.7 Why has the power and influence of trade unions declined over the last 20 years?

Laws passed which have weakened the power of trade unions Decline in trade union membership Change in structure of industry from heavily unionised manufacturing industry towards service sector businesses Change in philosophy from conflicts due to collective bargaining to individual bargaining between firms and employees

3.5.8 What is an employers’ association?

Organisation that represents the views and interests of companies within a certain industry. Acts like a pressure group on the government and also negotiate with trade unions. Examples: Universities and Colleges Employers Association Engineering Employer’s Federation

3.6 Employee Legislation

3.6.1 What are the main laws that affect how businesses manage people at work in the UK?

Equal Pay Act 1970 Ruled that both sexes should be treated equally in terms of pay and other employment issues

Sex Discrimination Act 1975

Made discrimination on the grounds of sex or marital status illegal in all aspects of working life

Race Relations Act 1976 Made discrimination on grounds of colour, race or nationality in terms of employment illegal

Disability Discrimination Act 1995

Ruled that employers must treat a disabled person equally as others unless good reason

Working Time Regulations 1998

EU legislation that set a limit on the maximum umber of hours (48 hours) employees should be required to work in a week. Employees can choose to work more hours if they wish.

3.6.2 What is meant by the Minimum Wage?

The legal minimum hourly wage rate that a business can pay an employee. This was introduced into the UK in 1999 and in 2003 the minimum wage for someone over 21 was £4-20. The rate is subject to regular reviews and is likely to be increased every few years as the cost of living increases.

3.6.3 What type of firms would be most affected by an increase in the minimum wage?

Small businesses who find it harder to cope with increases in costs Businesses which employ a large number of low-skilled workers e.g. catering, hotels, leisure businesses

3.7 Communication

3.7.1 What is communication? The process by which a message or information is exchanged from a sender to a receiver

http://www.ucea.ac.uk/

http://www.eef.org.uk/



3.7.2 Who might be the receivers of internal communications and external communications from a manager of a business?

INTERNAL Workers Directors Other managers

EXTERNAL Customers Local community Suppliers Shareholders Government Banks

3.7.3 Why is effective communication vital to a business?

Motivates employees – helps them feel part of the business Easier to control and coordinate business activity – prevents different parts of the business going in opposite directions Makes successful decision making easier – decisions are based on more complete and accurate information Better communication with customers will increase sales Improve relationships with suppliers Improves chances of obtaining finance – e.g. keeping the bank up-to-date about how the business is doing

3.7.4 Explain how effective communication can motivate employees.

Good communication is an important part of motivating employees and several of the motivational theorists recognise this (click here to revise more about motivation) In particular Mayo emphasised the importance of communication in meeting employees’ social needs and Maslow and Herzberg stressed the importance of recognising employee’s achievements and self-esteem needs. Other reasons are: Ensures that everyone is working towards the same company goals Enables employees to be involved in decision-making Employees can offer feedback and give suggestions People are motivated by having clear targets set for them Recognise employee achievements

3.7.5 What is two-way communication?

When feedback on the message is given back from the receiver to the sender

3.7.6 What are the five best methods of communication for obtaining feedback?

Face to face Telephone E-mail Meetings Video-conferencing



3.7.7 What factors would determine which method of communication should be used?

Content of the message (e.g. is it confidential or lengthy) Speed required Amount of feedback wanted Type of feedback required – e.g. is a decision required from the person to whom the communication is sent Cost

3.7.8 Describe three barriers to communication that a firm may face.

(1) Too many intermediaries (e.g. too many layers in the hierarchy through which the message has to be passed) (2) Geographical distance between a firm’s offices, production plants or outlets (3) Communication overload – too much information can cause problems e.g. slow down decision making



4 Accounting and Finance

4.1 Sources and Uses of Finance

4.1.1 What are the main reasons a business needs finance?

To start a business – financing the purchase of assets, materials and employing people To finance new technology – e.g. the introduction of new computer systems To develop and market new products – e.g. to do marketing research and test new products in “pilot” markets To open new markets – e.g. to research new export markets Take-over or acquisition – e.g. to buy a major competitor (acquisitions involve significant investment) Moving to new premises To pay for the day to day running of business e.g. to finance increased debtors when sales increase

4.1.2 What is the difference between internal and external sources of finance?

Internal finance comes from the trading of the business. For example: - Day to day cash from sales to customers - Money loaned from trade suppliers through extended credit - Reductions in the amount of stock held by the business - Disposal (sale) of any surplus assets no longer needed (e.g. selling a company car)

External finance comes from individuals or organisations who do not trade directly with the business e.g. banks

4.1.3 What is the difference between short and long-term finance?

Short term finance is needed to cover the day to day running of the business. It will be paid back in a short period of time, so less risky for lenders. Long term finance tends to be spent on large projects which will pay back over a longer period of time. More risky so lenders tend to ask for some form of insurance or security if the company is unable to repay the loan. A mortgage is an example of secured long-term finance.

4.1.4 What are the main kinds of long-term finance available to a business?

Mortgages; bank loans; share issue; debentures

4.1.5 How do businesses choose from the different sources of finance available to them?

The following criteria can be used: Amount of money required How quickly the money is needed The cheapest option available The amount of risk involved in the reason for the cash



4.1.6 Why might a businessman wish to finance the start-up of a firm with his own cash or that of his family?

Own cash is the cheapest form of finance since it carries no obligation to pay any interest or to give any control of the business to any other party

4.1.7 What are the main sources of finance available to sole traders and partnerships?

Bank loans; bank overdraft; trade credit; retained profits; taking on a new partner; government grant (small business support)

4.1.8 Why might a company wish to issue shares as a source of finance?

A large amount of money can be raised through a share issue. Unlike a loan the money does not have to be repaid over a fixed period of time.

4.1.9 What are the differences between Ordinary Shares and Preference Shares

ORDINARY SHARES Ordinary shareholders can vote at company meetings The amount of the dividend received varies

PREFERENCE SHARES Preference shareholders do not have a vote at company meetings The dividend is usually fixed (e.g. 5% of the value of shares held paid as dividend each year) Preference shareholders receive their dividend before ordinary shareholders

4.1.10 How do the owners of shares (“shareholders”) receive a return on their investment?

There are two parts to the returns earned by shareholders: (1) Dividends paid out on each share held by the company (e.g. companies on the Stock Exchange usually pay out two

dividends each year) (2) Increases in the value of each share as the company itself grows in value (this is often known as a “capital gain”)

4.1.11 Explain what is meant by a “debenture”

A long term loan which is usually secured against an asset. A debenture is repayable at a fixed date and has a fixed rate of interest.

4.1.12 How do debentures (or loans) differ from ordinary shares?

The lender has no voting rights in the company The loan attracts interests – whereas holders of ordinary shares get dividends The providers of loans are paid out before ordinary shareholders in the event that the business fails (assuming there is some cash left)

4.1.13 What are the main kinds of finance available to a business from a bank?

Bank overdraft Bank loans Asset finance (leasing)



4.1.14 What is the difference between a bank overdraft and a bank loan?

A bank overdraft is a limit on borrowing on a bank current account. With an overdraft the amount of borrowing may vary on a daily basis. A bank loan is a fixed amount for a fixed term with regular fixed repayments. The interest on a loan tends to be lower than an overdraft. Normally a fixed term loan will be for a greater amount than an overdraft.

