Cambridge International AS & A Level Business 2021 PDF

The Cambridge International AS & A Level Business series consist of a Student’s Book, Boost eBook, Skills Workbook and Teacher’s Resource Pack. Cambridge Cambridge Cambridge Cambridge International AS & International AS & International AS & Int...

The Cambridge International AS & A Level Business series consist of a Student’s Book, Boost eBook, Skills Workbook and Teacher’s Resource Pack. Cambridge Cambridge Cambridge Cambridge International AS & International AS & International AS & International AS & A Level Business A Level Business A Level Business A Level Business Second Edition Second Edition Skills Workbook Teacher’s Resource Boost eBook Pack 9781398308114 9781398308206 9781398308152 9781398308138 To explore the entire series, visit www.hoddereducation.com/cambridge-alevel-Business Practice and apply what you have studied and develop independent learning skills by answering a range of questions and activities that are clearly linked to the content of the Student’s Book. Build confidence with extra practice to ensure that a topic is thoroughly understood before moving on. Explore and analyse international businesses through data response questions based on real case studies. Keep track of your work with ready-to-go write-in exercises. Answers can be found at hoddereducation.com/cambridgeextras. Save time marking and get support for delivering the revised Cambridge International AS & A Level Business syllabus (9609). Confidently deliver the revised syllabus with expert author guidance and the subject specific skills students will need, including how to interpret quantitative data. Familiarise students with the command words and improve their confidence with exam-style questions including sample answers. Save time marking and assess student progress with answers to all questions in the Student Book.  Cambridge International AS & A Level Business Second edition Malcolm Surridge Andrew Gillespie 9781398308114.indb 1 05/03/21 11:06 AM  Acknowledgements p.118 © Charlie Box/Dyson; p.131 © Courtesy of L’Oreal; p.262 © Abel, G. J. (2018). Estimates of global bilateral migration flows by gender between 1960 and 2015. International Migration Review, 52(3), 809-852; p.282 © Berkeley Earth. Retrieved from http://berkeleyearth.org/wp-content/uploads/2020/01/2019_Time_ Series.png; p.283 © Toshiba Corporation (2019). Environmental Report. Retrieved from https://www.toshiba. co.jp/env/en/communication/report/pdf/env_report19_all_e.pdf; p.290 © Acha Leke, Mutsa Chironga, and Georges Desvaux, Africa’s overlooked business revolution. McKinsey & Company. November 15, 2018. Retrieved from https://www.mckinsey.com/featured-insights/middle-east-and-africa/africas-overlooked-business- revolution; p.292 © Colgate-Palmolive Company. Retrieved from https://investor.colgatepalmolive.com/static- files/a65490ac-2442-41e3-8751-e18a1471bd92; p.472 © BP p.l.c. Energy with Purpose. BP Annual Report and Form 20-F 2019. Retrieved from https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/ investors/bp-annual-report-and-form-20f-2019.pdf Every effort has been made to trace all copyright holders, but if any have been inadvertently overlooked, the Publishers will be pleased to make the necessary arrangements at the first opportunity. Although every effort has been made to ensure that website addresses are correct at time of going to press, Hodder Education cannot be held responsible for the content of any website mentioned in this book. It is sometimes possible to find a relocated web page by typing in the address of the home page for a website in the URL window of your browser. Hachette UK’s policy is to use papers that are natural, renewable and recyclable products and made from wood grown in well-managed forests and other controlled sources. The logging and manufacturing processes are expected to conform to the environmental regulations of the country of origin. Orders: please contact Hachette UK Distribution, Hely Hutchinson Centre, Milton Road, Didcot, Oxfordshire, OX11 7HH. Telephone: +44 (0)1235 827827. Fax: +44 (0)1235 400401. Email [email protected] Lines are open from 9 a.m. to 5 p.m., Monday to Friday. You can also order through our website: www.hoddereducation.co.uk ISBN: 978 1 3983 0811 4 © Malcolm Surridge and Andrew Gillespie 2021 First edition published in 2014. This edition published in 2021 by Hodder Education, An Hachette UK Company Carmelite House 50 Victoria Embankment London EC4Y 0DZ www.hoddereducation.co.uk Impression number 10 9 8 7 6 5 4 3 2 1 Year 2025 2024 2023 2022 2021 All rights reserved. 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A catalogue record for this title is available from the British Library. 9781398308114.indb 2 05/03/21 11:06 AM  Contents Introduction vii AS LEVEL 1 Business and its environment 1.1 Enterprise 1 1.1.1 The nature of business activity 1 1.1.2 The role of entrepreneurs and intrapreneurs 8 1.1.3 Business plans 13 1.2 Business structure 16 1.2.1 Economic sectors 16 1.2.2 Business ownership 18 1.3 Size of business 27 1.3.1 Measurements of business size 27 1.3.2 Significance of small businesses 27 1.3.3 Business growth 30 1.4 Business objectives 33 1.4.1 Business objectives in the private sector and public sector 33 1.4.2 Objectives and business decisions 38 1.5 Stakeholders in a business 41 1.5.1 Business stakeholders 41 1.5.2 The relative importance and influence of stakeholders on business activities 43 2 Human resource management 2.1 Human resource management 47 2.1.1 Purpose and roles of human resource management 47 2.1.2 Workforce planning 48 2.1.3 Recruitment and selection 50 2.1.4 Redundancy and dismissal 54 2.1.5 Morale and welfare 56 2.1.6 Training and development 59 2.1.7 Management and workforce relations 62 2.2 Motivation 66 2.2.1 Motivation as a tool for management and leadership 66 2.2.2 Human needs 66 2.2.3 Motivation theories 68 2.2.4 Motivation methods in practice 76 2.3 Management 83 2.3.1 Management and managers 83 3 Marketing 3.1 The nature of marketing 93 3.1.1 Role of marketing and its relationship with other business activities 93 3.1.2 Demand and supply 95 3.1.3 Markets 98 9781398308114.indb 3 05/03/21 11:06 AM  3.1.4 Consumer and industrial marketing 101 Contents 3.1.5 Mass marketing and niche marketing 102 3.1.6 Market segmentation 103 3.1.7 Customer-relationship marketing 104 3.2 Market research 106 3.2.1 Purposes of market research 106 3.2.2 Primary research and secondary research 107 3.2.3 Sampling 110 3.2.4 Market research data 111 3.3 The marketing mix 115 3.3.1 Elements of the marketing mix 115 3.3.2 Products 116 3.3.3 Product portfolio analysis 117 3.3.4 Pricing methods 123 3.3.5 Promotion methods 127 3.3.6 Place (channels of distribution) 134 4 Operations management 4.1 The nature of operations 142 4.1.1 The transformational process 