4.1.15 Explain what is meant by the term “working capital”

The amount of short term capital available for the day to day running of the business. Working capital is usually expressed as the current assets less current liabilities e.g. value of debtors and stocks less creditors

4.1.16 What is “debt factoring”? A business sells its outstanding customer accounts (those who have not paid their debts to the business) to a debt factoring company. The factoring company pays the business the face value of the debts less a charge (e.g. 15-20%), but then collects the full amount of the debts for itself. Good way of raising cash quickly, without the hassle of chasing payments. BUT not so good for profits since it reduces the total revenue received from those sales

4.1.17 Why do the Government and European Union provide grant finance to businesses?

Protect jobs in failing/declining industries Help create jobs in areas of high unemployment Help start up new businesses Help businesses relocate to areas of high unemployment Examples are: European Structural Fund; Assisted Areas; Regional Selective Assistance

4.1.18 How might a business “lease” the assets it needs to operate?

Leasing is like renting a piece of machinery/equipment. The business pays a regular amount for a period of time, but the item belongs to the leasing company.

4.1.19 What are the advantages and disadvantages of leasing equipment?

ADVANTAGES OF LEASING Cheaper in the short run than buying a piece of equipment outright If technology is changing quickly or equipment wears out quickly it can be regularly updated or replaced Cash flow management easier because of regular payments

DISADVANTAGES OF LEASING More expensive in the long run, because the leasing company charges fees which make the total cost greater than the original cost

4.1.20 Describe what is meant by hire purchase

Business hires the equipment for a period of time making fixed regular payments. Once payments have finished it then owns the piece of equipment. Hire purchase is different to leasing in that the business owns the equipment when it has finished making payments. With an equipment lease, the equipment is handed back to the leasing provider.

4.1.21 What are the main sources of finance available to public sector businesses?

Tax revenue from the government, usually paid out in the form of grants or subsidies Fees paid by the public or businesses e.g. trading licences E.g. In the case of the BBC, money from the TV licence

http://www.dti.gov.uk/europe/structural.html

http://www.dti.gov.uk/support/rsajf2512001.htm

http://www.tvlicensing.co.uk/tvlic/index_frameset.html



4.2 Financial accounting

4.2.1 Describe the main roles of the accounting function in a business

(1) Record financial transactions, collect money from sales, pay suppliers, salaries and wages (2) Help the managers to manage the business more efficiently by preparing regular financial information e.g. monthly management accounts showing sales, costs and profits against budgets, forecasting cash flows, cost investigations (3) Providing other stakeholders with legal/vital information (financial accounts: trading account, profit and loss, balance sheet)

• Shareholders • Suppliers • Banks and lenders

• Inland revenue

4.2.2 What are the main accounting records that make up the financial accounting information of a business

Records for keeping the details of transactions: - Sales ledger: shows how much is owed by customers who have bought on credit - Purchase ledger: shows how much is owed by the business to suppliers who have provided goods and services on credit - Cash book and bank statements: shows all transactions involving cash (e.g. receipts from customers, payments to

suppliers, employee wages) - Nominal (or “General”) ledger: used to categorise the transactions of a business under headings e.g. sales of widgets, raw

materials, electricity, postage

4.2.3 What are the financial statements of a business?

Profit and loss account – showing how the business has traded for a specific period Balance sheet – a statement of the assets and liabilities of a business at a particular time, and how those assets and liabilities have been financed Cash flow statement – a statement showing how cash has come into the business and what it has been spent on

4.2.4 Explain the purpose of the profit and loss account

Shows whether a business has made a NET PROFIT or LOSS over a financial year. Describes how the profit or loss arose – e.g. categorising costs between “cost of sales” and operating costs

4.2.5 How is the gross profit of a business calculated?

Sales revenue (value of all goods sold) minus the cost of making these products (cost of sales) SALES – COST OF SALES = GROSS PROFIT

4.2.6 What are the main types of cost that would be included in “cost of sales”?

Raw materials Cost of labour working directly on each product Cost of running the machines/equipment



4.2.7 What are the main overhead costs of a business?

Costs not directly involved in the production process are called overheads (or indirect costs). Typical main overheads are: Cost of premises e.g. rent, insurance, repairs Office costs e.g. stationery, postage, computer maintenance, staff salaries and wages Sales and marketing costs e.g. salaries of salesmen, advertising Finance costs e.g. bank charges, interest on bank loans

4.2.8 What is the difference between revenue expenditure and capital expenditure?

Revenue expenditure is money spent on goods and services which have been or will be consumed Capital expenditure is money spent on long term assets which are used over and over again

4.2.9 Provide three examples in each case of costs that would be classified as revenue and capital expenditure

REVENUE EXPENDITURE Wages Raw materials Computer Software

CAPITAL EXPENDITURE Buildings Machinery Computer systems (hardware)

4.2.10 What is meant by “net profit”?

Gross profit less overheads: it is the final profit of the business from its normal activities.

4.2.11 Give four examples in each case of how to improve gross profit and how to cut overheads

(1) Improve gross profit by : - Changing to cheaper raw material suppliers - Redesigning the product to use fewer or cheaper materials - Increasing selling prices - Offer fewer discounts to customers (2) Cut overheads by: - Reducing advertising expenditure - Move to cheaper premises - Combine jobs done by administrative staff to reduce employee numbers - Renegotiate the cost of overheads such as legal and accounting fees



4.2.12 What information is provided by the balance sheet?

It is a snap shot of the business at a point in time – the “balance sheet date” It shows what the business OWNS, IS OWED and OWES

OWNS IS OWED OWES

Assets such as buildings, stock and cash

Money from debtors Money to creditors and the bank PLUS owes money to the investors/owners of the business (they own the profit)

4.2.13 What are fixed assets? Assets that provide a benefit for the business for more than 12 months, e.g. buildings and machinery

Assets that the business intends to keep

4.2.14 Why do businesses need to account for “depreciation” of their assets?

An asset reduces in value over its useful life due to wear and tear and obsolescence. Depreciation reduces the original value of an asset by charging an amount every year of its useful life to the profit and loss account.

4.2.15 What are the main categories of current assets

Stocks – finished goods, work in progress and raw materials (note: you may also see stocks called “inventories”) Debtors – people who owe the business money (customers who owe money are known as “trade debtors”) Cash –in the bank and in the cash box

4.2.16 What are the main categories of current liabilities?

Creditors – money owed by the business in the short term (suppliers who are owed money by the business are known as “trade creditors”) Bank overdraft – amounts due within the next 12 months

4.2.17 What is a “provision”? Where the business makes a charge against profits for something expected to happen, in other words reduces the stated profits for the year because they believe that they will be less for some reason. E.g. charging against profits a reduction in the size of the debtors because it is expected that a debtor owing money will fail to pay. This is called a bad debt. A business might also decide to make a provision for some kind of claim against the business – e.g. a legal claim for damages.