142 4.1.2 Efficiency, effectiveness, productivity and sustainability 144 4.1.3 Capital-intensive and labour-intensive operations 148 4.1.4 Operations methods: job, batch, flow, mass customisation 149 4.2 Inventory management 151 4.2.1 Managing inventory 151 4.2.2 Just in time 155 4.3 Capacity utilisation and outsourcing 157 4.3.1 Significance and measurement of capacity utilisation 157 4.3.2 Outsourcing 160 5 Finance and accounting 5.1 Business finance 162 5.1.1 The need for business finance 162 5.1.2 Working capital 166 5.2 Sources of finance 169 5.2.1 Business ownership and sources of finance 169 5.2.2 Internal and external sources of finance 170 5.2.3 Factors affecting sources of finance 176 5.2.4 Selecting the source of finance 178 5.3 Forecasting and managing cash flows 180 5.3.1 Cash-flow forecasts 180 5.4 Costs 187 5.4.1 Cost information 187 5.4.2 Approaches to costing 189 5.4.3 Uses of cost information 194 5.4.4 Break-even analysis 199 5.5 Budgets 205 5.5.1 The meaning and purpose of budgets 205 5.5.2 Variances 209 iv 9781398308114.indb 4 05/03/21 11:06 AM  A LEVEL Contents 6 Business and its environment 6.1 External influences on business activity 214 6.1.1 External influences on business activity: Political and legal 214 6.1.2 External influences on business activity: Economic 227 6.1.3 External influences on business activity: Social and demographic 255 6.1.4 External influences on business activity: Technological 266 6.1.5 External influences on business activity: Competitors and suppliers 271 6.1.6 External influences on business activity: International 274 6.1.7 External influences on business activity: Environmental 281 6.2 Business strategy 287 6.2.1 Developing business strategy 287 6.2.2 Corporate planning and implementation 304 7 Human resource management 7.1 Organisational structure 313 7.1.1 Relationship between business objectives and structure 313 7.1.2 Types of structure 316 7.1.3 Delegation and accountability 321 7.1.4 Control, authority and trust 323 7.1.5 Centralisation and decentralisation 324 7.1.6 Line and staff 325 7.2 Business communication 328 7.2.1 Purposes of communication 328 7.2.2 Methods of communication 330 7.2.3 Channels of communication 334 7.2.4 Barriers to communication 335 7.2.5 Role of management in facilitating communication 336 7.3 Leadership 341 7.3.1 Leadership 341 7.3.2 Theories of leadership 343 7.3.3 Emotional intelligence/emotional quotient 346 7.4 Human resource management strategy 349 7.4.1 Approaches to human resource management 349 7.4.2 Flexible workforces 352 7.4.3 Measurement, causes and consequences of poor employee performance 358 7.4.4 Strategies for improving employee performance 360 7.4.5 Roles of IT and AI in human resource management 363 8 Marketing 8.1 Marketing analysis 366 8.1.1 Elasticity 366 8.1.2 Product development 371 8.1.3 Sales forecasting 375 v 9781398308114.indb 5 05/03/21 11:06 AM  8.2 Marketing strategy 383 Contents 8.2.1 Planning the marketing strategy 383 8.2.2 Approaches to marketing strategy 384 8.2.3 Strategies for international marketing 387 9 Operations management 9.1 Location and scale 394 9.1.1 Location 394 9.1.2 Scale of operations 400 9.2 Quality management 406 9.2.1 Quality control and quality assurance 406 9.2.2 Benchmarking 410 9.3 Operations strategy 412 9.3.1 Operations decisions 412 9.3.2 Flexibility and innovation 414 9.3.3 Enterprise resource planning 416 9.3.4 Lean production 417 9.3.5 Operations planning 422 10 Finance and accounting 10.1 Financial statements 430 10.1.1 Statement of profit or loss 430 10.1.2 Statement of financial position 435 10.1.3 Inventory valuation 438 10.1.4 Depreciation 440 10.2 Analysis of published accounts 444 10.2.1 Liquidity ratios 445 10.2.2 Profitability ratios 448 10.2.3 Financial efficiency ratios 450 10.2.4 Gearing ratios 452 10.2.5 Investment ratios 453 10.3 Investment appraisal 457 10.3.1 The concept of investment appraisal 457 10.3.2 Basic methods 458 10.3.3 Discounted cash-flow methods 460 10.3.4 Investment appraisal decisions 462 10.4 Finance and accounting strategy 467 10.4.1 Using accounting data to enable strategic decision-making 467 10.4.2 Using accounting data and ratio analysis in strategic decision-making 471 Index 481 Photo credits 488 vi 9781398308114.indb 6 05/03/21 11:06 AM  Introduction The syllabus (9609) This book introduces you to Business. It has been written to meet the requirements of the Cambridge International AS & Glossary terms A Level Business syllabus (9609) for examination from 2023. These boxes contain descriptions of highlighted glossary terms used throughout the book to help explain additional The syllabus (9609) concepts. The Cambridge International AS & A Level Business syllabus Handling data is based on five topics which are studied at both AS Level This feature is designed to help to develop relevant and A Level. These are: numerical skills such as conducting calculations and » Business and its environment interpreting numerical data. » Human resource management (HRM) » Marketing » Operations management Case study » Finance and accounting. There is a diverse range of case studies to illustrate how The AS section of the syllabus gives you the opportunity to theories and concepts operate in the real world. These all understand what happens inside businesses and introduces have questions to help you to develop the skills needed in you to key business terminology. It also looks at the four preparation for your examinations. internal functions of businesses providing an understanding of how they operate and how businesses manage workforces, Study tip research and satisfy customer needs, manage the process of These appear throughout the book and are designed to help creating goods and services and manage their finances. You you to understand the material that you have studied and to are encouraged to consider the working of these internal prepare for your examinations. functions in different business contexts. The A-Level material builds on AS content and is based around Test your learning the concept of strategy. It looks in detail at the external At the end of each chapter there is a range of questions influences on business activity and encourages you to take and activities to help you to reinforce your learning and to account of what is happening in the real world. The syllabus develop the necessary skills. looks at ways in which businesses can develop, plan and implement corporate strategies. It also covers the strategic elements of the four business functions introduced at AS and The key concepts encourages you to think about these in business-wide contexts. The syllabus is based on the six key concepts set out below which should underpin your study of the subject The features of the book matter. Familiarity with these key concepts can help you to understand the material in this