4.2.18 Explain how the purchase of some plant and machinery by a business using a bank loan would affect its balance sheet

Borrow £1,000 to purchase plant costing £1,000 Capital: +£1,000 Long term loans Assets: +£1,000 Fixed assets

4.2.19 What is meant by capital? Amount of long-term money put into the business to buy assets. Main forms of capital: owners money (share capital) and long term bank loans



4.2.20 What is the purpose of a cash flow statement?

An historical statement that shows movements of cash moving in and out of the business. Split into two parts: SOURCES OF FUNDS – where the cash has come from (e.g. profits, increase in trade credit) USES OF FUNDS - how it was used (e.g. purchase of assets, repayments on bank loans) Note: a cash flow statement is different from a cash flow forecast which looks at the future movement of cash A cash flow statement is one of the three main accounting statements that have to be produced by limited companies; the others being the profit and loss account and the balance sheet

4.2.21 Why can a profitable business go bankrupt?

A business can make a profit but have a negative cash flow. Without enough cash to pay employees, suppliers, banks and taxes the business will go bankrupt. A business makes a profit when sales exceed costs. Positive cash flow arises when payments from customers exceed payments to suppliers and employees. Cash may not be due from customers until next month, but bills and employees may have to be paid today. This situation can give rise to negative cash flow, even though the value of sales is greater than costs. Poor cash flow is one of the main reasons why new businesses fail.

4.2.22 What accounting statements must be published by a limited company?

The Companies Act requires limited companies to produce the following accounting statements and publish them in the Annual Report and Accounts: Profit and loss account Balance sheet Cash flow statement

4.3 Analysing Financial Performance

4.3.1 What are the main ways in which management can measure the financial success of their business?

Monitor financial performance be analysing different financial ratios Key ratios are: Return on capital employed Gross profit margin Net profit margin These can be compared with previous years’ figures and with key competitors



4.3.2 Who are the main users of financial information?

Owners/shareholders Employees Managers Creditors and banks Competitors Government (e.g. the Inland Revenue – who calculate how much tax is due by a business)

4.3.3 Why would the government be interested in the financial performance of a business?

(1) Taxes are paid on the profits a business makes (2) To see if their economic policies are encouraging businesses to grow and employ more people

4.3.4 What kinds of financial information would be of interest to a bank lending money to a business?

Acid test ratio or current ratio (see below) – these show the liquidity of the business, the ability to pay back the money it owes in the short term. A ratio of less than one may mean that the business could find it difficult to cover their liabilities and so the bank may be reluctant to extend or continue lending Profit forecasts – a successful business will be able to pay back its loans Cash forecasts – future cash flows will be needed to pay interest and repay loans Fixed assets – a business can use assets as security for loans

4.3.5 What is the difference between “profit” and “profitability”?

Profit is an absolute measure – it equals sales revenue less costs Profitability is a relative measure – it shows the amount of profit “relative” to what created the profit E.g. The ROCE investment ratio measures the relative profitability of a business compared with the amount of capital invested in the business.

4.3.6 What are the main uses of profitability ratios?

Analyse and spot favourable and unfavourable trends Compare performance with competitors

4.3.7 Explain what is meant by the return on capital employed (“ROCE”)

The net profit as a percentage of capital employed.

4.3.8 Explain why management might want to use the ROCE figure to measure the success of their business

ROCE is also known as the primary efficiency ratio because it is a better indicator than profit alone of how well a business is using the money invested. It shows how much profit is being generated from the investment compared with alternative investments in similar businesses or with interest from bank deposits

4.3.9 How might a business increase its ROCE?

Increase net profits without increasing or introducing new investment Reduce the amount invested in the business by selling assets that do not contribute to the profit earned



4.3.10 How is the gross profit margin calculated?

4.3.11 Why might the gross profit margin of a business increase?

Increase in the selling price of existing products Introduction of new products which achieve a higher gross profit margin Reduction in cost of sales e.g. a fall in raw material prices

4.3.12 What is the net profit margin?

The amount of net profit generated per pound of sales Calculated as net profit divided by total sales (or revenues) Expressed as a percentage

4.3.13 Explain what is meant by a “liquidity ratio”

The ratio of short-term liabilities to liquid assets, indicating the ability of the business to cover its short term liabilities. Liquid assets are those assets that held in cash form (e.g. cash at the bank) or can be turned into cash very quickly

4.3.14 What is the current ratio? A liquidity ratio calculated as:

4.3.15 What steps could a business take to improve its current ratio?

Increase the value of profitable sales Turn its overdraft into a long term loan (reduces short-term liabilities and increases capital)

4.3.16 How does the “Acid test” ratio differ from the current ratio?

It is a tougher test of liquidity. Stock takes longer to turn into cash, so it is excluded from the current assets in the calculation of this ratio.

4.3.17 What is “stock turnover”? The number of times stock is turned into sales. The higher the figure, the more quickly stock has been sold or turned over. A fruit stall will have a higher figure of stock turnover than a car dealership.

4.3.18 Why might a business experience an increase in its stock turnover ratio?

Lower stock levels Disposal of slow moving or obsolete stock Reduction in range of products stocked

4.3.19 Explain what is meant by “debtor days”

The number of days it takes for a business to collect money from customers who have bought products on credit.



4.3.20 What steps could a business take to encourage customers to pay their debts more quickly?

Offer discounts for early payment Threaten to take the customer to court Refuse to supply more products or hold back part of an order until payment has been made

4.3.21 What is meant by the “creditor days” ratio?

The number of days it takes for the business to pay creditors.

4.4 Business costs

4.4.1 What is the difference between a variable and a fixed cost?

Variable costs change in proportion to the amount of output produced. Fixed costs remain the same, no matter how much the business produces.

4.4.2 What are the main kinds of variable and fixed costs

VARIABLE COSTS Raw materials Workers wages Energy/fuel for machines

FIXED COSTS Rent Salaries of head office workers Heating and lighting Insurance Interest on loans

4.4.3 When might a cost be described as being “semi-fixed”?

Costs which only change when there is a large change in output. For example, costs associated with buying a new machine to cope with increased production. Also telephones and electricity for instance have a fixed and variable element: a standard line rental and then a charge for each call/unit of electricity after that.

4.4.4 What is meant by a “standard cost”?

The cost per unit of production when the product is made with the correct quantity and quality of materials, and in the exact time allowed for its production.

4.4.5 What is a variance? When the ACTUAL cost is either greater or less than the standard cost Where actual costs are more than the standard, this is known as an “adverse variance” Where actual costs are less than the standard, this is known as a “positive variance”

4.4.6 How would a business use standard costing to help manage its business?

A variance (difference) from the standard may indicate what course of action to take to correct something which is going wrong. A greater cost than standard (“adverse variance”) might lead to an investigation into how inputs were being used e.g. too much waste of raw materials, incorrect operation of machinery



4.4.7 Explain what is meant by opportunity cost

The financial benefit forgone of the next best alternative use of money. A business can measure the outcome of a decision by comparing it with the benefits (probably measured in profits or revenue) it could have had if it had taken the next best option. The opportunity cost of buying a new piece of machinery might be compared with spending the money instead on a new advertising campaign

4.4.8 What are the main differences between direct and indirect costs?

DIRECT COSTS Costs which can be identified directly with the production of a good or service; e.g. raw materials

INDIRECT COSTS Costs which cannot be matched against each product because they need to be paid whether or not the production of good or services takes place; e.g. rent on the premises

4.4.9 What is meant by the “break-even point” for a business?

The point at which the contribution from the number of units sold exactly equals all the fixed costs of the business. Profit is made above the break-even point when the number of units sold exceeds the number of units at break-even point.

4.4.10 What is meant by contribution?

The amount of money each unit sold contributes to pay for the fixed and indirect costs of the business. Contribution = selling price less variable cost per unit E.g. a product sells for £15 and has variable costs per unit of £11. Each unit sale therefore makes a contribution of £4 towards the fixed costs of the business. If the business had fixed costs of £20,000, then it would need to sell 5,000 units (£4 x 5,000 = £20,000 contribution) in order to break even.