resource and the syllabus, The book will guide you through the Cambridge International and help you think about how these can be applied to AS & A Level Business programme of study, although you diverse business scenarios and questions. should supplement it with research into businesses in your own and other countries. You are fortunate that there is an As these concepts are an essential aspect of the syllabus, immense amount of information available about businesses, they have been signposted throughout the textbook using their behaviour and the environments in which they operate. the associated icons. The syllabus definitions of these The internet is an enormous and valuable resource and you key concepts can be found within the syllabus on the will also find that newspapers, magazines and television Cambridge International website, but we discuss these contain a lot of relevant information. However, business further here: activity takes place around you all the time: when you are shopping, travelling to and from school or college or Change enjoying leisure activities such as visiting the cinema. There All businesses are subject to change and have to respond to are many opportunities for you to see the operation of some it regularly and frequently. Change may be internal, perhaps of the models and theories you will study. following the appointment of a new leader which could, This textbook includes the following features: for example, result in a new organisational culture, new methods of production and the targeting of new markets. Chapter overview Alternatively, it may be external, perhaps as a consequence of a change in the business environment; the UK’s recent At the outset of each chapter there is guidance on the decision to leave the European Union is a prime example. material that is covered in the chapter. This shows the Managing change effectively contributes to business success. knowledge that can be gained from studying this chapter. vii 9781398308114.indb 7 05/03/21 11:06 AM  It comprises two data response questions which may be Introduction Context based on text and numerical data. Each question is split Businesses operate in diverse contexts and these have a into six parts. major influence on decision-making. A decision that might be Each of the two data response questions will carry a appropriate and successful for a small family-owned business maximum of 30 marks. facing a drop in sales may be entirely unsuitable for a large multinational manufacturer facing the same problem. You A Level Paper 3: Business Decision-Making need to understand the importance and impact of context. This paper carries a total of 60 marks and has a duration of 1 hour 45 minutes. Decision-making It tests the entire A Level syllabus and builds on AS knowledge and understanding. Change can create a need for decision-making. Decisions It is based on a case study which includes prose, tables can be taken by stakeholders within the business as well as of data and numerical or diagrammatic appendices. those outside of it. Decisions may be based on instinct or a The case study will normally have five questions ‘hunch’, or on the analysis of the available quantitative and attached to it. qualitative data. Decisions can be taken at different levels within an organisation and may impact on part or all of it. A Level Paper 4: Business Strategy This paper carries a total of 40 marks and has a duration Enterprise of 1 hour 15 minutes. Enterprise is the ability to make new ideas work and thus It tests the entire A Level syllabus, and builds on AS knowledge and understanding. enables businesses to take advantages of opportunities that may exist. Enterprise is not simply limited to start-ups; in a It comprises two questions, each worth 20 marks, based on a series of numerical and non-numerical data relating changing world, enterprise is vital for competitiveness. to a case study. Innovation The information in this section is based on the 9609 syllabus Innovative businesses are more able to develop new products for examination from 2023. You should always refer to the or better ways of producing them. This helps to enhance appropriate syllabus document for the year of your examination competitiveness and strengthen performance by leading to confirm the details and for more information. The syllabus the field rather than being a more passive follower. document is available on the Cambridge International website at http://www.cambridgeinternational.org. Strategy Preparing for Business examinations A business’s strategy is its long-term plan to achieve its objectives. Successful businesses are able to develop and The Business syllabus requires you to understand the implement effective strategies through analysing the relevant theories and concepts set out in the syllabus business environment and the opportunities available and and covered in this book. However, you will also need making appropriate choices. to know how to organise ideas, construct arguments, make decisions, solve problems, conduct calculations and interpret data. Finally, it is important for you to The structure of the AS- and ensure you know how to apply your knowledge to business A-Level examinations scenarios, such as those set out in questions that relate to data response materials or case studies. There are two examination papers for AS and two for A Level This textbook contains numerous questions throughout, and Business. The subject content of AS Business is assumed at the end of, each chapter which have been designed to knowledge for the A-Level papers. help you to develop these essential skills. AS Level Paper 1: Business Concepts 1  Malcolm Surridge & Andrew Gillespie This paper carries a total of 40 marks and has a duration of 1 hour 15 minutes. A note on the exam-style questions It tests the entire AS element of the syllabus. Exam-style questions (and sample answers) have been It comprises two sections: written by the authors. In examinations, the way marks Section A contains four short answer questions. The are awarded may be different. References to assessment first three questions are split into two parts each. and/or assessment preparation are the publisher’s Section B contains two essay questions, one of interpretation of the syllabus requirements and may which must be answered. The essays are split into not fully reflect the approach of Cambridge Assessment two parts each. International Education. Cambridge International Section A and Section B each carry a maximum of recommends that teachers consider using a range of 20 marks. teaching and learning resources in preparing learners for AS Level Paper 2: Business Concepts 2 assessment, based on their own professional judgement of This paper carries a total of 60 marks and has a duration their students’ needs. Third-party websites and resources of 1 hour 30 minutes. referred to in this publication have not been endorsed by It tests the entire AS element of the syllabus. Cambridge Assessment International Education. viii 9781398308114.indb 8 05/03/21 11:06 AM  1 Business and its environment AS LEVEL 1.1 Enterprise 1.1.1 The nature of business activity Chapter overview In this chapter we examine: ★ the nature and purpose of business activity; for example, we look at factors of production, the business environment, what businesses do and the concept of adding value ★ the differences between local, national, international and multinational businesses ★ the role of the entrepreneur and intrapreneur; for example, we consider why entrepreneurs are important to the economy, and barriers to entrepreneurship ★ business risk and uncertainty ★ business plans; for example, we consider the purpose of business plans, their key elements and their limitations. 1.1.1 The nature of business activity and organising what they do in order to achieve targets, such as helping people get better more quickly or improving the quality of students’ education. The purpose of business activity What will you do this weekend? Have you got a part-time The transformation process job to earn some money? Are you going to go out to a café All businesses are involved in the transformation process. or go shopping in the town centre? Whatever you do, you They take inputs and transform them in some way to will come into contact with many different businesses, produce outputs that they hope consumers will want. either as a consumer buying and using their products or as an employee working to create them. Businesses are INPUTS TRANSFORMATION OUTPUTS everywhere! Just think of the last time you went shopping land PROCESS goods – the outlet where you shop is a business, it has bought labour services the products from a supplier, they were transported by capital by-products a delivery business and the firm probably uses another CREATES VALUE business to help promote itself. In every transaction enterprise between a customer and a business, many other businesses will have been involved to bring about that exchange. There are many different definitions of a business, but what they tend to have in common is the idea of someone (or a FEEDBACK group of people) working in an organised way to achieve a given target. Notice the key elements of this definition ▲ Figure 1.1 The transformation process – firstly, the activities of those involved are organised in some way and, secondly, the business is created with a Inputs specific purpose in mind: often the business objective The inputs into a business are also called the factors of is profit but, as we shall see later, there are many other production. These are: reasons why people set up in business. Using a definition of » land organised activities and a given target, many organisations » labour such as hospitals and even schools could be classified as » capital businesses. They may not have profit as a target, but they » enterprise. do involve many different people working together, planning GLOSSARY TERMS Business objectives are measurable targets set by the The factors of production are the inputs into the business, such as sales or profits that have to be achieved transformation process of a business; namely land, labour, within a given time period. capital and enterprise. The transformation process involves converting inputs into outputs. 1 9781398308114.indb 1 05/03/21 11:06 AM  Land The choice of inputs This involves choosing the location of the business. This is The choice of inputs into the business and who supplies 1.1 critically important for businesses such as shops and cafés. For other businesses such as farming, what will matter them can affect: » the costs of a business is the quality of the land in terms of the ability to grow » the quality of the final product (and therefore sales). different crops or rear livestock. The success of a farming business will be directly affected by changes to the quality In recent years, customers have become increasingly of the land and the weather. For some businesses, what will interested in what resources are used in a production matter is access to resources; for example, oil drilling and process and where they have come from. Firms may mining businesses need to be near the natural resources. highlight the fact that they use recycled materials, that AS LEVEL 1.1 Enterprise The significance of land as an input will be particularly high their supplies come from local businesses or that their in the primary sector. ingredients are ‘natural’ or ‘organic’. Under the heading of land we also include premises. Firms will also face the choice of whether to buy in some The amount of space available to a business can affect materials or produce them themselves. Tyrrells uses the fact how much can be produced or how many customers can that it grows its own potatoes when it promotes its potato physically fit in the restaurant or store. The nature of the crisp products. Most other crisp manufacturers buy in their premises can also affect the working environment and potatoes. people’s motivation. For example, working in a modern office with a good canteen, parking spaces and a central Outputs location might be appealing to employees. The output of a business is a product. A product may be a good or a service, or a combination of the two. GLOSSARY TERM » A good (or a product) is a tangible physical item, such The primary sector is the first stage of production and as a car or a laptop computer. Businesses can produce includes extracting or growing resources. Farming, and stock them. This means that they can produce or mining and fishing are all part of the primary sector. purchase the goods that they sell in advance of demand; for example, a store may stockpile new electrical goods before a busy selling period. Labour » A service is intangible. Examples of services Organisations will need staff. The quality of employees are education, creating music, hairdressing and in terms of their skills, their attitudes (for example, to physiotherapy. Most businesses in more developed customers), their willingness to work and their natural economies are in the service sector. Services cannot be abilities will have an influence on the success of any stored; they have to be produced for customers as they business. What makes a film a great success? The quality of are needed. This can create problems, because if there is the writing, the acting and the production – people play a rush of customers, there are no products stockpiled and a key role in the success of any film. Many films therefore so queues form or waiting lists have to be introduced. promote themselves on the basis of who the actors are or who the director is. Similarly, universities promote their In many cases, a business