4.4.11 What is meant by the “margin of safety”?

The difference between the number of units of planned or actual sales and the number of units of sales at break-even point.

4.4.12 Why is it important for a business to understand its break-even point?

The contribution from every unit sold above the break-even point adds to profit. The break-even point provides a focus for the business, but also helps it work out whether the forecast sales will be enough to produce a profit and whether further investment in the product is worthwhile.

4.4.13 What is the formula for the break even point

The number of units needed to break even is calculated by: FIXED COSTS

SELLING PRICE - VARIABLE COSTS

4.4.14 What are the limitations of break-even charts

Do not take into account possible changes in costs over the time period Do not allow for changes in the selling price Analysis only as good as the quality of information Do not allow for changes in market conditions in the time period – e.g. entry of new competitor



4.5 Budgeting and Business Plans

4.5.1 What is a budget? It is an agreed plan for future expenditure and income from sales based on the objectives of the business.

4.5.2 How does budgeting help managers control a business?

A budget helps managers to measure whether they are achieving what they set out to achieve. If they are under or over budget they can take steps to correct the position. A budget also helps managers allocate resources at the start of a period – e.g. in which areas is the business going to invest? How much will be spent on advertising this year? Budgets also provide a way of allocating responsibility among employees.

4.5.3 What are the main budgets produced by a business?

Sales budget – probably a month by month breakdown of how many products the business aims to sell, and how much revenue it will get from those sales Marketing budget – describes how the business intends to achieve the budgeted sales (e.g. how much advertising, sales promotion) Production budget – numbers to be produced and costs of production – used to help schedule work and order raw materials Departmental budgets – sets out how much each department can spend during a year Cash flow budget – ties all the other budgets together – helps understand what money is coming in (sales) and what money is going out (production and departmental)

4.5.4 Explain the role a budget can play in motivating employees

As a non-money motivator a budget provides a focus and a sense of achievement when it is reached. Rewards in the form of bonuses can be linked to the achievement of budgets, encouraging employees to contribute more towards the overall profitability of the business

4.5.5 Explain what is involved in preparing a cash flow budget

Key elements:

Opening balance How much cash the business has at the start of the time period

Cash inflow How much cash is coming into the business from product sales, sales of assets, loans from the bank, grants from the government, and other sources of finance

Cash outflow How much cash is going out of the business, such as expenses, wages, raw materials, buying new machinery, tax payments and dividends

Closing balance How much money is left at the end of the month

Opening balance carried forward

The next time period brings forward the closing balance from the previous time period



4.5.6 Explain how a business plan could be used to help manage a business

A business plan will contain the main aims and objectives of the business and a number of documents (budgets) showing how these objectives are to be achieved. If the business follows this plan then, if nothing unexpected happens, it should achieve its objectives. If there are “variances” from a budget, then managers will need to make adjustments. For example, a positive or favourable variance, such as more sales than planned, means that the production budget will need to be adjusted to make products to meet the extra demand

4.5.7 Explain why a bank manager might want to see a business plan before giving a business a new loan

Before a bank will lend money to a business it will want to know if it will get the money back. A business plan serves several purposes in this case: (1) It fleshes out the business idea so the bank can see whether it is likely to work financially (2) It shows the bank whether future profits will cover the interest on the loan (3) It shows the bank when it can expect to be repaid (4) It shows where the information comes from and whether it is reliable. A business plan must be presented in such a way as to convince the bank that the intentions of the business are serious and achievable

4.5.8 Explain why it is wise for a firm to keep monitoring its cash flow forecast

Cash is needed to pay employees, suppliers, the bank, the Inland Revenue and so on. If one of these does not receive payment on time then the business is in trouble. It will go bankrupt when it is unable to meet its debts. Therefore the business needs to make sure it is “liquid” i.e. that enough cash is available and will become available to meet its immediate payments and near future expenses.

4.5.9 How can a business improve its cash flow?

Agree an overdraft or increase an existing overdraft from the bank Extend the length of time taken to pay suppliers Reduce the price of some products to get quick sales Sell to customers for cash rather than offer trade credit Sell some equipment Reduce stock levels Buy cheaper raw materials Allow debtors discounts for early payment Operate tighter customer credit controls Use debt factoring



5 Production

5.1 Introduction to Production

5.1.1 What are the three main stages of production?

Primary, secondary and tertiary production

5.1.2 What are the main kinds of input into production?

Land – the raw materials Labour – the workforce Capital – the machines and equipment Enterprise – the ideas, the organisation and the willingness to take a risk over a product

5.1.3 What activities are typical of businesses engaged in primary production?

Extraction of raw materials, through mining, growing and harvesting e.g. Agriculture, fishing, forestry, oil exploration and copper mining

5.1.4 How does secondary production compare with primary production?

Secondary production transforms primary resources into finished products through manufacturing Secondary production therefore involves more “added value” than primary production – which is mainly about extraction and harvesting

5.1.5 Provide five examples of businesses engaged in the tertiary production sector

High street bank; travel agent; supermarket; cinema; university

5.1.6 What is meant by mass production?

Large scale production where a business produces large numbers of the same item There is little, if any, “customisation” of the product

5.1.7 What are the typical features of a business that uses mass production?

A standard product (little or no variation in style or quality) using standard parts built using standard equipment e.g. washing machines, jammy dodgers.

5.1.8 What are the main differences between unskilled and skilled work?

Skilled work requires more in the way of training, knowledge, expertise and probably time. A skilled worker will be paid more than an unskilled worker and is often motivated by a sense of achievement rather than by pay alone.

5.2 Methods of Production



5.2.1 What are the three main methods of production in manufacturing?

Job production Batch production Flow production

5.2.2 What are the main characteristics of the job production method

One-off or small number of items produced Normally made to customers specifications (e.g. wedding cake or building project) Often undertaken by small, specialist businesses.

5.2.3 List some examples of businesses that use the job production method

Architects; tailors; portrait painters; plumbers; ship builders; road builders

5.2.4 What is meant by the term “batch production”?

Similar items are produced together. Each batch goes through one stage of the production process before moving onto the next stage.

5.2.5 In what circumstances would a business use a batch production method?

Most businesses produce a range of products. It is cheaper to produce a number of each item in one go because the machines are set up and the materials can be bought in bulk and the workers can specialise in that task.

5.2.6 What are the main aims of the batch method

To concentrate skills, to achieve better use of equipment and so produce good quality products more economically than manufacturing them individually

5.2.7 Name three advantages of the flow method

(1) Costs per unit of production reduced through improved work and material flow (2) Particularly suitable for the manufacture of large quantities (3) Capital intensive which means it can work at night and over weekends if necessary with little labour input

5.2.8 How should flow production be organised in order for this method to be effective?

In flow production the product moves continuously through the production process. When one task is finished the next task must start immediately. Therefore, the time taken on each task must be the same.

5.2.9 Explain how changing seasonal demand can affect the production process of a business

Changes in seasonal demand can mean a requirement for large quantities of stock at particular times of the year but very little demand at other times. E.g. the demand for children’s toys is heavily-focused on the pre-Christmas period. For producers, it may make sense to “build for stock” during periods of quiet demand – in order to make use of production equipment that would otherwise lie idle. However, some businesses may produce products that are “perishable” (e.g. food products with a best-before date). Here, the production process needs to be designed flexibly so that additional production capacity can be added close to the time when demand increases (e.g. bring in more part-time, temporary employees).