provides a combination of goods professors. Music labels promote their bands. Publishers and services. For example, you may choose a restaurant promote their author list. So people can be a crucial because of the food you can eat there (the goods) but also element of the transformation process. because of the waiters, the environment and the way you are treated (the service). Capital The word ‘capital’ has many meanings. In this instance, Most outputs are intended for sale. A firm produces we mean the equipment used by businesses. The coffee goods and services to sell to customers. However, there machines in the coffee shop, the ovens in the fast-food may also be by-products from the transformation process; restaurants, and the scanning equipment in shops are all for example, a firm’s production may create waste and examples of capital equipment. The amount and quality of pollution. Many customers pay attention to these issues the capital equipment in a business can affect the service it and, increasingly, firms are considering the effects provides. For example, the online retailer Amazon is admired of their production on other groups, such as the local for the efficiency with which it processes an order and is community. Some by-products may also form the inputs able to make suggestions to customers of what else they to other industries. might like to buy. These rely on the quality of Amazon’s warehousing facilities and computer programs. For most products there is a series of stages in the transformation process which are involved in taking the Enterprise initial materials and ending up with the final product. The Enterprise refers to a set of skills that develops new ways author JK Rowling took her imagination and a computer of doing things or new things to do. Enterprise refers to the and turned her ideas into magical manuscripts for her Harry ability to be creative and innovative, to come up with new Potter books. The publishing company worked with the ideas, to combine resources in different ways and to be willing author, designers, editors, a marketing team, a printing to take risks. Enterprise brings together the other factors of business and a distribution business and turned the production to create and make a business idea competitive. 2 9781398308114.indb 2 05/03/21 11:06 AM  CASE STUDY 1.1 Dabbawalla a ‘doer of something’ and a ‘dabba’ is a stainless steel lunchbox. The lunchbox is picked up from the customer’s home and taken to a sorting station. The lunchboxes are then divided up according to destination and delivered on bike, on foot or taken on the train. After lunch, the box is collected and taken back to the customer’s home. 1.1.1 The nature of business activity This is an incredibly efficient but very labour-intensive and low-technology process, with almost no boxes going missing or to the wrong address. The price is so low that it is easier to pay for the delivery than to take your lunchbox with you on your journey to and from work. Questions 1 Explain one way in which the dabbawallas transform ▲ Figure 1.2 A busy dabbawalla delivery in Mumbai inputs into outputs. 2 Evaluate how you would measure the success of Every day in Mumbai, India, around 250 000 people get this transformation process. their lunches delivered by ‘dabbawallas’. A ‘walla’ means manuscripts into a series of books. Bookstores take a range For example, artists such as Andy Warhol, Vincent van Gogh, of books and transform them into a retail experience for the David Hockney and Rembrandt took their imagination, paint customer. A series of transformations has gone on to get and canvas and produced amazing works of art that now the idea from the author’s mind into a book and into the sell for millions of dollars: far more than the cost of the hands of the reader. items used up in their production. They added value via the Managing the transformation process. Managing the transformation Managing the inputs process outputs Jamie Oliver, a famous chef, takes standard ingredients such as meat, herbs and vegetables, puts them together in a unique way and comes up with a fantastic meal. He takes ingredients that many others may use but transforms them TRANSFORMATION in a way that appeals to customers, sells books and attracts viewers for his TV series. Clearly, he has added value by INPUTS OUTPUTS using his talent, creativity and personality. PROCESS GLOSSARY TERM FEEDBACK Adding value occurs in a transformation process when ▲ Figure 1.3 Chain of operations outputs are produced that are worth more than the inputs brought in to provide them. Businesses need to identify exactly what they want to provide in terms of the range and quality of products they offer. For example, do they want to specialise in a few types Adding value can be done in ways that may seem odd to of items or provide a wide range of goods and services? some. Here are some examples: Businesses also need to decide on the resources they will » Some companies buy new jeans and then stretch need in order to provide the product to the standard they them, batter them and fray them to make them look want for their customers. There are a number of questions distressed while, at the same time, more than doubling involved here: How many people are needed? What skills are their price. needed? Will they be trained? What materials will be used? » Bottled water that sells for $10 a bottle comes from What equipment? And so on. Businesses need to find a way of King Island, near Tasmania. It is called ‘Cloud Juice’ and generating a product that customers value so much that they is claimed to be the purest in the world. It is rainwater will pay more for it than it costs the business to produce. that has been collected from a plastic roof and then bottled. It is supposed to be so pure because it comes from rain clouds that travel 7000 miles from South Adding value America without passing over any land, and therefore Adding value occurs in a transformation process when not encountering pollution. outputs are produced that are worth more than the inputs » One of the most expensive coffees in the world is brought in to provide them. Luwak Coffee. This is made from coffee cherries that 3 9781398308114.indb 3 05/03/21 11:06 AM  have been eaten and digested by common palm the brand or developing a unique selling proposition civets (a type of animal). The civets use their keen (USP). A USP is a feature of the product that makes it 1.1 sense of smell to select the choicest and ripest beans. The beans are supposed to be much sweeter as a different from competitors’ products for the customer; for example, a product may be perceived as better quality, result of the digestion process and, having passed better designed, more reliable or more user-friendly than through the animal, they are hand-collected from the competitors’ products. jungle floor. To increase the value it adds, a business might aim to: STUDY TIP » reduce the costs of producing the product. This means cutting back on waste, ensuring the best price for the When answering questions, you may need to think about AS LEVEL 1.1 Enterprise how different firms create value. What can businesses do supplies and making sure that mistakes are not made. All to add more value? Should they focus on the benefits they activities that do not create value need to be examined are providing, or try to control costs more effectively? to see if they are truly necessary. » increase the perceived benefit of the product in the eyes of the customer. This could be through building CASE STUDY FedEx FedEx connects people with goods, services, ideas FedEx has over 180 000 vehicles and nearly 680 planes. It and technologies. By doing this, FedEx says it creates delivers over 15 million packages on an average day and opportunities that drive innovation, energise businesses deals with over 250 requests linked to package tracking and help communities improve their standard of living. each day. FedEx says it does far more than deliver packages. It says Source: www.fedex.com/en-us/about/company-structure.html it delivers joy in the holidays, provides hope to survivors of natural disasters and solves business problems. Its Question network extends to over 220 countries and territories. 1 Explain one way in which FedEx can add value in its Its 490 000 team members are united behind the FedEx transformation process. promise to ‘make every FedEx experience outstanding’. CASE STUDY IKEA IKEA is a furniture producer and retailer. The value chain of a product describes all the stages of operations, from Listen to the initial raw materials through to the sale of the actual customers goods. In IKEA’s case, it owns and manages nearly all the stages of its value chain. IKEA says that the starting point for any value chain is the product itself, and the idea for this starts with ‘listening to people’s needs and dreams, Design and Sell create so we understand how we can make a difference’. the product Typically, IKEA turns this initial idea based on customers’ needs into a sketch of how the product might look. This sketch is then discussed with its suppliers, who consider how it might be made, transported and stored in-store. IKEA will be looking for ways of producing a product with Package and a high-quality design and finish while keeping costs low. Manufacture distribute to IKEA is always trying to improve the product at each stage the product stores of discussion and review. Improvements are welcomed from the various people involved in production; for example, designers and technicians. One such suggestion ▲ Figure 1.4 The value chain of a product might be using a more sustainable material. 4 9781398308114.indb 4 05/03/21 11:06 AM  Much of IKEA’s furniture is produced and packaged in the Questions form of a flat-pack, which lowers transport costs because it is easy to put large quantities on lorries and on shelves 1 Analyse one way in which IKEA adds value in its transformation process. 1.1 in-store. This helps keep prices low for IKEA’s customers, 2 Evaluate the importance of the customer in IKEA’s who then take the products home and build the products value chain. themselves. Collaboration between customers, partners and co-workers aids IKEA’s pursuit ‘to add value to people’s everyday lives’ by producing good-quality furniture at low prices. Source: https://about.ikea.com/en/about-us/the-ikea-value-chain 1.1.1 The nature of business activity government may provide some or all of the health services, GLOSSARY TERMS the transport system, the police or the education system in A brand is a name, design, logo, symbol or indeed anything a country. that makes a product recognisable and distinguishes it from the competition in the eyes of the customer. Governments tend to take control of goods and services they think are vital to their economy and where they want Market forces are the forces of supply and demand which to ensure access for most people. determine the price of a product and the quantity bought and sold in a market. However, whenever decisions are made about what Opportunity cost measures the sacrifice made by to produce – whether it be the free market or the choosing one option in terms of the next best alternative government – it will involve an opportunity cost. Given foregone. that resources are limited, if they are used to produce more of one item, then this is at the expense of something else. Opportunity cost measures the sacrifice you make if Businesses and economic activity you choose one course of action in terms of the next best Businesses make up an important part of any economy. alternative. For example, if a business decides to use its They are important because they employ people, they pay labour force to increase output of soft drinks, then the employees’ wages and salaries and they provide goods opportunity cost is what could have been produced if the and services. Businesses provide the products we buy and labour force had been used to produce something different. give us the jobs and earnings we need to buy them. When Whenever a business makes a decision it should consider the businesses are doing well and expanding they employ opportunity cost. A project that earns a profit of $100 000 more people and generate more income for the economy. may seem attractive, but if the resources could have been Businesses innovate to win more customers: they create used to earn $250 000 it is not so appealing. When judging new goods and services and this can improve the quality the success of a business you should also consider the of our lives, by providing better food, better clothes opportunity cost. If Walmart, the huge US retailer, made and better electronic goods. Businesses therefore drive a profit of $10 million, this would not be that impressive economies forward, and this is why governments are eager given the people, stores and equipment it has; these to help new firms start up and compete, and why they often resources could be used elsewhere to earn more than that. try to help businesses grow. Walmart’s profit before tax in 2020 was actually over $20 billion, so you can see why its investors wouldn’t be very happy it if only made $10 million! Choice and opportunity cost In any economy there is a fixed amount of resources at any The dynamic business environment moment and therefore decisions have to be made about how these resources are used. Given the scarcity of resources, Businesses do not operate in isolation. Whatever they do choices are inevitable in terms of what should be produced is linked to what other businesses do; for example, their in the economy, how these products should be produced and suppliers, the firms that distribute and