5.3 Production Efficiency

5.3.1 What is meant by the productive capacity of a business?

How much a business can produce during a specific period of time. Usually measured in production units (e.g. 1,000 cars per month)

5.3.2 What is meant by efficiency?

The lowest cost per unit at which production can take place. A more efficient business will produce lower cost goods than competitors and may generate more profit possibly at lower prices

5.3.3 What is meant by the term “productivity”?

An important measure of efficiency describing how much input can be turned into products

5.3.4 How might a business measure its productivity?

Output per worker, sales per square metre (in a shop) or output per machine e.g. a manufacturer of fridges produces 20,000 fridges this month and has a workforce of 1,000 Productivity = 20,000 divided by 1,000 which equals 20 fridges per person per month

5.3.5 How can a business improve its productivity?

Training Improved motivation More capital equipment Make use of better quality raw materials (reduces the amount of time wasted on rejected products)

5.3.6 How might measuring levels of stock indicate a change in productive efficiency?

The business will have a target stock level for finished goods to achieve. This is calculated to satisfy the demand expected by the marketing department plans and based on what the production department thinks they can produce. If the stock level falls below this level then the productive efficiency has reduced since the output per worker has not met the planned requirements.

5.3.7 Explain two ways in which mass production can lead to poor productivity

(1) Mass production leads to repetition of work, which can de-motivate the workers (2) Breakdown on any part of the line can mean a shutdown of the whole operation, reducing the number of units per hour produced

5.3.8 What are the main objectives of lean production?

To minimise the use of any resource that does not add value to the product or service e.g. operating Just In Time production (where goods are made just in time to meet customer demand, so no stocks held) To make the product right first time (not wasting time checking and re-checking)

5.3.9 How does cell production lead to improved productivity?

Cell production is where work is organised into teams. Teams are given the responsibility of doing a part of the production process as the product moves through the assembly line. Improvements due to: increased motivation (team spirit and added responsibility); specialisation;

5.3.10 What is Kaizen? Means continuous improvement – a process where overall improvement and progress comes from small improvements being made all the time. Management and workers are focused on trying to make small adjustments, even when the process/product seems to be working well.



5.3.11 What are the advantages and disadvantages of just-in-time (“JIT”) production?


Reduces costs of holding stock e.g. warehousing Needs suppliers and employees to be reliable

No money tied up in stock May find it difficult to meet sudden increase in demand

5.3.12 What are the main ways in which technology can be used to improve production efficiency?

Speed of production (machine can perform repetitive and complicated tasks more quickly) Increased accuracy therefore less wastage Can work longer hours

5.3.13 Explain the benefits to a business of investing in new technology

Improves productive efficiency Can improve the existing range of products or develop new ones Can enhance image of business as being at forefront of new technical developments

5.4 Economies of Scale

5.4.1 Define economies of scale Economies of scale arise when cost per unit falls as output increases.

5.4.2 What are the main kinds of internal economies of scale?

Internal economies of scale occur when the business itself grows (increased output)

ECONOMY OF SCALE DESCRIPTION OF THE BENEFITS INCREASING OUTPUT

Marketing economies Spreading the cost of marketing over a wide range of products

Buying economies Buying larger quantities so getting discounted prices and greater influence on suppliers

Financial economies Being able to negotiate lower interest rates than smaller firms which are seen as more risky

Managerial economies Able to employ more specialist staff (increasing output and lowering costs), but also spreading this overhead over a greater amount of output

Technical economies Being able to use techniques that smaller firms cannot, e.g. using mass production techniques, investing in more research

Risk-bearing economies Spreading the risks over a large number of different products (diversification)



5.4.3 What are the main kinds of external economies of scale?

External economies of scale occur when the whole industry the business is in grows Main kinds are: Transport and communication links improve (Silicon Valley) Training and education becomes more focused on the industry (more IT courses at college) Other industries grow to support this industry

5.4.4 How can economies of scale occur if the total costs of a business are increasing?

As production increases, total cost increases because it costs money to produce one more item. However the average costs of production (cost per unit) might fall because of economies of scale. Example:

Output Extra cost of production (£)

Total Cost (£)

Average Cost (£)

100 2,000 20.00

110 +100 2,100 19.09

120 +90 2,190 18.25

5.4.5 What are diseconomies of scale?

When a business grows very large the cost per unit can increase. This is mainly due to: Poor communication between different departments and along the chain of command; Lack of motivation Loss of direction and co-ordination

5.5 Quality Management

5.5.1 What is meant by quality? A quality product needs to be “Fit for purpose” and should “Meet or exceed customer requirements”

5.5.2 List four common examples of poor product or service quality

(1) Product fails – e.g. a breakdown (2) Does not perform as promised (3) Late delivery (4) Poor instructions/directions for use



5.5.3 Why is it important for a business to monitor and measure quality?

There are many costs of poor quality, including: Lost customers (expensive to replace – and they may tell other people about their bad experience) Cost of reworking or remaking product Costs of replacements or refunds Wasted materials Poor quality is a source of competitive disadvantage – if competitors are achieving higher quality, then a business will suffer

5.5.4 What is the objective of quality control?

To ensure each finished product meets the standard set out by the business for a quality product. Finished products are checked by inspectors who reject defective or substandard products.

5.5.5 What is Total Quality Management (“TQM”)

TQM is essentially an “attitude” where the whole business understands the need for quality and seeks to achieve it. Everyone in the workforce, from managers to shop floor employees, is concerned with quality at every stage of the production process. Quality is checked by the workers and not inspectors

5.5.6 What are the key advantages of TQM?

Puts the customer at the heart of the production process Motivational since workers feel more involved and are making decisions Less wasteful than throwing out defective finished products Eliminates the cost of inspection

5.5.7 Why is research and development important for quality control?

Research and development is the process by which new products are developed which meet customer needs and wants – and where existing products are improved to reflect customer feedback. The feedback from quality control (e.g. about customer complaints, or production problems) can be incorporated into the work of research and development. This should reduce quality problems in the future.

5.6 Business Location

5.6.1 Why might the availability of labour influence the location chosen by a business?

A business needs labour as a vital resource. It needs access to either cheap labour (an incentive to move to areas of high unemployment) or highly skilled labour. These people need to be within reasonable travelling distance (commuting) of the business.

5.6.2 Which forms of business infrastructure would a business consider when choosing a business location?

Infrastructure covers the modes of transport for people, materials and information. Key considerations: Road/rail/sea and air links (depending on type of business, but road is used by over 80% of business) Communications network – mobile phone coverage and suitable telephone lines; availability of broadband internet access Access to basic facilities such as water and electricity (and enough power)



5.6.3 Explain the factors a business needs to consider before deciding to change location

Access to and nearness to markets Availability of labour Infrastructure Sources of raw materials Government policy Cost of relocation

5.6.4 Why do governments provide financial and other incentives to businesses that locate in a particular place?

Enterprise zones, assisted areas and regional development agencies all provide help for businesses to relocate to areas which may have: high unemployment; declining industry (for instance coal); the area needs regeneration (inner cities); and to promote economic development

5.6.5 What is meant by the Uniform Business Rate?

This is the local tax paid by businesses to the local council in return for the amenities it provides.