promote their who should receive them. Some of these decisions will be products, the banks that lend them money. They are also made by market forces of supply and demand: it will be the affected by many other external factors such as: result of bargaining between consumers and businesses. If, » Political and legal issues For example, new laws by for example, demand for a particular product increases, this a government can prevent the way some products are will encourage businesses to use their resources to produce promoted (such as cigarettes) and can affect the way this instead of something else. Imagine you were a farmer employees must be treated and the way a business and had limited land. You have to decide what to grow on produces (perhaps to reduce its environmental impact). it. This will depend in part on demand: if the demand for a » Economic issues For example, the amount of income particular crop increases, you may switch to this and away in an economy can change over a period of time, from something less in demand. affecting demand; the value of one currency in terms of another can alter, affecting the cost of importing Some decisions about what to produce and how to produce supplies; and the cost of borrowing can go up, may be made by the government. For example, the increasing costs. 5 9781398308114.indb 5 05/03/21 11:06 AM  » Social issues For example, an increase in the size of the and, if necessary, managers will need to change some of population or the average age of the population in a their decisions about inputs, the transformation process or 1.1 country can affect the level of demand and the types of products people buy. the outputs they produce accordingly. » Technological issues For example, changes in the Economic Social availability and speed of the internet can make it easier to find suppliers and sell across the world. These external factors (known as PEST – political, economic, social and technological) will continually be changing and Political Technological this will affect what businesses produce and the resources AS LEVEL 1.1 Enterprise Business they use. These factors can all have an impact on a business, as shown in Figure 1.5. External factors can affect: » the demand for products » the costs and availability of inputs ▲ Figure 1.5 External influences on a business » the nature of the transformation process. If labour costs in one country become more expensive, for STUDY TIP example, businesses might switch production to another Remember that the key external factors in the country or start to use more machinery instead. If a environment of a business will vary between industries. government signs a treaty with another country to make In the health sector, demographics may be very trade easier, its businesses might start to sell more to significant; in the computer sector, technological changes customers in the new partner country. New laws may make may be critical. You need to assess the key issues for any certain products or production techniques impossible. given industry. Businesses therefore need to monitor their external business environment because it is dynamic (ever-changing) CASE STUDY Lockdown In 2020, the Coronavirus (COVID-19) pandemic affected weeks of lockdown, there was often panic-buying, with countries all over the world. Governments reacted in products such as hand sanitiser, toilet rolls and some different ways, but in many countries shops were forced food products in high demand. When lockdown was over to close and people were ‘locked down’ at home for there were concerns over how well economies would several weeks. Many businesses such as restaurants recover. Businesses had closed down and people had lost simply could not operate at all. Others such as food shops their jobs. were forced to change the way they operated to ensure that people kept a suitable distance from each other. A Questions limited number of people would be allowed in shops and, 1 Evaluate the possible effects of the COVID-19 pandemic once inside, they could not get too close to each other. on the transformation process of retail stores. Staff were often serving behind screens. In the first few examined in the rest of this book. Even if a business does What does a business need to do manage to become competitive, it cannot afford to be to succeed? complacent because competitors will soon follow its lead; To succeed, a business needs to be more competitive than this means it needs to keep improving and seeking ways of its rivals. This means it needs to provide better value for becoming more competitive. Many once-famous businesses money. Its ability to achieve this depends on: have now disappeared and those that are still successful can » the benefits it offers. For example, what does its only stay that way by constantly improving. product do relative to those of its competitors? Is it faster? Easier to use? Smaller? Bigger? Longer lasting? STUDY TIP » what price is being charged relative to the competition. Remember that businesses often compete in different Businesses will aim to outperform their rivals by offering ways. Some may offer premium products and be able to the same benefits for less, or more benefits for the justify high prices. Others may offer more basic products same price. The difficult part is deciding what it is that at low prices. An important thing to think about is how customers actually regard as a benefit, working out how sustainable this approach is in the long term – will others to provide them and somehow doing this more cheaply be able to imitate the idea easily or can the business than competitors, or finding additional benefits without protect its success? increasing the price. How businesses try to do this is 6 9781398308114.indb 6 05/03/21 11:06 AM  Why do businesses fail? Local, national, international and Businesses fail when they stop being competitive. This means that they stop providing good value for money multinational businesses 1.1 relative to their competitors. This can be due to external The scope of business activity can vary significantly. Some reasons (perhaps they have a high level of borrowing and businesses operate very much within a local market; for so their costs are hit badly when the cost of borrowing example, a local hairdresser or local café. Their customers rises) or internal reasons (such as poor training of staff will come from the local area. The success of these leading to poor customer service). Businesses fail when businesses will be affected by the number of potential they end up providing relatively low benefits given the customers in the local area and their spending power. A price they charge. This can be because of their choice of shop in a rural area, for example, may struggle to attract 1.1.1 The nature of business activity inputs, their choice of outputs or