5.7 Stock Control

5.7.1 What is the role of the purchasing department?

To buy materials, components, fuel, tools, machinery, equipment and services for the business, on time and at the best price

5.7.2 What are the main consequences of a stock-out?

Loss of production (with staff still being paid but no products being produced) Late deliveries, loss of sales

5.7.3 What are the advantages and disadvantages of increasing the level of stock held by a business?


Can meet sudden changes in demand Less chance of loss of production time because of stock outs Can take advantage of bulk buying economies of scale

Costs of storage Money tied up in stocks not being used elsewhere in the business Large stocks subject to deterioration and theft

5.7.4 What is meant by “economic order quantity (“EOQ”)?

The level of stocks that minimises costs. It balances the costs of holding stocks (which rises with the amount of stock held) against buying prices of stock (which falls when the size of order increases)

5.7.5 What is the buffer stock level?

The “safe” amount of stock that needs to be held to cover unforeseen rises in demand or problems of reordering supplies.



6 Marketing

6.1 Introduction to Marketing

6.1.1 Explain the meaning of the term “marketing”

The process of identifying, anticipating (predicting) and satisfying customer needs profitably.

6.1.2 What are the four main kinds of market? Provide an example of each

Commodity markets - e.g. steel, coal, coffee Industrial markets : e.g. engineering, construction Financial markets: e.g. banking, insurance, accounting Consumer markets: e.g. clothing retail, shampoo; holidays

6.1.3 Why does a business need to market its products?

Identify and anticipate – needs to find out what customers want now and in the future Satisfy – make sure the customer wants are matched by the product Profitably – needs to make sure that the price of the product is greater than the costs By use of the marketing mix (click here for the marketing mix) a business can influence buyers’ decisions

6.1.4 What is a “marketing orientated business”?

A business that reacts to what the customers want. The decisions taken by a marketing orientated business are based around information about customer needs and wants, rather than what the business thinks is right for the customer

6.1.5 What is a “product orientated” business?

A business that tries to sell a product it is good at making.

6.1.6 Why have industrial markets become more market-orientated?

Customers have become more knowledgeable and require more variety and better quality. To compete, businesses need to be more sensitive to their customers needs otherwise they will lose sales to their rivals.

6.1.7 Explain the difference between the roles played by a firm’s marketing department and the research and development department

A marketing department is concerned with identifying and responding to customer needs and wants. It also needs to deliver the marketing strategy that will achieve the target level of sales. Research and development (“R&D”) is mainly concerned with finding product and service solutions that meet customer needs and wants. It will work closely with the marketing department to understand these and to test the outputs from R&D

6.2 Market Segmentation

6.2.1 What is a market segment A market for a product is made up of different types of consumer who buy the product, which can be sub divided into segments.



6.2.2 What are the advantages for a business by segmenting a market?

It is easier to analyse who buys the product and then aim to target these customers specifically.

6.2.3 What is a mass-market? Give an example

A product that appeals to a large number of different segments, such as Coca Cola

6.2.4 What is a niche market? Give an example

A product that appeals to a few or perhaps one segment, a specialist product e.g. Railway Modelling magazine

6.2.5 What are the main ways in which a market can be segmented?

Socio-economic grouping Age of the customer Gender Size and composition of customer households Geographical location Ethnicity and/or religion Educational background of customers

6.2.6 Why is age an important characteristic in segmentation?

Members of the same age group tend to be at the same stage of their life cycle, e.g. new parents, and thus to have very similar wants. Consumers of a similar age also have similar financial circumstances (e.g. retired people living on a pension and savings will have a different income they can spend compared with students at university)

6.2.7 What are the six standard socio-economic groupings in the UK?

GROUPING DESCRIPTION A Higher managerial, administrative or professional e.g. surgeon or company director B Intermediate managerial, administrative or professional e.g. teachers, solicitors C1 Skilled non-manual e.g. sales assistants, shop floor supervisors C2 Skilled manual e.g. electrician, plumber D Semi skilled e.g. assembly line workers, cleaners E Unskilled, pensioners and unemployed

6.3 Marketing Research



6.3.1 What are the main purposes of marketing research?

Finding data and information that help a business understand what customers want now or in the future Finding out whether current products are satisfying customers Testing new products Assessing the results of its marketing strategy – e.g. effectiveness of marketing campaign. Understanding the activities of competitors

6.3.2 What are the two main methods of marketing research and how do they differ?

Primary research: getting original data directly about the product, data which did not exist before Secondary research: using existing information and material

6.3.3 What kinds of data are used in marketing research?

Answers to questions on whether the customer will buy the product and how often What they are willing to pay What type of customer is interested in the product where it should be sold?

6.3.4 What are the main kinds of secondary data?

Published accounts of rivals Government reports Data from consumer groups Reports from marketing research companies (e.g. Mintel, Keynote) Internal records – e.g. sales reports Press cuttings

6.3.5 Name four kinds of information that might be obtained from secondary research data

(1) Size of the market segment (2) Number of competitors in the market place (3) Prices of competitors (4) Age profile of consumer in a region

6.3.6 Why is it important to use secondary data as part of marketing research?

It is quicker and cheaper than primary research, which can mean the business can obtain the information it needs quicker It can provide a perspective on the whole market

6.3.7 What are the main aims of market and customer surveys?

To gain an accurate prediction of how the whole market would react to the questions asked from a small sample of the market population.

6.3.8 What is primary data? Primary data is first hand information about the specific product or market.



6.3.9 What are the main methods of field research to collect primary data?

Face-to-face interviews Telephone interviews Online surveys Mailed, printed questionnaires Focus groups and consumer panels

6.3.10 Explain why marketing research is important when considering whether to make new products

Marketing research is aimed at reducing the risk of failure. It tries to find out how the customer will react to the new product. If they are negative in their findings, then either the product is shelved, or adjustments are made.

6.3.11 What desk research would be useful for a business introducing a new product?

Government statistics could provide information on the size and growth of the market, the socio-economic groups in a launch area, and the way in which the market is regulated. Competitors’ brochures and websites could give information on pricing, product sizes and features.

6.3.12 How is sampling used in marketing research

A small section of the population is asked a number of questions or is given the opportunity to use a sample of the product to indicate what the whole population would think about the product

6.3.13 Describe four different kinds of sampling used in marketing research

Quota sampling – asking people who have certain characteristics (e.g. aged between 18-25) Random sampling – everyone has an equal chance of being asked a question Stratified sampling – population is segmented by a common characteristic Cluster sampling – target population is divided into groups (normally by geographical region) and random sample taken from these groups

6.3.14 Discuss the best ways in which a business could monitor the satisfaction of its customers

A business needs to gain FEEDBACK Sources of feedback: Focus groups (very strong feedback, but expensive) Telephone follow ups after sales have been made Feedback forms in the packaging or telephone number to call with comments Surveys Feedback from the sales force on how the market is responding, since they are closest to the customer.

6.4 Marketing Strategy and Objectives

6.4.1 Why is it important for businesses to set marketing objectives?

Managers need to set targets for their work. They can then measure more effectively the success or failure of their marketing strategies to achieve these objectives.



6.4.2 Give some examples of marketing objectives and strategies

MARKETING OBJECTIVES MARKETING STRATEGIES

Increase sales by 10% Launch a new product by the end of the year

Enhance product image Target selected market segment Mass marketing

6.5 Marketing Mix

6.5.1 What are the main elements of the marketing mix?

Product - the product (or service) that the customer obtains Price - how much the customer pays for the product Promotion - how the customer is found and persuaded to buy the product Place – how the product is distributed to the customer

6.5.2 Provide three examples of how the elements of the marketing mix interact with each other

(1) High quality materials used in a product can mean that a higher price is obtainable (2) An advertising campaign carried in one area of the country requires distribution of the product to be in place in advance of the campaign to ensure there are no disappointed customers (3) Promotion is needed to emphasise the new features of a product

6.6 Products and Brands

6.6.1 Explain what is meant by product differentiation

Making a product different from its competitors e.g. through design or branding The challenge is ensure that customers recognise that the product is different!

6.6.2 What are the main stages involved in launching a new product?

Marketing research Product development and testing Distribution of product to outlets Promotional launch to inform customers features of new product

6.6.3 Why do most businesses sell a range of products?

Spread the risk – a decline in one product may be offset by sales of other products A range can be sold to different segments of the market e.g. family holidays and activity holidays Selling a single product may not generate enough returns for the business (e.g. the market segment may be too small to earn a living)

6.6.4 Explain how services are marketed? How does this differ from the marketing of goods?

Services, such as banking, are mainly marketed through product differentiation. Similar products are adjusted to the target audience, for instance instant access account and long-term deposit accounts, or accounts for children. Businesses then use heavy promotion to highlight these differences. It differs from goods marketing, because goods have greater opportunity to use packaging and physical product design



6.6.5 Explain what is meant by a brand

A product with a unique character for instance in design or image. It is consistent and well-recognised.

6.6.6 What are the benefits of branding?

Inspires customer loyalty leading to repeat sales Can charge higher prices, especially if the brand is the market leader Retailers or service sellers want to stock brands

6.6.7 What is an “own-label” brand? Provide some examples

A retailer which uses their own name on the product rather than the manufacturer’s, like Tesco tea or Sainsbury Cola

6.6.8 Give five examples of well-known “global” brands

Microsoft Coca Cola Disney Mercedes Hewlett Packard

6.6.9 Explain what is meant by brand extension. Provide some examples.

When a business uses a brand name on a new product that has some of the brand’s characteristics. Examples include Dove soap and Dove shampoo (both contain moisturiser); Mars Bar and Mars Ice Cream

6.6.10 Explain what is meant by brand stretching. Provide some examples

Brand stretching is where the brand is used for a diverse range of products, not necessarily connected. E.g. Virgin Airlines and Virgin Cola; Marks and Spencer clothes and food

6.6.11 What are the main purposes of packaging?

Protects the product on its journey from the manufacturer and warehouse to retailer and then to customer (who might use the packaging for storage e.g. jam jar) Promotes the product by communicating information about the product Gives key details on usage/storage and safety (most products need to comply with packaging legislation)



6.6.12 What are the main stages of the product life cycle?

Introduction – researching, developing and then launching the product Growth – when sales are increasing at their fastest rate Maturity – sales are near their highest, but the rate of growth is slowing down, e.g. new competitors in market or saturation Decline – final stage of the cycle, when sales begin to fall

6.6.13 What product extension techniques are available to help prolong the life cycle of a product?

Advertising – try to gain a new audience or remind the current audience Price reduction – more attractive to customers Added value – add new features to the current product Explore new markets – try selling abroad Re packaging – brightening up old packaging, or subtle changes such as putting crisps in foil packets

6.6.14 Give some example of some products in the different stages of the PLC

Introduction stage Growth stage Maturity stage Decline stage

3G mobile phones

Portable DVD players

Personal computers

Typewriters

6.6.15 What is meant by a product range?

The different types of products a business offers. Also known as the product portfolio.



6.6.16 How are products categorised in the Boston Group Consulting matrix?

6.6.17 How can a SWOT analysis help a business make decisions about its products?

SWOT analysis stands for present Strengths and Weaknesses, future Opportunities and Threats. By categorising the business situation under these headings, managers can analyse clearly what strengths to build on and weaknesses to put right. Then they can see which opportunities they might want to take and which threats they may want to react to.

6.7 Pricing



6.7.1 What are the main pricing strategies open to a business?

STRATEGY DESCRIPTION

Cost-plus pricing Setting a price by adding a fixed amount or percentage to the cost of making the product

Penetration pricing Setting a very low price to gain as many sales as possible

Price skimming Setting a high price before other competitors come into the market

Predatory pricing Setting a very low price to knock out all the other competition

Competitor pricing Setting a price based on competitors prices

Price discrimination Setting different prices for the same good, but to different markets e.g. peak and off peak mobile phone calls

Psychological pricing Setting a price just below a large number to make it seem smaller e.g. £9.99 not £10

6.7.2 What price might a business use if it were trying to enter a new market?

If they are first into the market then they might use SKIMMING. If they are trying to establish themselves in the market then PENETRATION pricing

6.7.3 What effect does the product life cycle have on pricing?

Price could be high or low at launch, see question above. Higher price in growth phase, but falling as sales start to slow down and reach maturity and then drop in price in decline.

6.7.4 What is a loss leader? A price so low that the retailer may not make any profit or even a loss on the sale, but does attract shoppers to buy other full price products.

6.7.5 Provide two examples of price skimming

Playstations and DVD players were both much more expensive at their launch.

6.8 Promotion

6.8.1 What role does advertising play in promotion?

Advertising is part of the promotional mix that includes directing mailing, personal selling, public relations and sales promotion. Advertising presents or promotes the product to the target audience through media such as TV, radio, billboards to encourage them to buy.



6.8.2 What factors should a business consider when choosing the medium through which to do advertising?

Reach of the media – national or local, number of potential customers it could reach Nature of the product – the media needs to reflect the image of the product; a recruitment ad would be placed in a trade magazine or newspaper but a lipstick ad would be shown on TV or women’s magazines Position in product life cycle – launch stage will need different advertising from extension strategies Cost of medium – radio cheaper than TV, but may want to consider cost per head if reaching a larger audience

6.8.3 What are the pros and cons of advertising on television?

PROS OF TV ADVERTISING CONS OF TV ADVERTISING

Use of pictures and sound very powerful combination Can reach a large audience Can target audience with different ads going out with certain programs (children’s TV and toys)

Very expensive Needs to get message across in very short space of time Needs to look good against some other very clever and attractive advertising by other businesses

6.8.4 What is the difference between a classified and a display advertisement?

A classified advert is normally put into a newspaper by an individual and is expressed solely in words and numbers. A display advert is where space is bought in the newspaper or magazine and can be filled with words and/or pictures. Display adverts generally take up more space and are more expensive. However, they are more effective in attracting the attention of readers.

6.8.5 What is the difference between persuasive and information advertising

PERSUASIVE ADVERTISING Tries to entice the customer to buy the product by informing them of the product benefits.

INFORMATIVE ADVERTISING Gives the customer information. Mostly done by the government (e.g. health campaigns, new welfare benefits)

6.8.6 What are the main advantages of newspaper advertisements?

Cheaper than TV adverts. Market segments can be targeted because newspapers are bought by either regional groups (local newspapers) or by socio-economic groups Newspapers also have special sections, such as Homes and Gardens where advertising will reach the target audience.

6.8.7 What role is played by an advertising agency?

Plans, organises and produces advertising campaigns for other businesses. The advantage of an agency managing the campaign is that it has the expertise a business may not have, e.g. copywriters, designers and media buyers.