the way they manage the enough customers. Local laws introduced by the city or transformation process. We hope that reading this book town will affect what the business can do. will help you avoid some of these problems if you decide Other businesses may have more of a national market. There to manage a business. Having said that, while many of may be a national bus company offering routes within the the problems of business are avoidable, some – such as an country or a national energy business. In this case, the earthquake – may be more difficult to plan for! business has a wider customer base that may be based In fact, many businesses fail early on in their life. This is all over the country. These businesses will be affected by because: national laws and by decisions of the national government. » the people managing them may not have had much For example, changes in national government spending may experience of business. Often people who start up a affect demand for products. business have an interest in a product but have not In other instances, businesses may operate around the necessarily run a business before. They may be good at world. These businesses are international – they export making things, for example, but not so good at dealing products to other countries. These businesses will be with customers or managing money. It may also be affected by changes in the value of their currency compared difficult to recruit experienced staff to join the business to other currency (this is known as the exchange rate) and because they may want the security of a bigger business by trading agreements between countries. For example, that has been around for longer and has a track record national governments may sign a treaty making it easier of success. This means that those making the business to sell products in each other’s countries. By becoming decisions may not be very good at it. an international business, an organisation may have more » new businesses do not have much market power, which places to find the best suppliers and resources; this can can make it difficult to survive. For example, suppliers allow it to access better quality supplies are a lower price. may be worried whether they will be paid and demand Going international means a business may also have more payment in advance, which can cause cash-flow markets to sell to; this can lead to faster growth and reduce problems. Meanwhile, buyers may have a lot of power. the risk of being dependent on one market. In recent Imagine being a new small supplier trying to sell to a big years there has tended to be more co-operation between supermarket. The buyer (the supermarket) may push the countries, making it easier to be an international business. price down and be slow to pay, causing further financial This has also been helped by better communications and problems for the new business. Given its lack of power, better transport systems. it may have to pay more for supplies and advertising than more established businesses, making it difficult to If businesses have bases abroad (for example, they have compete on price. shops or factories in other countries) they are known as a multinational. Whereas international businesses trade with or buy from other countries, multinationals actually have HANDLING DATA production bases or offices in these other countries. This means multinationals can benefit from incentives (such as Imagine 60 per cent of new businesses in a country fail subsidies) provided by other governments to locate there. in the first two years. Of those that survive, another 40 It also means the business is closer to its market, which per cent fail in the next three years. may mean it understands it better. In some cases, there are Imagine 400 000 businesses start up in one year; how limits to the products coming from abroad into a country, or many would you expect to be left after five years? a tax is placed on them which makes them more expensive; by being based within a country these restrictions can be overcome. Another benefit of being multinational is that it spreads risk by having bases in different countries. If there is a problem with production in one country – for example, due to a natural disaster – production may be switched to the other location. 7 9781398308114.indb 7 05/03/21 11:06 AM  1.1.2 The role of entrepreneurs According to the Royal Bank of Scotland (RBS) a successful entrepreneur is usually: 1.1 and intrapreneurs » well-rounded Someone who can make the product, promote it, sell it and count the money Entrepreneurs » able to bounce back A person who can cope with An entrepreneur is someone who is willing to take a mistakes and have the confidence to try again risk to start a new project or a new business. Enterprise » innovative Not an ‘inventor’ in the traditional sense, refers to the skills needed to do this, such as creativity. but a person who is able to carve out a new niche in the An entrepreneur has an idea and then tries to make it market, often a niche that is invisible to others work. Entrepreneurs see the resources that are available » results-oriented To make a business successful requires a drive that only comes from setting goals and targets AS LEVEL 1.1 Enterprise and the possibilities of combining them in a particular way to provide a product or service. Entrepreneurs create and getting pleasure from achieving them new businesses and in so doing provide new products and » a professional risk-taker To succeed means taking services. Some entrepreneurs, such as Sir Richard Branson measured risks. Often, successful entrepreneurs use of Virgin and Stelios Haji-Ioannou of easyGroup, continually a step-by-step approach to risk-taking, at each stage have ideas for new businesses and set up many different exposing themselves to only a measured amount of ones during their careers. Such people are called ‘serial personal risk and moving from one stage to the next entrepreneurs’. only as each decision is proved » totally committed Hard work, energy and single- mindedness are essential elements in the entrepreneurial GLOSSARY TERMS profile. Entrepreneurs are individuals who take the risk to create or start a new business or project. Enterprise is the skill needed to make a new idea work. CASE STUDY Hirka What qualities is an entrepreneur likely In 2017, an entrepreneur in Indonesia started a business to need for success? that turned scraps of skin from chicken feet into leather, which is then made into shoes. These ‘chicken’ shoes There is no single set of qualities that has been identified are marketed as alternatives to ones made from reptile that will definitely make someone a successful entrepreneur. skin, such as snake and crocodile, as ‘reptile’ shoes Entrepreneurs can differ enormously in terms of their have been increasingly criticised by customers and