6.8.8 What are the main laws which affect how a business can advertise?

Trade Descriptions Act – goods advertised for sale must be as they are described. Also the advertising industry has its own Code of Practice, plus the Advertising Standards Authority where complaints about the nature of advertising can be dealt with

6.8.9 What is the difference between “above the line” and “below the line” promotion?

Above the line – paid for communication in the independent media e.g. advertising on TV or in the newspapers Below the line – promotional activities where the business has direct control e.g. direct mailing and money off coupons

http://www.asa.org.uk/



6.8.10 What is public relations? Managing the relationships with different parts of the public e.g. customers, the media and investors

6.8.11 What are the main objectives of public relations?

To achieve favourable publicity about the business at low cost To build the image and reputation of the business and its products, particularly amongst customers To communicate effectively with customers

6.8.12 How does public relations differ from advertising?

No direct charge is made for PR, though business will need to pay for its own PR department or external PR consultant PR is arguably more powerful because the message the business communicates through PR is often more believable than paid for advertising. However there is no guarantee that PR will reach its target audience (newspapers may fail to print the story) whereas advertising must be printed since the space in the newspaper is paid for.

6.8.13 How important is a business logo in the promotional process?

A logo is a symbol or picture that represents the business It is important because it is easy to recognise, establishes a brand identity and can create a favourable image.

6.8.14 Explain the role personal selling can play in the promotional process

Personal selling is where businesses use people to sell the product directly to the customer. The sellers promote the product through their attitude, appearance and knowledge. They aim to inform and encourage the customer to buy the product.

6.9 Place (Distribution)

6.9.1 Explain what is meant by a distribution channel

The link between the seller and the buyer The channel describes how a product or service gets from the point of production to the final user



6.9.2 Describe the main channels of distribution

6.9.3 What are the advantages of wholesalers in a market?

Wholesalers “break bulk” – they buy in large quantities from manufacturers and then break them into smaller quantities to sell to retailers.

- reduces transport costs to the manufacturer (few journeys to wholesaler rather than many journeys to retailers) - retailers can order in smaller amounts from wholesalers

6.9.4 Provide some examples of distribution agents

Estate agents; travel agents; export/import agents

6.9.5 What is direct marketing? Aimed directly at the customer, so bringing the promotional activity straight to the target audience e.g. direct mailing or door to door sellers.

6.9.6 Provide three examples of businesses that market direct to customers

QVC (TV Selling); Boden (clothes from catalogue) ; Sunday Times Wine Direct (wine through flyers in newspaper)

6.9.7 What are the advantages and disadvantages of direct marketing?


No intermediaries (e.g. retailers) to take part of the profits Producer can control own marketing Chance to reach customers who would not have gone to the shops

Costs of distribution of promotional material Costs of making distributional material (e.g. catalogues for Next)

6.9.8 What are the main methods of sales promotion?

Money off coupons; competitions; discount vouchers; free gifts; point of sales material

http://www.qvc.com/

http://www.boden.co.uk/

http://www.sundaytimeswineclub.co.uk/



6.9.9 What are the advantages and disadvantages of sales promotion?


Short term boost to sales Can attract customers away from other brands

Reduces profit margin on each product Only effective in the short term, will need a longer term tactic to boost overall sales Customers may come to expect lower prices

6.9.10 Give four recent examples of sales promotions in the UK

Tesco computers for schools promotion; Daily Mail dream home promotion; Interest free credit on a new Fiat; Café Nero free coffee card

6.9.11 Why have retailers in the UK increasingly invested in customer loyalty cards?

Customer loyalty cards encourage the customer to return to the retailer. The low cost of the discounts given can be offset by the profits generated by the sales made. Loyalty cards also provide information about the shopping habits of customers – where do they shop, when and what do they buy?

6.9.12 What are the main types of retail business?

Independents – a shop run by an owner Multiples – chains of shops owned by a single company, e.g. Sainsbury’s or Body Shop

6.9.13 What is meant by “point-of-sale” material? Provide some examples

POS material is used to display and promote products in retail outlets e.g. leaflets on shelves, posters in the shop window, cardboard display cases, dump bins

6.9.14 What are the main challenges faced by a business wishing to sell its products overseas?

Exchange rates Language barriers Different cultures Trade barriers – such as quotas, tariffs and legislation

6.9.15 Explain why a marketing manager will find it easier to export to European Union countries than elsewhere in Europe

The EU is a Single Market that has the freedom of movement of goods and services within the market. The UK is part of the European Single Market which means it should not face any barriers to trade, e.g. quotas and tariffs, which would add costs to their exports.

6.10 E-Commerce

6.10.1 What is meant by online marketing?

Using websites and email to market the product



6.10.2 Describe the benefits to a business of e-commerce

Selling to larger markets Reduces cost of sales (especially through purchasing online) Attracts new customers Using websites to advertise more widely Small business can access wider than local markets Can market directly to past customers via email



7 Exam technique

7.1.1 What do I need to revise with?

This Q&A revision guide (!) and the Tutor2u Key Study Notes Your textbook Own notes Copy of specification Copies of past papers Tutor2u website http://www.tutor2u.net/

7.1.2 How long should I spend on the questions in the exam?

Work out the mark per minute. Divide the total marks available (look at past papers) by the number of minutes available E.g. 120 mark paper in 1 ½ hours. 120/90 = 1.333 marks per minute So a 4 mark question should take 5 minutes, a 10 mark question should take 13 minutes, and a 12 mark question should take 16 minutes.

7.1.3 What is the first thing I should do in the exam and before answering each question?

Quickly scan through the whole paper to get a feel for what topics and questions are coming up. Underline/highlight important words in QUESTIONS and the mark allocation for each question. If there is case-study material, read it carefully and try to use relevant parts in your answer. This gains application marks. Plan your answer before writing, particularly for longer answer questions. Keep re-reading the question while writing to ensure you are not losing focus.

http://www.tutor2u.net/



7.1.4 What do the question words mean?

Question words Description Example

Define Write a definition of the business studies word/expression

Define what is meant by cost-plus pricing

Identify Name a feature of Identify the types of pricing strategy a business could use

Name, state or list As above State two types of pricing strategy

Describe Write down what is shown, probably by a diagram or a report

Describe what has happened to the sales of XYZ plc since 1998

Compare What are the similarities and differences between two items

Compare the sales of XYZ plc since 1998 with the sales of ABC plc over the same time period

MORE DEPTH NEEDED FOR THESE TYPES

Explain State why something happens, give the reasons

Explain why a business might launch a new product

Analyse State why something happens and then say what the consequences are

Analyse the effects on a business of an increase in the cost of raw materials

Discuss Give reasons for and against Discuss how a business might promote its new product

7.1.5 How should I approach longer answer questions?

For 8 mark questions develop 2 points (unless the question says differently) For 10 mark questions develop 2 or 3 points and also include evaluation if required Generally you should try to extend your arguments (points) by using words such as therefore, so, leads to.., as marks are awarded for quality and depth of explanation/discussion not number of points made. Try to create 2 or 3 chunky paragraphs.

7.1.6 What is meant by evaluation?

Look at both sides of the argument Make a judgement on which argument is the most important, and justify it Draw a conclusion based on the evidence given

7.1.7 When should I use examples?

Use examples from the case study material in the question or from your own knowledge as often as possible. It helps gain important application marks.



7.1.8 What is needed to get an A/A*?

(1) Use full sentences to help gain quality of communication marks (2) Use business studies language to express your opinions and avoid using slang (3) Justify the conclusions you make e.g. On balance XYZ plc should use price skimming BECAUSE the product is the first in the market place and it would be a good chance to recoup the costs of research and development. (4) Think about the type of business and the products they are selling…do your points make sense e.g. would a tractor manufacturer use door to door selling?

Documents

Gcse business studies qa 2004 final